The New Economy

This is a fine article that spells out the reality of the failing credit system. The first break last fall told us that the system was clearly broken. The remedies to date have merely postponed the application of real remedies. In the meantime, all that bad debt is sucking up liquidity as desperate people try to keep things financially afloat. We are passing through an era of de leveraging with a vengeance.

The hope is that all distressed inventory will be recycled back into the market successfully over the next three years. While this is happening, wages are dropping and that movement is impossible to quell. We see the auto industry, but we do not see yet the move to out source the medical industry to India and China who are becoming chock a block with US trained professionals.

It is a hard pill to swallow, but global wages are inexorably reshaping the labor market. This force will take decades to run its course and we will end up with a true global economy in which local labor and product monopolies are snuffed out.

I have explained how the credit system can be presently jump started. Barring that, we have to allow most everyone to go through insolvency and to pass the loss on to the banking system and ultimately back to the Federal Reserve. Once the bulk of indebtedness is resolved as happened in Japan over a decade, it becomes possible for the consumer to rebuild their credit.

While this is all happening, business will operate at a much lower turn over.

We continue to be run by well meaning people guided by economists who have no grasp of market operations exacerbated by the fact that everyone is trying to save their skins. The folks who understand markets are fixated by the fact that they are utterly bankrupt and will shortly have to jump from a tall building. The folks who do not understand are deathly afraid to make a decision. And so it goes.

Feel sorry for the poor American worker who must now look forward to much lower wages. In the long term, third world wages will rise briskly, since most are now in the market place and are becoming consumers them selves. Trouble is, the long term is over the next forty years. None of us can wait for that happy day. It is also a lot easier if our wages sit still while this all happens.

The turn around itself must come from an abrupt shift out of the oil economy over the next four years. That alone can regear the economy and put paychecks into everyone’s pocket.

The Economy's Search for a "New Normal"

By Shamus Cooke

URL of this article: www.globalresearch.ca/index.php?context=va&aid=13646

Global Research,

May 17, 2009

When the reality of the economic crisis first made itself known, many who realized what was happening dubbed it “the greatest crisis since the Great Depression.” This description was more than bombast; it was a sober analysis of the immensity of the economic problems in the country — problems that had been building up for years. The mainstream media is now — for political reasons — in a constant clamor for the economy's elusive “rock bottom.” This is so people will be more hopeful, less agitated, and more willing to let those who destroyed the economy continue running the country un-challenged. Every time a new economic indicator comes out that wasn't “as bad as expected,” Wall Street cheers and politicians give their “we've turned the corner” speeches. Reality is thus turned on its head.

Regardless of what the media says, the reasons for calling this crisis the “worst since the Great Depression,” still exist. Not only this, but new problems are being created that are compounding the old.
One of the original, major concerns of the economy was the fact that the banks were bankrupt. This problem still persists, even after trillions of dollars of taxpayer money was given away, not to mention a “stress test” where the banks in fact “negotiated” the terms of the test. By pretending this problem doesn't exist, the Obama administration is continuing the Bush-era approach to the banks: don't ask, don't tell. Banks will thus continue to be bailed out when their problems are too explosive to be ignored; credit will continue to be restricted, and a general level of instability will taint the system itself.

Another major problem of the economy is that consumers are bankrupt. Unemployment continues to skyrocket, ensuring that every month hundreds of thousands of less people will be able to consume, driving more establishments out of business. The people who lose their jobs thus fail to pay their mortgages, credit cards, student loans, etc., all furthering the losses of the banks.

The issue of debt is fundamental to understanding the current crisis: households, corporations, banks, and the government have all taken on massive levels of debt.

Getting rid of the debt is often referred to as “de-leveraging.” On all levels of society a gigantic de-leveraging is taking place; and only after this process is done will the elusive “bottom of the recession” be found, amidst a society that looks far different than the one we're used to.

For example, households are rapidly getting rid of expenses they can no longer afford, due to either joblessness, low wages or lack of credit. They are thus saving more than they are spending. For an economy that depends on 70 percent consumer spending, this is a huge problem, not only for the U.S., but for the world as well, since many countries constructed their economies as export machines directed towards U.S. consumers.

Is this problem likely to go away anytime soon? Probably not. The recession is creating such dramatic effects on so many people that the consuming culture is being changed, much like what happened after the Great Depression. The New York Times notes:

“...forces that enabled and even egged on consumers to save less and spend more — easy credit and skyrocketing asset values — could be permanently altered [!] by the financial crisis that spun the economy into recession.” (May 9, 2009)

If the U.S. consumer can no longer be the driving force of the economy, what will replace it? The elitist Economist magazine offered a cure: because consumer spending will be debilitated, “something else will have to grow more quickly. Ideally that would be exports and investment.” (May 6, 2009)

There is in fact little else that can be done if one is playing by the strict rules of the market economy. Obama again gave his allegiance to this broken system by agreeing with the Economist, when he stated, “We must lay a new foundation for growth and prosperity, where we consume less at home and send more exports abroad.” The average person will be totally uninspired by this “solution.” Nevertheless, Obama should have answered an important question: why isn't the U.S. an exporting economy now? And what would it take for it to be one in the future? The answers to these questions are intertwined with Obama's proposal that Americans “consume less.”

In order for US corporations to sell products (export) on the world marketplace, they must have competitive prices. Labor is a key ingredient in determining the price of a commodity, since the other ingredients have relatively stable prices. The price of labor in the U.S. was, in part, the result of a strong labor movement, which achieved a living wage. This not only drove down profits for corporations, but made them less competitive on the world market — they consequently defected to countries that pay slave wages. How, then, does Obama plan to “send more exports abroad?” The answer is simple: by insuring that Americans are able to “consume less.” For example, Obama's Auto Task Force told Chrysler and GM workers that their incomes were too high, that they needed to make less so that their companies could “remain viable” (compete) on the global market. They were thus threatened with bankruptcy if they did not offer “significant concessions.” The workers conceded, and bankruptcy happened anyway — a phenomenon bound to happen again soon at GM — unless workers fight back.

If such a “restructuring” happens at a company the size of GM, the precedent would be haunting. Corporations of all kinds are looking to “de-leverage” in the same way to successfully survive the recession. They need to balance the books, and workers' wages are one of the few options they have. Obama's Auto Task Force is overseeing the destruction of the U.A.W., and clearing the path for this restructuring to happen across the U.S.

But falling wages have a negative side effect, aside from disgruntled workers. As Nobel Prize- winner Paul Krugman points out:

“Families are trying to work that debt down by saving more than they have in a decade — but as wages fall, they're chasing a moving target. And the rising burden of debt will put downward pressure on consumer spending, keeping the economy depressed.” (New York Times, May 3, 2009 )

His conclusion is sobering: “The risk that America will turn into Japan — that we'll face years of deflation and stagnation — seems, if anything, to be rising.” Equally concerning is the amount of debt the U.S. government has taken in bailing out banks and fighting foreign wars. The New York Times notes:

“[the national debt] has prompted warnings from the Treasury that the Congressionally mandated debt ceiling of $12.1 trillion [!] will most likely be breached in the second half of this year.” (May 3, 2009)

The debt is so high that those financing it are getting worried, and thus demanding a higher rate of interest in repayment (since they correctly think they'll be paid back in inflated dollars). Already the U.S. pays $176 billion a year in simply paying the interest on the debt, a number that is expected to reach $806 billion by 2019, according to the Congressional Budget Office.

This debt is of course unsustainable. There are numerous signs that overseas' buyers are likely to reduce their investment, worried as they are about the U.S. money printing bonanza. In an effort to bolster confidence, Obama has plans to balance the budget by the end of his presidency. Again, a massive de-leveraging of debt will need to happen. Obama has made no secret of where this restructuring will come from: he has made repeated references to “reforming entitlement programs” (Social Security, Medicare, etc.).

It should be noted that the only other way Obama could balance the budget is if he taxed the super rich at a high rate while slashing military spending, neither of which is going to happen on its own.

Nevertheless, these items must be central demands for the American worker, who is already under immense economic pressure, with more to come.

The recession is creating a “fight or die” environment for corporations and governments around the world. The super rich that currently control both entities are using their influence to ensure that workers carry the brunt of this burden. It doesn't have to be so.

The fight for jobs, a living wage, progressive taxation, social security, and single payer healthcare are all topics capable of uniting the vast majority of U.S. citizens. If properly organized, and with the Labor Movement playing a leading role, such a coalition would have no problem overcoming the objections of those who oppose it — the tiny group of super rich benefiting from how things are currently.

Shamus Cooke is a social service worker, trade unionist, and writer for Workers Action (www.workerscompass.org). He can be reached at: shamuscook@yahoo.com

US Carbon Policy - Kelpie Wilson

This report by Kelpie Wilson brings us up to date on the present state of carbon policy in the US and I am pleased to see that a lot of very positive steps are been taken particularly at the state level. The international and national press really fails to cover the regional initiatives well even when they truly impact in the larger arena. Do you really think that a major success in California will fail to resonate elsewhere?

In fact, the best strategy for generating contentious change is to find a friendly regional player who helps prove the case. The classic example of that strategy in Canada came with the creation of the universal medical insurance system. One province (Saskatchewan) grabbed the nettle and made it work. Within five years the political support was so overwhelming that it was made a national system. It will never be perfect – just ask the critics – but for 45 years, a person struck down by ill health has had immediate access to care.

Arnie in California is very much taking that approach. He represents as many folks as most European countries and knows that there is no point waiting for Washington to lead when you have room to lead yourself and in the process grab the agenda and bend it to your state’s needs.

Whatever we may think of the oncoming carbon economy, postponing involvement will likely mean paying top dollar later. If you snooze, you lose. In any case this report updates real progress.

While we are here and talking about California, I do wish they would rein in the rhetoric on global warming. The place is desert, largely watered by sporadic rainfall and seriously prone to droughts with a clearly finite supply of fresh water requiring diligent management. If you run out of water, it is because the will was not there to manage it properly. This is another place that seriously needs solar powered atmospheric water harvesting though that will fail to provide far inland in the great valley’s rain shadow climate.

Coming Soon - The Carbon Economy

By Kelpie Wilson

t r u t h o u t | Report - Tuesday 04 March 2008

By refusing to sign on to the Kyoto climate treaty, Americans have insulated ourselves from the complexities of the carbon market the European Union has been trading in for the last three years. But that state of ignorance, while not exactly blissful, is about to end.

On February 26 and 27, the international carbon trading financial community descended on San Francisco to present Carbon Forum America, the first American carbon trading conference to include a full trade show featuring 80 companies that manage carbon credit assets and trades, negotiate contracts, validate projects, and perform various other market services.

Why California and why now? California is the US leader on climate policy and now is the time the tea leaves are spelling out a coming certainty for investors. The first serious US climate change measure, the Lieberman-Warner bill, has passed out of a Senate committee. All three front-running presidential candidates have acknowledged a cap-and-trade system for carbon emissions is inevitable. US regional programs like the Western Climate Initiative are picking up steam, and 32 states have now adopted hard emissions targets.

The conference sponsor, the International Emissions Trading Association, is banking on the idea US investors will embrace a worldwide carbon trading market that reached $60 billion in 2007 and could mushroom to $300 billion or more very soon.

But what exactly is a carbon market? At a press briefing, IETA president and CEO Henry Derwent acknowledged the concept was a difficult one to explain. "Carbon is an externality, not a commodity. People say, 'What on earth do I need that for? It's not a pork belly.'"

Derwent said investors should look at carbon trading as a form of derivative like a hedge fund. He defended the idea of traders making a profit from carbon trading. "They should be taking a margin for a service. If they do their job well they will provide the world with energy with a lower risk of climate change."

Environmental critics of a cap-and-trade system worry carbon traders, like other derivatives traders, will get carried away and game the system to produce excessive profits for themselves. But the biggest issue as the US contemplates its first national climate bill is the how to allocate the emissions under the cap.

The European Union Emissions Trading System established under the Kyoto protocol gave away emissions allocations to polluting industries in a grandfathering scheme. This depressed the price of carbon and got the market off to a slow start in 2005.

The Lieberman-Warner bill would repeat this strategy in the US by giving away over half of the pollution allowances - worth billions of dollars - to big industries like coal-burning electric utilities. By contrast, both Clinton and Obama advocate auctioning 100 percent of the allowances.

One hundred percent auctioning is a litmus test for much of the environmental community, which sees the revenues as a crucial source of funds to pay for research and development of renewable energy and to support low-income people who will be hurt by higher prices. In fact, a cap-and-trade system with 100 percent auctioning of allowances is functionally not very different from a carbon tax.

At a Carbon Forum plenary session on potential federal greenhouse gas regulation, representatives of some big corporations weighed in on the auctions debate and other issues.

Ralph Moran, West Coast Climate Change director for British Petroleum, said his company supports some amount of auctioning, but it will dramatically increase the cost of doing business. He warned there was no guarantee government would use the revenues from auctions wisely.

Rich Rosenzwieg, Chief Operations Officer of Natsource, a carbon trading firm, continued the theme of mistrust in government. He said we should start small with auctions because "the public won't support giving government billions of dollars in revenue." He said the revenue stream would end up in a "roach motel" where the money goes in but may not come back out to the taxpayer. Rosenzwieg also stressed the need for flexibility and said we should not expect to "solve the problem in ten years."

Katharine Brass, director of General Electric's Ecomagination program, spoke about a looming gap in US electricity production due to the recent cancellation of many new coal-fired generators. That capacity was needed to meet projected demand, she said, and it will take ten years to bring on new coal plants with carbon capture and storage, even if we could start now. But last month, the Bush administration canceled FutureGen, the only pilot program to develop the untested technology.

California Lt. Gov. John Garamendi closed the conference with a stirring address. In an obvious reference to the Bush administration's refusal to allow California to regulate greenhouse gas emissions under the Clean Air Act, Garamendi detailed all of the ways in which global warming is now impacting and will impact California in the future. While drought and warming are reducing mountain snow pack and drying up the Colorado River, sea level rise will soon push salt water into the Central Delta.

"The end result: the California water system as we know it today - terminated. Doesn't work. We are going to spend billions upon billions of dollars to redesign our water system," Garamendi said.

California is taking action, he said, and state legislation (AB32, The Global Warming Solutions Act) will enable California to establish a carbon cap-and-trade program in the next two or three years. His hope is the California program will drive the coming federal policy: "We are eleven months away from a new regime in Washington and when that happens we want them to follow the California lead and that means we are moving very rapidly forward on a whole set of policy issues."

Garamendi wants California to auction its emissions allowance permits to create a fund to deal with aspects of the problem not covered by markets, like energy research and development and environmental justice.

He also supports bringing in transportation, which accounts for 40 percent of California's greenhouse gas emissions. He said there have been lots of discussions of how to do that, but his view is, "If anyone figures out a way to have a cap-and-trade system that rewards individuals, then we will have a big winner because everyone will want to make an extra buck."

Getting individuals to engage by coming up with the right incentives would be "an awesome system," Garamendi said. "If any of you know of anywhere in the world where such a system is being tried, please let us know here in California."

If Garamendi's enthusiasm is any guide, the new carbon-based economy is coming very soon, at least to California, with the rest of the country following shortly.

Mette Peterson, one of the Carbon Forum organizers, said the conference attendance exceeded expectations with 1,400 participants. She said American businesses were there to learn about the market and get positioned for the future.

It looks like the smart money is gearing up to hedge against climate change.

---

Kelpie Wilson is Truthout's environment editor. Trained as a mechanical engineer, she embarked on a career as a forest protection activist, then returned to engineering as a technical writer for the solar power industry. She is the author of "Primal Tears," an eco-thriller about a hybrid human-bonobo girl. Greg Bear, author of "Darwin's Radio," says: "'Primal Tears' is primal storytelling, thoughtful and passionate. Kelpie Wilson wonderfully expands our definitions of human and family. Read Leslie Thatcher's review of Kelpie Wilson's novel "Primal Tears."

Transition to THAI oil production

Now that Thanksgiving is over, I think that we are facing a true winter of discontent. The global economy has to absorb and adjust for several uncomfortable changes over the next year. I am personally a perennial optimist but also a realist.

We have to overcome a shrinkage in US purchasing power known also as credit, brought on by the unraveling of the sub prime lending business, while the global economy is now eating an energy tax in the form of much higher fuel costs. This is not funny.

What is more, there is little reason to think that the credit decline will not be felt globally. Institutions are taking hits everywhere and they simply will not have as much liquidity. Remember that it was excess liquidity looking for a home that created this mess in the first place. And real estate price inflation took place just about everywhere.

We can thus expect a rolling squeeze on borrowers lasting about three years or more as inventories are unwound. I personally think that there is enough global liquidity slopping around to sponge up the excess housing inventory in the US within three years or very quickly.

Higher energy costs will impact everywhere, but in the US in particular. There is plenty of room for a recession style contraction in the economy that cannot be bailed out this time with cheap money. It is already dirt cheap.

The best scenario is for the oil price regime to stay generally neutral over the next three years while the credit markets work through their problems. In spite of the heated press. the credit situation will work itself out because the global economy will continue to expand for at least another generation or two simply because of the transition to a global middle class modern economy.

A shift in the price of oil to $200 per barrel will surely precipitate a serious recession. The problem is that looks as likely as a decline back to $60 per barrel. In the meantime, the industry and the users are all in denial. New discoveries now are still far too few, although they are been made, and they all need decade long lead times to become productive. The necessary wells that should have been discovered over the past fifteen years were not made.

The only technical fix that is even on the horizon and looks like it may be implemented is the THAI production protocol. It actually looks like the second coming of the oil business. although few have heard of it.

Right now it is been successfully tested on the deep tar sands in Alberta. Three well pairs are now sustaining 2,000 barrels of fluid per day with a water cut of around 50%. They have all started in the past eighteen months. They are currently shaking out the sand handling problems and perfecting the process. Two more years of production should see theses wells paid for. I do not know how long the wells will operate until the available resource is properly depleted and I am sure that the operators do not know either.

The real payoff, however, is that this protocol can be rolled out on thousands of wells just on the tar sands. And there are negligible inputs required unlike the mining protocol. And it can really be done very quickly in Alberta.

This exact same technology can be applied in theory in every other oil resource in the world and can lead to the recovery of huge amounts of left behind oil.

The creation of a pyrolysis front in the oil bearing formation upgrades and mobilizes the bulk of the remaining oil all0wing it to flow readily to the production well. If the oil cannot escape, it is likely to be burnt providing process energy.

Unheard of seventy percent recoveries are been touted by the project promoters.

If THAI fails, then the oil option will continue to evaporate and quickly. Right now, we are trying to get through the next several years while facing pending production declines.

Kyoto protocol denounced

In a recent article in Nature magazine, well regarded economists have declared the Kyoto protocol as a failure at generating tangible results. Of course, this should have been obvious to all. Without direct technology change, the only way to reduce CO2 emissions is by direct economic contraction.

To date we have had neither. And fantasies that forced CO2 reduction is an option are in dreamland. At most we will get transferrance which is most certainly not reduction. So far transferrance has been to China and India who are even less careful about what is dumped into the environment.

The harsh unrelenting reality remains. We are going to burn most of the extractable oil, gas and coal that we can get our mitts on over the next century. We will work hard at doing it more efficiently, but somehow I do not think that the coal mining industry is laying off its workers anytime soon.

As I have pointed out, the only credible replacement for these high quality fuels is algae based bio fuels. This will become well established over the next fifty years and we will get very good at using it. That will not stop us from pumping cheap oil and mining cheap coal until it is no longer cheap. Only when agriculture can bring the cost of such fuels well below that of fossil fuels, will the fossil fuel economy disappear.

Since we are going to burn it all regardless, our only economic strategy that has any validity is to systematize a global carbon credit economy that starts with a direct global tax of CO2 emission. This is as simple as taxing the fuels directly with absolutely no exceptions. This directly underwrites a carbon credit system. A meaningful dollar value could be $20.00 per ton of carbon contained.

In this way, absolutely no new distortions are introduced that will fuel political manipulation. At the same time, been a true global tax, it will inspire a working forum for tackling other global problems.

This tax will accomplish two things. It will swiftly induce a massive investment in more efficient energy regimes for all participants to remain competitive and will thereby strongly shift investment into better technologies. And secondly it creates a financial carbon credit worth $20.00 per ton for newly sequestered carbon.

I showed you yesterday how easy it will be to use this credit to induce the 2,000,000,000 subsistence farmers to sequester carbon while also upgrading their land. They alone can actually solve the whole problem, or come so close that it is the same thing. After all, with this type of support and land improvement and perhaps a little proper social support, these farmers are no longer subsistence farmers. Go look and see what has happened in China, much as I am sure they complain.

And the absolute beauty of the proposed system, it is dead trivial to audit the process. A ten percent allocation at most for the financial institutions and we will even have enthusiasm at all levels. Of course the crooks will try to divert ninety percent into their pockets while turning the farmers into slaves. Since this is a global system, this may actually be global opportunity to lift the bottom third of the global population out of their difficult circumstances. Certainly this is a new option.

Besides, though it is absolutely critical to get the subsistence farmers on board in order to have the maximum social and economic benefit, it goes without saying that the rest of the global economy which has the available capital to deploy will work overtime to earn their fair share without any further intervention by any government.