Andy Sutton will appear again for a regular monthly appearance with host Joe Cristiano on Liberty Talk Radio. The show starts at 8PM EDT tomorrow, March 16th, 2011.
They will be discussing the economic ramifications of the ongoing crisis in Japan, and the multitude of other boiling points around the globe including the Middle East, Europe’s debt woes, and our own stateside fiscal situation. Click Here to Listen
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NEW YORK (AP) — High fuel prices are putting the squeeze on drivers’ wallets just as they are starting to feel better about the economy. They’re also forcing tough choices on small-business owners who are loathe to charge more for fear of losing cost-conscious customers.
Gasoline prices rose 4 percent last week to a national average of $3.29 per gallon. That’s the highest level ever for this time of year, when prices are typically low. And with unrest in the Middle East and North Africa lifting the price of oil to the $100-a-barrel range, analysts say pump prices are likely headed higher.
Bryon Gongaware, an owner of The Floral Trunk and Gifts in White Bear Lake, Minn., didn’t raise his $7 flower delivery charge when gas prices spiked in 2008, and he doesn’t plan to do so this time, either.
“I don’t think the economy is solid enough that you can be careless about raising prices,” he said, standing among the flower clippings on the floor of the shop he has run for 21 years.
That means the extra costs that come from driving the store’s delivery van 70,000 miles a year come from only one place: “right out of the bottom line,” he said.
For drivers such as Robert Wagner, 51, a high school teacher from Thornton, Colo., the higher fuel costs mean cutting back on movies and dinners out for him, his wife and their two children. “We’re very, very frugal right now,” he said as he trickled enough $3.09-per-gallon gasoline into his Chevrolet Suburban to get him to his next pay day.
Analysts and economists worry that by lowering profits for businesses and reducing disposable income for drivers, high gasoline prices could slow the recovering economy.
Over a year, analysts estimate, oil at $100 a barrel would reduce U.S. economic growth by 0.2 or 0.3 of a percentage point. Rather than grow an estimated 3.7 percent this year, the economy would expand 3.4 percent or 3.5 percent. That would likely mean less hiring and higher unemployment.
Americans are less prepared to absorb the spike in gasoline prices than they were the last time prices rose this high, in 2008, because unemployment is higher and real estate values are lower, says David Portalatin, an analyst for the market research firm NPD Group.
It has been four months since gasoline rose beyond $3 per gallon. During that time, drivers have spent $14 billion more on gasoline than they did a year ago, Portalatin says.
Diane Swonk, chief economist at Mesirow Financial in Chicago, says this year’s cut in payroll taxes offers consumers a buffer against higher fuel prices. Still, she expects all but the wealthiest Americans to cut back on discretionary spending. And the longer prices stay high, the more damage they do.
Gasoline prices rose throughout last fall as the developing nations of Asia and the recovering economies of the West began using more oil.
In recent weeks, upheaval in the Middle East and North Africa stoked fears that oil supplies would be disrupted, and oil prices exceeded $100 per barrel for only the second time in history.
Much of the most dramatic unrest took place in countries that are not big producers of oil. But when Libya plunged into chaos, there were disruptions in shipments of its high-quality crude, which is well-suited to making gasoline. That sent refiners scrambling to find other sources of high-quality oil. Gasoline prices rose further.
Gasoline prices typically fall in the winter and rise in the spring as refiners switch to more expensive summer blends of gasoline. Since 2000, prices in May have been 52 cents per gallon on average higher than in February, according to the Energy Information Administration.
Tom Kloza, chief oil analyst at the Oil Price Information Service, believes that the normal seasonal rise in prices has been pulled ahead by events in the Middle East, but he still expects prices to rise further. He predicts prices will reach $3.50 to $3.75 per gallon, barring more chaos in the Middle East.
“When we get over $3.75 we are looking at very serious consequences for the economy,” he says.
For every 25-cent increase in the price of gasoline, the nation spends an extra $3 billion filling up its cars and trucks, Kloza says.
For Jay Ricker, who owns 51 convenience stores in Indiana that sell gasoline under BP and Marathon brands, that’s less money for the “affordable luxuries” he offers — cappuccinos and candy bars that people enjoy, but can do without. “I hate these high prices,” he says. “People don’t want to come in and buy something I make money off.”
Drivers often get angry when gasoline prices spike for reasons that aren’t apparent, such as refinery problems or overseas demand for oil.
This time, though, the dramatic news reports from the Middle East are making customers more understanding, says Scott Hartman, CEO of Rutter’s Farm Stores, which owns 56 convenience stores and gas stations near Harrisburg, York and Lancaster, Pa.
“Whenever you see chaos in the Middle East, people expect higher prices, and this has been more widespread than most of us have seen in our lifetimes,” he says. “It’s quite clear our customers know what’s going on.”
That doesn’t mean they like it.
When asked about fuel prices at a RaceTrac service station in Dallas, Shaun DuFresne tapped the screen on the pump, showing he had just spent $90.14 for diesel — at $3.50 a gallon — to fill his 2006 Ford F-250 pickup truck. Then he said something unprintable.
Editor’s Note: Ron Paul had a huge impact in 2008, awakening people to the plight of liberty in this country. Hopefully in 2012, he’ll be able to continue his fine work. Congratulations Dr. Paul!
Texas Rep. Ron Paul has won the Conservative Political Action Conference (CPAC) 2012 presidential preference straw poll of 3,742 activists, the chairman of the huge annual gathering of conservative activists announced on Saturday.
The poll, sponsored this year for the first time by The Washington Times, is seen as one of the earliest tests of grassroots popularity among the party’s dominant conservative wing, and Mr. Paul, who ran unsuccessfully for the nomination in 2008, has traditionally done well in the CPAC voting.
The Republican lawmaker, long a favorite of the party’s libertarian wing, took 30 percent of the votes cast, followed by Massachusetts Gov. Mitt Romney with 23 percent. New Jersey Gov. Chris Christie, who has said he will not be a candidate in 2012, and New Mexico former Gov. Gary Johnson tied for third, with 6 percent of the vote.
Former GOP House Speaker Newt Gingrich followed with 5 percent.
Tied at 4 percent were Minnesota Rep. Michele Bachmann, Indiana Gov. Mitch Daniels and former Minnesota Gov. Tim Pawlenty. Trailing them was former Alaska Gov. Sarah Palin, who garnered just 3 percent of the vote.
Asked in the survey if they were generally happy with the field of GOP contenders lining up to challenge President Obama next year, 56 percent of CPAC voters said they were generally satisfied with the current crop of candidates, while 43 percent said they were not.
The announcement of the vote came at the end of the third and final day of the CPAC gathering in Washington.
This year’s event attracted a record attendance of over 11,000, and more than 3,700 attendees participated in this year’s straw poll — up more than 1,300 from a year ago.
World food prices reached their highest level ever recorded in January and are set to keep rising for months, the UN food agency said on Thursday, warning that the hardest-hit countries could face turmoil.
Rising food prices have been cited among the driving forces behind recent popular revolts in north Africa, including the uprising in Egypt and the toppling of Tunisia’s long-time president Zine El Abidine Ben Ali.
And in its latest survey, the Food and Agriculture Organisation said its index which monitors monthly price changes for a variety of staples averaged 231 points in January — the highest level since records began in 1990.
“The new figures clearly show that the upward pressure on world food prices is not abating. These high prices are likely to persist in the months to come,” FAO economist and grains expert Abdolreza Abbassian said in a statement.
The Index rose by 3.4 percent from December — with big increases in particular for dairy, cereal and oil prices. The rises were most significant in China, India, Indonesia and Russia, data from FAO’s monthly report showed.
“There are a lot of factors that could spark turmoil in countries and food is one of them,” Abbassian said, pointing out however that several countries have become better at managing prices after a series of riots in 2007 and 2008.
“They have learnt from previous episodes,” he said, adding however: “These are obviously not very easy times. There is now no hope that prices will return to anything we can consider normal, at least until the summer.”
The data from the Rome-based FAO showed that prices for dairy products rose by 6.2 percent from December, oils and fats gained 5.6 percent, while cereals went up by 3.0 percent because of lower global supply of wheat and maize.
“The increase in prices follows stronger export demand during the last month and concerns about tightening supplies of high quality wheat. The market was also supported by higher oil prices and a weaker US dollar,” FAO said.
Meat prices remained broadly stable due to a fall in prices in Europe caused by last month’s scare over dioxin poisoning in eggs and pork in Germany, compensated by a slight increase in export prices from Brazil and the US.
“High food prices are of major concern especially for low-income food deficit countries that may face problems in financing food imports and for poor households which spend a large share of their income on food,” Abbassian said.
Global aid agency Oxfam said: “Millions of people’s lives are at risk.”
“Poor people in developing countries spend between 50 and 80 percent of their income on food, making higher prices, as well as unpredictable prices, a serious threat to their ability to eat,” Oxfam said in a statement.
Oxfam blamed the price rises on reduced production due to bad weather, increased oil prices making fertilizer and transport more expensive, increased demand for biofuels, export restrictions and financial speculation.
It called on governments to implement social protection programmes for the people hardest hit by the price rises and to help control prices “by increasing support and investments in small scale agriculture.”
The FAO data showed the Food Price Index hit 200 points over the whole of 2008 at the height of the 2007/2008 food crisis. It breached that level for the first time in October 2010 with 205 points.
In Africa, Somalia has been particularly hard hit by a rise in prices for red sorghum and maize due to a poor 2010 crop, while Uganda has seen a rise in the price of maize because of strong demand from neighbouring countries.
Meanwhile ongoing unrest in Ivory Coast had helped push up prices in West Africa as a whole because of its status as a key transport hub, it said.
But the most dramatic rises were seen in Asia and in particular in Bangladesh, China, India, Indonesia and China, it added.
For many years now this column has been periodically dedicated to the analysis of economic reports, and the exposure of ‘fudging’ that takes place in most macroeconomic data series. Immediately upon looking at this morning’s trade data it seemed that, once again, something was amiss. It probably jumped out at me because I had just finished a crude oil analysis report for December’s Centsible Investor and the information was still fresh in my mind. However, I am quite sure that I am not the only one who noticed this.
In Exhibit 17 of this morning’s Foreign Trade Report, found on the Census Bureau’s website, the report claimed that the United States imported 9.656 million barrels per day (mbpd) in September of this year. The report goes on to assert that October’s level was 8.209 mbpd. The crude in question sold for an average cost of $72.36, and $74.18 per barrel in September and October respectively. This accounts for a $2.1 Billion decrease in our crude oil import bill from September to October.
This struck me as odd, especially considering the higher relative price and the drastic nature of the drop in imports, so I took a look at the EIA’s (Energy Information Administration) data for the same periods. The EIA reported average (derived from the weekly import numbers) daily imports of crude oil of 9.06 mbpd in September and 8.74 mpbd in October; certainly not the drastic drop purported to have existed in the Census Bureau’s data. The average prices for that oil, according to the EIA, were $71.71 and $75.84 per barrel in September and October respectively. Not a big deal, right? What’s a few cents here and there? Well, it turns out when the numbers are totaled up that, according to the EIA, our oil import bill for September 2010 was $19.49 Billion, and our bill for October was $20.55 Billion, an increase of nearly a billion dollars!
What’s the Big Deal?
Regardless of why this discrepancy exists, it important that it be exposed. We can dispute the validity of data from either group. Obviously the EIA doesn’t actually go out and dipstick every storage tank from sea to shining sea each week. I’ll readily admit that. And the Census Bureau? I’m not sure they could count much of anything at this point since they’ve laid off most of their temporary help (yes, the Census Bureau is actually the subgroup of the Commerce Department that compiles and releases FT900 – the Foreign Trade Report). Perhaps there is a difference in methodologies by the two groups. Again, the reasons aren’t as important as the results.
These discrepancies in reporting are a big deal because of the takeaway messages and bias that the media applies to the data. In this case, the message is clear: The economy is primed for growth and the lower trade deficit will provide the fuel. Here’s a brief sampling…
From Bloomberg…
“It is good news all around. The deficit is down as exports are up, oil imports are down, and nonoil imports rebounded moderately. The overall U.S. trade deficit in October shrank to $38.7 billion from a revised $44.6 billion shortfall the month before…. The decrease in goods imports was led by a $1.7 billion drop in industrial supplies with the crude oil subcomponent down $2.3 billion.”
From MarketWatch… “The U.S. trade deficit narrowed sharply in October, surprising economists and suggesting that the trade sector may make a positive contribution to growth in the fourth quarter for the first time since the final three months of 2009…. The value of U.S. crude-oil imports fell to $18.88 billion in October from $20.96 billion in September despite a rise in the price of a barrel of oil to $74.18 from $72.36 in the previous month. The quantity of crude imports fell to 254.5 million barrels from 289.7 million in September.”
So once again, the average person is confused. They’re hearing that our imported oil bill is decreasing; yet anything they buy that is made from or with oil is going up steadily. Another component in this report that I’ll leave for another time is the food component. A closer look at the data reveals that food price ‘inflation’ contributed quite a bit to the nominal dollar gain in exports in October’s data. This doesn’t purport well for growth anywhere, but is yet another (un)intended consequence of Central Bank quantitative easing.
(Our proprietary model identified this move more than a month ago and we dispatched our subscribers on 11/2/2010)
US Treasuries suffered their biggest two-day sell-off since the collapse of Lehman Brothers, following a torrid month that has seen borrowing costs for western governments soar.
Germany, Japan and the US have all seen their benchmark market interest rates rise by more than a quarter in the past month while the UK’s has risen by nearly a fifth.
“You could argue that we are at a new stage where the global cost of capital goes higher and higher,” said Steven Major, global head of fixed income research at HSBC.
The yield on 10-year US Treasuries hit a six-month high of 3.33 per cent on Wednesday, up 0.39 percentage points from Monday and 1 percentage point higher than its October low. Japanese five-year yields also rose the most in two years, while Germany’s benchmark borrowing costs hit 3 per cent. “People are getting out of the market and moving to the sidelines, feeling shellshocked at the speed of the rise in yields,” said David Ader, strategist at CRT Capital.
US 10-year yields have risen by about 0.76 percentage points since November 8, those of Germany by 0.62 percentage points, the UK by 0.53 percentage points and Japan by 0.29 percentage points as the prices of the bonds has fallen.
Yields are still relatively low compared with long-term trends but investors are starting to fret that they could continue to move sharply higher. “Yields at this level are clearly unsustainable,” said Paul Marson, chief investment officer at Lombard Odier, the Swiss private bank.
The market moves came after President Barack Obama agreed with Congressional Republicans to extend Bush-era tax cuts and combine them with a $120bn payroll tax holiday. But investors and traders were divided over whether that was sufficient to explain the recent global spike in yields.
The primary explanation is that growth expectations have increased because of better economic data and the “second stimulus” provided by the US government. But others argue it could be due to fears that the US Federal Reserve will not follow through on asset purchases or because of higher government deficits. “It is probably all three,” said Mr Major.
Germany has suffered from fears it could bear a high cost for bailing out troubled eurozone countries. Stock markets in Germany, the UK and Hong Kong all fell on Wednesday.
Andy Sutton appeared on Liberty Talk Radio with host Joe Cristiano for their monthly conversation about the economy, financial markets, and anything else Joe had up his sleeve. Some topics included:
As a reminder, these appearances are the third Wednesday of each month, starting at 8PM Eastern Time. The call-in numbers are 888-773-4496 and 646-652-4620
Leading economies should consider readopting a modified global gold standard to guide currency movements, argues the president of the World Bank.
Writing in the Financial Times, Robert Zoellick, the bank’s president since 2007, says a successor is needed to what he calls the “Bretton Woods II” system of floating currencies that has held since the Bretton Woods fixed exchange rate regime broke down in 1971.
Mr Zoellick, a former US Treasury official, calls for a system that “is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi that moves towards internationalisation and then an open capital account”. He adds: “The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values.”
His views reflect disquiet with the international system, where persistent Chinese intervention to hold down the renminbi is blamed by the US and others for contributing to global current account imbalances and creating capital markets distortions.
This week’s meeting of government heads in South Korea is likely to see yet more exchange rate conflict. A US plan for countries to sign up to current account targets has run into widespread opposition.
Wolfgang Schäuble, Germany’s finance minister, has raised the temperature by describing the US economic model as being in “deep crisis” and criticising the US Federal Reserve’s decision to pump an extra $600bn into financial markets. “It is not consistent when the Americans accuse the Chinese of exchange rate manipulation and then steer the dollar exchange rate artificially lower with the help of their [central bank’s] printing press.”
Although there are occasional calls for a return to using gold as an anchor for currency values, most policymakers and economists regard the idea as liable to lead to overly tight monetary policy with growth and unemployment taking the brunt of economic shocks.
The original Bretton Woods system, instituted in 1945 and administered by the International Monetary Fund, the World Bank’s sister institution, comprised fixed but adjustable exchange rates linked to the value of gold. Controls to restrict destabilising shifts of capital from one economy to another buttressed it.
“The scope of the changes since 1971 certainly matches those between 1945 and 1971 that prompted the shift from Bretton Woods I to II,” Mr Zoellick writes. “Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.”
Anyone who cares to see who received the benefits of the stimulus needs to look no further….
Andrew W. Sutton, MBA
In the first part of this series, we took at a look at Partial Equilibrium (PE) analysis in terms of analyzing a particular good or service rather than macroeconomic aggregates. What PE allows us to do as well is to both qualitatively and quantitatively assess the true effects of taxes and subsidies. We can also answer whether or not taxes and subsidies represent Pareto efficiencies. For our example we chose to look at the area of gasoline taxes. Many state governments are considering increasing gasoline taxes in the face of collapsing tax receipts. Intuitively, it would seem that such measures would be penny-wise and dollar foolish, but let’s use PE and see if that bears out conventional wisdom.
We’re going to also take it a step further and add an externality to our analysis: reserves depletion. Peak oil has been talked about in many forums, including military think tanks, World Bank whitepapers, and countless other places. We’ll take a look at efficiency and how it is affected by the lack of internalization by energy producers and consumers.
The first conclusion that we were able to arrive at last time is the fact that non-intervention (zero taxes / subsidies) market equilibrium are Pareto efficient, that is to say that Total Net Social Benefit (TNSB) is maximized. This fits the criteria for being Pareto efficient since any other combination would result in certain parties being made better off at the expense of other parties.
In the non-intervention equilibrium, there are only two types of surpluses – consumer and producer. There were no other parties involved. Certain economic agents produced the goods, while others consumed them. However, in the situation where there is a tax or subsidy (in this case a proposed tax), the government is now put into the mix and its impact on equilibrium must be studied. When the government collects a tax, it now has a surplus, which otherwise would have accrued to either producers or consumers. We’ll call the government’s new windfall GS.
The bottom line in any tax situation is that consumers are now short GS. In the most simplistic terms, GS could be returned to the consumers and a return to Pareto efficiency would be observed. Obviously GS has not disappeared; it is still available to society. This is where the rhetorical question of who spends your money better comes from.
In the following chart, note that equilibrium is present at Pm and Qm. When the government imposes a tax (let’s insert our proposed gasoline taxes in here), the price of gasoline is shifted to Pc, with producers collecting Pp. The new quantity produced/traded is Qd. This new reality reflects consumers’ lack of willingness to consume at the equilibrium quantity since they’re facing higher prices. It must be noted that elasticity of demand will determine exactly how much less they’re willing to consume, but for the purposes of this discussion, let’s assume that demand and supply are both linear functions.
In the situation where the tax is collected, consumers will lose surplus because they are paying more for what is consumed. Producers are losing surplus because they receive less for what they sell. The government generates a surplus because it collected the tax. Let’s take a look at the welfare calculations:
It is obvious from the welfare analysis that the equilibrium was economically efficient while the new tax equilibrium is not because the total welfare is lower under the tax equilibrium than the market equilibrium. Put another way, the change in total welfare from the new tax is negative, indicating that the tax is not economically efficient. –(E+F) is often referred to as a welfare loss in general economics classes.
Conversely, let’s think about the affect of reducing a tax. Let’s say we reduced the tax by 40%. We’d now see equilibrium re-appear at new price level P(reduced tax) and the new quantity at Q(reduced tax). The new –(E+F) or welfare loss would be considerably smaller than at the original tax level. In this case, the total welfare would have increased from the level of the original tax levy, but would still not be Pareto efficient since it would still be less than market equilibrium.
Partial Equilibrium with Externalities
Obviously with peak oil on the mind of most people, it pays to take a look at partial equilibrium with a negative externality, namely overproduction, in this instance. In our prior example, we had several classes of surpluses: consumer, producer, and government. Now, we’ll add a fourth economic agent, albeit a non-acting agent, in the form of petroleum reserves. It is important to note up front that we are not in any way trying to estimate the degradation of any specific resources, but merely to show how efficiency towards reserves will be affected by other intransigent policy.
In our example, we’ll label our variables CS, PS, GS, and ES for consumer surplus, producer surplus, government surplus, and externality surplus. The total welfare or TNSB will be the sum of these four surpluses. We can then further deduce that the change in TNSB (?TNSB) will be the sum of the changes of the four surpluses. ?G will merely be (R-S) revenue minus subsidy or spending. ?E will be the change of petroleum reserves.
In the above chart MSC represents the marginal social cost, and MPC represents the marginal private cost. The difference here between the MSC and MPC represents the ?ES or depletion of reserves in this case. The case where MSC intersects MSB is the efficient outcome from the standpoint of the depletion externality, and the intersection of MPC and MSB is the market equilibrium. It is fairly obvious in this case that consuming at the market equilibrium entails inefficiency in terms of reserves depletion. Again, any consumption is obviously going to diminish reserves, however, we’re searching for the most efficient mix of production and consumption.
Let’s take a look at total welfare and see what we get in terms of adding this very important externality to the equation.
In the case of petroleum, taxes can actually serve to bring MSC and MPC (MC) into line, meaning that in effect, taxes can make actual production equal the optimal from both a cost and depletion perspective. However, too high of a tax will obviously be inefficient as well. In our case, graphically, the tax would need to be precisely the difference between MSC and MPC (MC) in the above chart. This would serve to reduce production and consumption to the point where utilization was optimal.
Let’s look at the total welfare analysis:
Surpluses in the presence of the tax:
Surpluses at market equilibrium:
Welfare analysis (Sum of changes in all surpluses):
With the externality in place, less oil is produced, less damage is done to reserves, and TNSB is maximized with a tax equal to the different between MSC and MPC in place.
Summary and Conclusions
Consumers and producers both generally prefer the market equilibrium and, minus externalities, the market equilibrium is the most efficient as measure in Pareto terms. Taxes in such a situation will cause immediate dislocations and will not be efficient. However, in cases where there are externalities, taxes can be useful for bringing the monetary costs and the net social costs into line. We can easily conclude that imposing a gasoline tax merely for the purposes of increasing revenue is inefficient because the intent is not to bring monetary and social costs in line, but rather is arbitrary and capricious in nature. Further analysis could easily glean whether or not the actual taxes collected were efficient or not. The example of using depletion of petroleum reserves is key since taxes can actually help to make our use of this wasting asset more efficient. However, simply applying additional revenue-generating taxes on the purchase, consumption, or the byproducts of oil are not economically efficient, and while they may prolong reserves a bit further, there will be other economic costs that will be greater than the benefits accrued.
References: Primer on PE: R. Wigle, Microeconomics: J. Perloff, Economics and Public Policy: J. Kearl.