Enlightened Economics

Economics for an Enlightened Age

Posts Tagged ‘oil’

• America’s Economic Rebirth

Posted by Ron Robins on April 12, 2011

By Ron Robins. First published March 24, 2011, in his weekly economics and finance column at alrroya.com

A rebirth of the American spirit and economy is probable. It would be founded on huge reductions of societal debt and consumption. It will arise on re-invigorated American entrepreneurship, a revamped government and healthcare system, new energy sources, local manufacturing and a growing working age population, amongst many other changes Americans will embark on.

However, before America can begin its rebirth, it has to deal with its debts. Total US societal debt may well have reached a tipping point and many investors are wondering when US government bonds will be abandoned. In fact, this process might already be underway. Reuters’ Jennifer Ablan reported on March 9 that Bill Gross’s $237 billion Pimco Total Return Fund, the largest bond fund in the world, had sold all its US government bonds over the past few months.

The most likely cause for wholesale abandonment of US government bonds is when there is broad recognition that the US economic recovery is not self-sustaining—as Bill Gross believes—and that the fiscal stimulus packages and Fed quantitative easing (QE) programmes have been ineffective in righting the US economy. One major result of US bonds being dumped will likely be much higher US interest rates and restrictive credit market conditions. Such conditions could give rise to dramatic falls in consumption as happened in 2008-2009.

In such circumstances, facing a stark new reality, Americans will be forced to look within themselves for guidance. As they do, I believe they will regain their ‘can do’ attitude and surprise the world with a regenerated spirit and incredible enterprise and entrepreneurship. Gerald Celente, probably the most accurate trends forecaster of our time, predicts an ‘American Renaissance.’

More than likely the economic and social circumstances of the next few years will cause a total re-organisation of US governments: federal, state and local. With greatly restrictive finances, many of their services will no longer be available. This will leave room for numerous private entrepreneurs to fill the gaps. Perhaps the area where this will be most felt will be healthcare. As I have written in US Healthcare Delivering a Heart Attack!, financial conditions will force major reductions in Medicare and probably private insurance plan coverage as well. Individuals will have to pay directly for many more services.

With patients in the drivers’ seat by having to pay directly for numerous healthcare services, doctors and healthcare service providers will have to compete in ways they never had imagined before. Alternative therapies such as Chinese medicine, homeopathy, ayurveda, meditation, etc, will compete on a more equal footing with established healthcare practitioners, drug plans, and so on, to provide health remedies. It will be messy and likely finally force down the prices of many healthcare services that had been rising in prices far faster than incomes. Finally, healthcare will become more affordable to Americans. But as in any competitive marketplace, those that offer the most cost-effective services and products will gain most.

There is also the opportunity for eventual US energy self-sufficiency, particularly as many forecasters believe that oil will become ever more expensive—most especially in devalued dollar terms. Renewable energy systems—wind, sun, geothermal, etc —all have the capacity to vastly increase output. An article by Karin Rives on February 18, on the website United States Mission referred to a Bloomberg New Energy Finance report that said US onshore wind power electrical generating costs are now about the same as for coal-generated power. The gradual transfer to electrically driven vehicles is also just beginning.

Furthermore, if environmental safeguards can be found, shale gas deposits in the US could go a long way to ensuring US energy self-sufficiency. In “Facts About Shale Gas”, Washington DC based API states that the US has over 100 years of supply at current gas consumption rates. Moreover, an MIT study reviewed in the New York Times by Matthew L. Ward on June 25, 2010, foresaw natural gas usage doubling over the next several decades to 40 per cent of the US energy market.

Thus, US ingenuity in energy production could substantially change its energy mix. The US could become much more self-reliant while dramatically decreasing its oil related imports that today account for more than 50 to 70 per cent of its trade deficit.

The financial conditions that will befall the world when the US dollar crumbles will probably lead to trade restrictions and tariffs in the US and in many countries. US manufacturing, behind a tariff wall and ‘buy America’ policies, together with a shortage of imported goods, will re-invigorate American manufacturing and technological prowess. Mr Celente predicts an ‘elegance trend’ and the need for durability in all things manufactured.

Similarly, Mr Celente forecasts a rebirth of American agriculture. Americans will demand real, natural food and it will also be grown abundantly in numerous urban and roof gardens.

Looking out over the next few decades, the US has another advantage over other large developed countries. It is expected to have the most favourable demographics as well. By 2050, according to the UN’s 2008 population database projections, the US dependency ratio is forecast to be 63 dependents per 100 working age individuals, compared to 96 for Japan and 74 for Europe.

The next few years will be difficult for America. But beyond that is its revival. Its unsustainable debt burden will be substantially reduced and US governments—federal, state and local—will be financially forced to live within their means. This will entail a huge restructuring of what they do and in the process provide major opportunities for new entrepreneurial activities.

Healthcare, energy, food, manufacturing and technology, will be among the areas that will undergo transformations that will lead America and the world into a new era. A new American spirit probably arising sometime this decade will give rise to the birth of a new US economic paradigm.

Copyright alrroya.com

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• Free Markets Are Rare Indeed

Posted by Ron Robins on February 21, 2008

Most major markets influencing business and consumer decisions are not ‘free.’ They are manipulated by governments to varying degrees. Governments feel that it is for ‘social good’ that they intervene. Here is a brief list of key markets and descriptions of the government interventions. You can decide about the worthiness of these interventions yourself.

Currencies
The world’s most important currency, the US dollar, does not really trade freely. The US Treasury established in 1934 the ‘Exchange Stabilization Fund’ specifically to ‘manage’ the US dollar exchange rate. Its dealings are secret. In 1987, 1998, 2003/4 and likely at many other times, the treasury departments and possibly central banks of the US, Japan, the EU and other countries collectively intervened to manipulate currency values. China has pegged its currency, the renminbi, to the US dollar for many years. As the US complains about Chinese currency manipulation, it needs to come clean about its own efforts first.

I suggest that currency traders and speculators should not be blamed for strong currency movements. They are nearly always reacting to bad or anti-market policies of governments and central banks and generally reflecting the ‘collective consciousness’ of the global financial community.

Stock markets
Stock markets are not free of government intervention either. After the 1987 US stock market crash, President Reagan established the Working Group on Financial Markets, (the ‘plunge protection team’), to effectively stop stock market crashes. How and when it operates is again secret. Journalists and others have tried for years to get information of the Working Group’s meetings and activities, but to no avail. On January 22, 2008, it was believed that the US Federal Reserve purposely reduced its Federal Funds rate by 0.75% just before the US Dow Jones Index was due to open 600 points (over 5%) lower! This move potentially saved the US stock markets from a major crash that day. Here we have a clear – and public case – of market intervention for the purported ‘public good.’

Interest rates
The US Federal Reserve, the EU Central Bank, Bank of Japan – in fact nearly all central banks regularly announce interest rate changes to short term securities. And through their buying and selling of government bonds, they also influence rates on all longer-term securities.

Unfortunately, a largely economically illiterate public clamours for manipulated, low interest rates. Central banks generally oblige, despite them supposedly being mostly ‘independent.’ Artificially induced low interest rates then create excessive borrowing, such as we have seen in housing. A housing bust follows and everyone blames the government – rather than themselves! (Question: who is really best able to set interest rate policy? Is it a country’s central bank or the free market?)

Oil
By controlling over 40% of global oil production, OPEC (the Organization of Petroleum Exporting Countries), stage-manages global oil production and prices. Not only do they control production levels, but they have been free to cite their oil reserves’ data with no independent verification of what they do actually have in the ground. And there are many reasons – as Matt Simons, eminent oil analyst, suggests – why we need to be sceptical of the Gulf States oil reserve numbers. Again, with the reserves being unaudited by any reputable international agency, OPEC is able to abnormally influence oil prices.

Food
Governments influence agricultural markets to a massive degree. Annual agricultural subsidies in the EU amount to about $75 billion; in the US $55 billion. These subsidies with those of many other countries dramatically distort global agricultural production and prices. The Doha round of World Trade Organization (WTO) free-trade talks floundered largely because developing countries demanded that agricultural trade distorting practices be reduced and eliminated. The developed countries resisted and the trade talks collapsed. For much of the developing world the one area where they could compete – and potentially bring them out of poverty – is with agricultural exports, even with today’s significantly increased transportation costs.

Ethanol and biofuels is another area where government intervention to support markets has caused dramatic negative market dislocations. Food cropland and food crops now going towards the production of ethanol and biofuels has resulted in significantly increasing food prices around the world. In numerous developing countries it has contributed to food shortages and riots.

Two final thoughts…
Unfair economic or financial advantage is often gained by those who have inside knowledge of where and when governments intervene. Indeed, they can ‘front-run’ the governments’ actions and make huge fortunes without the public ever knowing what is going-on. This probably occurs especially in stock markets, where it might be welcomed by the governments who see it aiding their efforts to manipulate markets.

This discussion demonstrates that society does not have, nor apparently really believes in, wholly free markets at this time. Why? It feels that individuals cannot be trusted to do the ‘right’ thing. Yet, as we see here, governments frequently do not do the right thing either! In other posts I demonstrate that high consciousness individuals are much more likely to do the’ better’ thing. Such individuals will allow truly free markets to function and will create affluence, environmental sustainability, and fulfillment, beyond anything envisaged today. To turn things around and to begin to understand how free markets with higher consciousness individuals can work, see these posts Free Markets Need ‘High Consciousness’ Individuals and The Missing Ingredient in Economics – Consciousness!

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© Ron Robins, 2008.

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