Inflation and oil price shocks
Posted by Yankee on October 10, 2005 - 10:52am
According to King, the worst inflation scenario is that workers (who are presumably unionized) manage to get wage increases in the face of higher prices. Ultimately, this may induce companies to raise prices even higher. This turns out to be especially problematic for retirees, who are on a fixed income. King goes on to argue that since society has changed since the 70s, it's unlikely that such a shift in financial burden is likely to be acceptable.
Society has changed. Western populations have aged. Those people who managed to extract wage increases in the Seventies and early-Eighties are now in their 50s, 60s and 70s. This is the baby-boomer generation, the generation that, because of its numbers, has enjoyed an unusually large influence on political and economic choice.This is the generation that, in the Seventies, was prepared to tolerate higher inflation but, by the Nineties, was pushing for independent central banks with inflation targets. Now that they have their pension nest eggs, the last thing the baby boomers want is a return of inflation.
King also points out that the workers are less likely to be effective in demanding wage increases now, since there are fewer unions, and factories can always be moved to other countries.
Now, with the collapse of communism in central and Eastern Europe, and with a more open relationship with China and India, capital has become mobile. If workers misbehave, capital goes elsewhere. Workers are, therefore, resigned to the fact that higher energy prices will not be offset by bigger wage increases.The result, according to King, is that everyone suffers equally—or no one really suffers at all. I'm not sure how to interpret his last paragraph.
Of course, this means that workers suffer as a result of higher oil prices. But that's life. So long as inflation remains low, the arbitrary creation of winners and losers in the light of an oil price shock should be avoided.In any case, I have a feeling that higher prices due to higher energy cost certainly isn't going to affect us all equally—my guess is that it won't do anything to lower the ever-growing disparity between the rich and poor in the US (and elsewhere in the world).
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The total effect in highly competitive market should be more bancrupcies and drop of GDP and investor confidence. This can lead to a total crash if it happens too fast... We are simply living on the edge in fact on many edges at once, but this is not a news.
When the stream of cash from refinancing comes to its end, something has to give. People can't run up other debts indefinitely, so we've either got to see an increase in personal productivity, a decrease in consumption or both. Unfortunately, productivity in some areas is constrained by our bad investments in energy-inefficient equipment (since 1980, but especially since 2001) which prevent people with e.g. inefficient pickups from taking jobs which require lots of vehicular travel. This causes some inflexibility, and points to a looming drop in consumption.
People who are caught in a bind between mortgage and credit card bills and fuel costs on one hand and stagnant wages and rising health costs on the other will have to do something. Many people who live from paycheck to paycheck are now buying gasoline on credit to get to work; when their cards are maxed out, they cannot drive and they lose job, house and possibly their vehicle too (if anyone is willing to even take a repo'ed truck or SUV). Enough of this and the value of mortgage-backed bonds and credit-driven bank stocks fall.
The alternative is to inflate. By decreasing the value of debt compared to income, inflation accomplishes the same end without all the bankruptcies and securities defaults. But something is going to give; we've got to bring things back into balance somehow, and we've already missed the opportunity to start getting efficient soon enough to prevent one of the above two phenomena.
It is simply not an option - a currency runnup now will turn USA in a third world country overnight. And given the lack of experience with force majore situations in USA - I'm absolutely sure that millions of people will not be able to survive.
Of course, the US's debts are denominated in dollars. Other nations dumping them lets us buy them back for less than face value, and our problem shrinks (messily, but it shrinks).
There is - euro. There are strong enough economies behind that currency that can accumulate the capital flow. Especially if the EU succeeds in forming energy allience with Russia this will be the best place to put your money in the long term.
I think this is because of the central flaw in the Breton Woods system which requires an international currency and an indebted nation emitting it. The result is a major instability in the world currency markets and of course US hegemony.
"Of course, the US's debts are denominated in dollars. Other nations dumping them lets us buy them back for less than face value, and our problem shrinks (messily, but it shrinks)."
That's why it has not happened yet. But we've seen that already in the 70s - at some critical point the market realises that a currency is overvalued and the fear of loss becomes stronger then the meager attempts of central banks to handle the situation. In short - you can not pull a string forever.
Basicly it is always a good idea to diversify the financial risk and have different assets in your account. Just don't put all the eggs in one basket - you can buy some euro, maybe energy stock, some would also suggest precious metals (though these already overvalued to my mind).
In the short term there is a great probability that you will lose from euro - there is a rising interest rate differential that can cause the dollar to continue to appreciate in the near future. I'd watch the energy situation - if oil gets close or above $100 the risks of sudden dollar depreciation become pretty high. Our energy wastefulness costs the world too much and at some point they can decide to get rid of US demand just by dumping the dollar (maybe systematically and moderately but maybe not).
Eurozone countries will also be tempted to inflate away their debts. Take a look at their
- public debt/GDP ratios,
- budget deficit/GDP ratios,
- prospective dependency ratios (retired vs working folks).
They are as screwed up as the US is, and maybe more, because the US budget deficit was brought about by tax cuts that can just end, and by a war that can also just end (not during this Administration, obviously). But their budget deficits cannot be pinpointed to similar specific and easily reversable (mis)policies: they have not cut taxes or entered any war recently. Rather they are structural, and so more difficult to solve. The difference is that the US debt has been financed mainly by foreigners, so the net gain from inflating it away is greater for the US citizens.By the above measures, Japan is just a very bad joke. So, forget the yen.
OK, what about the Swiss franc? I don't know really what those parameters are for the Swiss economy, and actually don't care, because the case can be dismissed on grounds of volume: if a significant amount of currency reserves are switched to CHFs, that would cause such a CHF overvaluation that would enable the lowest-wage-earning Swiss folks to vacation in five-star resorts anywhere! Which brings the point: using any currency as reserve currency amounts to giving the issuing country a free lunch. They give paper and receive goods.
So we are left with precious metals. BTW, the Bretton Woods system (1944-1971) was a gold standard: the USD was pegged at 35 USD/ounce. And while it worked the US was a net creditor to the rest of the world.
Interestingly, this viewpoint is not just the realm of gold bugs and pseudo-analysts on the fringes. It has just been proposed by one of Morgan Stanley economists, Stephen L Jen. See:
http://www.morganstanley.com/GEFdata/digests/20051007-fri.html
"We argue gold is a good hedge, or, more precisely a `neutraliser', against currency risk.
This favours central banks holding more gold in their reserves to dilute their exposure to foreign currencies. First, the USD could falter and thus erode the USD value of the Asian central banks' foreign reserve holdings. Second, the Asian currencies could appreciate leading to a valuation loss on official reserves. Gold holdings could partly `neutralise' or dilute the first risk but can do little about the latter, especially if the country in question has low gold holdings. For the same reasons, petrodollar holders should also consider buying gold."
Interestingly too, the same issue of MS Global Economic Forum features a comment by another of their economists, Robert Alan Feldman, about the prospect of peak oil. It is good to see that not all economists are of the flat-earth variety:
"For policymakers, the oil market presents a classic case of decision under uncertainty. There are two axes to consider. First, either the optimists are right or wrong. Second, either the world invests in technology/exploration, or it does not. So there are four combinations. (1) Optimists right/Few investments: Civilization is safe, with little waste. (2) Optimists right/Big investments: Civilization is safe, but has wasted some resources. (3) Optimists wrong/Few investments: Civilization is NOT safe. (4) Optimists wrong/Big investments: Civilization safe, but not as rich as if oil were unlimited. For a policymaker, it is better to spur the investments, because the worst possible outcome is a bit of waste. This waste can likely be absorbed by economic growth."
Others argue gold, and while I'm also a goldbug, if you have anything close to a decent amount of investment monies it just doesn't make sense. Where are YOU going to keep $200,000 of gold without making yourself a target? It's better for low investors like myself who have a couple of thousand invested, can carry their money in gold easily, and really are less interested in making that money grow as much as just having a safe investment, although that can be argued with gold.
The best money-making, value-secure investment would be in goods. It is obviously a large-scale investment, as it requires investment in warehouses and hard security, but post-collapse, the price of necessities like water and tools will skyrocket, and there will be demand. Further, if you're shrewd, you can always barter for goods that are in low demand in the short-term (construction utilities) but will be heavy demand once we gain our footing again (if we do). Also, goods are extremely cheap right now, with outsourced production. Of course, there's alot of ethical delimas in there, including profiting on life necessities and sending more dollars out of the country.
But, overall, that's where the money will be post-collapse. Just remember, during the gold rushes, it was the merchandisers that struck it rich, not the speculators.
I am not an economist so won't venture to do more than guess but it seems as if similar economic considerations are in place once again that might see a significant dollar devaluation (inflation), a significant flight out of dollars to other "safe havens" like gold, euros, or foreign bonds, and subsequent recession in the US (and by extension in the rest of the world).
As for the article referenced, I suspect that there are many talking heads desperately trying to "jawbone" the economy into some sort of soft landing rather than a harder crash. But hey, it's October again, the month of past historic stock market flops and this one looks shakey against the current economy.
However, through globalization we are mothballing domestic production capabilities that will be essential as A. The dollar weakens B. Transport becomes ever more expensive C. Each region has to become more self-sufficient in food, energy, goods.
I have to say that I'm now feeling pretty negative about the WTO model of world trade. We should keep some industries capable of ramping up to meet domestic needs in a crisis.
land transport. Ships can run on any solid or liquid fuel,
as well as wind. For land transport only rail approaches the
versatility and efficiency of sea transport.
With steeply increasing fuel costs, corporations will find that it is not so easy to move to a different country if a local labor force demands higher wages.
blog on peak oil and peak dollars:
NEONTETRA.blogspot.org
http://www.theglobalist.com/StoryId.aspx?StoryId=4542.)
But King doesn't push the implications beyond that smarmy remark about tough luck for the little guy and gal getting shafted by capital's greatly increased ability to vote with its feet. He forgets that central bankers are acting as if they think we will have inflation, in increasing interest rates. That's putting a damper on the economy. Another problem is that without inflation where is the US middle class going to get the purchasing power to continue buying? The refi boom seems to be ending in declining house prices, so that door to extra income is probably closed (and may slam hard enough to take down the house if house prices plunge). In the midst of this unpleasant mix, oil price increases and their effects on other prices come as a big tax increase. And there's a good reason why you don't impose a massive tax increase when an economy's beset by lots of problems.
King might be writing nostalgically about the merits of inflation in a while...
For inflation to happen, there MUST be a growth in the money supply relative to the supply of goods.
The central bank (the Fed, in the U.S.) largely regulates the growth of the money supply. If they do not expand the money supply through lowering interest rates and other means, the money supply will not grow, and there will not be inflation.
Rising oil prices cannot cause inflation. They do not cause more money to be created, and without more money there is nothing that can cause general prices to rise.
A more likely sequence is that an increase in oil prices threatens to send the economy into recession, so the Fed decides to stimulate the economy by lowering interest rates and adding to the money supply. This increase in money in circulation can cause inflation. But it is the Fed's decision and action which causes the inflation. By itself, a price rise cannot cause inflation.
Presently, the Fed is on a trend of increasing, not decreasing, interest rates. Most observers expect this to continue at least until early next year. Therefore we will not see significant inflation at least in this time frame. Only if the Fed changes its policy and starts reducing interest rates is inflation a possibility.
(Yes, there have been localized price hikes due to increased energy costs, but without an increase in the money supply, the impact of these will be to reduce demand and curtail general spending, causing other kinds of goods to have to lower their prices because consumers have less to spend. We will probably see significant price-cutting this holiday season as consumers and businesses see more of their income going to energy related expenses.)
If the real economy slows down the money velocity also slows down. This is equivelent to expanding money supply and you get your inflation. That's why the FED is fighting the inflation preemptively until it's not gone out of control yet (inflation -> recession -> more inflation etc.)
The real economy is long due to slow down because you can not feed growth with stock and RE bubbles forever. We can only hope that the process can be controlled.
No, you've got it backward. A fall in the velocity of money is equivalent to people hoarding money (and you're right that people do this when the economy slows down) but this reduces inflation rather than increasing it. Inflation is an increase in the money supply, but if people are hoarding it (equivalently, slowing down its velocity of circulation) that has the same effect as decreasing the money supply. This is another reason why energy price increases will tend not to be inflationary.
See for example http://en.wikipedia.org/wiki/Velocity_of_money
M*V = P*Q
M -> money supply
V -> money velocity (number of times a dollar is spent per month)
P -> price level
Q -> GDP
so, P = M*V / Q
If Q drops in constant M and V prices rise. The way to contradict that is to decrease V by raising interest rates and keeping money in the banks (this relation has always been quite vague to me, how do you make people addicted to(and locked in) spending save? you have to be really aggressive).
Q drops if energy prices rise for an energy importing economy because businesses and individuals offset their spenditures to foreign economies (the energy exporters).
So, price stability can be achieved only by means of quite severe recession (at least in theory). The original article somehow assumed that we'll have price stability whilst keeping the currrent pro-growth status quo which I can not agree. Of course for the US exists a third option - to expand borrowing abroad to offset rising energy costs. Whether it is a good idea I don't know.
I suspect there's a liquidity crunch in our future. Ironically that might cause enough demand destruction to obscure the fossil fuel production peak. I would expect energy prices to fall, although people's ability to afford access to energy supplies may fall even more quickly, amountng to a price rise in real terms.
Now all you need is a good crystal ball so you can predict deflation before it happens, and you're all set.
Short term debt instruments do not carry the same risk, at least for the time being. Eventually the US government may copy Argentina and convert all short term debt to long term and subsequently default on it, but we are a very long way from that point in my opinion.
Bonds other than government issued are likely to fare much worse as deflation should precipitate a flight to quality that sees credit spreads widen to an unprecedented level. Interest rates even on high grade debt should increase to relect higher levels of risk, but the rates on lower grade bonds are likely to climb far higher and many bonds are likely to be defaulted on. Higher interest rates would worsen the domestic economic situation drastically, but the government is unlikely to have a choice if it can't attract the new foreign investment it needs in order to continue servicing its obligations without raising rates.
Personally, I think deflation is right around the corner (ie within the next year) and preparing for it should be a matter of priority.
An overdebted economy would never take a restricted / deflationary course to avoid (hyper)inflation. This will cause such a bankrupcy level that 1929 will look like a pinic. Besides in a contracting economy you will need to constantly raise interest rates because you will have more and more derivative assets against contracting real sector. Unless these assets suddenly lose their value (debtors go bancrupt). Since the biggest debtor is the government I am hard to believe that it would desire its own bankrupcy; no, it would rather try to devalue its debt by permitting a moderate inflation - but not such that would cause currency devaluation. We are simply walking on thin ice with this, and it is getting thinner over time.
This is in fact what US has been doing with the rest of the world all the time since 1949 - emitting fiat assets, providing a shelter for the world's hot capital. These assets though, get devalued with time and this helps keep debt under control.
I agree with you that a deflationary spiral will be a financial disaster and will make 1929 look like a picnic. Indebtedness is much worse now than it was in 1929 and asset classes are arguably more overvalued than they were then. Positive feedback has taken us further up than it had then (the virtuous circle), and when it kicks into reverse will take us further down as well (the vicious circle). On the bright side, if there can be said to be one, it will take the pressure off a tight energy supply market through demand destruction.
Deflation happens spontaniously in case of overproduction or drop in consumer demand whichever comes first... Well I intuitivly rule out overproduction because the rising energy costs should act like an added friction to scaling out production. Indeed the drop of consumer demand is there because of the sticky wages and higher personal spenditures on energy. So the companies are stuck between dropping demand and rising costs. But if they lower the prices to boost demand in this highly competitive market they will certainly go bankrupt.
My scenario is that most of them will try to raise prices and scale back to smaller units and to markets that are not that price sensitive. Thus they will also cut the growing transportation costs. Not surprisingly WalMarts, KMarts etc. will be the first to disappear.
This is more like a stagnflation scenario - and this is what the history of the 70s is telling us will happen.
They'll have to raise interest rates in order to attract foreign capital into the bond market under conditions of increased risk, which will result in an even more severe economic contraction. It really won't be a question of the government having a choice in the matter, but merely responding to external pressures. The same thing happened in the 1930s and cost Herbert Hoover his reputation, but it was no more a matter of choice then than it will be this time.
The Japanese government spent over a decade desperately trying to stimulate their economy, but the population wouldn't spend. In a deflation, why would you spend? If you wait the price will be lower. Money is withdrawn from circulation by those saving for a rainy day or to buy something when the price has fallen much further. The perpetual growth machine grinds to a halt and the accumulated leverage crucifies the economy on the way down.
We have a great deal of excess production capacity (for things other than fossil fuels) in our system, constructed with virtually free credit during the great credit binge we've just lived through. We will probably have a shortage of demand in the near future, once the markets crash and precipitate a depression. The setup for a deflation of historic proportions is clear.
To protect oneself from deflation, getting out of debt is the highest priority. It is advisible to have reserves of liquidity (cash or cash equivalents - short term treasuries for instance) in an extremely safe banking environment. US banks have been playing Russian roulette in the derivatives market for far too long and do not represent a safe banking environment. They constitute a house the leverage built, and leverage is not kind to the banking system during a credit contraction.
Suitably protected liquidity allows you to take advantage of a deflationary scenario, in that the value of all asset classes falls in relation to the value of cash. This is a result of people trying to cash out all at once in order to cover their debts once a crash has begun. If you still have cash when there are many sellers and few buyers, there should be tremendous bargains to be had. The key is to cash out in advance. Unfortunately, what is rational for the individual becomes one more nail in the coffin for the collective, but failing to cash out doesn't save the collective anyway. The damage is already done as the mountain of leveraged debt already exists.
A measure of self sufficiency is also a good idea, whether as a hedge against inflation or deflation. Either can disrupt the brittle lifesupport system globalization has created. A deflationary scenario would suggest sitting on the cash and purchasing the means to be self sufficient once prices fall, but to do that means forgoing the opportunity to learn the skills necessary for modest self reliance. It takes time to install renewable energy equipment for instance, and to adjust your lifestyle in order to accommodate it. Other self sufficiency measures also take time to learn. I regard it as an insurance policy and therefore didn't wait for prices to fall first.
I'm also afraid that significantly higher IR can throw us in a severe depression. If you compare it with the Reagan's 80-s it will be a whole lot worse, because 1) higher energy prices 2) much higher indebtment (higher interest due).
However, Mr. Greenspan is a monetary fanatic and he's wetting his pants right now with the commodity and a few other inflation numbers. Good probablity of a half-point rise and you can count on quarter point rises until Greenspan leaves, which will most likely induce a recession into a situation that has great global financial instability. History never repeats itself quite exactly.
And this instability was caused in part as Mr. King says "by the Nineties, was pushing for independent central banks with inflation targets." That's close to the funniest thing I've read in awhile, I remember people being in the street demanding "independent" central banks.
The share of oil in world energy mix has diminished from 39.3% in 1999 to 36.8% in 2004 (BP). This has mitigated a little the oil impact. Besides all oil prices have not risen. Many oil producing countries have heavily subsidized or regulated prices that show in the price of exported goods. The diminishing share of oil means that if we had today the -99 share the oil consumption would be about 7% higher - this would mean almost 5 million barrels. Here we see that substitution happens - this time mostly by coal.
The imports from China (with its 94% energy self-sufficiency) dampen inflationary tendencies in the US and Europe. Note that we have here not only cheap labor but cheap energy, too. This effect is quite significant.
The share of oil in the US GDP is about 4%. The oil prices are still relatively low compared to the GDP level (deflate oil price in constant dollars with real GDP). The relative impact of oil is not so high yet.
The commodity prices have decreased markedly lately as the Chinese demand growth has slowed a bit. This has offset part of the oil price effect.
The energy-intensive industry has left or shut down in the US. Its share in the manufacturing is smaller now than at the time of the previous oil crises. This mitigates also the impact of the natural gas prices.
And there is always the lag. Oil prices rise has been very sharp so the effects of $60 oil will be seen a little later. The wages and other prices may follow but they have not had time yet to really do that. We will see.
There are two kinds of oil price increases. During the '70s, OPEC increased oil prices because they could. They had monopoly power. Our response was fight monopoly with monopoly. We have a monopoly on printing dollars so we just readjusted the price levels so that their oil was worth what it was worth pre-1973.
The recycling of Petrodollars occurred. What OPEC got was a transfer of ownership but the world economy moved along once the adjustments and accomodations were made.
The second type of oil price increase occurs when its EROEI increases. More resources have to be allocated to achieve the same energy inputs.
We're beginning to see this as the easy oil is extracted and the best fields deplete. Deep water oil is hard to get.
Looking at the Hirsch Report, I've estimated that we could deal, for a while, with a switch to substitutes at a 3% depletion rate on a 100 mbpd economy by about doubling our investment in oil E&P or $100 billion a year. But that's a very rough calc.
When we have to make big shifts in capital and resources to keep energy flowing in, then other uses of capital will have to surrender. That means lower growth and inflation - "stagflation" will return, as Stuart has mentioned.
This stagflation will affect different economies differently, largely due to their ability to adjust and to their energy productivity. Highly productive, highly adaptive economies like the US will do better than, say, China, since the Chinese need access to foreign energy (especially oil) to upgrade their productivity to help make the most of their human capital.
A well-handled transistion to peak oil can be made. The result will be an economy that grows more slowly and devotes more of its productive surplus to infrastructure. We'll see more people working in energy businesses and hopefully fewer people pursuing frivilous, wasteful careers as lawyers or journalists.
Rising oil prices are having a strong impact on the trade balance. But it is not necessary that the dollar will crash because it will not help much. There is no way to boost exports or imports-substituting domestic production based on very expensive imported oil and non-available natural gas. The alternative is to cut imports drastically (to reach balance now would mean cutting it to half!). So the result is most likely a strong recession and deflation, not stagflation.
The US has now a double energy crisis and the natural gas situation is worse. No additional gas is physically available for some time (LNG terminals are not there). No significant nuclear capacity is being added. Coal could help a little but it is very difficult to boost production enough to compensate all this. This will hit the economy.
We're working feverishly on new nukes here at VBM - really! We've got several RFPs on the table and engineering can't get enough talent to work on the new design. Expect ramp rates to be less than demanded of the industry for maybe a decade given lack of experienced people and global fabrication bottlenecks.
There are some power uprates still to be performed in the US but not many. Otherwise capacity factors are about max'ed out.
Coal plants are coming more expensive than nukes! Two data points art 600 MW in Omaha at $1800/kW and 500 MW in Virginia (SE anyway) at $2000/kW. We can do a 1500 MWe plant for maybe $1600. A comparable output coal plant would see economies of scale but I doubt it could catchup especially with higher fuel costs.
Chinese imports into the developed world have more than dampened inflation in the past--they have been deflationary. But that is in the base period. Now, we've seen shipping costs roughly triple, price of steel and plastic and other inputs sharply up, US dollar declines and the yuan (very slightly) up. So import prices rise.
If you substitute a cheap import for an expensive local good, there is a one-time cut in inflation. But once we depend on buying that import, if its price rises, it contributes to inflation.
Commodities-yes, steel dropped from $650ish to $550ish, but it's headed up again. And it was $350 2 years ago.
I will grant that workers are weak, and their pay rises will fall behind other costs. But with rises in the costs of energy of all types, transport, interest rates and a lot of other inputs, I'm betting on a period of higher inflation with lower growth.
In the last few months it has been up and down, but precious metals are definitely on a trend up... so, who puts their money into that type investment and why?
see above posted worries for possible answers...
http://321energy.com/editorials/fibonacci/fibonacci090705.html
"An analyst for the U.S. Energy Information Administration (EIA) told Reuters Monday that the government would likely drop its U.S. and global energy demand estimates in a report to be released Thursday. "
does anyone know why? the US & global energy demand estimates are in every weekly EIA report. why all of a sudden drop it in this week's report?
Yea.. That's exactly what we need at this point in time. One of the major manufacturers left in the states going bankrupt. A massive government bailout of a company with 300 BILLION dollars of debt. That's more than the cost of the Iraqi War and the total spending on Hurricane Katrina so far COMBINED.
Granted, they won't pay that much of the debt off and much will be liquidated, but to who? Which auto companies in the world have enough capital to purchase entire auto plants? I guarantee that none of them are domestic. Even if they don't liquidate the plants, all the rest of the assests are still going to go foreign. Even if it's a very light bailout, giving them enough to survive for a few more years, the budget will be expanded, finainced through foreign investors. Why are we at a point that we cannot save an American company by our own means? Why do we have to save an American company by prostituting it out to foreign competitors? It's just pure bullshit.
Maybe, the one positive thing that could happen because of this, based on current energy prices, is a stipulation of the bailout being extremely heavy investment in hybrids, electrics, and maybe hydrogen. That would be an extremely forward looking investment strategy and if pulled off would solve alot of our current crises.
Of course, since the powers that be don't like government interference, even while we give them billions of dollars, I doubt anything like that would happen.
Bankruptcty will allow them to restructure the company; in my view they will try and renegotiate labor contracts. According to the same article they have a 'healthy balance sheet' so bankruptcy may not even be necessary. I see this as a red flag they are tossing up to say they are going to make some drastic changes.
The message I hear from him to Labor is: 'If you don't negotiate, we'll declare bankruptcy, and the courts will negotiate for you.'
But then, S&P moved their bonds from "junk" to "junkier," which won't help matters much.
To quote the guy from Airplane! : "They bought their ticket, they knew the risks, I say let 'em crash."
If you think the government will do this for even the most modest of airline companies, and not a manufacturing and economic giant like GM (I mean.. they generate more revenue than alot of countries do), I think you're greatly mistaken. And, you can't use the excuse of the political capital gains that caused alot of the bailouts post 9/11. Airline bailouts were happening along time before that.
GM is setting up shop in China; expect Delphi to follow. Entire manufacturing chains are moving to China. Some multinationals are insisting on their suppliers being in East Asia.
In the states, people overextended through credit are going to be hard pressed to repay those loans and credit cards as they find their salaries cut again and again. And the price of energy will drive in exactly in the opposite direction. This is not the 1970's. It's far worse.
http://news.yahoo.com/s/ap/20051010/ap_on_re_us/governors_hello_hybrids;_ylt=Asi0z5BgECTt9.bFAgekDJO s0NUE;_ylu=X3oDMTA3OXIzMDMzBHNlYwM3MDM-
Let the Feds bail out GM, and then Delta and all the rest of the stupidly-run corporations. The whole concept of "bailing them out" is fradulent, because the Federal government we have today exists on BORROWED MONEY. This is the house that must inevitably crash, or that we taxpayers will be indentured to finally pay off. The sooner it corrects, the better, because no matter what anyone here wishes, it will correct itself and it will be painfull in the extreme. As I have posted earlier, there are many crows coming home to roost in the near economic future.
HYBRIDS by POLITICOS
You can have a look around Texas and find lots of hybrids being used by various municipalities. They began quickly phasing out pickup trucks in favor of hybrids when gas started to rise. You can see lots of them in Houston and Austin.
But a politician driving a hybrid is just a PR-show - you have to look at their voting record to determine if they are what they wish you to believe. Most are not.
Politicos rely on soundbites and videosnippets to convey positions they do not actually endorse or believe in.
And, you will notice, one of my points is that it doesn't matter who bailouts the bailouts the corporation, be it government money or by liquidated assets. The point is, it will ALL be paid for by foreign investors, driving even more money into the foreign market. We're saturating the gd thing with our cheaply produced, easy-money, Wal-Buck dollars, and the only result is hyperinflation.
Come on.. don't you really think that somewhere in the PRC there is some upper-management person running around telling the elites that they have to start seriously devesting their dollar assets? How long will it take for them to listen?
Until we begin to sink on our own, it's in PRC's best interest not to rock the boat. As soon as any country begins divestiture of dollars, the dollar will be worthless. And that will happen instantly in todays electronic trading markets. I think the piling on would happen at light speed.
When we sink, so does the dollar hegemony, and with it, the world as we know it. Something new will have to be birthed or rebirthed at that point.
Isn't it interesting, even in our light-speed globilization, things would still be limited by natural sleep cycles?
Anyway, as far as diversification out of the dollar market, I think if it were done at a slow enough pace no one would notice until it were too late to stop it. Hell, maybe PRC is doing that right now.