Wednesday, November 14, 2012

Was Paul Ryan A Fool To Blindly Parrot the Romney Platform

Listening to Paul Ryan repeat the Romney stump speech, including his support for tax cuts, leads me to question Ryan's integrity. Supporting tax cuts was stupid politics and foolish economics. Paul Ryan had been one of the few politicians to be willing to address the third rail issue of entitlements. As a senior member of the House Ways and Means Committee, he is acutely aware of the unsustainable nature of the rapidly growing U.S. deficit. It seems hard to believe that Ryan really supported tax cuts, despite his espousing them as he parroted the Romney message. The support for tax cuts played right into the Obama campaigns claims that Romney was just out to help the rich.

What happened to Ryan's backbone? Neither he nor Romney really took Obama to task for the dangerous deficits that the U.S. is running up. Given that Romney lacked the political courage to back any sort of deficit reduction plan that would might risk his alienating key voting blocks, he was unable to attack Obama for being a spendthrift. Romney's own plan barely even touched upon how he was going to address the deficit.

Paul Ryan should have been an attack dog, going after Biden and Obama for putting social security, health benefits, and the economic future of all U.S. residents under age 55 at risk  However, rather than attack Obama's continuation of his trillion dollar a year deficits, he parroted the Romney platform. In particular, Ryan's support of tax cuts was nauseating. There is no way that any meaningful cuts to entitlements can be made without making some compromises on tax increases. Not only would the Senate reject attempts to cut entitlements without corresponding tax increass, the domestic turmoil engendered by benefit cuts might make the Occupy movement seem mild, as I pointed out in a post entitled Beware of Little Old Ladies With Signs 

I can only guess that when Ryan signed up for the Romney campaign, he agreed to parrot the current stump speech/ However, by doing so, he emasculated his capability to attack Obama's biggest weakness, the trillion dollar deficits. Thus, he blunted his own effectiveness in the debate with Biden, and raised questions about his own integrity. So, yes Ryan was a fool to blindly parrot the Romney platform.

Friday, September 14, 2012

U.S. Stock Market Euphoria is Insane as Europe Economy Crumbles

A friend just returned home from a trade show in Europe. Attendance at the show was down and the mood was downbeat. While it may be rash to jump to a conclusion based on an anecdotal report from a single trade show, I judge a good case can be made that this weak trade show offers a pretty good  indication that the downward trending economic situation in Europe is on its way to becoming a vicious cycle. European purchasing managers are holding back on purchases. The reduced purchasing by retail stores will ripple through the entire economy. European income will continue to slip and tax revenues will continue to fall.

There is no way the European debt crisis can possibly be fixed while the member nations' economies continue to shrink. Europe will continue to stumble from crisis to crisis in a worsening cycle, until the ECB's money printing pronouncements can no longer save the markets.

My forecast back in December that the problems in Europe would begin to pull the U.S. stock market down was woefully premature, and obviously dreadfully wrong given the gains by the stock market . However, European kicking the can down the road can not go on forever as sovereign debt continues to grow and money flows out of the banks in Greece, Italy, and Spain.

Eventually, the European recession (soon to be depression?) will have a horribly negative impact on the U.S. stock market. The biggest question in my mind is whether it will be before or after the huge declines in U.S. stocks that are likely as we march along the calendar toward the fiscal cliff and bumping up against the debt ceiling. Given that these events will occur in about 3 1/2 months, the Europeans may well be able to keep kicking the can down the road until next year, and the approaching year end fiscal cliff and debt ceiling may be a bigger short term risk.

The risk to the U.S economy and stock market from Europe's declining economies is so large, that just this alone leads me to judge that U.S. stocks are overpriced. Add in the upcoming fiscal cliff and debt ceiling, and the potential for a spike in oil prices if war breaks out in the Mideast, and the euphoria in the market seems very difficult to justify. Seems like this might be a good time for me to take capital gains at the current rates.

Wednesday, September 12, 2012

Chicago Taxpayers are the Big Losers From Teachers' Strike

Lost among the sound bites arising the Chicago teachers strike is the fact that local taxpayers are getting hosed. Chicago's schools are broke. The Chicago Public Schools would have run a $665 million deficit even if the school board had only had held firm on the originally proposed 2% raise for this year. They certainly do not have a revenue stream that supports paying teachers 16% more in pay, even with the raises spread over 4 years. Thus, future tax increases will be the results of giving in to teacher's outsized salary demands. 

The school board folded on the pay raise issue almost immediately. Thus, future tax increases will be required to pay for the higher teacher salaries, unless Chicago's tax base miraculously increases. The widely publicized strike preparations of the Chicago Teachers Union over the summer led to an exodus of many families to the suburbs. The teachers actions have diminished an already shrinking tax base. Given the fact that taxpayers do not have a seat at the in these negotiation, decisions by upscale families to move out of the city are understandable.

On the public relations front, the Chicago School Board has failed miserably to communicate to taxpayers in Chicago how much a 16% raise translates into as a tax increase per household. Thus, for now Chicago's taxpayers are seem oblivious to the tax implications of the teachers' raises.

According to the Windy City Young Republicans, the total base salary/pension per year: $74,798 which if calculated into pay/per hour for the year would add up to about $34.50/hour assuming the teacher used all of their sick days.

Additionally, CPS teachers receive health coverage and are required to pay a minimal contribution from their base salary toward the plan. Currently the average contribution for a CPS teacher with a family is 1.8% of their base salary. Thus, the average teacher pays $1,282 toward the cost of their health plan. The range in employee contribution is from 1.3% - 2.8% depending on the level of coverage selected.

As long as teachers and public service unions continue to hold leverage that leads to their getting outsize raises, the downward spiral to economic calamity in cities like Chicago and states like Illinois will continue. The immense political contributions of the public unions keep politician under their control. The playing field has to be leveled if cities and states are to avoid bankruptcy. While it won't happen in Democrat party controlled Chicago, it would be a welcome development to see a school board decide to fire overpaid striking teachers and replace them with the 1000's of teachers that are out of work. 

Another teachers' strike is taking place in a suburb to the north of the city, Lake Forest. Time will tell whether the school board in this more conservative town holds the line in salary negotiations with the teachers. However, it will be challenging for the school board volunteers who care about their student to stand up to teachers that shamelessly hold students hostage.

Tuesday, September 4, 2012

Burning More Coal Due To Shutting Down Nuclear Plants

The environmental movement in Germany is so deeply brainwashed that its members fail to realize that shutting down nuclear plants leads to burning more coal. The naive assumption of the Greens that nuclear plants can be replaced via clean energy sources is ridiculously misguided. In reality, coal will be a primary source for electricity if Germany goes ahead with its plans to shut down all its nuclear plants.  The Germans are building over 20 coal-fired power plants to offset the shut down of nuclear power. Thus, shutting down nuclear plants increases air pollution and CO2 emissions. Some researchers even judge that the soot from burning coal is a bigger factor in the increased arctic temperatures than are CO2 emissions.

Germany drew some 20 percent of its total power from wind, water, solar and thermal energy sources in 2011. Even at this level there were increased costs as well as huge problems distributing power from the windy northern sections of Germany to the southern part of the county. On particularly windy days, some wind turbines had to be switched off because the current network cannot cope with the quantity of wind power being generated. It will require years, if not decades, to get all the permits required to build new power lines across the country that would make the goal of 50% of electricity from renewables feasible. 

Germany has already experienced a 10% increase in the cost of electricity. The costs will sky rocket if they close all their nuclear plants, as the country will go from being an exporter of electricity to being an importer. In addition to the increased number of coal fired plants within Germany, some of the imported energy will come from coal fired plants outside of German borders. Further, the intermittent nature of wind power requires wildly expensive backup power plants being built to fill in the gaps during periods of light wind, making significant increases in wind energy a form of economic suicide for Germany's energy intensive manufacturers.

Thus, the anti-nuke Greens in Germany are leading to increased soot and CO2 emissions due to forcing the country's utilities to burn more coal. 

Wednesday, August 22, 2012

Retail Sales in August 2012 Will Be Disappointing

The consumer in the U.S. is hurting. The large bills for air conditioning this summer, high priced gasoline, and the high cost of food are combining to hit consumers with a triple whammy. Disposable income is increasingly scarce in many households that are skimping to get by and pay for inflated food and energy costs.

Within my household, the battle over use of the air conditioner is becoming a major source of family conflict. We kept the house relatively cool during the record breaking heat wave in July (in my opinion, ridiculously cool), and the bill from ComEd is astronomical. We will be substituting macaroni and cheese for steak this month to cover the cost of this bill. This substitution of lower priced products and reductions in spending will be replicated in households across the country

Retail sales during August in the U.S. will be negatively effected by the reductions to discretionary income due to higher food and energy costs. The 0.8% increase in July sales came after three very weak months and consumers had  not yet felt the bite of higher prices that are just beginning to work through the production chain,” says economist Chris Low of FTN. “Because the food price increases are the result of a supply shock, not stronger demand, they will weigh on consumption down the road.”

Thus, my prediction is that the economists predicting another month of positive retail sales growth in August are going to be dead wrong. If there is any increase in sales at all, it will be due to higher costs, not increased demand. Be prepared for a disappointing retail sales reports when the August reports from are released by retailers and the Commerce Department. 

Sunday, July 15, 2012

Will The French Be Able To Tax Their Way To Prosperity?

The newly elected Socialist government in France plans on taking a path that seems almost certain to fail. Increasing the tax rates on the rich and upon big businesses seems like an unlikely route to prosperity. The tax increases include extra levies on those who pay the wealth tax, a 75% rate for households earning over €1m, higher inheritance tax, an extra 3% tax on dividends, heavier charges on stock options, higher taxes on financial transactions, banks and oil firms, and a 5% extra tax on big companies. 

The increased revenue is needed in order to meet deficit reduction targets of 4.5% of GDP this year and 3% next. Yet France desperately needs to grow their economy. The unemployment rate is about 10% and trending upward and business activity is flat. Increasing taxes is almost certain to restrain job creation and economic growth.

Among the various methods of reducing the deficit, the Socialist Party is taking the most politically palatable. Given how poorly reducing spending has worked out for Greece, it is no surprise that politically unpopular austerity measures have not even been put upon the table by the new government. Increasing taxes on the middle class would be equally unpopular. Thus, while the French increases in taxes on the rich and big business are likely to send the country into recession, the new government did not have a lot of other politically palatable options for reducing the deficit.

As the demographic time bomb of aging baby boomers explodes in economically developed democracies  across the globe, voters will have to choose between:  1) continuing to run up unsustainable deficits; 2) cutting entitlements, 3) increasing taxes, or 4)  making structural changes such as increasing the work week and pushing back retirement ages. It seems unlikely that France will be the only country to choose to increase taxes on the rich and big business. Despite the fact that increasing taxes on the rich and big business will fail in France, that lesson is unlikely to be learned as deficit problem worsen in every country with generous entitlement problems for aging baby boomers.

Wednesday, July 4, 2012

How Will French Plan to Reduce Budget Deficit By Soaking The Rich Work Out?

Wealthy individuals in democracies across the world had better keep a close eye on what is happening in France. While governments in the U.S,, U.K., and Japan continue to run up unsustainable public debts. the government in France is taking measures to reduce their deficit. The newly elected socialist government is doing so by implementing the only solution that is politically feasible in the age of entitlements -- soak the rich and big business.

There is little appetite in the U.S. for the type of deep cuts that would be required to balance the budget. Thoughtful plans to for deep budget cuts, such as those proposed by Paul Ryan or the Simpson-Bowles Commission are brushed aside by knee jerk attacks by the left. The Tea Party talks a good game about balancing the budget, but has too much that is off limits to make doing so feasible, including their inflexibility on taxes. Proposals to reduce medical spending are met with demagoguery on the Right about "death panels", and defense spending cuts are off the table among the favored candidates of conservative voters.

In the age of entitlements, voters want ever more benefits, but are deeply reluctant to pay more in taxes. The only type of taxes that voters will approve are those that are imposed upon the rich and big businesses. Thus, the wealthy had better hope that the French plan to soak the rich fails miserably, otherwise they are next on the docket for big tax increases in democracies running big deficits.
The following is a summary from the The Guardian of the French plan to soak the rich 

 Over half the measures target households, mainly the country's richest, and just under half target big business. They include lowering France's wealth-tax threshold, which had been raised by Nicolas Sarkozy. France's wealth tax is unique in the EU and Hollande will now add a one-off higher levy on those with net wealth of more than €1.3m. Inheritance tax, which had been loosened by Sarkozy, will be tightened.
• Banks will face higher taxes, as will petrol giants through a new tax on energy firms holding oil stocks. A 3% "dividend tax" must be paid by companies on dividends distributed to shareholders. This aims to encourage firms to use cash flow for investment as France seeks to close the competitiveness gap with its industrial powerhouse neighbour, Germany.
• The tax on financial transactions will be doubled to 0.2%.

Wednesday, June 27, 2012

Global Warming May Lead to Food Shortages within Months, Rising Sea Level Decades Away

Much of the doomsday messaging about global climate change is focused on the potential impact of rising sea levels. However, the potential problems from rising sea levels are seemingly easy to disregard because it may be decades before the consequences become devastating. On the other hand, it may only be a matter of months before the world is facing serious food shortages. Drought conditions across the globe are reducing crop yields and food shortages could become serious before long. There is an immediacy to the near term impact of extreme weather that is more worrying than the long term problem of rising sea levels.

The U.S corn belt is facing the worst drought since 1988. Only 56% percent of the U.S. corn crop was in good-to-excellent condition as of June 24, a 20-year low for this point in the season according to the USDA. Korea is suffering its worst drought in recorded history. In Europe, crop yields are likely to be reduced by drought in Spain, northern Germany, eastern Italy, Ukraine and southern Russia. In China, severe drought is parching the eastern Anhui province and the central Hubei province. In Africa, due to the combination of drought and armed conflict, more than 17 million people are facing possible starvation in the Sahel region, the zone skirting the southern portion of the Sahara Desert. In South America, the drought during the last growing season resulted in low yields in Brazil and Argentina--both major players in the global grain market, and the two largest producers of soybeans after the United States.

Are the drought conditions in many parts of the world due to global climate change, or are they just normal variations in weather? The fact that the decade long shortage of rain in Australia has come to an end, and the drought has moderated in some parts of Texas demonstrates that weather and rainfall are variable from year to year. However, it is not very challenging to connect the dots and come to a conclusion that there is a connection between global warming and the increasingly frequency of droughts. According to meteorologist Jeff Masters.
The stunning extremes gives me concern that our climate is showing the early signs of instability. I suspect that crazy weather  becomes the norm
Global climate change is highly controversial, as are the steps that are appropriate to be taken to minimize its impact. However, it seems to me that for those that want to raise an alarm about the consequences of global warming, is much more compelling to claim that food costs will go up 25% within the next couple of years and that millions will suffer from food shortages, than declaring that the sea level will rise in future decades. It will be harder to ignore a problem that confronts us on every trip to the grocery store than one that is decades off. While the science connecting drought to global climate change is far from settled, the correlation is strong enough that it seems probable that it is only a matter of time until additional evidence of direct causation is found.

Related Post
Should We Worry About Extreme Weather Causing Inflated Food Costs? 

Sunday, June 17, 2012

Would Romney Be As Fiscally Irresponsible As Bush?

Bond buyers have been remarkably compliant in allowing the U.S to fund its $15 trillion national debt at low interest rates. However, if the U.S. continues to add a $1 trillion or more annually to the national debt, the consequences for the economy could be disastrous by the end of the decade. If Obama wins the election, the U.S. is almost certain to continue down a path of huge annual deficits. However, if Romney wins would he really cut spending enough to avoid a fiscal calamity? Or would his legacy by closer to that of Geoge W. Bush, who ran up $4.9 trillion in debt during his two terms in office.

Mitt Romney claims the he will keep the U.S. from becoming like Greece, Spain, or Italy, but for the most part has only made vague claims on how he would cut the budget. His platform promise to increase defense spending by $2 trillion over the next ten years requires painfully deep cuts in entitlements if he is to make any real progress on reducing the deficit.

The vague promises that Romney has made to cut spending will not give him a mandate to slash entitlement programs. Given the current stalemate in Congress, it seems unlikely that he would be able to push through much in the way of budget cuts, unless the Republican party gains control of both the House and the Senate. And even if the Republicans gain control of Congress and the Presidency, it seems doubtful that they truly have the political will to make the types of deep cuts to entitlements that would be required to close the budget gap. Thus, it seems likely that regardless of who is President, the U.S. will continue down a path towards fiscal calamity. However, a candidate that talks a good game of fiscal responsibility is probably a better choice than one that does not even have it on his agenda.

Thursday, May 10, 2012

How Paul Krugman and Global Warming Skeptics Think Alike

In a thought provoking article on the global warming debate, a point made by the author is that the conflicting views about global climate change delve down to a question of how "sensitive" is the earth to the tons of CO2 being pumped into the atmosphere. If global warming skeptics are correct, then the earth's temperature is not very sensitive to the impact of CO2 emissions and global climate change alarmists such as Jeff Masters and James Hansen are misleading the public.

The issue of "sensitivity" is equally critical to the debate on sovereign debt. As shown by the low interest rates for the government issued debt of the U.S., Japan, the UK, and Germany, the economies of developed countries that control their own monetary policy via sovereign central banks have a low sensitivity to their current huge level of national debts and deficits. However, at some point interest rates are almost certain to show more "sensitivity" to government debts and deficit spending.

Paul Krugman favors larger deficits, seeing historically low interest rates as a go-ahead for even more federal borrowing.  He supports massive New Deal-style public-works spending, which would employ “armies of government workers.” Krugman also favors more monetary stimulus by the Fed to boost spending throughout the economy. Krugman's position is that we have not used enough Keynesian stimulus ammunition on the monetary or fiscal fronts. 

In my view, the complacency and optimism of both Krugman and global warming skeptics is lunacy. The U.S. economy may muddle along for another 2-5 years behind a fiscal policy that adds a trillion dollars a year to the national debt, but at some point the sovereign debt will become unsustainable. Similarly, our planet may be able to sustain a couple more decades of pumping over nine billion metric tons of carbon a year into the atmosphere, but eventually this will lead to severe and disruptive climate change. Krugman and global warming skeptics may believe in low sensitivity of: a) the economy to debt and b) the planet to carbon emissions, but this path is filled with frightening long term risks.

Related Posts
A Scorecard For Ranking U.S. Treasury Debt Risk Versus Other Countries

Wednesday, May 9, 2012

Will Greek Exit From Euro Lead to Tourism Limiting Riots

It seems inevitable that Greece will exit the Euro. The kicking the can down the road is coming to an end with there seemingly being little likelihood that a government willing to agree to the Troika imposed austerity measures is electable. It also seems unlikely that the Germans will compromise on making changes to the bailout package. Thus, without a bailout, Greece will run out of money within a few months. This default will lead to converting back to the Drachma .

Conventional wisdom seems to suggest that about a 50% devaluation of the Drachma versus the Euro will  ultimately be the result. However, since Greece is not self sufficient in energy or food supplies, this will result in higher costs, with a doubling of the price of some imported goods. It would not be terribly surprising if the higher cost for food and energy led to civil unrest.

A huge potential benefit to the Greek economy of a devalued Drachma is that it makes traveling in Greece cheaper. Greece could benefit from a huge tourism boom due to exiting the Euro. However, if the consequences of exiting the Euro are turmoil and chaos, tourists will stay away. Thus, in this worst case scenario, Greece would not achieve much of a bump in tourism, but would incur higher costs for imported goods. The assumption that a devalued Drachma would lead to a tourism boosting economic revival may turn out to be wishful thinking. The downward spiral of the Greek economy may continue without much help from the tourism industry.

Friday, May 4, 2012

Will Coal Train Protesters Cause Economic Harm?

Over the last few months on this blog, I have been suggesting that environmental activism is likely to become a  headwind in the future for economic activity. Successes of the environmental movement include  shutdowns of nuclear plants in Japan and Germany, and the moratorium on building the northern section of the Keystone XL pipeline. The next target of the North American environmental movement is coal trains and coal export terminals.

On Saturday (May 5), protesters are planning to block Burlington Northern Santa Fe coal trains from reaching Vancouver’s ports. "From dawn to dusk on May 5th we will also stop all unloaded coal trains traveling [southeast] approaching mile 122  (White Rock pier) on the New Westminster Subdivision, Northwest Division," explains a letter addressed to Warren Buffett from Stop Coal B.C.
The planned Saturday protest follows closely on the heels of the Thursday (5/3) arrest of seven anti-coal protesters after they chained themselves to a railroad track outside of Terrell, North Carolina and halted a coal train heading to a Duke Energy power plant.

The coal train protest movement has the potential to gain significant traction. The Occupy camps tapped into a desire to be a part of a protest movement held by many of today's disaffected and unemployed youth. The Occupy protesters became a mass movement despite a fatally flawed lack of direction and failure to actually accomplish anything. The coal train protesters goal to "save the planet" and capability to disrupt coal deliveries give this movement a highly targeted focus and potential for achievement that is much more compelling than complaining about "the 1%".

A geography that could offer fertile ground for recruiting activists for the coal train protest movement is Appalachia. There is a wide spread sense across this region in which mountain tops are being lopped off  that their beautiful scenery is being destroyed and environment damaged simply in order to ship coal off to India and China.

The coal train protest movement definitely bears watching. Time will tell whether it will gain enough traction to impact coal shipping and harm the U.S. and world economies.

Thursday, May 3, 2012

Drought in Spain and Italy Adds To Economic Woes

The weak economies of Spain and Italy are being battered by Mother Nature. In addition to the debt and  unemployment crisis in these countries, the agricultural sector is also being hit by freakish weather. In Spain, a spring spell of cold and wet weather, coming on the back of the driest winter in over 50 years, reduced crop yields. The continuation of Spain's long-running drought has cut the country's capacity to irrigate crops and generate hydro power. Scarcity of hydropower makes Spain more dependent on gas-fired generators and increases spending on imported natural gas.

Much of Italy is also suffering from drought. As shown in the image below, most of the country is in drought conditions. If the drought worsens significantly this summer, it will a huge drag on the economy due to: 1) reduced income for farmers: 2) reduced employment for farm hands, and 3) higher food costs.

Source: Global Drought Monitor

Thursday, April 26, 2012

May Day 2012 Rioting Was Surprisingly Sparce

Given the high levels of youth unemployment in the North America and Europe, it is mildly surprising that May Day 2012 did not result in a wave of violent protests and riots. While there was violence and vandalism in Seattle, Montreal, and Oakland, the demonstrations were peaceful for the most part across most of Europe and North America. The efforts of anarchists to use May Day to stir up a wave of disruptive demonstrations mostly failed

There is a huge amount of rage among unemployed youth. The hordes of unemployed is a tinder box that may be unleashed in the future, but at least on May Day 2012, did not erupt.

Wednesday, April 25, 2012

Oil Prices Seem Sticky Above $100 A Barrel Despite Lessening of Iran Tension

A critical reason for the lack of growth in the economies of Europe, Japan, and the U.S. is the high cost of oil. Expensive oil serves as a tax on economic activity. Two of the primary factors getting the blame for the high cost of oil are: 1) speculators; and 2) the threat to supplies due to a potential conflict between Iran and either Israel or the U.S.

The price of a barrel of oil trading on the NY Mercantile Exchange is basically flat today at midday despite news that "Iran Considers Halting Nuclear Expansion to Avert EU Oil Ban". While it may be that traders are discounting this news as simply more posturing by Iran, it is disconcerting that it has not been a bigger market mover.

The price of oil may be permanently stuck at a price above $100 a barrel. Demand keeps increasing while supply stays flat and the cost of production goes up. Yes, lots of new sources of oil are being found or are becoming economic to produce now that oil is so pricey. However, these new sources of supply are barely keeping up with the growing demand from Asia and South America. Further, as the supply from established oil fields with low cost of production diminishes by about 5% per year, the high cost of production from new sources virtually guarantees that oil will never again drop below $80 per barrel for an extended period of time, unless there is an absolute collapse in demand. The supposed  "speculative bubble" may not exist, but simply be a function of traders foreseeing that future demand is likely to outstrip future production.

Some economists judge that the growth of economic activity in Europe, Japan, and the U.S. since WWII was largely based on the availability of cheap oil. If they are correct, it raises serious questions about how these developed economies can rekindle growth given the massive debts they have incurred and the high costs of supporting ageing populations. In addition to the high cost of oil, all three economies have self imposed incremental energy costs. Japan and Germany are paying more for electricity due to shutting down nuclear plants. In the U.S., cost efficient coal power plants are being shut down.

What will it take for Japan, Europe, and the U.S. to re-ignite economic growth despite high oil prices? Lessening of tensions with Iran may not lead to a plunge in the price of oil. Thus, given the drag on the economy from high oil prices, the agonizingly slow pace of economic growth in the U.S. of the last couple of years may be as good as it gets.


Tuesday, April 17, 2012

Should We Worry About Extreme Weather Causing Inflated Food Costs?

The cost of buying food is going up. The food-at-home Consumer Price Index (CPI) increased 4.8% in 2011. One of the factors that led to higher food prices was the weird weather. Not only was the U.S. hit with extensive flooding in the Midwest and drought in the Southwest, but changing precipitation patterns and mounting water stress cut into food production around the world.

The weather has gotten even weirder in 2012 and may lead to even bigger increases in food costs this year. The European cold snap is likely to reduce the continent's soft wheat crop by about 5%. Officials in Texas cut off irrigation water to rice farmers downstream of reservoirs depleted by the worst one-year drought in Texas history. It is the first time in its seventy-eight year history that the Lower Colorado River Authority has cut off water to farmers. In California, only 50 percent of the water requested from the State Water Project is expected to be delivered to nearly one million acres of irrigated farmland due to the lack of snow this winter.

So the question becomes, are the spate of floods and droughts just a fluke, or is extreme weather going to get worse? According to a couple of theories, the droughts and flooding are being caused by aspects of global climate change.
1) research by Jennifer Francis and Steve Vavrus suggests that warming in the Arctic is causing weather patterns in mid-latitudes to become more persistent. This persistence can lead to conditions like heat waves, cold spells, drought, flooding, and heavy snows. The researchers found that as temperatures in the Arctic warm and become closer to temperatures in lower latitudes, the waves of the jet stream tend to spread out, and west-to-east winds slow down in the upper level of the atmosphere (where storm tracks form). Both of these effects tend to slow the progression of weather patterns, which means that a weather pattern, whether hot or cold, is more likely to stick around.
2) A 4% increase in atmospheric moisture has been observed and is consistent with a warming climate.7 The increased moisture in the atmosphere is driving the shift to heavier but less frequent rains — “when it rains, it pours.” While an atmosphere that holds more moisture has greater potential to produce heavier precipitation, precipitation events also become less frequent and shorter, as it takes longer to recharge the atmosphere with moisture.9 By analogy, a larger bucket holds and dumps more water, but takes longer to refill.
If the above theories are correct, then it seems likely that the balance of 2012 will continue to feature extreme weather events. An increase in droughts and flooding would lead to further agricultural losses. And the increase in weird weather may be a long term problem. If extreme weather leads to food shortages in future years, big increases in the cost of food could become a serious problem. Thus, it seems appropriate to worry about extreme weather inflating the cost of buying food.

Tuesday, April 10, 2012

Deficits Must Not Matter -- U.S. Treasuries and Japanese Yen Both Rallying

The decline in U.S. stock prices and the increase in interest rates for the sovereign debt of Spain and Italy are getting most of the headlines today. However, it is noteworthy that the U.S. Treasury Bonds and the Japanese Yen are both rallying. The interest rate on the 10 year Treasury note dropped back below 2.0%. The Japanese Yen continued it's rally versus the U.S. dollar and closed at $0.807, a 4% jump in the past three weeks.

At least for now, traders are certainly complacent about the huge U.S. and Japanese deficits. The fact that the U.S. and Japan are projected to run the largest deficits as a percent of GDP among all world's developed countries is obviously not scaring off traders. As shown below, the deficits in the U.S. and Japan in 2012 are projected to be 9.3% and 8.9% of total GDP respectively.

Neither the U.S. nor Japan are taking any measures that will put a dent in their deficits in 2012. While continuing to run up massive deficits may lead both countries to fall off a fiscal cliff within the next few years, they obviously are considered safer haven than Europe.

Ultimately the huge deficits the U.S. and Japan are running up will matter. But given that the consequences of  unsustainable deficits may not wreck its fiscal havoc for a number of years, and traders have a very short time frame, deficits of countries that control their own currencies do not matter much for now in the bond and currency markets.

Friday, April 6, 2012

When Will Romney Slam Obama For Trillion Dollar Deficits?

The attacks that Mitt Romney has taken at President Obama so far have been no more damaging than the light jabs that fighters sometimes throw early in a boxing match. However, there is a purpose to boxers' jabs. They are using them to explore for opportunities and set up an opponent for bigger blows later in the fight. In the case of Mitt Romney, his lame attacks on Barack Obama are due to the fact that he is a weak campaigner.

Here is a message for Romney -- explain to American voters the dangers of four more years of trillion dollar deficits that a second term Obama administration would bring. Stop being so wishy washy and use justified fear mongering. The current Romney message is not connecting with voters. Romney is never going to be able to pull off a positive message the way the Ronald Reagan could. Yes, American voters would like an upbeat "shining city on a hill message", but Romney is not a strong enough campaigner to make it work for him.

The Romney campaign should go back and review tapes of Ross Perot's campaign. It is remarkable to recall that back in June, 1992, Ross Perot led the presidential popularity polls with support from 39% of respondents (versus 31% for Bush and 25% for Clinton). While part of Perot's appeal was his populist anti-establishment message, his core platform was the need for an end to U.S deficit spending. In hindsight, it seems almost hard to believe that one of his campaign infomercials drew 10.5 million viewers for a message that was loaded with economic statistics. 

The U.S. debt crisis is far more severe in 2012 than it was in 1992. There should be a lesson for U.S politicians from the popularity gained by Ross Perot. His use of charts to explain the dangers of the growing U.S. debt made the deficit math easy to understand.  And once U.S. voters understood the problem and the fact that Perot stood to address it, he gained widespread support from both conservatives and liberals. Given the incredible missteps of Perot's campaign, including dropping out of the race and then jumping back in, it seems shocking that he still ultimately received 19% of the vote on election day.

Illustrating the dangers of an Obama administration running up the U.S debt up to $20 billion during the next four years is a powerful campaign message. It is time for Romney to start using some justified fear mongering. The American voters need to understand what is at stake in this election. So far, Mitt Romney has failed to give voters a persuasive reason to vote for him. Romney needs move beyond weak jabs along the lines of Obama being "anti-business, anti-investment and anti-jobs" and start throwing some powerful uppercuts.


Monday, April 2, 2012

Why Are Gasoline Prices So High? The Japanese Nuke Shut Down Is A Contributing Factor

The high price of gasoline in the U.S. is primarily due to the high cost of oil. While there are many causes for the high cost of oil, a key factor is oil traders requiring a premium price for orders for oil in a market that is experiencing increasing demand amid concerns about supply disruptions. 

The demand for oil has been increasing in Asia as economies grow and car ownership becomes more commonplace. China has already surpassed the U.S. as the world's largest car market. The market for new car sales in India has also grown, to the point where it now is over a quarter the size of the U.S. market.

However, in addition to steady growing demand for oil throughout Asia, there has been a sharp spike in demand for oil from Japan due to shutting down nuclear power plants. Since the March 11, 2011 earthquake and tsunami that wrecked three reactors at the Fukushima plant northeast of Tokyo, Japan has shut down all but one of its 54 nuclear power plants. The country relied on nuclear sources for almost 30 percent of its electricity before the disaster. Japan has increased its oil imports for power generation by about 275,000 barrels a day .

It would be an overstatement to conclude that incremental demand from Japan of 275,000 barrels a day of oil was a primary cause of the increase in oil prices. This incremental demand only represents a fraction of the 90,000,000 billion barrels a day consumed world wide. However, it is a contributing factor to the tight supply of oil.

The Japanese economy was struggling before the tsunami hit north of Tokyo. The extra cost of importing 275,000 barrel of oil per day is one of the factors the converted the country from being an exporting powerhouse into a net importer during January, 2012. Time will tell whether Japan decides to restart its nuclear plants, but if they do so, it may offer a bit of a relief from today's high gasoline prices.

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Tuesday, March 27, 2012

Will The Standard of Living of Our Children Decline Due To Profligate Spending and Depletion of Resources?

I got into a debate the other day about whether our children will experience a declining standard of living. My opinion is that the standard of living in the U.S. for our descendants is going to be significantly below current levels due to: 1) massive government debt; 2) underfunded pension and medical obligations, 3) an ageing population; 4) resource depletion; 5) extreme weather.

Regardless of whether my bleak view of the future is accurate, I find the complacency regarding the risks of the economy heading off a cliff to be inexplicable. The U.S. economy may muddle through for the next few years, but the fact that our profligate behavior is creating so much risk for our children is concerning. If the World War II generation was the “greatest generation”, will we be considered the “worst generation”.  I do not think it to be much of an exaggeration to consider our generation to be financial sociopaths. We continue to pile up government debt to support our lifestyles, while leaving the burden for future generations to pay off.

It seems highly likely that the U.S. will elect politicians in November that will continue to pile up trillion dollar annual deficits. At some point, the massive government deficit and debt will become unsustainable. Further, U.S. voters do not have the political will to address the coming Medicare crisis. The depth of the Medicare crisis is outlined in Mish’s post on the 2013 Budget Showdown.

The current frustration over the current high cost of gasoline may grow in intensity as the supply of cheap oil is depleted. While enough new sources of oil has and will be discovered such that we will not run out oil during this century, supply is tight and may get tighter. As the expensive of pumping and refining new sources of oil continues to go up, so will the price of gasoline.  Further, investment in clean energy simply produces electricity, it does not replace oil. I challenge anyone to remain complacent about the impact the cost of oil may have on the U.S economy after reading Global Oil Risks in the Early 21st Century.  Oil is not the only resource that is being depleted. Aquifers are being depleted. The oceans are being over fished and becoming more acidic.

The more time that passes before U.S. voters address the fact that we are on a path toward an economic calamity, the harder it will be to avert the crisis. Given the current failure and total lack of political will to address hard economic choices, I fear the standard of living of our children will be substantially lower than what we have experienced. 

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Tuesday, March 13, 2012

Insane Interest Rates - Countries With 10 Year Bond Yields Lower Than Their Rate of Inflation

The Fed warned today that "inflation could rise temporarily because of the recent increase in oil and gasoline  prices." Given the likelihood of inflation increasing, it seems insane that the interest rate premium for 10 year U.S Treasuries is below the level of inflation. It is straight out of economics 101 that bond pricing includes
An inflation premium added to compensate for the expected loss of purchasing power;
thus, it is obvious that the U.S. bond market is being artificially manipulated to keep interest rates low. While the interest on the 10 Year Treasury did rise a bit today to 2.077% , the rate is still well below the 2.9% rate of inflation in the U.S.

However, as shown in the chart below, the U.S is just one of a number of countries with interest rates on sovereign debt that is below the rate of inflation, basically featuring negative real rates of return. The market with the most negative real rate of return is Hong Kong at -4.8%. The negative real rate of return in the U.S. is also surpassed by Singapore, the UK, Finland, and Denmark. (For reference, today's rise in the U.S. rate on the 10 year note is not reflected in the chart below)

Given that interest rates on sovereign debt is likely to revert back to levels above the rate of inflation at some point, and the world could be in for a nasty bout of inflation due to higher oil prices and money printing by central banks, it seem unlikely that the 10 year notes of the countries listed above will turn out to be good long term investments.

Thursday, March 8, 2012

Proposing A $1 A Gallon Gas Tax Would Be Political Suicide, But Would It Be Good Policy?

Most car and truck drivers probably have a viscerally negative reaction to the idea of higher gas taxes. However, given the tightness of oil supplies and the massive budget deficit, this might be a tax that is appropriate. Reducing demand for oil would extend and conserve this resource for future use. As has been shown with tobacco taxes, behavior and consumption is influenced by price. Reduced demand for oil in the U.S. would make us less dependent on hostile foreign sources and reduce the number of dollars flowing out of this country. Further, increased oil drilling (drill baby drill) and reduced consumption are not incompatible. Both are required to eliminate the 9 million barrels of oil the U.S imports daily.

New technologies and newly discovered oil finds seem to have pushed back peak oil by a decade or so, but the world is running out of easy to find, easy to pump oil.  The cost of oil seems likely to be on a slow upward spiral as demand  from Asia increases and oil becomes increasingly expensive to find and pump. More leaks and spills seem likely as drilling takes place in hostile and fragile environments. 

The challenge of closing the budget deficit is illustrated by how little support a gas tax would engender. U.S. voters may approve of imposing increased taxes on the rich, but are unwilling to increase taxes that impact themselves. Cuts in entitlements are equally unpopular. Thus, the U.S. will continue to run up huge deficits for the foreseeable future. A gas tax would offer a long term benefit by preserving scarce oil resources, as well as reducing the budget deficit. However it has no chance of gaining support as long as U.S voters remain complacent about the deficit and the diminishing supply of cheap oil. Time will tell if our profligate behavior comes back to haunt us in the future.

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Tuesday, March 6, 2012

Euro Zone Economy Declined Even With Mild December Weather, Cold Snap Impact to Show Up In Next Quarter Report

Headlines from Europe are causing losses in financial markets in the U.S. today. According to the European Union's statistics office, output in the 17 countries sharing the euro shrank 0.3 percent in October to December from the third quarter. While the uncertainty over a Greek debt deal may be an even bigger factor in the declines in the financial markets, concerns about the sinking European economy are contributing to the decline.

The monetary stimulus provided by the ECB has kept the European banking sector afloat and held down interest rates for sovereign debt, but has not provided a meaningful boost to economic activity. When reports on January through March economic activity are issued, it seems almost certain that further declines will be reported. The almost month long cold snap the began during the last week of January sapped economic activity in the eastern countries of the Euro zone. In particular, tourism and shipping declined due to the cold and snow. While the western countries of the Euro zone, including France and Germany, escaped the brunt of the cold and snow, they still felt the impact of higher energy costs due to high demand across Europe. The high heating bills during the cold snap were Euro zone wide and the reduced economic activity impacted a significant number of the member countries

The negative impact on economic activity from the cold snap, the higher cost of oil this quarter, and reduced government spending resulting from austerity budgets will combine to weaken first quarter economic activity in the Euro zone. The economic forecasts predicting a mild recession in Europe may be overly optimistic, at least in their predictions for the 1st quarter. Be very wary of the impact of the European recession on U.S. financial markets. So far, the weakness in the Euro zone has not spilled over into the U.S., but continued de-coupling is by no means assured.

Thursday, March 1, 2012

Would Greece Suffer From Food Shortages If They Left The Euro?

In previous posts, I have suggested that going back to the Drachma might be the only solution to the Greek debt problem. A devalued Drachma would make Greek exports more competitive and increase revenue from tourists taking advantage of low prices. Numerous other commentators have published posts along a similar vein.

However, there is a monster problem with Greece leaving the Euro, the country is not self sufficient in food production. The cost of imported food might double if the Drachma experienced a 50% devaluation. As reported by Megan Greene,
Greece has few export industries it could rely on to grow its way out of the crisis even if it devalued its currency. There is tourism, but any profits from shipping are kept out of the country and green energy is still but a mere pipe dream as an export industry for Greece. Given that Greece is not self-sustaining in agriculture,  a devaluation accompanied by hyperinflation would result in a starving population, and that the resulting civil unrest would destabilize the entire Balkan region
Thus, while a return to a devalued Drachma would be good for those whose make their livelihood from tourism and related services, the rest of the country would be plunged into even more dire straits. The high cost of imports, including food and energy, would push a significant portion of the population into poverty. 

The current efforts of the Troika are primarily based on avoiding short term damage to the European financial system from fallout that will occur when unsustainable Greek deficits and debt lead to a default on their sovereign debt. However, the austerity measures being forced upon the Greeks are destroying the economy. No real solutions that might potentially solve the problems caused by a government that spends more than it collects in revenue are even on table at this point. Given the downward spiral of the Greek economy, deficits will continue to mount. Eventually, the Greeks will either decide for themselves to leave the Euro zone or they will be forced out by the member countries that are already weary of funding Greek deficit spending. Regardless, of whether Greece voluntarily leaves the Euro zone or if they are forced out, the outcome will likely be years of grinding poverty for the Greek population.

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Wednesday, February 29, 2012

Leap Day Weather Weirdness Suggests Global Warming Is Not Just A Hoax

A scan of the headlines on on Leap Day 2012 illustrates that weather weirdness is striking across the U.S. While weather extremes are normal, today is yet another day when the weather seems to be on steroids.
  1. Record heat is being experienced in the South and Midwest, 
  2. 17 tornadoes have been reported and damage is widespread in some towns
  3. the drought in California is worsening. 
Is seems hard to reconcile Rick Santorum's claim that "global warming is a hoax" with the increasing frequency of extreme weather. While the weather being experienced today across the U.S. does not prove anything in regard to climate change, it certainly seems to be a reason to pay attention to the predictions of those warning about global warming. Of course, with it being a leap day, the high temperature records that will be set today only have 1/4th the usual competition as on others day of the year, so they can be somewhat discounted. However, regardless of the lower hurdle for new records on a leap day, the 80 degree temperatures predicted for southern Texas and Florida are remarkably warm for February.

Hottest Day Records

If global warming theory is valid, the U.S. may be in for a hot summer. It appears that La Nina is winding down and may end in a few months. Thus, the cooling effect of La Nina caused by cold waters rising to the surface in the Pacific is unlikely to influence the summer temperatures in the U.S.  Last year was the coolest La Nina year on record. This summer we will discover if  new records for hot weather will be set without the qualifier of only being compared to other La Nina years.

Tornadoes and Hurricanes

The wild card into whether there is a trend toward an increase in extreme weather in the U.S will be shown by whether there is a change in tornado and hurricane activity.  According to meteorologist Jeff Masters, last year's "incredibly violent tornado season is either a fluke, the start of a new trend, or an early warning symptom that the climate is growing unstable and is transitioning to a new, higher energy state with the potential to create unprecedented weather and climate events. All are reasonable explanations".

It is also impossible to predict the number and potential devastation from hurricanes striking the U.S.  Any of the following the could either be the beginning of a trend or a normal variation in the weather:
  1. an increase in tropical storms in 2010 and 2011- suggesting more hurricanes hitting the U.S. 
  2. only one hurricane has made landfall in the U.S. since 2008- suggesting no change in hurricanes hitting the U.S.
  3. the massive devastation from hurricane Irene - suggesting the hurricanes hitting the U.S. may become more powerful and destructive in the future
The weird weather striking across the U.S. provides evidence that climate change may be having an impact on local weather. However, while the debate about global warming is a source of contentious debate, there is too much evidence of its impact to label it a hoax. Global warming researchers predictions may be faulty, but there is not an organized attempt to perpetuate a giant hoax. 

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Monday, February 27, 2012

U.S. Debt Ceiling Scenarios - When Will The Ceiling Be Hit and Which Party Will Control Congress

The U.S. government is rapidly spending its way toward the debt ceiling. Treasury Secretary Tim Geithner recently told lawmakers that he expects the debt limit to be reached "quite late in the year." The United States will likely hit the $16.4 trillion debt ceiling between late November 2012 and early January 2013.

The Treasury Department can employ a variety of accounting maneuvers to push back the deadline prior to  the U.S. defaulting on its debt. It did so last year, when the debt limit was technically reached in May but Treasury was able to push back the deadline until early August. Thus, it seems unlikely that the debt ceiling debate will have to be broached by Congress until after the November election.

Regardless of what scenario plays out, the solution will be messy. The credit rating of the U.S. is in danger of being slashed again. Here are a couple of critical considerations:
1) Will Congress and the Presidency be unified under one party or remain split between the Democrats and Republicans?
2) Will raising the debt ceiling fall to a lame duck Congress and/or President to vote upon after the November elections but before the winners actually take their seats in January?
If the Democrats take control of all three branches of Federal government, raising the debt ceiling will probably be noisy, particularly if there is a Republican attempt at a filibuster, but should pass fairly easily. If Republicans take control of all three branches, it may take considerable arm twisting to round up the votes to pass the debt ceiling. however, it seems unlikely that they would force a Federal government shutdown by not passing an increase. As pointed out by Norm Ornstein, of the American Enterprise Institute, if President Obama loses the election, he may still have a strong hand to play in the debt ceiling negotiations, since the newly elected Republican President will not want his first task in office to be rounding up votes for a debt ceiling increase.

The most likely outcome seems to be that the U.S. will continue to have a divided Federal government after the 2012 elections. The seems little cause for optimism that the 2012 Congress will be any better at achieving compromises than the current Congress. The debt ceiling debate is likely to be just as contentious as it was last summer, however, the Republicans may not be amenable to any sort of compromise after the failure of the Super Committee to achieve an amenable solution to reducing the deficit.  

If voters send another divided government to D.C. in the 2012 elections, the potential for a bitter stalemate over legislation to raise the debt ceiling may be in the cards. A shutdown of the Federal government seems like an outcome with a reasonably high probability of occurring. Federal employees should probably be prepared for skipped paychecks and investors should probably be prepared for stock and bond prices to take a hit from a continuation of dysfunctional U.S. government.

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Thursday, February 23, 2012

Cold Snap and High Oil Prices Will Accelerate European Slow Down

Beware of economic data and surveys from Europe. Any backwards looking reports that are based on results prior to January 26 incorporate the boost to economic activity provided by the mild winter and stable oil prices up to that point. The cold snap and higher oil price will serve as a one-two punch that will lead to a dip in economic activity that will show up when reports on February results are released.

An example of using backward looking data to suggest that the European economic situation is muddling through is provided by EU Economic and Monetary Affairs Commissioner Olli Rehn who stated ""recent developments in survey data suggest that the expected slowdown will be rather mild and temporary" at a news conference the other day.

Europe is in danger of an economic slowdown that is much worse than just "mild and temporary". European December Industrial Output declined by 1.1%, led by a 2.7% drop by Germany, compared to November (which in turn was a 0.3% decline). The slide in industrial production most likely will show another big drop when February results are published.

The cold snap led to blocked transportation, reduced shopping and tourism, and higher energy costs. Just one  aspect of the cold snap, the freezing of the Danube, led to millions of dollars (actually Euros) in reduced economic activity. As shown in the map from NOAA, the temperatures in most of Europe were 4-6 degrees below normal for 30 day period from January 22 - February 20.

The European economy (as well as the U.S.) is being propped up by the $2 trillion liquidity injection in the past 4-6 months by global central banks, however, this massive money printing is starting to be reflected in higher prices for oil. Continued money printing (or if your prefer, quantitative easing) seems likely to lead to further increases in the price of oil. Combine the dangers of money printing with fact that the Greek debt deal is likely to unravel in the very near future, and it is challenging to come to any other conclusion than that the financial  markets are behaving with irrational exuberance. The recession in Europe is likely to be both severe and lengthy. At the very least, the results for February economic activity are likely to be depressed and come in lower than currently projected.

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Tuesday, February 21, 2012

Will Rising Oil Prices Burst the Money Printing Bubble?

The debt crisis has remained reasonably well contained over the last few months. The impact of planned austerity measures has not hit the northern tier of the Euro zone countries. Japan, the U.K., Canada, the U.S. and most of the world's other developed economies have blissfully proceeded along with continued profligate government spending. The reason that interest rates required to finance the burgeoning government debts has not gone through the roof is that central banks have been printing money by buying up the supply up government debt. Central banks have pumped nearly $7 trillion into buying government debt in the past 4 years.

So far, the gold bugs that have been warning that this money printing will lead to hyper inflation have been wrong. However, funding trillions of dollars in new debt simply by having central banks buy up the debt is unsustainable. There is a time limit on how many more years that U.S. can continue to add a trillion dollar to the national debt. Japan may already be at the edge of an economic abyss.

The inflationary effect of higher oil prices may hasten the bursting of the money printing bubble. If the opinion of some economists that proclaim that oil prices have a bigger impact on inflation than federal deficit spending is correct, then we may be in for a bout of inflation. The cost of oil impacts the price of almost every product sold in the U.S. in addition to its huge impact on food and transportation costs, as detailed in Do 2012 Economic Forecasts for U.S. Foolishly Discount High Cost of Oil?

There is a real danger that higher oil costs will function synergistically with the massive money printing to reignite inflation. And if interest rates go up due to inflation, government deficits will grow even larger as interest expense will grow. The whole process could turn into a vicious cycle of increasing inflation.

The irony of higher oil prices is that the effort of the U.S. to impose oil sanctions on Iran is backfiring. The higher prices of oil hurts the economies of the U.S. its oil importing allies, while increasing the compensation to Iran for their oil sales. The concept that an embargo on Iranian oil can be effective is incredibly foolish. Oil is too fungible to be effectively embargoed simply via economic sanctions.

The central bank money printing is creating a bubble that is sure to burst at some point during the next few years. Given the saber rattling by Iran, Israel, and the U.S., the price of oil seems unlikely to be headed anywhere but up. The higher price of oil could reignite an inflationary spiral and burst the money printing bubble before the November U.S. election. The rally in the price of gold over the past two days seems likely to continue. The gold bugs are starting to seem a lot smarter than they did when the price of WTI oil temporarily dropped below $100 a barrel.

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Thursday, February 16, 2012

Japan - Will The Economic Powerhouse of the Eighties Become The Next Greece?

During the 1980's Japan was a manufacturing dynamo that many feared would decimate the American industrial base. However, the country has lost its status as an exporting powerhouse. During 2011 it ran its first annual trade deficit since 1980.  The country also experienced a  2.3% contraction in the  GDP in the fourth quarter. It is stunning to contemplate the downward spiral that the Japanese economy has undergone within the last few decades. Japan may be approaching a tipping point that could lead the country into a depression. 

As reported by the New York Times in 2010, 
Japan rode one of the great speculative stock and property bubbles of all time in the 1980s to become the first Asian country to challenge the long dominance of the West. But the bubbles popped in the late 1980s and early 1990s, and Japan fell into a slow but relentless decline that neither enormous budget deficits nor a flood of easy money has reversed. For nearly a generation now, the nation has been trapped in low growth and a corrosive downward spiral of prices, known as deflation, in the process shriveling from an economic Godzilla to little more than an afterthought in the global economy.  
The economic outlook for Japan had gotten even worse over the last couple of years due to: 

  1. the March 2011 Tsunami 
  2. the increased cost of energy due to shutting down of nuclear plants
  3. the country's ageing and declining population
  4. the largest debt to GDP ratio of any country in the world at 235% 
  5. a government budget that will fund half off all spending via borrowing in 2012
The tipping point for Japan may be the countries high cost of energy. A powerful anti-nuclear movement has prevented Japan's nuclear reactors from being brought back online after they are shut for routine maintenance, and only three of 54 are now operating. Without approval for restarts, all of them could be shut by the end of April, boosting fossil fuel use and adding over $30 billion a year to the nation's energy costs. The elimination of this source of electricity has led to frequent brownouts, leading to increased manufacturing costs..

Tepco, the struggling operator of the tsunami-hit Fukushima nuclear complex, plans to raise electricity prices for commercial customers by an average 17 percent, citing a higher import bill as it shifts to fossil fuel-fired power generation. Concerns over the unstable supply and high cost of electricity have led to industrial production being shifted overseas, making it even more difficult to reverse the downward spiral of the economy.

The multiple problems facing Japan's economy make addressing the enormous budget deficit extremely challenging. The huge debt is only sustainable for now due to the low rate of interest on the government issued debt. However, if buyers start demanding higher yields for government debt, the size of the Japanese deficit will start increasing almost exponentially. 

Japanese Prime Minister Yoshihiko Noda's Cabinet is set to endorse his plan to double the sales tax in three years. With outstanding public debt that is over twice the size of the economy-- and higher than in Greece--Noda wants to raise the current 5% sales tax to 8% in April 2014 and then to 10% by October 2015 to fund growing social welfare spending. 

If the doubling of the sales tax passes, it may be as disastrous for the Japanese economy as austerity measures have been for the Greek economy. The downward spiral of the Japanese economy may pick up momentum and lead it to become the next Greece. 

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