Thursday, December 18, 2014

Deflation is Taking Hold in Some Economies. Is the US Next?



In response to the 2008 financial crisis and resulting Great Recession, the Federal Reserve (followed by central banks around the world) slashed interest rates to near zero and engaged in a policy of unprecedented money printing, know as "quantitative easing."

This combination spurred concerns that inflation would accelerate, perhaps rampantly.

But that hasn't occurred — at least not yet.

The pace of inflation over the past 12 months fell to 1.3% in November and is down sharply from 2.1% just five months ago.

The Federal Reserve has a publicly stated goal of 2% annual inflation. As recently as 2011, the US inflation rate averaged 3.2%. But the rate dropped to 2.1% in 2012 and then 1.5% in 2013. The steady decline is clear.

The financial world has been cautiously watching and waiting for any indication that the Federal Reserve will raise interest rates next year.

However, bond guru Bill Gross says the Fed may refrain from hiking rates in 2015 due to a lack of inflation.

"Why would the Federal Reserve raise interest rates in order to slow economic growth if inflation in fact was moving lower?"

It's an excellent question; one that many of us are asking. Oil is tumbling and cheaper energy means lower inflation.

In fact, the bigger concern at the moment is deflation, which is rearing its ugly head around the world.

Delation is the continual decline in prices and assets. It is often associated with a reduction in the money supply, or credit.

While the money supply has certainly expanded in an unprecedented manner (the Fed’s balance sheet has expanded from about $850 billion to more than $4.4 trillion since the 2008 financial crisis), economic demand and consumer spending remain weak.

Though Americans have paid down much of their household debts (including car loans, credit cards, student loans and home mortgages) from 130% of disposable personal income in 2007 to 103% today, it means that households still have more debt than disposable income. That is holding back spending.

Ultra low interest rates were supposed to be a temporary inducement to get households borrowing again and reverse the housing bust. But six years later, though rates remain at historic lows, mortgage lending remains weak.

The US homeownership rate fell to 64.4 percent in the third quarter, the lowest level since early 1995. First-time buyers have been kept out of the market by strict lending standards and low wages.

Weak and steadily falling inflation, plus weak demand, is raising fears of deflation.

Investopedia explains deflation this way:

"Declining prices, if they persist, generally create a vicious spiral of negatives such as falling profits, closing factories, shrinking employment and incomes, and increasing defaults on loans by companies and individuals."

Japan, most famously, has been battling deflation for two decades. The Bank of Japan had a zero interest rate policy in affect for many years, which didn't cure the problem. Then the BOJ initiated its own massive money-printing scheme last year, which has also failed.

Falling prices have hurt consumption in Japan, as consumers wait for prices to keep dropping before spending. If consumers refrain from spending long enough, it hurts corporate profits. That limits hiring and can even lead to layoffs. This vicious circle has led Japan back into recession.

There are concerns that the euro zone could be plagued by deflation in 2015. As it stands, Sweden and Spain are already grappling with its menace.

Now, some economists and analysts are concerned about the possibility of deflation arising in the US. It may not be that far-fetched, as the specter of deflation is growing globally.

Commodities — such as oil, gold and copper — have experienced serious declines this year.

The US economy has remained one of the lone bright spots on the global stage in 2014, but in a highly interconnected global economy, that could change quickly in 2015.

A lack of economic demand is a pernicious problem, which leads to a lack of consumption, fewer jobs, and a lower GDP.

Since consumer spending accounts for more than two-thirds of US economic activity (GDP), it's no surprise that this has been the weakest recovery since the Great Depression.

In fact, this is the first economic “recovery” in which median family income continues to drop. That is holding back consumer spending, which, in turn, is holding back economic growth.

Though the Great Recession is officially over, Americans are still 40% poorer today than they were in 2007, the year before the global financial crisis.

The net worth of American families — the difference between the values of their assets, including homes and investments, and liabilities — fell to $81,400 in 2013, a long way off from the $135,700 in 2007, according to a new report released this month by the nonprofit think-tank Pew Research Center in Washington, DC.

Over just the past year, incomes have barely budged. In November 2014, the average weekly wage was $853 versus $833 for November 2013, according to the Bureau of Labor Statistics.

Falling oil prices should allow Americans to spend more of their incomes on other things, which should buoy the economy. But if broader deflation sets in, lower oil prices won't matter.

While much of the decline in oil prices has been attributed to higher supplies, demand has also fallen around the world. The International Energy Agency has cut its estimates for demand for crude five times in the past six months, The Wall Street Journal reports.

Oil is the lubricant of the global economy and a lower demand indicates a slowing economy. Demand has fallen even in the US, where motorists are driving more fuel efficient vehicles and using less gas.

However, those trends could change in the face of tumbling oil and gas prices. Americans could revert to buying bigger, less efficient vehicles.

The diminishing demand for oil, and the robust drop in prices that has ensued, is sparking deflation concerns around the world.

The bond market has taken notice, as reported by Bloomberg:

"The difference in yields between Treasury two-year notes and comparable maturity inflation-indexed securities turned negative yesterday for the first time since the aftermath of the global financial crisis in 2009. The measure, known as the break-even rate, is generally seen as reflecting investors’ expectations for inflation over the life of the securities."

In other words, investors have abandoned all fears of inflation in the short term.

To be clear, the US is not in deflation at present, and it may not face it in 2015. But there are plenty of reasons to be concerned. Inflation, already below the Fed's target, is steadily declining.

The consumer price index fell by a seasonally adjusted 0.3% in November to mark the largest drop since December 2008, during the depths of the Great Recession.

The decline was driven by the sharp slide in gasoline prices. Energy costs fell for the fifth straight month, said the Labor Department, led by a 6.6% decline in the price of gasoline.

Here's the thing that really jumps out at me: If the Federal Reserve can add $4.4 trillion to the money supply in just six years — while dropping interest rates to near zero — without sparking rampant price inflation, some very powerful deflationary forces are surely working against it.

In other words, the US economy remains quite fragile as we head into 2015.

Monday, December 08, 2014

National Debt Surpasses $18 Trillion


A pretty major event took place recently, yet most people barely noticed.

The national debt eclipsed $18 trillion. That is a number so large that it is almost incomprehensible. For the record, a trillion has 12 zeros. A trillion is one thousand billion. So, 18 trillion is 18,000 times a billion.

Chew on that for a moment.

The U.S. economy totaled $16.77 trillion last year, according to the International Monetary Fund (IMF). If our economy grew by 2.8% in 2014, as the IMF projects, it will reach $17.24 trillion this year.

Obviously, that number is smaller than our national debt. But, quite critically, it also means that economic growth for the year was smaller than the budget deficit for the fiscal year.

According to the Congressional Budget Office (CBO), the federal budget deficit was $506 billion for fiscal 2014, which ended on September 30.

While that’s about a third the size of the deficit in 2009, during the depths of the Great Recession, it also means the deficit for a single year still surpassed half a trillion dollars.

The only good news in this story (and there are those who are surely spinning it as good news), is that the size of our annual deficits has shrunk in recent years. But the deficit is still massive by any reasonable measure.

The deficit has fallen from more than 10% of GDP in fiscal 2009 to only 2.9% of GDP in fiscal 2014. That puts the U.S. below the 3% limit at which the European Union requires member countries to take corrective action. The CBO expects us to remain near that level for the next five years.

While this is all very good news, it does not diminish the fact that the U.S. government is still spending more money than it collects in taxes, and therefore continues to add to the underlying national debt.

To be clear, the deficit represents excess spending above tax collections in any given fiscal year, while the debt is the sum total of decades of this excess.

The federal debt held by the public should reach 74% of GDP this year — the highest percentage since 1950. That was five years after WWII, so there was a good reason for all that debt back then.

The debt held by the public must be collected with taxes to pay off our creditors (i.e., Treasury bond holders). The rest of the public debt is money the government owes to its citizens for things such as Social Security and Medicare, plus military and civil service pensions, etc.

Since the government has already collected and spent these monies, it now needs to obtain additional funds to repay these debts. The government will either collect more taxes or make cuts to other budget items to repay the debts owed to the American people.

Social Security and Medicare are technically considered liabilities, not debts. Though the government has spent all the money in the Social Security Trust Fund on other budget items — and owes that money back to the people from which it was collected — it is still not considered "debt."

Including the national debt, the government's (meaning the taxpayer's) unfunded liabilities totaled $71 trillion at the end of fiscal 2013 (Sept. 30, 2013). It has since gone higher, though no official figure is currently available.

Ultimately, this debt belongs to us — the public — as well. We owe all of it, on behalf of our government. There is no differentiating our government's debts and liabilities. The taxpayers will fund it all in the end.

In order to stop adding to the debt, the government must first end it deficits — not merely lessen them.

In 2011, Congress and President Obama negotiated $1 trillion in cuts to discretionary domestic and defense spending over nearly a decade. Yet, this “sequestration” process still left us with annual deficits.

The government is currently being spared much higher debt payments because interest rates are historically low. But when rates are this low, they have only one way to go — up.

The 10-year Treasury currently yields 2.31%. Debt-service costs will be crippling when yields revert back to long term norms. For example, over the 20-year period from 1994 to 2013, the yield on the 10-year Treasury averaged 4.60%.

That's twice the current rate.

Since we're continually adding to the debt, it will make that eventual reversion all the more painful.

The U.S. public debt crossed the $1 trillion mark for the first time October 22, 1981. It took 205 years to get there. We've now added another trillion in roughly one year. And that's being heralded by some as progress.

This is very troubling, and the consequences will be quite harsh at some point in the future. It doesn't matter whether it's sooner or later. Some extraordinarily large debts are coming due, and they will impact all of us. They will impact our very way of life.

Money spent servicing our debts is money not spent on health, education, or our crumbling infrastructure.

In other words, the national debt is already robbing from our nation, and it will only get worse — much worse.

But here's the rub: Our entire monetary system is based on debt. In the absence of continually growing debts, the system will collapse. Yet, under the burden of all this debt, the system will eventually collapse anyway.

That makes for one hell of a predicament.

The only solution is to change the very essence of our debt-based, fiat monetary system.

Sunday, November 16, 2014

Falling Oil Prices Reflect a Slowing Global Economy, Yet Benefit US Consumers



Even if you don't watch the news and haven't heard about falling oil prices, chances are you've seen the results as the gas pump.

After months of tumbling prices, the cost of a barrel of US oil has fallen to roughly $75.

US crude prices have dropped 30% from their June peak of $108, putting oil in bear market territory. In fact, oil prices have fallen to a three-year low.

Brent oil, the international benchmark, has also fallen below $80, reaching a four-year low.

This tumble is good for consumers. Every one-cent drop in the price of gasoline amounts to a $1 billion boost to US household incomes, according to the automobile group AAA.

According to AAA, the national average price of gas has dropped for 46 days in a row (a cumulative decline of 42 cents), which is the longest consecutive decline since 2008. Last week, the national average for regular unleaded gasoline was $2.93 per gallon, which was the lowest price since Dec. 4, 2010.

So, what's behind this plunge in oil prices? Well, it's a combination of things.

First, the global economy is slowing, and oil is the lifeblood of economic growth. If there's less growth, there's less demand for oil. The European, Chinese and Japanese economies are all slumping, and they represent much of the global demand for oil.

Secondly, oil is priced in dollars, and the dollar is strengthening against other currencies. This is increasing the purchasing power of the dollar, meaning we can buy more oil with each dollar. In other words, as the dollar strengthens, oil becomes relatively cheaper.

This is great for the US, but not for other nations, which must first convert their currencies to dollars before buying oil. It now requires more of each of those currencies to obtain the dollars needed to buy oil.

Lastly, even as demand has fallen, the supply of oil has continued to grow. US oil production, for example, is at its highest level since 1970. Meanwhile, domestic demand is down because Americans are driving less and using more fuel-efficient cars.

This combination of slumping demand, a stronger dollar, and ample supplies have led to a big drop in oil prices.

Fracking for shale oil in the US has altered global oil markets — at least for the time being. The process has allowed the US to overtake Saudi Arabia as the world's biggest oil producer. The US hasn't seen this level of production in more than four decades.

However, the US is still the world’s largest oil consumer, and imported an average of 7.5 million barrels of crude per day in April, according to the Energy Information Agency. This undermines any reasonable notion of the US becoming an oil exporter.

Yet, even as the price of oil is tumbling, the cost of finding it is not. Fracking, in particular, is a very expensive process.

Shale oil is expensive to extract by historical standards, and is only viable at high-enough prices. Shale oil costs $50 to $100 a barrel to produce, compared with $10 to $25 a barrel for conventional supplies from the Middle East and North Africa.

At the current price of $75 per barrel, many producers will not be able to survive. The cost to extract shale, as well as Canadian tar sands, may be exceeding the returns from those extractions (more on tar sands in a moment).

Many shale oil producers do not have free cash flows, and are in fact in the negative. In other words, their capital expenditures result in negative operating earnings. In essence, their cost of operations exceeds their earnings, thwarting profitability.

These companies have taken advantage of low interest rates and assumed enormous sums of debt to finance their huge operating expenses. This huge drop in oil prices will leave them quite vulnerable, and many will likely collapse and go out of business. Many of them will find it difficult, or impossible, to return to the debt markets in this environment, as the capital markets decide not to throw good money after bad.

In the 1930s, it cost about $400,000 in today's dollars to drill an oil well in Texas, from which crude gushed plentifully. Such a well produced thousands of barrels a day for decades.

However, it now costs $6 million to $12 million to drill a well in the Bakken shale oil field in North Dakota. This requires complex fracking techniques and produces roughly 100 barrels (sometimes more, sometimes less) per day for just a couple of years. Then the well runs dry. This is why so many wells need to be continually drilled.

It's not just shale oil that's being affected by tumbling oil prices. The extraction and production costs of Canadian tar sands, or oil sands, are perhaps becoming too expensive to sustain at today's prices.

The Canadian Energy Research Institute estimates that oil-sands projects need a price of $85 a barrel to be profitable in the current cheapest method, and new standalone mines will require $105 a barrel to make a reasonable return.

Those prices don't seem likely for quite some time.

A recent report from OPEC cut the group’s forecast for global demand and prices over the next five years, which helped to drive down prices even further.

Goldman Sachs’ analysts have slashed their target price for US crude oil for the better part of 2015 from $90 to $75.

Sensing an opportunity to crush its competition, OPEC has stood pat and not altered supplies. The cartel seems satisfied with current low oil prices (at least for now) since they will likely kill the competition coming from North American shale oil and tar sands producers.

Acting unilaterally, Saudi Arabia cut oil prices for the US this month, while increasing prices to other large buyers, such as China. The move helped to push US oil prices to three year lows.

The Saudis seem to be aggressively moving against US frackers in an attempt to drive them out of business. With oil prices under $80, extracting shale oil may no longer be viable for many producers.

Typically, when demand for any product slumps, producers cut supply to stabilize prices. That isn't happening in the oil markets, despite projections that the demand for crude will remain weak for the next few years.

In its annual world outlook released this month, OPEC predicted less demand for its oil through 2017.

The cartel expects demand for its crude oil to fall from the current 30 million barrels a day to 28.2 million barrels a day by the end of 2017, as output from producers outside the cartel (such as the US, Canada, Latin American countries, and Russia) continues to rise.

Demand for OPEC crude will pick up again in 2018, but a year later it will still be lower than demand was in 2013, OPEC said.

OPEC crude presently meets around a third of global oil consumption needs. Perhaps that share will shrink if production increases in other nations, but, given the projections for global demand, that is no certainty.

If Saudi Arabia and OPEC are successful in crushing North American shale and tar sands producers, they will secure more market share and could then tighten supplies, thereby raising prices.

Higher prices are also needed for traditional US crude oil producers to maintain their investments in exploration, and for their highly expensive offshore drilling projects.

While lower oil prices are a boon to consumers, acting as a sort of tax cut, they also reflect a weakened global economy, which is not positive.

Given the growing world population and expanding global middle class, demand for oil will continue to rise, albeit more slowly than in the past. Oil prices will remain volatile, but even at $75 per barrel, they are still quite high by historical standards.

Oil was $9.95 a barrel in April 1986, and the annual average stayed below $30 a barrel until 2000. Rising global demand has since driven up prices considerably. Despite the recent price drop, oil is still 250% higher today than it was at the start of the millennium.

So, while $75 oil may seem like a bargain, a little historical perspective indicates otherwise. Nonetheless, American drivers are surely quite thankful for the current price drop every time they pull into a gas station.

Moreover, lower oil prices should ultimately reduce the cost of every transported product in America, and that's a whole lot of stuff.

Saturday, October 18, 2014

Where's the Inflation? (It's in the Asset Markets)



“The most important thing to remember is that inflation is not an act of God, that inflation is not a catastrophe of the elements, or a disease that comes like the plague. Inflation is a policy.” - Ludwig von Mises, “Economic Policy”

The Federal Reserve has a publicly-stated goal of achieving a 2 percent inflation rate. However, the US is running an annual inflation rate of just 1.7 percent through the 12 months ended in August 2014.

Many economists and analysts expected soaring inflation when the Fed initiated its quantitative easing (QE) program. Creating all that excess money in the absence of an equal expansion of goods and services in the economy was supposed to trigger price inflation.

But continued weakness in the US economy has thwarted any prospects of the runaway inflation that was expected in coincidence with the nearly $4 trillion dollars created out of thin air by the Federal Reserve (the Fed’s balance sheet has expanded from about $850 billion to more than $4.4 trillion since the 2008 financial crisis).

To be sure, there has been inflation -- it just hasn’t been in the consumer price index (CPI). Instead it's been manifested in assets. All that money had to go somewhere, and it has flowed into -- and distorted -- the markets.

Look at the stunning rise of the stock markets, not to mention the housing market, since the lows of 2009. Each of the Fed’s three QE programs have caused the stock market to surge as more liquidity was pumped into the financial system.

Before the recent turmoil, the stock market had tripled in value since the bull run started in early-2009. That is not reflective of the weak US economy, diminished household incomes, or reduced consumer spending.

During the throes of the financial crisis and subsequent Great Recession, the stock markets reached stomach-churning lows.

In March of 2009, the Dow fell to a 12-year low of 6,547; the S&P slumped to a 13-year low 676; and the NASDAQ dropped to a seven-year low of 1,268.

Yet, even after this week's market upheaval, the Dow now stands at 16,380; the S&P at 1,887; and the NASDAQ at 4,258.

This surging bubble in U.S. stock markets was created by the Federal Reserve through its record low interest rates.

So, in reality there's been plenty of inflation — it's all been in asset prices and, in many markets, housing. Home prices have once again reached 2005 levels.

Ultra-low interest rates have discouraged saving and instead encouraged massive speculation in volatile asset markets.

As history has shown repeatedly, this never ends well.

Looking for the highest possible returns, investors have forgotten the recent crashes of 2000 & 2008. Shunning savings accounts, CDs, money market accounts and Treasuries, investors have instead piled into stocks and high-yeild bonds, which are historically volatile.

Since the start of 2009, funds invested in junk bonds have returned an average of 14 percent each year. That's been very alluring.

For comparison, the yield on the benchmark 10-year Treasury note recently fell below 2 percent for the first time in more than a year. Moreover, the yield on the 10-year Treasury note hasn't consistently traded above 4 percent since shortly before the financial crisis of 2008.

U.S. Treasuries are viewed as the safest of all investments. In other words, investors are spurning safety in favor of high-risk yields. The alarm bells are ringing!

Less than ten years after the dot-com bubble burst, there was a housing bubble that inevitably burst. Money that drained out of stock markets during the dot-com panic instead flowed into housing markets and the now infamous mortgage-backed securities.

One form of massive speculation was simply traded for another.

Yet, we now find ourselves in the midst of concurrent equity and bond bubbles throughout the world's financial markets.

Most incredibly, we are now faced with our third asset bubble in less than 15 years. Will investors never learn? This is like the film Groundhog Day. Yes, history repeats, but three times in 15 years? This is the height of recklessness and delusion.

Former Fed Chaairman Alan Greenspan famously referred to it as "irrational exuberance."

Somehow, it's returned, and it seems to be a sign of the times.

So, the next time you hear someone (particularly some talking head news pundit) say there's little or no inflation, ask yourself how they can so blindly miss the absolutely massive level of inflation in the asset markets.

Monday, August 18, 2014

American Economy Hindered By Decades of Flat Wages



As most people know, the engine that drives the US economy is consumption. In fact, consumers account for 70 percent of the nation's GDP.

So, in order for the economy to function properly, consumers must have adequate incomes to fund all that consumption. Therein lies the problem.

The US economy has continued to struggle since the Great Depression due to an affliction of stagnant wages. In fact, as I've illustrated previously, the US economy has been slowing for decades, largely for this reason.

Adjusted for inflation, wages have been stagnant since the 1970s, reports the Milken Institute. That is a stunning revelation. This stagnation, in conjunction with the widespread prevalence of low-wage jobs, is hindering the economy.

The number of employees working in low-wage jobs has been rising since 1979, according to John Schmitt, senior economist at the Center for Economic and Policy Research.

Though these disturbing trends have been decades in the making, the consequences are now being felt more than ever.

According to the Economic Policy Institute, “the vast majority of U.S. workers—including white-collar and blue-collar workers and those with and without a college degree—have endured more than a decade of wage stagnation.”

Predating the Great Recession (between 2000 and 2007), the median worker experienced slow wage growth of only about 2.6 percent per year, and from 2007- 2012 (during the recession and post-recession hangover) wages fell, which, in essence, means that wages have remained flat.

This has depressed demand and consumption, holding back the economy in the process.

It's no surprise that if Americans don't have adequate incomes, they can't spend the economy into robust growth.

Out of 34 industrialized countries, the U.S. had the highest share of employees doing low-wage work in 2009, according to OECD data.

In fact, one-in-four U.S. employees were low-wage workers in 2009, according to the OECD. That is 20 percent higher than in the number-two country, the United Kingdom. Low-wage work is defined as earning less than two-thirds of the country's median hourly wage.

To compensate for this, the US economy continues to be fueled by asset bubbles and escalating household debt.

However, as we all witnessed in the fall of 2008 when our nation's debt bubble finally burst, these responses result in some rather devastating outcomes. We're still living with the aftermath of the Great Recession.

Yet, while the typical American worker has fallen further and further behind through the years, the nation's top earners have thrived. The income of the top 1 percent nearly quadrupled from 1979 to 2007.

But no matter how rich they are, the top 1 percent cannot possibly buy enough stuff, or use enough services, to make up for the wage stagnation of the masses.

There has been a steady, long-term decline in the US economy over many decades.

The annual GDP growth rate in the United States averaged 3.25 percent from 1948 through 2014. However, since 2001, GDP has only reached at least 3 percent in two years: 2004 (3.8 percent) and 2005 (3.4 percent). In every other year, GDP failed to crack 3 percent.

In the 1950s and '60s, the average growth rate was above 4 percent. In the 1970s and '80s it dropped to around 3 percent. But in the last ten years, the average rate has been below 2 percent.

Our economic decline dovetails with the decline in wages through the years. There is no denying that four decades of stagnant wages have led to our continuing economic stagnation.

This is why we've become so reliant on household debt and the asset bubbles forged by the Federal Reserve to continue eking out marginal economic growth.

What's particularly perverse about this wage stagnation is that American workers have managed to be ever more productive. Though productivity grew 7.7 percent from 2007-2012, wages fell for the entire bottom 70 percent of the wage distribution.

The longer term trends are even more troubling.

The median worker saw a wage increase of just 5 percent between 1979 and 2012, despite productivity growth of 74.5 percent.

The last decade, however, was particularly bleak for American workers.

Between 2002 and 2012, wages were stagnant or declined for the entire bottom 70 percent of the wage distribution. In other words, notes the Economic Policy Institute, the vast majority of wage earners have already experienced a lost decade.

In reality, it's been more like lost decades.

This is the sad truth in the United States, the nation that most Americans like to believe is one of opportunity, promise and hope. However, the reality simply doesn't square with those lofty beliefs.

This nation cannot remain great when such vast numbers of its citizens are continually falling further behind — even the skilled and the educated.

The fact that so many workers are facing great financial struggles is particularly troubling when corporate profits are at historic highs.

The Economic Policy Institute describes the problem thusly:

"The weak wage growth since 1979 for all but those with the highest wages is the result of intentional policy decisions—including globalization, deregulation, weaker unions, and lower labor standards such as a weaker minimum wage—that have undercut job quality for low- and middle-wage workers."

Globalization notwithstanding, these are political problems manifested as economic problems. That is to say, monied, corporate interests have influenced lawmakers and gotten them to do their bidding.

It also means that these trends are reversible. However, that requires political will, integrity, and a determination to serve the citizenry, the masses, and the electorate.

Unfortunately, those qualities are in short supply in our nation's capital.

Sunday, July 20, 2014

BRICS Challenge Western-Run International Finance System



The leaders of the BRICS nations – the emerging markets of Brazil, Russia, India, China and South Africa – announced in Brazil the launch of a $50 billion development bank this week. The move by the five nations is in response to the Western influence of the US-dominated World Bank.

Though it will be much smaller and less funded, the new bank is an attempt to counterbalance the hegemony of US and Western banking interests. In essence, it is an attempt to expand the financial relevance of the world's emerging economies.

The BRICS also set up a $100 billion currency reserves pool to help countries manage their short-term liquidity troubles during a currency crisis. The decision presents a small, but potentially growing, challenge to the International Monetary Fund (IMF), which is based in Washington, DC.

The World Bank finances development projects around the world, and the IMF is the lender of last resort to countries that don't have the dollars to pay their foreign debt.

Unable to exert more influence over the World Bank and IMF, the BRICS will now gain greater control over the funding decisions that directly affect them.

Though China is one of the world's two largest economies, it has less voting power in the IMF and World Bank than Belgium, the Netherlands and Luxembourg. Yet, China has 1.3 billion people, while those three European nations have less than 30 million people combined.

Belgium — a county with 11 million people and a $508 billion economy — has more IMF votes than Brazil — a nation of 199 million people and a $2.2 trillion economy.

Frustrated that their economic weight is not reflected in global financial institutions, the BRICS countries have now established one of their own.

In the process, they have suddenly carved out a larger role for themselves in international finance.

At the least, they have created some global competition for international lending.

Initially, the bank will have $50 billion in capital, divided equally among its five founders. The bank will start with just $10 billion in cash put in over seven years and $40 billion in guarantees, and it won't start lending until 2016. However, capital is planned to eventually grow to $100 billion.

To put this in perspective, subscribed capital in the World Bank is $223 billion.

The development bank, which will be based in Shanghai, intends to fund development and infrastructure projects in developing nations. India will lead operations for the first five years, followed by Brazil and then Russia.

The BRICS nations banded together in 2009 to press for a large role in the global financial system created by Western powers in the post-World War II Bretton Woods agreement.

Given that they account for almost half the world's population and about a fifth of global economic output, the BRICS' influence will likely continue to grow.

In fact, other nations, such as Indonesia, Mexico and Turkey, could ultimately join the development bank.

The bank is the biggest undertaking and the most significant achievement of the BRICS in their five-year partnership.

When the BRICS first announced their intention to form the bank in April of 2013, it was greeted with great skepticism in the West. But the emerging nations have shown their willingness to coordinate, cooperate and act.

Wary, and weary, of the terms and conditions applied by IMF and World Bank, the BRICS can now turn to one another for the financing of their development and infrastructure needs.

The US and, more broadly, the West may not have taken seriously this challenge to their supremacy in the world economy a year ago. But it's a good bet they're paying attention now.

Moreover, the creation of the development bank is not the end of the BRICS' ambitious plans.

These nations have previously called for an end to the dollar's singular role in international trade and the settlement of debts.

For example, since crude oil is bought and sold in dollars, the BRICS have publicly voiced their interest in collaborating in non-dollar oil payments. Their hope is to have an alternative payment system in place by 2018.

In 2012, the BRICS announced plans to extend credit to each other in their own currencies, with the goal of eventually replacing the dollar with their own currencies for trade amongst themselves.

That's a direct challenge to the dollar's role as the world's reserve currency.

So, the development bank may be just the beginning. It may take a few more years, but the BRICS are determined to increase their role and influence in international finance and credit, while simultaneously diminishing that of the US and the West.

Wednesday, July 09, 2014

Officials Unprepared for Southwest's Unfolding Water Crisis



The American Southwest is a vast, arid desert. Yet, it is home to some 40 million people and the cities of Las Vegas, Phoenix and Los Angeles. All of them are served by the dwindling water resources of the Colorado River and one of its primary reservoirs, Lake Mead.

A massive civil engineering project in the 1960s diverted part of the Colorado River to feed Phoenix and Tucson. Those cities could not exist in their current state without this unnatural influx of Rocky Mountain snowmelt.

A quarter of Arizona's water comes from the Colorado River, which has been drained to dangerously low levels. There's not enough water in the basin to keep Arizona's crucial Lake Mead reservoirs topped up. As of this week, the lake is about 39 percent full.

Lake Mead's surface is now about 1,080 feet above sea level, which is below the 1,082-foot level recorded in November 2010 and the 1,083-foot mark measured in April 1956 during another sustained drought.

If current trends continue, the level will drop to 1,000 feet by 2020, says the federal government. That's just six years from now.

Under present conditions, that would cut off most of Las Vegas’s water supply and much of Arizona’s. Phoenix gets about half its water from Lake Mead, and Tucson nearly all of its.

The problem is worsening quickly.

The federal Bureau of Reclamation forecasts that Lake Mead will fall this week to a level not seen since the lake was first filled in 1938. Again, Lake Mead is now about 39 percent of capacity and is dropping steadily.

Last month, officials at the Central Arizona Project (the state’s canal network) said they may have to cut water deliveries to Phoenix and Tucson, its two largest cities, due to the dire state of the dwindling Colorado River.

Despite Arizona's dwindling water resources, the state's population continues to swell. Here's a look at Arizona's population in recent decades:

1970: 1,745,944
1980: 2,718,215 (55.7% increase)
1990: 3,665,228 (34.8% increase)
2000: 5,130,632 (40% increase)
2010: 6,392,017 (24.6% increase)
2013 (est.): 6,626,624 (3.7% increase)

In essence, Arizona's population has nearly quadrupled since 1970. Yet, the desert state is getting ever drier.

Arizona is in the midst of the worst drought ever seen in the state's 110-year long observational record. The last two years were the driest in a century in the Southwest.

Consequently, the state will have to reduce water consumption rather quickly. Mandatory cuts could begin as early as 2019, according to an analysis by the state's water project.

Arizona does not presently have a plan to deal with water shortages as extreme as those being predicted by 2020, just six years from now. It's unconscionable that state officials have allowed the situation to come this far with no actual, valid plan.

The fact that a pending water shortage in Arizona's two biggest cities is just now being raised publicly is tough to comprehend. Denial, or withholding vital information from the public, are not solutions.

Arizona's groundwater levels have dropped by hundreds of feet over the last century. Yet, the state still grows cotton on its arid lands.

According to the Arizona Department of Water Resources, more than two-thirds of Arizona’s water is still used to irrigate fields, down from a peak of 90 percent last century.

However, roughly 42 percent of the land in Arizona is covered by desert. In fact, there are four different deserts in the state, making it a very difficult place to grow food, much less sufficiently feed its 6.6 million residents.

Of Arizona's total area, just 0.32% consists of water, which makes Arizona the state with the second lowest percentage of water area (New Mexico is the lowest at 0.19%).

Climate change will only make the drought situation worse, and the effects are continually occurring faster than scientists had predicted a few short years ago.

Most scientists believe global warming will make an already arid desert Southwest even drier in this century.

Research done at the University of California, Berkeley shows that the 20th Century was an abnormally wet era in the West and that a new mega-drought may be starting.

The U.S. Global Change Research Program projects 20 percent to 50 percent less water by the end of this century, with temperatures 5 to 10 degrees warmer (Fahrenheit).

With 6.6 million residents in Arizona, 4.3 million of whom live in the metropolitan Phoenix area, there are simply too many people vying for far too little water.

Given its limited water resources, the desert region was not meant to support a population that large. Yet, those limited water resources are rapidly dwindling.

However, Phoenix is not alone in facing this issue. Most of the Southwest is reliant on the same water source.

Seven southwestern U.S. states share the Colorado River's water supply under a 1928 allocation agreement that also provides shares of the river water to Native American tribes and Mexico.

“The Colorado is essentially a dying river. Ultimately, Las Vegas and our civilization in the American Southwest is going to disappear, like the Indians did before us,” said Rob Mrowka, a Las Vegas-based scientist at the Centre for Biological Diversity.

Las Vegas, which has more than 2 million residents and about 40 million tourists a year, is almost completely dependent on Lake Mead for drinking water. The city is presently grappling with a water crisis.

“The situation is as bad as you can imagine,” said Tim Barnett, a climate scientist at the Scripps Institution of Oceanography. “It’s just going to be screwed. And relatively quickly. Unless it can find a way to get more water from somewhere, Las Vegas is out of business. Yet they’re still building, which is stupid.”