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Reflections on world economy and more by Nick Rost van Tonningen of Canada

March 10th, 2011

A gold bull whom I respect because he thinks for himself & has made money doing it, suggested in a recent radio interview that people may be looking at the gold price through the wrong end of the telescope; for it may be less a matter of the value of gold going up than that of paper money going down.  

As to oil, here are some things to consider. In the past year Nigeria ramped up its oil output by 14.2%; but it is having elections in April & election campaigns in that country traditionally have been accompanied by rising sabotage of oil industry installations. The IEA forecasts 2009 oil consumption of 89.1MM bbld (up 1.6%), & the EIA of 89.0 bbld, but global oil output is expected to be only 88.1MM bbld. Growing numbers of analysts believe OPEC’s much-vaunted ‘excess capacity’ is a figment of someone’s imagination, especially since most OPEC producers have already been cheating & producing more than they are supposed to (which makes Libya’s 1.7MM bbld, 75% of it exported, that much more important). Few people realize that 70% of the daily global oil demand is met by production from fields discovered 40 or more years ago, i.e. fields that are well into their second half life) & that, while 40 years ago over half the world’s oil reserves were controlled by Western oil companies, today that has shrunk to just 6%. Longer term, it is worth remembering that in 1978, prior to the Iranian Revolution, Iran produced 5.2MM bbld but that in the immediate aftermath thereof it cratered to 1.3 bbld (although it is back up to 4MM bbld albeit slipping again). Ditto for Venezuela : before Chavez took over it produced 3MM bbld., this slid to 1MM bbld & today it is struggling to maintain 2.2MM bbld. And Iraq produced 2.8MM bbld in 2003 which dipped to, or below, 2.0MM bbld in the aftermath of GW II, although it is now back up to 2.7MM bbld. The reasons are always the same : foreign workers & foreign oil companies depart, depriving the countries of critical expertise, & governments strip out so much of the state-owned oil companies’ cash flow to support their budgetary activities that not enough is left for maintenance and exploration & development.         

I listened this week to an analysis of the North African/Middle East situation by the founder of STRATFOR, a US-based global intelligence shop. It can be summarized as follows : 1) forget about North Africa : in geopolitical terms it is a by-play; what we saw in Tunisia & Egypt was basically a dust-up in the establishment about the dictators’ plans to have their son-in-law & son succeed them & 2) the real geopolitical power play is unfolding in the Persian Gulf where Iran is using Bahrain’s Shiite population & will try to use Saudi Arabia’s Shiite minority (that is concentrated in its Northeastern oil producing region), and its relationship with a sympathetic Iraqi government once the Americans finish pulling out at the end of this year, to further its plans to become the dominant force in the region. According to a friend of mine, who has had much first hand experience in the region, events in Bahrain could prove to be a ‘major inflexion point in the history of the region, as Archduke’s Ferdinand’s assassination was for Europe’. But Iran’s timing, last December, for cutting its fuel- & food subsidies (thus ending a US$70BN drag on its budget) may have been bad;  for local fuel prices have quadrupled & food prices more than doubled, resulting in a 70% inflation rate (the question, however, is what it will do with that US$70BN : the higher fuel prices will hit the upper half of its social structure hardest, while the money it has freed up could buy a lot of favour with the lower half and/or fund a significant expansion of its popular unrest-repressing capability).  


The degree of thievery by the Qadaffi clan can be gauged from the fact that, while Libya’s per capita GDP in the past five or six  years doubled to about US$14,000, 60% of its hoi polloi must survive on less than US$1.25/day. 

A while ago the Economist had a feature on Brazilian agriculture. It noted that it is using only 50MM of its 400MM hectares of potential farm land outside the Amazon rainforest. It pointed out that the value of its farm output quadrupled between 1996 & 2006 with relatively low levels of farm subsidies (they account for only 5.7% of Brazilian farm incomes vs. 12%, 26% & 29% for the US, the OECD & the EU).  It said it now has a 40% share of the global soybean trade, second only to the US, but has come in relatively few years from 14% to 85% of US soybean exports, & that it now accounts for 80% of global orange juice-, and 40% of global sugar- & poultry-, exports, and is the world’s largest exporter of sugar & ethanol. With < 200MM people, it has as much renewable water resources as all of Asia with 20x that many people, its driest region in the Northeast gets more rainfall than the US corn belt, it has 25% of the world’s farm land with an annual rainfall > 975 mm/38 inches, its annual renewable fresh water supplies are tops in the world, greater than the Nos 2 & 3, Russia & Canada, combined & its per capita water availability is 5x the global average. 

This peaked my curiosity. So here are some other things I have found out since. 48% of Brazilian households have a computer, vs. 76%, 25% & 13% in the US, India & China. It has a literacy rate of 91%, on a par with China but well ahead of India’s 61%.  It has a total dependency ratio (children 14 years & under plus those 65 & over relative to the total work force) of 33.1% vs. 35.7% for India & 36.2% for China (low dependency ratios are conducive to fast GDP growth) even though these numbers may not give a true picture of what the future holds; for China’s ratio will start sky rocketing by as early as 2013 to 65% by mid-century while the total dependency ratios of Brazil & India will stay relatively stable for some time, or may even decline (their populations’ median age is much lower than China’s, - 24.9 years & 28.9 years respectively  vs. 35.2 years).  

Going forward, only three things will really matter : water, food & fuel. Brazil has ample water, albeit not always in the right places. Its farm sector has the potential to become the global food export power house. With an  8 : 1 energy efficiency ratio (i.e. it contains 8x the energy it took to produce it) sugar cane-based ethanol has a huge competitive edge over of the 1.5 : 1, or less, of grain-based ethanol. It has discovered vast amounts of oil offshore around which it appears intent to build a world class offshore oil industry; while at record ocean depths beneath a geological structure that makes this oil difficult & costly to access & produce, this may in the long run prove a blessing by requiring unparalleled offshore drilling technology. Add to that a diversified resource base & companies like Vale, that since its privatization in 1997 has turned itself from a sleepy state-owned diversified company into the world’s second-largest mining company with operations on six continents, and we may have been underestimating the “B” in BRIC.  

In September 2010 the Dutch Actuarial Society issued new ‘longevity tables’. Three months later Holland’s Philips Electronics, Europe’s largest investment grade company, warned that, given the now longer life expectancies of its pensioners, it might not be possible, next April, to adjust their pensions to compensate for inflation, since doing so would drop its pension fund’s asset/liability ratio below the 106% threshold set by the central bank, the country’s pension fund regulator. Recently pensioners got the bad news : there will indeed be no indexing for 2011 (which in this case is of an ‘ex gratia’ nature, awarded, or withheld, annually at the Board’s discretion).  


No. 400 - March 10th, 2011 


    · For the second month in a row the FAO’s Food Price Index hit a record in February. And FAO economist Abdolreza Abbassian says food prices will likely to stay close to current highs until the condition of the new crops is known, adding that the higher oil price will also impact on grain markets which have already seen its benchmark US wheat price jump 60% in the past year. And the UN warned on March 3rd that the oil price spikes, & stockpiling by importing countries trying to head off popular unrest, will also affect volatile cereal markets .

Higher food prices = more potential for social unrest outside the developed world.  


    · The most recent annual rates are : Argentina 10.6%, Russia 9.6%, India 9.3%, Brazil 5.99%, China 4.9%, South Korea 4.5%, the UK 4%, Poland 3.8%, Australia 2.7%, Sweden 2.5%, Italy 2.4%, Canada 2.3%, Germany 2%, France 1.8% & the US 1.6%. 

And the way food- & oil prices are going, you likely ain’t seen nothing yet.   


    • US states face a US$125BN shortfall in fiscal 2012, & Congress one 10x that size (a conservative estimate?). Pimco’s Bill Gross says that if the US were a company no one in his right mind would lend it any money & that for the past decade “we’ve been relying on the kindness of strangers” to help us cover our debts. He sees two options : keep spending or balance the Budget by cutting entitlements (while the Democrats & Republicans feud about how much & where to cut spending from only a tiny part of the Budget, neither is serious about reforming entitlements which account for one-third of the Budget). Under Option 1 foreigners will lose faith in the US dollar causing it to weaken further causing foreign goods to become more costly & all Americans’ standards of living to drop. And under Option 2 also many Americans, the older & disadvantaged, will experience a drop in their standard of living. He says “There’s really no way out of this trap” & advises investors to stay clear of “bonds in dollar-denominated terms”, and to be “wary of high interest rates going forward.”      

So the issue as defined by Gross is whether the burden of adjustment will be shared by all or ‘offloaded’ onto those least able to defend themselves. Meanwhile, in Washington pressures are building for a QE3 program to “avoid the US economy being dragged down by the high cost of gasoline”; if so, this will bring the day one step closer to the world realizing that the US Treasury now operates a gigantic Ponzi scheme rather than a debt management program (the definition thereof being “an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors” - the latter in this case being future generations of taxpayers). 


    • We should quit lying to ourselves about our country. It is great in many ways but In others it has become the laggard in the industrial world, something hard to accept for Americans who prefer to bathe in platitudes about its grandeur. The draconian budget cuts the Republicans are seeking to make in the tiny vein of non-security (& non-entitlement?) spending would prove devastating to the poor & the working class : at the very time they are trying to get out of a very deep hole, the Republicans would simply throw more dirt on top of them. Financing for education & social services isn’t about handouts but about building infrastructure for the future and, with one of President Obama’s new catch phrases being “win the future”, we can’t do so by ceding the present & romanticizing the past.

  • Of nine criteria surveyed by the IMF among the 34 OECD members, America was among the “worst of the worst” in four (income inequality, food security – have you, at some point in the past 12 months, been without enough money to buy food for you & your family?” -, prison population & PISA achievement in Math tests), just bad in two (unemployment & life expectancy at birth), average for the other three (level of democracy, the Gallup Poll Wellbeing Index & PISA achievement in Science), and above average in none.

The problem with well-intentioned types as Blow is that they don’t appreciate that, as one respected European intelligence shop recently put it, “It is naive to try and solve a crisis with the same means that caused it, i.e. an expansive monetary policy.      


(, Tom Curry) 

    • A bipartisan group of six Senators, led by Sens. Mark Warner (D.-Va) & Saxby Chambliss (R.- Ga), is struggling to keep alive the recommendations of President Obama’s bi-partisan Commission on Fiscal Responsibility (that he has since distanced himself from). It recommended slowing the growth of future SS retirement benefits, particularly for higher earners, increasing taxes on higher earners, & raising the eligibility age for collecting benefits. But the skeptics say “Why pick on SS now since it is solvent until 2037 … it has $2.6TR in reserves ... and that $2.6TR doesn’t add to the deficit”. 

The flaw in the latters’ argument, appealing as it might be to the hoi polloi & the willfully uninformed who are disinclined to look beyond the end of their noses, is that those reserves are invested in UST securities. So when they are cashed in (which is now expected to start happening later this decade), they will boost the Treasury’s borrowing requirements (and to make matters worse there are growing numbers of forecasts that put the time the system will become insolvent much closer to the present than 2037).   

THE CASE FOR A NO-FLYZONE (NYT, Nicholas D. Kristof) 

  • General Merrill McPeak is a former Air Force Chief of Staff who was involved in overseeing the operation of the no-fly zones over (the Kurdish part of) Iraq and, prior to that, Serbia. He is mystified by all the hand-wringing in Washington over a no-fly zone over Libya, saying “ I can’t imagine an easier military problem ... If we can’t impose a no-fly zone over not even a third rate military power like Libya, then we ought to take a hell of a lot out of our military budget and spend it on something usable.” He also doubts the need to maintain 24/7 surveillance on the grounds that, if Libyan pilots knew there was a risk of interception they would be less motivated to drop bombs & more inclined to defect. He also believes US Air Force aircraft should be used to jam Libyan military communications. And while he acknowledges that at a time like this it’s a good thing to have a President who counts to 10, he hopes “he won’t count to a googleplex” (whatever that might be).

Meanwhile, NATO has taken ‘decisive action’ in support of a no-fly zone, but only if approved by the UN, full well knowing that both China & Russia oppose the idea. So this is nothing but cheap posturing. And as far as the deployment of America’s military resources, the burden of enforcing a no-fly zone would fall on the two branches of the US Armed forces that have either been lightly used in Iraq & Afghanistan (the Air Force) or not at all (the Navy).  


  • The President worries about the US being seen as again meddling in the Middle East & keeps reminding his staff “the best revolutions are completely organic.”
  • Some in Congress, & even in the Administration, argue he’s moving too slowly, contend there is too much concern about perceptions & say a military already caught up in two wars is exaggerating the risk & difficulty of a no-fly zone.
  • The military is skeptical of humanitarian gestures that put the lives of its troops at risk for a “cause of the moment” which it deems of only marginal national interest. 
  • Sen. John Kerry (D.-Mass), who chairs the Senate Foreign Relations Committee & who is one of the President’s closest allies, warns of repeating the mistakes made in the Kurdish part of Iraq, in Rwanda & in Serbia, that of failing to step in to avoid a massacre. And he worries about what he calls “The Spectre of Iraq 1991” when Bush 41 “urged the Shiites to rise up and, when they did, was nowhere to be seen.” 
  • The most vocal camp is led by Sens John McCain (R.-Ariz) & Joseph Lieberman (Ind.-Conn) who say that establishing a no-fly zone is justified because the rebel leaders have asked for it, with the latter arguing in a media interview on March 7th that doing so would not be a matter of imposing the American will on the Muslim world. And while some say that the best outcome would be an international effort involving NATO, the Arab League and/or the AU, Lieberman et. al. argue that the risk of waiting far exceeds that of early decisive military intervention, while conceding that Libya’s future is far from clear if Qadaffi is overthrown.

This is a time when democracy has it drawbacks. It tends to talk issues to death (in the hope they will go away- which they seldom do?), and when having a dictatorship has its advantages : thus while various Western nations diddled & doodled about getting a few hundred of their citizens out of Libya, China got 35,000 of its citizens out in a week! 


    • The Senate was expected to vote March 8th on two budget-cutting bills, neither of which were expected to get the 60 votes needed to pass. The Republican bill would cut US$60BN from the current spending basis & the Democratic one US$6BN. Sen. Joe Manchin D.-WV), up for re-election in 2012, announced he would vote against both on the grounds that “the latter doesn’t go far enough” & the former ”blindly hacks the budget with no sense of our priorities or our values as a nation.” And he believes nothing serious will happen about the Budget until the President himself gets involved in the necessary “tough negotiations”. 

On the Budget most, if not all, lawmakers are sleepwalking, and the Republicans & Democrats like “ships passing in the night.” The only thing that will change that is a Titanic-like event. And Obama’s remark on Saturday March 5th that ‘spending cuts to narrow the US Budget deficit must not be politically motivated or threaten the economy as it climbs out of recession” suggest he is prepared to engage in a game of chicken with both lawmakers & the rest of the world. If so, he will likely come out second best since he lacks the ‘killer instinct’ needed to be successful in such an endeavour.  


    • California-based CoreLogic reported on March 8th that they rose sharply in the Fourth Quarter to 23.1% of all homes with mortgages, up from 22.5% in the Third Quarter. This broke a three quarter-long decline in underwater mortgages (which had been driven by more homes going into foreclosure). In Nevada two-thirds of all homes with mortgages are underwater and in Arizona, California, Florida & Michigan up to 50%. On the other hand, in Oklahoma it was only 5.8%. 

Part of the higher underwater rate was due to house prices in 11 of the US’ 20 major metropolitan areas hitting their lowest point since real estate started heading South.   


    • Hundreds of police were deployed in Riyadh on March 11th to prevent demonstrations, inspired by the wave of unrest sweeping across the Arab world, calling for democratic reform. But midday no protesters had shown up. This came the day after violence had erupted in the country’s East where police had opened fire to disperse demonstrators in the mostly Shiite city of Qatif. Officials said later that security measures around Saudi Aramco’s headquarters in Dharan & its various facilities in the Eastern part of the country had been beefed up.

    • Shiites account for one-tenth of Saudi Arabia’s 23MM people. Most of them live in the country’s main oil producing region in the East and have long complained about being discriminated against & shut out from senior positions in government & the military, and about not getting their fair share of the country’s oil wealth. 

They and just about every Saudi, Sunni or Shiite, outside the Royal Family; that’s why the government recently threw US$34BN of freebies at them. 


    · Exchanges between China & Taiwan have been booming for over 20 years. China & Hongkong now take over 40% of Taiwan’s exports & the latter recently reported a 2010 surplus on bilateral trade with the former of US$70+BN. Taiwanese businessmen have invested at least US$90BN in China & 800,000 Taiwanese now live in China. Beijing’s hope was that such economic interdependence would win hearts & minds. But it hasn’t worked out that way. In the November local elections the pro-independence party won more votes than the one more congenial to Beijing. And polls show that support for unification, at 1.2%, is now as low as it has ever been & that support for “the status quo now/unification later” has flatlined at 17.6%, while support for independence now or later has risen from 30.5% to 35.5%. The increased contacts appear to have made the Taiwanese aware of how lucky they are to be prosperous & free. 

The pro-independence party accuses the others of being Chinese stooges wanting to lead Taiwan blind-folded towards absorption, while the latter accuse the former of risking a Chinese invasion if the country moved towards independence (thereby suggesting that they too prefer the status quo & don’t want to put it at risk). In its planning Beijing overlooked the fact that, human nature being what it is, people usually can see no reason ‘to buy the cow, if they can get the milk through the fence”

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