A couple days ago, I presented my views on the policy response to the financial crisis and the Great Recession in a UW Center for World Affairs and the Global Economy / UW CIBER / MITA and ICE sponsored event. The power point slides are here (big file, 1.3MB). I took the latitude as the invited speaker to expand the topic from the Obama Administration’s measures to encompass the response to the crisis and recession from both the fiscal and monetary policy authorities.

One slide I generated for the talk is of particular interest, when thinking about the combination of monetary and fiscal policies — it is the plot of consumption and household net wealth.

Figure 1: Log consumption, Ch.2005$ SAAR (blue, left scale) and log househld net wealth (red, right scale), Ch.2005$, deflated using PCE. NBER defined recession dates shaded gray; assumes last recession ended 09Q2. Source: BEA, GDP 09Q4 2nd release; Federal Reserve Board, Flow of Funds, March 11, 2010.

What is quite remarkable is the fact that real consumption expenditures have been essentially flat for a year and a half — even at a time when population has grown. (Since 08Q2, consumption has fallen 0.6 while population has risen 1.3%.) One question is whether the rebound in net wealth will support a resumption in consumption growth even as disposable income growth remains lackluster.

Another slide, pertaining to the rebalancing issue, is an update of my net exports/real exchange rate graph.

Figure 2: Log US dollar real broad exchange rate, lagged two years (blue, left scale), net exports to GDP (red, right scale), and net exports ex.-oil to GDP (green, right). NBER defined recession dates shaded gray; assumes last recession ended 09Q2. Source: BEA, GDP 09Q4 2nd release; Federal Reserve Board; and NBER.

If previous patterns hold, then — to the extent that the 08Q4-09Q2 dollar appreciation was understood to be transitory — the trade balance (at least the ex-oil component) should not deteriorate substantially going forward. This conclusion is consistent with the October IMF WEO discussed in this post.

As I’ve mentioned before, continued progress in keeping the trade deficit relatively small depends in part upon the trajectory of consumption. A resumption of consumption growth would be — all else held constant — desirable, but would tend to worsen the trade deficit. An exogenous upward shift in US exports would relax that constraint (as would further dollar depreciation). This is why the Obama administration has stressed export promotion [1] [2].

On a slightly different matter, the IMF provided an interesting heat map summarizing growth across the G-20, in this Staff Position Note.

Figure from IMF Note on Global Economic Prospects and Policy Challenges, February 27, 2010 – Seoul, Korea.

The map highlights the two-speed nature of the global recovery.

Update: 7:30am, Pacific

One of the graphs that didn’t make it into the presentation is an elaboration of how certain fiscal measures — EGTRRA, JGTRRA, and the total cost of operations in Iraq — limited the fiscal space available to policy makers. In the absence of these measures, we would not have to worry so much about rising debt-to-GDP levels. In other words, deep recessions are the times to run deficits, not in non-recessionary times.

Figure 4: Impact on budget balance, in billions of FY2010$, for EGTRRA; for JGTRRA; and budget authorization for operations in Iraq, FY01-FY10. Source: CBO, Budget and Economic Outlook: An Update (August. 2001), Table 1-4; CBO, Budget and Economic Outlook: An Update (August 2003), Table 1-8 (revenue implications only); A. Belasco, The Cost of Iraq, Afghanistan, and Other
Global War on Terror Operations Since 9/11,” Congressional Research Service report RL33110 (September 28, 2009), Table 3..

I first made this point about fiscal space (although I didn’t use the phrase) in 2006 [3].

Read more….

The Daily Reckoning

Financial Times: US Household Debt Falls for First Time Since WWII

Yes, dear reader, we have been a voice howling in the wilderness. First the wilderness around the Café des Dames in Paris’s 19th arrondissement…recently the wilderness of Bethesda, Maryland…and lately the wilderness near the Taj Mahal Hotel in old Bombay.

Reading the TIMES of India is a delight. We see that a politician has been given a colorful, over-the-table bribe…a garland made up of 50,000 thousand-rupee notes (about $1 million)…

..a headless body has been found in Kandivli…26 people were killed when their bus fell off a bridge…

..and that more than half the population defecates in public.

In fact, India is Number One in outdoor Number Two, if our dear, delicate readers know what we mean. It has 10 times as many people defecating in public as the runner up, Indonesia. The US didn’t even make the top ten.

The poor Indians. They can’t handle alcohol. Research shows that Indians suffer higher rates of heart disease if they drink. Even light drinkers face a 40% higher risk of heart trouble, according to the study. Heavy drinkers’ risk of heart problems is twice that of non- drinkers…still, well worth it, in our humble opinion…

“110,000 killed on India’s roads and railways,” says another news item.

“Is that all,” we asked a colleague. Every time we cross a road we narrowly escape death. And we’re being careful. Other pedestrians seem to ambulate in the middle of highways…beg between lanes of busy rush- hour traffic…and make daredevil dashes across chaotic intersections. It’s amazing more aren’t killed.

There’s also an item that shows how India’s civil justice system works. A landlord has finally won an eviction – thirty-three years after he went to court! The unauthorized tenant lived in the apartment for an entire generation before finally being booted out.

But wait…our beat is money. So back to the big money story…

Mainstream economists and mainstream financial media tell us that the worst is over…that the ‘recession’ has passed…and that things are getting back to normal.

Nope, we reply. Not a chance. The old economy that existed since the end of WWII is dead. No way could it recover; you can’t revive a corpse.

It was beginning to look as though we would have to eat our words: the cadaver was sitting up in bed and watching TV.

Everything was beginning to look eerily normal, after all. A year after the stock market hit bottom, it still has not resumed its downward slope. Businesses that should have gone bust are still in business. Politicians who should have been run out of town on a rail are still putting their earmarks on everything. Bankers who should now be parking cars are still making loans.

The government is still misleading… Economists are still mis- interpreting… Investors are still mis-understanding…

..it sure seems like things are back to normal!

But something important has changed. And here comes the proof from the good ol’ FT.

The FT, by the way, has the same dim economists as everyone else. While we wouldn’t trust a government employee to manage a coffee shop, the FT’s leading economist, Martin Wolf, thinks they can manage the whole world’s economy. It’s just a matter of getting the balance right, he thinks.

But beneath the surface of the flow of silly opinions and distracting noise, there is a powerful tide…an undertow that is sweeping everything out to sea. For the first time since 1946, household debt in the US is actually going down.

This is what de-leveraging is all about. The credit expansion is over. The tide has turned. Credit flowed for 61 years. Now it ebbs. No more increases in household credit. No more increases in consumer spending, over and above wage gains. No more extra sales. No more ‘growth’ at the expense of private sector debt.

It’s over.

Regards,

Bill Bonner
for The Daily Reckoning Australia

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More articles from The Daily Reckoning….

OPEC Expands Oil Rigs Most in Three Years as Quota Promises Prove Illusory

(Bloomberg) — OPEC is increasing oil drilling at the fastest rate in 2 1/2 years, even as production exceeds its quotas by the equivalent of a supertanker of crude a day and delegates prepare to pledge no increase in output.

The 12-nation group boosted its number of oil and gas rigs by 8.4 percent in January and February, the biggest two-month gain since June 2007, data from Baker Hughes Inc. show. OPEC members excluding Iraq pumped 26.8 million barrels a day last month, 1.9 million more than targeted, data compiled by Bloomberg show. Shipments will rise again this month, according to tanker-tracker Oil Movements.

While oil prices recovered from a four-year low at the end of 2008 as OPEC announced a record supply cut, excess production means the doubling in oil prices since then may have run its course, according to the Centre for Global Energy Studies and Commerzbank AG. The premium charged for crude deliveries in 2015 has plunged 43 percent in three months, indicating investors are less concerned of future shortages.

OPEC to urge compliance, keep output target steady

VIENNA (Reuters) – OPEC ministers due to arrive here for their meeting on March 17 say there is no need to change output targets with oil prices above their preferred range, but soft demand is prompting calls to curb overproduction.

“In my opinion, I don’t think we are going to see any change, even though inventories are high,” Qatar’s Oil Minister Abdullah al-Attiyah told Reuters by telephone on Monday.

Global LNG Shipments to Accelerate This Year, JPMorgan Says

(Bloomberg) — Liquefied natural gas shipments may grow at a faster pace this year because of the global economic recovery and plants increase output, JPMorgan Chase & Co. said.

“The last two months of 2009 global LNG exports were the highest on record,” Joseph Allman and Xin Liu, analysts for the U.S. bank, said in a report to clients on March 12. “Large new LNG liquefaction plants are ramping-up and several more are scheduled to start up through 2010 and into 2011.”

Power lines take shape in Iraq

DAMASCUS – It is now certain that the final results from Iraq’s March 7 parliamentary elections will not be out before the end of March. What we do know for sure is that voter turnout was impressively high, at 62%, and that the State of Law Coalition, headed by Prime Minister Nuri al-Maliki, has the lead across southern Iraq, within the capital Baghdad and in the oil-rich province of Basra, effectively winning seven provinces out of a total of 18.

Ex-prime minister Iyad Allawi, a secular Shi’ite and former Ba’athist, is also winning the vote in the predominately Sunni al-Anbar province and the controversial city of Kirkuk, which is inhabited by Arabs and Kurds. Both leaders are bracing themselves for the premiership – Maliki for a continuation, Allawi for a thundering comeback.

Chile May Face More Blackouts After 80% Lose Power

(Bloomberg) — Chileans braced for more blackouts after an outage yesterday left 80 percent of the population in part of the country without electricity, the result of grid damage from last month’s earthquake.

Explosions hit Nigeria oil amnesty talks

Two suspected car bombs have been set off in the Nigerian oil city of Warri, where officials were in talks over an amnesty for militants in the area.

Witnesses said the explosions shattered windows at the state governor’s office and sent officials fleeing for cover.

The militant group Movement for the Emancipation of the Niger Delta (Mend) had issued a bomb threat earlier.

Russia Rejects Eni Call to Merge Europe Gas Pipelines

(Bloomberg) — Russia isn’t considering merging its South Stream gas pipeline to Europe with the rival European Union-backed Nabucco link, Energy Minister Sergei Shmatko said.

South Stream is “more competitive” than Nabucco, Shmatko told reporters in Moscow today. Paolo Scaroni, chief executive officer of Italy’s Eni SpA, Gazprom’s partner in South Stream, last week said combining the two pipeline projects would save time and money.

Shell Said to Plan Oil Output Growth Out to 2020

(Bloomberg) — Royal Dutch Shell Plc, vying with BP Plc to be Europe’s largest oil and gas company, will outline a plan tomorrow to increase output every year until 2020, a person familiar with the company’s strategy said.

Chief Executive Officer Peter Voser, due to brief investors at an annual strategy update in London, will say Shell has a pipeline of more than 20 projects with the potential to sustain low single-digit average annual production growth in the second half of the decade, the person said, asking not to be indentified because the presentation hasn’t yet been made.

Arrow May Reject A$3.3 Billion Shell Bid, Review Says

(Bloomberg) — Arrow Energy Ltd. may reject a A$3.3 billion ($3.03 billion) takeover offer from Royal Dutch Shell Plc and PetroChina Co., the Australian Financial Review reported, without saying where it got the information.

Energy Secretary: renewables key to future energy needs

The U.S. Secretary of Energy wasted no time outlining his arguments for climate change legislation at a Houston energy conference, even as the governor of the state in which he was speaking is pushing back against the Environmental Protection Agency’s recent moves to regulate greenhouse gas emissions.

The Nobel Prize-winning physicist, Steven Chu, stressed that U.S. residents will live in a carbon-constrained environment in the near future, and while other countries, such as India and China, recognize this fact and are investing hundreds of millions in renewable energy resources, the U.S. has been slow to act.

Eugene gets EPA funds for transport program

The Environmental Protection Agency last week awarded the City of Eugene $104,126 to fund SmartTrips, a greenhouse gas reduction program. Next year, the money will help encourage walking and biking to reduce instances of individuals driving alone.

The money is a small portion of a nationwide grant worth $7.8 million and offered by Climate Showcase Communities Grants, an EPA division, to environmentally aware communities nationwide. Eugene was one of 20 cities and counties that received a grant.

Nuclear Bill Stalls in India, Delaying GE-Hitachi Venture Entry

(Bloomberg) — India’s government failed to introduce a bill intended to shield U.S. nuclear equipment suppliers from liability, delaying the entry of companies including General Electric Co.’s atomic venture.

Hall then and now: Former nuclear critic still an activist in changing times

Rep. John Hall, D-Dover Plains, a pioneer of the 1970s anti-nuclear movement as a rock star, and harsh critic of the Indian Point nuclear power plant as congressman, has voted for legislation that includes $7.5 billion for clean energy — including nuclear power.

Hall was, long before he got elected in 2006 to represent New York state’s 19th Congressional District, a rock ‘n’ roll singer, songwriter and guitarist with the hugely successful Woodstock-based band Orleans. In 1979, Hall, along with fellow rockers Jackson Browne, Graham Nash and Bonnie Raitt, founded the organization MUSE — Musicians United for Safe Energy. The group staged the famous No Nukes concerts, five nights of music at Madison Square Garden in September 1979. The concert raised more than $1 million.

Vestas Sells Bonds for First Time as Growth Slows

(Bloomberg) — Vestas Wind Systems A/S, the biggest maker of wind turbines, is selling bonds for the first time to diversify funding as growth in the market slows.

Kunstler: Where Have We Been; Where Are We Going?

Being an actualist, I’m in favor of getting real about things, and the reality we’ve entered is one of comprehensive contraction, especially for our cities. One of the reasons places like Cleveland (and Detroit, and Milwaukee, and St Louis, and Kansas City….) continue to fail in their redevelopment efforts is because they are already too big. They became overgrown organisms a while ago, unsuited to the realities of the future — especially the energy resource realities of the future — and they have tried everything except consciously contracting into smaller, finer, denser, differently-scaled organisms. In fact, the trend up until the so-called housing bubble of recent years was to just keep on expanding ever outward beyond the suburban frontier, which left our cities in a condition like imploded death-stars — cold and inert at the center, with debris speeding uselessly outward to an unreachable infinity.

This future we’re entering, which I call the long emergency, compels us to imagine our society differently. Our cities and towns exist where they do because they occupy important sites. Cleveland is where a significant river empties into the world’s greatest inland sea (which has the additional amazing benefit of being fresh water). Some human settlement will continue to be there, very probably a place of consequence, but it will not be run under the same circumstances that produced, for instance, the civic center of Daniel Burnham with its giant Beaux Arts courthouses, banks, and municipal towers.

EU’s Arctic Policy skating on thin ice

STRASBOURG – As global warming will open up new sea routes and make it possible to exploit oil and gas resources in the North Pole, MEPs discussed developing the EU’s Arctic strategy at the Strasbourg’s plenary session last week. EU High Representative for Foreign Affairs and Security Policy Catherine Ashton continued what was started by the Commission and followed up by the European Council last autumn, launching a debate on EU’s Arctic strategy.

Bjorn Lomborg: ‘Carbon cuts have got us nowhere in tackling global warming’

Sceptic or realist? Bjorn Lomborg speaks to Tom Levitt about why his ideas on tackling climate change will actually help to solve the crisis.

If You Care About The Climate Do Not Read This Article

Dear Pablo: What is the contribution to climate change by TreeHugger.com for each page view?

If the reverse-psychology of this article’s title got you please keep reading, you will find it interesting. Past articles have explored the environmental impact of the internet and the environmental benefits of shopping online but this time I am taking our favorite sustainability media outlet under the microscope. Let’s see what we can find!

Oil Production Gets Tougher

Abu Dhabi, the emirate that holds almost all of the United Arab Emirates’ oil reserves, has ambitious plans to boost oil-production capacity to 3.5 million barrels a day by 2017 from about 2.8 million barrels now. But meeting and maintaining the output target won’t be an easy task.

The crude reservoirs that are easiest to access have already dwindled. Extracting the remaining reserves is becoming more complicated and expensive.

Joining the Nuclear Club

It may seem odd for a country sitting on one of the world’s largest oil and gas reserves, but the United Arab Emirates has an energy problem—one that it hopes to solve by building nuclear power plants.

Most of the power stations in the U.A.E. run on natural gas at present. But the country is running short of this commodity. Much of the gas that the country produces has already been sold through long-term export contracts or is being used to help extract oil or produce petrochemicals. The U.A.E. is already importing gas from neighboring Qatar, the only country in the region that doesn’t face a gas shortage.

On top of this, every barrel of oil or cubic meter of natural gas that the country burns to meet its own energy needs is a barrel or cubic meter that it can’t sell. With oil prices hovering around $70 to $80 a barrel, that adds up to quite an opportunity cost. Far better to export the country’s hydrocarbon wealth and use some of the proceeds to invest in new energy sources to meet growing domestic demand.

Oil Refinery Slumps Together With Worldwide Oil Demand

“Global financial and economic crisis are eroding oil and gas demand. The financial crisis in the U.S. has had a domino effect worldwide which in turn may stem the flow of capital expenditure by exploration and production (E&P) companies,” adds Collier.

Oil trading price predictions for 2010 to 2012

Oil prices are back on their way up and currently, oil trading prices on global markets have hit highs last week for 2010 for both NYMEX Light crude oil and ICE Brent crude oil futures. So, the golden question is, what’s in store for the rest of the year and what’s the price oil going to be in the future years, 2011 and 2012?

Of course that question is impossible to answer with any accuracy because of poor oil reserve data, the obscure intentions of oil producers and elasticity effects that lead to oil demand destruction or substitution. However, it is possible to do simple minded extrapolations of recent price behaviour to see what might happen if various trends continue.

OPEC has little wiggle room at upcoming meeting

VIENNA — With U.S. demand for oil lackluster, even traditional OPEC price hawks like Iran and Venezuela are happy with present prices near $80 a barrel as they head into Tuesday’s meeting of the 12-nation organization.

These two countries traditionally are the greatest advocates of tight OPEC supply. But ahead of their meeting there is informal unanimity among OPEC oil ministers that – with the world’s economic recovery feeble at best and crude prices at preferred levels – it’s best not to rock the boat.

Cnooc Turns to Ventures in Global Oil Push After Unocal Defeat

(Bloomberg) — Cnooc Ltd.’s failure to buy Unocal Corp. for $18.5 billion in 2005 taught Chairman Fu Chengyu a lesson: use overseas ventures rather than takeovers to gain the global oil resources China needs.

The natural gas story

If there’s a headline from the recent CERAWeek conference here that deserves to be flashed in neon to President Barack Obama and the rest of the nation, it is this one: “Domestic natural gas is clean, cheap and plentiful — look here for answers, Mr. President, as you seek energy security.”

Indeed. Natural gas appears to be all those things — and maybe much more. A report by IHS Cambridge Energy Research Associates, released here last week, confirms that North American gas potential has tripled in just the past three years.

Technology and abundant gas extending the fossil fuel era

It was a star studded attraction, with the movers and shakers of the energy world almost on their annual pilgrimage – the CERAWeek – at the Hilton Americas-Houston downtown. And with Houston the “ecosystem for the world’s energy,” there could be no better place for the august gathering.

With roughly 2,200 in attendance, the IHS Cambridge Energy Research Associate’s annual energy forum, held under the title, “Energy: Building a New Future,” reflected the renewed optimism in the global scenario. Yet it also suggested the uncertainty that exists. While the worst of the recession may be over, and this indeed is open to debate, yet one certainty exists – what’s ahead for the industry is unlikely to look anything like the past.

Natural gas exceeds 24% of world total energy mix and going higher

Big oil appears to be making natural gas the core of its business. The abundance of it combined with low extraction cost seems bound to change the energy landscape forever. ExxonMobil, Royal Dutch Shell and ConocoPhillips are making the transition from crude oil to natural gas. Currently in focus is the shale gas business which is profitable if run on an assembly line basis. U.S independent energy companies were the first to exploit the shale gas potential. Now the majors are coming fast.

As Its Arms Makers Falter, Russia Buys Abroad

Russian-made cars may be rickety, and its passenger airplanes such fuel-guzzlers that even the country’s flag carrier, Aeroflot, has switched to a mostly Western fleet. But Russians could always point with pride to the fearsome reputation of their weapons — the Kalashnikov and the MIG and Sukhoi fighter jets.

Indeed, until recently, Russia’s military exports were second in volume only to the United States.

But in today’s Russia, the $40 billion military equipment industry is withering alongside civilian manufacturing.

Spate of Myanmar privatisations raises questions

BANGKOK — Myanmar’s junta has embarked on a flurry of privatisations of state firms, raising questions about whether it is reforming the economy or trying to take profits before 2010 elections.

The military government, which faces strict Western sanctions because of its human rights record, is trying to sell off petrol stations, ports and state-owned buildings including cinemas and warehouses.

Saving U.S. Water and Sewer Systems Would Be Costly

As city employees searched for underground valves, a growing crowd started asking angry questions. Pipes were breaking across town, and fire hydrants weren’t working, they complained. Why couldn’t the city deliver water, one man yelled at Mr. Hawkins.

Such questions are becoming common across the nation as water and sewer systems break down. Today, a significant water line bursts on average every two minutes somewhere in the country, according to a New York Times analysis of Environmental Protection Agency data.

Conn. would waive student loans in ‘green’ jobs

HARTFORD, Conn. — Paul Goulet hopes Connecticut will help him get from under nearly $8,000 he’s borrowed for college after losing his job in a paper manufacturing plant.

Goulet, 55, is a student in environmental studies at Goodwin College in East Hartford, aiming to find work in wastewater treatment. State legislation that would waive thousands of dollars in loans would benefit him and other students who earn degrees or certificates in green technology and other jobs.

Bees in the City? New York May Let the Hives Come Out of Hiding

New York City is among the few jurisdictions in the country that deem beekeeping illegal, lumping the honeybee together with hyenas, tarantulas, cobras, dingoes and other animals considered too dangerous or venomous for city life. But the honeybee’s bad rap — and the days of urban beekeepers being outlaws — may soon be over.

On Tuesday, the Department of Health and Mental Hygiene’s board will take up the issue of amending the health code to allow residents to keep hives of Apis mellifera, the common, nonaggressive honeybee. Health department officials said the change was being considered after research showed that the reports of bee stings in the city were minimal and that honeybees did not pose a public health threat.

The officials were also prodded by beekeepers who, in a petition and at a public hearing last month, argued that their hives promoted sustainable agriculture in the city.

Leaders answer our readers’ questions

Q: Given that the effects of peak oil are most likely to begin being felt during this term of Parliament, how will you lead the response to the challenge in Tasmania?

Cuba’s green revolution — achieving sustainability

Applying the yardsticks of conventional economics to assess Cuban society (for example focusing on disposable income, gross domestic product or levels of consumption) commentators often conclude that the revolution has failed to pull the Cuban people out of poverty.

But such criticism omits the facts that: the Cuban state guarantees every citizen a basic food supply; most incomes are not taxed; most people own their own homes or pay very little rent; utility bills, transport and medicine costs are symbolic; and the opera, cinema and ballet are cheap for all.

MENA Has The Potential To Become One Of The World’s Largest Producers Of Renewable Energy

The Middle East and North Africa (MENA) region has the potential to become one of the world’s largest producers of renewable energy. Renewable energy industry developments combined with the region’s potential in wind and solar power could create significant advantage for countries that move to capitalize on them, according to a new study by Booz & Company.

Charging Ahead: Electric Vehicle Rollout On Track In NW

The West Coast is about to take part in the biggest rollout of electric cars and charging stations in the world.

The first mass-market electric cars go on sale in greater Seattle and Oregon’s Willamette Valley at the end of this year. Pollsters are finding high interest in the Northwest in electric cars.

If you’re one of those curious drivers, now is your time. Tom Banse has the latest on what prospective plug in car buyers need to know.

Firefly Energy gives up battery business

PEORIA — Firefly Energy Inc. filed for Chapter 7 bankruptcy Friday, and both the city of Peoria and Peoria County will likely pursue legal action to regain the $6 million the governments loaned the start-up in 2007.

…The high-tech start-up company was founded in 2003 by Williams and Mil Ovan, who was senior vice president. The company developed and manufactured a lighter, powerful lead-acid battery, replacing lead plates with graphite foam.

Kurt Cobb: Ocean acidification: Why the climate change deniers don’t want to talk about it

Most people know that the release of carbon dioxide into the air from human sources has contributed to rising global temperatures and massive increases in the rate of melting of the ice at the poles and on Greenland. One of the major consequences they may not know about is the acidification of the oceans.

Mexico, The Caribbean, and Central America – The Impact of Climate Change to 2030: Geopolitical Implications [PDF]

The panelists concluded that through 2030 climatic changes in the region may aggravate civil unrest and internal conflicts leading to increased migration, and that strong, centralized states, and states with robust civil societies, will likely fare better than others.

Although the region does not contribute to significant global greenhouse gases, it is highly vulnerable to the effects generated by increasing climate variability. Rising temperatures, rising sea levels, increased rainfall in some places, drought in others, and a greater frequency of extreme weather events such as hurricanes, floods, and heat waves are expected from climate change.

If a person were to listen to Energy Secretary Steven Chu or National Geographic’s Aftermath: World Without Oil, one might think that our energy problems are fairly minor and distant. We can easily add sufficiently renewable energy to substitute for fossil fuels in a fairly short time frame. All we need to do is put our minds (and pocketbooks) to it.

But if one looks at the situation more closely, one discovers that the situation is quite different. Our energy problems are close at hand, and solutions using what are optimistically called “renewables” are distant and may very well sink the country further into recession.

US energy consumption is already down quite a bit–some might say due to recession, but it seems even more likely that the result is the other way around–high energy prices squeezed the financial system. This in turn caused credit availability to drop and demand for oil, gas, and coal to drop. We have put a huge amount of effort and subsidies into wind and solar, but they hardly show up on the chart. Ethanol isn’t shown separately in the chart this data was taken from–instead it is combined with wood and with other biofuels in a category called “biomass” in the EIA data. The biomass line has thickened a bit, but it is still pretty insignificant.

The following are a few observations about our current situation:

1. Even though wind, solar photovoltaic (PV), geothermal, and ethanol are called “renewables”, they cannot be produced without fossil fuels, and need fossil fuels for maintenance.

In many ways, these energy sources should be called “fossil fuel extenders” rather than renewables, because they are very dependent on our current system. For example, growing corn for ethanol depends on tractors run by diesel for growing the corn, and natural gas or coal to power the ethanol plant. Corn is fertilized using fertilizers which are often imported, and sprayed with oil-based insecticides. Wind turbines require regular maintenance, and need to be part of an operating electrical system with fossil fuel back-ups. Solar PV will continue to make electricity once they have been made, but will not produce round-the-clock electricity unless they are part of an electrical system (which requires fossil fuels) or have battery backups which are replaced every few years (also requiring fossil fuels).

2. World oil production appears to have peaked. If it has not reached its maximum level, its maximum level is likely only a few years away.

World oil production was increasing quite rapidly through 2004 (except for slowing down during recessions). In 2005, the rate of increase dropped, and production has been on a bumpy plateau since–although 2009 appears to be possibly headed downward–or at most on a continuing plateau for a while, before heading downward. There is no longer oil to be found which can be produced inexpensively–most of it was found long ago, and has already been pumped.

Newer sources of oil tend to be more expensive. If economies could really afford $200 or $300 or $400 barrel oil, and had unlimited capital, perhaps production could increase some more. But at some point, we run short of capital for more and more expensive new production, and the high price of oil tips the economy into recession and dampens demand.

Many analyses are reaching the same conclusion about world oil production. Just this week, a new study from Kuwait predicted oil production may reach a peak and decline in 2014. The International Energy Agency has also been talking about the possibility of a peak before 2020.

3. Whether the peak in production is from Peak Supply or Peak Demand, the result for the consumer is equally bad–recession, reduced job availability, and increasing loan defaults.

It does not really matter whether one puts the label “supply constraint” or “demand constraint” on the resulting drop in production–the effect is the same. Prices are still high relative to historical prices, even through the world is struggling to emerge from recession, as shown in Figure 3 below.

Oil is essential for food production and transportation. Consumers tend to cut back on discretionary purchases (causing recession) or to default on their loans, if their budgets are squeezed by high prices oil prices. James Hamilton was one economist showing a link between high oil prices and recession.

4. Scaling up renewables to replace fossil fuels in current quantities does not look like it has much of a chance of succeeding, even in the long term.

One issue is the point made previously–it takes fossil fuels to produce renewables like wind and solar PV. Also, Figure 1 shows our success in scaling up so far has been quite limited. Scaling up ethanol further would require taking a huge share of our corn crop. Cellulosic ethanol isn’t working out to date, and may never work out. Wood and other biomass is limited in supply, limiting production if it could be perfected.

There may be some particular applications of renewables which may turn out to work out well–for example, natural gas from waste, or biofuel from waste grease. But these tend to be limited in quantity.

Even if we were to, say, discover a way of producing biofuel from algae economically, it would years to work out the details of scaling production up, and a huge amount of investment (and fossil fuels to make tanks and other apparatus) to actually produce the biofuel in quantity. One would probably be looking at more than 30 years before the process could be scaled up sufficiently to start replacing a significant share of our oil production.

5. Natural gas will not solve all of our problems.

There has been considerable publicity about the US having “100 years of natural gas” available at current usage levels. There are several issues, however:

a. Natural gas will not run in our current vehicles. Fixing vehicles to run on natural gas, and adding infrastructure to deliver the gas, is likely to be expensive and take quite a few years.

b. If we were to use natural gas for transportation, supply would run out very quickly–perhaps 20 years or use, or even less. Look at natural gas use, compared to oil use on Figure 1.

c. It is not clear that the “100 years of natural gas” is available at prices consumers can afford. If the price is high, we may very well have the same “peak demand” issue we have for oil–people will not be able to afford huge electric bills and huge home heating bills–say double today’s level.

d. Scaling up natural gas faces huge challenges. Our infrastructure is only built for the current usage of natural gas. Adding more pipes, storage, and end usage is very expensive and time consuming. If the timing of the new infrastructure is slower than the increase in gas production, gas prices are likely to plunge or stay too low for profitability.

e. There are concerns regarding “fracking” near major water supplies, such as that of New York City. Expansion of natural gas may not occur to the extent that many are hoping will take place in the 100 year supply numbers.

6. If increased drilling is done in the US and offshore, is likely to have modest beneficial impact on oil supply, but it is highly unlikely that it will solve our problems.

Gary Luquette, President of Chevron North America Exploration and Production recently wrote:

The good news: the OCS [Outer Continental Shelf] has significant potential. Over time, it could add 1 million more barrels of oil and natural gas equivalent a day–potentially representing a fifth of the current total U.S. oil production. Advances in technology could increase that amount dramatically.

One million barrels of oil and natural gas equivalent is great–certainly more than what we are getting from biofuels or from wind or solar. If one adds additional onshore production, it could be more than this, perhaps another 1 or even 2 million barrels of oil and natural gas equivalent a day.

But remember, this isn’t even all oil–part of this is natural gas, the problems of which were described in Item 5, above. Compared to the world’s oil supply, an additional one million barrels of oil a day about 1% of world oil production. Compared to US oil usage, an additional one million barrels of oil a day is about 5%. So the additional oil supply would be helpful, (as would the additional jobs, and reduction in needed imports), but it wouldn’t solve all of our problems.

Also, if the price of the new oil supplies turns out to be too expensive (because, for example, the cost of drilling in deep water is too expensive), we may find that the new supplies are really more expensive than the economy can afford. Oil prices may remain below the cost of production, bringing a fairly quick end to new production–oil companies will soon quit production, if deep sea (or other new production) is clearly a money loser.

7. Renewables tend to be high priced. If our big problem with oil is high price, renewables will not solve our problems.

Subsidies only hide high price–the cost to the economy is high, with or without a subsidy.

If we can find cheap renewables, it would be in our interested to expand them as much as possible. But expanding expensive renewables should be done with great caution, in my opinion. We have no guarantee regarding how long the renewables will last–wind is likely only to last as long as fossil fuels supplies are available. Just because an analysis is done assuming that wind (or another energy source) will have a 40 year lifetime doesn’t mean it will actually last that long.

The fault lines in the U.S.-China
relationship have been increasingly exposed in recent weeks, with
rhetorical barbs exchanged on trade, the treatment of foreign
companies in China, strategic issues such as U.S. support of Taiwan and
Tibet’s Dalai Lama, responses to Iran’s nuclear ambitions and especially
exchange rates. Domestic consensus in the U.S. on the need for action with
regard to the renminbi
(RMB) is growing. Chinese leaders, including Premier Wen Jiabao, have recently
hit back at the U.S. for what they characterize as interference in China’s
security and economic affairs and U.S. economic mismanagement. Today’s note
draws from two recent pieces of RGE Analysis, “U.S.
China Tensions: Co-Dependency Pains” and “Who
Will Buy the Treasurys?” in which we examine the quest for the new normal
between the world’s largest creditor and debtor. Given the importance of the
relationship to global trade, growth and security, RGE believes that the two
countries will avoid a full-blown confrontation, but uncertain relations and
tit-for-tat trade policies could constrain global growth.

Finding the New Normal

The friction suddenly afflicting the world’s most watched bilateral
relationship stems from a struggle on the part of both China and the U.S. to
find the “new normal” wrought by the changing dynamics of global economic and
political power and influence since the financial crisis. To some extent, the
financial crisis exacerbated ongoing structural changes that elevated the role
of emerging markets in the global economy and increased their influence in
debates on financial
regulation, trade
and currency policy. China’s ample resources,
together with its ability to encourage its banks to lend and its state-owned
enterprises (SOEs) to spend, also allowed it to be opportunistic, adding
sharply to its resource
holdings and supporting cash-strapped countries and companies during the
recession. Yet its leverage on U.S. policy seems overstated, particularly as
China’s willingness to diversify away from U.S. assets remains constrained by
its desire for stable economy policy. Moreover, its economic apparatus is
stronger than its security position. In this environment, there is a risk that
one or the other player might overplay its hand or badly misinterpret the
intentions of the other.

In part this normalization reflects the fact that the pressure for bilateral
and multilateral cooperation, which helped stave off a near depression in 2009,
has diminished. Given the role of the U.S. and China in sparking—and ultimately
easing—the crisis, it was no surprise that bilateral tensions would be
suppressed during this period as both countries looked inward to support
growth. China, and to a lesser extent, some of the other emerging market
economies, have not yet fully embraced the economic and political multilateral
policy initiatives that will help mediate the changes and continuities of the
global economic order. By the same token, the existing institutions still do
not reflect some of these changes. The G20’s rise to prominence does provide a
potential venue for such negotiation, but it remains too large and diverse to
be efficient, and many different policy goals have been thrust onto its agenda.

Although political tensions appear to have heightened after December’s Copenhagen
climate change meeting, in part due to the American perception that China’s
behavior prevented a more ambitious agreement on carbon emissions from
taking shape, at least some of the recent friction seems designed to play to
their respective domestic constituencies. The U.S sells weapons to Taiwan;
China threatens sanctions on U.S. defense contractors; President Obama meets
with the Dalai Lama, and China cancels bilateral military parleys; meanwhile,
both cry foul with respect to the other’s economic policies in their legislative
meetings.

The lull in the cycle of diplomatic summits and visits since the Copenhagen
meeting has contributed to the falling out. But the diplomatic cycle picks up
again in April, with President Hu Jintao expected to attend an April summit on
nuclear proliferation in Washington, while U.S. officials prepare for the next
round of the U.S.-China Strategic
and Economic Dialogue (S&ED) scheduled for this summer in Beijing, as
well as upcoming G-20 meetings. Each side will probe for new sources of
leverage, and further chiding in public may be inevitable.

Still, the past several months have revealed some dangerous misperceptions.
Last year the Obama administration pushed for China’s cooperation on a global
climate change deal, but expectations that China would ever sign a binding emissions
deal that might slow its economic growth seemed optimistic at best.
Recently, China appears to have pressed U.S. diplomats to foreswear future
weapons sales to Taiwan in return for cooperation on Iran, a position the
administration could not legally take. RGE does not think either side will
seriously overplay its hand in 2010, but the risk is that, in areas where
contact is infrequent and superficial, like military-to-military ties, one side
may adopt policies or postures which inadvertently provokes the other. The
first year of the Obama administration saw diplomatic exchanges increase across
the board, with rather dramatic results on some under-the-radar issues like
clean tech. While each side has taken the recent lull in diplomatic exchanges
to recalibrate, the resumption of these exchanges may struggle under the burden
of recent tensions. Meanwhile, other U.S. allies, ranging from Australia to the
Europeans, seem to be calling on the U.S. to retain its firm position with
China, a message that may pervade President Obama’s Asia trip next week.

The tit-for-tat trade
tensions seem fated to continue simmering into 2011, given subdued global trade
growth, but RGE regards it unlikely the U.S. will to declare its second-largest
trading partner a currency manipulator, which would set in motion an economic
and political response. China will drag its feet on Iranian sanctions, but
ultimately it is not in a position to block any deal on Iran’s nuclear program
if Russia is really on board. Yet in the medium-term the coincident political
cycle in the U.S., China and Taiwan could prove dangerous, with each country
holding presidential elections (or a Communist Party succession in China’s
case) in 2012.

Read more….

The Great Recession of 2008-2009 was triggered by excessive
debt accumulation and leverage on the part of households, financial
institutions, and even the corporate sector in many advanced economies.
While there is much talk about de-leveraging as the crisis wanes, the
reality is that private-sector debt ratios have stabilized at very high
levels.

Read more….

The central bank of Iceland lowered its interest rate by 50 basis points to 9.0%. It also said it would slash the deposit rate to 7.5% from 8% and overnight rate to 10.5% from 11%. The recession-mired economy owes near $5 billion to U.K. and Netherlands and seeking international aid to end the dispu…

Read more….

Zero Hedge

Looks like this is going to get done.

SCHUMER: CHINA FX’ONE OF THE CAUSES’ OF GLOBAL RECESSION
SCHUMER: CHINA CONTINUES TO ‘GAME THE SYS’ ON CURRENCY
SCHUMER: CHINA FX’HAMPERING’GLOBAL ECONOMIC RECOVERY
SCHUMER: ‘GROWING CONSENSUS’ON CAP HILL RE CHINA FX MANIPULATION
SCHUMER: WILL TRY TO ADD CHINA FX BILL TO’MUST PASS’ LEG

We are now taking bets what China’s re-re-retaliation to this next step will be.

More articles from Zero Hedge….

By Karl Denninger, The Market Ticker

Let’s put a bit more color on my morning HAMP Ticker – this time at a more-macro level of the economy.

To recap, here’s the table in question:

From this we can “back in” to the median annual income of these completed mods.  If $837.86 is the median home payment and post-modification it is 31% of gross income (Front end ratio) then we get $2,703 a month in median income, or $32,433 a year.

This is gross income – that is, before taxes.

As I pointed out such a person will pay (monthly) $206.70 in FICA and Medicare tax (the half they “see” in their check) and will have another $300 or so a month withheld in federal income tax.

So we start with a “baseline” of $2,196 monthly that comes in the door (ex payroll and federal withholding taxes, but not accounting for state income tax.)

We know, however, that these people have 59.8% of their gross income that goes to all debt service (house and all other mandatory debts), which means that they have $579.30 to spend on everything other than that mandatory debt service a month.

Now realize this: “Mandatory” debt service only includes minimum payments on revolving accounts such as credit cards!  Making a minimum payment on a credit card, while charging nothing new, results in a pay-down period of many years.  But most people will charge back up at least the principal paid down (which isn’t much when paying the minimum especially if you have a 29% interest rate!)

Diane Olick and other analysts say that 2 million homes have “started” HAMP.  Of those only something like 16% have wound up in permanent modifications – under 200,000 – which is what the above represents.  In addition, another 2 million+ people have gone delinquent since the HAMP program began.

The remainder of the HAMP “starts” either have not or will not lead to permanent modifications.  That is, their internals are either worse than or equal to the above – it is almost impossible they are better, or they’d be permanent modifications.

Let’s put color on this.  According to Diane Olick 7.5 million homes are either delinquent or in foreclosure.  23% of those delinquent properties have been so for more than a year yet have not foreclosed. 

These are people who are spending in the economy, propping up GDP and economic numbers, because they are making no payment on their house at all.

Let’s remember that when these loans “resolve”, no matter how they do, that spending power will instantly evaporate in the economy.  Whether their loan is modified into a “sustainable” one (ha!) or whether they are ejected from their house and become renters either way the more than $1,000 a month they are not paying for their mortgage, but are instead dumping into consumer spending will evaporate as they will be forced to spend that money on housing once again.

This is not an inconsequential amount of money.  If we assume the “average” amount not tendered in mortgage (and spent into the economy) is $1,000 per month per home, this is $7,500,000,000 – or $7.5 billion a month (that is, $90 billion a year) that is being “contributed” to the economy falsely and will come back out – one way or another.  It simply must.  This is a bit more than 1/2% of GDP – hardly insignificant – and that consumer spending fuels economic activity with a multiplier effect (the money these people spend at Starbucks pays the employees of Starbucks, who then spend THAT money into the economy.)  There is much argument about the multiplier effect of various government spending programs, but there is less dispute that private spending always has some multiplication factor associated with it.  Therefore, the $90 billion number is understated – the gross GDP “goose” from these defaults may be as high as double that $90 billion, or 1% of GDP!

To this we must add the positive impact of credit-card and other defaults.  The paradox is that failing to pay down debt – that is, defaulting instead of paying as agreed, actually increases GDP, because such a refusal to pay down debt while the money is spent elsewhere causes consumption to be supported.

This, along with the “fiscal juice” from running $1.5 trillion in deficits, are two of the biggest issues facing a “sustainable” economic recovery.  The refusal to understand this dynamic is responsible, in large part, for the (false) belief that our economy is in fact recovering.

You can’t really blame most of the ToutTV and media idiots for their lack of thinking in this regard.  It requires analysis, which none of these folks actually do, in order to suss out what’s going on.  We haven’t had a debt-overhang-fueled recession for 70 years – the last one was The Depression in the 1930s.  Literally none of the current reporters and pundits was alive and trading in the markets or anywhere else the last time it happened, and all we have is a (biased) historical record – an incomplete recollection.

How many people think that the 1920s – the “Roaring 20s” – were a time of fiscal reason and a booming economy?  Nonsense.  The “Roaring 20s” were a time of rampant speculation and debt-binging.  The illusion of prosperity was bought, paid for and maintained the same way it was this time in the 2000s – with debt.  Yet if you read “history” you will find scant if any mention of this fact.

We’re not out of this one folks, and we’re not going to get out of it either, so long as we keep pretending that loans that aren’t performing – and can’t – are “money good.”  Further, the temporary and ethereal “boost” to consumption and thus GDP that comes from debt defaults will dissipate.  It mathematically must, as eventually creditors run out of cash flow to maintain the illusion that they have “performing” assets when payments are in fact not being made.

More articles from the Market Ticker….

Or, counterfactuals, yet again.

Or, rejoinder to Casey Mulligan, Joseph Lawler, david, tim kemper and others.

From the WSJ March survey survey of forecasters, the results indicate that instead of the 0.15% growth rate recorded in 09Q4 y/y growth, the growth rate would have been -0.93%. For 2010Q4 Q4/Q4 growth, they forecast 3% growth, and in the absence of the ARRA, they would have predicted 2.2% growth.

In addition, 75% of the respondents believed the stimulus plan was a net positive for growth, 12% a net negative, and 14% neither.

In Figure 1, I depict log GDP, the implied path for GDP according to the WSJ survey, along with the 20% trimmed hi/low, and the levels of GDP implied in the absence of the ARRA (i.e., the “counterfactual”).

Figure 1: Log GDP in Ch.2005$ (blue), mean WSJ forecast (red), and 20% trimmed high (pink) and trimmed low (gray) forecasts, mean predicted GDP in the absence of ARRA (purple square), and CBO estimate of potential GDP (black). Trimming removed the top 5 and bottom 5 forecasts out of 54 responses. NBER defined recession dates shaded gray, assuming recession end is 2009Q2. Source: BEA 2009Q4 2nd release, WSJ March survey, CBO, NBER, and author’s calculations.

More on counterfactuals: [1], [2], and [3].

Read more….