Northman's Fury

Along with the US Federal Reserve cutting interest rates yet again, the mortgage giant Freddie Mac has announced that it now expects to lose between $10 and $12 billion in the sub-prime mess.

Last month, the firm set aside $1.2bn (£580m) to cover bad debts between July and September and reported a $2bn loss.

Freddie Mac then announced that it would sell $6bn of shares to cover more bad debt losses.

"Our fourth quarter results are not going to be effectively better than they were in the third quarter," Mr Syron told investors at a conference in New York.

Quite the sales pitch. "Listen, we're losing money and expect to lose a fair bit more, and we'd really appreciate it if you all wouldn't mind buying a bunch of our shares to cover the losses."

I'll get right on that.

A so-so article in the New York Times today regarding how the world's major oil suppliers have been using the wealth from high oil prices to build their economies, which in turn, is driving up domestic consumption of oil and gas.

The economies of many big oil-exporting countries are growing so fast that their need for energy within their borders is crimping how much they can sell abroad, adding new strains to the global oil market.

Experts say the sharp growth, if it continues, means several of the world’s most important suppliers may need to start importing oil within a decade to power all the new cars, houses and businesses they are buying and creating with their oil wealth.

Indonesia has already made this flip. By some projections, the same thing could happen within five years to Mexico, the No. 2 source of foreign oil for the United States, and soon after that to Iran, the world’s fourth-largest exporter. In some cases, the governments of these countries subsidize gasoline heavily for their citizens, selling it for as little as 7 cents a gallon, a practice that industry experts say fosters wasteful habits.

I suppose we won't talk about how this justifes Iran's pursuit of nuclear power for civilian energy purposes, or mention the billions in tax breaks given to oil companies in Canada and the US, or the big write-off for people buying big SUV's in the States, but they are important points to keep in mind.

The article also fails to mention one other recent oil producer turned importer, China. Now one of the major drivers in world oil consumption, China was still exporting oil until 1993.

The big problem I have with the article is that there is no mention whatsoever of a possible decline in world oil production. Production declines are significant, since both Mexico's and Iran's "flip" from exporter to importer is driven as much by decreasing production of oil as increased consumption. The authors seem willing to acknowledge the oil peaks in individual countries but refuse to do the same globally. They state that Saudi Arabia will be increasing production by 40% by 2010. I would really like to know where that number comes from, because nothing I've read indicates that the Saudis have that much reserve capacity. There is mention of the Alberta tar sands, without any acknowledgement that prouction there can't be increased very quickly. While production there continues to grow, the conventional fields in Alberta, which still provide most of its oil, are starting to tap out. Canadian oil production as a whole is likely to start declining within the next decade.

The fact that more producers are becomng importers begs the question of just who it is that's going to be able to export to them.

I suppose I should give some props for the NYT for acknowledging at least part of the problem, but leaving out the global peak oil issue makes the problem seem less severe than it is, which means less urgency and efort put into alternatives, meaning a harder hit when the crunch time comes.

I very much like this story:

Malawi hovered for years at the brink of famine. After a disastrous corn harvest in 2005, almost five million of its 13 million people needed emergency food aid.

But this year, a nation that has perennially extended a begging bowl to the world is instead feeding its hungry neighbors. It is selling more corn to the World Food Program of the United Nations than any other country in southern Africa and is exporting hundreds of thousands of tons of corn to Zimbabwe.

And how was this remarkable turn-around accomplished?

Over the past 20 years, the World Bank and some rich nations Malawi depends on for aid have periodically pressed this small, landlocked country to adhere to free market policies and cut back or eliminate fertilizer subsidies, even as the United States and Europe extensively subsidized their own farmers. But after the 2005 harvest, the worst in a decade, Bingu wa Mutharika, Malawi’s newly elected president, decided to follow what the West practiced, not what it preached.

You have to hate it when the fuzzie-wuzzies figure out that the "free-market" reforms the World Bank and USAID make a condition of their aid aren't something they're actually willing to try and do themselves. The only way economies ever grow is through the help of government intervention of some sort, and the removal of it usually means someone else is growing at your expense. So the focus then goes to who the "free-market" reforms actually do help.

In the 1980s and again in the 1990s, the World Bank pushed Malawi to eliminate fertilizer subsidies entirely. Its theory both times was that Malawi’s farmers should shift to growing cash crops for export and use the foreign exchange earnings to import food, according to Jane Harrigan, an economist at the University of London.

. . .

The United States, which has shipped $147 million worth of American food to Malawi as emergency relief since 2002, but only $53 million to help Malawi grow its own food, has not provided any financial support for the subsidy program, except for helping pay for the evaluation of it. Over the years, the United States Agency for International Development has focused on promoting the role of the private sector in delivering fertilizer and seed, and saw subsidies as undermining that effort.

But Alan Eastham, the American ambassador to Malawi, said in a recent interview that the subsidy program had worked “pretty well,” though it displaced some commercial fertilizer sales.

The idea that these poor countries shouldn't grow their own food provides a market for the developed countries that do, and no subsidies also makes an attractive market for the fertilizer producers. Add to that the fact that the cash crops these countries are instructed to grow can't compete with the heavily subsidized Western crops, and you have a recipe for permanent misery and poverty, and an additional chance to subsidize Western farmers by buying up their crops for food aid.

I wonder what will happen if this Malawi thing catches on?

The latest of them is the run on Florida’s Local Government Investment Pool, which just froze withdrawals after nearly half of its holdings were pulled out by the quicker and (possibly) smarter investors.  And the problem isn’t limited to Florida, or even the US.

Now, start adding the stories about Citigroup from last month laying off thousands of employees and selling off assets in a bid to maintain some liquidity as their bad debt losses mount, and the share offering by the semi-government mortgage giant Freddie Mac for much the same reason.

Even the mighty American consumer is beginning to show signs of strain.  While sales over the Thanksgiving weekend were up, they were up only because there are more consumers.  The consumers themselves are spending less.

The US population has been running a negative savings rate for some time now.  Without credit, the whole system collapses, and the credit is drying up and becoming more expensive.

Going to be an ugly time ahead.