Friday, April 25, 2008

WSJ: Food Inflation, Riots Spark Worries for World Leaders

I've been a little bit behind in my posting. Trying to clear the archive, but this is a story that I think everybody should know about.

With government ethanol subsidies, environmental regulations, failure to add refining capacity, failure to open up ANWAR and the outer-continental shelf for oil drilling, the devaluation of the dollar due to chronic borrowing and the Fed adding "liquidity" the the market, this is more than just about us. The actions of the U.S. government have far and wide implications worldwide. This story shows a bit about how our assinine policies impact the rest of the world.

Food Inflation, Riots Spark Worries for World Leaders
IMF, World Bank Push for Solutions; Turmoil in Haiti
By Bob Davis and Douglas Belkin
Wall Street Journal Monday April 14, 2008 page 1A.

Finance ministers gathered this weekend to grapple with the global financial crisis also struggled with a problem that has plagued the world periodically since before the time of the Pharaohs: food shortages.

Surging commodity prices have pushed up global food prices 83% in the past three years, according to the World Bank – putting huge stress on some of the world’s poorest nations. Even as the ministers met, Haiti’s Prime Minister Jacques Edouard Alexis was resigning after a week in which that tiny country’s capital was racked by rioting over higher prices for staples like rice and beans.

Rioting in response to soaring food prices recently has broken out in Egypt, Cameroon, Ivory Coast, Senegal and Ethiopia. In Pakistan and Thailand, army troops have been deployed to deter food theft from fields and warehouses. World Bank President Robert Zoellick warned in a recent speech that 33 countries are at risk of social upheaval because of rising food prices. Those could include Indonesia, Yemen, Ghana, Uzbekistan and the Philippines. In countries where buying food requires have to three-quarters of a poor person’s income, “there is not margin for survival,” he said.

Many policy makers at the weekend meetings of the International Monetary Fund and World Bank agreed that the problem is severe. Among other targets, they singled out U.S. policies pushing corn-based ethanol and other biofuels as deepening the woes.

“When millions of people are going hungry, it’s a crime against humanity that food should be diverted to biofuels,” said India’s finance minister, Palaniappan Chidambaram, in an interview. Turkey’s finance minister, Mehmet Simsek, said the use of food for biofuels is “appalling.”

James Connaughton, chairman of the White House’s council on environmental quality, said biofuel are only one contributor to rising food prices. Rising prices for energy and electricity also contribute, as does strong demand for food from big developing countries like China.

But beyond taking shots at the U.S., there was little agreement this weekend on what should be done. Mr. Zoellick pushed the ministers to focus on the food issue in a dramatic Thursday news conference at which he held up a 2-kilogram (4.4-pound) bag of rice, which he said would now cost poor families in Bangladesh half their daily income. He kept up the pressure over the weekend. In a Sunday news briefing, he said, “We have to put our money where our mouth is now – so that we can put food into hungry mouths.”

But the weekend’s meeting produced few concrete results. Mr. Zoellick recently urged rich nations to contribute another $500 million to the United Nation’s World Food Program, but he said that the UN has received commitments for only about half the money.

Meanwhile, the IMF’s board of governors – basically, the world’s finance ministers, who run both the IMF and World Bank – urged the IMF to work with the World Bank for “an integrated response through policy advice and financial support.”

On Sunday, the committee that oversees the World Bank noted that “large groups of poor people are severely affected by high food and energy prices across the developing world.” The committee echoed the IMF’s committee’s call for “timely policy and financial support for vulnerable countries” and urged rich countries to be more generous in “immediate support for countries most affected by the high food prices.”

The World Bank plans to nearly double its agricultural lending to Africa next year to $800 million, and is urging members to ramp up relief for hard-pressed nations. The World Bank, IMF and big industrialized nations are also pushing for the completion of the Doha global trade talks, though cutting food subsidies in the U.S. and Europe under a trade deal would boost prices of food for impoverished importing nations.

Last week, British Prime Minister Gordon Brown urged the G7 nations – the U.S., Britain, Canada, France, Germany, Italy and Japan – to develop a comprehensive strategy for the food problem, encompassing trade, agricultural productivity, technology, biofuels and short-term aid for poor countries. In the past, Britain has taken the lead in pushing the G7 to write off the debts of the world’s poorest nations.

The situation in Haiti underscored some of the problems afflicting the world’s poorest countries. Haiti has enough food in the marketplace to feed its populace, but prices have increased beyond the means of many of the urban poor to pay for it, said Michael Hess, an administrator in the U.S. Agency for International Development’s Bureau for Democracy, Conflict and Humanitarian Assistance. “People are making two bucks a day,” he said. “And we’re seeing food prices go up around the world.”

In the Philippines, the world’s biggest importer of rice, a shortage of the grain has become acute. The government is considering a moratorium on converting agricultural land to construction of housing developments and golf courses. The government also is urging fast-food restaurants to offer half-portions of rice to slash the country’s rice bill.

Aggravating the problem, in some countries food inflation ahs prompted a wave of protectionism. Countries usually impose trade barriers to imports to protect local industries and try to boost exports. But food-trade protectionism works the opposite way. Recently at least a dozen of 58 countries surveyed by the World Bank have reduced tariffs to food imports and erected barriers to exports in hopes of restraining food prices domestically and moving toward “self-sufficiency.”

Indian, home to more than half the world’s hungry, is restricting grain exports, including a ban on the export of non-basmati rice. Taxes on edible oils, corn and butter have been decreased or eliminated.

Egypt similarly halted rice exports for six months as of April 1. The price of cereals and bread there has climbed by nearly 50% over the past 12 months. Eleven people have died in the past two months in incidents related to lengthening bread lines. The shortage compelled Presidnet Hosni Mubarak to order the army to bake additional loaves.

The global effect of export barriers, however, is to drive food prices even higher than they would be otherwise. Such policies “distort global prices,” said Mr. Simsek, the Turkish finance minister, in an interview. Rather than erect barriers, he said, Turkey plans to pick up the pace of constructing irrigation canals near dams in Anatolia, in southeastern Turkey.

Arvind Subramanian, a former senior IMF researcher, said that when countries adopt restrictive trade policies regarding food, “it becomes a bizarre kind of beggar-thy-neighbor. You’re not trying to sell more to the other guy; you’re trying to keep more in your own country.”

With the international financial institutions working on a slow track, countries have been cutting their own deals. Ukrainian President Viktor Yushchenko said on Tuesday that he had agreed to let Libya grow wheat on 247,000 acres of land in the Ukraine. In exchange, Libya promised to include the former Soviet republic in construction and gas deals.

Brazil recently invited Egypt’s minister of commerce to discuss a possible trade deal which would have a strong agriculture component. China also cut its first free-trade deal with a rich country, picking New Zealand, a major food exporter, and is talking about a pact with Australia, another big agricultural producer.

Meanwhile, Uganda plans to sell more coffee, milk and bananas to India. “Our problem is too much food and little market,” Uganda President Yoweri Kaguta Museveni told reporters, according to news reports,

About 18 of the countries sampled by the World Bank also are boosting consumer subsidies and instituting price controls. That prompted a warning from U.S. Treasury Secretary Henry Paulson to “resist the temptation of price controls and consumption subsidies that are generally not effective and efficient methods of protecting vulnerable groups.” He said, “They tend to create fiscal burdens and economic distortions while often providing aid to higher-income consumers or commercial interests other than the intended beneficiaries.”

Instead, the World Bank’s Mr. Zoellick urged countries to look at better-targeted subsidies – such as providing food in exchange for work, or increasing school-lunch programs for poor families, so that children can take food home to their families.

During informal conversations and interviews, ministers mainly agreed that the U.S. policies on biofuels were especially harmful. U.S. ethanol is made from corn, which, ministers said, could be exported to feed the hungry, and benefited from tariffs that block Brazilian ethanol, which is produced much more efficiently from sugar cane.

The White House’s Mr. Connaughton said the U.S. is working on developing “second generation” biofuels that would use varieties of grass or agricultural wastes – not food – as source material. “That’s where we need to get to go,” he said.

The World Bank also has blamed the boom in biofuels for the rise in global food prices. That has put Mr. Zoellick in a ticklish position. Before taking his job at the World Bank, he was U.S. Trade Representative, and defended U.S. agricultural positions. In his Thursday news briefing, he didn’t mention the U.S. by name, but he praised sugar-based ethanol of the sort made in Brazil and questioned whether tariffs to block the fuel – such as the U.S. uses – make “economic sense.”

-John W. Miller in Brussels and Scott Kilman in Chicago contributed to this article.

Thursday, April 24, 2008

AP: Federal Reserve to auction another $75B in Treasuries

From Page 2C of the Thursday April 24, 2008 issue of the St. Paul Pioneer Press, courtesy of the Associated Press.

The Federal Reserve said Wednesday it will auction an additional $75 billion in super-safe Treasury securities to big investment firms, part of an ongoing effort to help strained credit markets.

The auction - the fifth of its kind - will be held today.

In exchange for the 28-day loan of Treasury securities, bidding firms can put up more risky investments, including certain shunned mortgage-backed securities, as collateral.

In the four auctions held so far, the Fed has provided close to $158.95 billion worth of the Treasury securities to investment firms.

The auction program is intended to help financial institutions and the troubled mortgage market.

The goal is to make investment houses more inclined to lend to each other. It is also aimed at providing relief to the distressed market for mortgage-linked securities. Questions about their value and dumping of these securities had driven up mortgage rates, aggravating the housing slump.

The lending program is one of several unconventional steps the Fed has taken to deal with a credit crisis.

Constitutional Amendment may be introduced

The following is being considered as a House Joint Resolution as a constitutional amendment related to Federal Government spending. To my knowledge, it has not been introduced as of yet.


Mr. CAMPBELL of California introduced the following joint resolution; which
was referred to the Committee on _______________

Proposing an amendment to the Constitution of the United
States to control spending.
1 Resolved by the Senate and House of Representatives
2 of the United States of America in Congress assembled
3 (two-thirds of each House concurring therein), That the fol4
lowing article is proposed as an amendment to the Con5
stitution of the United States, which shall be valid to all
6 intents and purposes as part of the Constitution when
7 ratified by the legislatures of three-fourths of the several
8 States within seven years after the date of its submission
9 for ratification:

2 ‘‘SECTION 1. Total outlays for any fiscal year shall
3 not exceed an amount that would cause total outlays to
4 have increased by a rate that exceeds growth in the United
5 States economy over the period since 2007, unless two6
thirds of the whole number of each House of Congress
7 shall provide by law for a specific increase of outlays above
8 this amount by a roll call vote.

9 ‘‘SECTION 2. Prior to each fiscal year, the President
10 shall transmit to the Congress a proposed budget for the
11 United States Government for that fiscal year, and for all
12 other fiscal years covered by the President’s budget, in
13 which total outlays do not exceed the outlays from the pre14
vious year after taking into account an increase to reflect
15 the average growth in the United States economy over the
16 period since 2007.

17 ‘‘SECTION 3. The Congress may waive the provisions
18 of this article for any fiscal year in which a declaration
19 of war is in effect.

20 ‘‘SECTION 4. The Congress shall enforce and imple21
ment this article by appropriate legislation, which may rely
22 on estimates.

23 ‘‘SECTION 5. Total outlays shall include all outlays
24 of the United States Government, except for those for re25
payment of debt principal.

1 ‘‘SECTION 6. This article shall take effect beginning
2 the second fiscal year after its ratification.’’.

Wednesday, April 23, 2008

AP: Existing home sales, median price fall in March

The following appeared in the Wednesday April 23, 2008 edition of the St. Paul Pioneer Press on Page 2C, courtesy of the Associated Press.

Sales of existing homes fell in March, the seventh drop in the past eight months, as the spring sales season got off to a rocky start.

The median price of a home was down compared with a year ago, and some economists predicted home prices could keep falling for months given all the troubles weighing on housing, from a severe credit crunch to a rising tide of foreclosures.

The National Association of Realtors reported Tuesday that sales of existing single-family homes and condominiums dropped by 2 percent in March to a seasonally adjusted annual rate of 4.93 million units.

The median price of a home sold last month was $200,700, a decline of 7.7 percent from a year ago and the seventh consecutive year-over-year price drop. It also was the second biggest decline following a record 8.4 percent drop in Fedruary. These records go back to 1999.

The median sales price in March was up from a February median of $195,600. Analysts said this was statistically meaningless because the monthly price changes are not adjusted for seasonal variations and prices always rise in March at the start of the spring sales season.

Banks hit up Fed for another $50 billion

The following appeared on page 2C of the St. Paul Pioneer Press Wednesday April 23, 2008 edition.

Battling to relieve stressed credit markets, the Federal Reserve has provided a total of $360 billion in short-term loans to squeezed banks since December to help them overcome credit problems. The central bank on Tuesday announced the results of its most recent auction - the 10th since the program started in December, where commercial banks bid to get a slice of another $50 billion in the short-term loans.

It's part of an ongoing effort by the Fed to help ease the credit crunch, which erupted last August, intensified in December and January and took another turn for the worst in March with the sudden crash of Bear Sterns, the nation's fifth-largest investment house.

Tuesday, April 22, 2008

Piece of the Treasury for $100

The following appeared on page B2 in the April 12-13,2008 weekend edition of the Wall Street Journal.

Piece of the Treasury for $100
Bills, Notes, Bonds Easier to Get, But Do You Want Them?
By Chuck Jaffe

At a time when investors seem obsessed with safety and security, the Treasury Department in the past week instituted a major change in the way people can invest in Treasury bills, notes and bonds.

While many market observers question the value of buying Treasurys now – yields are so low that ordinary bank accounts can be a better value – the changes should cause a stir among small investors looking for safe havens.

On Monday, the Treasury started making all of its marketable securities available to the public in “minimum and multiple amounts of $100.” For roughly the last decade, the threshold has been $1,000.

The change is significant because it means consumers can buy Treasurys for a C-note, making these securities affordable for the masses. It also puts Treasurys on the level of savings bonds and gives consumers new and different low-cost options.

What’s more, it simplifies the process for anyone looking to buy Treasurys. In the past, an investor with $1,200 or $2,700 to put into bills or notes would only be able to invest to the nearest thousand dollars. That made mutual funds or bank deposits more attractive alternatives. Now, that barrier has been eliminated.

“The policy makers are just trying to open it up as widely as possible,” said Stephen Meyerhardt, a Treasury spokesman. “But in opening Treasurys up, I hope that people understand what they are getting and really make sure that they are getting the right investment for their needs.”

Treasury securities can be purchased noncompetitively directly from the Treasury. For this, you need to open an account through the TreasuryDirect program.

The TreasuryDirect program isn’t for traders, and knowing the rules is crucial. For many investors, savings bonds will continue to be the superior choice to Treasurys.

Savings bonds lock up your money for up to 30 years, but an investor can cash out after five years without penalty. Even if you sell after the first year, the penalty amounts to just three months’ worth of interest charges – not much considering that the current payout is fixed at 3%.

With marketable securities such as Treasurys, in contrast, you are locked in to a set term. While you can sell the security through TreasuryDirect before it reached maturity, market forces can rip into the bond’s value, plus you’ll be facing a $45 charge from TreasuryDirect for the privilege. That’s a steep fee on a small-dollar investor who was throwing a few hundred bucks into Tresaurys rather than bank deposits.

One place where the changed Treasury program will help investors is in creating laddered portfolios of securities, where you hold different maturities of bonds and each time one matures, you simply reinvest the proceeds into a new issue that is at the long end of the time spectrum. So an investor might buy one-year, two-year and three-year bonds, for example, and then buy a new three-year note every time one step of the ladder reaches maturity.

Another area where small investors might turn to Treasurys is in place of short-term government bond funds. The little secret that most fund firms don’t say is that most Treasury funds are largely unmanaged. Rather than trying to pick the perfect mix of short-term maturities, the fund manager simply pools the cash, buys a new issue meeting an appropriate time frame and repeats the process whenever there’s cash to invest.

Individual investors can do the same through TreasuryDirect and avoid bond-fund expenses.

Because of their simplicity, Treasurys are something of a commodity, and the changes allow investors to buy in for less money upfront.

“You certainly could replace a bond fund, assuming you have the time and energy to devote to doing it yourself,” said Jeff Tjornehoj, senior research analyst at fund-tracker Lipper Inc.

“You’re not getting a lot of professional management in most short-term bond funds,” he added, “so what you are really paying for is convenience. …But some people probably would feel better having their money with the government – and the full faith and credit of the United States Treasury – than with some fund company, given what we have seen happening in the financial-services business.”

For his part, Mr. Meyerhardt says investors need to be careful not to view Treasurys as a replacement for a bank account. “If what you want is a savings account, and you are below the FDIC insurance limits, you can trust that,” he said, “and not be putting just $100 or $200 into Treasurys.”

Monday, April 21, 2008

Jefferson County struggles against rising tide of debt

The following appeared in the Tuesday April 15 issue of the Financial Times on page 24. This is a warning to what will happen to the United States government if we do not get our borrowing and spending under control.

By Stacy-Marie Ishmael on why the municipality is facing the prospect of a major default

Alabama’s Jefferson County, one of the most indebted US municipalities, will today try to persuade creditors to extend the deadline for a $184m payment in its efforts to stave off default on its broader obligations.

Jefferson County has around $4.6bn in outstanding debt, and a default on that scale would dwarf 1994’s Orange County debacle, in which the California county defaulted on some $1.6bn in debt.

The country’s financial problems – it has already missed a series of payments to banks led by JPMorgan – are directly linked to the credit crisis that has rattled both Wall Street and Main Street.

Jefferson County has been hurt by soaring interest rates on the $3.2bn of debt it issued since 1997 to fund a sewer project. Investors started demanding higher interest rates in part because of problems facing the bond issuers that had guaranteed that debt, and partly as a result of a broader collapse in the auction-rate securities market, much used by municipal borrowers and where interest rates are set by auction every seven to 35 days.

County Commissioner Bettye Fine Collins said interest costs for the sewer project financing could reach $250m – almost twice the $138m in revenue the sewer system generates – if the county is unable to restructure the debt.

The county’s woes have been compounded by a series of complex agreements it entered into with Wall Street banks earlier this decade.

The agreements, known as interest rate swaps, were designed to reduce the risk and cost to the county of issuing variable-rate debt.

The swaps allowed Jefferson County to make fixed payments to investment banks including Lehman Brothers and Bank of America, and in return to receive floating payments linked to 3-month Libor.

But this strategy, which had been the favourite of municipalities across the nation, turned sour when the market for auction rate securities froze and three-month Libor started to fall. In other words, Jefferson County faced rising interest rate payments at a time when the swap contracts were paying out less than before.

Moreover, after the county skipped a $53m principal payment earlier this month, ratings agencies cut its credit ratings to the lower end of the investment grade spectrum. Those cuts triggered clauses in the swap agreements that allowed Jefferson’s creditors to demand $180m in additional collateral – money the county did not have.

Jefferson has already missed one such deadline, and a second one expires today. Unless it can persuade its banks to renegotiate the terms of the agreements, it may be pushed into bankruptcy, county officials said.

“If we don’t extend [the deadline], were basically calling in bankruptcy at that point in time,” county commissioner Jim Carns told the Birmingham News last week. But Alabama state officials are working to prevent such an outcome.

The state Senate has approved resolutions that would prevent the county from unilaterally declaring bankruptcy, for instance.

The Wednesday April 16, 2008 issue of the Wall Street Journal gives an update on the Jefferson County story on page C2.

Alabama County Votes To Delay Debt Payment

Alabama’s Jefferson County Commission voted Tuesday afternoon to approve an agreement with banks that allows the county to further delay a $53 million payment on its municipal sewer debt.

This measure gives the county, which includes Birmingham, more time to negotiate a rescue plan necessary to avoid bankruptcy. Such a bankruptcy would represent the largest-ever municipal default, roughly double the size of the Orange County, Calif., debt default in 1994.

A representative for Jefferson County Commission President Bettye Fine Collins said the five-person commission voted unanimously to approve an extension of the county’s existing forbearance agreements with banks, bond insurers and swaps counterparties related to the county’s sewer debt.

The representative couldn’t confirm the length of the extension that was agreed upon, and referred queries to the office of the county attorney, who didn’t immediately return a phone call.

Sunday, April 20, 2008

Law of the Taxpayer

The following was sent to me by a dedicated reader of National Debtbusters:

I keep hearing (usually from liberals) "you can't legislate morality". Well, then, why do we have laws punishing those who (for example) lie [to the IRS] or steal [from their employer] ? It's because without a man-made law, that dishes out punishment in this world for transgressions, many people would pay no attention
to the ancient "religious" laws of civilisation.

My thought is, I want a law that requires the government -- my government -- to play fair. I'm giving up on the hope of a tax code that is fair or consistent or even understandable. But I know this: when Uncle Sam sends tax "refunds" or "rebates" to big corporations, BEFORE sending me my own little bitty refund, it doesn't really make all that much difference to the Big Guys -- but going without my little tax refund really does hurt me.

The Law of The Sea says the less maneuverale vessel has the right-of-way.

I propose a Law of The TaxPayer: the individuals with the smallest refunds due, get theirs first. Non-individuals (i.e. corporations) get theirs last.

The Democrats are in the majority. & they're always saying they fight for the little guy. Let me see it happen now.

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