by Alex Evans | Jan 2, 2008 | Global system
So says Ambrose Evans-Pritchard in the Telegraph, so it must be true. He writes: “As the credit paralysis stretches through its fifth month, a chorus of economists has begun to warn that the world’s central banks are fighting the wrong war, and perhaps risk a policy error of epochal proportions.” And what might that policy error be?
Buckets of liquidity are being splashed over the North Atlantic banking system, so far with meagre or fleeting effects … “Liquidity doesn’t do anything in this situation,” says Anna Schwartz, the doyenne of US monetarism and life-time student (with Milton Friedman) of the Great Depression.
Peter Spencer of York University continues:
“The central banks are rapidly losing control. By not cutting interest rates nearly far enough or fast enough, they are allowing the money markets to dictate policy. We are long past worrying about moral hazard … [The global financial authoritie] still have another couple of months before this starts imploding. Things are very unstable and can move incredibly fast. I don’t think the central banks are going to make a major policy error, but if they do, this could make 1929 look like a walk in the park”.
I’m not sure that the ‘chorus of economists’ saying that it’s an insolvency crisis rather than just a liquidity crunch is really so new – Nouriel Roubini was saying so back in mid-August, as we observed at the time – but let’s let that pass. Here are three interesting, if controversial, thoughts that emerge from E-P’s piece:
1. Remember what happened to Japan in the 1990s:
In theory, Japan had ample ammo to fight a bust. Interest rates were 6 per cent in February 1990. In reality, the country was engulfed by the tsunami of debt deflation quicker than the bank dared to cut rates. In the end, rates fell to zero. Still it was not enough. When a credit system implodes, it can feed on itself with lightning speed. Current rates in America (4.25 per cent), Britain (5.5 per cent), and the eurozone (4 per cent) have scope to fall a long way, but this may prove less of a panacea than often assumed. The risk is a Japanese denouement across the Anglo-Saxon world and half Europe.
2. E-P’s outlook for Britain:
The risk for Britain – as property buckles – is a twin banking and fiscal squeeze. The UK budget deficit is already 3 per cent of GDP at the peak of the economic cycle, shockingly out of line with its peers. America looks frugal by comparison. Maastricht rules may force the Government to raise taxes or slash spending into a recession. This way lies crucifixion. The UK current account deficit was 5.7 per cent of GDP in the second quarter, the highest in half a century. Gordon Brown has disarmed us on every front.
3. Something you may not have considered vis-a-vis the European Central Bank:
The ECB’s little secret is that it must never allow a Northern Rock failure in the eurozone because this would expose the reality that there is no EU treasury and no EU lender of last resort behind the system. Would German taxpayers foot the bill for a Spanish bail-out in the way that Kentish men and maids must foot the bill for Newcastle’s Rock? Nobody knows. This is where eurozone solidarity stretches to snapping point. It is why the ECB has showered the system with liquidity from day one of this crisis.
In other news, Nouriel Roubini finds that in 2007, cash (in short term Treasuries or money market funds) outperformed the stock market.
by Alex Evans | Jan 2, 2008 | Climate and resource scarcity
No ho-ho-hos from the International Energy Agency this Christmas. They chose December 27th, of all days, to announce that, er, their reserves data is – how to put it? – rather Enronesque.
As the FT says, the Agency “has been paying insufficient attention to supply bottlenecks as evidence mounts that oil is being discovered more slowly than once expected”. The article continues: “To make amends, the International Energy Agency has started work on a new study to be published next year that will rework its long-term projections for global oil reserves”.
Alongside a plan to build a new set of data for the decline in production rates in the world’s top 250 oilfields, the IEA is also ready to reassess its own forecasts for projected oil discoveries, which it based on estimates by the US Geological Survey.
Any downward revisions in oil discoveries or upward revisions to decline rates will in theory increase the probability that global oil reserves will be smaller than expected and that global oil supply will peak much sooner than expected.
Natural decline rates for discovered fields are a closely guarded secret in the oil industry, and the IEA is concerned that the data it currently holds is not accurate.
Doubts are also surfacing about the original estimates for new oil discoveries around the world that were calculated by the USGS in 2000. A USGS re-assessment of these statistics in 2005 showed that actual new oil discoveries averaged only 9bn barrels a year between 1996-2003, 60 per cent less than the average annual estimates for the forecast period of 1995-2025. Just a few months ago, the USGS also downgraded its estimates of future new discoveries around Greenland by 38bn barrels.
“Insufficient attention to supply bottlenecks”? Call me lacking in seasonal goodwill, but wasn’t the whole point of creating an International Energy Agency to have organisation whose job it was to pay attention to supply bottlenecks?
What’s all the more alarming about the IEA’s Yuletide admission is that the Agency was already sounding alarm bells and pointing to flashing red lights on the dashboard even before this announcement. Regular GD readers will recall that November 16 saw the publication of the latest World Energy Outlook, when the Agency said that over the next 25 years some $22,000 billion – just under half 2006 world gross product – would need to be invested in supply infrastructure. If even that astronomical figure was based on an over-optimistic assessment of reserves data, then – ?
Nor was this even the end of the IEA’s Christmas message to the world. The following day, it announced its finding that the rising cost of oil has already wiped out the benefits of increased aid and debt relief to non-oil producing African countries, according to an IEA survey of 13 countries including South Africa, Ghana, Tanzania, Ethiopia and Senegal. According to the IEA, the increased cost of oil bought by these countries since 2004 was 3 per cent of their combined GDP: “more than the sum of debt relief and aid received over the past three years by the countries, which have a combined population of 270m, of whom 104m live on less than $1 a day”. One implication:
The situation is raising fears that, in spite of the strong growth many African countries have seen in recent years, there could be a repeat of the 1980s’ debt crisis in the developing world that was caused in part by the oil shocks of the 1970s.
by Alex Evans | Jan 2, 2008 | Climate and resource scarcity, North America
Hal Weitzman is with Barack Obama in Iowa. Barack Obama loves ethanol.
When the last presidential caucus was held in 2004, Iowa produced 860m gallons of ethanol. A year later, after Washington introduced a renewable fuel standard mandating the yearly production of 7.5bn gallons by 2012, the industry enjoyed a growth spurt. Today, Iowa’s 28 plants are responsible for 2bn gallons of the US’s annual production of 7bn gallons, with 18 new plants expected to add 1.6bn gallons next year. As a result ethanol is one of the few issues on which there is near-consensus among the leading presidential hopefuls on both sides.
Go figure. As Weitzman continues,
Nationally, there is a growing chorus of disapproval against the ethanol industry. Foodmakers and retailers blame ethanol for higher corn prices. Livestock producers resent the effect of the corn boom on feed costs. Some environmentalists question ethanol’s green credentials and say there should be more support for wind and solar power. Free-market groups oppose a 51 cent-a-gallon government subsidy for refiners who blend ethanol into traditional petrol.
Regardless of this opposition, ethanol is likely to become a permanent fixture of the US’s energy supply, boosted by growing interest in renewable fuels and a widespread sentiment that the country needs to wean itself off its dependency on oil imports. Polls show most Americans support the industry. This month Congress passed an energy bill that mandates an increased annual production of 36bn gallons of ethanol by 2022. “It’s pretty easy to take a shot at ethanol, but the reality is that it’ll be a part of any ‘final package’ on energy,” says Wallace Tyner, professor of agricultural economics at Purdue University in West Lafayette, Indiana.
Grrr.
by Alex Evans | Jan 2, 2008 | Africa, Conflict and security, Economics and development
With the death count now well into the hundreds, and the number of Internally Displaced People from the Rift Valley alone placed at 70,000 by the Kenyan Red Cross, decision-makers at aid agencies must be wondering whether they’re hallucinating. As Richard Dowden quotes a Kenyan friend: “But these things don’t happen in Kenya!”.
As if to prove the point about Black Swans, Kenya has erupted just as the eyes of the world were focused exclusively on Pakistan. A scan of media reporting before polling took place shows that the prevailing mood among opinion formers was upbeat: few saw this coming. The Times‘s take on 27 December, for instance, was cheerful:
For many observers, the very fact that the race is so close run is a sign of how far Kenya has come in 15 years of multiparty democracy. An incumbent has never before faced a credible challenge.
Even on the day of the election itself, when rumblings from Raila Odinga’s Orange Democratic Movement were becoming audible, the picture seemed to be broadly positive. Here’s the IHT:
So far the election period has been relatively peaceful, with a few scattered bursts of violence but no widespread turbulence. Foreign election observers, including the U.S. ambassador to Kenya, have praised the process, saying it was free and fair, though at times a little chaotic.
“At times a little chaotic” neatly sums up the international community’s attitude to Kenya until now. ‘True, it’s endemically corrupt’, went the standard line, ‘but it’s stable: in spite of everything the state more or less works’. Often, Kenya was invoked in the same breath as Tanzania or Zambia, as an example of a ‘ruminant’ rather than a ‘vampire’ state. Rather than being of the purely blood-sucking variety, the argument went, the corruption in Kenya was of the sort that gave something back – producing fertile ‘manure’ in the form of infrastructure projects and so on.
But as Richard Dowden – one of the few commentators who can claim to have provided ample warning of risks in Kenya – noted yesterday, “Kenya has been a catastrophe waiting to happen”.
Kenyan politics are more than a lucrative game of musical chairs for the elite. They are the most vicious and tribalised on the continent. Politicians often address their own people in coded language. “It is our turn to eat!” is a phrase they often use. It means that it is the turn of our ethnic group to rule — and loot as much as we can.
The issue of spoils politics, and donors’ attitude to it, is at the very heart of the conundrum that Kenya now poses to the international community. It’s been a while since President Mwai Kibaki has been a ‘donor darling’, but there’s no doubt that that’s exactly what he was after his election victory in 2002. His subsequent relapse into clientelism and patronage politics is entirely consistent with the ‘passionate-love-affair-followed-by-fall-from-grace’ archetype that aid agencies seem unable to resist – whether with Museveni in Uganda, Meles in Ethiopia, or (dare one recall), one Robert Mugabe.
When the dust has settled and the wash-ups and lessons-learned exercises get underway in earnest, there will be two central questions for donors. One: what’s the role of aid in fragile states? Is it actually helpful to spray vast volumes of cash into directly into governance systems fundamentally based on patronage, in the form of budget support? And two: what is donors’ theory of influence in such states? If they can recognise that the problem is not to do with individuals like Kibaki or Odinga, but is instead systemic, then what can donors do to change that system – or at least avoid propping it up? For what it’s worth, here’s an attempt to answer those questions that I made back in May last year.
Happy new year.
