Portugal is the latest of the PIGS nations in Europe to head for collapse. Already we have seen Greece, Ireland and Spain reach the critical level, and now it seems that Portugal has finally admitted that it needs help. The implications for countries such as the UK is that the necessity to fund the rescue package will hit the pocket of every man, woman and child. However, if Portugal does not end its Socialist practices, and if Portugal does not cut the unnecessary spending, then there is no real hope. (I will post something else on this subject when I learn more about what is happening).
However, the collapse of Portugal is small potatoes compared to some of the other crises in the world. Earlier this year, Christchurch suffered its second devasting earthquake in a matter of months. The first one in September left lots of damage, but there were no deaths or injuries. The epicentre was close to a town near Rolleston. It happened in the middle of the night, so that no one was around when a few buildings collapsed. Probably the worst damaged building at the time was the Anglican Cathedral. At least when we had a tour that included Christchurch, we saw the fencing around the cathedral indicating that there was a danger of collapse and people getting injured. However, when the shallow quake at Lyttleton harbour struck, it led to a devastating loss of life, widespread destruction and an economic disaster for New Zealand, as well as the insurance industry. The final death toll was more than 160 persons killed, with hundreds injured, including those who had limbs amputated. Several families have been left without a mother or a father.
Unfortunately, the earthquake in New Zealand has been overshadowed by the devastating magnitude 9.0 quake and tsunami in Japan. Thousands have lost their lives and thousands have been left homeless, with many small towns being almost wiped out by a tsunami that was around 32 ft or approximate 12-14 metres in height. It is this quake that will have financial aftershocks for Japan well into the future.
The problem in Japan is not so much the devastation to property and the wiping out of thousands of people, but the nuclear accident at Fukushima that followed the quake and tsunami. As a short background, the nuclear reactors at the Daiichi and Danii plants shut down as expected when the quake hit. The generators started so that the reactors could continue to operate and cool down. There was no damage at this point to the housing of the reactors. However, the tsunami was much larger than anticipated and the 14 ft wave took out the generators that were providing the emergency power to the Daiichi plant. The battery operated generators kicked in, but these only had 8 hours of life. It was after these died that the real problems began at the Daiichi plant. There was an explosion at the nr 1 reactor. The outer concrete housing partially collapsed, but the inner steel housing survived. The explosion was explained as being the result of a build up of hydrogen. This was followed by an explosion in the 2nd reactor, and then another in the 3rd reactor. In one case, the one I believe was due to human error, the rods were exposed to air for 140 minutes, which has led to a partial meltdown of the core. It is in this reactor, where it is believed that the containment unit was damaged. The Japanese are struggling to bring everything under control again. This accident is on a par with the accident at Three Mile Island.
The most devastating part about this kind of accident is that radiation is released into the atmosphere. This is what has happened at the Daiichi plant. At first the releases were small, and the over-reaction from the anti-nuclear lobby has been a joke, but the levels of radiation from the later explosions have been cause for concern in Japan, as well as in countries that have been importing Japanese food products. In Tokyo the levels of radiation are high enough to be considered dangerous to babies, and several farms outside of Fukushima have had traces of radiation discovered on their produce, meaning that they cannot sell their product on the open market.
As the exports stop for foodstuffs, Japan will suffer some economic consequences, but hopefully this will be short-lived. It is too soon to tell how this will hurt the Japanese economy. At the same time, thousands of foreigners have fled from Tokyo and Japan out of fear of the impact of the radiation. Again, there will be some economic consequences to Japan because of this flight of foreign workers. This is all on top of the losses sustained because of the earthquake and Tsunami.
At the same time, the Middle East has broken out in a fever of revolution. It started in Tunisia, then Egypt caught the bug, followed by Morrocco, Syria, Bahrain and then Libya. Whilst I have concerns about some of these countries because there is a very real possibility of them falling into the hands of Muslim Brotherhood, there is one country that is a stand out, mainly because of the brutal manner in which its leader, Moammer Gadhaffi has attempted to put down the revolt. As a result of the humanitarian crisis, the UN responded with sanctions against the regime in Libya, followed by Resolution 1973 which led to the bombing of Gadhafi’s military bases. That action saved Benghazi from a promised massive slaughter.
This turmoil in the Middle East might be just a hiccup, but it has consequences in the form of oil price rises. This is the 1970s redux.
Professor Russell Roberts responds to the comments made by Robert Zoellick regarding his suggestion that there be some kind of return to a gold standard. Zoellick’s remarks are understandable in the current economic climate, especially when there is a probable trade war looming (thanks for nothing Barry).
The points raised by Professor Roberts are:
- how should central banks be constrained.
- the Gold Standard itself is a flawed system that imposed burdens upon the world’s economies during the Great Depression; this in turn either caused or exacerbated the downturn.
- the current system is just as flawed as the Gold Standard.
What is the best system? A return to the Gold Standard would be a very backward step, and I believe it is one that should be avoided. However, a system that seems to be unconstrained is as bad as the system of constraints under the Gold Standard. The alternative needs to be a system where business is allowed to prosper without too many government constraints, and yet there needs to be some constraints when it comes to the activities of a Federal Reserve.
Based upon my Australian experience of the Reserve Bank, I would offer the way in which it has to operate as an alternative. Australia was not as deeply affected by the Global Financial Crisis as elsewhere and I think that there are some very good reasons for this situation:
- banks do not give mortgage loans to families who do not have the ability to re-pay the loan;
- Statutory Reserve Deposits
- the RBA meets once a month and looks at the economic data. If it looks like inflation is heating up they attempt to apply the brake by raising interest rates (curses upon their decisions!!)
Is there a trade war brewing? There seems to be tension between China and the United States of America over currency valuations.
The gist of the problem is that the USA is upset with China because of the US trade deficit with China. The USA is accusing China of deliberately undervaluing her currency. The US position has been undermined as a result of Ben Bernanke’s decision to print $600billion to “boost a sluggish economy” (not that this action will work anyway).
Other nations such as Thailand and Indonesia fear that the “hot” money will flood their markets, where returns are higher. These emerging markets are more vulnerable to a crash if investors decide to pull out and move money elsewhere (Soros-style).
The dispute between China and the USA seems set to revive destructive protectionist policies like the policies that worsened the effect of the Great Depression in the 1930s. The big fear is that trade barriers (which Øbama wants to erect will send the global economy back into recession.
Whilst it seems that the G-20 nations are unable to come up with specific answers to the problems, I think that there is an obvious solution to the trade deficits: Americans need to produce more of the goods and services that are currently supplied by China.
One might not think that this is a viable solution, but I would disagree because the solution that is required is one that requires every State government to do something about the increases in taxes that have been crippling the U.S. economy during the past decade or so… I will use California, New Jersey and Massachusetts as examples. In each state where there has been increased welfare spending and at the same time there has been a hike in general taxes there has been a flight of capital. The only way to reverse the trend is to reduce those taxes and encourage entrepreneurs to set up shop so that employment opportunities will increase.
Economists around the world continue to question the moves being made by the U.S. Federal Reserve under Ben Bernanke.
ICAP economist Adam Carr is one of many who is critical of the $600billion stimulus. He comments that the U.S. data had been better than expected and that the mammoth round of stimulus was unnecessary.
German Finance Minister Wolfgang Schäuble has sharply criticized the US Federal Reserve’s decision to pump a further $600 billion into the country’s ailing economy. He says the move could create problems for the global economy. Others have joined in the condemnation.
The Germans “get it” – they can more clearly see what is so very dangerous about the moves being made by Ben Bernanke and how those moves will hurt the world economy.
Schäuble has some very harsh words for Øbama and Ben Bernanke regarding what he states is a violation of an agreement or pledge given at the previous G20 summit meeting in Toronto last June.
It is not just Germany that is critical. China also gets it, that this move will hurt the world economy. From this same article:
Criticism has also come from China, with the country’s central bank head, Zhou Xiaochuan saying that the Fed’s move might hurt economies in the rest of the world. “There is a spill over,” he said. Brazil, Indonesia and Japan have also voiced concern.
Despite the rather flowery language of the author, this article on the IMF and where it wants to head is worth reading. It takes time to digest because it becomes necessary to remove all of the flowery language to get down to the nuts and bolts.
There are several European countries that are in danger of collapse: Spain, Greece, the U.K., Ireland, Turkey, Italy and a new one to add to the list Hungary. The IMF seems intent upon interfering in the economies of these countries by providing loans coupled with austerity measures. This is certainly the prescription that was given to Greece. (I have already covered the issue of the laziness of the Greeks). The question though, is whether or not this interference is justified, especially when these Socialist countries do not seem to want to reform, let alone grasp the reality that their Socialist policies might be to blame for the imminent collapse of their respective economies.
Hungary had been on the brink many times since the fall of the Berlin Wall, and it had been borrowing from the IMF on and off for several years, until the negotiations were broken off. Any country borrowing from the IMF must be prepared to make certain necessary reforms including: a reduction in the civil service employees and employee pensions. Here is an outline of Hungary’s interaction with the IMF and the results for that country (not all that encouraging):
Hungary has been an IMF member since 1982. The country embarked on economic reforms early on, and to do so it needed IMF loans — to the tune of $520 million in the first year of its accession to the Fund. Hungary, a model student when it came to developing a market economy, relaxed its import policies in 1984. Subsidies were cut and the Hungarian forint was devalued, all at the request, urging or instruction of the IMF.
The country received six more loans by 1996, one for $365 million, another for $480 million, and in 1991 the Fund approved a loan worth $1.6 billion. In all those years, Hungary was reinventing itself. The banking system was restructured to satisfy free-market requirements, and a value-added tax was introduced. In 1990, the government passed laws to allow foreign investment, removed customs barriers, reduced government bureaucracy and lifted controls on prices and wages.
But there was a dark side to the policies, even though they pleased Washington, attracted investors and were rewarded by the financial markets. The real wages of Hungarians — those who even had a job — declined by 22 percent between 1989 and 1996. When the Berlin Wall fell and the country opened up to global markets, Hungarian industrial production declined by more than a third, unemployment rose and inflation reached 30 percent. In other words, workers, retirees and the overwhelming majority of Hungarians had less in their pockets from one year to the next, they had to work longer for a pension that was smaller than expected, and when they became welfare cases, the state no longer felt responsible for them — because the very nature of the state had changed.
Hungary’s accession to the EU in 2004 brought a new round of so-called adjustments. And then came the global economic crisis. By 2008 Hungary was on the verge of default. To avert a disaster, the IMF, the World Bank and the EU joined forces to provide Budapest with $25 billion. The IMF, which put up $15.7 billion of the total, dictated the conditions: pension cuts and a freeze on civil servants’ salaries. It was back to square one for Hungary.
The real gems in this article come from the economist Rogoff from Harvard University. These gems includes not very flattering assessment of the new financial reform legislation, as well as some not very flattering comments about the way in which the IMF and the G-20 handled the GFC. Here are some of the statements and assessments by Rogoff:
“A Greek bankruptcy is unavoidable. There is a 95 percent chance that Spain will go bankrupt. Hungary is on the brink. Things will get much worse in Eastern Europe. We will have a certain number of countries that will go bankrupt. We will have a number of euro zone countries that would be well advised to take a sabbatical from the euro for a year. The situation in the United States is very worrisome. The markets will refuse to tolerate this level of debt.”
and on the Wall Street reform legislation:
The government asked him to comment on a draft bill on the regulation of the financial sector. “The draft had 2,000 pages,” says Rogoff. “I don’t know what to say to that. I suspect that those 2,000 pages are filled with enough loopholes that Wall Street will discover and exploit to come up with new business models.”
A real reform of the banking and finance sector would have to drastically shrink the system to a business volume that existed 30 years ago. Rogoff says: “The financial market, with all of its products, adds up to $200 trillion, $120 trillion of which represents trading in debt securities. I remember a speech given by Angela Merkel. She said that the Americans make the profits while distributing the risks, with all those debt securities, worldwide. That’s true. This could be curbed.”
On the IMF and crisis management efforts:
“We are fundamentally too quick with bailout packages and too hesitant with default,” he says. Rogoff believes that the G-20 and the IMF, with their protective mechanisms, have already pre-programmed future misconduct. Experts call this a “moral hazard,” the notion that bailout packages, instead of preventing crises, simply create new ones. “It boils down to the banks ultimately speculating with taxpayer money,”
The final gem in this piece comes from the Chinese IMF worker Min Zhu. It is actually a sage piece of advice, and I might add here that it is quite obvious that this is the remedy that Europe should be seeking (rather than agreeing to follow the Watermelons to the precipice of destruction):
. “There is the issue of social welfare, and demographic change. Everybody has longevity, so the cost for the pension and health insurance is very different today than, say, 20 years ago. The model, of course, does not fit today’s needs. It would not survive tomorrow.” Besides, he adds, Europe needs a growth strategy, an industrial strategy. Europe must invent new products and sectors that meet the demands of the world — otherwise, with labor costs of $30 an hour, they won’t prevail “against a country that pays $3.”
What to do? Where should I post about what has become a very serious crisis situation in the USA, yet one that is being ignored? I am choosing to post this on my blog regarding a world in economic crisis because the long term consequences of this oil spill and the lack of clean up have yet to be determined. I will outline why I see this as leading to an even greater crisis in the future.
I do not agree with the conspiracy theorists that the oil spill was the result of a terror attack. Probably the most ludicrous story that I have heard so far is the one implicating Cheney and his company – claiming that they set charges on board the rig and blew it up. Here is what I think happened, and yes my theory is conjecture too.
First of all I tie the incident to the Haitian earthquake which happened in January 2010. The reason that I believe that there is a possible link is that the Horizon rig first reported leaking in the well as far back as February. In fact the crew and BP notified the Government that there was a problem in February 2010. After this notification there was an attempt to shut down the well, and this is why a BP executive type of person was giving directions on shutting down the well. If I am correct and the earthquake was the catalyst for the initial leak, then it is more than likely that we have not heard the last of problems associated with this particular well.
Second, I see the attempting capping of the well and the clean-up as two separate functions. Certainly, the attempt to cap the well should be left in the hands of BP and the crew that they have brought in to achieve the task. This is now being done by a successor to Red Adair. However, the clean-up operation is the province of the Federal Government of the USA according to an act that was passed after the Exxon Valdez oil spill disaster. Unfortunately, what is all too apparent, is that the person who should be in charge of making sure that the clean up happens at a fast pace has been doing the following:
- playing golf;
- going on vacation;
- having parties;
- going to concerts and theatre;
- looking for photo opportunities;
- creating a crisis on the Arizona border with Mexico;
- playing more rounds of golf;
- fund raising and holding town hall meetings for loyal obots.
and the list goes on and on… very little time has been spent in co-ordinating a fruitful clean-up effort. Instead there have been impediments being placed in the way of the States that have been affected in such a disastrous way, and this includes stopping the operation of the skimmers to do a fire extinguisher and life-jacket survey, preventing the building of sand berms, not ensuring that an adequate number of skimmers are available, taking time to assess offers of help from international countries, refusing the waive the Jones act… and the list of the incompetence goes on and on. One of the most damning though, is the refusal to allow the Dutch skimmers because a very minute amount of oil would have been released back into the sea.
Third, the Obama regime has used the oil spill to put a moratorium on offshore oil drilling. What is little understood is that offshore oil drilling has been going on for a very long time in a lot of countries without such disastrous consequences. When oil rigs explode or have a problem it takes very little time to bring everything under control, and do very little damage to the environment. For example in November 2009 an oil rig exploded off the coast of Australia. The rig itself has been capped, and it seems that there is very little in the way of any spillage that has reached the shores of northern Australian beaches (if this is not the case, then the lack of information is the fault of the LSM). The 6 month moratorium will be disastrous for the Gulf States in the USA because it will bring the mining industry to its knees, and will affect thousands of workers at the same time. The owners of the rigs that are now idle, will not want them to remain that way, and this could see those rigs moving to the coast off Brazil or moving to Africa where they can be put to immediate use. This will mean even more suffering of economic consequences for the Gulf States.
Interestingly, what is escaping a lot of attention by the LSM is that the Obama regime has given more than $2billion to Petrobas of Brazil for the purpose of offshore drilling in waters that are deeper than the well that is leaking. Why? Well the answer to that question is: GEORGE SOROS. It seems that the billionaire backer of Barack Obama has a very big monetary interest in Petrobas. As soon as the moratorium was announced for the offshore leases Petrobas attempted to try and hire the rigs that are now lying idle. Is it a coincidence? I do not think so.
Fourth, the Obama regime sees this as an opportunity to push through the unnecessary Cap and Tax legislation. The end result of this “energy” bill is that all energy prices will rise substantially. As a result of such increases in the price of gas, natural gas, electricity other prices will also rise and will include practically everything from clothing to food. The consequences are simply enormous because the petro-chemicals are the basis of so many products, especially clothing items made out of synthetic materials such as nylon, as well as hair shampoo etc. etc.
It should be obvious to the astute observer that the plan of the Obama regime is to allow the oil slick in the Gulf States to get as bad as possible as a means to point the finger at the oil industry and then to attempt to shut the industry down. If this happens then the USA will become dependent upon foreign oil. Who would be the beneficiary? Brazil? Iran? Venezuela? Who knows? However, one beneficiary will be the billionaire George Soros.
One of the more disgraceful aspects of the situation is the way in which the Obama regime has been attempting to shut out the press, and the one reporter that has taken a stand about the situation is Anderson Cooper from CNN. Even Newsbusters has remarked upon the stand that is being taken by Cooper during this oil spill crisis. The lack of effort, and the bungling of the clean up operation should be big news, but most outlets remain silent.
I do not know for certain what the long term impact of this whole disaster will be, but I do know that if the Obama regime is successful in shuttting down the oil industry in the Gulf states and elsewhere then the USA will be most likely in a free fall, and economic recovery will be very hard and slow. The country is already suffering from high unemployment and high hidden inflation. The future impact upon the world is at this point unknown.
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