AuthorTopic: Good News, Bad News  (Read 2166 times)

Offline steve from virginia

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Good News, Bad News
« on: January 25, 2014, 07:36:34 PM »

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Published on Economic Undertow on January 22, 2014

Discuss this article at the Economics Table inside the Diner

The World holds its breath …

… as we wait to see what kind of beating we are going to absorb from ourselves. After a season of ‘happy talk’ there are now voices of discontent; it seems there are consequences to our actions and we must face them … at least some of us (Telegraph):


‘Fatal spiral’ of fiscal crises threatens global economy in 2014Ballooning debt levels in advanced economies pose biggest threat to the global economy, World Economic Forum report warnsFiscal crises triggered by ballooning debt levels in advanced economies pose the biggest threat to the global economy in 2014, a report by the World Economic Forum has warned.Szu Ping ChanFiscal crises triggered by ballooning debt levels in advanced economies pose the biggest threat to the global economy in 2014, a report by the World Economic Forum has warned.Ahead of next week’s WEF annual meeting in Davos, Switzerland, the forum’s annual assessment of global dangers said high levels of debt in advanced economies, including Japan and America, could lead to an investor backlash.

This would create a “vicious cycle” of ballooning interest payments, rising debt piles and investor doubt that would force interest rates up further.


Funny, seems like two weeks ago we were all hearing about how everything was coming up roses; there was a return to ‘growth’ in the Europe, more ‘growth’ in the emerging markets, how well Japan’s ‘growth’ was responding to Abenomics, how the US was ‘growing’ (like a cancerous tumor) so well that the US central bank could rein in its easy-credit regime. Now, out of the blue, it’s a ‘Fatal Spiral’ of bad news, (Bloomberg-Businessweek):


Is China facing the prospect of a financial meltdown? That’s a question gaining new urgency as its economy decelerates: Growth in the second quarter came in at 7.5 percent, its second consecutive decline. Total debt now amounts to more than $17 trillion, or an astonishing 210 percent of gross domestic product, up 50 percentage points from four years ago, estimates Wang Tao, chief China economist at UBS Securities .The scale of the problem suggests the worries are well founded. Take China’s highly leveraged corporate sector. Company debt reached 113 percent of GDP at the end of 2012, up from 86 percent in 2008, when the country’s leadership directed banks to open their lending spigots during the financial crisis, estimates Louis Kuijs, chief China economist at Royal Bank of Scotland in Hong Kong. Making matters worse, the biggest company borrowers—state-owned enterprises in heavy industries like steel, aluminum, solar, and ship-building—are now saddled with overcapacity funded by the easy credit.A significant portion of new lending is going towards paying interest on old loans, according to UBS’s Wang. “Manufacturers facing oversupply issues will be the most likely source of new non-performing loans for banks this year,” says Liao Qiang, director of ratings for financial institutions at Standard & Poor’s. “And next year banks will see growing pressure, from [stressed] property developers, construction companies, and local government borrowers.”


This is from an article that says that China won’t crash. There are more recent articles in Bloomberg suggesting that China will indeed crash … and it will be spectacular! Here is the good news:


… With its high personal savings and $1.7 trillion in net foreign assets, China has ample resources to bail out banks and ailing industries. Kuijs figures that even under a “severe stress” scenario, where one-third of loans went bad, the cost of a rescue would push up government debt by only seven percentage points, to a still-manageable 60 percent …


Then again … maybe not. The ‘high personal savings’ and ‘net foreign assets’ are chimeras. The savers won’t voluntarily commit their funds to bail out decrepit companies … that are owned and operated by greedy cronies of the corrupt leadership. The funds will have to be committed for them — or from them — involuntarily.

All of this will be for the good of the country, of course.

At the same time, the foreign assets are simply claims on funds already pledged elsewhere … as vendor financing for continuing rounds of exports, for instance. China can indeed bail out its firms with its ‘reserves’ but only by starving the firms’ customers of credit at the same time. This will be a neat trick if they can pull it off; in a crisis there is far more likely be a depositor stampede out of Chinese banks. From here, ‘Rescue’ ?? looks a lot like ‘Bail-in’ ???.

In a crisis, China managers would have to make a lot of very precise moves at the drop of a hat. Policy errors are inevitable because China has a) not been in a serious economic crisis since its modernization began, and, b) the managers believe a crash is impossible due to the farsighted wisdom (arrogance) of the Chinese Communist Party leadership. Because few managers have any crisis experience, few will know what to do. Bosses will be unreachable — or they will simply not answer the phone. Other bosses will stuff what liquid assets they can grab onto planes and fly out of the country … to follow (too late) on the heels of the others who have already fled. The markets will be overrun with wild rumors; bad news. Chinese investors will be revealed as market fools. The tide would run out and everyone will be naked … more bad news!

Unlike 2008, the Chinese government cannot simply order banks to lend; they look to have lent far too much already. It is the same in the West, the banks are lending as much as they dare, albeit to themselves and each other; the central banks are already committed. In a crisis there is little more any of them can do, there is no ‘Plan B’.

Meanwhile, the US military warns of energy instability while an industry insider warns of a peak-oil driven recession, (Guardian, UK):


At a lecture on ‘Geohazards’ earlier this month as part of the postgraduate Natural Hazards for Insurers course at University College London, Dr. Richard G. Miller, who worked for BP from 1985 before retiring in 2008, said that official data from the International Energy Agency, US Energy Information Administration, International Monetary Fund, among other sources, showed that conventional oil had most likely peaked around 2008.Dr. Miller critiqued the official industry line that global reserves will last 53 years at current rates of consumption, pointing out that “peaking is the result of declining production rates, not declining reserves.” Despite new discoveries and increasing reliance on unconventional oil and gas, 37 countries are already post-peak, and global oil production is declining at about 4.1% per year, or 3.5 million barrels a day (b/d) per year:

“We need new production equal to a new Saudi Arabia every 3 to 4 years to maintain and grow supply… New discoveries have not matched consumption since 1986. We are drawing down on our reserves, even though reserves are apparently climbing every year. Reserves are growing due to better technology in old fields, raising the amount we can recover – but production is still falling at 4.1% per annum.”


Gloom-and-doom; this comes on the heels of British Petroleum telling us that everything is going to be alright (2013 World Energy Outlook):


Last year’s edition led the way in showing how North America is likely to become self- sufficient in energy. This year’s edition follows up by examining more closely the phenomenon which is driving America’s energy revival, the revolution in shale gas and tight oil, including its global prospects.


Sadly, the good news is made up of advertising slogans: “North America is likely to become …” that must include Mexico and Canada and “self-sufficient” must include coal, nuclear, hydro and natural gas. Yet the implication is that the sufficiency is the outcome of drilling for oil and gas. The average reader would just stumble across that good news and stop thinking. For BP, good news = customer stupidity … that is bad news for the rest of us.

More bad news masquerading as good news, (Falls Church News Press):


The Peak Oil Crisis: Hydrinos In Your Future?By Tom WhippleIn recent months I have written about the progress being made in “cold fusion” which is short hand for a third way to extract energy from the forces binding atoms together. Some who are familiar with the details of what has been going on appreciate that we are nearly over denying that cold fusion is real as at least three companies have mastered the technology at lab bench level and are working on commercial-scale hydrogen powered devices that hopefully will one day replace fossil fuels as a source of energy for heat, electricity, and transportation.The Italian developer Rossi seems to have linked up with a North Carolina company that not only is supplying the cash he needs to develop a marketable product, but apparently has made contacts to develop the technology in China.The California company Brillouin was recently the subject of a series of videos detailing the current state of development of the prototype commercial boiler it is developing along with SRI to replace fossil fuels as the source of heat in electric power stations.


It’s a sign of something imminent when otherwise hard-headed analysts fall for perpetual motion machines scams, just like it is when stock market bears become raging bulls … then again, maybe not! A looming energy shortage is fertile ground for pump-and-dump swindles like fracking, electric car manufacture, Thorium power research as well as old-fashioned nuclear fusion. All of these have proven to be excellent investment (sucking) opportunities to the tune of tens-of billions of dollars, euros and whatnot in subsidies, tax credits, grants and share offers. That’s very good news indeed, for entrepreneurs (thieves) and innovators (more thieves).

Electric cars are inexpensive only when there are very few of them, when there is no excess demand for grid electricity. Adding enough battery cars to affect petroleum market would push electric rates much higher, to the point of equilibrium between electricity and liquid fuels. Any successful car would have to scale, meaning a substantial percentage of today’s 280 million vehicles on US roads would have to be replaced with electrics. Millions of electric cars would require very many more power stations and high-tension transmission lines, more substations and transformers, more fuel to consume — presumably coal — all of these would have to be paid/borrowed for. There would be the cars themselves plus their batteries and the battery material as well as the continued cost of operating the existing liquid fuel powered fleet. There is nothing about this that screams, ‘Bargain’, yet it must be so! Otherwise nobody will choose the electrics. For there to be a bargain = subsidies. Yet, the cost of subsidies for the auto industry to date is what is bankrupting entire countries. This is indeed bad news, there is no way around it.

There is little in the way of a practical Thorium reactor other than design and research. A functioning Thorium power station is certain to arrive the same time as one that runs on nuclear fusion … forty years from now. What is visible is the non-stop hype for these things. Nobody discusses how these reactors are supposed to be paid for. The current fleet of fairly straightforward fission reactors is a finance-and fiscal black hole. Anything less than operational perfection is ruinous … and this is with massive government subsidies.

There is little difference between today’s energy gambles and Internet stock debacles such as Look for variations on ‘’, ‘’, ‘’, all swathed in ‘good news’ which is actually a trap, bad news for the gullible. As for ‘fusion in a bottle’ … it’s nonsense, not worthy of discussion.

Here is more good news that is really bad news … if it occurs, (Telegraph):


Coming ‘oil glut’ may push global economy into deflationAmbrose Evans-PritchardOne piece of the jigsaw puzzle is missing to complete the deflation landscape across the West: a slide in oil prices. This is becoming more likely each month.Turmoil across the Middle East and parts of Africa has choked supply over the past two years, keeping Brent crude near $110 a barrel despite a broader commodity slump. Cotton and corn prices have halved, as has the UBS index of industrial metals. Such anomalies rarely last.“We estimate that crude oil is now the mostly richly priced commodity in the world,” says Deutsche Bank in a fresh report.Michael Lewis, the bank’s commodity strategist, said markets face an “new oil supply glut” as three forces combine. US shale will add 1 million barrels per day to global supply for the third year running; Libya will crank up shipments after a near collapse in 2013; and Iran will come out of hibernation. “This will push OPEC spare capacity to levels last seen in the depths of the financial crisis in 2009,” he said.


In this case good news is also bad news as the good news will produce a not-so-good outcome …


A sudden slide in oil prices against this background may not be entirely benign. While it will boost spending power in the US and Europe, we also know from academic studies that oil shocks are asymmetric at first.The losers take an immediate hit, and that will be Bahrain, Nigeria and Algeria with a “fiscal break-even point” above $120, Russia at $117 and Venezuela at $110, among others. Some will face crises.The winners in Europe, America and Japan will enjoy slower and less concentrated gains. It is, in any case, double-edged. The risk is that it will “unhinge” inflation expectations as the headline rate keeps dropping. Half of Europe already has one foot in deflation, with prices falling over the past five months once austerity taxes are stripped out. Any shock at this point could start to frighten the horses.Albert Edwards, from Societe Generale, said investors are strangely nonchalant about the deflation risk, seemingly taking it for granted that there is no risk of recession and that central banks can and will bail out equities. “They do not seem to care that they are sitting on the edge of a cliff. They believe with all their heart that we are at the start of a self-sustained recovery,” he said.


Investors are just like the Chinese, believing in the wisdom and omnipotence of managers. Deflation appears as much to be the outcome of US strategy to export disruption in order to import consumption. The US will have its glut at the expense of the rest of the world. At the same time, there can be no good outcomes for the United States from a Chinese recession. Cheap gasoline is not useful for those without jobs:


Figure 1: More good news: build it and they won’t come: the relentless southbound march of US industrial capacity utilization, (St Louis Federal Reserve, click on for big). The trend has been nobody’s friend since 1966. This is what tens of trillions of dollars of debt over the past forty years has paid for; less with which to build anything.

It takes a stout heart to peer for a long time into the void and to carefully draw outlines of the beasts within. Yet, this is exactly what managers are supposed to do, that is their job, to anticipate difficulties, to discuss them like grown ups then agree what to do … Right now the managers pretend everything is fine, they talk their books, they invent fairy tails while whistling past the graveyard. They leave their duties undone, examinations and warnings are left to amateurs who lack the standing within society to affect any positive changes. The fault resides within both public- and private sectors. The governments have punted, there is no leadership; the politically easy way is the only way. The private sector lays blame on the government in advance of being caught out as the result of their own ineptitude. Business proprietors seem universally bent on fleecing their companies and flying away with the loot. They have insulated themselves from the consequences of their own mismanagement, they are rewarded whether their companies stand or fall. It is left to the customers — who are coincidentally firms’ workers — to bear the costs.

We need better management, we need to start facing our problems rather than hoping that Thorium or Chinese savers can bail us out. There are strategies for dealing piecemeal with large problems … those that have ballooned due to our own negligence. None is really that hard …


– Implement a world-wide moratorium on road- and highway building. This is yet another easy fix that is cost free, both it and the moratorium on logging are easily enforced by way of satellite surveillance. A parallel step is to eliminate World Bank subsidies for logging, road building, dam building and other environmentally destructive policies that also produce climate gases or reduce the ability of the biosphere to sequester carbon.– Electrify railroads and increase both freight and passenger capacity.– Ban land-grabbing in undeveloped countries by 3d parties. Much of the so-called ‘new’ farm land becomes biofuel plantations, cash crop industrial monocultures that produce climate gases.- Provide incentives — pay people — not to consume energy or other resources, not to have children, not to own or drive cars. Subsidizing the non-purchase of autos provides a direct capital return on investment that remains with the recipient. Subsidizing resource consumption leaves the consumer without the resource … without the subsidy either. He’s older … and poorer even if his consumption suggests otherwise.

This was just a small part of a long list of low-cost, non-controversial steps that could be taken to rein in climate change. The step-by-step approach would work with our other ‘issues’. Taking any steps at all would be good news.

We really don’t have a money problem, per se. Money is the embodiment of certain specific sets of rules, these rules can be changed, certainly to meet new challenges such as those we face right now. We can change money rules then solve money problems, afterward we can invent a more rational regime regarding resource capital. Money is important because it is the instrument by which we destroy capital. This must change or else: money must become the means to husband capital and improve it wherever we can. Those who have responsibility over capital much be given the incentive to conserve it; so that money is used to save capital rather than destroy it.


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