Economics

Am I missing something?

It is impossible to call a bottom on any market, except through sheer luck. And claims to have done so should be treated with nothing but derision. NIB clearly has vested interests in this sector.

The Big Picture speculates that Bernanke was caught out by Societe Generale dumping futures contracts. The WSJ Market Beat blog tends to agree.

Did Bernanke know about the fraud on Monday? Did Societe Generale tell the Bank of France, who then would have told the ECB? Did the ECB inform the Fed?

The dumping of all those futures contracts, says the WSJ, certainly contributed to the market falls on Monday and Tuesday. What now for the presumed Fed Cut on January 30? IF Bernanke knew of the fraud, then he acted partly on that basis, if he didn’t then he acted without knowing the full picture.

This story will run, and is certainly bigger than the individual fraudster himself.#

Update:

According to this breaking Bloomberg story: Federal Reserve policy makers didn’t know about a $7.2 billion trading loss at Societe Generale SA prior to their Jan. 21 decision to reduce interest rates.

Policy makers were convinced by late December that increasing volatility in financial markets reflected a weakening U.S. economy and that further rate reductions were needed, said the official, who spoke on condition of anonymity.

The Federal Open Market Committee convened a conference call at 6 p.m. on Jan. 21 after stock markets in Asia and Europe tumbled. Members voted to cut the federal funds rate by three quarters of a percentage point, the most since the Fed began using the rate as its main tool of monetary policy in 1990, to 3.5 percent. Chairman Ben S. Bernanke and his colleagues concluded that losses in financial markets may result in reduced credit for companies and consumers, the official said.

What stage are we at? Fear?

Good post from HousingPanic [via arandomwalk].

On a tangent to Frank’s discussion on the costs of corruption, I asked myself a slightly related question.

While I am of the opinion that government should be kept to a minimum, and that the market should be largely left to it’s own devices, I am dismayed by the lack of broadband in this country. I would like to put existing arguments concerning the legacy of state monopolies and local loop unbundling aside for a moment and ask a straight forward question.

Should the government have mandated several years ago, that all new housing estates be piped for fibre to the kerb or even fibre to the home technology? I ask that given that the housing boom has led to something like half a million houses being built in quite a short space of time.

Now I can imagine that a person in favour of free markets would say - if the market does not demand this technology, then developers will not provide it. And if people do demand it, they will either ask for it, or specifically choose a development that does incorporate it.

But is there not a bigger picture? Is there not an argument that says economies that have implemented such policies (Korean and Scandanavian models come to mind) have benefitted from the foresight, and that such government interference has actually led to the market benefitting from something that, if left to it’s own devices, may not have happened?

I know it sounds like I’m saying the governments knew best, but it puzzles me that given such massive house building we are still in the same situation we were a decade ago - copper to homes where DSL may not reach.

It may have been sensible for developers to approach ISP’s or TV stations and offer a deal to cable homes with extremely fast connections, both to save money digging roads up again later, and give companies instant access to customer’s homes without a proxy like eircom - or even to enable a huge amount of homes to have technology that may not be available to them over copper.

Did Korean people demand super fast broadband and then benefit from it, or did the government see the benefits in advance and force it on a market that did not see the potential positive future effects on the economy?

Incidentally Cringely’s piece this week covers a similar subject.

Comments welcome!

What happened the Beast? MSFT fell 11% in one day, wiping $32 billion off the value of the company. Results did not meet expectations. They are now trading at just over $24.

In related news read Cringely’s latest. He speculates that Apple will buy Adobe.

It looks like the Dow Jones Industrial Average is about to surpass the record levels it was reaching prior to September 11 2001. The Dow reached a high in May 2001, at 11,301. The highest closing figure of the Dow Jones was 11,722 in January 2000, right before the bursting of the dot com bubble.

Right after September 11 it plummeted to 8235, returning to an average of about 10,000 in the last few years. At close yesterday it reached 11,268.

I liked this quote:

One arguments holds that the market is essential to individual freedom or to respecting people’s self-ownership. Forced redistribution of resources away from the outcome resulting from individual exchange violates people’s freedom to do what they like with what is theirs. Another, quite distinct, argument claims that the market gives people what they deserve. Talented, hardworking people deserve more than untalented feckless ones, and the market makes sure they get it. These justifications may coincide, in particular cases, but defenders of the market shouldn’t slide from one to the other without being aware that they may not.

Political Philosophy, Adam Swift, page 39.

I tend to agree.

If you have been following the travels of former Esat BT/Esat Digifone owner Denis O’Brien you will be aware that he has been investing heavily in the Caribbean. It seems that Digicel is causing something of a problem on some of the islands:

Historically, C&W has had a virtual monopoly in Britain’s former Caribbean colonies - a monopoly that has been suffering erosion since 2001, when Irish businessman Denis O’Brien, the man behind Digicel, entered the Jamaican market with the country’s first GSM mobile phone service.

Digicel quickly became the market leader in Jamaica and now has operations in 15 countries in the region, including Barbados, Grenada, Antigua and Barbuda, St Vincent and the Grenadines, Haiti and St Lucia.

“We generally overtake the incumbents within the first 12 months or quicker,” Mr O’Brien says.

But C&W has been prepared to fight Digicel every step of the way, as the West Indies Cricket Board discovered to their cost last year.

C&W had sponsored the West Indies team until 2004, when the board signed a five-year deal worth $20m (£11.4m) with Digicel instead - a move described in some quarters as being tantamount to replacing Coke with Pepsi.

In the meantime, C&W had signed individual sponsorship deals with seven West Indies players, including Trinidad-born captain Brian Lara and big-hitting Jamaican batsman Chris Gayle.

The resulting conflict led to the seven being dropped from last year’s opening West Indies Test match against South Africa in Guyana, although the weakened home team still held the visitors to a draw.

And so desperate was the incumbent to hold on to customers that they offered a buy-one-get-one-free phone deal to customers, causing riots.

The Economist outlines Charlie ‘bundled to Brussels’ McCreevy’s plan for simplifying financial services in the EU.

The former Irish finance minister, now the EU’s internal-market commissioner, is regarded as both a sensible champion of capitalism and a bureaucrat who has slowed the march towards a single market. But he is also seen as an enforcer who roughs up member states that don’t toe his line—pity his spokesman, who says, only half in jest, that Mr McCreevy wants to make him the least popular man in Brussels.

The sensible McCreevy is likely to be on display in a new financial-services plan for the next five years, due to be laid out by the European Commission on December 5th. The “White Paper” is sparing in its new proposals—a relief to financial firms groaning under a glut of past initiatives from the Brussels rule factory. In return, McCreevy the enforcer has undertaken to see through the huge volume of reforms already on the books. Being frugal with the new rules helps him to be adamant about the old.

Simplifying things can only be a good thing, can’t it?

After chatting with Brian Crowley briefly last week I am still puzzled and perplexed by some of the arguments in favour of the Common Agricultural Policy. This is mainly because he argued about it in a way I had not read or heard before. He mentioned the three current pillars of CAP, and I can only remember two that he mentioned, but he was emphatic about saying that CAP was not about subsidies.

Rather, CAP is about paying farmers to maintain the land as it currently is, and farmers being paid to look after their animals. It was also about food security, food standards and guaranteed supply to markets.

Yea, I was just as puzzled.

Of course I argued that subsidies, sorry payments, distort the market. That if Irish farmers produce say, sugar, and that same product can be produced cheaper by another country and exported to Ireland and sold to consumers at a cheaper price, then so be it. That is the market in action surely. And Irish sugar farmers go out of business, and start growing something else, or farming differently, growing say, rape seed oil. And it is natural that farmers adapt to market demands. And if the land goes into disuse - then let someone else buy it.

But in Crowley’s view, we should pay farmers to keep doing what their doing, regardless of whether it makes economic sense, because afterall, they are keeping the land the way it is, and looking after animals (that are there by virtue of the nature of the industry anyway).

Another example arose surrounding beef. I noted that it could be argued that if beef can be imported cheaply from say Brazil, why should money be given to farmers in the from of payments that resulted in the production of beef? Surely this amounted to distorting - aha argued Crowley, what if Foot and Mouth hit Brazil in this scenario - what then?

Price of beef goes up due to shortage of supply, people stop buying so much beef.

“So the consumer is king?” Remarked Crowley.

“Yes” I replied.

On the subject of the Constitution I thought Crowley was losing the run of himself. He argued that it would be back, probably in its current form, before it dies in late 2007. I just can’t see it, at least not its current form. But I felt a certain amount of smugness from Crowley, who argued too that no Treaty should have to be put before the people of Ireland at all, but should be passed instead by the Dail. He also dismissed any idea that having two Nice Treaty referenda was anything undemocratic, and that the Seville Declaration made the second referendum an entirely different document. (probably referring to Article 29.4.9 of the Constitution, but still allows Irish participation in Common Security and Defence)

So too was a rather strange, and to me outlandish, view that Iceland and Norway would join the European Union. Was all his time spent in Strasbourg really going to his head? Was I living on some different planet - Norway joining the EU? Not in my lifetime, and I would bet, probably never.

And then there was the article Stephen Collins wrote in the Sunday Tribune on the 30th of October, something Crowley appeared to take great exception to. It all relates, I believe, to the passage into law of the Sea-Fisheries and Maritime Jurisdiction Bill 2005. It has been causing some consternation among Deputies, and long story short - the Department of the Marine screwed up in drafting the legislation. Just don’t tell Brian Crowley I told you that.

I like this quote from Ann Mettler of the Lisbon Council, concerning France’s economic policies:

“France has not internalized a very important transition that is happening in Europe right now, which is the shift from the industrial economy to the knowledge and services economy,” said Ann Mettler of the Lisbon Council, a market-oriented research group based in Brussels. “Its interest groups, which are very strong, are still trying to preserve the industrial age.”

Sums it up pretty nicely.

I never knew that Brazil had previously gone down the road of ethanol based fuel for cars.

Prompted by the oil shocks of the 1970s, Brazilian governments used laws and subsidies to promote ethanol-only cars, which had 90% of the market by the late 1980s. But supplies of sugar-based fuel dried up suddenly when planters rushed to meet a surge in demand for sugar. Sales of ethanol-powered cars dropped to nearly zero by 1990—one taxi driver famously set his alight outside Congress.

Flex-fuel cars have persuaded Brazilians to give ethanol a second try. The initiative came from the Brazilian operations of parts suppliers such as Magneti Marelli, owned by Fiat of Italy, and Bosch, a German company. They persuaded the government to extend to flex-fuel cars the tax break previously applied to ethanol-only models. Volkswagen was first to the market, followed quickly by other big manufacturers.

Ford announced this week that flexi-fuel based cars will go on sale in Ireland in November. Ford are hoping that Brian Cowen will give tax breaks on bio-ethanol based cars. They have already proved very popular in Scandanavian countries. However flexi-fuel in Ireland will apparently be produced from the waste made during certain dairy processes, a product known as bio-ethanol. I am not sure if that produced from sugar is better or worse.

With the new guy in charge it looks like Sony are trying to get back on an even keel.

Few doubt that Sony, a much diminished force and brand, needs some shock therapy to revive itself. After all, its core electronics division, which accounts for 70% of sales, has lost money on an operating basis for the last two years.

Sony’s cost structure is bloated, and it has plenty of noncore businesses that could be sold off to raise cash for the main event at Sony: Turning out ultracool gadgets and must-have content that will wow global consumers once more.

Stringer is slated to roll out his restructuring plan on Sept. 22. In recent months, market chatter and the CEO’s comments have made pretty clear Sony has been looking into ways of streamlining its electronics product lineup, reorganizing its global plant network, and instituting some pretty painful layoffs.

Word has it that there will be huge lay-offs in the pipeline, perhaps as high as 15,000 people. And stock usually goes up after redundancy announcements, Sony currently trade at $36.55 a share.

Foreign Policy poses seven questions to Matthew Simmons, a chief proponent of the idea of peak oil. Some of the juicier ones:

FP: You’ve written that Saudi Arabia relies on old and overproduced oil fields that are likely to start declining in output. How has Riyadh responded to your analysis?

MS: They’ve said “trust me, we have no problems.�? Petroleum Minister Ali Naimi said that they could pump up to 15 million barrels per day for as many as 100 more years. The likelihood of that is as remote as me being on the moon 10 years from now. They dismiss requests for any field-by-field data as preposterous, and simply say that they’ve been a reliable supplier of oil for 70 years. My view is that it’s just good supply chain management to ask a key vendor for details about their capacity. Plus, they are shopping the market so hard for drilling rigs right now. If they can produce 15 million barrels per day for another 50 to 100 years, why do they need new rigs?

FP: Which countries are best positioned to deal with a decline in oil production?

MS: Papua New Guinea. Unfortunately, that’s an honest answer. The countries that haven’t yet built a society that needs an exponential amount of oil are in the best shape. Around 30 years ago, around half the world didn’t really use oil. And now look, cities like Hanoi have millions of motorcycles they didn’t have five years ago. We’ve built the global economy based on the false assumptions that oil is just another commodity, that the Middle East has basically unlimited amounts of oil, technology will improve, and that the price of oil would get progressively cheaper.

The more I’ve gotten into this, the more similar it is to what we do in our own minds with ignoring people’s getting old. When do you take your parents’ car keys away? It’s so painful that you go into denial that they’re getting really old.

Interesting figures:

China has overtaken Japan: it now has the world’s largest foreign-exchange reserves. The combined reserves of the People’s Bank of China and the Hong Kong Monetary Authority stood at $833 billion at the end of June. By now, given their recent rate of growth, they could be nudging $870 billion-worth, most of this in dollars—well ahead of the $830 billion in Japan’s coffers at the end of last month. Asia as a whole now has a stash of more than $2.5 trillion, two-thirds of the world total, up from $1 trillion in 2000.

Ultimately the Economist blames Americans not saving for its current account deficit, not Asian governments.

These kind of rises could really eat into any growth forecasts for the rest of the year, how high can it go?

In Wednesday trading in New York, a barrel of US light crude temporarily hit a fresh high of $65.00 before ending the day’s trading at $64.90. London Brent saw similar gains, jumping $2.08 to a new peak of $64.06 a barrel, before settling at $63.99.

I rather liked this story from last week’s Economist. It concerns risk aversion in humans and monkeys.

When buying things in a straight exchange of money for goods, people often respond to changes in price in exactly the way that theoretical economics predicts. But when faced with an exchange whose outcome is predictable only on average, most people prefer to avoid the risk of making a loss than to take the chance of making a gain in circumstances when the average expected outcome of the two actions would be the same.

…Keith Chen, of the Yale School of Management, and his colleagues decided to investigate its evolutionary past. They reasoned that if they could find similar behaviour in another species of primate (none of which has yet invented a cash economy) this would suggest that loss-aversion evolved in a common ancestor. They chose the capuchin monkey, Cebus apella, a South American species often used for behavioural experiments.

So the experiment was carried out as follows:

First, the researchers had to introduce their monkeys to the idea of a cash economy. They did this by giving them small metal discs while showing them food. The monkeys quickly learned that humans valued these inedible discs so much that they were willing to trade them for scrumptious pieces of apple, grapes and jelly.

Preliminary experiments established the amount of apple that was valued as much as either a grape or a cube of jelly, and set the price accordingly, at one disc per food item. The monkeys were then given 12 discs and allowed to trade them one at a time for whichever foodstuff they preferred.

Once the price had been established, though, it was changed. The size of the apple portions was doubled, effectively halving the price of apple. At the same time, the number of discs a monkey was given to spend fell from 12 to nine. The result was that apple consumption went up in exactly the way that price theory (as applied to humans) would predict. Indeed, averaged over the course of ten sessions it was within 1% of the theory’s prediction. One up to Cebus economicus.

The experimenters then began to test their animals’ risk aversion. They did this by offering them three different trading regimes in succession. Each required choosing between the wares of two experimental “salesmen�?. In the first regime one salesman offered one piece of apple for a disc, while the other offered two. However, half the time the second salesman only handed over one piece. Despite this deception, the monkeys quickly worked out that the second salesman offered the better overall deal, and came to prefer him.

In the second trading regime, the salesman offering one piece of apple would, half the time, add a free bonus piece once the disc had been handed over. The salesman offering two pieces would, as in the first regime, actually hand over only one of them half the time. In this case, the average outcome was identical, but the monkeys quickly reversed their behaviour from the first regime and came to prefer trading with the first salesman.

In the third regime, the second salesman always took the second piece of apple away before handing over the goods, while the first never gave freebies. So, once again, the outcomes were identical. In this case, however, the monkeys preferred the first salesman even more strongly than in the second regime.

What the responses to the second and third regimes seem to have in common is a preference for avoiding apparent loss, even though that loss does not, in strictly economic terms, exist. That such behaviour occurs in two primates suggests a common evolutionary origin. It must, therefore, have an adaptive explanation.

What that explanation is has yet to be worked out. One possibility is that in nature, with a food supply that is often barely adequate, losses that lead to the pangs of hunger are felt more keenly than gains that lead to the comfort of satiety. Agriculture has changed that calculus, but people still have the attitudes of the hunter-gatherer wired into them. Economists take note.

And yes I would be much more pro-nature as oppose to nurture.

The Economist has oil as its cover story this week, a subject oft-covered on this blog. Vijay Vaitheeswaran is writing this story in the Economist. Here’s a nice graph:

Vijay notes, and I will highlight the bits I like:

More worryingly, Mr Morse believes the problem extends well beyond just spare production capacity. He points to the tightness in markets for oil rigs, tankers, petroleum engineers, refinery capacity and various other bits of the oil value chain, and concludes that the problem is systemic: “The illusion that oil is in perennial oversupply has led to two decades of underinvestment in the oil industry. The world has been living off the legacy spare capacity built up many years ago.�?

Given today’s high prices, surely the market will soon enough provide the necessary new infrastructure? Probably not, for two reasons. The first is that the world seems to be coping rather well with today’s shockingly high prices, so perhaps they have to persist for longer or rise higher still before investors are stirred into action. The second reason is the bitter memory of oil at $10 a barrel.

OPEC countries are unlikely to rush to build lots of spare capacity because they are worried that another price collapse may follow. PFC Energy observes that when the oil price hit $55 late last year, spare capacity was less than 15% of the 8.7m bpd peak reached in 1985, and notes: “OPEC national interests do not lie in creating large capacity surpluses that have existed for most of the history of oil.�?

But as always in the style of Economist articles - on the other hand…

Still, the crunch may ease if the Saudis rebuild their buffer. It may be in their interest to do so. For most of the OPEC countries, it makes sense to try to maximise prices in the short term because their reserves of oil are relatively small. The Saudis, by contrast, are sitting atop at least 260 billion barrels of proven oil reserves, far more than Libya, Venezuela, Indonesia and Nigeria combined. Even at current production levels of around 10m bpd, which make them the world’s top exporters, they have enough oil to pump for most of this century. They will not want prices to stay too high for too long, or else investors will put money into non-OPEC oil or alternative fuels.

The desert kingdom’s rulers also remember the lessons of the 1970s oil shocks, when the biggest losers were not consuming economies (which eventually adapted to higher prices) but the petro-economies of OPEC. Ali Naimi, the Saudi oil minister, rejects the idea that his country wants prices to rise ever higher: “We are misunderstood: we thrive on the economic growth of others, which is concomitant with energy demand.�? That is why the Saudis have long acted as the voice of moderation within OPEC, resisting calls from price hawks such as Libya, Iran and, since the rise of Mr Chavez, Venezuela to squeeze consumers.

Indeed, at the most recent formal OPEC meeting, held in Iran on March 16th, the Saudis in effect bullied reluctant cartel members into trying to calm prices down. They won agreement for a rise in oil production quotas to boost global oil inventories that looked like a reversal of the cartel’s established policy of keeping OECD inventories tight and prices high.

Developments within Saudi Arabia seem to confirm that the buffer is being rebuilt. Saudi Aramco, the state-run oil giant (and the world’s largest oil company), has recently launched its biggest expansion programme in many years. Outside contractors report a surge in rig counts and drilling activity as the country increases spare capacity to its stated goal of 1.5m-2m bpd. But even if Saudi Arabia is willing to re-establish an adequate buffer, this could take years. Will prices stay high until then?

Well will they? In short, yes. But there is a ‘but’ attached. Here’s why.

OPEC ministers and Wall Street analysts talk of a new “price paradigm�?. At first sight, there seems to be something in that. In the past, contracts for delivery of crude months or years ahead (what Alan Greenspan, the chairman of the Federal Reserve, has poetically called “distant futures�?) usually stayed low and stable even if the spot price shot up because of some short-term disruption. But for the past couple of years the distant futures have tended to shoot up too. The markets clearly expect that higher prices are here to stay.

Political scientists point to the bloated welfare states in most OPEC countries which will require higher oil prices to balance budgets and avoid social unrest. Some industry analysts see a new “floor�? price of $30-40, if only to persuade oil firms to splash out on necessary investments upstream. Matt Simmons, a prominent energy investment banker, thinks that in view of rising input costs (for such things as oil rigs, steel pipes, tankers and so on) the oil price “needs to go way, way up�?.

But…(and what was Bush saying about China’s demand for oil recently?)

One factor is potential weakness in demand. There is much talk about Chinese demand changing all the rules, but that is just plain wrong. China’s share of world oil consumption is still under 8%, far smaller than America’s at 25%. Goldman Sachs, an investment bank, estimates that even assuming robust growth, China will remain a smaller oil consumer than America for decades to come.

And the growth in China’s oil demand of nearly 16% last year is unsustainable. For one thing, there are simply not enough cars in all of China to guzzle that much oil. Much of the 2004 rise was related to the country’s overheating economy and is unlikely to be repeated. For example, shortages of cheap coal led to the use of pricey fuel oil or dirty diesel for electricity generation; as bottlenecks in the coal system ease, that oil use will disappear. Over the past two years, as the country has developed its oil infrastructure, it has needed to fill pipelines, storage tanks and the like, but these were one-off purchases. The International Energy Agency (IEA) says that in January and February 2005, Chinese oil demand rose by only 5.4% on the same period in 2004, less than a quarter of the rate a year earlier. And if China’s banking sector or its overall economy takes a knock, oil consumption is bound to be hit too.

And to conclude:

Aramco’s boss [Saudi’s and indeed the world’s largest oil company] Abdallah Jumah, sums it up: “Where the oil price goes, nobody knows.�? He wishes it were otherwise. “The key is stability so we can plan. Oil investments take a long time to come to fruition.�? His boss, Mr Naimi, argues that “oil is simply too vital a commodity to be left to the vagaries of the marketplace.�? But even Saudi Arabia cannot guarantee oil-market stability, especially with its buffer so depleted. Indeed, the only sensible thing anyone can say about oil prices today is that they are unlikely to remain stable.

Dan Drezner has a lenghty post concerning a debate he’s having with Matthew Yglesias and Brad DeLong. It surrounds the US request for China to “immediately introduce a flexible currency” which the FT reports is “a marked shift in tactics after several years of patient diplomacy aimed at nudging China towards allowing the renminbi to float”.

Drezner notes:

Brad’s assertion is that political scientists think that “getting serious” about something is dispatching an ambassador — as opposed to the economists who want to fix the problem. Actually, to a political scientist — more specifically, one who studies international relations — you “get serious” about an issue like the currency when you engage in tactical issue linkage to change other government’s policies in such a way as to change the balance of returns and risks facing those buying and selling in foreign exchange markets. If one can arrange for other countries to bear a greater portion of the costs of adjustment from the current set of macroeconomic imbalances, then political scientists will predict that governments will prefer this policy option ten times out of ten — even if the long-term economic picture would be improved by listening to economists. [Yes, but doesn’t this still leave the U.S. with some long-term macroeconomic problems?–ed. I believe it was an economist who pointed out what happens in the long run.]

This leads to Matthew’s appropriate question about leverage — what does the U.S. have to offer? What is the tactical issue linkage that could be put in play here?

The Economist presents a pretty stark view of the world economy with such gems as:

Unemployment in the euro area is 8.9%; in Germany, France and Spain it is in double digits. Manufacturing in the single-currency zone has stalled. In its latest World Economic Outlook, published this week, the IMF, like other forecasters before it, slashed its forecast for euro-area GDP growth this year, to 1.6%. The world economy’s other weak link, Japan, faltered half-way through 2004 and despite the odd spark has not yet sputtered into life again. Rising oil prices have helped neither of these giant weaklings.

Even in America, where the strength of the expansion has consistently surprised economists, there are nascent signs of slowdown and worries about oil. With job growth scarcely topping 100,000, the March employment report was much weaker than expected. Retail sales grew by only 0.3% (month-on-month) in March, less than half of what analysts had expected, suggesting that record petrol prices were wearing holes in consumers’ pockets.

Or even:

According to statistics released on April 12th, America’s monthly trade deficit reached a record $61 billion in February (see chart). The climb in oil prices may mean another record in March—although much of February’s increase reflected sharp growth in non-oil imports, which were 16% higher than in February 2004.

Brad Setser, a former Treasury official who is now at Roubini Global Economics, an economic-analysis firm, reckons that if non-oil import growth continues at its recent pace and the oil price stays over $50 a barrel, America’s annual trade deficit would reach nearly $800 billion by the end of the year. That said, the figure may not get that high, because $50 oil ought to dampen American consumer demand and hence import growth.

But they conclude:

It is possible to be sanguine about America’s ever more colossal deficits, just as it is about oil. Certainly, the doomsday scenarios of a dollar crash or a hard landing for the American economy are not in sight. America has had little trouble attracting the necessary capital to fund its soaring deficits. Though Asia’s central banks are still big purchasers, they are not the only ones. Thanks to soaring prices, oil exporters have been building up their surpluses. Russia’s foreign-exchange reserves, for instance, are now over $130 billion. Many of these oil exporters are choosing dollar assets. The dollar has strengthened since the beginning of 2005 and long-term interest rates remain remarkably low.

This calm may explain why the world’s finance ministers have done so little to wean themselves off their addiction to American-led growth and why they will spend most of their time in Washington fretting about oil. That is a pity, for while the oil price seems to be the most imminent risk, the size and rate of growth of the global imbalances are the real reason to worry. If the world economy continues on autopilot, those imbalances are set to increase. And you do not need to be a Cassandra to predict that, eventually, they will create a nasty problem.

I guess we will have to see how things pan out in the coming months.

This one for all the free-market lovers out there:

Modern humans may have driven Neanderthals to extinction 30,000 years ago because Homo sapiens unlocked the secrets of free trade, say a group of US and Dutch economists. The theory could shed new light on the mysterious and sudden demise of the Neanderthals after over 260,000 years of healthy survival.

I have to hand it to them, it is a good idea.

Japan’s prime minister plans to dress down this summer, and wants millions of Japanese office workers to do the same. Junichiro Koizumi is asking workers to cast off their collars and ties in a national effort to use less energy on air conditioning. To show how serious he is, Mr Koizumi has ordered government ministers to shed their suits to set an example. Japan often endures hot, humid summers, forcing offices and bars to ramp up air-conditioning systems.

Diana has a stinging rebuke for the Freedom Institute in the ongoing debate concerning minimum wage and that girl being pade €1.08 an hour on Irish Ferries. The entire debate, including all the comments, is a very enjoyable read.

Thomas Homer-Dixon and S. Julio Friedmann suggest using a new-type energy source known as gasification. What is it?

Here’s how it works: In a type of power plant called an integrated gasification combined-cycle facility, we change any fossil fuel, including coal, into a superhot gas that is rich in hydrogen - and in the process strip out pollutants like sulfur and mercury. As in a traditional combustion power plant, the heat generates large amounts of electricity; but in this case, the gas byproducts can be pure streams of hydrogen and carbon dioxide.

This matters for several reasons. The hydrogen produced could be used as a transportation fuel. Equally important, the harmful carbon dioxide waste is in a form that can be pumped deep underground and stored, theoretically for millions of years, in old oil and gas fields or saline aquifers. This process is called geologic storage, or carbon sequestration, and recent field demonstrations in Canada and Norway have shown it can work and work safely.

The marriage of gasified coal plants and geologic storage could allow us to build power plants that produce vast amounts of energy with virtually no carbon dioxide emissions in the air. Moreover, these plants are very flexible: Although coal is the most obvious fuel source, they could burn almost any organic material, including waste cornhusks and woodchips.

There are hurdles. For example, we need a crash program of research to find out which geological formations best lock up the carbon dioxide for the longest time.

On balance, though, this combination of technologies is probably among the best ways to provide the energy needed by modern societies - including populous, energy-hungry and coal-rich societies like China and India - without wrecking the global climate. The combination of gasified coal plants and geologic storage can be our bridge to the clean energy of the 22nd century and beyond.

David H. Levey and Stuart S. Brown write in the latest issue of Foreign Affairs on the US deficit. A riveting read, for those interested in US economics, I know some of you out there enjoy it at least. In their conclusion they look at some precedents:

At the peak of its global power the United Kingdom was a net creditor, but as it entered the twentieth century, it started losing its economic dominance to Germany and the United States. In contrast, the United States is a large net debtor. But in its case, no plausible challenger to its economic leadership exists, and its share of the global economy will not decline. Focusing exclusively on the NIIP obscures the United States’ institutional, technological, and demographic advantages. Such advantages are further bolstered by the underlying complementarities between the U.S. economy and the economies of the developing world — especially those in Asia. The United States continues to reap major gains from what Charles de Gaulle called its “exorbitant privilege,” its unique role in providing global liquidity by running chronic external imbalances. The resulting inflow of productivity-enhancing capital has strengthened its underlying economic position. Only one development could upset this optimistic prognosis: an end to the technological dynamism, openness to trade, and flexibility that have powered the U.S. economy. The biggest threat to U.S. hegemony, accordingly, stems not from the sentiments of foreign investors, but from protectionism and isolationism at home.

Some ongoing tensions between Japan and China are detailed here.

Japan has begun planning for the worst. A conflict with China over rich gas deposits in the East China Sea has escalated since late January when two Chinese destroyers entered the area, which has been in dispute for decades. Japan warned China that it would defend its resources there.

But conflict is not inevitable. China’s June 2004 proposal to jointly develop a large gas field that straddles a boundary claimed by Japan is an opportunity to cap rising tension, and at long last harvest the resources in the disputed area.

The East China Sea is thought to contain up to 100 billion barrels of oil - it is one of the last unexplored high-potential resource areas located near large markets. The development of oil and gas in much of the area has been prevented for decades by the boundary dispute. The Japanese government has refused to let companies explore and develop the resources in the area because it says that it could adversely affect relations and negotiations with China on the boundary.

But now China is drilling near the boundary claimed by Japan. Tokyo has officially protested the drilling and is now considering allowing some companies to drill on Japan’s side of its claimed boundary. Just the possibility has been protested by Beijing.

The former head of Yukos with a letter to the outside world. He warns:

I have already realized that wealth, and especially vast wealth, does not in itself make a person free. As a co-owner of Yukos, I had to make enormous efforts to protect this wealth. I had to limit myself in everything that might harm this possession.

I avoided saying many things, because speaking candidly could harm my possessions. I had to close my eyes to many things, to put up with many things, all for the sake of my assets, to preserve and to increase them. I controlled my possessions; they controlled me.

So I would like to warn young people today, those who will soon come to power: Do not envy those who have great wealth.

Do not think that their life is easy and comfortable. Property creates new possibilities, but it also paralyzes a person’s creative forces, it dilutes the personality. It is a cruel tyranny, the tyranny of property.

I have been transformed. I am becoming a normal person (economically, a member of the well-to-do middle class), for whom what is most important is not to acquire, but to live. The struggle now is not for property, but for myself, for the right to be myself.

In this struggle, popularity ratings, official contacts and public relations gimmicks are not important. All that is important is you, yourself - your feelings, ideas, talents, will, intellect and faith.

This is, indeed, the only possible and correct choice - the choice of freedom.

I have great pity for those authorities who sincerely believe that they are doing a good thing for the country, for the people. The road to hell is paved with good intentions. Further down this road they will realize that repressive methods and the forced redistribution of wealth are not compatible with modern economic development. And they will not be able to limit this assault to Khodorkovsky, Yukos or the oligarchs - their victims will be many, including those who created this machinery.

My persecutors know that there’s not a shred of evidence of any guilt on my part. But that’s irrelevant, since they could always accuse me of something else - burning down the Moscow Manege, or economic counterrevolution. I’ve been told that they want to put me away for a long time - five years or more - because they fear that I will seek revenge.

These simple people judge others by themselves. Relax: I have no intention of becoming a Count of Monte Cristo. To breathe the spring air, to play with children studying at an ordinary Moscow school, to read good books - all this is so much more important, more right and more pleasant than multiplying wealth and settling scores.

I thank God that unlike my persecutors, I have understood that making more money is far from the only (or most important) goal of human endeavors.

For me, the time of big money is in the past. Now, freed from the burden of the past, I am determined to work for the benefit of those generations that will soon take charge of our country. Generations that will come with new values and new hopes.

Ever wonder how much Hollywood makes out of foreign DVD sales? Nobody knows the exact figures, but they are pretty high.

Can a single retail company affect inflation? A recent National Bureau of Economic Research study argues that Wal-Mart’s size and lower-than-average prices have pushed the U.S. inflation rate substantially below what official statistics indicate. According to the study’s authors, the government’s current inflation metric assumes that lower prices at big-box discounters mean products of lower quality. But as the authors point out, the food products available at Wal-Mart tend to be exactly the same as those at local supermarkets, so customers don’t sacrifice quality by taking their business to the big discounter. When the authors corrected for Wal-Mart’s impact on the cost of food around the country, they found that from 1998 to 2001 the government had overstated increases in food prices by 14 to 18.3 percent�meaning, in turn, that the Bureau of Labor Statistics had overstated nationwide inflation by about 15 percent a year.

Slate had a brief storyon the Irish economy too last week…

The lessons of Ireland’s success are obvious enough to border on common sense, in the same way that eating less is the key to losing weight. Support free trade. Create an environment that is amenable to investment. Educate your population. Align the interests of industry and workers. And, most of all, have patience and persevere; it took decades for Ireland’s efforts to bear fruit, and the path to prosperity was twisted at best. But even a country that is a dedicated follower of the Irish way could find that linguistic or geographic bad luck might mean that its perseverance would not be rewarded.

Of course, any number of wobbly Third World hellholes has a flock of venal bureaucrats who - thanks to the largess of developmental aid - are fluent in the language of economic openness and investment attraction. Unfortunately, developing countries usually fail to create an (admittedly deceptively) simple and straightforward plan - and stick with it for the following 40 or so years. In much of the Third World, long-term refers to the period required for a crooked minister to siphon off enough cash to leave town in his Mercedes SL-class roadster. The institutional credibility of Ireland’s legal, regulatory, and administrative infrastructure (which was pretty solid, in relative terms, to begin with) was cultivated over decades. And progress didn’t happen in a straight line; as recently as 1988, for example, Ireland’s unemployment rate stood at the nosebleed level of 16 percent.

In any case, though, the Irish tiger’s stripes are fading. Growing by 8 percent a year is a lot more difficult for a $130 billion economy (Ireland in 2003), than it is for a $25 billion economy (Ireland in 1973). Many of the drivers of Ireland’s growth were one-off (even if relatively extended) events, like the sharp increase in workforce participation and massive inflows from the European Union. Corruption has worsened over the past eight years, according to watchdog Transparency International. Perhaps most worryingly, Ireland is a victim of its own success: High prices and rising wages are eating away at the foundations of Ireland’s competitiveness. A deep-seated complacency, particularly in the services industry, will in time undercut one of the key appeals of Ireland as an investment destination. The country’s infrastructure is struggling to manage the explosive population growth - highly unusual for Europe, due to both a relatively high birth rate and significant immigration - of recent years, with no slowdown in sight.

Of course, there’s no shame in becoming a normal First World country. And even now, Ireland’s anticipated 4 percent growth in 2005 is around double European averages. Crowning its turnaround, an annual Economist Intelligence Unit survey named Ireland the best country in the world to live in (the United States came in 13th). As billboards throughout the country have it, the Guinness is great - at more than $5 a pint, it had better be.

Dan Drezner has a good round up of the stinginess debate.

Number 8 in the top ten things from Foreign Policy (see below) is this little gem:

Although the Boston Red Sox undid their curse in dramatic fashion, the West African country of Chad is quietly trying to undo the �oil curse� that plagues many developing countries. Chad became an oil exporter and in July received its first $38 million in oil revenues. Oil resources routinely fuel government corruption and civil conflict and undermine economic development. But, as part of a deal with the World Bank, which helped fund the pipeline that transfers the Chadian oil to market, 80 percent of the oil revenue will be spent on health, education, and infrastructure for its mostly poor population, and 10 percent will be invested for future generations. The government�s expenditures will face the scrutiny of a watchdog committee that includes individuals from civil society and government, and most of the money will be held by the World Bank in a London account to preempt graft. The arrangement may not work out�one nongovernmental organization already complained that the oversight board receives inadequate resources. But if it does, it could be a powerful model for other countries who are rich in resources and poor in everything else.

Could Turkey be plunged into a fiscal nightmare? Erinc Yeldan, professor in the department of economics at Bilkent University in Ankara and Mark Weisbrot, co-director of the Center for Economic and Policy Research in Washington seem to think so. Will this threaten future Turkey accession to the EU?

They note:

But beneath these numbers, a crisis looms. The expansion has been driven by a huge inflow of capital from abroad, $10.9 billion in 2003 (4.6 percent of the economy) and $12.5 billion in just the first eight months of 2004. These are overwhelmingly speculative, short-term inflows - not direct investment, for example, which would expand the country’s productive capacity and create jobs. Foreign direct investment has in fact fallen since 2000. The country is very vulnerable to a serious economic downturn when the inflow of foreign money goes dry.

These kinds of massive speculative capital inflows have a habit of reversing themselves, as they did in Asia in 1997, setting off the Asian financial crisis and a regional depression. In such situations, investors eventually begin to worry about the sustainability of such borrowing and debt. Any number of external events could trigger such an exodus from Turkey: For example, if U.S. and world interest rates rise, as they undoubtedly will from their current historic lows, safe assets like U.S. Treasury securities will become much more attractive.

The influx of speculative money from abroad has also pushed the Turkish currency, the lira, to an overvalued level. This, too, is a bubble waiting to burst. In the meantime it has devastated traditional Turkish industries that are typically labor-intensive by making imports artificially cheap, thus aggravating the unemployment problem. The lira had risen 139 percent against the dollar between 2000-2003.

The country’s public debt is unsustainable at 70 percent of the economy. In order to sustain it presently, the IMF has the government running a primary (excluding interest) budget surplus of 6.5 percent. This is extremely high (compare it with 3.0 percent for Argentina and 4.25 percent for Brazil), and prevents the government from making necessary investments in human capital and infrastructure.

Another devastating part of the IMF program is high interest rates: The Treasury’s debt instruments that are the leading assets in the Turkish financial markets carry an interest rate of 26 percent, still very high at 15 percent in real, inflation-adjusted terms. Compare this with 2 percent in the United States - it is easy to understand why businesses in Turkey are reluctant to borrow and invest in productive capacity.

In short, the policy makers have created an economy that runs on a speculative bubble. It would be nice if a majority of the Turkish people at least got some of the benefits of bubble-driven growth for as long as it lasts. But unfortunately, this has not been the case. Since 2000, the unemployment rate has risen by almost 4 percentage points to 10.5 percent, and real wages have actually fallen.

As Turkey and the European Union continue talks on the possibility of EU accession, the Turkish government should re-examine its unsustainable economic policies of the last five years. Continuing these IMF-supported policies in hopes of garnering credibility with the EU may be dangerous. Ironically, such policies could lead to an economic failure that would actually doom Turkey’s chances for membership.

A stark warning from the IEA:

A growing dependence among European Union countries on Russian gas supplies piped through politically unstable Ukraine is placing the EU’s energy security at risk, the International Energy Agency has warned.

At a time when China and Japan are increasingly looking to Russia to meet their rising energy demands, Claude Mandil, the director of the IEA, the energy adviser to the industrialised countries, warned: “Governments have been too early in thinking there would never be supply issues with natural gas and electricity.”

Russia is the world’s largest gas producer. EU countries, excluding the 10 new members, buy 40 per cent of their gas imports from the former Soviet Union, most of which is supplied by Gazprom. Some of the new members are entirely dependent on Russian energy.

The IEA’s alert about Russian supplies came as German Gref, Russian economy minister, warned that Gazprom’s proposed purchase of Yugansk, Yukos’s main oil producer, would erode its efficiency and could invite legal action from Europe.

Conflict in Ukraine could have very serious consequences indeed.

Jad Mouawad writing in the New York Times discusses such as facts as:

According to Wood Mackenzie, an energy research firm, six of the 10 largest oil companies have cut their investments in exploration since 1998. Together, the world’s leading companies spent $8 billion drilling for oil last year; in 1998, they spent more than $11 billion. The number of wells drilled in the 11 full members of the Organization of Petroleum Exporting Countries fell 6.5 percent in 2003 from the year before.

As worldwide oil consumption has grown by about 17 percent over the past decade, to about 80 million barrels a day, explorers need to find ever growing quantities of oil to replace depleted reserves. Exxon Mobil, BP and Royal Dutch/Shell alone need to find 4.4 billion new barrels of oil each year just to replace their current production.

Along with most U.S. production, Alaska’s North Slope, which provides a quarter of America’s output, is in decline. With the United States importing increasing quantities of oil to meet demand - to a projected 70 percent in 2025 from 54 percent in 2002 and 37 percent in 1980, according to a forecast by the U.S. Energy Information Administration - the oil industry wants to be allowed to look at the Alaska National Wildlife Refuge.

More interesting stuff:

Unlike the British sector of the North Sea, which is considered completely explored, the Norwegian continental shelf is believed to still hold substantial quantities of undiscovered oil - perhaps one-third of the amount already found, or 9.4 billion barrels of oil and 67 trillion cubic feet, or 1.9 trillion cubic meters, of gas, according to estimates by the Norwegian Petroleum Directorate, the government agency that oversees the oil industry.

But only 19 exploratory wells were drilled last year in Norwegian waters, the fewest since 1977. Only about one in three found oil or gas, down from half in 2002.

Increasingly, the search is moving northward into the Barents Sea, above the Arctic Circle and near Norway’s far northeastern border with Russia, where the weather is bitter and there is no daylight for months in the winter.

The oil industry is also eyeing the Lofoten Islands off Norway’s northern coast, which are closed to exploration because of seabird colonies and cod spawning grounds that environmentalists and the Norwegian fishing industry want protected. Environmental concerns led to a two-year halt in drilling throughout the Barents Sea, but the Norwegian government allowed exploration programs to resume in December, and three more wells are due to be drilled this winter.

“We’re forced into new frontier areas, into deeper and harsher conditions, and into potentially more politically and environmentally sensitive areas,” says Tore Holm, the director of exploration for Shell in Norway. “It’s by nature riskier, and by nature most costly. But the rewards could be higher.”

Dan Drezner links to an informative article in the New York Times.

Drezner sings her praises, perhaps correctly, she notes:

American military supremacy remains unquestioned, regional officials say. But the United States appears to be on the losing side of trade patterns. China is now South Korea’s biggest trade partner, and two years ago Japan’s imports from China surpassed those from the United States. Current trends show China is likely to top American trade with Southeast Asia in just a few years.

China’s prime minister, Wen Jiabao, as much as threw down the gauntlet last year, saying he believed that China’s trade with Southeast Asia would reach $100 billion by 2005, just shy of the $120 billion in trade the United States does with the region.

Mr. Wen’s claim was no idle boast. Almost no country has escaped the pull of China’s enormous craving for trade and, above all, energy and other natural resources to fuel its still galloping expansion and growing consumer demand. Though the Chinese government’s growth target for 2004 is 7 percent, compared with 9.1 percent for 2003, few are worried about a slowdown soon.

This one has been sitting around waiting to be blogged for a while now. Steve A. Yetiv, professor of political science at Old Dominion University in Norfolk, Virginia, and author of the forthcoming book “Crude Awakenings: Global Oil Security and American Foreign Policy”, writes about the price of oil.

He points out:

All this brings us to market psychology, which is affected by supply and demand but is its own animal as well. Unlike in the past, oil is now traded like other commodities. When traders believe that the price of oil will rise, they go “long the market” or buy into oil, thus pushing the price higher. The more buyers, as with any traded good, the higher the price.

Part of their action is driven by the fundamentals of supply and demand, and part of it is speculation. Speculation can vary in rationality. The stock market bubble that sent U.S. Nasdaq index above 5000 was driven by irrational speculation, not real fundamentals.

Speculation is affected by many things, including fears about oil-supply disruptions in the Middle East, Russia, Venezuela and Nigeria. Today, these fears may well add 20 percent to the price of oil.

Just grin and bear it:

Such fears have always been around, but today they seem to represent a perfect storm of angst. This is despite the fact that there may well be enough supply out there to meet demand and that the Saudis could add about 1.4 million barrels per day if need be, albeit not of the most desired low-sulfur crude.

So there we have it. Yes, things look a bit grim today. But the global oil market can change quickly. In the short run, at least, we may well have to hold onto our hats, grin and bear it.

Randall Stross in the New York Times [Reg reqd] tells of the other IPOs this year that went unnoticed. He points out that it is only the trendy tech industry gets all the press comment while other bigger IPO’s receive scant attention.

Some readers may have missed the news. Genworth’s was only the biggest initial public offering so far this year, raising $2.8 billion in May. It and the second biggest - Assurant, which went public in February - did not draw nearly as much attention as A Certain Other Company’s $1.67 billion offering for a simple reason: boring ZIP codes.

Companies in financial and insurance services, however well they perform, lack the cachet of the most-envied corner of the economy: tech land. No other sector, year in and year out, receives such disproportionate attention from prospective investors and the news media alike. The computer industry is good. Software is even better. A company name already familiar to nontechnical computer users is best of all. This has been the case ever since the initial public offering of Microsoft nearly two decades ago.

He asks and answers appropriately in relation to market hype:

Will Google have a halo like Microsoft’s, benefiting the many other hopefuls in tech? This is a question of pure psychology, nothing more. Experience suggests that “halo” is a euphemism for “investors turning bullish en masse for no substantive reason.”

Is this man the godsend of Libertarians and free-market lovers everywhere? Could Georgia be the model for future economies? Or will it end up plunging into war with Russia?

None of my readers know it, but one of my pet subjects is Caucasian politics. I read about it regularly, and discuss it with some very nice Georgian people. I have picked up the odd bit of Russian and Georgian. Ravakha Bijou. [loose phonetics].

Here are some choice quotes for people that I know will like this guy, namely Frank.

He says that Georgia should be ready to sell �everything that can be sold, except its conscience�.

Next year�if not sooner�he will cut the rate of income tax from 20% to 12%, payroll taxes from 33% to 20%, value-added tax from 20% to 18%, and abolish 12 kinds of tax altogether. He wants to let leading foreign banks and insurers open branches freely. He wants to abolish laws on legal tender, so that investors can use whatever currency they want. He hates foreign aid�it �destroys your ability to do things for yourself,� he says�though he concedes that political realities will oblige him to accept it for at least the next three years or so.

As to where investors should put their money, �I don’t know and I don’t care,� he says, and continues: �I have shut down the department of industrial policy. I am shutting down the national investment agency. I don’t want the national innovation agency.� Oh yes, and he plans to shut down the country’s anti-monopoly agency too. �If somebody thinks his rights are being infringed he can go to the courts, not to the ministry.� He plans, as his crowning achievement, to abolish his own ministry in 2007. �In a normal country, you don’t need a ministry of the economy,� he says. �And in three years we can make the backbone of a normal country.�

The lesson he drew from the Russian experience, he says, is to change the method of privatisation, not the principle of it. He promises public sales to the highest bidder, and cash only: �no conditions, no promises, no beauty contests�.

Big improvements in business conditions are needed in order to offset big political risks and to keep investors coming. �Other governments make budgets,� he says. �We are making a nation.�

When you think of a productive economy you’re thinking of an anxious economy. You’re looking at many, many people who are afraid about hanging on to their places. You can either lead a simple life�the Jeffersonian ideal of the independent farmer with his simple log cabin. Or you can lead a city life. It’s your choice. I guess a Marxist would say that in the ideal future we would have a noble feudal community and high technology at the same time. But on the whole I think it’s perceived as a choice. Productivity and GNP are linked to the anxieties of many, many individual workers. An economy like that of France�a so-called “unproductive economy”�is in a way a more relaxed economy. Any given country will be successful at some things and unsuccessful at others. France may be somewhat unsuccessful economically, but it’s successful in its long lunch break. There’s that choice.

Will Europe’s economy stand up to its old population and spiraling pensions costs? It might, or at least according to this article. Also mentioned is Chirac’s likely successor, Nicolas Sarkozy.

In office, Sarkozy has steered a complicated course of talking of reform, including efforts to increase working hours in France, while also pushing through a state bailout of Alstom, the large engineering firm, and blasting German companies that have threatened to move operations out of Europe if workers did not agree to longer hours.

His popularity does not appear to have fallen, and Chirac now seems to be trying to force Sarkozy to leave the government.

The writer is optimistic about Europes looming worker deficit:

European economies are on track to grow reasonably well this year, even if they are trailing the United States and much of Asia. European productivity growth has trailed that of the United States, but the gap narrows substantially when expressed in terms of hours worked. It can be argued that the difference reflects a quite reasonable preference for leisure over additional income. No doubt that is true for some, but many of the persistently unemployed in Europe would no doubt prefer less leisure and more income.

The demographic horror story - in which the structure crumbles because there are too few workers being forced to pay taxes to support too many retirees - may be oversold. There is an ample supply of extra workers available via immigration, and while there is great reluctance to let them in, and more than a little discrimination against hiring those that are already in Europe, that can be seen as an untapped resource.

He continues:

And while it is true that European growth has lagged in recent years, in one important measure it has done reasonably well. Paul Krikorian of Bridgewater Associates, an American investment firm, calculates that since 1999 the United States’ market share of world exports has fallen by 4.4 percentage points.

Most of that went to China, but some of those lost exports were replaced by exports from European countries, whose share fell in 2000 but has since rebounded. Europe is running current account surpluses even as the United States runs record deficits.

So maybe we should look on the bright side:

It is true that Western European countries have huge debts looming over them in the form of promised but unfunded pension benefits for aging populations, and it is not at all clear how that issue will be resolved. But owing a lot to one’s own citizens - under laws that the government can change - may not be worse than owing real money to foreigners who have a right to repayment, the position the United States Treasury finds itself in.

Philip Bowring in the IHT asks us to keep an eye on it. A warning, and something to note. I may as well quote the whole thing:

The world may soon pay a high price for years of low global food prices resulting in large part from European and U.S. farm subsidies. The winners could include China’s long-exploited farmers.

We should remember that food shortages were second only to oil prices in causing the huge global inflation of 1973 to 1975, which resulted in a collapse of financial asset prices and pushed the global economy into deep recession. Then, as now, the surge in commodity prices followed a period of easy money and rapidly rising financial markets.

History is threatening to repeat itself. Despite a hoped-for small rise this year, China’s grain output is still some 12 percent below its peak, and the country is experiencing another large grain deficit. Most of India is still anxiously awaiting a belated monsoon. Unless it comes soon, India’s ability to export food will be in jeopardy. Australia, too, has another drought.

While both India and China have huge grain stocks, the interlinkage of poor local harvests and tight international supplies is clear enough. The revival of inflation in China is due more to food prices - up 30 percent over a year ago - than to oil and other minerals.

That may not seem important for rich nations, for whom raw food prices are a tiny part of the price index. However, in an interdependent world, and especially one in which China plays a major role as supplier of manufactures, food prices are the beginning of an inflation chain.

The 30 percent rise in grain prices in China is spurring 4 to 5 percent or more consumer price inflation, which thus requires wage increases well ahead of productivity growth. Those additional wage costs are on top of higher prices for oil, steel, copper, plastics, etc.

Sooner or later these will be reflected in export prices and hence in a significant portion of retail sales in the United States. Inflation could again become embedded.

Given China’s extremely competitive position in labor-intensive manufacturing, it is unlikely to suffer significant loss of market share by raising prices. Alternative suppliers are facing many of the same cost pressures or have currencies that have appreciated against the dollar.

The good news is that in the short run farmers in China and elsewhere will see their incomes rise, slightly redressing China’s immense urban-rural income gap. The longer-term opportunity is that it will lead to investment in China to boost rural labor productivity, create off-farm employment, and promote the pricing of China’s scarcest resource - water.

Whatever the long term outcome, today’s reality is that real food and commodity shortages exist side-by-side with excess global liquidity and low interest rates.

It is not a comfortable combination, and it could well get worse if the weather compounds man’s self-created problems.

Michael Lind writes a piece in Prospect concerning how the earth will cope with the projected peak population of 9 billion people. This somewhat relates to recent debate on the amount of oil left on the planet. Lind gives some interesting stats including:

As the economist Paul Romer pointed out in the magazine Reason (December 2001) US per capita income in 2000 was around $36,000. If real income per American grew by 1.8 per cent per year, by 2050 it would increase to $88,000 (in purchasing power of 2000 dollars), while 2.3 per cent annual growth would increase the average American’s income to roughly $113,000 per year. Romer observed that in the second scenario, “in 50 years we can get extra income per person equal to what in 1984 it had taken us all of human history to achieve.”

And…

As machines get ever cheaper, more people will be able to afford more of them. Today the combined mass of all machines, at more than a gigaton (Gt), exceeds the combined mass of human beings, about 1 megaton. The total amount of carbon, 5Gt, required to power and construct machines and electric utilities greatly exceeds the 1.3Gt global consumption of carbon by human beings, mostly in the form of food. As affluence grows, the amount of energy and raw materials “consumed” by machinery will escalate even more rapidly than human consumption. But this need not mean an end to the machine age. If manufacturing processes were to imitate the recycling that takes place in the biosphere, then most machine materials might be recycled to make new machines, rather than thrown away. And long before all fossil fuels were exhausted, their rising prices would compel industrial society not only to become more energy efficient but also to find alternative energy sources sufficient for the demands of an advanced technological civilisation - nuclear fission, nuclear fusion, solar energy, chemical photosynthesis, geothermal, biomass or some yet unknown source of energy.

He concludes:

Providing stuff, space and speed to 9bn people without putting serious strains on the global environment is possible, but not inevitable. A planet of crowded slums, extreme inequality, devastated ecosystems and rising atmospheric temperatures is a frightening possibility. To avert such a future, campaigns for political and behavioural reform, at both the national and international level, will be necessary to supplement the development of new technology - no argument there. But political and moral campaigns should take the preferences of people into account and they should be based on sound reasoning. It makes no sense to counsel individuals and nations to adopt austerity in cases in which there are technological solutions to problems created by technology. Sometimes there really are technical fixes.

Oh and by the way, Lind is the Whitehead senior fellow at the New America Foundation in Washington, DC