Moon of Alabama Brecht quote
March 26, 2005


More confirmation, if ever it was needed, on the "poodlehood" of Tony Blair, courtesy of this morning's Financial Times:

Blair kept quiet on Wolfowitz candidacy

Tony Blair was sounded out on the candidacy of Paul Wolfowitz to lead the World Bank before the White House announced his nomination but did not share the controversial proposal with cabinet colleagues or fellow European leaders.

The British prime minister was informed about Mr Wolfowitz's possible candidacy and relayed to Washington that he would not oppose him.

The issue was raised with Mr Blair when Condoleezza Rice, the US secretary of state, visited London last month, according to two senior US officials close to the proceedings. Mr Blair's discreet support gave President George W. Bush the confidence to know that Mr Wolfowitz, the deputy defence secretary and an advocate of the war in Iraq, would not face united opposition from the World Bank's European shareholders.

Blair does not care about Europe. Don't ever believe that myth. All he cares about is his personal access to the White House, and that dream that he can be the sole go-between between Europe and the USA.

But by honouring Mr Bush's wishes, Mr Blair chose to keep the candidacy from Gordon Brown, the UK chancellor, who is chairman of the International Monetary Fund's governing body and the European finance minister most closely identified with the development agenda.

Yep, he does not even care that this access be to the UK Prime Minister. No, it's just Tony Blair.

A Downing Street official said: "We had a number of discussions with a number of different countries over possible candidates over a period of time. Like others, we were first notified of the decision to nominate Paul Wolfowitz on the day of the president's announcement." Treasury officials declined to comment.

While the details of Ms Rice's private conversations with Mr Blair remain tightly held, officials and diplomats on both sides of the Atlantic have said they were aware of Mr Bush's effort to secure the support of his chief European ally. The UK Treasury, the British foreign office and officials in other European capitals remained in the dark, according to UK officials.

Following a report in the Financial Times on March 1 that Mr Wolfowitz was a leading candidate for the US nomination, a senior UK Treasury official telephoned his US counterpart.

The US Treasury dismissed the story, according to British officials. A British diplomat, who contacted the administration, was told Mr Wolfowitz was not in the running.

So this was intentional. This is an even bigger "fuck you" from Bush, and the story makes it explicit that Blair knew about the "fuck you" and endorsed it.

The World Bank presidential nomination is seen by Washington as a White House decision and it chose to garner support for Mr Bush's choice by contacting European leaders directly rather than lobbying finance ministries and development agencies.

Unlike Mr Blair, some European leaders were not given advance warning. Jacques Chirac, the French president, and Gerhard Schröder, the German chancellor, only spoke to Mr Bush after the announcement. But European leaders have made clear they will not stand in the way of the Wolfowitz candidacy.

Blair is a traitor. To Europe, which may not be so important, but to his country and his party. What a pathetic fool.

One of the biggest reasons why I hope that France votes "Yes" in the coming referendum on Europe is that a "No" would save Blair from actually having to make a stand on Europe, which he has never done. He has pretended to be pro-European, but has never behaved that way and has never argued the case to the British electorate.

Slimy fucker.

Posted by Jérôme à Paris on March 26, 2005 at 11:16 UTC | Permalink | Comments (17)

March 25, 2005

Billmon: The Nice Guy


Posted by Jérôme à Paris on March 25, 2005 at 6:55 UTC | Permalink | Comments (12)

Billmon: My Back Pages

My Back Pages

Since I reopened Whiskey Bar back in January, huge numbers of readers – well, OK, one or two – have asked me why I’m not “writing” anymore.

Go read the rest and reply here!

Posted by Jérôme à Paris on March 25, 2005 at 6:52 UTC | Permalink | Comments (56)

March 24, 2005

U.S. May Veto UN Vote on Schiavo

BushUNITED NATIONS (RBN) - France is to put to a vote on Thursday a U.N. resolution referring the Schiavo case to the International Criminal Court, daring Washington to cast an embarrassing veto or accept a judgement by a court it opposes.

The U.S. Supreme Court on Thursday refused to order Terri Schiavo's feeding tube reinserted, rejecting a desperate appeal by her parents to keep their severely brain-damaged daughter alive. The U.N. Security Council has been deadlocked on where to refer the case to the ICC as a possible crime against humanity.

France's U.N. ambassador, Jean-Marc de la Sabliere, had introduced a draft resolution that would refer the Schiavo case to the ICC, the world's first permanent criminal court, as recommended by a U.N. panel of experts.

But the United States offered to create a new U.N.-Florida State tribunal in Miami that has drawn little support, with several council members arguing that only the ICC already has investigators on staff ready to begin work.

The Bush administration objects to this court, set up in The Hague to try war crimes, genocide and crimes against humanity. It fears U.S. citizens could face politically motivated prosecutions.

However, a U.S. veto could send a signal to the United States courts that legal officials and judges were safe from punishment in the Schiavo case, where arguments are escalating, thousands have demonstrated and millions of people have voiced religious concerns about the case.

Uncertain yet is whether nine Security Council members will vote in favor of the ICC, the minimum needed to adopt a resolution in the 15-member council. If there are not enough votes, the United States would be spared a veto.

The Bush administration, in the forefront of trying to get action on the Schiavo case, sought to break the deadlock on Tuesday by denying international relevance of the case and referring it back to Florida.

Posted by b on March 24, 2005 at 16:10 UTC | Permalink | Comments (16)

Life Expectancy

The most recent life expectancy statistics for France has just been published (4 page pdf, in French), and within that document comes a nice visual of one of the most amazing "laws" of social sciences:


For the past 250 years, life expectancy has increased with amazing regularity (interrupted only by war) at a rate of one trimester per year.

(see also this graph, from this study by Oepen and Vaupel, discussed on the Maternal & Child Health blog)

An even more interesting graph is the following:


(the two lines are for women (above) and men)

It is interesting to note that until the 20th century, improved life expectancy was linked exclusively to better survival rates in the early years, whereas in the past century, the life expectancy in later years has significantly increased. Again, it is striking how close to a straight line these graphs are.

I have also read that this increasing life span has been accompanied by an increasing healthy life span, i.e. older people are, for the most part, in good health, and it is only in the last year of their lifes that their health becomes really bad. So it's not a question of (ab)using medecine to extend the life of severely ill or weakened patients: we live longer AND better.

The obvious question is - how long can that last?

I have no smart answer to that, and there are a lot of worrying tidbits floating around:

- no progress can be expected (in Western countries) on improving survival rates for children : the mortality is already pretty close to nil:


- cancers and other diseases associated to tobacco are only now beginning to strike women in large numbers. A sign of that impact is that life expectancy for women has increased by much less than for men in recent decades (you can find US statistics here (pdf))

- the biggest worry these days is linked to obesity, which has been growing at a rapid pace in most Western countries (and in some thrid world countries as well), with the US leading that sad race. Obesity is associated with a number of diseases and, as a recent study (mentioned in the above link) states, could be a cause of declining life expectancy, for the first time in almost 3 centuries.

In the meantime, enjoy this tidbit - every year, you are only 9 months closer to your death...

Posted by Jérôme à Paris on March 24, 2005 at 14:39 UTC | Permalink | Comments (10)

March 23, 2005

Open One Again

News, views, whatever and a link to the forerunner

Posted by b on March 23, 2005 at 19:48 UTC | Permalink | Comments (81)

Billmon: Ignorance of the Law ... +++

Tweedledee and Tweedledum

Killing prisoners: Eat Our Shorts, Dude

Christians? In the Name of the Son

Full Court Press

(I need to find a new form for Billmon posts. Any ideas? Please email them.)

Posted by b on March 23, 2005 at 19:44 UTC | Permalink | Comments (3)

GM Bullshit

Gen manipulated corn is save. It is thoroughly tested. The controls are strict. There are self regulating elements in the industry that will not fail. The government strictly controls the gen companies and will inform the public immediately in case any irregularities occur.

You do believe this bullshit? Here is news:

US admits GM crop cock-up

A US biotech company has admitted that several hundred tonnes of non-approved GM corn produced from its seed have been sold over the past four years. The Bt10 seed was planted accidently instead of the Bt11 variety, and although developer Syngenta says that its admission of the error to US regulators last year confirms that monitoring procedures are effective, critics claim the opposite.
Since late 2004, the Environmental Protection Agency, the Food and Drug Administration and the US Department of Agriculture - the bodies jointly responsible for GM regulation - have been in talks with Syngenta as to how best to deal with the error, and "how and when information should be released to the public". Regarding said release, the US administration is reported to have taken a keen interest in the damage-limitation procedure.

That the White House is also involved comes as no surprise, given that the US and EU are enjoying an ongoing punch-up over GM crops. Bt11 was approved for importation into the EU in 1998, and the US hopes it will become one of the first GM crops for widespread cultivation across the Pond. Syngenta declined, however, to say whether Bt10 had inadvertantly landed on European shores, or indeed to list any countries to which it may have been exported.

This was no accident and this was a massive cover up, but aside from that, the problem is different.

For thousands of years farmers have saved some of their fruits to seed them the next year. They selected the best looking, the best tasting, the most profitable crops for this. To the GM-industry this is a problem as the can sell their product only once. So they make their seeds impotent. Thereby it is impossible for a farmer to uses the crops from their seeds to use these as seeds in the next planting period. They simply will not grow.

There is no necessity for this plant behavior. Gen manipulated crops may be useful to harden seeds, for example, against salt in the ground. We will probably need such crops to prevent future mass starvation, even if there are some negative issues with them.

But the impotence of the crop is an additional gene manipulated "feature" with the sole purpose of monopolizing the markets. It is not needed to add other desirable qualities to these plants. It is dangerous for the population if, for whatever reason, such seeds may not be available for a planting season. There will be no alternatives if only impotent crops have been grown.

There is resistance to such schemes. But this can be broken. Just conquer the worlds early bread chamber and change the laws for Plant Variety Protection. This wording is  of course pure newspeak as the law is forbidding the thousands of years old diverse selection process of the Iraqi farmers and mandating to buy from the GM monopolies.

Breaking laws in cooperation with the government and not to inform the growers and consumers about accidents is just another way to avoid resistance.

Posted by b on March 23, 2005 at 19:31 UTC | Permalink | Comments (16)

Low Taxes and Growth Not Linked

Here's a strong argument to those that say that taxes are a drain on growth and must be cut: there is no correlation whatsoever between public spending levels and growth per capita, as this graph below shows


The economic performance of the US over the past 10 years is pretty much identical to that of sclerotic, socialist, rigid France, and significantly worse than that of socialist, statist Sweden and Finland, measured in statistically significant terms, i.e. growth per capita

Martin Wolf: Big spending doesn’t mean less growth (FT, 23 March)

The question [is whether high shares] of public spending in GDP prove economically harmful. Some think that no economy can tolerate taxes higher than those elsewhere if it is to sustain "competitiveness". Others talk as if public spending disappears into a black hole from which nothing of value emerges. Is there anything in these crude arguments? Not much, is the answer. Citizens of the rich countries deserve a more subtle debate. Start then with overall economic performance, particularly the growth in output per hour and GDP per head. The charts [see at the top of the post and below] show both between 1995 and 2004 against the share of general government spending in GDP in 2004. The share of government spending in GDP varies by a ratio of almost two to one, from Sweden on 58 per cent to Ireland on 34 per cent. There is a group of relatively low spenders: the English-speaking countries (except the UK), Switzerland, Japan and Spain. There is a group of extremely high spenders: Sweden, Denmark and France. What, then, do the charts show about the link between government spending and economic performance? There is none, is the answer.


Ireland's performance generates a small, but statistically insignificant, slope downwards to the right. But Ireland is an exceptional case. What is striking is the slow growth of GDP per head in low-spending Japan and Switzerland and the high growth in high-spending Finland and Sweden. The relatively poor performance of the US may surprise some readers. But remember that US GDP grows faster than those of European countries because its population of working age increased by 1.2 per cent a year, against 0.4 per cent in the European Union between 1994 and 2004. I would not wish to push such crude data too far. Measurement of GDP and so of productivity is increasingly hard to do as output becomes less material. It is particularly hard to measure the output of government services. Yet one overriding point does emerge: the mere fact of a rising ratio of public spending in GDP does not spell doom for the UK (or any other) economy. This is consistent, surprisingly enough, with an analysis from impeccably conservative US sources: the Heritage Foundation and The Wall Street Journal. In the 2005 Index of Economic Freedom, which measures, however roughly, the underpinnings of market economies, Luxembourg (ranked 3rd) and Denmark (8th) are above the US (10th), as is the UK (7th). Sweden (14th), Finland (15th), the Netherlands (17th), Germany (18th) and Austria (19th) all fall in the global top 20. What then of the idea that higher spending (and so taxes) must also spell a lack of global competitiveness? The short answer is that it is nonsense, for reasons elaborated in my book, Why Globalization Works (Yale University Press, 2004). The burden of higher taxation will be shifted on to owners of relatively immobile factors of production. Moreover, no link exists between the size of government spending and a lack of something one could reasonably define as "international competitiveness". What does indeed matter is the efficiency with which money is both raised and spent. But tax levels are only one of many determinants of economic performance. Far more important are: the quality of institutions, particularly of public administration and the judiciary; the security of property; the probity and public spiritedness of politicians; the soundness of money; the quality of education, health and infrastructure; and the extent of arbitrary regulation of economic activities. Monomania is usually a mistake. An exclusive focus on the tax burden is an example. What we must abandon is a debate that takes the form of "public sector bad, private sector good", or the other way round. It is particularly stupid when, as in the UK, the decision has already been made to pay for evidently high social priorities through the state. Health and education do not suddenly become far less important than holidays in Ibiza merely because they are financed through taxation. In making the decision on what to put into the public sector and how much to spend on it, we have to place substantial weight on underlying social and political values. But we must also ask, first, what we must do through the government (defence and law and order, for example); second, what we want,for reasons of social solidarity, to do through government (provision of basic incomes for all, of universal education and of basic health services, for instance); third, whether we wish to pay for services through general taxation or user fees; fourth, what is the least costly way of raising revenue; and, finally, whether we want services to be paid for and provided by government or merely paid for by government and provided by competitive private suppliers. These are the right questions. Labour's higher spending will not destroy the British economy, just as Finland's high spending has not destroyed Finland. What matters here, as elsewhere, is not what you do but the way that you do it. Sources for charts: OECD; The Conference Board

Martin Wolf is one of the most respected (and reality-based, to use a term you may be familiar with...) economics columnists around, which is why I copied most of his column here. Let me repeat again: The economic performance of the US over the past 10 years is pretty much identical to that of sclerotic, socialist, rigid France, and significantly worse than that of socialist, statist Sweden and Finland, measured in statistically significant terms, i.e. growth per capita Do not believe everything you read in the press about continental Europe. There are a number of problems, but we are not in terminal decline. Our economic model has its flaws, but being unsustainable or significantly weaker than the Anglo-Saxon one is not one of them. Taxes are not bad - it's a HARD FACT They are used to provide necessary services or socially useful goods which have positive macroeconomic effects. They are not just a drain on productive workers.

Posted by Jérôme à Paris on March 23, 2005 at 13:14 UTC | Permalink | Comments (6)

Billmon: Hillary Rodham DeLay


Posted by b on March 23, 2005 at 8:28 UTC | Permalink | Comments (5)

March 22, 2005

France to Vote EU Constitution (I)

An interesting series about the UK elections is currently underway over at dailyKos (provided by Welshman and Febble), and it has been suggested that I provide the same on the other important vote due to take place in Europe in the coming weeks: France's referendum on the EU Constitutional Treaty (or EU Constitution) on 29 May.

I'll use this post to make a brief description of the Constitution, how we got there, what will happen next, and what are the stakes in France. I intend to make a series of posts on the topic as the campaign unfolds, and this can be used to discuss various European issues.

Please bring in your input and your questions, I'll try to respond in the comments or in future installments.

First of all, there are many sites where you can find the full text of the EU Constitution and many detailed explanations, so if you want to have lots of information, you can go there:

Official site of the European Union on the Constitution, including the full text of the Treaty (pdf, 860 kb), links to the various institutions of the European Union, and some interesting Powerpoint presentations (pps, ca. 400kb);

The site of the UK Foreign Office on the topic, including their commentary of the treaty (scroll to bottom of that page);

The European Convention, the group that negotiated over two years the Treaty which was finally adopted by the Heads of Governments one year later, with small amendments;

The BBC Special on the topic, including a summary of its main terms and explanations on the various institutions and decision making mechanisms.

Two of these sites are European, and two British. There is an untractable problem when discussing Europe in English - the perception bias. As you hopefully know, the UK is the most Eurosceptic country in Europe, and this means that, as a general rule, commentary in English about Europe is more critical, distrustful and dismissive of Europe than the general European public is. Being French and strongly pro-European, I will of course strive to fight that perception bias with a bias of my own!

So here we go.

I will not go into a detailed history of the construction of Europe (you can find a British-slanted timeline here courtesy of the BBC), but the idea of the Constitution came about after the disastrous Treaty of Nice, in France in 1999, which then set the parameters for decision making once the enlargement to Central Europe would take place, and which is unanimously considered to be a terrible treaty, with complicated and impossible to explain rules, and very unwieldy voting procedures. The brain child of Chirac and Schroeder when they did not get along, it has come into force last year and will remain in force if the EU Constitution is not ratified.

Faced with that perspective, the European countries decided that it would make sense to try to simplify the rules of the EU, make them clearer to everybody, and hopefully improve the decision-making processes in an union of 25. Thus the European Convention, was born, regrouping representatives of the European Commission (the European executive body), the European Parliament, each national government and each national Parliament, 115 members in all, led by Valery Giscard d'Estaing, the former French President in the 1970s. They worked for 2 years to find a consensus, and it was almost mission impossible as there were so many conflicting requirements and wishes (more federalism, more subsidiarity, more powers to the Commission, more power to the member States, more social norms, etc...) and it is a significant achievement that they managed to produce something in the end.
This is important to note: this document is the result of negotiations between representatives of all countries (including the Central European countries which were not members at the time), where both euro-federalists and euro-skeptics were represented, nationalists and federalists, left and right; it was done in an open and transparent debate which was discussed in each country, and the result was a real pan-European consensus (and Giscard d'Estaing deserves a lot of credit for driving this massive debate to a successful conclusion)

The document was tweaked by the heads of States a little bit, but was kept essentially as prepared by the Convention; it was agreed on 18 June 2004 by the Heads of State and signed on 29 November 2004. (A first attempt to agree on the document failed in December 2003 because of a disagreement between Spain and Poland on one side, and most others, lead by Germany and France, on the other, about country weighting rules for majority votes. The change of leadership in Spain in March 2004 helped unblock this situation)

Its content can be summarised as follows:

- it consolidates all past European Treaties into one single, better written document
- it gives a legal personality to Europe
- it creates a President of the European Council and a Union Minister for Foreign Affairs
- it extends majority decision making (as opposed to unanimous) in the Council of Ministers to a number of new fields, including justice and home affairs, and provides for more co-decision powers to the European Parliament
- it puts in place new voting procedures (a system of double majority voting from November 2009: decisions will need support of 55% of countries, representing 65% of EU population)
- for the first time, it makes it explicit that Member States can leave the EU if they wish
- it incorporates the Charter of Fundamental Rights

It is a tidying exercise, with, as usual, a few more powers given to the European institutions here and there. The main changes are symbolic, through the creation of more visible representatives (the Union chief diplomat, and a more permanent President), through the name of "constitution" itself, and through the Charter of Fundamental Rights. It adds prerogatives to the European Institutions in what are eminently sensitive political issues, and while the substance is not all that different, it is widely seen as a new step towards the creation of a political Union, complete with executive (the Commission); legislative (the Council of Ministers and the European Parliament) and judicial (the European Court of Justice) powers.

As an aside here, Europe has always been a political project, and has always been seen as such in France and other "core" countries. It has been sold to the British public (and thus to the English-speaking world) as an economic endeavor, and that misunderstanding has been the source of many problems, as the British public smells the politics, is more reluctant to go there due to its specific history in Europe, but has Europe rammed down its throat for "economics" reasons which, of course, do not tell the full tale. In France, it is more the other way round: the population likes the political project part, but not so much the economics ("a vast laissez-faire anglo-saxon conspiracy")...

Now that the Constitutional Treaty has been agreed and signed, it must still be ratified by ALL Member States to come into force. Ratification can be done by a vote of Parliament (as Lithuania, Slovenia and Hungary have already done) or by a referendum (as done recently in Spain, and as will be done in France, UK, Netherlands, Denmark, Luxemburg, Ireland, Portugal, Poland and the Czech Republic - see the map in previous link).

So this gets us to the French referendum, which is due to take place on 29 May 2005.
Polls showed initially a strong margin in favor of the "Yes", but this margin has shrunk, and two recent polls have shown for the first time a small majority for the "No". The mainstream parties of both left and right are campaigning for the "Yes", but there are opponents on both sides, nationalists on the right (or "sovereignists"), and the hard left (Communist party and other assorted extreme left groups, as well as a significant minority within the socialist Party). A lot on issues unrelated to Europe are influencing this vote, and I will go into these in coming installments. The main topics of discussion are the following:

- the adhesion of Turkey, while formally totally unrelated, is very present in the debate;

- the Bolkenstein directive, liberalising services within the Union, has become a bogeyman in recent weeks (mainly because of the concept that service providers could do business in one country while respecting the laws of another Union country);

- the general unhappiness over unemployment, lack of revenue growth, and a general sense of social malaise;

- a desire to punish Chirac who appears out of touch, and a desire on the left not to give him a boost with a referendum victory (after having being forced to vote for him in 2002 against Le Pen);

- a perception on the left that the Constitution is too business-oriented and not "social" enough;

- jockeying on the right in the perspective of the 2007 presidential elections (and possibly before that of a change in the Prime Minister, the current one, Raffarin possibly to be fired after the referendum)

- a general feeling that France has lost its dominant place in Europe and that Europe is no longer exactly a tool of French influence and grandeur.

I'll stop here for today. don't hesitate to ask questions, I'll try to respond in comments or in future diaries. I hope that other European posters can contribute with their experience of the debate in their country

Posted by Jérôme à Paris on March 22, 2005 at 22:22 UTC | Permalink | Comments (4)

General Motors Junk

As you may have heard, GM shocked the markets last week with its very weak earnings, and its shares dropped almost 12% in one day. What happened on the bond market was actually more interesting, and also more symptomatic of the current state of the world economy in general and the US economy in particular.

Today comes the news that GE Capital pulls $2bn GM credit facility (FT, 22 March). The short version: the smarter rats are leaving the sinking ship.

Below, some thoughts on:

  • the amazing power of rating agencies and how they misuse it
  • too much money in the markets and the "flight to garbage"
  • the backlash

Massive problems for the ungainly giants (FT, 22 March)
(btw this article is a very interesting take on "big business is beautiful" which I recommend)
Fortune favours the large, and consolidation among leading companies is inevitable. There is no more firmly held belief in popular thinking about business. In banking and pharmaceuticals, in oil and insurance broking, in the motor industry and telephony, the future is said to lie with a small number of large global players. Chief executives across industry have followed the maxim of Jack Welch, the former General Electric boss, that unless you are number one or two in your industry, you are dead.

There used to be a phrase for it - the aspiration "to be the General Motors of this industry". Not any more. Last week, GM forecast another set of disappointing results: the latest in a 30-year history of disappointing results. The ratings agencies threaten to call its securities junk.

You have probably heard more about the drop in share prices than about that last item. For market commentators, the big news is that they are actually talking about downgrading GM. Standard & Poor's, the biggest rating agency, put GM on "negative watch", which means that they expect their next rating evaluation to go down, in that case from the lowest rung of "investment grade" to the highest of the "speculative" (or "junk") ratings. Such a rating has been seen as long overdue by many commentators (see box below), but resisted by GM (as it would increase its cost of funding) and by the market more generally (having the biggest debtor of the market downgraded would trigger massive reallocation of portfolios, with many unpredictable consequences, as many portfolio managers are not allowed, either by federal regulations, or by their own internal rules, to hold "speculative" rated paper). Markets are finally coming to terms with reality. GM's debts are increasingly unsustainable.

An inch from junk (FT, 18 March)
General Motors is teetering on the brink of a downgrade to junk bond status. This week's profits warning could push it over the edge. GM could survive a ratings downgrade. But the loss of investment grade status could force it to change the way it organises and funds its business. The impact is unlikely to be confined to GM itself. If the company is downgraded, the shock waves could rock the entire corporate bond market. GM has $300bn (£156bn) debt, of which only one-third is secured asset-backed debt. The jury is still out on whether the corporate bond market can smoothly swallow an issuer of this size.

Rating agencies have an amazing power because so many fund managers rely (blindly sometimes, it would appear) on these ratings for their investment decisions, although such ratings are made by private entities, paid by the issuers of the debt, and are not regulated in any way. This creates herd-like movements on markets, it generates unhealthy conflicts of interest (a rating downgrade is always bad news for a borrower, as it increases the interest rate applicable to its debt, and yet the borrower is the client of the rating agency, not the fund managers). When the rating has a macro-economic effect because it applies to hundreds of billions of dollars (which happens for a few countries and a smaller number of corporate borrowers), the management of such issues becomes, quite frankly, tricky, as it can be argued that these ratings influence economic policy and thus become heavily politicised.

This has happened in a context where interest rates have been very low for a long time, with the world awash in liquidity (and investors desperate to find good returns - thus investing in increasingly risky paper), but the trend is now towards a tightening of such interest rates, with the Fed widely expected to increase its rates by another 0.25% this afternoon, and there is a growing risk that the riskiest investments / the weakest borrowers are going to suffer and possibly bring their creditors with them. High tides lift all boats; we are now in the phase when the sea is going out and we will see who is really in good financial shape as oppsoed to being propped up by cheap money.

GM, oil and the turn of the monetary tide (John Plender, FT 21 March)
The combination of rising US government bond yields, a strong oil price and the threat that credit rating agencies would downgrade General Motors to junk bond status prompted a sudden loss of risk appetite. Or, in the inelegant phrase occasionally favoured by this column, the flight to garbage went into reverse. Emerging markets, with the exception of those in Asia, took the brunt of an otherwise indiscriminate selling wave. Is this the turning point in a credit cycle marked by a manic hunt for yield?

I believe that there may well be a turning point this year and it could be traumatic. But I am not yet convinced that this is it. Monetary conditions in the US, even after the Federal Reserve's interest rate increases since last June, are loose despite the policy of "measured" tightening. A world glutted with excess savings is still awash with liquidity. While the rise in US Treasury yields has done its bit to tighten financial conditions, the bond market has not yet exercised its right to be seriously unmeasured. That suggests that, while carry traders who borrow at low rates to invest in higher yielding assets will have a less comfortable life and riskier assets may be more prone to sporadic panicky evacuations, this may not be enough to spring a systemic shock.

Could General Motors change this plot line? Since I castigated the credit rating agencies last year for failing to downgrade GM's debt to junk, they have woken up. GM paper will soon be downgraded. Such a huge addition to the junk market will cause ructions, with many smaller borrowers being crowded out. Yet the move has been so well-signalled that many market participants will surely have hedged against that eventuality. What could turn this into a trauma would be if it coincided with other shocks such as volatile behaviour by the currency or bond markets. That would encourage over-borrowed traders to engage in the time-honoured dash for the same side of the boat.

Even without a systemic shock, the turning of the credit tide will leave many participants exposed, among them some banks that made pricey acquisitions or heavy investments in branches when interest rates were at historic lows. Nor should we forget that the hefty proprietary trading profit revealed by the big US investment banks last week are largely the product of a freakish cycle in which US monetary policy has granted an astonishingly generous gift to all in the financial community. The laws of financial gravity will not be suspended indefinitely.

The real problem of GM is that it is not making money from selling cars. It has essentially become a huge consumer-credit company / pension fund with an attached manufacturing operation: it makes all of its money from lending money to consumers buying their cars, and it has, in parallel, massive pension liabilities (it has 2.5 pensioners per worker currently, and that ratio is set to worsen yet). In all logic, its management is more focused on financial issues than on manufacturing, and this shows, in terms of market share, profitability and other similar industrial criteria.

(Go read this fascinating account comparing GM to Harley-Davidson, whose market value has just overtaken that of GM, and who has been more successful in regenrating its manufacturing business by focusing on its brand: GM faces life in the slow lane as Harley roars past (FT, 21 March))

In any case, as the initial GE story shows, and as this additional story (Investors bet on GM downgrade chances (FT, 22 March)) shows, the market is beginning to price the GM risk as pretty close to "junk" already, thus underlining both the weakness of the company and increasing wariness of the rating system in current conditions.

There is so much money flying around that the macro-economic effects of changing investment patterns will be both massive and unpredictable, with likely episodes of strong volatility. The smarter investors see the dangers ahead, but worry that their movements (when they are significant players) will trigger the crisis they are trying to avoid. The fact that everybody focuses on the financial side of business means that less attention is given to the underlying manufacturing or service part of the company which makes the crisis in such activities get steadily worse, and weakens the base on which the financial games are played (I am not criticising these games per se, they do bring value, as I am paid to know... but it is a question of balance, as in everything). Equilibrium becomes increasingly hard to maintain, until....

There are so many warning signs:

  • currency movements
  • tensions on the oil market
  • all the risks associated with increasing interest rates
  • the US-China trade unbalance, and all risks of trade wars

All are linked to cheap money and reckless federal spending, feeding a consumer boom based on virtual real estate and other financial asset price increases, hoovering in imports from all of Asia, paid in federal IOUs, fuelling the growth boom of China and others which in turn creates all the current tensions on the commodity markets.

It is all unsustainable, and GM is only the biggest and weakest collateral damage, but it is a sign of things to come.

Posted by Jérôme à Paris on March 22, 2005 at 14:21 UTC | Permalink | Comments (45)

March 21, 2005

Billmon: The Burning of Florida +++

A plague of locusts


An Answer to an Orwellian Rightist


A Slow Learner in the Pentagon


Names and Faces

Posted by b on March 21, 2005 at 20:07 UTC | Permalink | Comments (35)

Molybdenum and Whale Oil

What happens when there is a supply-demand imbalance in a market with very low demand inelasticity, like oil?

In other words, how high should the price of oil rise to cause a drop in demand sufficient to clear the market in a situation where supply is contrained by physical and/or political factors?

The case of molybdenum, a metal which also displays low demand inelasticity, offers an interesting insight:


Prices multiplied by 10 or more is what is required...

(Thanks to mobjectivist, via Pedro in the comments)

Whale Oil is another interesting precedent for price predictions.


Molybdenum is a metal which is used in steel production. Since 2002 supply demand balance swung to the demand side. The demand has outgrown the supply.

This deficit has had some very interesting consequences for the price. over the past three years the price of molybdenumoxide has increased from $2 to $28.50, a fourteenfold increase . Since the speculative position on this market is relatively small we can assume that these prices reflect the real supply demand fundamentals. It is staggering to see how a relatively small supply shortage can lead to these enormous price increases. It really shows how inelastic these markets are.

I think the steel market and the oil market are fairly comparable when it comes to inelasticity. If so then this is what we can expect for oil when the market runs into a deficit. The price increases we have seen so far are nothing compared to what is going to happen.

If moly is of any guidance we can expect the price to suddenly double, triple or quadruple when a real shortage occurs. That is a pretty scary thought.

As I have argued in several previous posts, we are indeed entering a situation in the oil market where we have a serious risk that there will not be enough supply to satisfy all potential demand:

- demand keeps on increasing (and shows how inelastic it is: since 1999, prices have already been multiplied by 5, and yet demand has increased in every single year, and by record volumes in the past 2 years);

- additional supplies are becoming increasingly scarce, as mature fields see their production decline and not enough investments are made to develop new fields. (Note that I do not personally think this is due to peak oil - this is in my view due to lack of investment - the oil majors would invest but have no access to most of the reserves in closed countries, and these countries seem more intent to spend their oil bonanza than invest in new capacity). OPEC has slowly put in production its existing spare capacity and has nothing left now.

The recent reaction of the markets to the recent quota increase by OPEC shows that the traders believes the same: the increased production does not bring the price down because it is taken from the last cushion of available, and will not be sufficient if demand increases a tad more or if there is a disruption to production anywhere (weather event, strike, accident, terrorist attack, political decision by any producer to withhold production...)

We are living on our last emergency batteries currently (until more investment is made to develop untapped reserves, but that will require a few years). Prices have been multiplied by 5 since 1999, to no obvious effect; if we take the example of molybdenum, if will require another tripling of prices to have any effect; but if we consider that oil prices were in the 15-20$ range in the 90s, it will require another 5-fold increase (and we have no real way to know how relevant the example of molybdenum is - after all its consumers are industrial users that are mostly rational, not citizens with a "God-given" right to drive and travel...).

For once, I won't leave you on this gloomy note but will point you to another interesting historical precedent for oil : that of whale oil, the only commodity to have gone through a full Hubbert's peak cycle:

The "bell-shaped" production curve of a non-recyclable mineral resource was described first by M. King Hubbert in 1956, and was used to correctly predict that the production of crude oil in the United States (Lower-48) would peak in 1970. It is reasonable to suppose that the worldwide production of crude oil will also follow a similar bell-curve, with much of the present debate focusing on when the peak will occur. It is anticipated that it will generate an epochal change deriving from a steep rise in prices.

The rise in prices at the peak is expected because of the switch from a market driven by production to one driven by supply. The Hubbert model, however, does not itself provide quantitative information on prices, and it is not possile to draw conclusions from individual country peaks because oil prices are set globally.

In order to obtain historical evidence for price trends, one needs to examine a case where a non-recyclable resource went through a complete Hubbert cycle worldwide. There are no previous examples of a mineral resource that has done so. In fact, crude oil may turn out to be the first, which incidentally may be one of the reasons why the concept of "peak oil" is so difficult for many people to grasp.

A resource does not need to be a mineral one to show a Hubbert curve. A biological resource which is produced (or "extracted") much faster than it is replaced may also follow a bell-curve. Historically, there have been several cases of terminally depleted biological resources. The whaling industry of the 19th Century is a good example, as already noted by Coleman (Non Renewable Resources, Oxford University Press, 4(1995) 273).



From the figure [above], it is evident that the production of whale oil followed a bell-curve according to Hubbert's theory, modelled with a simple Gaussian curve, albeit showing strong oscillations. These data are in excellent agreement with the report on Right Whale abundance by Baker and Clapham (Trends in Ecology and Evolution Vol.19 No.7 July 2004), indicating that the fall in production after the peak was caused by depletion and not by the switching to different fuels.


we can derive insight into crude oil price trends from the figure. Whale oil prices started to increase approximately at the inflection point of the curve well and before the production peak. An upward spike in prices took place a few years after the peak, being also detectable in the non-inflation corrected price data  (see Coleman, ibid.).

There are good news:

A somewhat surprising result is that the inflation corrected prices remained approximately constant after the peak despite the progressive depletion of whales.

But this may not be the most important:

If, as often claimed, we are close to the peak, and if the analogy with oil production holds, we may expect a further sharp increase in prices in the coming years, a trend that may, actually, have already started in 1999.


The concept of the terminal depletion of a mineral resource is alien to us, since there have been no worldwide precedents. In addition, we are apparently just near the midpoint on the production curve, so we still have to experience the peak, the associated price rise, and the decline.

Put simply: the uncertainty is so great, and the impact likely to be so big on our economies (if only from the wild oscillations of the price) that it is criminal not to plan for this, and not to be actively seeking alternatives.

Terri Schiavo is not the only one to be Brain-Dead.

Posted by Jérôme à Paris on March 21, 2005 at 13:22 UTC | Permalink | Comments (32)

Ghost Rodeo

by anna missed, 35" x 28" douglas fir slab, (detail, compressed)
full, resized, compressed (45 KByte)
full, original size, uncompressed (1,500 KByte)

Posted by b on March 21, 2005 at 13:04 UTC | Permalink | Comments (39)

March 20, 2005

Billmon: 03/20

Pure Science may be tolerated, may be.

Seperated at Birth? may be yes, may be.

Infectious Disease in Texas and Florida.

(Note to MoA readers: I have a bad, bad cold and lost my physical voice for now. This somehow also blocks my virtual voice here even though there is much to say. If you have a piece for the community, please send it to me and it will be posted. b.)

Posted by b on March 20, 2005 at 21:07 UTC | Permalink | Comments (29)

Open Thread 05-29

Two years of war on Iraq and other tales ...

Posted by b on March 20, 2005 at 8:42 UTC | Permalink | Comments (38)

March 19, 2005

Billmon: Strategy of the Weak - plus plus

Dangerous folks


All Patients on Life Support Are Equal Some Are Less Equal Than Others


Brain Dead by Billmon

Posted by b on March 19, 2005 at 10:46 UTC | Permalink | Comments (21)

Brain Dead

What does it say about the brain activity on the hill, when the U.S. Congress needs to subpoenae a brain-dead women and demands her appearance at a hearing?

Not a good joke, I know, but serious: Do people have a right to die?

Posted by b on March 19, 2005 at 9:00 UTC | Permalink | Comments (29)

March 18, 2005

Billmon: 02/18

Cover Up Accomplished: In the Clear

Posted by b on March 18, 2005 at 20:00 UTC | Permalink | Comments (5)