Volcker fears for the future of America

Paul Volcker, who chaired the Fed through most of the 1980s, thinks the dollar is in trouble:

Former Federal Reserve Chairman Paul Volcker, who is chairman of President Barack Obama’s Economic Recovery Advisory Board, said the U.S. dollar is in danger of losing its role as a global benchmark currency.

“The growing question is whether the exceptional role of the dollar can be maintained,” Volcker told a gathering of New York civic leaders at the University Club of New York last night.

The decline of the U.S. economy, political gridlock at home, U.S. involvement in two wars and “festering” geopolitical issues in the Middle East and Asia have undermined the ability of the U.S. to influence global events, Volcker said.

From Bloomberg (h/t Eric Janszen in this iTulip thread). Not surprisingly, Volcker takes it for granted that this will be a bad thing. But perhaps most interesting is this:

Volcker offered no prescriptive solutions as he spoke in broad terms of the country’s loss of stature.

When a guy who's supposed to be in charge of America's economic recovery admits that he has no clue what to do about it, it certainly does look like that country is in trouble.

Irish bailout talks continue

The Irish government is still trying to negotiate terms for a bailout, having become overextended in bailing out the country's banks (among other things) while trying to keep taxes low (sound familiar?) The thing is, once they get a deal, they still have to get it through their minority parliament (Irish MPs are elected by multi-member single transferable vote, so majorities are virtually unknown there). And needless to say, a vote on this issue would be a vote of confidence. The government has already agreed to call an election immediately after the necessary legislation is passed, but when huge numbers of people are demanding that the government not agree to the austerity measures the EU and other backers demand in return for a €85 billion loan, one has to wonder if the government's coalition partners are going to be in the mood to co-operate. Several of them are independents, and following a by-election this past week (which was won by Sinn Fein, incidentally) the government has a majority of two seats assuming no defections.

One thing is clear - if Ireland defaults instead of accepting the bailout, things will get very interesting very fast. A lot of bondholders will lose a lot of money, of course, and unless the sky falls on the country quite a few other countries will follow their lead, compounding the situation. My money's on the sky not falling, by the way, though times will get a bit hairy for a while.

And even if Ireland doesn't default, Thomas Walkom in the Star reports that the markets aren't optimistic about two other troubled European economies:

The markets are also betting that two other euro nations, Spain and Portugal, will drop out of the common currency, default on their debts or do both.

Walkom, incidentally, thinks default is only a tiny part of the risks ensuing from this crisis:

Yet perhaps the most distressing element of the Irish crisis is the sense of déjà vu it creates.

In the ‘30s, nations faced with angry bondholders did exactly as Ireland’s government is doing now — raised taxes and cut spending in an effort to persuade financial markets of their fiscal rectitude.

Ireland is even lowering its minimum wage.

As in the 1930s, the Irish government is portraying its actions as inevitable.

As in the ‘30s, its cutbacks — by squeezing even more spending power from the economy — will only make matters worse.

And, as in the ‘30s, governments in Ireland and elsewhere will eventually find that their voters can put up with only so much.

The Great Depression boosted the fortunes of European fascism. We don’t know yet where the politics of this slump will take us.

But unless democratic governments show some imagination, the future doesn’t look pretty. Portuguese workers staged their largest one-day strike in 22 years Wednesday to protest government austerity plans. More troubles are on the horizon.

Now as hinted at above, the main beneficiary, politically, of the crisis in Ireland has been Sinn Fein. They certainly are not what most people would call fascist, though they do have a nationalist streak that bears watching. But as things degenerate in other countries, things could go very differently. Indeed, it already has in places (notably Austria and the Netherlands).

China lowers US credit rating

This is interesting:

The dispute between Washington and Beijing about monetary policies and trade imbalances has spilled over into the more arcane world of debt ratings.

Citing concerns about Washington’s capacity to repay debt and the potential impact of another round of quantitative easing by the Federal Reserve, an unheralded Chinese bond rating agency has slashed its sovereign credit rating on U.S. government debt to the equivalent of single-A-plus from double-A, with a negative outlook.

The rebuke is mainly symbolic; the rating cut by Dagong Global Credit Rating Co. Ltd. will not have any impact on the market. But it is another sign of growing world anger over the U.S. decision to further loosen monetary policy and could be another indication the Chinese are becoming disenchanted with U.S. Treasury bonds.

Major mainstream rating agencies, such as Moody's Investors Service and Standard & Poor's, still give Washington their top, triple-A rating, despite also expressing concerns about soaring debt levels and record deficits.

From CTV. I have to wonder why Dagong's assessment of American debt differs so much from the other agencies. I can't help but wonder, though, if Moody's and Standard and Poor's don't have a bit of a conflict of interest here; if the US dollar collapses those companies, which are US-based, have a lot more to lose. On the other hand, China would have a lot to lose if the dollar collapses too, so it's hard to say.

Recovery stalls

A blip, or a double dip?

The Canadian economy shrank for the first time in 11 months in July, another clear sign of a slowdown, as factories, construction and consumer activity all posted declines.

The country’s real gross domestic product fell 0.1 per cent in the month, the first monthly drop since last August, Statistics Canada said Thursday.

Many measures of the economy have stalled in recent months, from job growth and housing starts to consumer spending and exports, as the global recovery petered out. The latest GDP reading will bolster expectations that the Bank of Canada will pause in raising interest rates next month, after three hikes in a row.

From the Globe. Will holding steady on interest rates be enough? Perhaps some stimulus programs need to be extended...

Some interesting employment data

Apparently employment has now risen to pre-recession levels. But there's a catch:

All the jobs lost during the recession in Canada have now been recouped, a feat that suggests the labour market has repaired itself in a mere four quarters, much faster than in previous recoveries.

But a closer look at Statistics Canada data shows the quality of the labour market has deteriorated by many measures compared with the pre-recession scene.

Manufacturing, traditionally a source of higher-paying work, now sits at a 34-year low. Contract jobs are proliferating, and part-time jobs have been added at a faster clip than full-time work.

The average duration of unemployment is longer than it was a year ago, even as some new jobs are being created. Nearly a third of people working part time are doing so involuntarily, meaning they'd rather be full time. Hours worked remain below the previous level, suggesting many people are still feeling their incomes squeezed.

From the Globe. Unfortunately, this sort of thing is likely to continue for some time. Thanks to peak oil, energy is going to become more and more expensive for quite some time to come, and the money to pay for that is going to come out of workers' pockets long before it comes out of profits. This is doubly true given that the worker's first line of defense -- unions -- are decidedly out of fashion these days.

What are the prospects for a resurgence in the union movement? The thing is, globalization has given management a potent threat - namely, to close factories and move their operations overseas if unions ask for something outrageous such as a living wage. This could change soon, however, again due to peak oil. As transportation costs make it less practical to manufacture stuff offshore, the old threat of "we'll pack up and do our manufacturing in China" will be a lot more expensive to follow through on. So maybe a resurgence of the labour movement is possible. Let's hope so, because I think we're going to need it.

The "D-word" continues to appear

This time it's the Globe and Mail:

What’s a depression anyway? Basically, a depression is a very long recession.

You know you’re in a depression when interest rates go to zero and there is no revival in credit-sensitive spending.

The economy is in a depression when the banks are sitting on $1.3-trillion (U.S.) of cash and yet there is no lending going on to the private sector. It’s called a liquidity trap.

Depressions, usually, are caused by a bursting of an asset bubble and a contraction in credit, whereas a “plain-vanilla” recession is typically caused by inflation and excessive manufacturing inventories.

You tell me which fits the bill today.

It could be a long time before this settles down. But surely this will at least prevent the hyperinflationary scenario, right? Well, maybe not:

A minority, though—and God bless ’em—actually do go ahead and go through the motions of talking to the crazies ranting about hyperinflation. These amiable souls diligently point out that in a deflationary environment—where commodity prices are more or less stable, there are downward pressures on wages, asset prices are falling, and credit markets are shrinking—inflation is impossible. Therefore, hyperinflation is even more impossible.

This outlook seems sensible—if we fall for the trap of thinking that hyperinflation is an extention of inflation. If we think that hyperinflation is simply inflation on steroids—inflation-plus—inflation with balls—then it would seem to be the case that, in our current deflationary economic environment, hyperinflation is not simply a long way off, but flat-out ridiculous.

But hyperinflation is not an extension or amplification of inflation. Inflation and hyperinflation are two very distinct animals. They look the same—because in both cases, the currency loses its purchasing power—but they are not the same.

Inflation is when the economy overheats: It’s when an economy’s consumables (labor and commodities) are so in-demand because of economic growth, coupled with an expansionist credit environment, that the consumables rise in price. This forces all goods and services to rise in price as well, so that producers can keep up with costs. It is essentially a demand-driven phenomena.

Hyperinflation is the loss of faith in the currency. Prices rise in a hyperinflationary environment just like in an inflationary environment, but they rise not because people want more money for their labor or for commodities, but because people are trying to get out of the currency. It’s not that they want more money—they want less of the currency: So they will pay anything for a good which is not the currency.

From Gonzalo Lira, via ThePythonicCow in this iTulip thread. I'm not entirely sure what to make of this; it has a ring of plausibility to it, to be sure, though hyperinflationary scenarios are a favourite bugbear of the right and should thus be taken with sizeable quantities of salt.

How long can China's "economic miracle" last?

It's hard to avoid -- everywhere you look there's another story about China's tremendous economic growth. They're now the second biggest economy in the world, and seem unstoppable. But as Gwynne Dyer points out in the Georgia Straight, we've heard this story before:

Back in 1988, the last year of Japan’s 30-year boom, the land in the garden of the Imperial Palace in central Tokyo was allegedly worth more than the entire state of California, but that was just another way of saying “unsustainable property bubble”. The bubble duly burst, bringing down the entire Japanese economy with it—and it has stayed down for the past 22 years, achieving at best two-percent annual growth and usually much less.

The property bubble in China is reaching similar dimensions, with prices rising annually by 50 percent or more in dozens of cities. When property bubbles finally burst—and they always do—they tend to do a great deal of damage. (Nobody say subprime.)

As Dyer points out, China has a lot of parallels with Japan, though it would be premature to predict that they'll collapse as badly as Japan has. Still, the status quo can't go on forever.

Wal-Mart taking a beating

Seems the American consumer's spending spree is slowing:

Wal-Mart Stores (WMT, news, msgs) has a problem: Its typical shopper appears to be tapped out.

The world's largest retailer reported $112.8 billion in worldwide revenue in its fiscal fourth quarter, up 4.6% from a year earlier. But Wal-Mart also said U.S. same-store sales fell 1.6% in the period and noted that traffic in U.S. stores fell slightly. Same-store sales are considered an important measure of a retailer's health.

Wal-Mart's financial results unnerved investors, outweighing plenty of good news in the Bentonville, Ark., company's quarterly report. Wal-Mart has been slashing expenses and inventory, and international sales growth remains strong. Earnings per share last quarter were $1.17, beating Wall Street's estimate of $1.12.

Still, Wal-Mart shares fell 1.1% after the quarterly results were announced on Feb. 18.

One explanation for sales weakness is deflation. The company said prices for groceries and consumer electronics continued to fall, causing customers to spend less on each shopping trip.

The tough economy and high U.S. unemployment are also playing a big role. U.S. consumers are still feeling squeezed, Wal-Mart Chief Financial Officer Tom Schoewe told reporters. "We see the influence of the paycheck cycle as pronounced now as it's been in the past," he said, according to Bloomberg News.

From here (h/t Mega at iTulip). The risk of a double dip is increasing, I think.

How long will the recovery last?

So far, the world economy seems to be on an upswing from the depths of the last couple of years. The participants in the G20 meeting have, in fact, agreed to slash their deficits by half. But is it really time for this? Paul Krugman thinks not:

Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31.

Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

From the New York Times (h/t flintlock at iTulip). Despite the dismissive attitude taken by flintlock and other iTulipers in that thread, I don't think Krugman's warnings should be ignored.

More on that "recovery" thing

It's become a mantra in the mainstream business press to say that we're in a recovery. But what does that mean? David Rosenberg has this to say (h/t pogge):

There are classic signs indeed that the recession in the U.S. ended last summer — output, sales, etc. But the depression is ongoing and the reason we say that is because real personal income, excluding handouts from the government, has barely budged. In fact, real organic personal income is nearly $500 billion lower now than it was at the peak 16 months ago and this has never occurred before coming out of any technical recession. It is a depression, as the chart below attests — that is the trendline for real household incomes, until the government comes in to top them off with handouts, subsidies and extended jobless benefits. The share of U.S. personal income being derived from Uncle Sam’s generosity has risen above 18% for the first time ever.

What's going on here? Simply put, a recession is defined solely in terms of overall GDP. If the GDP declines for two consecutive quarters, the economy is considered to be in recession; once it gets back on a solid growth track the recession is considered to be over. We normally think of a "depression" as simply a large recession, but I think Rosenberg is suggesting that it should be seen as a measure of how people are actually faring (what a radical idea!) So a "jobless recovery", or a recovery in which people are going back to work but at lower wages, would be a continued depression, because people's actual wages are depressed.

Chronic unemployment in the US

The situation is really bad:

Just one in five people who were out of work last summer have found jobs since then.

Of more than a thousand unemployed people surveyed by Rutgers University researchers last August, just 21 percent had landed a job by March, a followup survey reveals. Two-thirds remained "unemployed" according to the government's definition -- the rest gave up looking for work altogether, either going to school or retiring early.

From the Huffington Post, via Rajiv in this iTulip thread. I wonder what this is going to mean for the future? If there are a lot of chronically unemployed people, the social effects of this could be far-reaching.

Some comments on those green shoots

We're hearing everywhere that the economy is now recovering. Hugh McFadyen and his motley crew are using this as ammunition against the Selinger government, saying that there's no reason to run deficits any more, because the recession is supposedly over. Now technically that may well be true, since recessions are generally defined solely in terms of the overall growth rate of the economy. And there have been gains in jobs lately, too -- but what sort of jobs are they? Armine Yalnizyan at Progressive Economics has some comments:

Forget total employment numbers, it’s the types of jobs coming back that count.

There is a shadow side to this recovery that may undo it in the end. Uncertainty is fast becoming the new normal in the labour market, and that has long-term implications for aggregate demand, household indebtedness, and the rate of defaults on mortgages and credit cards.

The latest Labour Force Survey results show that — though there are still 253,000 fewer jobs than when the recession began in October 2008 — employment growth continues its slow path upward. As Erin Weir noted on Friday, this month’s rising head count is driven by part-time jobs.

By March 2010 there were 47,800 more part-time jobs than when the recession began, but we are still down 300,000 full-time jobs. That mirrors another shift from stable to unstable jobs: more temporary jobs, fewer permanent ones.

And that's based entirely on "pure" economics, and doesn't take into account the fact that oil is likely to get a lot more expensive soon. Throw in that element and things could get quite unpleasant indeed.

More oil news...

Further to yesterday's post about peak oil, the International Energy Agency is very concerned about what will happen as the price rises:

Recovery in the world's biggest economies could be jeopardized if crude oil prices stay over $80 (U.S.) per barrel, the International Energy Agency said Tuesday.

The IEA also reported that OPEC posted the first “significant drop” in output in March in more than a year – falling 190,000 barrels per day to 29 million barrels a day – largely due to a near 10-per cent drop in Iraqi output.

The agency, the energy arm of the Organization for Economic Cooperation and Development, a grouping of the world's richest nations, said concerns remain that global oil markets are “overheated,” with crude around $85 per barrel.

“Ultimately, things might turn messy for producers if $80-100 (per barrel) is merely seen as the new $60-80 (per barrel), stunting economic recovery while prompting resurgent non-oil and non-OPEC supply investment,” the Paris-based IEA said in its monthly oil market report.

From the Globe. The use of the word "overheated" is interesting, as it would seem to suggest that the current oil prices don't reflect fundamentals. But if peak oil is as close as yesterday's post suggests, oil might well be undervalued. Also interesting is the comment about "resurgent non-oil and non-OPEC supply investment"; they seem to think this is a bad thing. Admittedly, some of it is (given that it could include stuff like the tar sands, coal liquefaction, etc) but this could also include proper investment in better alternatives. I have my doubts that the IEA wants this, though. Indeed, they've been accused of distorting their numbers to avoid rocking the boat, presumably because it might lead to investment in alternatives before the established energy companies can corner the market.

Peak oil... when again?

One thing pretty well everyone can agree on is the fact that the amount of oil in the ground is finite. The big unknown, of course, is how much there actually is, and thus when demand will outstrip supply. Well, America's finest military minds fear that it may happen soon:

The US military has warned that surplus oil production capacity could disappear within two years and there could be serious shortages by 2015 with a significant economic and political impact.

The energy crisis outlined in a Joint Operating Environment report from the US Joint Forces Command, comes as the price of petrol in Britain reaches record levels and the cost of crude is predicted to soon top $100 a barrel.

"By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 million barrels per day," says the report, which has a foreword by a senior commander, General James N Mattis.

It adds: "While it is difficult to predict precisely what economic, political, and strategic effects such a shortfall might produce, it surely would reduce the prospects for growth in both the developing and developed worlds. Such an economic slowdown would exacerbate other unresolved tensions, push fragile and failing states further down the path toward collapse, and perhaps have serious economic impact on both China and India."

From the Guardian (h/t Mega in this iTulip thread). Of course, they're particularly concerned with the national security implications, just like the CIA's Center on Climate Change and National Security.

Rubin: Expect a new peak for oil next year

They aren't making any more of it, so this should come as no surprise:

What does $80-per-barrel oil say to you?

Three years ago, it would have told you that global oil markets were at record tightness. Back then, the U.S. president was making a personal pilgrimage to Saudi Arabia to vainly plead for more production. And economists were worrying about the implications for global economic growth.

Today, it seems the goalposts have suddenly moved. After filling up on $4-per-gallon gasoline only two Memorial Day weekends ago, today’s $2.20-per-gallon average gasoline price doesn’t seem so expensive to American motorists anymore.

And suddenly, $80-per-barrel oil is no longer seen by the Saudis as threatening global oil demand, but is instead viewed as a minimum price for their nation to invest in new supply. And as far as my fellow economists are concerned, we’ve heard not even a peep from them about what these types of oil prices may mean for the global economy in the days ahead.

But how much longer can the world pretend that it won’t soon be facing another energy shock, one every bit as challenging as the one it faced two years ago?

From the Globe.

So are we out of the woods yet?

In the last couple of days there have been a few good news stories about the economy. The US lost 11,000 jobs in November, which sounds like bad news until you read on and see that the pundits were predicting more than ten times that. Paradoxically, their unemployment rate actually dropped. The paradox is resolved when you realize that the unemployment rate is based on the number of people actively seeking employment... but more on that in a moment. In Canada, we had a net gain of 79,000 jobs. And gold is down, which is usually seen as a sign of improved confidence in the economy (or at least the value of the US dollar).

However, we shouldn't assume that it's going to be clear sailing from here on in. For instance, looking at the American stats, there's still a net loss of jobs... which implies that the drop in the official unemployment rate may be because of people who have given up looking for work and have gone back to live with their long-suffering parents. And the job stats do not necessarily reflect quality; if an auto worker is laid off from a $50,000 a year job, but two fast food workers are hired at $18,000 a year, that is a net gain in employment, but it isn't really a favourable economic indicator. Note too that retail sales on Black Friday fell short of expectations (don't get me wrong, I'm no fan of the crazy consumer culture that surrounds that day, but it is an indicator of public confidence). And on the international front there may still be some shocks awaiting us. Canadian Silver Bug reminds us that the Dubai crisis may not be the last, and identifies Japan, the UK, and Russia as potential trouble spots. And of course, a default by any of those countries would have dramatic effects on the global economy, which might mean big trouble ahead... although I suspect creditors might be willing to renegotiate things before it gets to that point, because they could stand to lose a lot from the secondary effects of such a default.

Some more Roundup for those green shoots

The powers that be have been claiming recovery for some time, of course. Certainly things aren't as bad as some were predicting; the TSX is doing very well, and other North American and European exchanges have generally closed up as well, as of this moment. But many economists, such as Jim Stanford, are wary:

Now Statistics Canada’s GDP report for the third quarter adds to the consensus that the recession is over. Led by public sector stimulus, a surge in auto production (tied to the U.S. “cash-for-clunkers” program, now finished), and a steady expansion of the financial industry, real GDP eked out an increase of just under 0.1% (rounded up) for the quarter. “Annualized” (that is, raised to the 4th power), that means growth at an annual pace of 0.4% (again, rounded up).

Qualitatively, this is within the statistical error of margin of zero growth. So again, while it is more evidence that the free-fall in economic activity which occurred from last autumn through this spring has been (thankfully) arrested, this report does not remotely indicate that anything approximating a “recovery” is underway. So don’t pop the champagne just yet.

Here are a few cationary nuggets buried within the StatsCan report:

• Without public sector stimulus, GDP would still be contracting. Private sector GDP shrank marginally during the third quarter.
• Of course, the finance industry is the brightest light in the private sector — partying like the good old days since the markets turned around in March. GDP in the FIRE sector grew a full percentage point in the third quarter. By contrast, private non-financial GDP (what I call the private “real economy”) was shrinking at an annualized rate of 1.4 percent.
• A $1 billion boost in auto sector output (as Chrysler’s Canadian assembly plants came back on stream, and all auto exports were boosted by the U.S. incentives) accounts for 150% of the total expansion in Canada’s national GDP in the third quarter. So much for the Fraser Instutute’s claim that the rescue of GM and Chrysler was a gigantic waste of money. Never mind that it may not actually cost taxpayers a cent; without the auto turnaround, Canada’s GDP would have kept declining. I doubt that performance will be repeated in the months ahead.

Of course, whether the GDP is growing or not is hardly the ultimate arbiter of whether the economy is healthy, for all the reasons we know so well. But it is important. Yet even by this narrowest of criteria, we cannot say that the recovery has arrived. Without public sectior stimulus (both here and in America), and without the current rebound in financial exuberance (that is quite likely simply the onset of the next pointless boom-and-bust cycle), real GDP would still be falling.

The awkward thing is, if they don't keep up the stimulus, things could get dangerously out of control. On the other hand, if they keep it up for too long, they'll run into other problems -- inflation, deficits that can't be readily managed, and all that stuff. The thesis of the iTulip folks is something called "Ka-Poom theory" (I kid you not). What it is, basically, is that the current crisis will play itself out first with deflation or disinflation (the "ka") in which people sit on much of the stimulus money rather than spending it, followed by major inflation when the economy does recover and people start spending the cash they've been hoarding. I'm not so sure it will play itself out like that myself, though; most of the hoarding is being done by investors, so it will likely just go into long term investments rather than circulating freely through the economy. The situation has to be handled carefully, though.

It's worth noting that the current run the TSX is on is partly explicable by a flight from US dollars. The TSX is quite gold-heavy, and even setting that aside the Canadian dollar is seen by many investors as a potential safe haven, making Canadian-denominated stocks a good investment anyway. And the American dollar is making a lot of folks nervous:

During a recent visit to Tokyo, Timothy Geithner, the secretary of the US treasury, said that a strong dollar is "very important" to Washington, even as the American currency continued its noticeable depreciation.

This is a very curious statement as it seems to indicate that the US treasury is going to defend the dollar from any further slide in the near future. But this is highly unlikely as the US treasury does not have a history of intervening in foreign exchange markets.

It is true that the treasury's Exchange Stabilisation Fund (ESF) can be used to prop up the dollar, but it has never really been used for that purpose. The ESF, which right now has about $50bn, was originally created by the Roosevelt administration in the early 1930s to deal with currency upheavals as the Gold Standard was being dismantled.

The ESF was used only once in international financial markets and that was to defend the Mexican peso in 1994.

Therefore, the treasury's use of the ESF to defend the dollar can be ruled out.

In any case, it would take a lot more than $50bn to stabilise the greenback if there were to be a speculative attack on the dollar, like there was against the British pound in 1992.

Source. I wish the article went into more detail about why the Treasury won't use the ESF; the author implies that there's more factors at work than the fact that the fund isn't big enough to stave off the worst case scenario. Indeed, if it's no good for that, the sensible thing for the US to do would seem to be to use the fund now, to shore up the dollar before there's a big speculative attack.

The country that holds most of the cards, of course, is China. Thing is, they can't just dump their dollars all at once, or those dollars will depreciate before they can get rid of them all. So it's hard to say how this will play out.

If the US dollar does collapse in a big way, the effects on the world economy will be dramatic. Since they import so much energy, they'd be forced to buy that energy with depreciated dollars, which would limit their ability to buy cheap stuff made in China (or Canada, for that matter). But for that reason, a lot of people both in the US and elsewhere will pull out all the stops to avoid such an outcome. We'll have to see how things go...

Manitoba's economy still holding its own

Well, we've been hearing for a while how messed up the economy is, and on a national or global scale, this is true. According to this article, the national unemployment rate in April was 8%, unchanged from the previous month. That's actually not bad all things considered, though the fact that the new jobs are all "self-employment" makes me feel uneasy, for reasons pointed out here.

But in the same Free Press article, we find this:

Here's what happened provincially (previous month in brackets):

-Newfoundland 14.7 (14.7)

-Prince Edward Island 12.4 (11.5)

-Nova Scotia 9.2 (8.9)

-New Brunswick 9.5 (8.8)

-Quebec 8.4 (8.3)

-Ontario 8.7 (8.7)

-Manitoba 4.6 (5.1)

-Saskatchewan 5.0 (4.7)

-Alberta 6.0 (5.8)

-British Columbia 7.4 (7.4)

So Manitoba is actually well ahead of the game here. Unfortunately, I'm not sure how long this will last:

Export Development Canada predicts Manitoba's export sales will plunge by 16 per cent to just under $10.8 billion in 2009 from $12.8 billion in 2008.

That would be the biggest percentage decline since at least 1981, according to EDC chief economist Peter Hall. It's also more than four times bigger than the next worst decline in the last 28 years -- a 3.8 per cent drop in 1986.

But if it's any consolation, most other parts of the country are expected to fare worse, Hall told about 85 guests at a noon-hour session co-sponsored by the EDC and the Canadian Manufacturers and Exporters.

The EDC predicts Newfoundland and Labrador's export sales will plunge by 51 per cent this year, Saskatchewan's by 37 per cent and Alberta's by 34 per cent. And Canada is looking at a 22.2 per cent drop, which Hall said would be its biggest annual decline in more than 48 years.

From this article. It's good that even here, we're expected to be ahead of the game, but we'll definitely see some hard times.

Seems the downturn is hurting all kinds of people...

... including drug dealers:

Sammad’s got a problem. The recent downturn in the economy means that he can’t drive his car; he’s racking up a ton of debt, and soon, he might lose his livelihood.

“Pretty soon I’ll have to get a regular job,” he says with a chuckle.

Sammad’s not the typical victim of financial turmoil; he’s not a factory worker or a car dealer; he’s a different kind of dealer.

Sammad sells cocaine from his apartment in the suburbs of Vancouver. What used to be a lucrative profession is going south for him and the economy is primarily to blame.

It might be surprising, but the saleability of Sammad’s product really does depend on how well the economy is doing, and in particular, how well males between the ages of 18–40 are doing in that economy. A lot of uneducated male workers are losing their jobs, and for Sammad, they are his prime clienteles. Compound this with police in the United States intercepting a major shipment from South America destined for BC, and you get a product with a skyrocketing price and a market that can’t afford it.

“A kilo of coke used to be 18 G’s, now it’s 42,” he complains. “I can’t even make a profit unless I sell these chinsy little bags. My half-grams used to cost $25; now they’re $40 and even then I only make, like, five bucks off each one.”

From here. Thanks to highryder in this babble thread for the link.

China's future darkens

The boom seems to have ended there:

China’s exports fell for the first time in seven years, more evidence that recessions in the U.S., Europe and Japan are driving the world’s fourth-largest economy into a slump.

Exports declined 2.2 percent in November from a year earlier, the customs bureau said in a statement on its Web site today. Imports plunged 17.9 percent, pushing the trade surplus to a record $40.09 billion.

China’s leaders pledged “more forceful measures” to help small companies and create jobs in statements within hours of the trade report. The export collapse intensifies pressure on the government to add to last month’s steepest interest-rate cut in 11 years, extend a 4 trillion yuan ($581 billion) spending plan and let the yuan depreciate.

“The figures are horrifying,” said Lu Zhengwei, chief economist at Industrial Bank Co. in Shanghai. “Plunging imports show that on top of faltering global demand, domestic demand is also shrinking as the economy cools.”

From Bloomberg. The long term situation may be far worse, though, if this story is accurate:

Two new reports – one from the Chinese government, the other based on criteria developed by the United Nations – should be enough to scare every government, economist and investor in the world about the future of the Chinese economy, currently the one global bright spot.

The underlying question raised by these reports is this: How can a nation’s economy grow when its soil is rapidly eroding and its water is rapidly becoming so polluted that it isn’t just unsafe to drink. It’s even unsafe for fishing, farming and factory use.

In short, how can a nation’s economy grow when its ecosystems appear on the verge of collapse?

As reported late last month by Xinhua, the official Chinese news agency, “A three-year investigation reveals almost 40% of China’s territory, or 3,569,200 square kilometers of land, suffers from soil erosion.” Reuters news agency put it this way: “Over a third of China’s land is being scoured by serious erosion that is putting crops and water supply at risk, a nationwide three-year survey has found.” The survey reportedly was carried out by China’s bio-environment security research team.

Thanks to meatball in this Kitco thread for the link. What will the consequences be for the rest of the world when a country with over a billion people (not to mention a substantial nuclear arsenal) finds that it can't feed itself?