absolutely alex’s adventures & times

While the worst of the credit crunch might be over, as articulated by US Treasury Secretary Henry Paulson in the hope of shoring up confidence in the battered US economy, the real indicator consumers should be watching is oil prices.

The economy has been flirting with disaster, no thanks to the credit crunch, which led to a housing slump and foreclosures nationwide, along with skyrocketing energy costs. With the credit crunch “closer to the end” than the beginning, as Paulson described to the media, energy costs remains the biggest worry for the economy.

But the pain of rising energy costs is not just felt at gas pumps, where prices have already crossed the psychological $4 a gallon line in some parts of the country.

With crude oil hitting just shy of $124 a barrel in trading today, and talk that it might go as high as $200 by the end of the year, the credit crunch might pale in comparison in the economic pain infliction category to the troubles that could be caused by ever-rising energy prices.

Energy costs will affect more people than the credit crunch could. We might not all take out risky mortgages but every part of our lives involves the use of energy in one form or another.

Besides the cars we drive or the public transportation we take, even basics like our food and clothes prices are affected by energy costs, due to the production and transportation costs of the food to our local supermarkets, and the clothes that have to be shipped from China or Vietnam. Manufacturing plants need to use massive amounts of energy to run their usually energy-intensive factories. Farmers need fuel to run their tractors. The airlines industry is powered by oil. The harder we work in producing all kinds of products, the higher the demand for energy and fossil fuels, and the steeper oil prices become. And countries with nothing other than the luck of the geographical draw benefit.

There really has to be a more concerted effort to look into developing alternative energy sources. For far too long, we have been held hostage to countries that supply us with oil and it is our own fault that we have not yet summoned the will to get out of that nasty scenario.

The oil is not going to be there forever. It will run out in the next few decades and the oil-producing nations know it. They are thus relentless now in holding down production and supply despite the ever-growing demand for more oil.

With gas prices going through the roof, people should summon the energy and will power to say “enough”. Now is the perfect time to want to do things differently and wean ourselves from the prison of oil dependence. We might just be willing to try out alternative sources of energy if there was enough leadership and initiative out there. Dare we hope that with a new administration in the White House next year, things might change and we will finally free ourselves of the shackles of oil dependency and all the political problems that are associated with it?

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With 44 percent of Americans telling a recent poll that rising gas prices is a serious economic concern, it is no wonder that the presidential candidates have weighed in on the issue.

But it would be a mistake to cave in to populism and enact a gas and diesel tax holiday, as proposed by both presumptive GOP nominee John McCain and Democratic hopeful Hillary Clinton. Only Barack Obama has refrained from jumping on the bandwagon, arguing that the idea is too flawed.

Both Clinton and McCain want the federal government to suspend the 18.4 cent-a-gallon federal gas tax and 24.4 cent diesel tax between Memorial Day and Labor Day, traditionally a peak travel period for American families. 

I myself will be doing a 2-week road trip this summer and should be enthusiastic about Clinton and McCain’s proposals, but it is a bad idea at the end of the day.

For one, the savings are small. Experts have calculated that the average driver would save about $2.35 at every trip to the pump, based on a 13-gallon full tank estimate.

But the fiscal hole caused by the gas tax holiday in the federal coffers would be considerable — to the tune of some $10 billion.

That means less investments in roads and infrastructure, at a time when heavier usage of roads and highways would presumably occur. Remember the deadly bridge collapse into the Mississippi River in Minneapolis last summer that took 13 lives and injured 100 others? There should be no compromise in the up-keep and repairs of infrastructure and we can ill-afford to gamble with chance as the nation’s roads and bridges get older.

The politicians have also forgotten to factor in another casualty should the gas tax suspension become reality: jobs. According to a US Transportation Department study, every $1 billion spent of federal highway investments helps support 34,779 jobs. Extrapolating from that, $10 billion in revenue lost to the federal government could mean 347,790 less jobs, if construction projects were halted or killed due to a lack of funding. While it might not ultimately hit that kind of numbers, it still looks like a substantial number of jobs could be lost due to the gas tax holiday. 

Finally, cutting the price of gas for the short-term would only make demand rise and gas prices to follow suit. If prices were artificially lowered this summer, consumers might drive more (not to mention the environmental consequences of that), causing demand to rise, which inevitably leads to higher prices. It would also fail to wean Americans off gas dependence, perpetuating the misery in the long term, making oil producers the only winners.

And after Labor Day, wouldn’t everybody get a rude shock at the 18.4 cent tax being put back in place?

It is election season and it might be clever politics to ease things like taxes. But pandering is short-term and myopic. McCain and Clinton would be better off thinking up more sensible policies that will take the US towards the long-term goal of energy independence rather than scoring small political points that has dire consequences in the long run. 

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Presumptive Republican presidential nominee John McCain has said that economics isn’t his strong suit.

His economic policies speech on Tuesday in Pittsburgh shows why.

The bulk of his focus was on tax cuts, such as making permanent the income tax cuts introduced by George W. Bush, proposing the elimination of the alternative minimum tax and doubling the value of exemptions for dependents to $7,000 from $3,500. He also wants a simpler tax system.

AP photo

Sounds suspiciously like Reaganomics.

While he railed against the high salaries of Wall Street executives and called for tougher regulation, he proposed slashing corporate taxes to 25 percent from 35 percent, businesses be allowed to write off the cost of new equipment and technology from their taxes and tax credits for research and development.

The cost of all his proposed cuts? McCain says it would cost the Treasury $200 billion annually. The truth is probably closer to $400 billion, according to analysts.

To offset that, McCain has suggested cutting spending, such as getting rid of earmarked pork-barrel projects, economic growth and other savings in government programs such as reducing spending in Medicare’s prescription drug program.

Which are still unlikely to balance the budget, something he had often mentioned as a goal before.

In a populist measure, McCain called for a tax holiday on the 18.4 cent a gallon federal gas tax and 24.4 cents a gallon tax on diesel from this Memorial Day until Labor Day, which is a seriously bad idea.

Not only will that give a false sense of how much oil costs, it will not help the US lessen its extreme energy dependence on fossil fuels and love of gas-guzzling vehicles, which have contributed to much of the US’ geopolitical headaches in the first place.

Making gas cheaper would only encourage more people onto the roads, which also means more carbon dioxide emissions — didn’t McCain pledge to do more for the environment? The whole idea of those gas taxes is to have money to pay for the roads. But McCain’s proposal will only cause more wear and tear on roads and highways, while the revenue to upkeep them will be lost during that period. Fortunately, that proposal is unlikely to become reality.

McCain might be trying to assuage the perception that he is weak on economics and proving that he has plans to get things under control as the economic picture gets gloomier. But he ought to play up his abilities in national security and foreign policy more. That could get him a better shot at the White House.

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Don’t believe it when House Speaker Nancy Pelosi declared that she is looking out for the concerns of American families in her maneuver to kill the free-trade agreement between the US and Colombia.

She is merely trying to hold the trade pact hostage while pushing the White House to come with a second economic stimulus package.

But in delaying the vote to ratify the trade pact, she is hurting the US economy and workers.

Consider this — the pact would immediately allow 80 per cent of US exports of consumer and industrial products to Colombia to be duty free, with the goal of all tariffs to be cut within ten years. This covers a cross section of the US economy, from farm exports such as beef, cotton, soybeans and wheat, to textiles, medical, scientific and heavy equipment.

Services like telecommunications would gain access to the Colombian market, and US suppliers could bid for Colombian government contracts, on a similar basis as Colombian companies.

The US currently has an Andean Trade Preference Agreement, which already allows many Colombian products to enter the US duty-free. It only makes sense to subject US goods to tariff-free export into the Colombian market with the bilateral trade pact and level the playing field for US companies. And if companies stayed in business and do better, workers benefit.

The Wall Street Journal cites Illinois-based heavy machinery company, Caterpillar Inc., as a company that could lose out if the trade pact was left to languish.

Cat sells off-highway trucks to the Colombians with a 15 per cent import tax or $200,000, but would have an edge in price if the trade pact was approved and tariffs were dropped. More crucially, Cat is in competition to export to the Latin American country other heavy equipment like motor graders with Canada. Incidentally, Canada is also in talks with the Colombians for a free-trade agreement and should that be concluded before the US-Colombia one gets passed, guess whose equipment will be cheaper to purchase for the Colombians?

“If Colombians don’t buy our tractors, they’ll buy them from Japan,” Commerce Secretary Carlos M. Gutierrez warned. “If they don’t buy our wheat, they’ll buy it from Canada. And if they don’t buy our high-tech equipment, they’ll buy it from China.”

But beyond economic considerations, the FTA with Colombia is an important tool to show support for all the strides the Colombian president, Alvaro Uribe, has made in taking on violent crime and drug trafficking to stabilize the country.

Uribe has stuck his neck out to remain the region’s staunchest US ally, defying the tide of anti-US sentiments that had been swelling in many South American countries, led by Venezuelan president Hugo Chavez. A yes vote for the trade pact would have been a strong show of support for a loyal ally. A no vote comes across as a “slap in the face” for the Colombians, its vice president had said. It could also curb US influence in an already tough neighborhood.

A bone of contention for the Democrats is that Colombia is not doing enough to fight the extra-judicial killings of unionists there. The Colombian government is by no means perfect on that record but the numbers have fallen from a peak of 196 in 2002, to last year’s 26. While it is still too many lives and families affected, it is a marked improvement.

Uribe has also turned Colombia’s economy around in the past five years, with his emphasis on reducing public debt, modest budgets and better security to lure investments. The approved pact would have been another boost to the economy.

The US has a lot to gain from the ratification of the US-Colombia FTA. Not doing so would not only hurt US-Colombia relations and US credibility, but most importantly, American companies and workers, subjecting them to tariffs and higher vulnerability of losing businesses to other countries eager to gain market share in the Colombian market. Unfortunately, the Democrats just don’t seem to get it.

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John McCain, Hillary Clinton and Barack Obama can squabble all the want about who will make the best commander-in-chief or be the toughest in safeguarding the nation.

But if they want to win in the general election, they should do well to remember, especially Clinton, what helped Bill Clinton win in 1992 — “The Economy, stupid.”

The economic news keeps getting grimmer everyday. February saw the second straight monthly decline of job figures, with a 63,000 plunge in the number of jobs lost. The US dollar continues to lose its value against other currencies, oil prices persist in challenging their record high prices and the stock market cannot seem to stop swooning.

And while the housing market has been giving countless heart attacks to homeowners, the credit and the construction industries, the gravity of the situation really hit home when the Federal Reserve announced a $200 billion fund to ease illiquidity in banks.

The New York Times sure got it right when it said the good times as we know it, could well be over very soon.

So it’s no wonder that poll after poll showed that the economy and/ or jobs is the topmost concern or issue of those surveyed.

One of the most recent, a CBS News/ New York Times poll had 33% of respondents naming the economy and jobs as the most important problems facing the country. The second most important, the war in Iraq, was cited by 20% of the respondents.

A USA Today/ Gallup Poll yielded similar results, as did those done by NBC News/ Wall Street Journal and other news outlets.

On this issue, the Democrats seem to have an edge over the Republicans, when it came to perceptions on which party would be better able to handle the economy.

A survey sponsored by the Pew Research Center for the People & the Press found that 53% of respondents thought the Democrats would be better at dealing with the economy, versus 34% who thought the Republicans would be better. More also believed that the Democrats would handle the tax system better than the Republicans (49% to 37%).

Clinton herself got a first hand experience of the urgency of the economic issue. Her campaign was recently given a lifeline by Ohio, Texas and Rhode Island, many experts say, because of her “red phone” advertisement. But in Ohio where she beat Obama by a 10 percentage point margin, those Ohioans who strongly stated that the economy is their biggest priority went for the New York senator.

So while the debate about who can out-Rambo the other is important enough, the candidates really ought to beef up their economic messages and come up with well thought-out plans about how they are going to deal with the economy and get the good times rolling again when they get into the White House. It’s most probably the biggest thing on which they would be judged.

And actually, the candidates could also benefit from referring to former president Clinton’s campaign strategist James Carville’s two other points in the campaign’s central goals and core messages, as they still make pretty good sense in 2008: “Change vs. more of the same” and “Don’t forget health care”.

Plus ça change, plus c’est la même chose: The more things change, the more they stay the same, indeed.

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Get ready for a rough ride ahead.

Put away your credit cards, eat out less and keep your car in the garage when you do go out.

New data shows that the US economy has entered a dark tunnel, with no clear end in sight yet, as a spate of gloomy data hit the streets at the same time today, bringing little cheer to this unseasonably cold winter and holiday weekend. The debate is whether the trip there would be a quick one or long-drawn.

While consumer confidence plunged as expected, its rate of decline took even pessimists by surprise. The widely-watched University of Michigan index of consumer sentiment dived 11 per cent from the previous month to 69.6, to hit its lowest level in 16 years. People are similarly expecting lower income and more lay-offs this year. University of Michigan says this sort of reaction has not happened since the recessionary years of the previous decades, and is usually a harbinger of tough economic times to come.

Ominously for matters of economic and consumer confidence, 86 per cent of consumers surveyed say they feel that the country is already in the midst of a recession. Not a good sign, since consumer consumption is the engine of the economy, contributing around 70 per cent of the gross domestic product. This aspect has bailed out the economy countless times and its decline is a worrying sign.

The lack of confidence isn’t all imaginary on consumer’s part.

The price of imports, such as for food, energy and other commodities rose 13.7 per cent in January from a year earlier, the biggest increase since the Labor Department began keeping records in 1982. Month-on-month, it advanced 1.7 per cent.

Oil prices continue to show no signs of relenting, with the price of light, sweet crude oil gaining another 4 cents to reach $95.50 a barrel this afternoon on the New York Mercantile Exchange. That means consumers will continue feeling the pain at the gas pumps – the price of imported petroleum surged by 5.5 percent in January and was up 66.9 percent over the past 12 months, the biggest 12-month increase since October 2004.

According to the Empire State Manufacturing survey, which gauges business conditions in the state of New York, its index posted its biggest monthly drop into negative territory in February, to minus 11.72 from plus 9.03 in January, the weakest since April 2003. That is due to a slump in orders and payrolls.

Only one little spark stands out from all the declines, the Federal Reserve said industrial production figures grew slightly by 0.1 percent in January, matching the December increase, in line with economists’ expectations.

There has already been a quarter of negative economic growth in the last three months of 2007, at 0.6 per cent. If the first three months of the year continue along that trend, the economy would officially be in a recession.

Although the Bush administration is putting a lot of emphasis on the $170 billion stimulus package just passed as a way to help the economy, and the Federal Reserve is ready with more interest rates cuts, it remains doubtful if those measures will be enough to stem the tide of a weakening economy.

Along with the larger problem of failing companies and markets, such as banks, the debt market and now bond insurers, there is a perception that not enough appreciation nor attention has been paid to the looming problem and that is now ham-stringing the administration from doing more. So take care of yourself and sock some away for the bumpy road ahead, if it isn’t already too late.

Perhaps Senator Barack Obama’s message of hope is so infectious that it has even permeated the White House.

In a one-two punch today, two of the president’s men claimed through different forums that recession in the US economy is not looming and probably will pass the country by.

The chairman of the White House Council of Economic Advisers Edward Lazear said while submitting the White House’s annual report on the economy to Congress, “I don’t think we are in a recession right now, and we are not forecasting a recession. We are forecasting slower growth.”

Meanwhile, Federal Reserve Bank of St. Louis President William Poole told reporters after a speech in St Louis that the country could avert a recession, making the distinction that consumer spending is “soft” but it is “completely different from crashing”, according to Bloomberg.

Both also point to the $168 billion stimulus package and the interest rate cuts by the Federal Reserve as instances of action that would stop the economy’s descent towards a recession.

The administration adds that it predicts economic growth of 2.7 per cent this year, while unemployment stays at 4.9 per cent.

All these flies in the face of grim data that has been coming out in the last few weeks, which suggest that the US economy is dangerously on the brink of a recession, if not already in one.

Tempering it with euphemisms like “slower growth” is not going to stem the tide, no matter how much the Bush administration hopes to play down the problem.

The economy grew at a 0.6 per cent annualized pace in the fourth quarter, which makes it the slowest growth rate in five years. This comes after a 4.9 per cent growth rate in the previous quarter.

Job losses surfaced in January’s data, with a dip of 17,000 jobs in non-farm payroll employment, led by declines in construction and manufacturing jobs. This makes it the first time the US has reported job losses since August 2003, and follows the trend of weaker job growth in 2007 in comparison to 2006.

Activity in the non-manufacturing sector in January was also gloomy, which recorded its first downturn since March 2003.

It would be interesting to see what retail sales figures would be like when it is released this week, but analysts are already predicting a second consecutive decline to the effect of a 0.3 per cent contraction.

While the subprime mortgages problem continues to rise and more bodies remain to be found, borrowers with good credit are increasingly swarmed, the New York Times reports. Other signs that the credit crunch is making its effect felt in other areas include rising credit card debt, more problematic auto loans and increasing bankruptcy.

We are bombarded every day with news of the ailing health of financial companies, from massive losses in big-name banks to hedge funds collapsing.

Top economic experts predict that the economy will go into a recession this year, which they define as a contraction in activity that lasts for at least two consecutive quarters.

And the Bush administration continues to operate in dreamland.

Billionaire extraordinaire Warren Buffett has spoken, and this time, he directs his wrath against the banking system and its greed.

Buffett called the banking meltdown “poetic justice” for bankers, their chickens coming home to roost for designing complex investments which are now haunting them and their companies’ bottomlines.

“It’s sort of a little poetic justice, in that the people that brewed this toxic Kool-Aid found themselves drinking a lot of it in the end,” he said in a corporate event in Toronto.

True, but Buffett has unfortunately overlooked two things – the evil bankers whom he derided would still have plenty of cash and get rescued despite their missteps, while ordinary folk who have done nothing wrong but save their earnings have been hard hit by the developments.

Witness the Federal Reserve’s bailout of the bad bets made precisely by the bankers vilified by Buffett. Interest rates have been cut aggressively by 1.25 percentage points in two successive steps last month, as the Federal Reserve got nervous at the extent of the damage to the housing market and the stock market. But these cuts are driven more by a panicky reaction to the falling markets than inflationary worries, a point that worries economists about the Fed’s handling of the economy.

And bankers don’t seem to lose the shirts off their backs when they develop sloppy investment instruments that falter badly, taking the economy down with them. These self-styled masters of the universe still get their hefty bonuses. And if they were fired, such as Merrill Lynch and Citigroup’s bosses, better yet – a cushy package ushers them out to continue playing their golf games. Or allows them to move on to start other dodgy hedge fund businesses. Or they might even be back at a different firm which would allow them to wreak more havoc in the very forgiving industry in which they operate.

Despite some spectacularly bad investments, banks still have many willing rescuers – witness eager sovereign funds like the Singapore government’s investment arm, Government of Singapore Investment Corporation, injecting $10 billion in funds into Swiss bank UBS, and Merrill Lynch given a second lease of life by selling $5 billion in new stock to another Singapore government investment arm, this time Temasek Holdings. The Abu Dhabi Investment Authority has also thrown $7.5 billion at Merrill, while the Chinese government’s investment company has bought a $5 billion stake in Morgan Stanley.

Meanwhile, ordinary folk are the ones left footing the bill – tougher credit, substantially lower interest rates, and the threat of a recession, which means possible job cuts.

So much as I think Buffett has often been a good Samaritan in the greed-fueled world of business and finance, giving away some 85 per cent of his Berkshire Hathaway stock worth over $40 billion to five foundations, his comments this time do not quite hit the mark.

But that is more that can be said of Google, whose ostensible motto is “don’t be evil”.

Google has been seeking to thwart the Microsoft-Yahoo tie-up after Microsoft’s unsolicited $44.7 billion bid for Yahoo.

Reasons it offers against the Microsoft-Yahoo merger include antitrust issues, this when Google already dominates the market overwhelmingly in internet search and online advertising.

Google had also placed calls to Yahoo to dissuade it from taking up Microsoft’s offer with offers of partnership between the two internet companies.

While all is fair in business, Google’s feelings of being threatened by the Microsoft-Yahoo merger has it acting disingenuously, going to the extent of it appealing to other companies like Time Warner to intervene with a counter offer to Yahoo and prevent a credible competition to it.

So while there isn’t much sympathy for Microsoft, Google’s actions does leave an unpleasant taste in the mouth and would only lose them credibility on being the team which is out to use technology to help others while differing from the bullying path that Microsoft has taken.

Talk about being out of touch.

Look at what happened right after Bush took the rare chance to talk about the economy and told reporters that the economy was in a good shape “…the fundamentals of our economy are strong. Inflation is down. Real wages are increasing. The job market is a strong job market. People are working. Small businesses are flourishing,” the decider was quoted as saying.

Well, markets worldwide went into a tail-spin on Thursday, as fears of liquidity drying up spread. Banks reacted in shock, jacking up interbank borrowing rates as many big name companies like Bear Stearns, BNP Paribas and Deutsche Bank revealed massive losses in their hedge funds arms.

Central banks from Europe and the US had to inject large amounts of money into the system to calm nerves and stabilize rattled markets and financiers.The New York Fed even took the unusual step of buying over $30 billion worth of mortgage-backed securities, the very sub-prime loans that have been sold by investment banks and repackaged as financial investment instruments.

The sub-prime mortgage industry in the US is the often-cited villain, lending to dodgy owners without regards to credit history and their ability to repay loans.

These loans have been repackaged into other complex instruments like bonds and derivatives and have been sold to financial institutions worldwide. Thus, financial institutions around the world are taking hits from a US-originated problem, thanks to the globalized nature of financial services.

A large part of the problem is no doubt due to market sentiment, which reacted from the debt to the equities market. It’s believed that the scale of losses in the sub-prime loan sector could be in the neighborhood of $100 billion.

Equities investors are going to be feeling the brunt of this for a while, especially those with holdings in banking stocks.

The revelation that most of the terrorists detained and involved in last week’s UK and Glasgow car bombing plots being doctors put paid to the conventional wisdom that poverty and lack of education are the crucial factors that drive many a desperate young man towards extremism by blowing themselves and others up.

After all, the “biggest” terrorist of them all is Osama bin Laden, and he is no poor boy. The man comes from one of the richest families in Saudi Arabia, billionaires that are also well-connected to the Saudi royal family.

Not that the rest of the other terrorists are billionaires too, but a substantial majority of them are fairly well-educated, coming from middle-class families by and large.

Similarly, the members of the Southeast Asian arm of the al-Qaeda-connected group, Jemaah Islamiah, though halfway around the world, also had well-educated operatives, such as engineers and lecturers.

It is shocking and hard for most of us to understand why people who should theoretically be more able to reason and have more to lose, would willingly put themselves in harm’s way. But economic circumstances is a poor indicator that radicalism would take hold.

Princeton economist Alan Krueger told the Wall Street Journal that his research showed that as a group, terrorists are usually from “wealthier families than the typical person in the same age group in the societies from which they originate”.

He has a good point — most of the September 11 attackers were from relatively wealthy families. Being Saudis, they’re not your typical poor either.

Krueger and his team had also come up with other statistics to back their theory up. They found that research on 148 Palestinian suicide bombers showed that they were not from impoverished families, but were more likely to have graduated from high school than the general Palestinian population. Similar findings cropped up when they researched Hezbollah and Israeli terrorists.

More disturbingly, Mr Krueger and his team discovered that when public opinion polls were held in countries like Jordan, Morocco, Pakistan and Turkey, the better-educated ones from there were the ones likelier to reply that suicide attacks against Westerners in Iraq are “justified”. Conversely, Palestinian polls demonstrate no visible difference in the opinion between the educated and uneducated about support for terrorism as a way to reach political objectives.

On the other hand, the theory that terrorists spring from poverty hardly has data to back it up. It is an attractive theory though, that most people can easily wrap their heads around. Witness the Bush administration’s statements about fighting poverty in hot spots around the world to combat terrorism.

The Wall Street Journal points out that the 9/11 Commission itself came to the conclusion that terrorism is not brought on by poverty. Instead, Mr Krueger suggests that the suppression of civil liberties and political rights are more plausible causes. That perhaps makes things more alarming, given how many countries suffer from those factors.