Recently in Economics Category

Currency, like all forms of abstract value, is based on trust. And trust itself is based - except among the most naïve - on experience, and the repetitive demonstration of fidelity, whether positive or negative. At present, the US dollar, which had experienced a gradual rise during the 20th Century to the position gained well into the Cold War of being the trading world's reserve currency. It had the mass, in terms of volumes of available currency; it had the backing of an indisputably wealthy national asset base to move away from the gold standard; it had stable governmental backing.

All of that is evaporating. Not, in absolute terms, as far as the mass of currency available, because that has dramatically expanded in recent years, and particularly during the past year of the Administration of Pres. Barack Obama. Not in the underlying asset valuation of the US economy, but it has begun to erode as the productive capability of the US to extract that value diminishes due to excess governmental interference and anti-business practices. It is far to say that other countries, from Nigeria to Russia, have vast untapped underlying asset value. That they did not create global reserve currencies from their naira and ruble was due to governance failures.

However, as we are witnessing, good governance as an essential component of currency value and the trust in that currency, can transform overnight, just as we witnessed the post-World War II collapse of sterling, and, now, the shakiness of trust in the US dollar (despite the reality that, at $14.2-trillion in value in 2008, is the world's largest). The age of the US dollar as the global reserve currency is not yet over, but it is threatened, and the trend toward a flight from the dollar (despite occasional returns to it) is evident. At present, however, the dollar is shored up because in many respects there is nothing of its stature ready to replace it. This leads to the essential question:

Are we entering a period in which we may have no global reserve currency?

The People's Republic of China (PRC) has been searching for safe-havens for its holdings of foreign earnings. The US dollar has slipped in its esteem, with some short-term benefits, perhaps for US exports, but with perilous long-term consequences. As a result, and whilst attempting to preserve the intrinsic value of its currency holdings, the PRC has been gradually scaling back its holdings in US currencies or US dollar-denominated instruments.

Where can the PRC go with its hoard? It looked at euro investments, at Canadian and Australian dollar holdings, and so on. The Australian and Canadian economic bases -- at just under a trillion US dollar GDP for Australia, and about $1.4-trillion GDP for Canada -- are insufficiently large to hold much in the way of PRC investments. Nonetheless, these economies have benefited from the PRC dilemma. The euro, however, is, like the US dollar, suffering from a loss of credibility, and unless some profound action is taken the euro may dramatically diminish in credibility, severely hampering the loose confederal structure of the European Union, preventing it from becoming the federal state of Europe to which some (mostly unelected) aspire.

The Dow has closed above 11,000, the European Union is bailing out Greece and the U.S. economy seems to be perking up. Is the future as bright as it looks? In fact, it looks pretty good, says Wharton finance professor Jeremy Siegel. While the Dow's 11,000 close doesn't mean much to professional market watchers, it can give ordinary investors a psychological boost, and it focuses attention on the stock market's fine showing over the past year. According to Siegel, the U.S. economy is in a self-sustaining recovery, no longer dependent on government stimulus -- and while the housing market could take years to make up recent losses, the economy should do well. With interest rates likely to rise, it's a risky time to invest in bonds, but stocks could end the year 8% to 10% higher than they are today, Siegel said in an interview with Knowledge@Wharton.

An edited transcript of the conversation can be found here.

SandRidge Energy's agreement this week to acquire Arena Resources, a producer of conventional oil in West Texas, for $1.6 billion is the latest example of natural gas companies seeking to balance their portfolios with more oil as the two resources decouple in price.

Natural gas prices have fallen more than 25% this year to below $4 a million British thermal units while oil prices have risen 8% and are now testing the $85 a barrel level, with some analysts forecasting $90 to $100 a barrel for later this year. The price ratio between the two fossil fuels has widened to more than 20-to-1 after staying closer to 10-to-1 in the past, even when oil rose to $147 a barrel.

SandRidge CEO Tom Ward said last month at the Howard Weil Energy Conference that companies can make "10 times more money" producing oil rather than gas. SandRidge has been acquiring oil properties over the past two years to achieve greater balance.

Gas accounted for 85% of SandRidge revenue at end-2008. Currently, oil represents only 28% of production but accounts for 54% of revenue.

The Arena Resources acquisition is SandRidge's second in West Texas since November, when it spent $800 million to acquire properties from Forest Oil.

Other producers at the Howard Weil conference - including Noble Energy and Cabot Oil & Gas - said they were shifting investment to oil rather than gas.

Crude oil futures kept falling back from highs even though speculative funds increased their bets that prices are headed higher. The benchmark West Texas Intermediate contract ended the week at $80.68 a barrel, after nearing $83 earlier in the week, compared to $81.24 a week ago.

Saudi Arabia's oil minister, Ali Naimi, made it clear once again on Tuesday that the world's largest oil producer prefers a range of $70 to $80 for oil prices. Speaking to journalists in Vienna prior to and OPEC meeting, Naimi said the oil-exporting group, which accounts for 40% of daily oil consumption, won't let tight supplies push prices too high.

Further bearish factors were the increase of 1 million barrels in U.S. crude oil inventories in the weekly report from the Energy Information Administration and renewed strength of the dollar amid continuing concern about Greece's fiscal situation.

A report in The Wall Street Journal on Friday suggested that EIA collection methods for the oil inventory data may be flawed, according to internal agency documents obtained by the newspaper. Greece said on Thursday it might have to call on the International Monetary Fund for aid if its efforts to reduce its deficit are not successful.

But bulls were encouraged by the Federal Reserve's reiteration that interest rates would remain low and by OPEC's decision to leave production volume unchanged, indicating their belief that prices would remain firm. The benchmark oil contract settled at $82.93 on Wednesday.

However, the move by the Reserve Bank of India to raise its key rates on Friday drove oil prices down amid fears that China and other emerging economies might follow suit and dampen demand for oil.

The Monfort Plan (Wiley Finance, April 2010) presents the new architecture of a redefined capitalism. This summary piece introduces the five year action plan and explains why a new architecture may be needed in today’s environment.

Today’s capitalism is based on a vintage architecture that dates back to the 1940s and the American effort to pull the world away from Nazi Germany and Soviet communism. It was then when the four institutions of this old architecture were designed: the World Bank, the International Monetary Fund, the United Nations and the GATT. The old architecture designed by the Bretton Woods elites served a purpose: it contributed to the economic resurgence of Western Europe and brought peace to a continent that had fought wars for centuries.

Subsequent to the design of the new architecture the Truman Administration proposed and implemented the Marshall Plan, the plan for the economic recovery of 17 countries in Western Europe. The plan enabled the vision of Jean Monnet to come up with a European Community of Coal and Steel, the parent of the European Union. These were times of courage and vision. The great changes of the 1940s and 1950s were precipitated by the devastation of the two World Wars and the economic collapse of the Great Depression. The environment set the basis for thirty years of phenomenal economic growth on both sides of the Atlantic.

The second half of the twentieth century had two flavours that modeled the world's geo-political pattern of both Hemispheres: the cold war and the emergence of neoclassical economics fathered by Milton Friedman and Alan Greenspan and implemented by Ronald Reagan and Margaret Thatcher. Neoclassical economics brought about an increasing mathematical sophistication where economic sub-fields such as financial economics prospered thanks to the work of gifted mathematicians such as Merton, Black or Scholes. Monodimensional utility functions prioritized profit maximization over other variables such as human dignity or environmental sustainability. Academia was captured in the allure of models. Our economic policy-makers were constrained by mathematical models that worked on paper.

In a speech on the outlook for the world economy, OECD Secretary-General Angel Gurría spoke about the impact of the financial crisis and OECD's work to produce a more inclusive globalisation.

The financial system is a conveyor belt through which the economy works. And if the financial system is partially blocked or paralysed, as it is now, then the economy cannot work normally.

Continue reading: The Global Economy and OECD

“From Indian antiquities to modern Chinese art; from land in Panama to Mayfair; from forestry, infrastructure, and the junkiest bonds to mundane blue chips; it’s bubble time!” By now you have probably heard this quote by Jeremy Grantham in his letter to investors (which includes vice president Dick Cheney and a host of other high profilers) discussing a six week trip around the world and the pending bubble popping events to come (at least by his predictions). Grantham is not the only forecaster that has mentioned the overvalued prices of assets across the globe. Most recently (May 23rd), in one of Alan Greenspan’s consulting appearances he mentioned that Chinese markets were at unsustainable levels.

Martin Weiss, Ph.D. examines the global marketplace and the six giants leading the economy. In this issue of Money and Markets, Dr. Weiss discusses the high demand for natural resources due to the booming global economy.

Jupiter, Fla. (PRWEB) April 26, 2007 -- Martin Weiss, Ph.D. examines the global marketplace and the six giants leading the economy. In this issue of Money and Markets, Dr. Weiss discusses why China, India, Japan, Brazil, Australia and Canada continue to outperform the Dow.

The Issue Is Not China’s Stock Markets – It’s the Model

By Scott B. MacDonald

In late February 2007, the global stock market meltdown started in Shanghai. As The New York Times noted on March 4, 2007:

“Less than a week ago, it might have seemed preposterous to suggest that a 9% fall in the Shanghai stock exchange could jolt markets across the world, triggering declines in everything from European stocks to American corporate bonds.”

In the last 10 years three billion people have started to climb the first rungs of the Global economic ladder and are lifted out of poverty and ignorance. The shift of wealth is set to accelerate as the “sea change” of prosperity and economic growth swing from the developed world shift to the emerging economies. These people are working 60 hours a week, saving and investing, and going to school a recipe for success wherever you reside.