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The looming Yuan-Dollar currency crisis

No dearth of pretenders - EU, Japan ... and now China!

No dearth of pretenders - EU, Japan ... and now China!

There are three separate reasons for this … The reasons refer to the broad determinants of economic growth — capital, labour and productivity.

On the first, India is investing at the same rate as China (approximately 40 per cent of GDP), on the second, India’s labour force growth is about 1.8 per cent per year faster than China, and on the third, China has outpaced India by about 2 per cent per annum (for the last five years).

Most of this outpacing has had to do with the deep and deeper currency undervaluation practised by the Chinese authorities which led to two unsatisfactory outcomes: the great financial crisis of 2008, and now the largest and fastest growing polluter of the world.

For how long will the international community stand idly by? Not very, and this is the first big forecast for the ensuing decade: China’s exchange rate will appreciate significantly starting 2010. How significantly? A first year appreciation to about 6 yuan per dollar from the present 6.8 level. (via Surjit S Bhalla: India’s Shining Decade).

Plausible! Probable … Possible?

'Get to heaven by climbing the terraced fields'. Great Leap Forward poster, Artist - Yang Wenxiu, Published - 1958, September, © Stefan R. Landsberger

'Get to heaven by climbing the terraced fields'. Great Leap Forward poster, Artist - Yang Wenxiu, Published - 1958, September, © Stefan R. Landsberger

Surjit Bhalla outlines a plausible scenario – with China needing to adjusting their exchange rate upwards – much like other US client-states had to! Europe had to in the 70s, Japan in the 90s, Asian Tigers in last 10 years. As examined earlier in some detail by 2ndlook. One question is settled. There will be economic mayhem.

However, Bhalla assumes that the Dollar-Yuan revaluation will happen smoothly – without any significant disruption. And that is one, big, huge assumption – which is based on really, really slippery slope.

Bhalla would do well to remember that last time when China had a problem, it resulted in the India China War of 1962. Just after the disastrous Great Leap Forward and before the equally disastrous Cultural Revolution.

The Great Leap Forward began in 1957-58, saw famine and hunger across China. After the Communist takeover of China, land seized from land owners, was given to peasants in 1949. Ten years later, in 1959, the Chinese State took away the same land from the same peasant. Food shortages, starvation followed. Western (questionable) estimates are that 30 million people died during this period. War with India followed in 1962 – a diversion from the domestic Chinese catastrophe.

What will it be this time?

The approaching mayhem

The next few years will be tumultuous for China.

Much like, when Europe was weaned off the low exchange rate crutch in 1967-1974 period. Stagflation, oil shock, the Nixon Chop followed. How Japan had to live with endaka, the Plaza accord, with S&L crisis in the US.  Or the Asian Tigers had to reset to a higher exchange rate and higher foreign reserves, that accompanied the 1997 (Asian Crisis) to 2000 (The Tech meltdown).

What will follow the Chinese moment in the sun? What will set off economic mayhem in China?

Crime in China (a simmering threat), terrorism in Xinjiang (remote possibility), real estate bubble (a real scenario), dollar-yuan exchange ratio (significant risk)?

Will the Chinese Government be able to ride this storm? Without a war with India? Which side of the fence will China fall? Answers to these questions will be worth waiting for! And prepared with!

Signs of coming troubles?

Great Leap Forward © Stefan R. Landsberger; Source - Zhongguo meishuguan (ed.), 中国美术年鉴 1949-1989 (Guilin: Guangxi meishu chubanshe, 1993). Designer: Zhang Xin'guo (张辛国); Liu Duan (刘端); 1958, October; Put organizations on a military footing, put actions on a war footing, put life on a collective footing; Zuzhi junshihua, xingdong zhandouhua, shenghuo jitihua (组织军事化,行动战斗化,生活集体化); Publisher: Hebei renmin meishu chubanshe (河北人民美术出版社).

Great Leap Forward © Stefan R. Landsberger; Source - Zhongguo meishuguan (ed.), 中国美术年鉴 1949-1989 (Guilin: Guangxi meishu chubanshe, 1993). Designer: Zhang Xin'guo (张辛国); Liu Duan (刘端); 1958, October; Put organizations on a military footing, put actions on a war footing, put life on a collective footing; Zuzhi junshihua, xingdong zhandouhua, shenghuo jitihua (组织军事化,行动战斗化,生活集体化); Publisher: Hebei renmin meishu chubanshe (河北人民美术出版社).

When the Soviet Union imploded, one of the unexpected fall out was the Russian mafia. Recent troubles in China, with the underworld creates a spectre of yet another mafia creating global disturbances. One more element in global trouble spots. To understand this better, turn to Chinese cinema.

Most films that have any Chinese element in it, (actors, directors, characters, locations) end up having the Chinese underworld as an important part of the storyline. Is it that the Chinese are morbidly fascinated by criminals and the underworld – much like Europe was with English pirates and murdering Spanish Conquistadors.

Ranging from Jet Li in Kiss of the Dragon, (Jet Li takes on the French mafia) or Chow Yun-Fat in The Corrupter (exposing police-underworld nexus and corruption in the USA), or Jackie Chan in Rush Hour series or the Chinese Ric Young in The Transporter, Jet Li in Lethal Weapon 4.

All have two elements in common.One is the pervasive Chinese underworld. Across Europe, in the USA. In drugs, fake currency, in smuggling boat people, the Chinese are there – everywhere. Many of these movies have Chinese stars, directed by Chinese directors or even partly funded by Chinese studios .

The second is the absence of the Buddhist monk.

India – the loose cannon!

What kind of ending will we see ...?

What kind of ending will we see ...?

Now, India is one box which defies description. By any global and historical standards, the country should not even exist – much less prosper, or be a significant global player. Too many languages, too much poverty, too much freedom, too many political parties, too many languages, too many religions, too many racial types are the common factors going against India (so goes the Desert Bloc narrative).

In such a situation, even in India, for the Westernized types or the remnants of the Desert Bloc admirers, India remains a failure waiting to happen.

Unfortunately, for these doubting Cassandra’s, India has proven them wrong for more than 5000 years now!

equally

RBI to buy 200 tonnes of IMF gold

November 3, 2009 1 comment

RBI to buy 200 tonnes of IMF gold

RBI’s decision to shore up its gold reserves needs to be seen in the context of other central banks across the globe increasing their gold reserves. Among them are the central banks of China, Russia and a few countries in the European Union.

In the last one year, China has increased its gold holdings, by weight, by 75.69%, Russia by 18.78%, the Philippines by 18.50% and Mexico by 108.91%.

Compared with this, India’s central bank did not add anything to its gold reserves in the last one year, according to Bloomberg data. (via RBI to buy 200 tonnes of IMF gold – Home – livemint.com).

Two years ago …

2ndlook had estimated that the Chinese could possibly (and they have)  increase their monetary gold reserves. On April 24th, 2009, Bloomberg reported that China had increased

its (gold) reserves by 454 tons to 1,054 tons through domestic purchases and refining scrap metal, Hu Xiaolian, head of the State Administration of Foreign Exchange, said in an interview with the Xinhua News Agency today. China, the world’s biggest gold producer, has increased its holdings before, Hu said in the interview carried on the administration Web Site. They rose from 394 tons to 500 tons in 2001 and to 600 tons in 2003. The U.S. has the world’s biggest gold holdings at 8,134 tons, followed by Germany with 3,413 tons, World Gold Council data show. France has 2,487 tons and Italy 2,452 tons, while the IMF has 3,217 tons, according to the council.

Another report, from Market Watch, a WSJ web publication added,

The increase makes China the world’s fifth-largest holder of gold, just ahead of Switzerland, and among the six nations plus the International Monetary Fund that have reserves of more than 1,000 metric tons. Although Hu did not elaborate on where China had sourced the additional bullion, her comments were interpreted as meaning they came from domestic sources and may included refining of scrap metal.  Traders also say the gold was accumulated systematically over a number of years. Last year China ranked as the world’s largest gold producer with 12.2% of world output, equivalent to 288 metric tons. The U.S. ranked second with a 9.9% share, or 234 metric tons.2008 - Sensex VS Gold

What are the future plans of the Chinese? A report quotes an analyst

China should increase its gold reserve from 600 tons to about 2,500 tons in a short term and to 3,000 tons in a long term to cope with the versatile exchange rate risks, said Teng Tai, an economist of China Galaxy Securities Company.

Exactly …

This really does not mean much – except that it may keep gold prices on boil. Whether a currency is backed by 5% or a 10% gold reserve makes no material difference, especially in this era of rampant use of (not just by the US of A) “a technology, called a printing press” as an economic tool. For long term economic stability, gold needs to be in the hands of individuals – and not Governments.

Why India

Since China is a significant gold producer by itself, it may not get a shot at buying IMF gold. India has negligible domestic gold production -and was possibly therefore given preference by the IMF. Of course, preference may have been given to RBI’s purchase, given its ‘responsible’ and ‘mature’ behaviour during the current Great Recession.

What does RBI’s gold purchase mean

RBI’s gold purchase means two things.

The Indian Government which has had a rather low percentage of gold holdings as their currency reserves will now bolster these reserves. Even after this purchase, Indian official reserves, will only be the ninth largest in the world in absolute terms.

On average, countries hold about 12.6% of their reserves in gold, up from 9.9% a year ago. Some of this represents an increase in gold holdings, but another driver of the increased proportion is the rise in the value of gold. (from India propels gold to new high.)

The overhanging threat of open market sales by the IMF, speculated by many and discounted by 2ndlook, now stands neutralized. This will be a kicker to gold prices in the short term.

The ideal thing …

Sell gold to individuals. Governments should not have such large holdings of gold. Gold in the hands of Governments is the prime cause of war. Gold holding should be widely dispersed, as widely as possible, amongst individuals – like the Indian gold possession model. No national government, in the new financial architecture should be allowed to have more than 250 tons of gold – to progressively reduce to 50 tons.

A dollar devaluation by another name

September 25, 2009 2 comments
Devaluations can be addictive

Devaluations can be addictive

British Prime Minister Gordon Brown said on Tuesday there was substantial support among the Group of 20 nations for creating a new framework to tackle global economic imbalances … Analysts said the United States’ drive to agree a roadmap for a more balanced global economy could meet resistance from China which is unlikely to agree reforms that would threaten its growth … A document outlining the US position ahead of the September 24-25 summit said big exporters, which include China, Germany and Japan, should consume more, while debtors like the United States ought to boost savings … The euro hit a one-year high against a sliding dollar ahead of a federal reserve meeting and the G20 talks on rebalancing, a process which is likely to require a weaker dollar.

Like Quicktake has pointed out in earlier posts, the US has alternated between an overvalued currency to gain ownership over large sections of world economy – and now with a devalued dollar, it seeks to gain an upper hand in merchandise exports. The three main points that one needs to understand are: –

One – It reduces the real value of US debt. The Chinese, the Rest of BRICS and the Others need to be paid a lot less in the future. (as pointed out earlier in various posts linked here.) Two – It makes US exports artificially competitive. (as pointed out earlier in linked posts). Three – The US competitiveness will be anchored to assets purchased with over-valued dollars.

Factor US Germ

any

Japan China ASEAN India
Labour High High High Low Med. Low
Welfare Costs High High High Low Med. Low
Entrepre

neurship

Med. Med. Low Low Low High
Domestic market Large Med. Med. Med. Small Large
Raw materials

(Self-owned)

High Low Low Med Med Med

What the US is proposing is that the Chinese Yuan must become ‘stronger’ – and the dollar must become weaker. This will mean a real reduction in US debt – and a subsidy for US exports. Of course, a devaluation has never helped any regime in the long run – but in the short run it reduces imports and increases exports. But is a ‘fix’ that the patient begins to row dependant on!

Is that the US is wanting to do to itself?

Related Quicktakes

  • Toward a robust globalisation
  • Fitch cuts Russian debt rating, sparks memories of ‘98 crash- Internation…
  • Leadership in the Developing World
  • Shashi Tharoor patterns Indian foreign policy on US-Israel template

    September 2, 2009 Leave a comment

    As President-elect Barack Obama prepares to take office this month, he has avoided the fawning praise of India that has become fashionable in some Washington circles. But experts on the region say that India-US ties now have a momentum of their own. Industries in each country now have a vested interest in deepening ties with their counterparts.

    “In 20 years, I expect the Indo-US relationship to resemble the Israel-US relationship, and for many of the same reasons,” said Shashi Tharoor, an Indian writer and former undersecretary general of the United Nations. (via Will the love-fest stoked by Singh, Bush bear fruit? – Economy and Politics – livemint.com).

    Am I missing something here?

    Am I missing something here? Look at the cartoon date!

    Why is the Israeli model a bad idea

    The first disqualification against accepting the Israeli State model is the fact it is heavily dependent on America, for fiscal and military aid – which “since 1974 totals roughly $80 billion”.

    Do I sense envy when an article from Daily Times Of Pakistan says “The United States has poured $140 billion into Israel since its formation”. That is about a US$56,000 for every Israeli family.

    Is this what you learnt at the UN Tharoor Saar

    First, did it ever occur to Tharoor Saar to check where is the guarantee that the US will be in a any position to underwrite India’s long term requirements?

    After satisfying himself, did Tharoor Saar ever ask, “Why would the US underwrite India?” In case of Israel, the US had good reasons. After all, (as NYT says)

    America has vital long-term strategic interests in the Middle East. The gulf has well over 60 percent of the world’s proven conventional oil reserves and nearly 40 percent of its natural gas.

    To some it may look like a boon, but is surely the kiss of death.

    American policymakers began regarding Israeli strength as an American asset in the Cold War, they supported significant aid as a matter of strategy, not charity. … American aid continues to flow to Israel. … critics on the opposite end of the political spectrum argue that while aid to Israel may be tied to the best of intentions, it does more harm than good to the Jewish State by propping up a big and inefficient government and making Israel dependent upon the U.S.

    For how long can any country, society, individual survive on foreign largesse? Note how during the 1973, Arab Israeli War, the tide of battle finally turned when the massive US airlift of weapons, tanks, spares happened! Which itself, is self-serving – American assistance, emerging as a disjointed policy that urges a peaceful resolution to the conflict while boosting military aid to Israel.”

    Another client state of US, Pakistan enviously records, that

    Israel is the only country that receives all of its U.S. aid in a single package, while others only receive it in quarterly installments.” It continues, “Most recipients of military aid are obliged to spend it in the US but Israel is permitted to spend 25 percent of what it receives to subsidize its own defence industry,”…

    Doubtful motives, suspect intentions

    Three aspects of the Israeli behaviour makes Israeli intentions doubtful.

    One – Israel surely knows that US support cannot continue ad infinitum. What will be the Israeli response after they stop getting US support?

    Two – After consistent and constant efforts to make enemies, over the last 50 years, how does Israel plan to continue living in a hostile neighbourhood – without American aid?

    Three – With a population of little over 50 lakhs (5 million) in Israel and a world Jewish population of less than 1.3 crores (13 million), how does the Jewish population stop itself from going extinct?

    Is there a pattern …

    Tharoor Saar’s statement needs to be read in light of two other incidents. For starters, read Manmohan Singh’s speech at Oxford, praising the Raj,  while receiving his honorary doctrate. Continue with Chidambaram’s decision to end “abject poverty” in India that he seems to “have known for 5,000 years.” And now add Tharoor Saar’s stated objective to make India into a US-client state in another 20 years. Are these three incidents stray and unrelated? Do they form a pattern?

    Any which, Tharoor Saar’s thinking is a cause for concern.

    Resolving global imbalances aka currency manipulation

    Some time in the future
    Some time in the future

    The Obama administration is increasingly signalling that the US will not continue to be the world’s consumer and importer of last resort. The clearest statements came last month from Larry Summers, White House economics director, in a speech at the Peterson Institute for International Economics and in an interview with the Financial Times. The US, he said, must become an export-oriented rather than a consumption-based economy and must rely on real engineering rather than financial wizardry.

    This long-run vision for US growth entails greater exports and probably a smaller current account deficit than where it is now (about 3 per cent of gross domestic product). Although Mr Summers did not and could not say so, the vision will require an end to the remaining overvaluation of the dollar.

    Put starkly, Mr Summers has stated that China can no longer behave like China because the US intends to behave much more like China. The world economy cannot have two, or even one-and-a-half, Chinese growth strategies from its two most important economies. Which will prevail? (via Fred Bergsten & Arvind Subramanian: Resolving global imbalances).

    In the last 50 years, the US dollar has swung from being grossly overvalued to slightly overvalued. The inertia of the Bretton Woods system has kept this overvaluation going. How has this benefitted the US?

    It has allowed the US to use its overvalued (and over-printed) currency to buy vast tracts of the world economy. And now having captured these segments of the world economy (especially raw material sources), with an over-valued currency, it will achieve two objectives.

    The US is in no position to pay off its nearly US$4 trillion, it owes the Rest of the World – equal to about 1 years GDP (my estimate, in PPP terms). This kind of dollar devaluation does three things at one stroke.

    Kojak Haircut Series – A Greenspan-Bernanke Production

    Kojak Haircut Series – A Greenspan-Bernanke Production

    One – It reduces the real value of its debt. The Chinese, the Rest of BRICS and the Others need to be paid a lot less in the future. (as pointed out earlier in various posts linked here.) Two – It makes US exports artificially competitive. (as pointed out earlier in linked posts). Three – The US competitiveness will be anchored to assets purchased with over-valued dollars.

    Readers can take courage from the fact that each such ‘process’ gives the US lesser returns and fewer options. The Law of Diminishing Marginal Utility. Or in plain language ‘crying wolf’ often never paid off.

    But the smart answer is to go out and buy one kilogram of gold. If each reader of Quicktake and 2ndlook blogs were to do this, the world would become a safer and fairer world in the next 10-20 years.

    Swear!

    The Arctic’s oil reserves mapped – BBC NEWS

    June 1, 2009 6 comments

    The map is the culmination of an assessment carried out by the US Geological Survey (USGS). Writing in the journal Science, its authors say the findings are “important to the interests of Arctic countries”. But, they add, they are unlikely to substantially shift the geographic pattern of world oil production. (via BBC NEWS | Science & Environment | The Arctic’s oil reserves mapped).

    What may save US yet? Not the usual suspects.

    Transportation

    US auto is down – but not yet out. It will limp along for few more decades.

    Chinas ARJ21 - Advanced Regional Jet for the 21st Century
    China’s ARJ21

    Boeing will face fresh competition from BRICS – Brazil’s Embraer, Russia’s (Ilyushin)  and the Chinese (passenger jet programme). US electronics is stagnant – and fading power.

    Computing Equipment

    The US is still the prime force in the computing industry – though not on the manufacturing side. Chinese manufacturing is the dominant force in computer manufacturing.

    Energy

    US oil industry no longer dominates international markets the way they did in mid-20th century. The US Nuclear industry faces increasing competition from a public sector French and Russian industry – and India is planning to add its ‘frugal engineering’ muscle to this segment.

    Higher education may save the day

    What will sustain the competitiveness of the US industry – with out the dollar hegemony? The US education system is still significantly productive (measured in terms of patents, Nobel prizes, innovation, output, research papers, etc.). The US higher education system is notoriously hobbled by a weak school education system. How long will that advantage last – without an infusion of foreign talent?

    The US entertainment industry remains the biggest in the West – and by many measures in the world also. Partially controlled by the Japanese, it however remains significantly competitive and dominating.

    Agriculture is more fragile than estimated …

    The seemingly strong position of the US in agriculture is based on two aspects. Massive direct subsidies – of more than 8 billion dollars. And indirect subsidies of possibly another US$ 8 billion. Most of which goes to the 46000 farmers who account for 50% of the US agricultural production.

    Communication technology

    The communication sector has seen an erosion in US competitiveness. The domination of GSM technology is seemingly solid for another 10-15 years – a technology, in which the US is weak player. The long-term direction for that industry anyways seems like IP-protocol systems. This may well result in commoditization of network equipment and terminal – and the increased importance of content. Low and medium switching technology may see greater commoditization with the eclipse of Cisco by the Chinese switch companies.

    Green is still in the red …

    Environment engineering provides no major advantage to the US. Solar panels, wind energy equipment, hydrogen technology have all seen greater diffusion of leadership and market share. It may not give greater opportunity to the USA.

    Finance and banking

    Global financial markets were dominated by the US organizations in the past – but with the global financial crisis and the end to dollar dominance may see reduced clout for US firms. Their position will become broadly similar to current position of Swiss banks – mildly competitive, solid history, fading reputation.

    Outlook

    With such an outlook over the next 10-25 years, what the US leadership may focus on is Arctic oil. Oil will remain a strategic asset only with high prices (slower production increase and faster demand growth) and if no other energy source appears. Oil finds in the Atlantic and Pacific republics may spoil the party – for instance, Cuban oil.

    Much like the respite of the North Sea oil to Britain, Arctic oil may provide a temporary halt to the slide in US economic dominance.

    If the US can lay its hands on a significant part of it!

    Cuban deepwater block yields two oil & gas leads

    ONGC Videsh (OVL), the foreign investment arm of Oil & Natural Gas Corp (ONGC), has found two significant hydrocarbon leads in a Cuban deepwater exploration block where it has a 30% stake. The leads are likely to result into major hydrocarbon discoveries, people close to the development said.

    OVL had acquired 30% participating interest in Spanish oil company Repsol-YPF’s Cuban deep water exploration blocks 25, 26, 27, 28, 29 and 36 in 2005. The other partner of the blocks, StatoilHydro (erstwhile Norsk Hydro) of Norway holds a 30% interest. Repsol is the operator of the blocks. The acquisition had marked OVL’s foray into Cuba’s oil and gas industry. (via OVL’s Cuban deepwater block yields two oil & gas leads-The Economic Times).

    Brazil takes the first step

    On October 14, 2008, 2ndlook had proposed a BRICS-Caribbean accord for oil exploration in the Caribbean.

    Reeling under the curse of history, Western intervention and poverty, the Caribbean islands have been dealt a bad hand. Third World countries are paying through their nose to the OPEC cartel and for a dollar hegemony. Oil can break this vicious cycle.

    “I don’t understand why it took so long to sign this agreement,” said Brazilian President Luiz Inacio Lula da Silva, who presided over a signing ceremony for the deal with Cuban President Raul Castro.

    That makes two of us, Mr.President!

    Brazil has also taken the first step. ONGC was already in the game. As is Russia. With India, Brazil and Russia working on Cuban oil exploration, it is a promising first step to a prosperous Caribbean.

    Next stop, Haiti?

    Toward a robust globalisation

    March 11, 2009 3 comments
    Manu and Chiddu are wasting time

    Manu and Chiddu are wasting time

    In a famous speech exactly four years ago, Fed Chairman Bernanke represented the US as responding passively and benignly to the global “savings glut” which had developed following the East Asian crisis of 1997-98.

    Even though most closely associated with Chairman Bernanke, this formulation is widely shared by respectable economists and commentators, such as Martin Wolf of the Financial Times, Professor Richard Portes of the London Business School and the Centre for Economic Policy Research, and Professor Max Corden of the University of Melbourne. The task of recycling these imbalances fell on the sophisticated financial systems of the advanced countries. In the event, for a variety of reasons, even they proved unequal to the burden placed upon them.

    Not surprisingly, quite a different view is taken by the major current account surplus countries, notably China, but including Germany, Japan and, for a while, the major oil-exporting countries. Here, the finger is pointed squarely at the monetary policies followed by the US Federal Reserve

    The G-20 is not the perfect vehicle for India to show leadership, but it is a start. India should grasp the opportunity being given to it and run with it. (via Suman Bery: Toward a robust globalisation).

    Dollar prop!

    Dollar prop!

    Promising start.

    The post laid out the position of the world economic structures and developments in the last few years, rather well – and the way Bretton Woods unravelled. And then, in the last paragraph, Suman Bery suddenly, from nowhere comes out that India is being ‘given an opportunity’! And makes out as though India(ns) should be grateful – kow-tow and bless the benefactors. And, before they change their mind.

    RUN with the bone that they have thrown at India!

    Note the language …

    Similar is the story with Manu and Chiddu. They use the language of recipients, of pleading and impotence. Chidambaram says that ‘they’ will now “give greater representation and voice to developing countries” Manmohan Singh mirrors the sentiment when he says,”consultations were merely for the sake of form”.

    The Developing World FTA

    Instead of breaking heads with the WTO, the Developing World should declare a 100 country FTA. As Rajat Nag, of the ADB points out,

    “East Asia already trades 55% of its output within the region. India’s trade with China, Japan and ASEAN (Association of Southeast Asian Nations) is increasing. That is the structural shift which will have to happen. Our forecasts are not based on any dramatic shift”

    Put the Doha round in deep freeze, and turbo charge work on a FTA within the developing world. That can add another 2%-4% to economic growth – especially to the poorest countries.

    The Third Global Reserve Currency

    To this add the Third Global Reserve Currency option – and junk the Dollar and the Euro. With this, the World economy will have two strong drivers for economic growth – without dependence on the West. The world needs to move away from the Dollar-Euro duopoly to tri-polar currency regime.

    This calls for leadership – intellectual and political. Does the developing world have it? Can India provide it?

    OPEC to cut oil output by 2 mn barrels a day

    December 18, 2008 Leave a comment

    Saudi Arabia, OPEC’s de-facto leader, said today the group will slash a record 2 million barrels from its daily production as of January 1, while Russia and other countries said they would remove hundreds of thousands of additional barrels from the market.

    An official decision to cut 2 million barrels from output all at once would be a first for the organization. OPEC had cut that amount from its output four years ago, but that was done in two stages.

    Also significant would be formal support from Russia, Azerbaijan and other non-OPEC producers. Mexico, Norway and Russia slashed production in the late 1990s, at a time oil was selling for about $10 a barrel. (via OPEC to cut oil output by 2 mn barrels a day).

    These price cuts may be difficult to sustain for a simple reason that Oil revenues are a significant part of Government revenues in these countries.  While oil revenues are on a down ward drift – Government expenses are trending upwards. Combine this the recessionary global outlook, and pump priming will increase Government’s expense bills.

    The US-OPEC nexus of increasing oil prices leading to greater dollar liquidity onto higher lending resulting in global overcapacity boosting asset prices in booming stock markets is now broken.

    To recreate that cycle will take a decade – at least, if at all.

    The oil price bubble – and its aftermath

    December 16, 2008 Leave a comment

    Francisco Blanch, the Merrill Lynch & Co. analyst who called the $147.27 record crude-oil price nearly on the nose, sent markets into a tailspin with his forecast that the next move may be back to $25 a barrel in 2009. Such relief for consumers may be short-lived once the global recession ends, he said.

    “If we reignite economic growth to a very fast level, we will have a shortage of energy again,” said the 35-year-old head of global commodity research at Merrill Lynch in London. Oil may rise to $150 in two or three years, said Blanch. World growth will reach 2.2 percent next year and rise to 4.8 percent by 2011, according to the International Monetary Fund. (via Bloomberg.com: Exclusive).

    What’s being trotted out …

    it was largely due to the surging middle class in India and China

    Cant be true. India and China are still too small and consume too little of oil., still. India produces 30% of its own oil – and another 50% is tied up with long term supplies. The last 20% of this is tied to spot markets – which is where the oil prices yo-yoed.

    it was price fixing by the oil companies

    For how much and how long … They no longer have the power or the reach to do that – the way they did earlier. Oil production, supplies and trading is now controlled by State Oil companies of OPEC, Russia, Norway and para-State Oil companies like BP. For them to do this for such a long time was not possible

    others said the Enron loophole was largely to blame for high oil prices

    How much difference can regulators make … ‘Irrational exuberance’ did result in a few contracts – but they would have vaporised in a jiffy, with the coming of settlements.

    Further I would draw attention that all these theories came from the Governments (US, Saudi, etc.) themselves – which immediately disqualifies them (in my mind).

    I would draw attention to the following dots – which may paint another picture altogether.

    1. The biggest shareholder of Citibank is a Saudi prince (HRH Prince AlWaleed bin Talal bin Abdul Aziz Al Saud (Arabic: الوليد بن طلال بن عبد العزيز آل سعود‎).
    2. The housing and mortgage boom ran concurrently with the boom in oil prices.
    3. Most of the petro dollars were invested back in the US funds
    4. Many private funds (like Blackstone, Cerberus, etc.) came up on the back of this liquidity.
    5. The Chinese appetite for dollar Treasuries and debt.

    This spike in oil prices was designed by the US and OPEC to ‘suck out’ the excess ‘dollar liquidity’ from the world currency markets – to sustain high dollar exchange rates, to sustain the dollar hegemony. Since very few people were involved, the operation continued.

    If you notice, every few months, there would be a supply disruption – like a fire on a rig, a boat would crash into a rig, a pipeline would undergo maintenance, etc. Not to forget the Iraq War, the Afghan War, the 9/11, etc.

    All this was done to prolong the spike. As this situation, ground into an impossibly high bubble, it crashed. Likely architects – Citibank, Alan Greenspan, Ben Bernanke, OPEC, and of course, our favorite, George W Bush.

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