Saturday, November 28, 2009

DUBAI in default we trust

You know about Dubai's economic crisis. But do you know the background to - and fallout from - the crisis?

A Brief History

Who did Dubai’s emir, Mohammed bin Rashid Al Maktoum, think he was kidding? He launched one of the biggest construction booms in history, erecting the Burj Dubai, which at 161 stories is the world’s tallest building. He built artificial islands in the Persian Gulf with lofty names like “The World” that are so big they are visible from space. He bought the legendary Queen Elizabeth II, a ship that holds many fond memories of transatlantic crossings for me, to convert into a floating hotel at unimaginable expense. The spending didn’t stop there. His spending binge went global, taking a partnership role in the Las Vegas City Center, which became the worst commercial real estate project since the Tower of Babel. The problem is that all of these acquisitions were done on credit, with only a fig leaf of equity, and the wind is now blowing with hurricane force. Dubai property values have slid 50% in a year, and the plunge shows no sign of abating. No surprise then that development arm Dubai World has defaulted on $59 billion in debt. The spendthrift emir spent way too much time on horse racing and not enough on research. Sure, turning Dubai into the next Hong Kong was a laudable goal, but did anyone think this through? While the former crown colony is backed by the sweating masses of China, tiny Emirate is surrounded on two sides by 2,000 miles of sand and on the other two by the not so friendly maritime neighbors of Iran and Iraq. Oil, you may ask? My Caesar salad has more oil than Dubai. Haven’t they heard of peak oil? I always thought Dubai would revert to a ghost town once the neighborhood ran out of Texas tea. Now that Dubai’s debt has been correctly marked down to junk the big question is who else this hubris gone wild is going to take down. The shareholders of the UK’s Standard Chartered Bank and HKSB, the lead lenders, are going to take a body blow, and a rash of hickies will spread among the many syndicate members. Greece and Ireland could be next, as the premiums for their credit default swaps have skyrocketed. Things could get ugly in Dubai when the country’s 360,000 migrant Indian workers find out they aren’t going to get paid. How do you say “domino theory” in Arabic?

Historically, Dubai had an oil-based economy....?

But because Dubai's oil reserves were declining, the government - led by Sheikh Muhammed Al Maktoum - decided to diversify into other areas, especially tourism and commerce. See this and this.

That's why Dubai built the world's only 7 star hotel, a series of luxury islands, and the world's largest tower.

But the global property bubble is bursting.

As I wrote last December:

Housing bubbles are now bursting in China, France, Spain, Ireland, the United Kingdom, Eastern Europe, and many other regions.

And the bubble in commercial real estate is also bursting world-wide. See this.

But Dubai got hit the hardest.

As Bloomberg notes:

Dubai suffered the world’s steepest property slump in the global recession, with home prices dropping 50 percent from their 2008 peak, according to Deutsche Bank AG.

As the CBC notes, things went South quickly in Dubai:

Hundreds of billions of dollars worth of building projects were delayed or cancelled. Thousands of jobs disappeared.

Dubai, playground of the ├╝ber-extravagant, suddenly found itself facing the very real possibility that its biggest state-owned company, Dubai World, could go into bankruptcy. It warned it was having trouble making debt payments on $59 billion US — money borrowed to pay for all the excess.

Global Impact

The CBC also notes that Dubai World has holdings worldwide:

Dubai World is Dubai's main holding and investment enterprise, but its holdings range far beyond the Persian Gulf area ...

Another Dubai World holding — DP World — operates Centerm, a container terminal in Vancouver's inner harbour. DP World acquired the terminal when it bought the marine terminal assets of P&O Ports in 2006, and plans to spend $140 million to expand it.

That purchase also gave it ownership of many key U.S. ports — something that raised national security concerns in the U.S. Some American legislators didn't like the idea that U.S. ports would be controlled by Middle Eastern state-owned enterprises. DP World subsequently sold its U.S. port assets.

In Britain, another Dubai World subsidiary, Leisurecorp, bought the Turnberry Resort in Scotland in 2008 — home to the 2009 British Open — for more than 50 million pounds.

In the U.S., Dubai World's investment arm, Istithmar World, bought the luxury retailer Barneys New York in 2007 for almost $1 billion US. There were reports earlier this year it was trying to unload the retailer as the luxury market unwound and Istithmar racked up big losses from the global financial meltdown, but Dubai World's chair denied it.

In addition, Bloomberg notes that India might be effected by Dubai's economic problems:

About 4.5 million Indians live and work in the Gulf region and remit more than $10 billion annually, according to government data. The turmoil may affect remittances, said Thomas Issac, finance minister of the southern state of Kerala, which accounted for about a quarter India’s migrant labor in 2005...

Remittances from the Middle East account for about 25 percent of Kerala’s economy, Issac said
The Royal Bank of Scotland is Dubai's biggest creditor, with $2.3 billion, or 17 percent, of Dubai World loans since January 2007. HSBC, Europe’s biggest bank, has the “largest absolute exposure” in the U.A.E. with $17 billion of loans in 2008

Yves Smith notes that Dubai's default caught creditors by surprise:

I got a message from someone who was on the conference call [with Dubai government officials]... Some European banks may be on the wrong side of this trade. As readers may know, EuroBanks went into the crisis with even lower capital levels than their US counterparts, and have taken fewer writedowns of their dodgy exposures:

The standstill announcement…was a massive surprise. One could sense the panic in those asking questions….this could be the turning point in spreads and could be viewed similar to the Russian debt crisis in 1998 or the Bear situation in 2007…based on companies and the accents of the people asking questions, it is obvious European institutions will be hit hard…Dubai made this announcement at the beginning of a four day holiday, so there will be little news until next week…There is another wave of pain out there. This information does not seem to be making its way to other markets. It will.

Zero Hedge has a good roundup of statistics regarding the biggest creditors of the United Arab Emirates, of which Dubai is a part:


Of United Arab Emirates (By Origin via Credit Suisse citing Bank for International Settlements):

United Kingdom: $50.2 billion
France: $11.3 billion
Germany: $10.6 billion
United States: $10.6 billion
Japan: $ 9.0 billion
Switzerland: $ 4.6 billion
Netherlands: $ 4.5 billion

Of United Arab Emirates (By Entity via Credit Suisse, citing Emirates Bank Association):

HSBC Bank Middle East Limited: $17.0 billion
Standard Chartered Bank: $ 7.8 billion
Barlays Bank Plc: $ 3.6 billion
ABN-Amro (RBS): $ 2.1 billion
Arab Bank Plc: $ 2.1 billion
Citibank: $ 1.9 billion
Bank of Baroda: $ 1.8 billion
Bank Saderat Iran: $ 1.7 billion
BNP Parabas: $ 1.7 billion
Lloyds: $ 1.6 billion

The Associated Press has additional details.

Bloomberg notes that Dubai's default might increase risk aversion of investors to emerging markets:

“We’re bound to see a rise in risk aversion,” Arnab Das, the London-based head of market research and strategy at Roubini Global Economics said in an interview. “The Dubai situation signifies that although the major central banks around the world have stabilized the financial system, they can’t make all the excesses simply disappear.”

India’s stocks, currency and bonds fell on concern investors may shy away from riskier emerging market assets over losses stemming from the turmoil in Dubai. India’s benchmark stock index dropped 1.3 percent yesterday, while the rupee lost 0.5 percent.

Zero hedge also notes:

  • UBS speculates that (among other possibilities) $80-90 billion (which is already over 100% of GDP) may be a low figure for Dubai's debt and that significant "off-balance sheet" amounts might explain the restructuring attempt
  • The Dubai government is on holiday (Eid Al-Adha) until December 6th
  • Abu Dhabi's Sovereign Wealth Fund (generally thought to command upwards of $500 billion) may have significantly less available. (Rumors of $125 billion in 2008 losses abounded last year). Bloomberg quotes sources to the effect that Abu Dhabi SWF's AUM has been "overstated, sometimes by as much as 100 percent."

British prime minister Gordon Brown has indicated how serious the situation is:

"Clearly the restructuring announcement has caused disruption and uncertainty in world markets,” Brown’s spokeswoman Vickie Sheriff told reporters in London. Brown’s “view is that U.K. banks are well capitalized having undergone rigorous stress testing,” she said.

And the Associated Press is asking whether Dubai's default will cause another financial panic.

The numbers involved are not that great for most creditors - on the order of hundreds of millions of dollars.

But the sense of shock and loss of confidence - when many had optimistically believed that the world economy was out of the woods - could indeed be profound....
As it turned out, we didn't have to wait five years or anything of the sort. Needing a further $10 billion in funding by the end of the year, the rulers of Dubai appear to have spoken again to their cousins in Abu Dhabi, only for the previous conditions - namely Dubai's corporate jewels to be handed over to the latter - to have been mentioned again.

We will probably never find out quite what happened in these negotiations, but the upshot of receiving $5 billion for the government of Dubai last Wednesday, November 25, appears to have been an immediate announcement of a "standstill" on the debts of the conglomerate Dubai World for a period of six months.

In the total debt pile of $59 billion attributed to Dubai World, a large amount comes under the name of Nakheel, the construction company behind some of the most iconic developments in the city, such as palm-shaped reclamation off the coast and a host of reclaimed islands in the shape of a map of the world.

The real trouble with the announcement though is that Nakheel has an Islamic bond (sukuk) due in the middle of December to the tune of $4 billion or so. This is almost sure to default because time is too short for investors to get together and agree to a standstill. Also, there is no specific clause such as "standstill" in the debt world, just an agreement to restructure.

At the weekend, the UAE's central bank said it stood behind the country's banks, easing some concern about a possible default by Dubai World. The Abu Dhabi-based central bank of the UAE said lenders would be able to borrow using a special facility tied to their current accounts, Bloomberg reported.

TBTF and real estate
Even so, with the events in Dubai, one of the central tenets of the so-called recovery from the global financial crisis was broken. This relates to the concept of "too big to fail", implying that governments and central banks will always protect systemically important entities.

For the tiny city-state of Dubai, it would be no exaggeration to suggest that Dubai World was for all intents and purposes "too big to fail". Being state-owned, run by the right-hand person of the ruler himself (until early last week), and in the limelight for the most eye-catching tourist/expatriate/investment properties in the world, Dubai World served as an extension of the ruler's ambitions in every direction.

Still, although the company owns some globally cash-rich businesses, such as Dubai Ports, and is famous for other businesses, such as Emirates Air, Dubai World has been held down by the weight of its over-ambitious real-estate ventures under the umbrella of Nakheel. Announcing a grand property venture is easy, finishing it on time and delivering the real estate profitably to one's customers isn't quite that.

More importantly, unlike cash-flow based lending (such as loans to a factory), lending for real estate is termed as asset-based lending; it depends much on the ability of the company to sell its properties for above cost, or to secure a running rental income in excess of borrowing costs. Unfinished properties don't let you do either, so it is clear that Nakheel was always going to be a challenge.

Real and unreal guarantees
The next question that popped up in the market's mind was that the rulers of Dubai had somehow violated their implicit guarantee on Dubai World. Unfortunately, that very notion is wrong in the world of credit (that is, debt): there is no such thing as an implicit guarantee; what really matters is if there is an explicit guarantee. In this case, there wasn't. So the rulers of Dubai may have decided to take advantage and escape the debt load. Essentially, this implies they had no expectation or belief that the property projects will be completed, much less that they would be profitably completed.

As the Financial Times reported on November 26, the following statement was issued by the ruling family of Dubai to debunk any of the stories of the Dubai World standstill being the result of a capricious action by one or more of its princes:
Our intervention in Dubai World was carefully planned and reflects its specific financial position. The government is spearheading the restructuring of this commercial operation in the full knowledge of how the markets would react. We understand the concerns of the market and the creditors in particular. However we have had to intervene because of the need to take decisive action to address its particular debt burden. Like most global cities, Dubai has experienced its share of economic and social challenges in this global downturn. No market is immune from economic issues. This is a sensible business decision. We want to ensure resources are deployed in the full knowledge that they are used to enhance the businesses of the Dubai World Group, build on the restructuring that has already been taking place and ensure long-term commercial success. Further information will be made available early next week.
As one of my friends remarked after reading the statement, "If this is them being 'carefully planned', imagine what they would be doing in the case of an impulsive action." In any event, whatever idea the rulers of Dubai professed to have about the "full knowledge of how the markets would react", it must have been from sources quite removed from reality, as Thursday's big declines in global stock markets led by Asia and Europe showed. Or perhaps they had sold some puts on the Hang Seng Index - what do I know?

While much of the European market reaction was tempered on Friday, declines in Asia suggested that fears of a fresh bout of contagion - the notion that all emerging markets would suffer from the fallout from Dubai - could be on the horizon. There are many reasons for this fear, not the least of which would be the stunning performances of such emerging markets over the past year or so; but also because of fears that many a Dubai lurks in this part of the world.

In the same week, we had Vietnam devaluing its currency and bumping up interest rates - taking up the dubious distinction of the only Asian country that needed to do so in 2009.

From a purely top level perspective, the idea is nonsensical. The total size of Dubai obligations, at $80 billion or so, represents a boil on the backside of the debt monster running amok in the developed and developing markets. For example, it represents barely 5% of the mortgage obligations of the US market alone; a paltry 10% of the sovereign wealth fund in neighboring Abu Dhabi; a smallish 3% of the foreign exchange reserves of China, and so on.

Then again, there is the normal contagion with which the likes of the International Monetary Fund and World Bank are familiar (being the root causes of the same); then there is the "contagion from extrapolation" that markets are more familiar with. This is where things actually get hairy.

Let us remove all the drama from the Dubai saga, and consider the facts:
1. High debt levels.
2. Poor performing collateral for debt.
3. Markets that expect continuing "strategic" bailouts.
4. A fractious political climate around debt discussions.
5. No real (sector-specific) growth to support future repayment.

If I read just the above and was asked to guess what exactly was the subject being discussed, a large number of options would spring up:
a. US mortgage debt.
b. Senior and subordinated debt of global banks.
c. Smaller European governments (Greece, Ireland etc).
d. Leveraged loans and high-yield bonds in the US and Europe.
e. Chinese bank lending to the property sector.

Don't be put off by the lack of specifics (there isn't the space to go into all of them); what really matters is that the rough, back-of-the-envelope calculation for the above five sectors alone is $4 trillion to $5 trillion. When considered in that light, the Dubai debacle suddenly becomes a mere portent of things to come; the thin end of the wedge as fundamentals reassert from the perilously slippery slope of systemic liquidity-driven prices.

Over the weekend, a number of more supportive headlines have sprung up in the financial press with respect to the Dubai story: that Abu Dhabi is "willing to help on a case-by-case basis"; that, as noted above, the "UAE central bank has agreed to provide emergency liquidity"; and even more fantastically, that the Gulf Cooperation Council (composed of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE) will ride to the rescue of Dubai. All that may indeed come through, but, whatever happens, Pandora's Box has now been opened....

Sunday, November 22, 2009

We are in for a very nasty surprise in the spring of 2010... the economy and the markets will tank dramatically.

We are in for a very nasty surprise in the spring of 2010... the economy and the markets will tank dramatically...

November , (LPAC)—Speaking at the central school of the Chinese Communist Party, Italian Economy Minister Giulio Tremonti said yesterday that the crisis is not over, and a that real solution can come only from an international treaty among governments, which he called a new Bretton Woods.

"After the disaster, I was of the view that only those banks should be bailed out, which finance families and companies. Instead, all of them have been bailed out. In this way, we gained time, but did not solve the problem. And therefore, the threat of another crisis is around the corner."

"Stock markets are again at pre-crisis levels, and derivatives are growing again at a frightening rate.... The world can be precipitated again into the crisis because the chance of changing was lost." Throughout the world, "governments have intervened using two hands: with one, they injected an enormous amount of liquidity in the system. With the other, they turned private debt into public debt." Such interventions have fixed the balance sheets of large investment banks but not those of the state, and
"an enormous part of this money has stayed in the banks themselves, which today are using it to make profits, by borrowing at 1% and reinvesting into financial instruments at 5.5%.

"At the end of the '90s, de facto the power of uttering currency, which was a power of sovereign states, was put into the hands of banks and the market," allowing large banks to count more than average nations.

"The crisis has put governments back on center stage, but nevertheless there is still an enormous mass of finance inside banks, out of control of the state. Now we must do something completely new."

"We cannot think of solving the problems that emerged out of the crisis through a series of new technical rules written by the bankers," Tremonti "roared" according to the daily Il Riformista, drawing applause from the audience.

The G20 was necessary but "not sufficient," Tremonti said. "Today we need a collective political effort to define the new order, an international treaty to define a new Bretton Woods, which must be the product of a multilateral effort, not only in joining it, but also in drafting it," Tremonti said. "I have the honor to deposit here a first draft of my treaty. I could not imagine a better place."
During his stay in Beijing, Tremonti will meet Chinese government officials.....

Not talking about peak oil.....?

OECD leaders go far out of their way to never, ever mention Peak Oil. This in fact is the biggest real world driver for worldwide Energy Transition away from C02 emitting fossil fuels. Due to limited world oil reserves and production capacity, moving away from fossil fuels is necessary, whether or not there is climate change or global warming. Complicating this, world pipeline and LNG gas supplies are now entering a period of large or massive increase, depending on country and region, perhaps able to last 5 years or more. While oil can get very expensive, natural gas will likely remain cheap, and international traded coal will likely remain low cost on delivered energy terms.

For OECD leaderships seeking rapid transition away from oil, and cutting C02 emissions, natural gas is cleaner burning, with lower emissions than oil or coal. This is a rational energy strategy -- oil substitution by gas -- for the short term.

Waiting for the soft energy and electric car revolution will however be long-haul. Growing the role of non-hydro renewables in the energy mix to anything above 5 percent, by 2030 without also cutting global total energy demand every year by well above one percent, will be costly, complex and slow. Setting policies for non-hydro renewable energy, including wind and solar energy, replacing or substituting large proportions of current fossil fuel demand implies long-term, massive funding, and the related industrial and technical mobilization for the task. To date, no such financing and frameworks exist, OECD leaderships seemingly imagine that ‘the market’ can be relied to carry out and sustain this massive, long term, high cost task.

More rationally, more realistic and at least as necessary as acting to limit climate change, substituting the loss of world oil production capacity due to Peak Oil, through the next 20 years, itself sets massive challenges. Here again, however, we enter the realms of politically correct censorship, because until late 2009 the IEA and other energy agencies, and most of the major oil corporations stood together in officially forecasting no possible shrinkage in world oil supply, and perhaps 25 percent or more supply growth over the next 20 years. Periodic market shortfalls, yes, but not long term declining supplies fixing 90 Mbd as the maximum possible oil output the world can achieve.

This united front is breaking up, like Arctic glaciers, with Zero Petroleum Growth of supply to 2030 now being hinted at, if not openly stated. Peak Oil analysts present much more radical scenarios, based on real world reserve history and production statistics, extending to a loss of up to 25 million barrels/day (Mbd) of production capacity, around 30 percent of present supply, by 2030. Under these scenarios, world oil production, and therefore demand could fall to 60 Mbd or so, by 2030.

Entering a period where annual increase of world oil demand is no longer possible, and demand only decreases, is as economically catastrophic in its implications, as mediatic rantings on global warming catastrophe indulged by some OECD leaders, in the run up to the COP15 ‘climate summit’ of Copenhagen. Doing nothing about the real threat of oil decline and high prices to the economy and society, and possible repeats of ‘military adventure’ in the Mid East and Central Asia, to assure oil supplies, is a bigger threat than of losing face from COP15 failure.

Biting the bit, and facing this uncomfortable reality without the fig leaf of a scientifically shaky and histrionic ‘climatic apocalypse’ as the prime mover for Energy Transition is the best outlook from the failure of COP15 to achieve an impossible consensus. In the coming weeks, as this failure becomes more certain, we will find out which OECD leaderships care to face the reality of peak oil decline in world supply. Action can focus the creation of multilateral agencies, frameworks and funding for global energy transition on a long-term basis.

Why ignore peak oil?

The reasons stretch back at least 30 years to the oil shocks of the 1970s. The complete and total dependence on mostly imported oil, of most major OECD consumer societies was heavily underlined by chaotic and unsuccessful attempts at keeping the economy on the rails. The supposed link between oil prices, economic recession, and inflation were established at that time in the mindset of OECD leaders who like the Bourbons have forgotten nothing, and learned nothing since.

Speaking at Jackson Hole in August 2009, The US Fed’s Ben Bernanke solemnly warned that oil prices are already uncomfortably high for the US economy. He went on to say oil prices reaching $100 a barrel would be as serious a threat to US economic recovery, as prices hitting $145 a barrel were in 2008 and that he could raise interest rates, despite the impacts of this on the recovery, if they went above his new $100 ‘pain threshold.’ This merely states the obvious, but adds the interesting possibility that the US and other world economies are now more sensitive, not less sensitive to high oil prices. Support to this argument is not lacking, in energy economic studies.

In 2007-2008, however, the US economy soldiered along quite a while with prices above $125 a barrel and little evident inflation, albeit with constantly falling growth rates by quarter. Whether oil prices, or the subprime debt bubble and Wall Street ‘exuberant’ trading of nearly-virtual financial derivatives in vast quantities were the real cause of the 2008-2009 crisis remains to be elucidated, but Bernanke’s new oil price limit leaves alternate theories almost ignored.

In any case, the Keynesian recovery masterminded by Bernanke and the US Fed has included the printing, borrowing, lending and engaging of truly vast sums, probably exceeding $3,750 billion for the US economy alone, for 2008-2010. The US Federal budget deficit in 2009 will probably attain or exceed $1,600 billion, around 12 percent of GNP. We can note that even at Bernanke’s fear price of $100 a barrel, US oil imports costs would struggle to achieve a yearly level above $300 billion. This tends to suggest that oil prices, alone, are not the bogeyman they are painted, and also could suggest that any future rise of oil prices and US oil import costs could (at least in theory) be covered by the Keynesian print-and-forget route, in the event of no other sustainable strategies being available or being ignored due to ‘market thinking’ replacing planning and organization.

One thing, however, is sure, oil prices remain hard-wired to economic and political decider mindsets as a dire threat to economic growth -- this growth always featuring the growing consumption of oil dependent and energy intensive products and services. Unsurprisingly, oil demand tends to increase anytime there is ‘classic’ recovery. Just as unsurprising, oil prices rise with demand growth and this process shows higher and higher positive feedback in an ever shorter feedback loop. The basic cause is peak oil, reserve depletion, higher costs and longer lead times for raising oil supply capacity, as well as environmental, geopolitical and other causes. As a growing number of well documented web sites (such as The Oil Drum) show, the correlation of declining oil supply growth and higher cost/longer lead times for supply expansion, with oil prices, is high and positive. Any hope that Bernanke or others might have for oil prices staying ‘moderate’ is likely to be dashed -- if there is sustained conventional and classic economic recovery for any period of time.

To be sure, the fond hope is that ‘green energy,’ notably the non-hydro or ‘new’ renewables, and to some extent energy saving could quite quickly replace or economize oil in the economy. Selling this to a recalcitrant mass consumer public totally hooked on oil-based consumer goods and services supposedly requires the big stick of Climate Apocalypse fantasy, rather than informing the same public of peak oil reality. In turn, this makes the likely failure of the COP15 ‘climate summit’ problematic for the image management of OECD political leaderships, terrified of losing face.

Likely the most basic reason for studiously ignoring peak oil and making sure any comment or data on this subject can be contradicted or denied derives from the real world, real economy dependence on oil of the ‘postindustrial’ consumer societies of the OECD. Today, compared with 1979, this remains high, even if oil’s part in total energy consumption has slipped, as gas, coal, hydro and nuclear energy, and to a small extent the non-hydro renewables have reduced the percent share of oil. This however sidelines one major fact which can be measured. Total oil consumption, and total oil imports of the OECD economies have in general and on average increased since 1979, in some cases doubled (100 percent growth), sometimes in less than 15 years. Those countries that have decreased their oil consumption in absolute terms are the minority. This reinforces the careful ignorance of oil dependence and the reality of peak oil, but in no way prevents (in fact guarantees) the coming progressive and long-term reduction in world oil supply. Replacing or substituting oil with ‘other energy sources’ will soon need open and real debate, when the sideshow of Global Warming apocalypse collapses from lack of public conviction, and lack of fact.

Moving forward

With the failure of the COP 15 conference now almost programmed in advance, but oil prices showing little signs of following traded natural gas prices into ‘sweet and low’ territory, the time may be ripe for OECD leaderships to bite the bullet on coherently moving to Energy Transition. The tapering down of world oil export supply, called export ‘offer,’ may be faster than world oil production capacity decline. Conversely world gas supplies face a short-term and large scale bulge. Coal supplies on the same horizon are limited by export and transport infrastructures, not reserves.

The net effect of oil being shortest-fuze energy resource, this can only refocus geopolitical rivalry and tension to the Middle East and Central Asia, and African oil exporter countries. IEA scenarios for 2030, we can note, are forced to claim that OPEC could or might produce 55 Mbd by 2030, quite close to 100 percent above present production, simply to balance out demand forecasts, with supply. This will again refocus and concentrate oil drive tensions and rivalries in the above cited regions.

Believing in the above cited IEA miracle, OPEC led by the OAPEC group practically doubling production in 20 years, is comparable with believing in Al Gore stories of coming global warming tsunamis, and Biblical Floods which can sweep all before them.

OECD leaderships can now begin to blend in real world facts to their energy speeches, with the same target: mobilize their consumer publics to accepting energy saving and non-oil energy sources on a constant and long-term basis. Enabling transition from oil, followed later by gas and coal, is the most serious and basic challenge faced by leaderships in the ‘postindustrial,’ but not post-oil or post-carbon consumer societies. Facing this reality is one of the largest tests of leadership quality that we face in the short term.

Energy Transition is both a policy challenge, and a necessity that will not go away. While we still have time, this challenge should receive the attention it needs, not hidden behind a cloud of global warming rhetoric. Failure of COP15 conference will therefore be the chance for a new departure, facing real world limits, and moving the world forward.....

Friday, November 6, 2009

There is a gigantic chess game being played behind the scenes on a Global scale....

There is a gigantic chess game being played behind the scenes on a Global scale....
To a certain extent all the critics of fed policy are sycophants, seeking to measure their own scant conceptual shadow against the giant of shadows cast by these colossal incubators of economic policy. The personage of A. Greenspan or B. Bernanke are little more than figureheads of gigantic think-tanks manned by experts with far more on their minds than economics or economic theory.

Leading the world is like climbing on board a bucking-bronco....

Policies are less steerage than they are a
defensive grasping at some modestly safer harbor. Most often policies chosen are the least-worse of many different more-worse possible directions that are exhaustively explored and projected.

Yes, someone calls the shots, -but dozens upon dozens of well-connected people get the chance to say, "See, I told you so."

There is also a gigantic chess game being played behind the scenes.

It's not a fair game by any stretch of the imagination, but, there is a continual necessity to make the better defensive move to prevent seepage of the lopsidedness of the current game-board and its often unforgiving rules.

From the quite childish perspective of these critics, some interesting avenues are explored -for the common mind. But no one should be deceived into thinking there is any real impact going on here other than upon the delusions of a small segment of an ill-informed public.

It was pointed out long ago, how the human mind will watch an athlete, and find what that athlete is doing -is not only easy to loosely comprehend, but similarly easy to imagine oneself doing too, -too easy as it turns out.

Our minds are after all, finite, if complex.

Reality is infinitely complex by comparison.

Our minds have a sometimes movable but limited range in every expression, observation, or experience.

That limited range is best observed as we consider our fallible memories. It is seemingly easy for us to fill in the blanks.
The inherently limited range of expression, observation and experience is why our memories fail to conjure an exact reality for our reflective perception.

This same inherently limited range of expression, observation and experience is also why our dreams do have every appearance of reality.

It is as if we had a deck of fifty-two playing cards fulfilling the entire range of all our expression, observation and experience. The seemingly infinite variety we experience in life is due to however many hands we are dealt with just such a limited number of these same cards.

Most of us have a full deck. However, very few of us will ever be in the position to do what Tiger Woods does, or Ben Bernanke.

And in that position, only a fool believes it would not be all too easy to blow the chance.....
As a critic of the Fed (and the whole debt-based money system it presides over), I guess I am one of your sycophants. To me, it seems pretty obvious that the design of the money system is wrong. It creates more debt every year than it creates ability to service that debt and even a dumb guy like me can see that at some point that has to crash.

From this intellectual netherworld, I support the kinds of monetary reforms that is discussed in the post: Take the Power to Create Credit Away from the Giant Banks and Give It Back to the People (11.3.09)

US treasury Issue debt free money. Capital G Greenbacks. Banking system remains private, but it loses the ability to create money (fractional reserve banking). Money creation becomes a public utility, spent into existence by the government, ideally on things like bridges, education, and health care.

Look at it this way: with Greenback dollars, you only pay for the bridge once, when you build it. Not two or three times over, the way we do now letting the banks create the money and borrowing it from them.

If we had done this in 1960, there would be no National Debt right now, and if such a system were well managed we could have an economy that would require very few taxes.

Imagine how well capitalism could work if you just removed the drag of the national debt......

The Wall Street Journal admits this week that economists blew it:

The pain of the financial crisis has economists striving to understand precisely why it happened and how to prevent a repeat...

The crisis exposed the inadequacy of economists' traditional tool kit, forcing them to revisit questions many had long thought answered, such as how to tame disruptive boom-and-bust cycles...

"We could be looking at a paradigm shift," says Frederic Mishkin, a former Federal Reserve governor now at Columbia University.

That shift could change the way central bankers do their job, possibly leading them to wade more deeply into markets. They could, for example, place greater emphasis on the amount of borrowing in the economy, rather than just the interest rates at which borrowing is done. In boom times, that could lead them to restrict how much money various players, ranging from hedge funds to home buyers, can borrow
I have repeatedly pointed out the flaws in mainstream economics. See this, this, this, this and this.

But the Journal makes it sound like the policy-makers and economists who deployed faulty models were innocently ignorant of any larger truths:
The models "were not able to draw up the red flags," says Tim Besley, a professor at the London School of Economics who served on the Bank of England's policy-making committee until recently.
Barry Ritholtz has an excellent criticism of the article, pointing out:

There are many areas I would have liked to see the [journal's] article explore: The lack of Scientific Method, the mostly awful performance of economists, its misunderstanding of the value of modeling, the bias inherent in Wall Street variant of economics, and lastly, the corruption of economics by politics...

Let’s start with the basics. Hard “science” — Physics, Biology, Chemistry, and all variants thereto — begins humbly. They try to describe the universe around us by creating theories, and then testing them. These theorems are always preliminary. Even when testing validates them, Science is always prepared — even eager — to replace them with newer theories that are proven to be even more valid.

The humility of science begins with an admission: We know nothing. We seek to learn through experiment and logic, and constantly evolve more and more accurate explanations. Scientific belief evolves gradually over time. Nothing is assumed, presumed, or hypothesized as true. Indeed, research is a presumption that current theories are inadequate or incomplete. The practice of science is a an ongoing search for better explanations, more proof, further verification — for Truth.

Science is the ultimate “show me” state.

Economics has a somewhat, shall we call it, less rigorous approach. Indeed, the arrogance of economics is that it is the polar opposite of Science. It begins with a few basic assumptions, many of which are obviously untrue; some are demonstrably false.

No, Mankind is not a rational, profit maximizing actor. No, markets are not perfectly, or even nearly, efficient. No, prices do not reflect the sum total of all that is known about a given market, sector or stock. Those of you who pretend otherwise are fools who deserve to have your 401ks cut in half. That is called just desserts. The problem is that your foolishness helped cut nearly everyone else’s 401ks in half. That is called criminal incompetence.

Where was I? Ahhh, our sad tale of the practitioners of the dismal arts.

Starting from a false premise that fails to understand the most basic behaviors of the Human animal, economics proceeds to build an edifice of cards on a foundation of sand. (How could that possibly go astray?) Like a moonshot off by a few inches at launch, by the time the we reach further into time and space, the trajectory is off by millions of miles . . .

Economics ... creates an illusion of precision where none exists. The belief in their models led to all manner of mischief, from subprime to derivatives to risk management...

The Behaviorists have been fighting the mainstream for decades now, trying to correct the errors of the basic building blocks of the dismal science.

But I would go further in my criticism of the economic profession by arguing that the decisions to use faulty models was an economic and political choice, because it benefited the economists and those who hired them.

For example, the elites get wealthy during booms and they get wealthy during busts. Therefore, the boom-and-bust cycle benefits them enormously, as they can trade both ways.

Specifically, as Simon Johnson, William K. Black and others
point out, the big boys make bucketloads of money during the booms using fraudulent schemes and knowing that many borrowers will default. Then, during the bust, they know the government will bail them out, and they will be able to buy up competitors for cheap and consolidate power. They may also bet against the same products they are selling during the boom (more here), knowing that they'll make a killing when it busts.

But economists have
pretended there is no such thing as a bubble. Indeed, BIS slammed the Fed and other central banks for blowing bubbles and then using "gimmicks and palliatives" afterwards.

It is not like economists weren't warning about booms and busts. Nobel prize winner Hayek and others were, but were ignored because it was "inconvenient" to discuss this "impolite" issue.

Likewise, the entire Federal Reserve model is
faulty, benefiting the banks themselves but not the public.

However, as Huffington Post

The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession, an investigation by the Huffington Post has found.

This dominance helps explain how, even after the Fed failed to foresee the greatest economic collapse since the Great Depression, the central bank has largely escaped criticism from academic economists. In the Fed's thrall, the economists missed it, too.

"The Fed has a lock on the economics world," says Joshua Rosner, a Wall Street analyst who correctly called the meltdown. "There is no room for other views, which I guess is why economists got it so wrong."

The problems of a massive debt overhang were also thoroughly documented by Minsky, but mainstream economists pretended that debt doesn't matter.

And - even now - mainstream economists are STILL willfully ignoring things like
massive leverage, hoping that the economy can be pumped back up to super-leveraged house-of-cards levels.

As the Wall Street Journal article notes:
As they did in the two revolutions in economic thought of the past century, economists are rediscovering relevant work.
It is only "rediscovered" because it was out of favor, and it was only out of favor because it was seen as unnecessarily crimping profits by, for example, arguing for more moderation during boom times.

The powers-that-be do not like economists who say "Boys, if you don't slow down, that bubble is going to get too big and pop right in your face". They don't want to hear that they can't make endless money using crazy levels of leverage and 30-to-1 levels of fractional reserve banking, and credit derivatives. And of course, they don't want to hear that the Federal Reserve is a big part of the problem.

Indeed, the Journal and the economists it quotes seem to be in no hurry whatsoever to change things:
The quest is bringing financial economists -- long viewed by some as a curiosity mostly relevant to Wall Street -- together with macroeconomists. Some believe a viable solution will emerge within a couple of years; others say it could take decades.
Note: I am not necessarily saying that mainstream economists were intentionally wrong, or that they lied because it led to promotions or pleased their Wall Street, Fed or academic bosses.

But it is harder to fight the current and swim upstream then to go with the flow, and with so many rewards for doing so, there is a strong unconscious bias towards believing the prevailing myths. Just like regulators who are too close to their wards often come to adopt their views, many economists suffered "intellectual capture" by being too closely allied with Wall Street and the

As Upton Sinclair said:
It is difficult to get a man to understand something, when his salary depends upon his not understanding it.