8 April 2009

Today's must reads

World Economy Falling Faster Than in 1929-1930

Barry Eichengreen, an expert on the Great Depression, and Kevin O'Rourke, take issue with the notion that the current downturn is less severe than the Great Depression. While the slump in the US is not as bad, that mis-states the global picture.

Note that many economists expect the US to suffer less than the big exporters, namely China, Germany, Japan. The reason is that the economic adjustment required of surplus nations is greater than that of debtors. Similarly, in the Great Depression, the US, then a major exporter, was harder hit than the overconsuming importers such as Britain, who defaulted on their debts.

The one bit of cheer is that this time around, government action is more aggressive, but it remains to be seen whether it is sufficient.



The history of energy in the United States is really only 160 years old, with coal being utilized starting in 1850 and oil only becoming a viable fuel beginning in 1900. Essentially, the world has found lakes of oil under the crust of the earth. If you pump 82 million barrels of oil from a lake per day, the lake will eventually go empty. New lakes are found every year, but the easy to get to lakes have all been found. The new lakes are deep under the sea or in tar sands and shale deposits. These sources take as long as a decade to reach and billions of infrastructure investment. With petroleum in permanent decline, the U.S. needed to have a plan 20 years ago.
Source: Department of Energy
Matt Simmons, the brilliant energy analyst and author of Twilight in the Desert, recently told Reuters, "We are three, six, maybe nine months away from a price shock. We are not talking about three to five years away -- it will be much sooner. These prices now are dangerously low. The lower prices fall, the less oil will be produced and the greater the chance of an oil spike."


April 7 (Bloomberg) -- The cost of protecting bank bonds from default jumped after the London-based Times reported the International Monetary Fund’s estimate of toxic debt held by financial companies may rise to $4 trillion.

The IMF is expected to raise its estimates for U.S. bad assets to $3.1 trillion from its January estimate of $2.2 trillion, with estimates of another $900 billion of toxic debt from Europe and Asia, the newspaper reported. Financial companies worldwide have lost or written down almost $1.3 trillion since the start of the credit crisis, according to data compiled by Bloomberg.

“It’s a lot of dough,” Gary Jenkins, a credit strategist at Evolution Securities Ltd. in London, wrote in a note to clients. “The higher figure now seems to include geographic regions that were excluded from the earlier estimate.”



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