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

May 5th, 2011

The power base of Syria’s Bashar Assad may be starting to erode as more members of his armed forces start rebelling against the repressive measures he expects them to implement, and as the elite of his ruling Baath party is getting concerned about the growing civilian casualty list & the effect this is having on the country’s image abroad.    

The best thing that can be said about bin Laden’s elimination is that it will make it more difficult for Republicans to claim President Obama is an unfit, indecisive, fussy-footing Commander-in-Chief; for it involved immense risks to his political future (as Jimmy Carter can attest to). As to claims his death makes the world a safer place, this may be more “spin” than reality, regardless what has since supposedly come to light. For years he has been more of a symbolic figure for Americans, an inspirational one for Muslim extremists & an embarrassment for the Pentagon rather than an active ‘enemy combatant’ (the house he lived in apparently had no landline phone hookup, he wouldn’t have dared to use a cell phone & according to one of his five wives  he hadn’t left his room in five years, all of which would have made it difficult for him to be a pro-active warrior in the War on Infidels. In fact, his death may actually boost the risk of (retaliatory) activities by terrorist sympathizers (not followers). And the US’ furtive & hasty disposal of his remains undermined its credibility & is already giving rise to a host of conspiracy theories.


In February & March Mexico’s central bank bought 100 tonnes (3.125MM ounces) of gold (close to US$5BN-worth). Right now gold prices are soft, due to optimism engendered by the bin Laden’s ‘take-out’ & rumours of investor profit taking in general, & hedge fund selling in particular. But its price is still well above its 150-day moving average that it has unsuccessfully tested 7x in the past two years. And more central bank buying would not only overwhelm investor selling but also would likely prompt them to rejoin the market’s buy-side. As to silver prices, they have been set back by huge futures sales by the world’s richest man, Sr. Carlos Slim of Mexico (who beat out both Bill Gates & Warren Buffett for that honour in the latest Forbes’ listing & who was recently fined US$1BN by Mexico’s anti-trust regulator for monopolistic practices by his cell phone company) to hedge the future output of his Minera Frisco SAB gold-silver mine, & by the Chicago Mercantile Exchange hiking margin requirements for its silver futures contracts 4x in less than two weeks, from US$8,700 to US$16,000 per 5,000 ounce contract (which makes one wonder why it would be so aggressive unless a major investor was hugely offside & needed a lower price to avoid imploding).


India’s central bank raised its key interest rate by a higher-than-expected 50 bps to 7.25% after its March wholesale price inflation rate came in at 8.98% (vs. an expected 8.00% & an actual 8.3% in February). Elsewhere the YoY inflation rate between February & March rose from 2.4% to 2.7% in the US, from 2.2% to 3.3% in Canada, from 2.4% to 2.7% in the Euro area (which was particularly significant since it was due to higher prices for goods other than food & energy), & from 4.9% to 5.4% in China. What do the inflation deniers think they know that the rest of us doesn’t? (while they no doubt will now point to the current weakness in oil- & other commodity prices to support their view, consumers will continue to feel the effect of the ‘locking in’ of earlier price increases into everything they buy).   

Alberta just experienced its biggest oil spill (28,000 bbls) in 36 years from a (non-oilsands) pipeline in Northern Alberta. While the apologists point to the highly sophisticated inspection systems now in place to verify pipeline integrity as evidence that everything is just hunky-dory, the incontrovertible fact are that the pipe is 44 years old (while much pipe of that era was designed for a 30-year useful life) & that all human-made goods have a finite life. Pipelines operate under high pressure & often carry corrosive products. This pipeline had experienced another break a number of years ago, after which the regulator had ordered the operator to cut the pressure in it, thereby questioning its integrity & reducing its daily throughput capacity by 15%. And a spill is seriously problematic when it involves 3½ hours of throughput & it takes the operator so to close the tap & reduce pressure in the line.   


The CEO of Walmart recently observed there was evidence of more & more modest income US consumers really living paycheque to paycheque in the growing trend for its sales to be strong early each month & to tail off as the month wears on - it used to be that the term “three day millionaires’ only applied to public welfare cases

There were two interesting aspects to the Palestinian unity agreement : it was signed one day earlier than expected & it was signed not just by Fatah & Hamas, but also by ten or so, often more radical, splinter groups. Meanwhile the Netanyahu government gave formal notice of its  displeasure by (unlawfully?) suspending the transfer to the Palestinian Authority of tax revenues it had collected, & is continuing to collect, on its behalf, prompting the Palestinian Prime Minister to comment that if it thought this would halt the unity process it had another thing coming. 

With all the kerfuffle about the US debt ceiling, it may be worth noting that it stood at US$1TR as recently as 1982 (vs. today’s US$14.6TR) & has been raised 78 times since 1962.  

Brazil has long been the world leader in the use of ethanol in motor fuel, has been mixing it into gasoline since 1976 & now has a mandatory ratio for motor fuels of 25% ethanol & 75% gasoline. This was driven in part by a desire towards fuel self-sufficiency & in part by the ready availability of cheap sugar (that is an 8x better feedstock for producing ethanol than corn from a energy efficiency point of view). But recently the price of sugar skyrocketed to three decade highs (although it is now expected to ease off following record sugar production in Thailand); so it found it advantageous to sell its sugar & import (highly subsidized) corn-based ethanol from the US, thereby adding to the pressure on the US budget & on the global food grain situation. 


No. 408 - May 5th, 2011 


  • According to the new President of the San Francisco Fed on May 4th, “We are seeing a temporary bulge in inflation before we return to an underlying level of about 1.25% to 1.50 percent annually”. That day another Bernanke loyalist, Boston Fed President Eric Rosengren, said surging food & energy prices are due to supply shocks & political upheaval; so “If supply shocks tend to have a transitory impact on headline inflation, and do not pass through to any meaningful way into core inflation, then monetary policy need not respond to the price increases caused by the supply shock ... (and) can remain in place and continue to support economic growth.” He also opined that, when the time came to tighten the current easy-money policy, this could be done in a very gradual way.

Seldom in its nearly 100-year history has more nonsense emanated from over-educated Fed staffers who have forgotten their Grade Two arithmetic, namely that, to quote Raoul Castro, “two plus two is four. Never five, much less six or seven, as we have sometimes pretended”. They base their case of plentiful excess capacity in terms of high unemployment, & obviously are too young to remember, or are wilfully ignoring, that there was “Stagflation”.   

KILLING A SYMPTOM (Lebanon Daily Star, Editorial) 

  • The US should use the death of Osama bin Laden to address the root causes of the anti-US sentiments that have spawned many would-be Osamas & enabled his twisted ideology to find so much resonance. For it has long fostered antagonism among many who don’t share bin Laden’s warped vision by pursuing two policies hostile to its own security. Its favouritism of an Israel that stifles the Palestinians’ legitimate statehood aspirations - a cause it claims to endorse - caused it overlook Israel’s blatant oppression of, & its violations of international law against, them. And, while advocating freedom & democracy as the greatest of human virtues, it has denied those fundamental rights to the region’s people for the sake of its unquenchable thirst for oil. And it wasn’t just violent extremists like bin Laden who mined these follies to further their cause, but also many local tyrants who claimed their state-sponsored terror was all that stood in the way of Islamist takeovers. The Arab Spring is providing Washington with an opportunity to start walking the walk & champion the call of the people for freedom, and help the Arabs & Palestinians to fulfill their aspirations, thereby hollowing out the basis for terrorism.          

The needed 9.0 foreign earthquake is not feasible in the current US political environment.


MALAYSIAN MINISTER DROPS BOMBSHELL (Business Insider, Joe Wiesenthal) 

  • On April 28th Lim Siang Chai, Malaysia’s Deputy Minister of Finance, told the China Daily China should help create a single Asian currency since “A unified  currency in Asia ... would help reduce the risk of exchange rate volatility (due to ‘hot money’ flows) and help the region’s trade ... Without China’s leadership, its hard for Asia to achieve that goal”

China, Japan & South Korea since agreed to start using their currencies in trade settlements, a big step forward towards achieving what they agreed on a few months ago, the creation of a trilateral free trade agreement (an event foreshadowed in a January 2011 Asian Development Bank Institute paper entitled A de-facto Asia-currency block in East Asia : It has been there but we didn’t look for it). Several years ago Iran started demanding settlement of oil payments in non-US$ currencies, a few months ago Russia & China agreed to trade settlement in their own currencies & now this; each such move reduces the global need for US$ working capital balances & speeds up the erosion of its pivotal role in the international monetary system).   


  • WTO Chief Pascal Lamy warned on April 29th that, despite calls to conclude it this year, the Doha Round is set to fail while “under the right conditions a deal would be doable.”

Trying to blow life into it in the present environment is like flogging a dead horse.  

U.S. AUTO SALES JUMP IN APRIL (AP, Dee-Ann Durbin & tom Krisher) 

  • They were up 18% YoY to 1.16MM units & thus for the 3rd month in a row hit a 13MM annual rate. But with gas up 36.5% YoY buyers want smaller, more fuel-efficient cars.

And buyers of bigger vehicles too are opting for models with smaller engines. This shift towards smaller cars & engines is known, rather tellingly, in the industry as “mix degradation”.  


  • Despite the unemployment rate rising from 8.8% to 9.0% as more people had started looking for work, market sentiment was pulled from the doldrums by focusing on the part of the same Labor Department report that, even after a 22,000 loss of public sector jobs, 244,000 new jobs had been created in April, far more than the 186,000 expected.

This is a good news, bad news story. The good news is that the private sector may be starting to pick up the slack, especially the SME sector, given an apparently a growing willingness by the banks to start lending money rather than just sitting on it, and the bad news that the loss in public sector employment is likely only a harbinger of things to come & that the banks may be more willing to lend since they are losing faith in their primary alternate outlet for funds, government securities. But stock market sentiment is critical since it has been the be-all-and-end-all of the two QE programs & since a swooning market might prompt Joe & Jill US Consumer take their feet off the consumption spending pedal.  


  • Despite the ISM’s Index of Manufacturing Sector Activity going to 60.4 in April from 61.2 in March, it grew more than expected as the weak dollar makes exports cheaper; so one expert said “The economy is not falling apart, despite the spike in oil prices. Firms are hiring, adding to inventories, seeing demand rising and exporting, not signs of malaise.”

This came from Joel Naroff of Holland, Pa.-based Naroff Economic Advisers, until two years ago Chief Economist at Commerce Bank/TD Bank. Nevertheless, the ISM’s Index of Input Prices rose from 85.0 to 85.5, an almost three year high, & its April Index of US Business Activity dropped sharply to 52.8 from 57.3 in March & February’s five-year high of 59.7.      


  • Most companies that have reported earnings so far beat the analysts’ sales predictions, many by 10% or more as, despite high gas prices and events in the Middle East & Japan, consumers spent more on non-necessities as well as necessities.

But the payroll tax break worth US$695 in additional take-home pay for 160MM workers is for one year only & more price hikes are in the pipeline. And while consumer spending was up 0.6% MoM, higher prices accounted for two-thirds thereof; so volume was up only 0.2%.  




  • At a conference on community development in Arlington, Va. on April 29th he said people & small businesses in low income neighbourhoods had been hurt most by the worst recession since the 30's; so he called for more lending in troubled communities since this would stimulate economic activity that would help generate more local taxes.

Meanwhile on his watch the Fed (& the Treasury) went all-out to save the hides of Wall Street banks while ignoring the Main Street banks that would have been the conduit for such lending. But social engineering isn’t part of the Fed’s mandate & banks are not welfare agencies (in fact, the government-prompted encouragement of their indulging people’s aspirations to fulfill the American dream of home ownership contributed big time to the unsustainable housing boom.   


  • Most Republicans & some Democrats in Congress say they won’t support raising the debt ceiling without appropriate fiscal action. The plan being hatched by the bipartisan ‘Gang of Six’ Senators would cut borrowing by US$4+TR by having Republicans accept higher taxes & Democrats cuts to benefit programs. Their plan is based on last November’s report of the National Commission on Fiscal Responsibility and Reform & on the political reality that getting anything passed into law will only happen if both Democrats & Republicans are equally uncomfortable at having to accept distasteful things since leaving their core beliefs off the table won’t make enough of a dent in deficits that otherwise could average US$1TR or more a year over the next decade. It is the only bipartisan effort in a town full of plans to tackle the deficit by people who couldn’t get politically poisonous decisions adopted (the Commission’s plan envisaged freezing the Pentagon’s budget & cutting spending at most domestic agencies, gradually raising the retirement age for SS benefits to 69 & curbing future COL increases, cutting income taxes & paying for that by eliminating popular tax breaks such as mortgage interest deductability, and eventually making the current tax-exempt employer-paid health insurance premiums fully taxable.
  • Following are three seemingly relevant quotations :
    • “While the conventional wisdom is ... we can punt ... this until after the next ...election ... there’s a growing consensus ... we may not have that long.” - Sen. Mark Warner (D.-Va.);
    • “A Republican plan will not pass. A Democratic plan will not pass ... It is going to require locking arms and jumping off the building together.” - Sen. Saxby Chambliss (R.- Ga.); and
    • Pray for the Gang of Six” - the former two-term Republican Senator from Wyoming, Alan Simpson, who co-chaired the Commission.

House Speaker John Boehner (R.-Ohio) says he would prefer to have the debt ceiling raised sooner rather than later (& is planning to tour Wall Street next week to spread the word his heart  is in the right place) & there are growing rumours that others in Washington share this view. But hurdles remain. The bipartisan effort solely involves Senators which is seldom conducive to a ready acceptance of its ideas by the House. Even if the Senate were to pass a bill raising the debt ceiling, it would take time, and could engender much controversy & animosity, before it was ‘reconciled’ with whatever the House might come up with. John Boehner has anything but firm control over his own troops (& not just the dogma-bound Tea Party types), never mind the House Democrats, & the same goes for Minority House Leader Nancy Pelosi). Many lawmakers don’t seem to appreciate the extent to which they are playing with fire and/or reflect grassroots sentiments among voters who are wholly oblivious to, or don’t care, about the debt ceiling issue. And longer term, the US$4TR would be spread over ten years, which means that the national debt could be expected to continue to grow faster than GDP, & the debt/GDP ratio to rise, for some time to come (while the IMF expects that of many other heavily indebted countries, like Britain, to decline in the years ahead), to the discomfort of foreign buyers & holders of UST securities. And while Sen. Saxby’s observation is wonderfully graphic, it is suggestive of a “hard landing” that wouldn’t sit well with voters.        


  • On April 26th in New York he told the Council on Foreign Relations China is still in its early stages of transition to a modern economy, described its handling of the financial crisis as “well-designed ... they did all the necessary things”, acknowledged its efforts to move to a less import-dependent economy & said the US would never embrace a strategy of weakening its currency to gain an economic advantage over its trading partners. He is confident the US Congress will raise the debt ceiling (this after reducing the pressure on lawmakers to do so sooner rather than later by telling them in writing that he had found enough scope for financial legerdemain to defer, absent a mid-May increase in the debt ceiling, the ’drop dead’ for a US default by almost a month to early August?), believes the US has a very good chance of emerging from the crisis with growth potential as strong as before the crisis (???) & says the US is way ahead of other countries that are caught in this mess (such as Iceland, Greece, Ireland & Portugal?), with its biggest challenge now being to build a political consensus under a reasonable balance of fiscal sustainability. This came a few days before he & Hilary Clinton will meet in Washington on May 9th & 10th with China’s Vice Premier Wanj Qishan & State Councillor Dai Bingguo for the annual US-China Strategic and Economic Dialogue to discuss economic & trade issues. And while China’s currency is always a topic of conversation, this year the US dollar, the low US interest rates, inflation concerns & the US budget deficit will likely also be on the agenda.

This sounds remarkably much like ‘sucking up’ to one’s banker. As to Geithner’s claim the US would never “embrace a strategy of weakening its currency to gain an economic advantage over its trading partners”, the Chinese reaction may well be the Mandarin equivalent of “tell that to the Marines”; for they are no doubt aware of the US policy practice known as “Benign Neglect”. 


  • Just one day after announcing plans for a unity government, Fatah & Hamas  interpreted it differently. Mahmoud Abbas said he will remain in charge of the peace effort, that it’s only functions will be to rebuild Gaza & prepare for elections within a year, and that no activists from either side will serve in it. And his aides said the rapprochement was due to Hamas being weakened by the turmoil in Syria & a new regime in Egypt that, while friendlier than Mubarrak’s, is unlikely to go down an Islamist path. Meanwhile Hamas portrayed Abbas as frustrated by the failed peace effort & heading in a direction more like its own, with one Hamas adviser saying the Palestinians had been “really disappointed” with Obama’s failure to act on with what had seemed a new American vision for the region.

There is some truth in both. But the real centripetal forces won’t surface for, say, six months, i.e. until one side or the other gets the feeling the election may not go its way.  


(BBCNews, Jon Donnison) 

  • Palestinians love Spanish football. So on April 27th, after watching Barcelona beat Real Madrid 2-0 on TV, they celebrated while on another channel another rivalry was settled when Hamas & Fatah leaders announced in Cairo that, after four years of division, they would sign a unity deal. Most Palestinians are hopeful but cautious : they want to see a deal actually signed & then will wait & see if it will work; for they know the  split between the two has been deep, bitter & violent, that Hamas will continue running Gaza & Fatah the West Bank, and that Israel opposes the deal (& will do anything to derail it).
  • Despite Netanyahu’s public warning to Mahmoud Abbas to choose between peace with Israel or Hamas, the latter opted for reconciliation since the peace talks had been going nowhere. But the unrest elsewhere in the Middle East, that had prompted mass pro-unity demonstrations in both Gaza & the West Bank, had also been a factor. While the EU had been more positive about reconciliation than the US, it remains to be seen how it will react if Hamas gets a say in what happens to the money it gives Fatah. Meanwhile Egypt’s interim regime is proud of the role it has played & Abbas expects the deal to strengthen his push for international recognition of a Palestinian state based on the 1967 borders, while Hamas will come under fire from the militants in its midst, who have been firing  rockets into Israel, for having given away too much & become too moderate.

It remains to be seen if they will really be able to bury the hatchet for the common good. One potentially divisive issue that has already arisen is Hamas’ demand that the unity government should be headed by someone from Gaza.



  • Israel, with help from Mubarrak, has blockaded Gaza ever since Hamas took control in 2007, ‘to prevent the import of weapons there’, a move viewed by many as ‘collective punishment’ & one the Red Cross in 2010 called ‘a clear violation of international humanitarian law’. But on April 29th Egypt’s interim Foreign Minister announced the Rafah border crossing will be permanently opened, alarming Israel & prompting one observer to call it the greatest shift in Egypt’s foreign policy in 30 years. The interim government also says it wants to improve relations with Iran & with the countries that share its dependence on the water of the Nile, but says that, despite many Egyptians favouring ending the peace treaty with Israel, it will honour existing international agreements.

This kills the Israeli blockade & presumably also the Mubarrak regime’s construction of a subterranean steel barrier to block traffic through the myriad of tunnels by which goods, incl. weapons & livestock, had continued to flow into Gaza. 


  • On April 17th he fired Intelligence Minister Heidar Moslehi only to have the Supreme Leader promptly re-instate him. So he stayed away from his office, shunned all official duties, missed two Cabinet meetings & cancelled a visit to the holy city of Qom. But following the despatch of a letter signed by nearly 300 MPs, & a meeting with a group of lawmakers, on April 30th, he was said to have renewed his allegiance to Ayatollah Khameni & signalled the end of his boycotting his official duties by chairing a Cabinet meeting.

All’s may not be well in the upper echelons of the regime. If so, this is due in part to the growing social unrest prompted by sharply higher food- & fuel prices ( due in turn in part to a reduction in the subsidies thereon), in part to the same forces as are at work elsewhere in the Middle East countries, an un/underemployed young population aspiring to a better life than they see their parents having had, and in part to squabbling within the ruling elite over the spoils of power.

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