Gasoline Prices Are Low! 04/28/2008 05:31:19 pm by Dan Krohn

	With fuel prices at an all time high, the headline to this blog entry looks bizarre. But fasten your seatbelts because it's quite likely true. The problem is that refined fuels are also selling at or near record lows relative to the price of crude oil. This means refiners are taking it on the chin - at least compared to the previous several years, and it's unreasonable to expect this to persist for long. If one needs an additional reason to be concerned, there are many who believe that crude oil prices will continue to rise. Recently an officer of Deutsche Bank was quoted as saying that crude prices might need to rise as high as $200 per barrel for a real consumer backlash to occur - bringing demand into balance with supply. Then today the president of OPEC announced that prices might hit the $200 per barrel level, blaming it on the falling dollar and strongly implying that OPEC would not increase supplies to help. This blogger hopes that the world's population catches on long before that level, but as of now indications are that the crude price rise has a ways to go. As previously mentioned in this blog, fuel prices by their nature tend to permeate the world economy in an inflationary way. For one critical example, fuel prices are a significant component inf the rise in food prices. Not only is fuel needed to power the machinery of modern farming, but the oil and gas industry provides most of the raw material for fertilizers. And not only is food affected, the price of oil affects the price of everything that is shipped. There will be some good economic news at some point, but for now this blogger recommends caution and serious study.

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Another Assault on Internet Privacy 04/28/2008 10:36:26 am by Dan Krohn

	Once again, the administration is pushing for new laws to require Internet companies to retain information on individuals' usage. The current administration of the U.S. never passes up an opportunity to increase its ability to spy on its own citizens. Though the details are still being debated, basically there is a desire for new laws which would require ISP's to maintain for at least two years records of individuals' email, instant messaging, search engine entries, and websites visited - with government access to that information, preferably without the inconvenience of a search warrant. If one could really trust the government, this would not be so bad. But history teaches us that those in government are not morally or ethically elevated by some magical process upon taking office. (One might well argue the opposite.) It is absurd to believe that such material would be used only for tracking terrorist threats to the country. First the material would be used to assist in any kind of criminal prosecution. But then the temptation would be to use the information for less noble purposes. Readers are reminded that through most of human history, and in many nations today, the ruling individuals are the state; and plots to remove them from office are considered treason. No people should be so sanguine as to think it could never happen where they live. Indeed it is healthy to remember that Adolf Hitler was elected to office. Alas, this blogger wishes everyone could be trusted fully. But the old rule remains true: power corrupts, and absolute power corrupts absolutely. Therefore, every government's power must be limited. There are and always will be threats from outside. Let us remember the many have given their lives fighting to protect our freedom. May we not make a mockery of their sacrifices by willingly giving up that very freedom for lack of courage and conviction.

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Comptroller concerned 04/23/2008 10:20:38 am by Dan Krohn

	The Comptroller of the Currency (the Treasury Department office which regulates nationally chartered banks) just commented in an interview with the Finanical Times that he expects bank failures to rise in the near future. Unfortunately bank failures affect more than banks, as anyone who lived in Texas during the 1980's knows. When a bank fails it goes into liquidation mode. This means that regulators try to liquidate the bank's assets (loans) so to lessen the blow to depositors, or in the case of insured deposits FDIC. In essence, borrowers from banks in trouble needs to beware as loans will not be renewed and even loans on which payments are current will be called. This liquidation puts tremendous pressure on small and mid size businesses, which adds to the domino effect of a struggling economy. The winners will be those banks which remain healthy and can acquire bank assets and customers at bargain prices. In a reversal of the norm, commercial borrowers need to be alert and study the financial condition of their banks. It would be smart for some business owners to move loans to healthy banks quickly before the storm hits. Been there done that. This blogger started his career with the Texas Department of Banking in the 1970's, and represented banks almost exclusively in the 1980's and early 90's - primarily doing collection work on commercial loans. Ugly.

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More Cause for Economic Worry? 04/28/2008 09:20:50 am by Dan Krohn

	Today the dollar hit an all time low against the Euro and dropped against most currencies. The price of oil hit an all time high. In Europe banks are trying to hold interest rates at four percent, which is higher than the Fed's discount rate in the U.S. Foreign investors, which have been keeping the U.S. economy afloat, are starting to look elsewhere. With a falling dollar and low interest rates, how could one expect otherwise? Meanwhile, the U.S. seems determined to follow in the historic path of previous major powers when they start to decline relative to other nations. History teaches that great powers typically try to maintain their power through military might. This actually speeds the economic fall as military activity is both very expensive and damaging to relations with other countries which in turn damages trading opportunities. Note that the term "relative" is critical in this context. The U.S. can continue to be a wonderful place to live with a high standard of living. It just might not be alone as other nations improve their lot. It would be wiser for a major power in this situation to adopt policies aimed at maintaining and improving the welfare of its citizens rather than attempting to maintain domination. Unfortunately, national ego gets in the way; and the power's economy suffers for it. Cynics would argue, with some justification, that within a major power such as the U.S., a powerful political group has come to exist which profits from military activity. Yet this is a short term benefit as the money eventually becomes too scarce to maintain the desired spending rate. One hopes that any such short term greed would not so dominate policy. This blogger sincerely hopes not. So, please U.S. leaders, wake up!

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Expect Inflation and Higher Interest Rates 04/21/2008 10:31:19 am by Dan Krohn

	A quick look at some current economic factors: Critical prices are rising. We all know oil, and hence other energy, prices are rising rapidly. Energy prices by their very nature eventually pervade the economy leading to higher prices on most everything. Food prices are rapidly rising - see entries on food shortages below. People might alter their diets, but food is not something people can do without. Interest rates, other than those available to financial institutions directly from the Federal Reserve system are stable or rising. As bank after bank recognizes its injuries from foolish lending derivatives razzle dazzle, they are trying to make up losses by tightening lending standards and demanding higher interest rates on loans. Indeed, one exacerbating problem with the credit crisis is that banks are not even lending to each other. Now if the above items were not enough to trigger inflation, here in the U.S. we are experiencing the effects of a falling dollar. Note the talking heads on television often speak fondly of a falling dollar, stating that it makes U.S. exports more competitive. True, but it also makes everything we import more expensive. Think oil, textiles, electronics, etc. A falling dollar inevitably leads to inflation. Indeed, it seems the only factor working against inflation in the U.S. is the possiblity of falling house prices. Not a very cheerful option. Now when there is inflation, there is a Federal Reserve Board increasing interest rates. That's almost automatic. The Fed has been lowering rates rather dramatically over the last 12 months in an effort to help out struggling financial institutions. But in an inflationary economy, this will not last. Rates will rise. Because of the global nature of economies today, the Fed's actions will be less effective than years ago when the U.S. economy was more isolated. So the rates may need to rise more than expected in order to get the job done. To summarize, expect higher prices and higher interest rates to dominate the U.S. economy over the next two years.

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Bailouts but no regulation 04/21/2008 09:48:29 am by Dan Krohn

	As we watch the credit crisis unfold, the big financial players are hoping for a double win. Having gotten into this mess through unbridled greed and what is proving to be a foolish relaxation of regulations, large institutions are assuming that the U.S. government will declare those in terminal shape to be too large to allow to fail. At the same time, they continue to fight any additional regulations which would either limit or make more visible their fancy maneuvering in the derivatives markets. Having worked in Houston, Texas through the 1980's S&L and bank failures, this blogger watched as one financial institution after another was allowed to fail. No bailouts then. And there should be no bailouts now. The extraordinary hypocrisy of those financial leaders who want to play without rules yet be saved by the taxpayer when all is lost defies imagination. The human cost of these games has yet to play out but is tremendous. Announcements of massive layoffs in the financial sector are postively raining down. (One cannot help but wonder why the C level executives are not losing their jobs at the same pace.) Note well, most of the people in power oppose bailouts or special help for the thousands of lower level laid off employees. Their future is clear. First they will try to hang on by running up credit card debt, on which these same financial institutions will be charging unconscionable rates of interest well above 20%. They will lose their homes. Then they will be subject to the outright cruelty to be found in the bankruptcy laws after the so-called "Bankruptcy Reform Act" which these same institutions lobbied through. The pain will not stop with those thousands of real people. These struggling financial institions are already struggling to increase their liquidity by calling in loans and refusing to extend credit to other businesses - which will in turn be forced to reduce their staffs. This blogger truly hopes his view of the current economic situation is wrong. But the facts point to a great deal of suffering before this situation is washed out of the economy. And you can expect the big players to come out just fine, as they apparently bought enough government to insure that long ago.

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Food Shortage Continued 04/15/2008 09:47:57 am by Dan Krohn

	The Financial Times reports that food prices have risen 60% in the last year. Food related riots have occurred in some countries. Many food exporting nations have banned or limited exports of food out of concern for their own populations.The U.S. is an agricultural exporter, more than able to feed its own population, so the story has not garnered much attention here yet. But it's having an indirect effect as will be noted in the next blog entry. As increasing starvation threatens the world population, we will see people falling back to Maslow level one - concern for survival must be satisfied before other more "noble" goals are considered. For example, how many people will be concerned with preserving rain forests when they can be cut down to increase food crop production? A severe international food shortage will have many unpleasant repercussions, including the possibility of war. This situation needs more attention, and it needs more attention now.

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A Perfect Storm of Starvation? 04/09/2008 10:06:58 am by Dan Krohn

	A news story that is getting unfortunately insufficient coverage involves rising grain shortages in the world. We ought not be surprised if massive starvation were to occur in some less developed countries. Two problems are looming with a third exacerbating factor. The first is the rice shortage. Rice is the staple for a large percentage of earth's population. Unfortunately, shortages are arising in numerous locations. Leading exporting countries, such as Egypt, are instituting prohibitions on exports of rice in an effort to guaranty sufficient local supplies. Importing countries such as the Phillipines are struggling to find enough. Rice prices have risen dramatically in recent weeks. The second grain supply threatened is wheat. A new fungus is threatening to devastate wheat crops around the world. Thus far it has been reasonably contained in parts of Asia; however, the fungus has now been identified in Pakistan apparently spreading more quickly than anticipated. Some experts estimate that it will be five years before a new wheat strain resistant to this pest is readily available. Lastly, cattle ranchers are already hurting form increased feed supply costs as corn production is being diverted to ethanol based fuels. To the extent that corn is a substitute basic grain - this hurts. Corn stocks may need to be redirected for food supply, but the economic factors as to fuel will keep that basic food source too expensive for many. There are many exciting stories in the news catching the attention of the population, and the possibility of widespread starvation is not among them. It should be. Wars have been fought for much less.

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