One can be forgiven for not understanding the state of our world today in terms of oil and its availability. A new article in Forbes assures us that peak oil is off, that the world is awash in oil. Meanwhile, an article from the current issue of The Economist claims the opposite: that oil supply is insufficient to keep up with demand. Meanwhile, the president is blaming high prices on those nasty speculators. So which of these competing claims is a person to believe?
For the uninitiated, peak oil is the point in time when maximum extraction of the world’s oil endowment is reached. Since oil is a finite resource, we can exploit it in increasing amounts until we can’t any longer, and flows begin to decline.
Tim Geithner, appointed to Secretary of the Treasury despite being unable to calculate his own taxes, has just proven he does not understand the role of oil prices in modern economies. Speaking at a breakfast today in Washington, Geithner claimed that:
“The economy is in a much stronger position to handle” rising oil prices, Geithner said…. “Central banks have a lot of experience in managing these things.”
This is the opposite of truth. Central banks do not, in fact, have a lot of experience in dealing with rapidly rising oil prices in a worldwide recessionary environment where there is no clear deflation nor inflation. Hell, central banks do not even have a lot of experience in managing an out of control real-estate bubble, or dot-com bubble, or any of the economic crises that hit over the past decade or so. Nor is the American economy in a “much stronger” position than it was in 2008, which was the last time a major oil price spike played a role in devastating the world economy.
In fact, there is no shortage of people arguing the opposite of Geithner. Let’s start with Fatih Birol, the chief economist of the International Energy Agency (IEA). Just yesterday, he warned of the danger of high oil price’s impact on the economy:
For some reason, our government and its propaganda arm, the mainstream media, refuses to give up beating the dead horse that is Cuba. We’ve had it in for them ever since they went Commie, and we’re not about to quit now! I just noticed this article from Newsweek entitled “Castro tells the truth about Cuba” which gives us the current bad news:
He has outlasted eight U.S. presidents, survived countless CIA efforts to do him in, and his communist regime has remained in power for a generation after the collapse of his Soviet sponsors. So what does the leader of the 1959 Cuban revolution think now of the system he created? Last week The Atlantic’s Jeffrey Goldberg reported Fidel Castro’s startlingly honest assessment: “The Cuban model doesn’t even work for us anymore.”
Some observers suggest that the 84-year-old Castro’s unexpected honesty may be a belated attempt to throw himself on history’s mercy. After all, they say, Cuba is in tatters. According to Andy Gomez, assistant provost at the University of Miami, tourism on the island has declined 35 percent this year, and remittances are expected to drop to $250 million—far below the peak of $800 million earlier this decade. Cuba’s own National Statistics Office has reported that economic indicators, such as construction and agriculture, were down significantly in the first half of the year. And last month, President Raúl Castro began a process of dismissing or transferring some 20 percent of state employees—a major move, given that the government employs more than 90 percent of the country’s labor force. Says Gomez, “The Cuban economy is the worst it’s ever been.”
How dare Castro “survive countless CIA efforts to do him in”, who does he think he is?? Anyway, some of these numbers are meaningless without comparison, so let’s look at the good-old U.S. of A.
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In this three-minute video, author Woody Tasch compellingly illustrates that “Economic growth is not synonymous with well being.” In fact, much of what we call “economic growth” is destructive.
Woody concludes: “We can’t just continue to grow our way out of our problem. In fact, ‘economic growth’ is often destructive.’”
My strategy is to disparage the ubiquitous media reports that applaud when the GDP is “up,” or when the “economy” is humming along. Those numbers assume that strip mining is better for the economy than conservation measures. They assume that rampant crime is better for the economy than fixing many of the root causes of crime– e.g., the “war on drugs,” injects violence into drug use and “allows” us to hire a lot more police officers, whereas decriminalizing drugs might cause the loss of law enforcement jobs. The many commentators who fetishize the GDP embrace a principle that prefers a violence-ridden police state. We need to dramatically shift our focus from measuring numbers of dollars flowing through the system to (admittedly more difficult task of) measuring the real quality of life.
Joseph Stiglitz is one of the greatest economists in the world. He’s held professorships at Yale, Stanford, Duke, Princeton and Oxford Universities, and now teaches at Columbia University. He was the chair of the president’s Council of Economic Advisors under Clinton. He served as Senior Vice President and Chief Economist at the World Bank from 1997 to 2000. He was awarded the Nobel Prize in Economics in 2001. There should be no disputing that he is eminently qualified in the field of economics, which is all the more reason for you to pay attention to what he says about the Federal Reserve.
Speaking at a conference held by the Roosevelt Institute, he said that if a country had come to the World Bank under his tenure seeking aid, while maintaining a financial regulatory system like the Federal Reserve, it would have raised very big alarms:
“If we had seen a governance structure that corresponds to our Federal Reserve system, we would have been yelling and screaming and saying that country does not deserve any assistance, this is a corrupt governing structure,” Stiglitz said during a conference on financial reform in New York. “It’s time for us to reflect on our own structure today, and to say there are parts that can be improved.”
At The New Republic, Simon Johnson and Peter Boone offer some eye-popping numbers to illustrate how big the big banks have gotten:
As a result of the crisis and various government rescue efforts, the largest six banks in our economy now have total assets in excess of 63 percent of GDP (based on the latest available data). This is a significant increase from even 2006, when the same banks’ assets were around 55 percent of GDP, and a complete transformation compared with the situation in the United States just 15 years ago, when the six largest banks had combined assets of only around 17 percent of GDP. If the status quo persists, we are set up for another round of the boom-bailout-bust cycle that the head of financial stability at the Bank of England now terms a “doom loop.”
From the same article, here’s more numbers to illustrate how big is big:
The big four have half of the market for mortgages and two-thirds of the market for credit cards. Five banks have over 95 percent of the market for over-the-counter derivatives. Three U.S. banks have over 40 percent of the global market for stock underwriting. This degree of market power brings with it not just antitrust concerns, which this administration has declined to act on, and a huge amount of economic risk–but great political influence as well. The banks are going to use that power to block legislation containing any meaningful financial reform. And they are likely to succeed.
Can we simply regulate banks? More bad news:
The idea that we can simply regulate huge banks more effectively assumes that regulators will have the incentive to do so, despite everything we know about regulatory capture and political constraints on regulation.
In their conclusion, the authors are not optimistic that the Obama White House has the will to push meaningful reform.
Writing at the NYT, Bob Herbert thinks that the U.S. desperately needs to turn things around. His concern is “frantic, debt-driven consumption, speculative bubbles, exotic financial instruments . . .” He’s not buying talk of our economic “recovery”:
We don’t hear a lot that is serious about the sorry state of the nation’s infrastructure or the trade policies that crippled so many American industries or our inability (or unwillingness) to compete effectively with China when it comes to the new world of energy for the 21st century or our abject failure to provide a quality public education for the next generation of American workers, scientists, artists and entrepreneurs.
Speaking at a conference here on Wednesday, Gov. Ed Rendell of Pennsylvania said that if we don’t act quickly in developing long-term solutions to these and other problems, the United States will be a second-rate economic power by the end of this decade. A failure to act boldly, he said, will result in the U.S. becoming “a cooked goose.”
How bad is the U.S. budget deficit? It’s so bad that I’ve lost sleep over it during the past year, even though the extent of the deficit rarely makes any local news. Here’s how Brett Arends of the Wall Street Journal summarizes the situation:
The federal government is expected to borrow $1.6 trillion this year, or about $15,000 for every household in the country. Over the next 10 years it’s expected to borrow a total of $8.5 trillion. And the government was already deeply in debt to begin with. . . Remarkably, the Treasury market has not yet panicked about the deficits: Yields have barely risen this week. Embedded in the market is a long-term inflation forecast of about 2.5 percent. I call that a dangerous complacency.
After giving the bad news, Arends gives some advice on how to protect your savings, though he doesn’t sound optimistic.