Bretton Woods, Nixon Shock, OPEC, Yom Kippur War, Oil Embargo, Stagflation, Paul Volcker, Ronald Reagan and Morning in America

Posted by PITHOCRATES - October 1st, 2013

History 101

(Originally published September 18th, 2012)

Under the Bretton Woods System the Americans promised to Exchange their Gold for Dollars at $35 per Ounce

Wars are expensive.  All kinds.  The military kind.  As well as the social kind.  And the Sixties gave us a couple of doozies.  The Vietnam War.  And the War on Poverty.  Spending in Vietnam started in the Fifties.  But spending, as well as troop deployment, surged in the Sixties.  First under JFK.  Then under LBJ.  They added this military spending onto the Cold War spending.  Then LBJ declared a war on poverty.  And all of this spending was on top of NASA trying to put a man on the moon.  Which was yet another part of the Cold War.  To beat the Soviets to the moon after they beat us in orbit.

This was a lot of spending.  And it carried over into the Seventies.  Giving President Nixon a big problem.  As he also had a balance of payments deficit.  And a trade deficit.  Long story short Nixon was running out of money.  So they started printing it.  Which caused another problem as the US was still part of the Bretton Woods system.  A quasi gold standard.  Where the US pegged the dollar to gold at $35 per ounce.  Which meant when they started printing dollars the money supply grew greater than their gold supply.  And depreciated the dollar.  Which was a problem because under Bretton Woods the Americans promised to exchange their gold for dollars at $35 per ounce.

When other nations saw the dollar depreciate so that it would take more and more of them to buy an ounce of gold they simply preferred having the gold instead.  Something the Americans couldn’t depreciate.  Nations exchanged their dollars for gold.  And began to leave the Bretton Woods system.    Nixon had a choice to stop this gold outflow.  He could strengthen the dollar by reducing the money supply (i.e., stop printing dollars) and cut spending.  Or he could ‘close the gold window’ and decouple the dollar from gold.  Which is what he did on August 15, 1971.  And shocked the international financial markets.  Hence the name the Nixon Shock.

When the US supported Israel in the Yom Kippur War the Arab Oil Producers responded with an Oil Embargo

Without the restraint of gold preventing the printing of money the Keynesians were in hog heaven.  As they hated the gold standard.  The suspension of the convertibility of gold ushered in the heyday of Keynesian economics.  Even Nixon said, “I am now a Keynesian in economics.”  The US had crossed the Rubicon.  Inflationary Keynesian policies were now in charge of the economy.  And they expanded the money supply.  Without restraint.  For there was nothing to fear.  No consequences.  Just robust economic activity.  Of course OPEC didn’t see it that way.

Part of the Bretton Woods system was that other nations used the dollar as a reserve currency.  Because it was as good as gold.  As our trading partners could exchange $35 for an ounce of gold.  Which is why we priced international assets in dollars.  Like oil.  Which is why OPEC had a problem with the Nixon Shock.  The dollars they got for their oil were rapidly becoming worth less than they once were.  Which greatly reduced what they could buy with those dollars.  The oil exporters were losing money with the American devaluation of the dollar.  So they raised the price of oil.  A lot.  Basically pricing it at the current value of gold in US dollars.  Meaning the more they depreciated the dollar the higher the price of oil went.  As well as gas prices.

With the initial expansion of the money supply there was short-term economic gain.  The boom.  But shortly behind this inflationary gain came higher prices.  And a collapse in economic activity.  The bust.  This was the dark side of Keynesian economics.  Higher prices that pushed economies into recessions.  And to make matters worse Americans were putting more of their depreciated dollars into the gas tank.  And the Keynesians said, “No problem.  We can fix this with some inflation.”  Which they tried to by expanding the money supply further.  Meanwhile, Egypt and Syria attacked Israel on October 6, 1973, kicking off the Yom Kippur War.  And when the US supported their ally Israel the Arab oil producers responded with an oil embargo.  Reducing the amount of oil entering America, further raising prices.  And causing gas lines as gas stations ran out of gas.  (In part due to Nixon’s price controls that did not reset demand via higher prices to the reduced supply.  And a ceiling on domestic oil prices discouraged any domestic production.)  The Yom Kippur War ended about 20 days later.  Without a major change in borders.  With an Israeli agreement to pull their forces back to the east side of the Suez Canal the Arab oil producers (all but Libya) ended their oil embargo in March of 1974.

It was Morning in America thanks to the Abandonment of Keynesian Inflationary Policies

So oil flowed into the US again.  But the economy was still suffering from high unemployment.  Which the Keynesians fixed with some more inflation.  With another burst of monetary expansion starting around 1975.  To their surprise, though, unemployment did not fall.  It just raised prices.  Including oil prices.  Which increased gas prices.  The US was suffering from high unemployment and high inflation.  Which wasn’t supposed to happen in Keynesian economics.  Even their Phillips Curve had no place on its graph for this phenomenon.  The Keynesians were dumfounded.  And the American people suffered through the malaise of stagflation.  And if things weren’t bad enough the Iranians revolted and the Shah of Iran (and US ally) stepped down and left the country.  Disrupting their oil industry.  And then President Carter put a halt to Iranian oil imports.  Bringing on the 1979 oil crisis.

This crisis was similar to the previous one.  But not quite as bad.  As it was only Iranian oil being boycotted.  But there was some panic buying.  And some gas lines again.  But Carter did something else.  He began to deregulate oil prices over a period of time.  It wouldn’t help matters in 1979 but it did allow the price of crude oil to rise in the US.  Drawing the oil rigs back to the US.  Especially in Alaska.  Also, the Big Three began to make smaller, more fuel efficient cars.  These two events would combine with another event to bring down the price of oil.  And the gasoline we made from that oil.

Actually, there was something else President Carter did that would also affect the price of oil.  He appointed Paul Volcker Chairman of the Federal Reserve in August of 1979.  He was the anti-Keynesian.  He raised interest rates to contract the money supply and threw the country into a steep recession.  Which brought prices down.  Wringing out the damage of a decade’s worth of inflation.  When Ronald Reagan won the 1980 presidency he kept Volcker as Chairman.  And suffered through a horrible 2-year recession.  But when they emerged it was Morning in America.  They had brought inflation under control.  Unemployment fell.  The economy rebounded thanks to Reagan’s tax cuts.  And the price of oil plummeted.  Thanks to the abandonment of Keynesian inflationary policies.  And the abandonment of oil regulation.  As well as the reduction in demand (due to those smaller and more fuel efficient cars).  Which created a surge in oil exploration and production that resulted in an oil glut in the Eighties.  Bringing the price oil down to almost what it was before the two oil shocks.

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Bretton Woods, Nixon Shock, OPEC, Yom Kippur War, Oil Embargo, Stagflation, Paul Volcker, Ronald Reagan and Morning in America

Posted by PITHOCRATES - September 18th, 2012

History 101

Under the Bretton Woods System the Americans promised to Exchange their Gold for Dollars at $35 per Ounce

Wars are expensive.  All kinds.  The military kind.  As well as the social kind.  And the Sixties gave us a couple of doozies.  The Vietnam War.  And the War on Poverty.  Spending in Vietnam started in the Fifties.  But spending, as well as troop deployment, surged in the Sixties.  First under JFK.  Then under LBJ.  They added this military spending onto the Cold War spending.  Then LBJ declared a war on poverty.  And all of this spending was on top of NASA trying to put a man on the moon.  Which was yet another part of the Cold War.  To beat the Soviets to the moon after they beat us in orbit.

This was a lot of spending.  And it carried over into the Seventies.  Giving President Nixon a big problem.  As he also had a balance of payments deficit.  And a trade deficit.  Long story short Nixon was running out of money.  So they started printing it.  Which caused another problem as the US was still part of the Bretton Woods system.  A quasi gold standard.  Where the US pegged the dollar to gold at $35 per ounce.  Which meant when they started printing dollars the money supply grew greater than their gold supply.  And depreciated the dollar.  Which was a problem because under Bretton Woods the Americans promised to exchange their gold for dollars at $35 per ounce.

When other nations saw the dollar depreciate so that it would take more and more of them to buy an ounce of gold they simply preferred having the gold instead.  Something the Americans couldn’t depreciate.  Nations exchanged their dollars for gold.  And began to leave the Bretton Woods system.    Nixon had a choice to stop this gold outflow.  He could strengthen the dollar by reducing the money supply (i.e., stop printing dollars) and cut spending.  Or he could ‘close the gold window’ and decouple the dollar from gold.  Which is what he did on August 15, 1971.  And shocked the international financial markets.  Hence the name the Nixon Shock.

When the US supported Israel in the Yom Kippur War the Arab Oil Producers responded with an Oil Embargo

Without the restraint of gold preventing the printing of money the Keynesians were in hog heaven.  As they hated the gold standard.  The suspension of the convertibility of gold ushered in the heyday of Keynesian economics.  Even Nixon said, “I am now a Keynesian in economics.”  The US had crossed the Rubicon.  Inflationary Keynesian policies were now in charge of the economy.  And they expanded the money supply.  Without restraint.  For there was nothing to fear.  No consequences.  Just robust economic activity.  Of course OPEC didn’t see it that way.

Part of the Bretton Woods system was that other nations used the dollar as a reserve currency.  Because it was as good as gold.  As our trading partners could exchange $35 for an ounce of gold.  Which is why we priced international assets in dollars.  Like oil.  Which is why OPEC had a problem with the Nixon Shock.  The dollars they got for their oil were rapidly becoming worth less than they once were.  Which greatly reduced what they could buy with those dollars.  The oil exporters were losing money with the American devaluation of the dollar.  So they raised the price of oil.  A lot.  Basically pricing it at the current value of gold in US dollars.  Meaning the more they depreciated the dollar the higher the price of oil went.  As well as gas prices.

With the initial expansion of the money supply there was short-term economic gain.  The boom.  But shortly behind this inflationary gain came higher prices.  And a collapse in economic activity.  The bust.  This was the dark side of Keynesian economics.  Higher prices that pushed economies into recessions.  And to make matters worse Americans were putting more of their depreciated dollars into the gas tank.  And the Keynesians said, “No problem.  We can fix this with some inflation.”  Which they tried to by expanding the money supply further.  Meanwhile, Egypt and Syria attacked Israel on October 6, 1973, kicking off the Yom Kippur War.  And when the US supported their ally Israel the Arab oil producers responded with an oil embargo.  Reducing the amount of oil entering America, further raising prices.  And causing gas lines as gas stations ran out of gas.  (In part due to Nixon’s price controls that did not reset demand via higher prices to the reduced supply.  And a ceiling on domestic oil prices discouraged any domestic production.)  The Yom Kippur War ended about 20 days later.  Without a major change in borders.  With an Israeli agreement to pull their forces back to the east side of the Suez Canal the Arab oil producers (all but Libya) ended their oil embargo in March of 1974.

It was Morning in America thanks to the Abandonment of Keynesian Inflationary Policies

So oil flowed into the US again.  But the economy was still suffering from high unemployment.  Which the Keynesians fixed with some more inflation.  With another burst of monetary expansion starting around 1975.  To their surprise, though, unemployment did not fall.  It just raised prices.  Including oil prices.  Which increased gas prices.  The US was suffering from high unemployment and high inflation.  Which wasn’t supposed to happen in Keynesian economics.  Even their Phillips Curve had no place on its graph for this phenomenon.  The Keynesians were dumfounded.  And the American people suffered through the malaise of stagflation.  And if things weren’t bad enough the Iranians revolted and the Shah of Iran (and US ally) stepped down and left the country.  Disrupting their oil industry.  And then President Carter put a halt to Iranian oil imports.  Bringing on the 1979 oil crisis.

This crisis was similar to the previous one.  But not quite as bad.  As it was only Iranian oil being boycotted.  But there was some panic buying.  And some gas lines again.  But Carter did something else.  He began to deregulate oil prices over a period of time.  It wouldn’t help matters in 1979 but it did allow the price of crude oil to rise in the US.  Drawing the oil rigs back to the US.  Especially in Alaska.  Also, the Big Three began to make smaller, more fuel efficient cars.  These two events would combine with another event to bring down the price of oil.  And the gasoline we made from that oil.

Actually, there was something else President Carter did that would also affect the price of oil.  He appointed Paul Volcker Chairman of the Federal Reserve in August of 1979.  He was the anti-Keynesian.  He raised interest rates to contract the money supply and threw the country into a steep recession.  Which brought prices down.  Wringing out the damage of a decade’s worth of inflation.  When Ronald Reagan won the 1980 presidency he kept Volcker as Chairman.  And suffered through a horrible 2-year recession.  But when they emerged it was Morning in America.  They had brought inflation under control.  Unemployment fell.  The economy rebounded thanks to Reagan’s tax cuts.  And the price of oil plummeted.  Thanks to the abandonment of Keynesian inflationary policies.  And the abandonment of oil regulation.  As well as the reduction in demand (due to those smaller and more fuel efficient cars).  Which created a surge in oil exploration and production that resulted in an oil glut in the Eighties.  Bringing the price oil down to almost what it was before the two oil shocks.

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Rising Supply and Falling Demand (i.e., Recessions) can lower Oil Prices

Posted by PITHOCRATES - May 13th, 2012

Week in Review

There is less bad news for gas prices.  Rising crude oil supply and falling demand will provide a little price relief at the pump.  ‘Little’ being the operative word here (see Oil price tumbles as global supplies flourish by Garry White, and Emma Rowley posted 5/13/2012 on The Telegraph).

Opec supply has risen to about 31.62m barrels per day (bpd), as the Libyan oil industry started to recover. Saudi Arabia has also been ramping up production by than 56,500 bpd to 9.9m. Oil inventories in the US have also been rising. Supply is no longer such a large concern.

As well as worries about contagion from another eurozone crisis, data from China have also been weak, implying that demand could fall.

Chinese industrial production is the weakest it has been in three years. Industrial production rose by 9.3pc in April, the lowest level since May 2009, while retail sales surprised the market by slowing to a 14.1pc rise. This is the lowest level in 14 months…

“Crude oil prices have remained weak after last week’s sharp falls, largely due to concerns over the US economy and the escalating problems in Europe,” Mr Jessop said.

Well, imaging that.  You can lower the price of crude oil by increasing supply.  And crashing your economy.  For that’s another big part of the fall in prices.  Lower demand.  Because the economies in China, Europe and the United States ain’t looking so good.  So President Obama may get his wish come the 2012 election this November.  Lower gas prices.  And if the economy keeps tanking he’ll have even better prices at the pump.  Of course that will probably come with an up-tick in the unemployment rate.   But he can massage that away by just not counting the people who’ve given up looking for full-time work and those working part-time because they can’t find full-time work.  The U-3 unemployment rate.  Which looks a whole lot better than the U-6 rate that counts all those other people.  And has been stuck in double digits throughout his presidency.

Of course he could do something else to bring down those gas prices.  He could drill more.  Increase supply more.  Then build refineries and pipelines to move that oil around.  Creating jobs AND lowering the price of gasoline.  A win-win if ever there was one.  And it would move both the U-3 and the U-6 unemployment rates down towards full employment.  But he won’t do that.  Because the Left hates oil.  So we’ll have to hear how great the economic recovery is.  When it isn’t.  At least until November.

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Increasing oil supplies won’t lower gas prices only reducing U.S. demand can according to Obama and the AP

Posted by PITHOCRATES - March 24th, 2012

Week in Review

On the one hand gas prices aren’t high (see Rising gas prices aren’t as bad as you think).  On the other hand they are.  But there’s nothing the president can do about it so quit your bitching (see FACT CHECK: More US Drilling Didn’t Drop Gas Price [Higher fuel economy won’t lower gas prices according to AP] by JACK GILLUM and SETH BORENSTEIN, Associated Press, posted 3/21/2012 on ABC News).

U.S. oil production is back to the same level it was in March 2003, when gas cost $2.10 per gallon when adjusted for inflation. But that’s not what prices are now.

That’s because oil is a global commodity and U.S. production has only a tiny influence on supply. Factors far beyond the control of a nation or a president dictate the price of gasoline.

Funny.  When the stimulus failed it was the stimulus wasn’t big enough.  But when we only increase oil supplies a little and it doesn’t influence the world price of oil they don’t say the increase in supply wasn’t big enough.

The late 1980s and 1990s show exactly how domestic drilling is not related to gas prices.

Seasonally adjusted U.S. oil production dropped steadily from February 1986 until three years ago. But starting in March 1986, inflation-adjusted gas prices fell below the $2-a-gallon mark and stayed there for most of the rest of the 1980s and 1990s. Production between 1986 and 1999 dropped by nearly one-third. If the drill-now theory were correct, prices should have soared. Instead they went down by nearly a dollar.

Figures don’t lie but liars figure.  Talk about twisting the facts to support your Democrat president.  For what they say the data doesn’t support the data DOES support during the previous decade.  Following the 1973 Oil Crisis.  When OPEC placed an embargo on oil shipments to the U.S. and other Western nations that helped Israel in the Yom Kippur War.  Oil prices soared.  Bringing a lot of non-OPEC producers into the market.  To cash in on those high prices.  And while they were increasing oil production from the mid-Seventies to the mid-Eighties they flooded the market with oil.  Which also coincided with a reduction in demand in the U.S.  Who switched from gas-guzzlers to little cars with ‘sewing machine’ engines.  Tiny four cylinder engines.  This explosion in supply and reduction in demand caused the 1980s oil glut.  Causing oil prices to plummet.  Which kept gas prices low throughout the 1980s oil glut.

So when oil supply goes up gas prices come down.  In the 1980s that increase in oil supply came from outside of the U.S.  But it lowered gas prices nonetheless.  If an increase in U.S. production can match the increase of the non-OPEC producers during the Eighties then gas prices will come down, too.  But NOT increasing oil production will only increase gas prices in the face of increasing oil demand.

Unlike natural gas or electricity, the United States alone does not have the power to change the supply-and-demand equation in the world oil market, said Christopher Knittel, a professor of energy economics at MIT. American oil production is about 11 percent of the world’s output, so even if the U.S. were to increase its oil production by 50 percent — that is more than drilling in the Arctic, increased public-lands and offshore drilling, and the Canadian pipeline would provide — it would at most cut gas prices by 10 percent.

By this logic then there’s no point in trying to improve fuel economy.  Yet we do.  For when it comes to gasoline everything on the demand side of the equation can lower gas prices.  But nothing on the supply side can.  President Obama says we can inflate our tires.  Get a tune up.  Increase CAFE standards (force auto makers to increase the miles per gallon their cars can get).  Move into electric cars and hybrids.  If we do any of these we can bring down the price of gasoline.  But if we flood the market with new domestic oil it won’t do jack squat.  Go figure.

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FT110: “You can’t blame our dependence on foreign oil for high gas prices AND say that producing more domestic oil won’t lower gas prices.” -Old Pithy

Posted by PITHOCRATES - March 23rd, 2012

Fundamental Truth

The Combination of Low Demand and High Supply caused Oil Prices to Fall over 70% by 1986

The Organization of the Petroleum Exporting Countries (OPEC) is a cartel.  Made up currently of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.  Their purpose is to set oil quotas for their oil-producing members.  To limit the amount of oil they bring to market.  To reduce supply.  And increase oil prices.  At least that’s the idea.  It’s been hard to keep the individual OPEC members from cheating, though.  And a lot do.  Often selling more than their quota.  Because when oil prices are high selling a few percentages above their quota can be very profitable.  Unless everyone else does so as well.  Which they usually do.  For their choice is either not to cheat and not share in any of those ‘excess’ profits (beyond their agreed to quota).  Or cheat, too.  Thereby increasing supply.  And lowering oil prices.  Not something any oil producer wants to do.  But it’s the only way to share in any of those ‘excess’ profits.

But that’s not the only problem OPEC has.  There are a lot of oil producers who aren’t members of OPEC.  Who can bring oil to market in any quantity they choose.  Especially when they see the high price OPEC is charging.  OPEC’s high price allows non-OPEC suppliers to sell a lot of oil at a slightly lower price and reap huge profits.  Which puts pressure on the OPEC target price.  Forcing them to lower their target price.  For if they don’t lower their price they will lose oil sales to those non-OPEC producers.  Which is exactly what happened in the late Seventies.  While OPEC was cutting back on production (to raise prices) the non-OPEC nations were increasing production.  And taking over market share with their lower prices.  Causing OPEC to reverse policy and increase production during the mid-Eighties.  Giving us the 1980s oil glut.

Of course, this rise in non-OPEC production was a direct result of the 1973 Oil Crisis.  Many of the OPEC members are Muslim nations.  Who don’t like the state of Israel.  In response to the West’s support of Israel in the Yom Kippur War (1973) OPEC announced an oil embargo on those nations who helped Israel.  Giving us the 1973 oil crisis.  Where this sudden reduction in supply caused the price of oil to soar.  Making the oil business a very profitable business.  Causing those non-OPEC producers to enter the market.  Then the Iranian Revolution (1979) disrupted Iranian crude production.  Keeping Iranian oil off the market.  This reduction in demand caused oil prices to rise.  Then Jimmy Carter broke off diplomatic relations with the Iranian state.  And boycotted their oil when it returned to the market.  Further encouraging the non-OPEC producers to bring more oil to market.  Meanwhile U.S. demand fell because of those high prices.  And our switch to smaller, 4-cyclinder, front wheel drive cars.  Saying goodbye to our beloved muscle cars of the Sixties and Seventies.  And the V-8 engine.  The combination of low demand and high supply caused oil prices to fall over 70% by 1986.  Giving us the oil glut of the 1980s.  When gasoline was cheap.  Enticing the V-8 engine back into the market.

Improved Fuel Economy AND Increased Oil Supplies can Reduce the Price at the Pump

So, yes, Virginia.  The amount of oil entering the market matters.  The more of it there is the cheaper it will be.  As history has shown.  When less oil entered the market prices rose.  When more oil entered the market prices fell.  And anything that can affect the supply of oil making it to market will affect the price of oil.  (And everything downstream of oil.  Jet fuel.  Diesel.  And gasoline.)  Wars.  Regional instability.  And governmental regulation. 

So what are things that will bring more oil to market?  Well there’s the obvious.  You drill for more oil.  This is so obvious but a lot of people refuse to accept this economic principle.  As supply increases prices fall.  The 1980s oil glut proved this.  Even John Maynard Keynes has graphs showing this in his Keynesian economics.  The economics of choice for governments everywhere.   Yet there are Keynesian politicians who avert their eyes to this economic principle.  So there’s that.  More drilling.  You can also make the permitting process easier to drill for oil.  You can open up federal lands currently closed to drilling.  And once you find oil you bring it to market.  As quickly as you can.  And few things are quicker than pipelines.  From the oil fields.  To the oil refineries.  (And then jet fuel, diesel and gasoline pipelines from the refineries to dispensing centers).  So before oil fields are ready to produce you start building pipelines from those fields to the refineries.  Or you build new refineries.

Improving fuel economy did help reduce our demand for imported oil in the Eighties.  As well as lowered the price for that imported oil.  But it wasn’t fuel economy alone.  The non-OPEC nations were increasing production from the mid-Seventies through the mid-Eighties.  Without that oil flooding the market oil prices wouldn’t have fallen 70%.  And they won’t fall again if we ONLY try to reduce our demand for foreign oil.  For reducing demand is marginal at best in reducing oil prices. 

Only if we Drill and Build Pipelines can we Reduce the Price at the Pump

For there are no electric airplanes.  The cost to electrify all railroad tracks is too prohibitive to consider.  The capital costs to build that electrical infrastructure.  The maintenance costs to maintain it.  And the electricity costs from the increased demand for electrical power while supply remains the same.  Or falls.  Because excessive regulation inhibits the building of new power plants.  And speeds up the shutdown of older plants.  Especially coal-fired because they pollute too much.  And hydro power.  Because of the environmental impact of dams.  Severely straining our electric grids.  And moving into electric cars will stress our electric grids even further.  Leading to brown outs.  And rolling blackouts.   Or worse.  Causing wires to overheat and sag, coming into contact with trees.  Shorting out.  Causing cascading blackouts as power plants disconnect from the grid to prevent damage from the resulting current surges.  Like they did in the Northeast Blackout of 2003.

You can’t replace oil with electricity.  In some cases there is just no electric equivalent.  Such as the airplane.  Or the cost of moving from oil to electricity is just prohibitive.  Such as updating the nation’s electrical infrastructure to meet an exploding demand.  Which leaves oil.  We need it.  And will keep using it.  Because there is no better alternative.  Yet.  So we need to produce it.  And do everything we can to help bring that oil to market.  Not fight against it.  And it all starts with drilling. 

We must drill.  Bring that oil up from under the ground.  Put it into a pipeline.  And pump it to a refinery.  If we do this enough we will be less dependent on foreign oil.  And have more control over the price at the pump.

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Government as Usual, Making a Bad Financial Situation Worse

Posted by PITHOCRATES - June 8th, 2011

The Federal Debt is Bad; what we’re Adding is Worse than can be Imagined

If you thought the debt was bad, you ain’t seen nothing yet (see U.S. funding for future promises lags by trillions by Dennis Cauchon posted 6/7/2011 on USA Today).

The government added $5.3 trillion in new financial obligations in 2010, largely for retirement programs such as Medicare and Social Security. That brings to a record $61.6 trillion the total of financial promises not paid for.

This gap between spending commitments and revenue last year equals more than one-third of the nation’s gross domestic product.

The current outstanding U.S. debt is $14 trillion and change.  So, in addition to that debt, the U.S. has to borrow an additional $61.6 trillion sometime in the future.  Meanwhile they debate deficit reduction in Washington.  And the Obama administration is desperately trying to get the Republican-controlled House to raise the legal debt ceiling.  By a whopping $2.4 trillion.  You don’t have to be a whiz kid to see that something bad financially is coming this way.

Medicare alone took on $1.8 trillion in new liabilities, more than the record deficit prompting heated debate between Congress and the White House over lifting the debt ceiling.

Social Security added $1.4 trillion in obligations, partly reflecting longer life expectancies. Federal and military retirement programs added more to the financial hole, too.

It’s those social democracy things.  The same things that are bankrupting countries in the European Union.  Free health care.  And free pensions (with everyone living longer people are collecting far, far more than they ever paid into these programs).  Which just goes to show that free things are very expensive.

The $61.6 trillion in unfunded obligations amounts to $527,000 per household. That’s more than five times what Americans have borrowed for everything else — mortgages, car loans and other debt. It reflects the challenge as the number of retirees soars over the next 20 years and seniors try to collect on those spending promises.

Imagine yourself living as you are.  Working hard to pay your bills (mortgages, car loans and other debt).  And then adding another mortgage to the mix for a magnificent half-million dollar home.  Only without the home.  Just the mortgage payments.  If you’re not good at imagining that’s okay.  Because you’ll be living it within 20 years.  Can it get worse?

The government has promised pension and health benefits worth more than $700,000 per retired civil servant. The pension fund’s key asset: federal IOUs.

Why, yes.  It can.  While you struggle to pay these enormous bills you can think about this.  Your civil servants.  The people that work for you.  They will be making about $173,000 more in retirement than you.  Their boss.  That ought to put a smile on your face.  And a skip in your step.

Here Comes National Health Care

And it’s going to get worse.  Because national health care is coming (see Study Sees Cuts to Health Plans by Janet Adamy posted 6/8/2011 on The Wall Street Journal).

A report by McKinsey & Co. has found that 30% of employers are likely to stop offering workers health insurance after the bulk of the Obama administration’s health overhaul takes effect in 2014.

The findings come as a growing number of employers are seeking waivers from an early provision in the overhaul that requires them to enrich their benefits this year. At the end of April, the administration had granted 1,372 employers, unions and insurance companies one-year exemptions from the law’s requirement that they not cap annual benefit payouts below $750,000 per person a year.

But the law doesn’t allow for such waivers starting in 2014, leaving all those entities—and other employers whose plans don’t meet a slate of new requirements—to change their offerings or drop coverage.

Bill Clinton lost the 1994 midterm election because he campaigned as a moderate and governed as a liberal.  With Hillarycare being the poster child of his liberal agenda.  Barack Obama lost the 2010 midterm election because he campaigned as a moderate and governed as a liberal.  With Obamacare being the poster child of his liberal agenda.  The people spoke.  Then.  And now.  They don’t want national health care.  That’s why Hillarycare failed.  And why they watered Obamacare down to be something short of national health care.  But Obamacare will serve its purpose.  It will kill the private health insurance market.  Setting the stage once and for all for national health care in the United States.

In surveying 1,300 employers earlier this year, McKinsey found that 30% said they would “definitely or probably” stop offering employer coverage in the years after 2014. That figure increased to more than 50% among employers with a high awareness of the overhaul law.

The Obamacare legislation was something like a thousand pages long.  Guaranteed to confuse.  In fact, it was so confusing that Democrats voted for it without reading it.  Republicans read as much of it as they could.  And because they saw what was in it they voted against it.  Those who take the time to read it don’t like it.  Including the 50% of employers surveyed.

The nonpartisan Congressional Budget Office, in a March 2010 report, found that by 2019, about six million to seven million people who otherwise would have had access to coverage through their job won’t have it owing to the new law. That estimate represents about 4% of the roughly 160 million people projected to have employment-based coverage in 2019.

So let’s crunch some numbers.  Private insurers can’t cap benefits below $750,000 per person per year.  Some 6-7 million people will lose their insurance because of Obamacare.  So if the government has to pick up the costs for half of the lower amount (3 million) of these people consuming $750,000 each that comes to…$2.25 trillion.  That’s a lot.  Now let’s say the 160 million who have employment-based coverage lose it.  And that half of them need $750,000 in benefits.  That comes to…$60 trillion.  How about that?  That’s about the same as the amount of the government’s unfunded financial liabilities. 

So, in addition to the $14 trillion or so in debt, there may be another $120 trillion that we’ll have to borrow.  And that’s a little more than the $2.4 trillion the Obama administration is desperately trying to get the House to approve.  And warn about dire consequences if the Republicans refuse to do so.  This reminds me of that scene in Jaws where Chief Brody was throwing out that chum to attract the shark.  It worked.  The shark appeared.  Only it was a lot bigger than Brody thought it’d be.  He told Captain Quint, “You’re gonna need a bigger boat.”  Because fighting a $120 trillion debt with a $2.4 trillion dingy is going to lose the battle.  And by ‘lose the battle’ I mean the United States will end up like Greece.  Only without anyone big enough to bail her out.

OPEC not increasing Oil Production, no Help for Depressed Economies

That’s some pretty doleful news.  Maybe there’s a white knight rushing to the rescue.  Perhaps the economy will rebound and go gang busters.  Maybe the United States will grow itself out of this debt sinkhole (see OPEC Keeps Lid on Oil Production Targets by The Associated Press posted 6/8/2011 posted on The New York Times).

OPEC decided on Wednesday to maintain its crude oil output levels and meet again within three months to discuss a possible production increase.

The decision was unexpected and reflected unusual tensions in an organization that usually works by consensus.

Saudi Arabia and other influential oil-producing nations had pushed to increase production ceilings to calm markets and ease concerns that crude was overpriced for consumer nations struggling with their economies.

To quote a line from Planes, Trains and Automobiles, they have a better chance of playing pickup sticks with their butt cheeks.  The moratorium on oil drilling in the Gulf of Mexico put pressure on supply.  Then the unrest in the Middle East and North Africa added more.  The recession had kept oil down for the last year or so.  But with supply being squeezed that wasn’t going to last.  It’s back up.  With an assist from Ben Bernanke.  Whose quantitative easing devalued the dollar and sparked some inflation.  For we buy and sell the world’s oil in U.S. dollars.  So consumer prices are up.  While high unemployment and flat wages continue to make life hard for the American consumer.

Those opposed were led by Iran, the second-strongest producer within the Organization of the Petroleum Exporting Countries…

Iran and Venezuela came to the meeting opposing any move to increase output, which would have probably lowered prices for benchmark crude from the present levels of around $100 a barrel.

But OPEC powerhouse Saudi Arabia, which favors prices of around $80 a barrel, wanted higher production levels — and served notice that it was prepared to raise production unilaterally, to close to 10 million barrels a day from its present daily production of about 8.7 million barrels.

How about that?  Our enemies want to keep the price of oil up.  While our friends want to bring it back down to $80 per barrel.  Yet the Obama administration demanded that Mubarak step down from power in Egypt (a move the Saudis did not like as Egypt was anti-Iran and kept a lid on radical Islam like the Muslim Brotherhood) while doing nothing to help the democracy movement in Iran.  And Obama himself has a close and personal relationship with the Venezuelan dictator.  Hugo Chavez.

Policies like these will do little to bring the price of oil down.  Or make the economy rebound and go gang busters.  So there’s little hope of the U.S. growing its way out of their unfunded financial obligations. 

Monetary Policy doing more Harm than Good

And it doesn’t help to have Big Government Keynesians trying to fix things (see Sizing up the Fed’s few options by Cyrus Sanati posted 6/8/2011 on CNNMoney).

At the time the Fed began its second round of quantitative easing, inflation was low, so Bernanke felt comfortable instituting a program that would see $600 billion injected into the economy. After all, how much inflation can $600 billion cause when the country has a national debt load of $14 trillion and a personal debt load of $30 trillion?

Inflation has jumped in the last three months at a much faster pace than historical averages. The consumer price index rose by 6.1% annually during the April quarter, and core CPI, which excludes food and energy, rose by 2%. Such an accelerated move in inflation would be explainable if there was strong economic growth, but that’s not the case.

Higher prices without economic growth.  We saw this in the Seventies.  Under Jimmy Carter.  His treasury secretary, Paul Volcker, raised rates to reduce inflation.  Interest rates soared.  But he tamed inflation.  And he didn’t do it with quantitative easing.  He did it by doing the exact opposite.  Bernanke could learn a lesson from Volcker.

“If you’re Bernanke and you are seeing this rapid acceleration in core inflation and a high unemployment rate, you got to be thinking to yourself, ‘Gee, my models aren’t working right,'” says Drew Matus, senior U.S. economist at UBS Investment Research. “This should cause more caution in the part of the Fed and it is this caution that will keep them from doing QE3.”

Yes.  The models don’t work.  They’ve never worked.  And never will.  Because monetary policy is not the be all and end all of economic activity.  Think of it this way.  Say there is a restaurant not doing well.  The Keynesian would help that restaurant with monetary policy.  It would lower prices on the menu.  To make the menu items cheaper (like making money cheaper to borrow from a bank).  The only problem is that this restaurant has problems.  People aren’t going there.  The food is bad, the service is poor and it’s dirty.  Lowering the menu prices isn’t going to fix those problems.  So lowering prices is not going to bring the people back.  Just as making money cheap to borrow won’t bring the consumers back to the market.

People need Disposable Income and Responsible Government

Unemployment is high.  A lot of people have no jobs.  Or disposable income.  Meanwhile, prices are going up.  Leaving even less disposable income.  Businesses aren’t going to borrow cheap money to hire people to expand production.  Because current production levels are already in excess of current demand.

People need disposable income.  Inflation is taking that money away from the people.  And two things are driving inflation.  High oil prices (demand greater than supply).  And bad monetary policy (a devalued dollar increases the price of oil and everything else).  We need to fix these things.  We need to drill.  We need to increase American production of oil.  And we need to stop printing money.  We need to do these two things ASAP.

Then we need to address the insanity of spending money we don’t have.  And stop it.  Sooner or later, we have to address entitlements.  Actually, later may no longer be an option.  With $60 trillion in unfunded liabilities in the pipeline.  And with Obamacare potentially adding another $60 trillion.  That’s just too much.  Trying to pay this will kill economic activity.  It will require more taxes, more borrowing and more printing.  Everyone of which will increase the cost of doing business or investing.  Which will ultimately kill jobs.  Giving people even less disposable income.

Benjamin Franklin warned, “When the people find that they can vote themselves money, that will herald the end of the republic.”  That’s why they designed the republic to have disinterested, responsible people between the treasury and the people.  But that was then.  When disinterested, responsible people were in government.  Perhaps not everyone, but enough to keep the republic solvent.  Today most serve themselves.  The treasury is just a tool to buy votes.  And to hell with the consequences because most of them will be dead by the time the republic ends.

So don’t expect them to do the right thing anytime soon.  Because doing the right thing will not make their lives better.  Only ours.

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FUNDAMENTAL TRUTH #58: “Presidents with aggressive domestic agendas tend to have inept and naïve foreign policy.” -Old Pithy

Posted by PITHOCRATES - March 22nd, 2011

Feeding their Egos with Illusions of their own Grandeur

First there were progressives.  Then there were liberals.  Self-proclaimed super geniuses.  Regular Wile E. Coyotes.  Smarty-pants know-it-alls.  You can’t tell them anything.  Because they know everything.  While you aren’t even smart enough to know what’s good for you.  But that’s okay.  Because they have taken it as their personal mission in life to run our lives.  To protect us from ourselves.  To tell us what to eat.  What to drink.  How to raise our kids.  How to educate them about the important things in life.  Fairness and multiculturalism.  Not math and science.  They teach us about the evils of greed.  Our greed.  Not theirs.  They can keep raising taxes to take our money so they can play with it.  But if we complain they say we hate teachers.  And children, of course.

These people start their government careers in the Ivy League.  Where they don’t learn anything useful.  They get law degrees.  Or some degree in the social sciences.  Public policy.  Philanthropy.  Degrees where they learn how to take other people’s money without providing anything useful in return.  All the while feeding their egos with illusions of their own grandeur.  They develop the cutting edge of progressive/liberal thought.  Most of it nonsense to you and me.  But in their little Ivy League world they’re saving the world.  Even though they have no idea of how the world works.  Understand things economic.  Or the role of energy in a developed economy.  They haven’t the foggiest idea about any of these things.  But they feel that only they are qualified to regulate these things.  Because they care about us.  And the planet.  Not profits.

Liberals are also not the manliest of men.  They get in touch with their softer, feminine side.  Get in touch with their feelings.  Some even cry.  Cowboys they’re not.  They’re into conflict resolution by diplomacy and timeouts.  They can be mean and nasty.  Partake in some of the worse character assassination.  But never alone.  Or without the power of the state to protect them.  You won’t see them get into any fights.  Because when it comes to actual fisticuffs, they’re not as brave as their words.  They’re the worse of bullies.  Weaklings that have others bully for them.  That’s why these people watch soccer instead of football.  Why they don’t hunt.  Why they hate the military.  They don’t like any manly behavior.  Or manly men.  No doubt from growing up in a childhood full of wedgies and swirlies.

Big Government and High Taxes

Much of a progressive’s/liberal’s life is spent getting even.  And the best revenge is living well.  And they sure do that.  Live well.  Better than most of us.  And with our money.  Either money gained through some frivolous lawsuit.  From the ‘overhead’ costs of the charitable organizations they ‘work’ for.  (Some keep more than 50% of all donations for their ‘operating’ expenses.  While the new healthcare legislations allow insurers to use no more than 20% of their premiums on their operating expenses.  How’s that for fair?)  High taxes.  Or kickbacks from the industries they regulate.

Those in government hate those in business.  Just like they hate the jocks and bullies in high school who tormented them.  But they hate business people for a different reason.  Because they have talent.  They’re able to create something people willingly pay for.  They can’t.  Of course they can play god over these people who have talent.  And they do.  Which makes up for their feelings of inadequacy.  It’s sort of a love-hate relationship.  They love taking their profits.  But they hate them because they have profits.

People need to feel a purpose.  And so it is with progressive/liberals.  Sure, having our money is good, but floating through life in the lap of luxury leaves them with an empty feeling.  Normal people may feel guilt over taking so much of our money. They just feel bored.  Like rich kids who get in trouble because they have too much time on their hands.  Bored rich kids get in trouble.  Bored liberals write legislation.  Exploit class warfare.  And go about redistributing our wealth.  They take money from the ‘rich’ people who have jobs or own businesses and give it to the needy.  And the more of these people you support with other people’s money, the more they will keep voting for you.  This allows the liberal to live a long life in politics.  Strokes their ego.  And fills that empty feeling they have from being the worthless waste of spaces they are.  And this is why they do what they do.  Keep government big.  And taxes high.

Projecting Force to Protect National Security Interests 

Liberals want power.  They want to expand government.  And expand the welfare state.  They always have big plans when they run for office.  They are never content to sitting back and let the free market work.  Because that’s no fun.  They want to control that market.  Using some bad economic theory (i.e., Keynesian Economics), they do.  They say it’s to make the markets more efficient.  But that’s not the reason.  It’s the power.  The getting even.  And getting their hands on all of that money. 

When presidents come out of the Ivy League, their heads are filled with a lot of progressive/liberal thoughts.  Ideas about income redistribution.  Fairness.  Multiculturalism.  But little about business.  Or the real world.  And as leader of the free world, that can be a problem.  Constitutionally speaking, the president’s responsibility is the real world.  The president is the commander in chief of the armed forces.  The president treats with foreign nations.  And appoints and receives ambassadors.  Nowhere in the Constitution will you see the president being responsible for income redistribution for fairness in a multicultural welfare state.

When a president goes in with an aggressive domestic agenda he comprises his Constitutional responsibilities.  It’s like a kid playing video games instead of doing his homework.  It’s fun.  But there is a cost.  The U.S. is a superpower.  And leader of the free world.  The president’s tools include military force, foreign aid and diplomacy.  And a powerful domestic economy that makes all of this possible.  If a president focuses on domestic policy over his foreign policy, both suffer.  The high taxes reduce economic activity.  Which reduces tax receipts.  And this makes budget deficits.  The progressive/liberal will not want to cut the domestic spending.  So they cut military spending and transfer it to the domestic side.  And borrow money.  Or print it.  Weakening both the military.  And the economic well being of the nation.  Which weakens the president’s ability to project force to protect national security interests. 

An Inconvenient Truth:  We Need Oil Flowing at Market Prices  

Of course, with the liberals’ disdain for the military and the military industrial complex, they don’t care.  They don’t believe there are any dangers out there.  And, if there are, it’s because we brought them upon ourselves.  For being bullies.  I mean, who are we to be a superpower and leader of the free world?  That’s just sticking our nose into other people’s business.  It’s time we stop.  Let other people live their lives.  Besides, it’s a different world today.  We don’t need standing armies or aircraft carriers.  Who’s going to invade us?

True, the chances of a D-Day type invasion landing on our shores is remote.  But there are other ways to attack our country.  9/11 comes to mind.  And there is economic warfare.  Have you enjoyed the Great Recession, the greatest recession since the Great Depression.  Probably not.  Do you remember how it started?  With $4/gallon gasoline.  Do you remember how horrible that was?  People were demanding Congress do something about it.  Amazing, isn’t it.  How high gasoline prices can trigger a recession (of course, the subprime mortgage meltdown changed that recession into the Great Recession).  Keeping oil flowing at market prices, then, is a U.S. national security interest.  Because a spike in gasoline prices will crash the healthiest of economies into recession.  Of course, this goes contrary to everything a progressive/liberal holds true.  But it’s an inconvenient truth they need to learn.

That’s why we’re in the Middle East.  We may get more of our oil from Canada, but we get some from OPEC.  More importantly, our trading partners do, too.  If that oil supply to the Western economies gets shut down, we will suffer a recession closer to the Great Depression than the Great Recession.  Oil is important to national security.  Income redistribution isn’t.  Or using the military for humanitarian purposes.  As bad as the suffering was in Darfur, Rwanda, Sri Lanka, etc., we can’t help everyone.  It would stretch our military too thin, cost more than we can afford and risk the lives of those in the military on a mission that doesn’t impact national security.  And all of this would impede the president in carrying out his constitutional responsibilities.  Protecting our national security.

We need Grownups in Charge of our Foreign Policy

Presidents often hailed for their great domestic agendas (FDR and LBJ, for example) have created economic messes that future generations have to clean up.  And because their real interests were in domestic policy, they bungled their foreign policy.  FDR may have rallied the nation to win World War II, but his naïveté gave us the Cold War.  And LBJ’s Whiz Kids mismanaged the Vietnam War so badly that the fallout nearly ignited a civil war in America.  The country changed.  And it’s never been the same since.

Kids don’t like doing their homework.  They’d rather play their games.  In this respect progressives/liberals are very much like children.  They, too, like to play their games.  And don’t like to do their homework.  But the world is a dangerous place.  We need to do our homework.  To learn the lessons of history.  More importantly, we need grownups in charge of our foreign policy.

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Libya Burns, Saudi Arabia Worries, Prosperous China Maintains Power and Prosperous Turkey offers way for Egypt

Posted by PITHOCRATES - February 21st, 2011

Turkey Provides a Democratic Model for Egypt

Can democracy work in the Middle East?  Well, it’s working in a nation with a predominately Muslim population.  That nation on the BosporusTurkey (see A Muslim democracy in action posted 2/17/2011 on The Economist).

In his eight years in power, Mr Erdogan has done more than any of his secular predecessors to move Turkey closer to its coveted goal of full membership of the European Union. Reforms that he rammed through during AK’s first term in office persuaded the EU to open membership negotiations with Turkey in 2005…

Turkey’s economy has survived the global financial crisis relatively unscathed. It is expected to grow by 5% this year, putting it only just behind China and India. Unemployment is down and the budget has begun the year with a surplus…

On the Arab street, Mr Erdogan’s salvoes against Israel over the Palestinians have made him a hero. Turkey’s high-profile diplomacy, its successful economy and its drive for new markets have made it the envy of many Arab leaders. It is little wonder that so many pundits have taken to talking up a “Turkish model” as a way forward for Egypt. It is also no surprise that Mr Erdogan is brimming with confidence.

Of course, Turkey isn’t a ‘Muslim democracy’ as the Economist wrote in its title.  It’s a secular democracy where nearly all of the people are Muslim.  People practice their religion in their private lives.  But not in government.  For in Turkey there is a wall between church and state.  Or mosque and state, as it were.

Turkey is doing well.  And it can serve as a model for countries where nearly all of their people are Muslim.  If they separate religion and government.  And herein lies the concern.  If the Muslim Brotherhood rises to prominence in Egypt, Islam will play a role in government.  And in nations where this happens there are concerted efforts to move away from Western influences.  Including Western business practices.  And prosperity.  The more extreme cases of this can be seen in Afghanistan.  And Iran.  But Turkey is looking to the West.  And economic prosperity by joining the European Union.  Still there are the critics.

Yet critics claim that Mr Erdogan’s confidence has curdled into the sort of authoritarianism that, if left unchecked, might transform Turkey into another Russia. Such claims are surely overwrought: Turkish elections are free and fair, and the press is largely unfettered. Yet there is also no question that Mr Erdogan is getting bossier and less tolerant by the day.

With a healthy economy, a budget surplus and jobs for the people, there is little reason for the people to rise up.  The political opposition may.  But not the people.  That’s why the democratic movements have been confined to countries with poor economies and high unemployment.  For working people have better things to do.  Such as enjoying life.

Discontent is Easier to Manage when you have a Booming Economy

The collapse of the Soviet Union was not pretty.  In the Soviet Union.  Or the Russian state following.  Crime.  Corruption.  Lawlessness.  And, worse, high unemployment.  People were unable to buy the bare necessities.  These were dark and dangerous times.  And had many pining for the good old days of Soviet Communism.  You may have been poor, oppressed and wanting for the basic necessities of life.  But you could walk the streets at night.  You just had to worry about the state busting down your door at night and taking you away to some Siberian gulag.  But other than that, life was at a leisurely pace.  And had routine.  And routine begets political stability.

China saw this trouble.  And they learned some valuable lessons from their northern neighbor.  Change too fast can be bad change.  Hence their crackdown at Tiananmen Square.  And now (see Discontent, but no revolt in China — yet by Charles Hutzler, Associated Press, posted 2/21/2011 on Salon).

“The current regime structure is very fragile. It’s not right for revolution at the moment, but that doesn’t mean mass political upheaval can’t take place in the future,” said Minxin Pei, a China politics expert at Claremont McKenna College in California.

In the latest test, China’s authoritarian government seems to have dispatched the threat of public protests with great efficiency. In response to an Internet appeal of unknown origin for simultaneous protests in 13 cities Sunday, police detained known activists, disconnected some cell-phone text messaging services and blocked online searches for the phrase “Jasmine Revolution” — the name of both the protest call and the wave of Middle East democracy protests that started in Tunisia.

And the protests for now seem to have petered out.  Why?  Economics.

China is the world’s fastest-growing major economy, with economists predicting another year of better than 9 percent growth for 2011. While unemployment is surely higher than the nearly 5 percent urban joblessness rate, factory wages and conditions are improving for many. University graduates — a crucial group in Egypt’s uprising — are finding jobs in China, though they are poorly paid.

Life isn’t that bad when you have a job.  The protests in the Middle East and Northern Africa started over high unemployment.  The protesters were poor, oppressed and unemployed.  And when you have nothing, you have nothing to lose.  The Chinese have something.  It may not be much.  But it is a lot more than they used to have.  And things aren’t bad enough yet to lose this new life of plenty.

The Asian Economy so Strong they’re Building Bigger Ships for Exports

And things are looking up for the Asian economy.  While the U.S. continues to struggle in the worst recession since the Great Depression, Maersk just received an order to build the world’s biggest container ship.  And guess who’s building those ships.  And what they’re going to carry (see Deal for biggest ever cargo ships sets sail by Tom Clarke posted 2/21/2011 on channel4.com).

A major shipping contract is a good barometer for the global economy – the industry at least seems to think trade between Asia and Europe will remain strong. However the European economy won’t benefit as much as Asia from the deal. All the jobs to build the new ships are in Korea and the vast majority of high value goods the ships will carry will be made in Asia to be sold here.

And sold in other parts of the world.  Including the United States.  So Asia is doing all right.  China, too.  The fact that they were able to shut down those protests so quickly indicates that the larger population is content.  For now.  Of course, that may change in the future.  The Chinese workers may demand more pay and better benefits.  Perhaps try to unionize.  If they do China may have to meet their demands.  Or risk further unrest.  Either way the economy will more than likely lose steam.  Either through higher labor costs.  Or political unrest.  And that could prod them more towards a Libyan fate.

Libyan Violence Escalates, Oil Supply Interrupted

And how are things going in Libya?  By all measure it appears to be going from bad to worse (see Oil soars on Libya violence, WTI shorts cover posted 2/21/2011 on Reuters).

In Libya, scores were killed in anti-government protests as one of the region’s bloodiest revolts hit Tripoli for the first time, while army units defected to the opposition and Gaddafi’s son vowed to fight to the last man standing.

And it gets worse.  Economically.

The focus was on deadly clashes in Libya, where one oil firm was shutting down some 100,000 barrels per day (bpd) of production and others evacuated staff. The leader of the Al-Zuwayya tribe threatened oil exports to the West would be cut off unless authorities stopped violence.

“The market is on edge about the potential for Middle East and North Africa supply disruptions,” said Mike Wittner, head of commodities research, Americas, at Societe Generale.

When oil prices go up economies go down.  Because oil is the engine of the modern economy.  We’ll probably first notice this supply interruption in higher prices at the gas pump.  Then in a slow but steady price inflation on everything we buy.  Those nations trying to get themselves out of bad recessions will then have to deal with this inflation problem.  And inflations are typically solved by recessions.  Economically, this is not a good outlook.  For if Europe and the United States fall back into deeper recessions, where will all those exports go from China and Turkey?  Nowhere.  And then these prosperous nations will see a rise in their unemployment numbers.  Giving strength to their opposition forces.  And perhaps extending the political unrest from the Middle East and North Africa to China and Turkey.  And beyond.

Things look like they may get worse before they get better.  Especially with what is happening in Bahrain.

A wave of popular unrest in North Africa and the Middle East has already toppled long-time leaders in Tunisia and Egypt, and traders are watching events carefully in other members of the Organization of the Petroleum Exporting Countries (OPEC) for signs of escalating tension.

While protests continued in Bahrain and Yemen, the greater fear was that discontent among majority Shi’ites in Bahrain who are protesting against the Sunni government might spread to Saudi Arabia’s own Shi’ite minority — who mostly live in the eastern province, the source of the kingdom’s oil wealth.

And this is the greatest danger.  That all of this political unrest may transform these revolutions from democratic struggles into theocratic ones.  Many of the countries rife in political unrest are Sunni countries.  Some have oppressed Shiite populations.  Or underrepresented Shiite populations.  And these populations have an organizing force.  The Muslim Brotherhood.  And inserting itself at the top of this Shiite power swell is the region’s largest Shiite population.  Iran.  The mortal enemy of Saudi Arabia.

It’s a Small World after All

Peace in the Middle East is not easy.  It’s mostly Islamic.  And in Islam, the Sunni hates the Shiite and the Shiite hates the Sunni.  Any government trying to rule over these disparate people rules on a powder keg.  They can maintain the peace most times if the people have jobs and can buy what they need.  During bad economic times, though, it’s quite a different story.  The rich kingdoms (often Sunni) will be attacked for being too Western.  And then economic issues become religious issues.

What will happen in Egypt?  Will it follow the Turkish model?  Or will it succumb to the radical elements like what happened in Iran following their 1979 revolution?  And what about Saudi Arabia?  Are they next?  If OPEC oil fails to flow at market prices, economies may crash throughout the world.  Including Turkey.  And China.  Because oil is the engine of a modern economy. 

It’s a small world after all.  What happens in the Middle East matters.  Everywhere.

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