Confluence of Housing, Energy, Commodities, Banking, Jobs & Food-price Strains Called 'Economic Perfect Storm'

On Thursday of last week, we found on the same day reports that mortgage foreclosures were at an all-time high in the US, the US dollar had fallen to an all-time low against the euro ($1.56 to 1€), the Federal Reserve joined with other central banks to infuse $200 billion into capital markets, oil hit an all-time record of $111/barrel, gold hit an all-time record of $1,001/ounce, Asian and European markets plummeted on news that Carlyle Capital —one of the world's largest capital management funds— was in collapse, and Chrysler would shut down its entire corporation for 2 weeks in July, with no pay, to "increase productivity".

The Fed deal for banks and bond-holders included a special allowance for banks to use otherwise questionable adjustable-rate-mortgage debt as collateral against the new loans. The move was an attempt to help banks re-capitalize holdings whose value had fallen so sharply that the likely result would be steep capital losses and a further wave of foreclosures. European and Asian central banks are likewise worried that a severe blockage in credit and lending in the US will cut into global export and trade potential.

Today, one of Wall Street's most prestigious and far-reaching investment banks, Bear Stearns, was bought for $2/share, a little more than 1% of what it was worth at the in late 2007, and just 10% of its worth just last Friday. Many investors lost far more than 90% of the value of their holdings; former CEO James Cayne is reported to have lost some 99.8% of the value of his holdings in the firm.

In January, the BBC reported that wild speculation by hedge funds may be driving financial deterioration extensive enough to create a global recession of historic proportions. Former Republican presidential candidate, Rep. Ron Paul (TX) has said US fiscal policy and government borrowing may overstress the US economy so severely it could lead to "global economic collapse".

On 14 March 2008, the last word in the US House of Representatives, spoken by Rep. Roscoe Bartlett (R-MD), warned of the economic crisis that could follow "peak oil", when oil extraction and production will enter a permanent decline, even as demand continues to rise worldwide. This was the 39th time Rep. Bartlett has presented the peak oil problem to the House of Representatives.

One can hardly exaggerate the swelling global economic crisis. Chinese officials are reportedly hoping that the crisis will slow its 10%-plus growth, because they are afraid unsustainable growth rates could lead to inflation. Exploding fuel costs, water resource depletion and the loss of arable land, along with the shift of grain crops to biofuels production, has brought a disturbing surge in food prices that threatens to exert long-term strain on economies across the world.

In June 2007, the Christian Science Monitor reported that:

A gallon of milk in Birmingham, Ala., is expected to cost $4.50 this summer, perhaps more. At Wetzel's Market in Glen Rock, Pa., the New York strip steaks that were on sale for $4.99 a pound last Fourth of July will be $6.99 this year. In Boston, some shoppers report checkout prices on certain items that are 30 percent higher now than last summer.

In 2007, Spain had one of its most productive harvests to date, yet the price of vital foodstuffs increased dramatically. The price of bread, the measure of economic stability or growth in Spanish tradition, increased by a stunning 40%, all while Spain's vibrant real estate and building sectors lost steam, and personal debt reached all-time highs, in an environment where incomes rarely grow by more than the mandatory minimum of the officially-declared rate of inflation.

Prices for basic grains in Kenya, itself a highly productive agricultural nation, have doubled in the last year. Recent political violence has slowed foreign investment, crippled the economy, turned off tourists and has delayed the start of the planting season, meaning that food production will likely diminish still further in 2008, as market pressures drive the cost of food sharply higher.

In a still more complicated case, Zimbabwe has inflation reported at 100,000% —some estimates in late 2007 put the rate of "real inflation" at 150,000%—, putting the price of bread into the millions of dollars (Z$). In 1980, US$1 was worth only Z$0.68, but by 2006, one US dollar was worth Z$101,000. The currency was revalued at 1,000 times its value, so that one US dollar was worth Z$101, but by the time the new currency was introduced, one US dollar was worth a revalued Z$250.

Part of the problem with the current economic unhealth is a failure of international systems to adapt real economic activity to globalized trade policies. Where markets have been "opened" and foreign investment has replaced failed compound-interest intergovernmental loan policies, the result has often been the displacement of resources without a corresponding infusion of comparable resources to balance the "innovations" of the global marketplace.

This means that agricultural powers —from Brazil to the US, Russia, Mongolia and western Europe— find themselves poorer in foodstuffs than they should be and facing price inflation, even as their real productivity has risen. The ability to move investment from tax-stressful markets to tax-favorable markets has built an expectation of gain into investment patterns that don't necessarily carry long-term economic resilience with them, making the reaction to underwhelming returns more severe than it should rationally be.

And industrial powers are finding that natural resources once considered so common and so basic in their overall economic expansion are now being distributed across the world, increasingly consumed in far higher per-capita rates by China and India —each close to or more than 4 times as populous as the United States—, meaning that the ability of traditional industrial powers to fall back on industry as a growth mechanism or to exert global economic power through industrial supply and demand dynamics, is severely diminished.

The tested wisdom available to most bankers and traders to deal with this apparently distorted but really "new-model" environment is limited. There has not been enough time to deal with a world where "emerging economies" can now dominate the pricing of global commodities like grains, metals and hydrocarbon fuels.

If we are seeing an 'economic perfect storm', what is not clear at present is whether it will be classed as a massive "correction" or whether it will build into a new productive model for global trade a tendency to shift resources away from traditional centers of power, a phenomenon for which few economic and political leaders are truly prepared.

FOOTNOTE: We may need to develop new technological alternatives to current regulatory practices, but keeping in mind that the freedom of movement of goods and services is key to the long-term health of a global economy. Balancing capital interests with consumer interests, lending interests with spending interests and resource availability with globalized demand are the keys to achieving such long-term resilience.

• HotSpring.fm: "Cloud Clarity vs. Shadow Banking"
  

Pittsburgh Jobs Conference to Focus on Greening of US Industry, Spurring Transition to 'Green-collar' Workforce

The emergence of ecological economic trends, methods and industries, means that a wave of job creation could be the stabilizing factor which helps American industry recover both momentum and public appeal, potentially helping to ease pricing pressures and banks' concerns about lending to individuals and small and medium-sized businesses.

An industry-environmentalist joint conference in Pittsburgh starting today will focus on the modes and the meaning of green job creation. According to the Houston Chronicle, "The growth of renewable energy should produce some 850,000 new jobs at existing U.S. companies alone, said David Foster, executive director of the Blue Green Alliance, a group formed by the United Steelworkers union and the Sierra Club."

The conference has as its aim the education of public officials, industry executives and other decision-makers, in light of new directions in energy, in public funding, in the long-term virtues of green industry, for both private interest and public good. And ultimately, the goal is to promote and to measure the progress made toward recasting the American industrial economy to survive in a globalized economy where environmental sustainability —still seen as costly and frivolous by many in leadership positions— is a basic requirement.

• Houston Chronicle: "Conference to Focus on 'Green Jobs'"

Why Ethanol Production Will Drive World Food Prices Even Higher in 2008

Lester R. Brown, EPI :: We are witnessing the beginning of one of the great tragedies of history. The United States, in a misguided effort to reduce its oil insecurity by converting grain into fuel for cars, is generating global food insecurity on a scale never seen before.

The world is facing the most severe food price inflation in history as grain and soybean prices climb to all-time highs. Wheat trading on the Chicago Board of Trade on December 17th breached the $10 per bushel level for the first time ever. In mid-January, corn was trading over $5 per bushel, close to its historic high. And on January 11th, soybeans traded at $13.42 per bushel, the highest price ever recorded. All these prices are double those of a year or two ago.

As a result, prices of food products made directly from these commodities such as bread, pasta, and tortillas, and those made indirectly, such as pork, poultry, beef, milk, and eggs, are everywhere on the rise. In Mexico, corn meal prices are up 60 percent. In Pakistan, flour prices have doubled. China is facing rampant food price inflation, some of the worst in decades.

In industrial countries, the higher processing and marketing share of food costs has softened the blow, but even so, prices of food staples are climbing. By late 2007, the U.S. price of a loaf of whole wheat bread was 12 percent higher than a year earlier, milk was up 29 percent, and eggs were up 36 percent. In Italy, pasta prices were up 20 percent.

World grain prices have increased dramatically on three occasions since World War II, each time as a result of weather-reduced harvests. But now it is a matter of demand simply outpacing supply. In seven of the last eight years world grain production has fallen short of consumption. These annual shortfalls have been covered by drawing down grain stocks, but the carryover stocks—the amount in the bin when the new harvest begins—have now dropped to 54 days of world consumption, the lowest on record. [Full Story]

'Davos Conversation' Allows Public to Match Ideas with Policy-Makers

The 'Davos Conversation' is a multimedia effort to bring online public together with major policy-makers, activists and economists, to broaden the scope of debate at the World Economic Forum. The question which was used as a platform for the online forum was "what one thing would make the world a better place?"

Individual citizens, government officials, economists and thinkers, recorded their ideas on video and blogged their answers, in an effort to ensure that there is contact between those thinking about the future of an increasingly integrated world's economic structure and those who have no direct say but will be affected.

Many take issue with the unfettered nature of "free market" capitalism, which some critics say is less about open markets and more a euphemism for the "laissez faire" plunder that shook the US economy and political system in the late 19th century, leading eventually to major anti-trust legislation.

Bill Gates, founder and chairman of Microsoft, put forth at the Forum itself his vision for a more humanitarian kind of capitalism, which not only acts responsibly, but envisions narrower wealth divides and increased prosperity among the poor as clear benefits for long-term financial gain.

Efforts to push for sustainable development as an absolute standard in international economic policy fed into debates on the nature of environmental resource depletion, agriculture, the hunger of developing nations for fuel and industry, and the responsibility of those at the top of one market for those at the bottom of another, socio-economically speaking.

Climate change was a prime subject, with presentations, videos, and some of the most credible debate yet on the policy side, as world leaders struggle to find a way to imagine tying down highly profitable but unsustainable industries in an effort to find a more responsible way forward.

Fmr. US pres. Bill Clinton espoused the theory of one British economist, who has called for the need for wealthy nations to voluntarily enter into an economic slowdown, if that's what's needed to arrange and implement a rapid transition away from the carbon-intensive 18th-century model that still underlies much industrial production, though he did not say it was an absolute necessity.

Clinton's vision, like that of many other attendees and observers, leans toward the idea that the US and other wealthy industrialized nations, are plodding along with ill-advised caution, when they could be enjoying a major innovation and job-creation boom, as whole economies transition to renewable energy systems.

Joseph Stiglitz warned that deregulation (again, a euphemism for "laissez faire") has not worked as many dreamed it would. With "barriers" to investment removed, money may flow into certain markets, but without regulatory authority to ensure fair play, that money does not necessarily benefit the market as a whole.

What now appears to be a global crisis in credit overwhelmingly affected the talks. Mass default on loans given in the US to people who did not have the capital to pay them back, with "adjustable" (read "rapidly escalating") interest rates that make them even harder to pay back, has dampened the lending power of banks across the world.

Central banks, major financial institutions, state pension systems, and high-value stocks, have all suffered as money available for lending and spending seems to dry up. The US government is planning to inject as much as $150 billion into its citizens pockets, in an effort to spur a positive economic reaction, though no major market has reacted exceedingly well to the news.

What one thing will make the world a better place? Communication, dialogue, understanding, efforts to collaborate and to seek mutually beneficial solutions. The Davos Conversation is an encouraging experiment, because the policy-makers who respond to what average people are worried about gain credibility, and that helps make for more responsible, more effective economic policy, and a brighter future for those who need such improvements.

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DavosConversation.org

Elections, Credit, Fuel Costs, Soil Quality, Water Policy & Access to Food Crucial in 2008

Sentido.tv :: 2008 will be a year in which the integrity of election processes, the quality and resilience of cultivated soils, the availability of credit to consumers, the affordability of homes and rentals, and access to affordable vital staples like food and water, as well as the cost of transportation, will affect economies the world over. Some economic analysts have said the combination of these factors, resulting instability or environmental degradation, and migration of affected populations, could mean the world is facing an unprecedented level of economic precariousness.

2007 saw prices of commodities, ranging from grains, to metals to petroleum, skyrocket, with mining giants like Río Tinto tripling their stock value, and the price of bread in Mediterranean countries like Spain, jumping 40%. The Earth Policy Institute reports that world grain stocks are at an all-time record low, with only about 54 days of consumption available in case of crop failure or demand-driven scarcity. Drinkable water is also frighteningly scarce, with overpumping of fossil aquifers already beyond sustainable and on the rise. [Complete Text]

Massive Diversion of U.S. Grain to Fuel Cars is Raising World Food Prices

Lester R. Brown, EPI :: If you think you are spending more each week at the supermarket, you may be right. The escalating share of the U.S. grain harvest going to ethanol distilleries is driving up food prices worldwide.

Corn prices have doubled over the last year, wheat futures are trading at their highest level in 10 years, and rice prices are rising too. In addition, soybean futures have risen by half. A Bloomberg analysis notes that the soaring use of corn as the feedstock for fuel ethanol “is creating unintended consequences throughout the global food chain.”

The countries initially hit by rising food prices are those where corn is the staple food. In Mexico, one of more than 20 countries with a corn-based diet, the price of tortillas is up by 60 percent. Angry Mexicans in crowds of up to 75,000 have taken to the streets in protest, forcing the government to institute price controls on tortillas.

Food prices are also rising in China, India, and the United States, countries that contain 40 percent of the world’s people. While relatively little corn is eaten directly in these countries, vast quantities are consumed indirectly in meat, milk, and eggs in both China and the United States.

Rising grain and soybean prices are driving up meat and egg prices in China. January pork prices were up 20 percent above a year earlier, eggs were up 16 percent, while beef, which is less dependent on grain, was up 6 percent. [Complete Text]

The World After Oil Peaks

Lester R. Brown, EPI :: Peak oil is described as the point where oil production stops rising and begins its inevitable long-term decline. In the face of fast-growing demand, this means rising oil prices. But even if oil production growth simply slows or plateaus, the resulting tightening in supplies will still drive the price of oil upward, albeit less rapidly.

Few countries are planning a reduction in their use of oil. Even though peak oil may be imminent, most countries are counting on much higher oil consumption in the decades ahead, building automobile assembly plants, roads, highways, parking lots, and suburban housing developments as though cheap oil will last forever. New airliners are being delivered with the expectation that air travel and freight will expand indefinitely. Yet in a world of declining oil production, no country can use more oil except at the expense of others.

Some segments of the global economy will be affected more than others simply because some are more oil-intensive. Among these are the automobile, food, and airline industries. Cities and suburbs will also evolve as oil supplies tighten.

Stresses within the U.S. auto industry were already evident before oil prices started climbing in mid-2004. Now General Motors and Ford, both trapped with their heavy reliance on sales of gas-hogging sport utility vehicles, have seen Standard and Poor’s lower their credit ratings, reducing their corporate bonds to junk bond status. Although it is the troubled automobile manufacturers that appear in the headlines as oil prices rise, their affiliated industries will also be affected, including auto parts and tire manufacturers.

The food sector will be affected in two ways. Food will become more costly as higher oil prices drive up production costs. As oil costs rise, diets will be altered as people move down the food chain and as they consume more local, seasonally produced food. Diets will thus become more closely attuned to local products and more seasonal in nature.

At the same time, rising oil prices will also be drawing agricultural resources into the production of fuel crops, either ethanol or biodiesel. Higher oil prices are thus setting up competition between affluent motorists and low-income food consumers for food resources, presenting the world with a complex new ethical issue. [Complete Text]

World Grain Stocks for 2006 Fell to 57 Days of Consumption

Lester R. Brown, EPI :: The world grain harvest for 2006 was projected mid-year to fall short of consumption by 61 million tons, marking the sixth time in the last seven years that production has failed to satisfy demand. As a result of these shortfalls, world carryover stocks at the end of this crop year were projected to drop to 57 days of consumption, the shortest buffer since the 56-day-low in 1972 that triggered a doubling of grain prices.

World carryover stocks of grain, the amount in the bin when the next harvest begins, are the most basic measure of food security. Whenever stocks drop below 60 days of consumption, prices begin to rise. It thus came as no surprise when the U.S. Department of Agriculture (USDA) projected in its June 9 world crop report that this year’s wheat prices will be up by 14 percent and corn prices up by 22 percent over last year’s.

This price projection assumes normal weather during the summer growing season. If the weather this year is unusually good, then the price rises may be less than those projected, but if this year’s harvest is sharply reduced by heat or drought, they could far exceed the projected rises.

With carryover stocks of grain at the lowest level in 34 years, the world may soon be facing high grain and oil prices at the same time (See Figure). For the scores of low-income countries that import both oil and grain, this prospect is a sobering one.

World grain consumption has risen in each of the last 45 years except for three—1974, 1988, and 1995—when tight supplies and sharp price hikes lowered consumption (See Figure). Growth in world grain demand, traditionally driven by population growth and rising incomes, is also now being driven by the fast growing demand for grain-based fuel ethanol for cars.

Roughly 60 percent of the world grain harvest is consumed as food, 36 percent as feed, and 3 percent as fuel. While the use of grain for food and feed grows by roughly 1 percent per year, that used for fuel is growing by over 20 percent per year.

Although the rate of world population growth is projected to slow further, the number of people to be added is expected to remain above 70 million a year until 2020. Each year the world’s farmers must try to feed an additional 70 million people, good weather or bad. This growth is concentrated in the Indian subcontinent and sub-Saharan Africa, which is where most of the world’s hungry people live. [Complete Text]