from the hip

New York Times just reported the oil prices has dropped to under 50 dollars a barrel for the first time in 22 months. NYT writes:

The drop in prices comes as stock and bond markets fell because of fears about the health of the financial system, and a flurry of new indicators showed how badly the economy was faring.

Just as a booming global economy had steadily driven up commodity prices for six years, the current meltdown means the world needs less oil, and is sharply driving down prices.

It is a stunning — and sudden — reversal that has taken aback many experts. Oil futures on the New York Mercantile Exchange fell $3.04 to $50.58 a barrel in morning trading. At one point, crude oil was down $3.71, to $49.91 a barrel. Oil futures have lost more than two-thirds of their value after settling at a peak of about $145 a barrel in July.

Some analysts predict oil could fall to $30 to 40 a barrel as the world economy worsens.

Also, the dollar is for the moment strengthening in international markets.
Another sign of the strength of the oncoming depression?

See also: Times: Shares fall as US jobless adds another 542,000

American newspapers, most notably New York Times, have now started to wonder why American consumers aren’t spending. And in the financial sector, stock brokers and real estate agents seem to expect that it will happen next week or so, judging from the advise they are giving. That really doesn’t seem very likely at this point.

Why do American consumers spend less?

Well. The financial system in the US is still not completely shored up. AIG just reported a loss of 25 billion dollars for the third quarter and will be receiving a 150 billion aid package. Fannie Mae lost 29 billion dollars. Circuit City is going down. Airlines are in trouble. GM and the whole American car industry is in deep trouble.

As for the overseas markets, most indicators are down there as well. Every time the numbers are revised, they get worse. Right now, according to Wall Street Journal, they indicate a deep recession in Europe as well. IMF (see figure) now assumes that 2009 will be worse than 2008 for the world as a whole.  For 2009   IMF predicts a decline in GDP in the advanced economies of 0.3 percent. If this happens, it will be the first time during the periode following the Second World War.  For the US IMF predicts a decline of  0.8 percent, and for the Euro-area 0.7 percent for 2009. So there will be little pull from overseas markets for American businesses.

Now, add to this that the banking system isn’t working, loans are hard to get, unemployment is on the rise and millions of jobs are threatened.  Consumer confidence is at the lowest ever.

Also, factor in a negative wealth effect. The positive wealth effects, the effect of people getting richer on paper when housing prices were rising, were key to the growth the last 5-7 years. Now this operates exactly in the opposite direction, and serves to limit peoples spending up and above the effects of other factors.

So, what does it mean?

So how likely is it that consumers will start spending in the near future? Not very. Let’s assume for a moment that consumer spending will continue as today for a while.

Consumer spending is down 30 percent on cars, and 3 percent on the average across all sectors. Consumer spending appears likely to fall next year for the first time since 1980. Perhaps by the largest amount since 1942.

If it stays the way it has been for the last three months for a full year, that means demand for goods and services from consumers in America will be down about 1200 billions. And, spending is still dropping. As well, demand from businesses is dropping. And, as I wrote above, demand from abroad is falling as well. And right now, American businesses have just barely started to adjust to these new numbers and levels. And this adjustment will mean more lay offs and more negative earnings reports. That is simply how it works. And it is hard to see any “quick fixes” that can act as a miracle cure and lift us out of this situation in the short term. Rather, the adjustments will have to work their way through the system.

As far as American consumers are concerned, I notice people using words like “lacking trust” or “fear” as reasons for the decline in consumption. These words suggest that consumers are driven by psychological factors, emotions, beliefs and sentiments. Such words, I think, are the wrong ones in this case. Right now, I think American consumers act very rational - markets are turbulent, times are getting harder, uncertainty is high, so the rational response is to buckle down, sit still and wait for the fog to clear up.

So, for the moment, and for a while, it is just going down, I think. We are nowhere near the bottom. I don’t think we will see new growth for at least 18 months.

That’s what I think.

See also:

• Yahoo Finance: Home values drop for 7th straight quarter
• New York Times: Best Buy Lowers Its Outlook for 2009
• Washington Post: Why GM Stalled
• Washington Post: Obama Asks Bush to Back Rescue of Automakers
• New York Times: A Town Drowns in Debt as Home Values Plunge
• Wall Street Journal: Indicators Across Europe Point to Deeper Recession
• New York Times: Jobless Rate at 14-Year High After Big October Losses
• Times:First full-year slump since 1940s, says IMF

When Saul A. Kripke published his thought in Naming and Necessity everybody was either furious, or exhilarated, or thoroughly perplexed (see also The New Theory of Reference - Kripke, Marcus, and Its Origins (Synthese Library) ). Naming and Necessity laid out a new way of thinking about the relation between language and the world. Kripke proposed the theory of direct reference, where a name “rigidly designates” its referent. That is, a name is a “tag” attached to its referent, with no descriptive content. Kripke also proposed an alternative theory for how names are transmitted, the causal theory of names.

It is somewhat interesting to view the words (names or tags) that are used on the current international crisis from such a perspective. Doing that, is becomes remarkable how the names used to denote this beast have changed over time.

It started out as the US sub-prime mortgage crisis. Then as is spread, it became simply the mortgage crisis, as it was now international. Then the credit crisis and the credit crunch. Then that changed into the banking crisis, and to underscore the fact that it is indeed international, the international banking crisis. Then, as other types of international financial institutions, eg. AIG, started to feel its impact visibly, it became the financial crisis.

Now, the naming used implies it has become an even more general crisis, affecting even more sectors of the economy. Thus, now we call it the recession. Some have even started to use the word depression, and started to build connotations linking it phenomenologically to the great depression.

It goes on and on - the financial crisis. Now Bank of England slashes interest rates to a 53-year low. The Independent writes:

Interest rates were today slashed to a 53-year low to fight off recession - but fears were growing that hard-pressed homeowners would fail to reap the benefit.

The shock 1.5 per cent cut by the Bank of England’s Monetary Policy Committee (MPC) is the biggest move since March 1981 and brings rates to 3 per cent - last seen in 1955.

Stock markets were stunned by the size of the cut and experts predicted rates could reach an all-time low of 1.5 per cent by mid-2009 as the Bank desperately bids to ward off a prolonged slump.

Also, the European Central Bank cut interest rates by 50 basis points today and signaled another reduction was possible later this year. In Germany the no. 2 bank has decided to tap into the government rescue plan, and the government will propose tax breaks on car purchases to stimulate spending!

The bottom still seems distant.

See also:

• New York Times: European Banks Reduce Rates, Some Sharply
• Guardian: Shock as Bank of England slashes rates to 3%
• New York Times: Bleak Reports Keep Markets in Free Fall
• Guardian: Wall Street and London shares plunge

Every day is important. All events taking place have a place in space and time. But some days are more important than others. And some events influence other events more and have greater ramifications and consequences than others.

Today, I believe, is the day when the most important event of this decade is taking place. Today is the day of the election of the next American president.

At this juncture, with the financial crisis, the American depression, and all the challenges facing the US and the rest of the world, the choice of the new American president is far more important than in any normal election year. Not only to America and the Americans, but to peoples and nations all over the world. The choice will determine how the current crisis will be handled, how America will face the challenges of becoming again a modern nation, with modern welfare, educational and health systems, as well as the future position and role of America on the larger international scene.

I am not an American. I am not able to do much to influence the outcome of this election. I can not vote. So, today, I sit, wait, watch, and hope. And I feel strongly the powerlessness associated with the role of the spectator.

I have been following the campaigns for the presidential election in the US for a while. While I find much to appreciate and much good, it is also somewhat sad to follow it. The sad part, to my mind, concerns the missing half or so of the American population.

There is much talk about the rich, both from Barack Obama and from John McCain. Their viewpoints differ considerably. But they do talk about the rich.

And both candidates talk about the middle class. A lot. About how the solution to the current crisis in the US resides with the well being of the American middle class. About how the middle class must be strong enough economically to be able to afford to give their children education. And so on and so forth.

But neither of the candidates spends much time discussing the poor in the US. They don’t talk about their numbers. They don’t discuss their living conditions. The houses they loose in foreclosures. They don’t discuss what they will do for them. They don’t even disagree about them - because they simply don’t discuss them.

And this is what I think is sad. Very sad.

I have discussed this with people. The most rational explanation I am able to get is that the poor don’t count in the election. So the candidates don’t bother spending time discussing them. And then, when I hear that, it is easy to think that they probably will not count in the next election either, so there is no reason to do anything for them between elections or talk about them in the next campaign either. I guess.

So, effectively, half or so (we can always fight over the exact percentage, but that is not my point here) of the population in the US don’t count, from a political perspective. They don’t matter, because they hardly ever vote. The don’t get to be visible. They don’t get to be the target of reforms aimed to improve their conditions. Indeed, it is easy to think that to the extent their chances,  as opposed to the chances of the middle class, improves, it is simply a result of a drip down or spillover effect of changes instituted for the benefit of others.

What a terrible waste of human resources this is! What a waste of talent! What a waste of happiness! How sad. For the United States of America.

How long can the United States continue like this in a knowledge and competence economy? Why the concern with energy saving and recycling of resources when such a large proportion of the greatest resource of all is hardly maintained and definitely not used efficiently?

The international credit crisis is bad news, of course. And bad for a lot of people. Still, there are some amusing things taking place as well. Like the story about the HUGE bank robbery that took place on Monday in the US, in Washington DC. Quite possibly the biggest bank robbery ever!!

When I first read the story of exactly how the US injected 250 billion dollars into the biggest American banks, I was stunned. Then, when I reread the story I started to laugh. I found it hilarious! What a move by the government. From one perspective a much needed infusion of capital, yet from another a highway robbery!

So here is the story, simply to good not to be distributed, courtesy of The New York Times:

Drama Behind a $250 Billion Banking Deal

The chief executives of the nine largest banks in the United States trooped into a gilded conference room at the Treasury Department at 3 p.m. Monday. To their astonishment, they were each handed a one-page document that said they agreed to sell shares to the government, then Treasury Secretary Henry M. Paulson Jr. said they must sign it before they left.

The chairman of JPMorgan Chase, Jamie Dimon, was receptive, saying he thought the deal looked pretty good once he ran the numbers through his head. The chairman of Wells Fargo, Richard M. Kovacevich, protested strongly that, unlike his New York rivals, his bank was not in trouble because of investments in exotic mortgages, and did not need a bailout, according to people briefed on the meeting.

But by 6:30, all nine chief executives had signed — setting in motion the largest government intervention in the American banking system since the Depression and retreating from the rescue plan Mr. Paulson had fought so hard to get through Congress only two weeks earlier.

What happened during those three and a half hours is a story of high drama and brief conflict, followed by acquiescence by the bankers, who felt they had little choice but to go along with the Treasury plan to inject $250 billion of capital into thousands of banks — starting with theirs.

What a story! Has anything like this ever happened before? This must be the biggest tale in the modern history of banking!

Iceland, which is currently in an economic meltdown, will be getting  help from its Nordic neighbors. The Danish newspaper Politiken writes that:

Iceland’s Prime Minister has been in contact with his Nordic counterparts ‘for some time now’, according to Prime Minister Anders Fogh Rasmussen, and Nordic help may be on the way to the beleaguered Icelanders.
The prime minister’s comments came as the benchmark Icelandic index, which has been closed for business for some days, reopened and plummeted a full 76 percent. Trade in Iceland’s three largest banks, which have been taken over by the state, remain suspended.

Elsewhere in the paper, Politiken reports that Iceland will be receiving a borrowing facility for 500 mill. Euro from the Danish national bank. The Norwegian newspaper Dagbladet, on the other hand, reports that the loan is 400 mill Euro, and that the borrowers are Denmark and Norway, both with 200 mill.

See also:

• Times - Iceland secures €200m from Norway, Denmark
• New York Times - Iceland Turns to Neighbors to Prevent a Collapse

The international financial crisis has lead to a spur of initiatives world wide. And now we have had the US rescue plan, with 700 billion USD. In an unprecedented move, the German government has unveiled a €500 billion ($679 billion) rescue plan to shore up the banking system after Sunday’s emergency summit of euro zones nations, where leaders agreed to guarantee new bank debt and inject capital to unfreeze money markets and restore confidence in the financial system. Der Spiegel reports:

The German Finance Ministry said Berlin’s plan includes a €400 billion financial market stabilization fund to guarantee loans and €80 billion to recapitalize the banking sector through the government taking stakes in banks.

An additional sum of €20 billion is also being set aside as a provision to cover losses, according to a statement from the Finance Ministry.

“We’re taking rigorous action to ensure that what we have experienced doesn’t get repeated,” Chancellor Angela Merkel told a news conference.

This is, of course, great news. The German packet is alone almost as large as the US packet. And that begs the question: Is the US packet big enough?

See also:

• New York Times: U.S. Investing $250 Billion in Banks
• Times: President Bush poised to follow UK with $250bn seizure of bank stakes
• New York Times: Stock Slump Imperils Putin’s Effort to Pump Up Russian Wealth, and His Legacy

I started writing about the credit crisis in the US and the possible international consequences of that crisis a long time ago. But writing about it gave me a strange feeling. Obviously I was writing about something that interested just a very few. And, equally clear was the feeling that I was writing about something nobody really wanted to hear about. Also, I strongly felt back then, something which major actors in the financial world as well as governments and central banks were more or less in denial about.

I am not happy to have been right. I am not happy that this crisis so far has turned out to be every bit as serious as I and a relatively small number of other people wrote back then. On the contrary, it is sad. Of course.

Today I feel that perhaps it is that unwillingness to see, to listen, to take the right measures at the right time, that has turned what was once a credit crisis in the US, originating in flawed valuation of the so called sub-prime mortgages, into the wild international beast we today speak of as the international financial crisis. Today governments all over the world fight against this crisis. And we have seen, I should think, that the crisis is not due to the price of oil, and that it cannot be solved by interest rate cuts. And a large number of financial institutions, from Lehmann to the Royal Bank of Scotland, have fallen victim to the crisis. At first there was no response. Then there was too little too late, as the Dainish Bank, for instance, noted. And now it is pure panic.

But now the fight is very much an uphill battle. Much time has been lost. And in this case lost time translates into lost confidence. That confidence must, of course, be restored. But it will take time. And even when the confidence in the international financial system has been restored, the battle will not have been won. There will also be serious shake outs in many sectors of the economy, will large companies failing and new winners emerging. And the global recession we are facing will not be over until consumers start increasing their spending again.

I fear they will not do so for quite some time.

See also:

• Financial Times: The week that panic stalked the markets
• Wall Street Journal: EU Writes Menu of Options
• Financial Times: UK to inject £39bn into banks
• Politiken: IMF frygter finansiel nedsmeltning
• Politiken: Eurolande klar med finansiel redningsplan
• Times: Royal Bank of Scotland under state control
• Guardian: Europe follows Brown plan for survival as EU bank bail-out plan is agreed
• Dagbladet: Europeiske land vil samkjøre krisepakker