The first quarter Gross Domestic Product rise of 0.6% was greeted with considerable relief by most Wall Street commentators; they had expected the chaos in the housing market and the banking system to have pushed the US economy into recession. This was unreasonable; the huge monetary stimulus currently being hurled at the economy was always likely to prevent immediate recession, while the fiscal stimulus of the $110bn rebate package is likely to prop it up through July or so. Beyond that, the future becomes less clear: at some stage the monetary and fiscal stimulus must run out.
As I have frequently written, monetary conditions have been pretty lax since 1995. It had been becoming difficult to determine how lax since March 2006, when the Federal Reserve stopped reporting M3 money supply, the measure used by the European Central Bank and other monetarist organizations. However the St. Louis Fed, which for the decade until April was run by the monetarist William Poole, has constructed its own measure of broad money, Money of Zero Maturity, which is a reasonable proxy for M3; it consists of M2 plus institutional money market funds minus small time deposits. Like M3, MZM began to expand excessively in early 1995; in the 13 years to March 2008 it grew at an average annual rate of 8.88%, compared with growth in nominal GDP during that period of 5.25%.
Thus monetary policy, however measured, has been excessively expansionary since 1995, in the sense of expanding the money supply faster than output. As I have written previously, the inflation-creating effect of this excessive monetary expansion has been suppressed for a decade by the Internet, which has had a similar deflationary effect through enabling outsourcing to cheap labor countries that the railroads and refrigeration did in the 1880s through allowing cheap agricultural produce from the Midwest, Canada, Australia and Argentina to be shipped worldwide.
From the beginning of 2008, however, monetary expansion has sharply accelerated. In the three months to April 21, the latest data available, MZM expanded at an annual rate of no less than 28.7%. This extra-rapid expansion is not surprising – the Fed has been terrified that the US financial system was about to collapse, and has been making funding available in large quantities in a variety of ways. Indeed on May 2 the Fed, concerned about the credit card financing market, allowed banks to use credit-card-backed AAA bonds as security for Fed loans – needless to say this involves yet more monetary expansion and further risk to the taxpayer. Monetary stimulus of this extraordinary magnitude will have an effect, it has to.
Max Keiser, the engaging and extremely well-travelled financial journo at Al Jazeera, on the clear implications of central bank support for dumb and busted speculators:-
The money quote - sorry for the pun - comes right at the end. “In this globalised financial world the profits have been privatised and the risks have been socialised”. In other words, the bankers can’t feel the effects of their crazier speculations because government simply shifts the losses to the taxpayer. In effect, the more crazy the speculation and the more spectacular the losses, the more certain it is that government will insulate the errant banker from the pain he causes. Government actually condones his most irresponsible speculation.
How sustainable this nonsense is, we are now engaged in discovering. Economic common sense dictates that it isn’t sustainable at all, and the longer it takes for the cost to return to source, the more likely the financial system will not be able to accomodate it, and will collapse.
Another very good financial dissection by Keiser, this time on what the yen carry trade is doing to Iceland, is available here.
Recently on an MR thread the question arose as to whether Latinos and blacks were really at the root of the sub-prime crisis. Here’s Stan Liebowitz, who is the Ashbel Smith professor of Economics in the Business School at the University of Texas at Dallas, with a definitive “yes”. Thanks to “The Fellist” for the link.
THE REAL SCANDAL
How feds invited the mortgage mess
PERHAPS the greatest scandal of the mortgage crisis is that it is a direct result of an intentional loosening of underwriting standards - done in the name of ending discrimination, despite warnings that it could lead to wide-scale defaults.
At the crisis’ core are loans that were made with virtually nonexistent underwriting standards - no verification of income or assets; little consideration of the applicant’s ability to make payments; no down payment.
Most people instinctively understand that such loans are likely to be unsound. But how did the heavily-regulated banking industry end up able to engage in such foolishness?
From the current hand-wringing, you’d think that the banks came up with the idea of looser underwriting standards on their own, with regulators just asleep on the job. In fact, it was the regulators who relaxed these standards - at the behest of community groups and “progressive” political forces.
I read The Myth of the Rational Voter by Bryan Caplan, 2007, and like many books, the title does not reflect the full extent of the book’s contents. Nevertheless, there are some interesting points addressed in the book that may be of interest to many of you.
One area of interest I have is how to make humans rational, either through breeding or education—whatever it takes. Human rationality is often addressed by the “heuristics and biases” research that tries to uncover how and in what areas humans are often biased through their evolutionary history. One frustrating component to this research is the absence of any generalized set of tests, similar to intelligence testing, which could score how rational a person is. This could be rectified if people were truly scientific materialists, relying entirely on empirical evidence, but it is clear that humans prefer religion, ideology, politically correct dogmas, etc., and reject science when it impinges on their uncritically embraced preferences. A good example is Richard Dawkins’ rejection of a belief in god, while he embraces secular humanism without question.
The papers have done their share of economic forecasting today. In particular, The Telegraph ran a bloodcurdling take on the liquidity crisis, filled with lurid fears of downward spirals, super-depressions and the financial system tipping into the abyss. The sub-prime loans crisis - pretty much a black and Hispanic thing - has “hit a vital nerve of the international financial system”, according to one Swiss central banker. The article, however, plainly says, “severed a major artery.”
Meanwhile, Martin Hutchinson at Prudent Bear has produced a less hysterical and more technical forecast for 2008.
THE FUTURE OF THE CREDIT CRUNCH
Observers of the credit crunch that has been bedeviling financial markets since August were mostly highly relieved this week when the European Central Bank injected some $500 billion into the world’s banking system via low cost funding and the Fed followed up with $40 billion of its own. This sharply lowered the premium that interbank deposit rates have commanded for the last four months over Treasury bill rates. However in the general rejoicing that the international financial markets were not about to ruin everybody’s Christmas, one question has so far been ignored: How in hell are the ECB and the Fed ever going to get their money back? The financial fate of the world’s taxpayers, as well as the future of the markets themselves, rests on the answer to this question.
Martin has sent me his latest Prudent Bear piece, which deserves the posting here.
GW
Close observers of the US housing finance disaster in recent months will have noted a curious phenomenon. Companies such as Countrywide that were in late August regarded as rock solid have recently passed clearly into the danger zone while those like Fannie Mae and Freddie Mac that were regarded as potential market saviors have come under a cloud. In Britain Northern Rock, whose September bailout was said to be modest, involving little risk to the taxpayer has now turned into an immense 25 billion pound ($51 billion) potential black hole – real money even in the US economy let alone in the much smaller British one. This illustrates a deeply troubling quality of the largest downturns: the tendency for the free market to turn into a death spiral, in which even sound well-run institutions are engulfed.
Death spirals are fairly rare in financial history. The Wall Street Crash of 1929 was perhaps the most virulent example. After the first downturn, the market recovered for several months. Then the collapse of the Bank of the United States in December 1930, together with the further economic damage from the Smoot-Hawley Tariff caused a further collapse in confidence and activity that was concentrated in the banking sector, as relatively solid institutions followed the Bank of the United States into bankruptcy. The Federal Reserve failed to correct for the money supply contraction caused by the bank bankruptcies, leading the US economy further into the pit. The additional shove given by President Herbert Hoover’s 1932 tax increase was almost unnecessary; only the confidence brought by a new president (albeit with equally counterproductive economic policies) brought recovery from 1933. By the time the spiral was over, more than one fourth of the banks in the United States had gone bankrupt and the stock market had bottomed out at one tenth of its peak.
A not-so-wealthy West, foreseen by Martin Hutchinson at the mainstream financial bulletin, Prudent Bear. The piece is a follow-on from his - to mainstream financial minds - sobering prognostications on the matters of outsourcing and migration.
GW
Negative earnings surprises by Pfizer and Caterpillar at the end of last week may indicate a new reality: the income premium for being a Westerner and having access to the centuries of Western intellectual property and business acumen may be sharply diminishing. We can all rejoice as poor and middle income countries are brought up to Western levels of affluence, but our rejoicing will presumably be sharply diminished if we come to realize that much of their gains may be at the expense of our children’s living standards.
The vision of the world of 2050 or 2100, in which the great majority of Third World peoples enjoy more or less Western living standards, has always been a but fuzzy. Thirty years ago, if you had asked people to imagine the world of 2050, all but the most manically environmentalist would have envisaged Third World residents enjoying living standards comparable to those of current Westerners, while the affluent West had reached living standards that could currently be dreamed of only by an affluent few.
The more thoughtful would have recognized that there was simply not enough space for the squirearchical dream of robot servants for all, together with country houses and rolling parklands. However the 18th century customers of Capability Brown didn’t enjoy modern plumbing, found travel impossibly time-consuming and uncomfortable, and had a nasty tendency to die in childbirth at 30 or of flying gout at 50. 2100’s median Western real income of $250,000 or so would have to be spent differently, but the income itself seemed pretty assured, given the continuance of technological development.
That is no longer the case. Elite opinion remains wedded to globalization as the best of possible economic policies, and believes with fanatical devotion that David Ricardo’s Doctrine of Comparative Advantage will ensure that there will be no significant class of people, even in rich countries, who lose out because of it. However it is becoming increasingly obvious to the populace as a whole that globalization produces substantial numbers of losers, particularly among the less well educated inhabitants of Western countries. No amount of cheaper consumer goods will assuage your pain if you have been forced to exchange a $25 an hour factory job for a $8 an hour service job.
I have discussed previously the effect of outsourcing and international migration on living standards at the bottom of the scale. Here I want to examine the extent that the advantages which have traditionally kept Western countries affluent—in particular those of financial capital, intellectual capital and a near-monopoly on innovation—are all losing their power to differentiate living standards.
Some grim predictions for the American, Chinese and British economies by Martin Hutchinson, in his latest piece at Prudent Bear.
GW.
The Federal Reserve, the Bank of England and the People’s Bank of China have this week all been faced with the same unpleasant reality: by their irresponsible monetary policies they have enabled gigantic asset bubbles that are redistributing wealth towards the criminal classes and in the long run will impoverish everybody else. Their reaction has been similar; to a large extent they have washed their hands of the problem.
The Bank of England’s response was most rational; it put up interest rates, though only by ¼%, far less than is required to right the foundering ship of Britain’s economy. The People’s Bank of China at least deplored the bubble, though it failed to recognize to what extent its irresponsible monetary policies and suppression of the yuan’s exchange rate had fueled it – but then after all, these people are nominally Communists; one cannot expect them to get it right every time when they are shown so many bad examples from abroad. The Fed on the other hand kept interest rates flat, as it has since last June, while easing its anti-inflationary language slightly – thus essentially acting as enabler to the Wall Street speculators, who had by Friday convinced themselves yet again that interest rates were about to drop.
On a recent thread Karlmagnus invited us to post on Wolfie’s romantic difficulties, for which purpose I have been waiting for the unsavoury denouement. However, I no longer need worry since the Bear has covered the matter in his latest offering at prudentbear.com. The President of the World Bank may be pleased to learn that the column does not dwell too long on his love life. He may be less pleased to learn that it details instead some of the unlovely aspects of the world he is striving so manfully to create.
GW
The decline of established institutions is supposed to be a liberating process, allowing individuals to express themselves fully and society to reach its potential through temporary structures that express its needs and values at a given time. Yet for those of us who are not 28 year old hedge fund traders, the new unstructured world seems likely to be a pretty grim place. “If you want a friend, get a dog” is in the long run an unpleasant way to live life.
The public sector in this respect is less of a problem than the private. The IMF and the World Bank have lost their useful economic role (to the extent they ever had one) but it appears unlikely that they will ever be abolished. The World Bank in particular is currently going through a bout of questioning because of its president Paul Wolfowitz’s crusade against Third World corruption. This is an entirely worthy if unpopular cause that is marred by the World Bank’s arrogance in tying it to handouts of money and by Wolfowitz’s own activity in arranging an overpaid tax-free job for his mistress. (One does not wish to be ungallant, but those wishing to make a salacious meal out of this case cannot have Googled the lady’s photo.)
Not an overly “majoritarian” issue this week. But Martin Hutchinson’s mini-tour of the global investment hotspots makes a good read, even if you’re poor like me.
Breaking the BRICs
Over the last few years, emerging market investment has been overwhelmingly centered around the concept of the “BRIC” group of emerging economies – Brazil, Russia, India and China. These countries were supposed to be the giants of 2050 and the only emerging markets that a truly Important institutional investor should consider, because of their liquidity. Like most ideas spawned by investment banks (truly original minds are weeded out by the banks’ Darwinian appraisal systems pretty rapidly) this idea was vapid and silly at the time. More interestingly, it is now a recipe for gigantic investment losses. There are economies in the world with excellent medium term prospects, but none of the BRICs qualify.
The following Post-Autistic Economics Review article, from March 2005, is an investigation of Japan’s enduring economic success by Robert Locke. It was sent to me by Wintermute who urged me to read the whole thing. It’s long ... some 8,000 words. So I will not reproduce it in its entirety here. But if you want to understand how the Japanese function economically, and whether they have a better way of doing things than our market-driven approach, I do urge you to read the article in full at source.
The basic picture of Japan is of a non-socialist but nevertheless centrally-planned economy. The central planning, however, is not the proscriptive unreality of Gosplan. It is subtle and it does not over-reach itself.
And in case you are asking why Wintermute would be interested in the Japanese, here’s what Locke has to say about Fascist and National Socialist economics:-
Neoliberal economists are dimly aware of the fact that fascist and Nazi economics were centrally-planned but not socialist, but they tend to dismiss these economic systems because of the attendant political horrors and have made precious little effort to develop rigorous theoretical accounts of how they worked. As we shall see, the Japanese system has achieved many of the things the fascists wanted.
My own somewhat kneejerk reaction is to retreat into genetic determinism and point to our inherent individualism, with its clear concomitant in the free market. Could the Japanese system function for long among a people who did not naturally exhibit high degrees of conformism?
Read, and see what you think.
GW
Japan, Refutation of Neoliberalism
No-one wants to talk about Japan these days. The conventional wisdom is that the bloom went off Japan’s economic rose around 1990 and that the utter superiority of neoliberal capitalism was vindicated by the strong performance of the American economy during the 1990s. Furthermore, everyone is now convinced that China – whose economy is 1/8 the size of Japan’s – is the rising economic power and therefore the appropriate object of attention.
But Japan is, despite everything, still one of the master keys to understanding the future of the world economy, because Japan is the clearest case study of why neoliberalism is false. Simply put, Japan has done almost everything wrong by neoliberal standards and yet is indisputably the second-richest nation in the world.
This doesn’t mean that neoliberalism is wholly meritless as an economic theory or as a development strategy, but it does mean that its claim to be the only path to prosperity has been empirically falsified. Japan’s economy is highly regulated, centrally-planned by the state, and often contemptuous of free markets. But it has thrived.
What follows is for space reasons necessarily a sketch and exceptions, subtleties, and refinements have been left out. Facts have been homogenized and caricatured to make structural fundamentals clear. But a reader who bears this in mind will not be misled, as detail analyses are available elsewhere.
On February 28th Karlmagnus, in response to a question about major business managers on PF’s Calcium Imaging thread, ventured the opinion that:-
… since the system is about to collapse, the intellectual outlook of management may be very different at Dow 5000 to what it was at Dow 12000. No point trying to change their thinking at the top of the bubble; large numbers of the current mob (particularly the investment bankers) will be behind bars by 2012, only peripherally because of their ideas on globalisastion. Just as 1935’s CEO was a very different animal from 1928’s, so too will 2014’s be very different from today’s.
Requests for elaboration went unanswered. But evidently, KM had already been at work on this because today the following piece appeared at Prudent Bear.
GW
This is what it will look like
It’s impossible to tell when the world’s stock markets will finally wake up from their easy-money induced stupor, but one thing is clear: when they do so the initial break will look like last Tuesday. A modest event of no apparent global significance will cause a stock market drop that cascades around the world, producing severe declines in other markets. Last Tuesday’s break may or may not have started the climacteric sell-off, but that sell-off cannot be long delayed.
More interesting than the unanswerable question of when precisely a crash will occur is that of which sectors will be worst affected, which relatively unscathed. Current market thinking appears to be that since the crash originated in China, that market is due for a significant downturn, and that emerging markets in general are overpriced and due for a fall. That view fails to reflect an intelligent appraisal of where the true economic vulnerabilities are.
Here is Martin’s latest offering at PrudentBear.com. Subject matter: the highly political global oil economy, following on rather neatly from James’ antennae-twitching piece on hyper-inflation.
Since the recent drop in oil prices, the market appears convinced that we have seen the last of their stratospheric rise – the NYMEX oil futures contract remains under $70 per barrel for the next 2 years, for example. However the free market economists’ theory that supply will always arrive to meet demand increases is pretty shaky in the oil sector, and the market looks likely to be wrong.
In conventional analysis, the surge in demand from the emergence of India and China and a strong economy in the West is believed to be temporary. Prices may be boosted by an unexpected event such as Hurricane Katrina or the Nigerian oil disturbances, but a sustained period of high prices such as in 2005-06 produces additional sources of oil supply. These take time to appear but eventually satisfy demand and drive prices down to their equilibrium level, currently thought to be in the $25-30 per barrel range.
This analysis may be wrong for a number of reasons. On the demand side, this is not an ordinary economic boom, but has been “turbocharged” in China and India by the Internet’s one-off enabling of outsourcing to those two countries. Thus the world’s economic growth is heavily concentrated in China and India, particularly China, rather than in the countries of the West and Japan in which oil demand is relatively saturated.
The Chinese automobile market has grown from 3.2 million vehicles in 2002 to 7 million in 2006, and is now the second largest automobile market in the world, just ahead of Japan, 40% of the size of the U.S. market and 10% of the world market. Naturally the buyers of these vehicles are going to drive them, since gasoline remains a relatively small part of the overall purchase and maintenance cost of an automobile. Hence gasoline demand in China is rising not by the country’s 10% overall economic growth, let alone by the lesser figure that might be expected as usage becomes more efficient, but by something fairly close to the 22% per annum growth rate of Chinese automobile ownership.
While Chinese gasoline usage still represents a modest share of world oil demand, if even a small part of the oil market is growing structurally by 22% per annum, the normal effect of higher prices in encouraging conservation and reducing consumption may be swamped. Indeed, that appears to be the case; in 2005 world oil demand increased by 1.2 million barrels per day, in spite of an average oil price around 40% higher than in 2004. Almost all that increase in demand was outside the OECD group of wealthy countries.
A few posts down, a certain commentator put forth the view that a defence of what we conservatives (used in the broadest sense) hold dear is necessarely threatened by the free market. Here is my reply, after cogitating much on the questions and dilemmas raised by the debate.
It was stated that we need an economic policy that best serves our interests, with which I can scarcely disagree, and then this was used to conclude that we need a more socialist one then what we have now. I would disagree, arguing on the contrary that reducing the burden of taxation and regulation on middle class enterprise and small business would lead to both greater wealth and a more secure yeoman class (or its modern equivalent). We can argue about this, but we must first stop pretending that pragmatism must necessarely mean more governemnt power.
Mention was made of Enron and Oprah as examples of market failure and I would have to agree with that assessment. But what about the great American car companies? (That is, before the US goverment’s irrresonsible taxation policy sold them down the river). What about Tesco or Sainsbury, companies which provide their customers with good agricultural produce? What about the UK mills which created its prosperity? Those comapnies which, like Enron, engage in underhand methods often find themselves quickly out of business, with angry investors and corporate lawyers hot on their heels.
More generally, further evidence that private actors are more efficient than the state can be provided. We saw how the USSR and the West before the 80s attempted and failed to run much of its heavy industry. In the UK, coal mining was a viable enterprise until three decades of state ownership had crippled it, leaving the tax payer without his money, and, eventually, the coal workers without their jobs and the country without its internal coal supply. And as for the USSR and, say, Chernobol, that scarcely requires any elucidation. This should concern as especially, as we believe that it is essential that certain industries stay within our borders.Government over-regulation and over-taxation has played a great part in creating the sell off of the western industrial base.
I just finished reading The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good, by William Easterly, 2006. I purchased the book because I thought it would be another socialist screed trashing capitalist systems—I was very wrong. The book is very well written from the perspective of a very knowledgeable economist, familiar with The World Bank, the International Monetary Fund, etc., and the countries and problems they try to assist.
The crux of the book is that “planners” are incapable of solving problems, and that “searchers” for solutions are better able to decide where money should be spent and how. He also does not give specific policy recommendations, and concedes we just need to try and do things differently.
I think I have probably harassed enough by now the economic ignoramuses who groan about the “peak oil” problem but I could not resist posting an article below which argues that even the brain-dead method of producing ethanol from corn may now be an economic proposition as a motor fuel:
Ethanol--the gasoline substitute made by distilling corn or other vegetation--has long been the subject of intense debate. According to its critics, ethanol does little to improve air quality and may actually contribute to smog, costs taxpayers billions of dollars in subsidies, and doesn’t do much to reduce our dependence on foreign oil. Ethanol’s defenders say its environmental effects are more positive than negative, the so-called subsidies are mostly federal and state tax breaks, and as the cost of making ethanol falls while the cost of fossil fuels remains high, ethanol could substantially reduce the nation’s oil consumption and even overtake gasoline as the preferred transportation fuel.
Ethanol was in the news recently [January 5] when General Motors, Chevron, the state of California, and other partners unveiled at the Los Angeles Auto Show a plan to greatly expand the use of E85, a motor fuel composed of 85 percent ethanol. GM already has manufactured 1.5 million “flexible fuel vehicles” able to run on E85, but they seldom do because the fuel is not widely available. Chevron announced plans to provide the fuel at selected gas stations, and Pacific Ethanol, another one of the partners, announced plans to build four ethanol plants in California over the next two years.
I’ve observed this debate for many years as a citizen and as a scientist. As a citizen, I don’t like subsidies or regulations that distort markets. But as a scientist, I’ve long supported ethanol as a “win-win” proposition for farmers and consumers alike. I view the recent announcements as evidence that ethanol has reached a tipping point, and that the debate over the fuel may be over. Ethanol’s advocates have won.
Richard Duncan has written a new paper on his Olduvai theory, which he traces back to (among other sources) Henry Adams. In a way it is a comfort to know that our current situation was foreseen long ago. Actually, no, on second thought, it isn’t much comfort.
The Olduvai Theory states that the life expectancy of industrial civilization is approximately 100 years: circa 1930-2030. Ackerman’s Law defines it: e = Energy/Population. Four postulates follow:
1. The exponential growth of world energy production ended in 1970.
2. Average e will show no growth from 1979 to circa 2008.
3. The rate of change of e will go steeply negative circa 2008.
4. World population will decline proximate with e.
Henry Adams in 1893 envisioned that electric power would accelerate society into chaos and ruin. Frederick Ackerman in 1932 showed that social change could be quantified by e. King Hubbert graphed the shape of the e curve in 1949. Thus an Olduvai scenario existed before 1950.
If George W. Bush needs an example of how ethanol can help to reduce dependence on oil imports, he need look no further than Brazil. What Saudi Arabia is to crude oil, Brazil is to ethanol - the environmentally friendly, renewable fuel of which it is the largest producer. Brazil makes the fuel by fermenting and distilling its sugar cane crop, the biggest in the world, and then using the liquid to fuel a rapidly increasing proportion of its transport fleet.
Seven out of 10 of all new cars sold in Brazil are now “flex-fuel” - owners can fill them with either ethanol or petrol. Computer sensors inside the engine then decide what will be the best mix of whatever is in the tank for optimum performance. Finding ethanol is not a problem either - almost all petrol stations have pumps selling pure ethanol, while all regular petrol sold at the pumps is in fact a mix called “gasohol”, a blend that contains up to 25 per cent ethanol. Ethanol produces a cleaner burn than petrol, resulting in less pollution and smog.
I try not to cudgel MR with this stuff, really I do. But today’s post on The Oil Drum is as close to a must-read as you could ask for. Stuart Staniford really likes graphs. Where is the carbon? Find out here.
Below is a plain-English summary from “Science” magazine followed by the abstract of one of the two papers mentioned. It is impressive that even using the moronic corn-sugar route, ethanol production has a positive energy balance. With half a dozen co-authors of the paper, however, it is pretty amazing that none of them seem to be aware of the enormously cheaper and more environmentally friendly method of producing ethanol directly from sugarcane.
In the late 1990s, Latin America was believed to have adopted a “Washington Consensus” of democratic politics and moderately free market economics. At the end of 2005, it is becoming only too clear that the two parts of the Washington Consensus are in conflict in the region, with the democratic politics leading to increasingly anti-market economics, which will inevitably be followed by decline. It’s worth asking why.
In 4th Century BC Syracuse, Damocles was the court sycophant who wished to change places with the wealthy tyrant Dionysius, and discovered that to do so involved having a sword suspended over his head by the finest of horsehairs, since Dionysius was in permanent danger of assassination. Likewise those who designed today’s U.S. economy sought to create an era of permanent prosperity; only in 2006 will we come to notice the slender thread by which hangs the prospect of economic catastrophe.
As you will see from the news excerpt below, Brazil is now filling up its motorists’ cars with ethanol for HALF the cost of petrol (gasoline). Most calculations of ethanol costs that you see are based on the insane American system of producing ethanol from corn sugar. In Brazil, ethanol production is fully integrated, with the sugarcane going straight from the farm to the distillery—thus VASTLY lowering costs. The distillery just puts the cane through a crusher and then immediately starts fermenting the squeezed-out juice.
The only thing holding up investment in ethanol production elsewhere is uncertainty about which way the oil price will go—and since that depends mainly on how much the Saudis decide to pump, the price could easily lapse right back, as it has done in the past.
