Gloomy Economic News

I saw many articles this weekend that the global economy is not recovering any time soon. We may have wait several years for the "sun to come out tommorrow."
No End in Sight to Global Jobs Crisis: UN Agency

"The global employment market that shows no sign of recovering, the International Labour Organization said on Sunday. In advanced countries, especially in Europe, employment is not expected to return to pre-crisis levels of 2008 until the end of 2016"

95 Percent Of The Jobs Lost During The Recession Were Middle Class Jobs

A higher percentage of Americans are working low income jobs than ever before, and the cost of living continues to rise at a very brisk pace. This is causing an erosion of the middle class unlike anything we have ever seen in American history. ... [for] college graduates, the future is not so bright. Last year, a staggering 53 percent of all U.S. college graduates under the age of 25 were either unemployed or underemployed.

Hugh Hendry On Europe "You Can't Make Up How Bad It Is"

We have reached a profound point in economic history where the truth is unpalatable to the political class - and that truth is that the scale and magnitude of the problem is larger than their ability to respond - and it terrifies them.

World Energy Use

"Everybody talks about the weather but nobody does anything about it."
- attributed to Mark Twain

There is much talk about converting to renewable energy resources but what has the world accomplished?
A report by British Petroleum, 2011 Statistical Review of World Energy, reveals that while renewable usage grew at an amazing rate, Fossil fuels gained market share overall. How can wind & solar increase at a greater rate but lose ground? Consider: would you rather have 70% interest on $100 or 1% interest on one million dollars?

Wind grew by 24.6% and solar by 73%. This is a fantastic increase but the total energy from wind and solar remains very small; Solar amounts to only 0.1% of global electric power, Wind is now 1.6% of global electric power. So even if these had grown by 400% they would still be dwarfed by even a modest increase in coal or oil.

An interesting offshoot of the study. China used 2/3 of the coal consumed last year and has surpassed the US as the world's #1 energy consumer. China passed the US for CO2 emissions five years ago.

For the 11th straight year, oil has a smaller slice of the global energy pie (now 33.6%). This is not to say oil usage went down. In fact it increased by 3.1% last year. But coal grabbed more of the pie with an increase of 29.6% for a total of 25.6%. We may see coal surpass oil if China continues on its present course.

Bottom Line

There are some who believe that high oil prices are here to stay. They point to ever increasing energy demands from China (up 11.2% last year ). Another indicator: while global oil use increased by 3.1%, the production of oil only increased by 2.2%. This was the strongest increase in production in 16 years but not enough to meet a growing demand.

Inflation

Up, up and away [in my] my beautiful, my beautiful balloon
-lyrics by the Fifth Dimension

In recent years the U.S went through an odd economic period where some price indexes actually fell (deflation). Last year inflation was officially just 1.6%. But the times they are a'changing. Inflation is on the rise around the globe and may soon hit our shores. See Can the U.S. Sidestep Growing Global Inflation?,

"Inflation in Britain hits 4%, double the official government target. China reports prices accelerating at 4.9% in January. And Spain says its inflation measure shot up 3% last month. ... the inflation scourge [is] now sweeping countries as far away as Brazil, India and the U.K."

From Forbes.com, America, poised for a hyperinflationary event?

At Instapundit.com, "I'm going to wish I'd listened to Glenn Beck and bought a lot of gold."

To which an Instapundit reader responded, "You’re going to wish you had some food storage first before you wish you had gold. In Weimar Germany there were people in the cities that starved because they had no food. [Could not afford to buy it with hyperinflation] Sure you can buy food with gold, but gold denominations (even the 1/10 oz American Gold Eagle) are not practical for buying groceries or a sack of potatoes."

The same point is made at SurvivalBlog.com, "What would a full ounce of gold buy?  That Corvette that we saw advertised?  A half a dozen cows?  Maybe.  It certainly wouldn't do much good for someone trying to buy day-to-day necessities. "

Bottom Line

For protection against simple inflation, build a food storage now. To learn more about hyper-inflation see this post I wrote in 2009: HyperInflation

My post, Five unusual items for your emergency supplies, talks about stocking items for trade or barter in your food storage. Alcohol and cigarettes are valuable during difficult time but not something I would personally stockpile.  Consider items like diapers, aspirin & medical supplies, and nails which can be better than gold under the right circumstances.

Global Food Shortage?

O beautiful for spacious skies,
For amber waves of grain,
For purple mountain majesties
Above the fruited plain!
- lyrics to America the Beautiful

Lately I've been seeing a lot of stories about inflationary food prices and possible food shortages globally. World production is not much greater than demand so if there is bad weather, fungus, insects, or anything destroying crops on a large scale, it tips the world balance to shortage.

For a look at big picture check out the Food Prices page at the Financial Time (FT.com). The site does require registration but there is a free option if you scroll the screen all the way to the right when registering. Sadly FREE is limited to 10 stories a month.

Here's a summary from one of the lead stories.

The world has moved a step closer to a food price shock after the US government surprised traders by cutting forecasts for key crops, sending corn and soybean prices to their highest level in 30 months. The price jump comes after the UN’s Food and Agriculture Organisation warned last week that the world could see repetition of the 2008 food crisis if prices rose further. The trend is becoming a major concern in developing countries.

And this gloomy forecast is actually optimistic!!! The US projection of expected World harvests does not account for future weather problems. “There’s just no room for error any more. With any kind of weather problem in the upcoming growing season we will make new all-time highs in corn and soy, and to a lesser degree wheat futures.”

See also Dinner Without Onions In India?

Bottom Line

This looks like a good time to stock up on rice and grains before prices rise further.

Global Impact of Volcano

Like a circle in a spiral
Like a wheel within a wheel
Never ending or beginning
On an ever-spinning reel
As the images unwind
Like the circles that you find
In the windmills of your mind
- lyrics to "Windmills of Your Mind"

In our global economy everything is interconnected. And with "Just in Time" warehousing there is little margin for error in delivery schedules. CBSNews.com has listed some of the global side effects of the volcano in Iceland:

• The lack of refrigeration facilities at the capital airport of Ghana has hurt pineapple and pawpaw farmers who are unable to fly their produce to Europe.

• Kenya has thrown away 10 million flowers since the eruption. Asparagus, broccoli and green beans meant for European dinner tables are being fed to Kenyan cattle instead. Thousands of day laborers are out of work.

• In New York City's Flower District, thousands of dollars worth of tulips, peonies, daffodils and other varieties from the Netherlands are not arriving. Last weekend's weddings didn't have Dutch flowers.

• The U.S. economy is losing approximately $130 million per day in travel revenue. Every international flight bound for the U.S. is worth an average of $450,000 in spending from travelers.

• Three Nissan production lines in Japan will stop all day Wednesday because tire pressure sensors from Ireland have not arrived, 2000 vehicles will be delayed.

• A group from Sierra Leone and Liberia had to abandon a fact-finding trip to The Hague for the war crimes trial of former Liberian President Charles Taylor.

• Cambridge University's modern and medieval languages faculty delayed oral exams after students and examiners were left stranded last week.

Bottom Line

Expect price increases in flowers and produce.

Unintended Consequences

“The supply of government exceeds demand.”- Lewis H. Lapham

My latest commuting lecture series on CD has been on the Fundamentals of Economics. With all the problems in the economy and odd government behavior, I decided to brush up on my Micro & Macro Economics that I learned so long ago in college. As the instructor points out, it would be a good thing for ALL government leaders to brush up on the basics.

For example: Supply & Demand. You don’t have to like it but it’s a “force of nature” that cannot be denied. It explains behavior in all kinds of economies – capitalism and socialism - around the world. It results in all manner of unintended consequences in “well-meaning” legislation.

Case in point – the economics professor says one should NOT use prices to bring about social change. The setting of price caps or wage floors upsets the balance of Supply & Demand and nature will not be denied. It will find ways to compensate.

Consider rent control laws. Landlords have no desire to support apartments that return less than market rates. They will let the place run down, or charge high fees (like key deposits) to make up the balance. New landlords stay out of an unprofitable market resulting in fewer “low-cost” places to live. There are also consequences for the renter. When supply of rent-controlled apartments diminishes, those that have them hold on to what they have, no matter what. They become reluctant to move or “trade up” because they have a great below-market deal. The apartments become family assets that are passed on to children or (illegally) subleased, sometimes at higher rates. Because the rent is fixed for everyone, there is little to stop the rich from getting great deals. A congressman from NY has 4 rent-controlled apartments in the same building that he combined into a nice living space.

What are the alternatives to rent-control? If the government wants to help low-income families to find affordable living, then target these families directly (not indirectly with prices that affect everyone). Give them an apartment check that is similar to food stamps – payable only towards rent. Or a tax rebate if rent exceeds x% of your budget for households earning less than $Y.

Or consider tax-cuts & other programs to simulate the economy. Sounds good at first glance – more money in peoples pockets. But what are the unintended consequences?

- More money chasing the limited goods can result in inflation that erodes away the new dollars available. So no one is better off afterwards.
- The extra money may be spent on foreign imports, improving the economies of other nations at the expense of US taxpayers. The “Cash for Clunkers” helped Japanese car makers more than US companies.
- Less tax means the government debt will increase (at least short term until the economy recovers). Government borrowing drains money from investors making it more costly for companies to borrow money or issue bonds/stocks for improvements. Instead of stimulating, the resulting debt can slow down the economy. This happened under FDR, Regan and looks to be happening again under Obama.

The alternative: government spending should focus on long-term improvements that lift up the nation, not handouts to “shovel-ready” jobs for frivolous projects. We could instead build a new Internet super-highway to bring network speeds up to levels enjoyed by nations like Japan. Or build wireless access across the nation. Or fix old roads and bridges and public waterworks. Strengthen our nation’s electricity grid against failure.

Bottom Line

The science of economics is not perfect; it’s not called the “dismal” science for nothing. Just look at the debate of Keynesian vs. Supply-Side vs. other theories on how to “fix” a recession. But an awareness of economic principles and history can teach us that there ain’t no such no such thing as a free lunch. Someone always pays though it may be quite hidden or indirect.

So the next time a politician promises to fix some ill via a law or spending, ask yourself – who will indirectly benefit from this? What will be the long-term consequences and who will suffer? Can this new law/spending be exploited by the rich and powerful [Example: a law was passed requiring government to spend X% of contract dollars on companies with female or minority ownership. What happened – big white-male companies set up dummy companies led by a woman or minority that would subcontract everything back to the big white-male company. There are always loopholes.]

Bad Science

“While human-induced global warming is not going to turn present-day Earth into present-day Mars, global warming is dire enough that our most distinguished scientists recently concluded that as many as 1 million species on the planet could be extinct by 2050 if affairs do not change.”- Jay Inslee

When Former VP Al Gore Jr. won the Nobel Peace Prize in 2007, he shared the prize with the “distinguished scientists” of the Intergovernmental Panel on Climate Change (IPCC). Their published reports have been filled with stories of the Himalayan glaciers melting, African farm lands drying up, rain forests disappearing, polar bears without ice, and so on. Now it appears that much of the evidence for this is of low quality or non-existent. Though ignored by the U.S. Mainstream Media, the papers in London have daily front-page news of IPCC scandals. See The Great IPCC Meltdown Continues.

1. The IPCC has claimed that global warming could cut rain-fed north African crop production by up to 50% by 2020. Rajendra Pachauri, the IPCC chairman, and Ban Ki-moon, the UN secretary-general, have repeated this in speeches. Now Professor Chris Field, the lead author of the IPCC’s climate impact team, tells reporters that he can find “no evidence” to support the claim.

2. IPCC officials admit mistake over melting Himalayan glaciers ...The claim that Himalayan glaciers could melt away by 2035 was based upon a flimsy chain of events. The source was not peer-reviewed scientific literature – but a media interview with a scientist conducted in 1999. An offhand quote by a scientist was picked up the World Wildlife Conservancy and then became “common knowledge”. India is so upset that it has set up it’s own scientific group to study the glaciers since it has lost all faith in the IPCC.

3. The Dutch government has demanded that the IPCC correct its erroneous assertion that half of the Netherlands is below sea level. Actually, it’s only about a quarter.

4. An IPCC prediction about the impact of sea level increases on people living in the Nile Delta was taken from an unpublished student dissertation.

5. The IPCC report contained inaccurate data about generating energy from waves and about the cost of nuclear power (this information was apparently taken without being checked directly from a website supported by the nuclear power industry).

Now scientists make mistakes, sometimes really big mistakes (like seeing canals on Mars). But the purpose of the IPCC is to peer-review other scientists and separate the wheat from the chaff. To identify climate claims that are accurate and true so the United Nations can act upon facts instead of opinions. They have failed miserably in this job.

Bottom Line

I’m not opposed to the idea of global warming. I am opposed to bad science. When you ask nations to change the global way of life and spend billions or even trillions of dollars, you had better have your facts right. You must accountable and completely open to scrutiny and verification. Instead we’ve seen refusal to release data in FOI requests, data deletion, loss of original data sets, loss of verifying documentation, and so on.

I fear we are not seeing science but rather scientists with an advocacy agenda. Some may have the best of motives at heart, but others have profited greatly with millions in dollars of research grants to “save the glaciers”. Either way, the climate scientists have crossed a line and their unscrupulous behavior may weaken public respect for science for a generation.

New Rice Price Spike

“Without rice, even the cleverest housewife cannot cook” - Chinese Proverb

In March to May 2008, there was a “super-spike” in the global price of rice. Droughts in major producing countries like Australia created a shortfall of rice that resulted in panic buying and stockpiling. The price of rice returned to normal once everyone realized that there was still enough rice to meet global demand, i.e. no storage.

Fast forward to this year and the return of the spike. The weather this year was terrible for rice. India had its driest monsoon season in four decades and has halted all rice exports except for high quality basmati. India will eat all the rice it produces. A series of typhoons destroyed crops in the Philippines so that country is going on a buying spree. Other rice countries experienced droughts because of El Niño. Global rice stockpiles are at their lowest since 1976. “It feels a little like early 2008,” said Frederic Neumann, an economist at HSBC in Hong Kong. “Prices can quickly escalate if jittery consumers and public officials see supply risks looming, even if these are more perceived than real.”

Rice traders are divided on what to do. The world’s largest rice buyer, the Philippines, is buying now for 2010 but others are waiting for the spike of 2009 to fall like it did last year. However 2009-2010 might be worse than last year. According to the US Department of Agriculture, global rice output will fall to 432 metric tons in 2009-10 while demand is estimated at 437 metric tons. A small gap but a true shortage.

Bottom Line

If you can buy rice cheaply for food storage, do so. Otherwise wait until 2010-2011 for this new “spike” to hopefully fall.

Ghost Ships

“Ships that pass in the night, and speak each other in passing, Only a signal shown, and a distant voice in the darkness; So on the ocean of life, we pass and speak one another, Only a look and a voice, then darkness again and a silence”- Henry Wadsworth Longfellow

Although some economists and pundits are declaring the recession over, color me more pessimistic. One website that I keep on eye on is Kiplinger’s Recover Index. They list six leading economic indicators and only two of them are “fully positive”. One of the positives, an increase in existing home sales, says more about the collapse of mortgages and house prices than about the strength of buying power. And harking back to an earlier post, what does “success” mean here? Kiplinger says that just three positive indexes would indicate that the recession is over. I’d set the bar higher and suggest at least 4 out of 6 before declaring victory.

Economics is a complex science with many time-delayed built in interactions. It’s possible for unemployment to decline, yet the newly employed people are still shell-shocked and reluctant to spend for a while. So store sales and profits remain low which slows down future hiring.

A well-written article on the stalled state of the global economy appeared in the UK Daily Mail Online, Revealed: The Ghost Fleet of the Recession. Hundreds of the world’s cargo ships have been parked off the southern shores of Malaysia, near Singapore. A local fisherman says, “We don't understand why they are here. There are so many ships but no one seems to be on board. When we sail past them in our fishing boats we never see anyone. They are like real ghost ships and some people are scared of them.”

The answer is that 12% of the global cargo fleet has nothing to ship (this could climb to 25% before things improve). Business and profits have plummeted, “This time last year, an Aframax tanker capable of carrying 80,000 tons of cargo would cost £31,000 a day ($50,000). Now it is about £3,400 ($5,500).” The ghost ships sit idle waiting for better times ahead.

Bottom Line

Curiously despite the glut in cargo ships, new ones are still being built. It takes three years to build a ship so orders placed when the economy was good in 2006 are ready to hit the water and the delivery bill is due. But now some clients are unable (or unwilling) to pay and the ships are sold instead on the open market for a bargain price. New orders have slowed to a trickle so expect the ship building industry to remain in recession for several years to come.

For another sign of slow sales and unsold inventory, check out these picutues of new unsold cars www.guardian.co.uk/business/gallery/2009/jan/16/unsold-cars

Here is another article claiming that the financial crisis is just the first in a series of interlinked crisises as one problem cascades to another. http://www.financialarmageddon.com/2009/09/still-in-the-economic-crisis.html

Update

CONSUMER CONFIDENCE INDEX drops in September.

The Coming Collapse?

[My] theory states that the United States and the Soviet Union will have collapsed for the same reasons, namely: a severe and chronic shortfall in the production of crude oil, … a severe and worsening foreign trade deficit, a runaway military budget, and ballooning foreign debt. … Other factors, such as the inability to provide an acceptable quality of life for its citizens, or a systemically corrupt political system incapable of reform, are certainly not helpful, but they do not automatically lead to collapse, because they do not put the country on a collision course with reality. - Reinventing Collapse, by Dmitry Orlov

Author Dmitry Orlov compares the collapse of the Soviet Union with events he sees happening in the USA today. In Feb 2009 he provided some Social Collapse Best Practices:

We [Americans have built] a brave new world where the Chinese made things out of plastic for us, the Indians provided customer support when these Chinese-made things broke, and we paid for it all just by flipping houses, pretending that they were worth a lot of money … And now it turns out that … the last five or so years of economic growth was more or less a hallucination, based on various debt pyramids, a "whole house of cards"…

When the Soviet system went away, many people lost their jobs, everyone lost their savings, wages and pensions were held back for months, their value was wiped out by hyperinflation, there shortages of food, gasoline, medicine, consumer goods, there was a large increase in crime and violence, and yet Russian society did not collapse. Somehow, the Russians found ways to muddle through…

Here is the key insight: you might think that when collapse happens, nothing works. That’s just not the case…

Forget “growth,” forget “jobs,” forget “financial stability.” What should [the US government] realistic new objectives be? Well, here they are: food, shelter, transportation, and security. Their task is to find a way to provide all of these necessities on an emergency basis, in absence of a functioning economy, with commerce at a standstill, with little or no access to imports, and to make them available to a population that is largely penniless. If successful, society will remain largely intact, and will be able to begin a slow and painful process of cultural transition, and eventually develop a new economy, a gradually de-industrializing economy, at a much lower level of resource expenditure, characterized by a quite a lot of austerity and even poverty, but in conditions that are safe, decent, and dignified.

Bottom Line
I’ll summarize Orlov’s big four concerns:

Food - The food industry in America is highly subsidized and very dependent on oil. This is a good time to practice gardening so you know how to raise some food as a supplement to high food prices and shortages.

Shelter – if you lose your job, can you afford to make the rental or mortgage payments where you live now? Downsize now if you can’t afford your current lifestyle. If you don’t have a home, look for an opportunity to be a caretaker where you live rent-free for an absent owner while you maintain the property.

Transportation – if or when the price of gas skyrockets again, will you be able to afford your commute? If there is a gasoline shortage (like the 70’s), what will you do?

Security –

"Security is very important. … people must be ready to come to each other’s defense, take responsibility for each other, and do what’s right. Right now, security is provided by a number of bloated, bureaucratic, ineffectual institutions, which inspire more anger and despondency than discipline, and dispense not so much violence as ill treatment."

Troubled Times

“I was reminded that when we lose and I strike out, a billion people in China don't care.” - Reggie Jackson

Here are two recent articles demonstrating that the world is becoming increasingly unstable.

Unrest in China Worse Than Widely Reported

Bankruptcies, unemployment and social unrest are spreading more widely in China than officially reported, according to independent research that paints an ominous picture for the world economy.

Vladimir Putin faces signs of mutiny in own government as protests break out in east

As Russia's economy begins to implode after years of energy-driven growth, Mr Putin is facing the germs of an unexpected power struggle … Mounting job losses and a collapse in the price of commodities have triggered social unrest on a scale not seen for at least four years, prompting panic among Kremlin officials more accustomed to the political apathy of the Russian people.

Bottom Line

With stories like this, I remain skeptical that the economy has hit bottom and will soon improve. We could experience a global depression lasting many years.

Number of Public vs Government Workers

“The worst thing in this world, next to anarchy, is government” - Henry Ward Beecher

Part of preparedness is being aware of the risks and potential for problems. That includes looking at the economy, long-term trends, and the recovery from our current recession/depression. The graph below comes from Fabius Maximus in a posting titled America passes a milestone. It shows that the employees working for the government now exceeds the employees working in the manufacturing sector. This is NOT healthy for the county. With rare exceptions (NASA, military equipment, interstate roads) the government does not increase the Gross National Product – it does not create products, just laws and regulations.


Bottom LineSome government is certainly needed like Police, Fire, Military, and “simple” Food & Drug regulation. But do we really want 22 million government workers (7% of the US population) putting restrictions and restraints on companies and people? See my posting, Waiting to Be Rescued, about government bureaucracies.

"Within the political process, … government agencies are more often concerned with pleasing other political actors and finding ways to expand their budgets and power. This often makes them less sensitive to the direct needs of the people who rely on them to get specific tasks accomplished."

Global Economic Depression

“A ship is safe in harbor, but that's not what ships are for” - William
Shedd

The article Shipping rates hit zero as trade sinks from http://www.telegraph.co.uk/ reports that,

Freight rates for containers shipped from Asia to Europe have fallen to zero for the first time since records began, underscoring the dramatic collapse in trade since the world economy buckled in October. …"This is a whole new ball game," said one trader.

Why is this significant you ask? This is a contra-indicator for one of my favorite books, The World Is Flat by Thomas L. Friedman. While the world looks small and everybody is your neighbor or BFF via the internet, in order to exchange more than just ideas and pictures, we still need ships to carry goods between countries.

The shipping problem began last fall with the banking and credit crisis. Shippers were unable to obtain routine letters of credit “causing goods to pile up at ports even though there was a willing buyer at the other end.” The credit problem has been resolved, but the shipping industry is now plagued by global trade contraction:

Trade data from Asia's export tigers has been disastrous over recent weeks … “This is no regular cycle slowdown, but a complete collapse in foreign [US, UK and European] demand."

To keep ships sailing, shippers have cut their fees to zero and will ship containers at “bunker” (i.e. cost) rates so as to earn some money to cover crew salaries, insurance, docking fees and other fixed expenses.

Offering slots for free is akin to an airline giving away spare seats for nothing.

Bottom Line

The shipping crisis is further proof that we are experiencing a global economic depression. Do not expect a quick turnaround or a quick fix. The US “bailouts” are keeping companies alive but will do little to stimulate the US or world economy.

What should you do? Cut expenses and build up your savings now. We will be facing many rainy days ahead.