Nick Rost van Tonningen ~ Gleanings II ~ 524 Posted by John on August 16, 2013

Quote of the week : “When the well is dry, we learn the worth of water,” – Benjamin Franklin.

Water is a need & essential to human life, & to many other forms of life. But oil is a want – life is much better with it but would go on without it, albeit at the cost of a vastly reduced quality of life. This isn’t always fully appreciated by the entitlement-crazed who expect unlimited cheap water on demand at the turn of a tap. For a number of reasons (among which population growth may be one of the lesser ones) water is becoming a scarcer commodity in the world, incl. North America (at least given current extraction & consumption parameters). Thus London-based Courcy’s Intelligence Service, the world’s oldest independent risk advisory service, founded in 1934, recently forecast that California “may have 20 years of water left”, & New Mexico “ten”. While the optimists among us take solace from the fact that throughout history the human race has displayed a remarkable ability to adapt to change & to meet challenges[1], the longer it will wait to address this, & other, environmental issues, the more costly the solutions will become. With that in mind, following are some factoids pertaining to the US (& global water) situation :

$          safe water is now deemed a “‘human right”/entitlement. So it is being priced on the basis of its cost of production, with little or no provision for the inherent value of the  commodity itself, thereby encouraging inefficient, sub-optimal usage;

$          on a per capita basis each American consumes 720 litres of water per day (twice the global average & 4x as much as Brits or Frenchmen), vs. a WHO minimum standard of 100 litres & the Palestinians’ 60 litres;

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            the US watermain system has been allowed to age & deteriorate. Thus in Chicago mains  were installed at a 75 mile annual rate around the start of the 20^th century[2] but at only a 30 mile rate at its end, in a system which by then was 4,300 miles long & carried 4BN litres of water a day (at which rate it would take 150 years to replace pipe that in many cases was already 100 years old) – small wonder that its price of water was recently raised to help fund speeding up the process &, more generally speaking, that the US is said to be losing 28BN litres each & every day (i.e. 90 litres per capita) through leakage;

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worldwide in the past fifty years water withdrawals from traditional sources have tripled and, according to the UN, are now twice consumption, i.e. half of it is wasted (a  percentage that is a large multipe of that a century ago); 

$          while in the developed countries 60% of all water usage is accounted for by households, in developing countries it can be as low as 8% (with a far greater share being used in agriculture to irrigate crops &, to a lesser extent, to water lifestock);

$          globally more water is lost through evaporation from reservoirs & other causes (with pivot irrigation especially a culprit)  than is actually consumed (a UNEP estimate).

The gold market continues to emanate conflicting signals. Major gold miners have been announcing huge write-offs in the value of their assets, in part because at current gold prices quite a few mines are money losers, & yet their share prices have been  strong (thus Barrick shares today, August 15^th, are in the $20 range, up from $17.50 in mid-April           while the price of gold in the interval went from US$1,550  to US$1,365)[3]  In South Africa 60% of its gold production is now deemed unprofitable. On the other hand, the demand for gold seems to be holding its own in India despite the government having hiked duties on gold imports for the third time first time this year, And China in te Second Quarter imported 386 tonnes of gold, almost the amount in the year-earlier period, after having imported 295 tonnes in the First ( 20% YoY), while nearly 1,200 tonnes of physical gold was reported delivered from the Shanghai Exchange[4] .

Japan’s national debt has surpassed the one quadrillion (1,000,000,000,000,000) yen threshold, i.e.  US$10 trillion (so it is now is greater than the aggregate GDPs of Germany, France & the UK). Going forward it will likely continue to grow rapidly through the interaction of more large deficits & a shrinking population. And what in a global context will aggravate matters is that, with its population aging, its traditional mama-san savers are becoming dis-savers in their waning years. This will makeJapan’s traditional domestic funding model a thing of the past & force it into international capital markets. This in turn will throw, as never before, the spotlight on its creditworthiness [at which point its stratospheric (240+%) national debt-to-GDP ratio will become an issue]. And, to complicate matters further, while domestic borrowing is merely a matter of redistributing wealth among locals, foreign borrowing entails transfers of wealth to foreign savers

Last year I mentioned a Japanese-made machine that converts plastic into oil. There is only one in North America, in Whitehorse, YT of all places! So being there last week visiting family, I went to see it  & talk to the operator. He told me there are  60 operating in Japan & a few elsewhere, incl. one in Nepal that is truck-mounted & used to teach people not to throw away their plastic, & another one in Tanzania, with a others in the process of being installed in various places, incl. the first one in Europe. It handles all plastics except Nos. 1, 3, & 7. It has a 3-5 year payback period & its next generation is expected to have a shorter one still. The basic operating formula is simple : one kg of plastic + 1 Kw of electricity produces one liter of light, sweet synthetic oil. Electricity costs $0.12/Kw there, & gasoline $1.39; so, with a capacity 60,000 liters of oil per year  (on a one shift basis? – I forgot to ask) that can be used directly or refined into gasoline or diesel, such machines could form the basis of a cottage industry all over the world, especially, but not exclusively so, in isolated places (& there would seem to be no reason why it could not be adapted to work on a larger scale(for the technology involved doesn’t seem particularly earth-shattering). And there are other considerations. All heating involved is done electrically in closed chambers; so it generates little, if any, pollution (other than that in producing the electricity consumed).  If the plastic were to be shipped out for recycling, it would cost $100/ton, with zero offsetting revenue since the recyclers everywhere are deluged with the stuff. Any oil produced saves on the cost of bringing oil in from the outside. And, finally, the plastic doesn’t end up in the landfill.

Rail transport of crude oil has been in the spotlight as a viable, & more flexible, albeit more costly, alternative to pipelining. But there still is no official answer as to what caused the recent horrific explosion when a crude oil-carrying train derailed & exploded in, and leveled, the heart of a small town in Québec’s Eastern Townships; for crude isn’t supposed to explode. And just when the kerfuffle started to die down some, came the not surprising news that the small railroad involved had sought creditor protection on both sides of the border, with far less assets than liabilities. This will do two things : it will make nonsense of the Québec government’s claim it wasn’t going to cost its taxpayers any money. And it will create a big & costly legal dogfight between the numerous creditors as to the relative ranking of their claims, with the situation complicated by the fact that governments on both sides of the border may have such large & high priority claims that just about every one else will be left to fish behind the net. The unions have now taken this opportunity to demand that all freight trains must have two man crews, since the derailed train had only a one-man crew [which is a total non-sequitur since this accident had nothing to do with the size of the crew but by company rules that allowed ( & union rules that insisted?) the crew in charge of the train could leave it unattended to go off & get some shut-eye].

It’s also worth noting that between 2007 & 2012, while the number of car loads of crude oil hauled by rail in North America grew over 20-fold from < 10,000 to > 230,000, the number of “non-accident releases” of crude (i.e. “unintentional spills  or leaks, usually small in nature, … not caused by collisions or derailments”) went up closer to one hundred-fold to 106. And what is also being ignored by proponents of this mode of moving oil to markets is that all the calls for greater safety & greater insurance coverage, and soon likely for the upgrading of the existing tank car fleet, will add to the cost of doing so, never mind, at the political level, the likely spread of NIMBY claims.       

On Friday August 9th the Toronto Globe and Mail breathlessly reported “Imperial, Exxon deal offers hope of industry turnaround”. The basis for this was the proposed acquisition by Imperial Oil & its US parent, ExxonMobil on a 27.5%/72.5% basis, subject to approval by the Competition Bureau (a slam-dunk?), of the 91,000 hectare/226,000 acre Conoco Phillips’ Clyden oilsands lease 150 kms South of Fort McMurray.  But what glitters in the headlines isn’t always gold & in this case does not seem supported by the facts. For Conoco will make a $450MM after-tax gain on the $751MM sale proceeds. Being one of the largest landholders in the oil sands, with 1.1MM acres (1,720 square miles) containing an estimated 16BN bbls of oil, the sale will leave it with considerable (& still more than it is comfortable with?) oil sands exposure. On the other hand, both Imperial & Exxon have deep pockets &, while often not among the most astute of short-term investors, usually do OK in the end because of their long-term planning time frame. They may also have gotten a steal of a deal from a vendor anxious to exit the oilsands so as to deploy its E&D budget in areas it thinks have greater short-to-medium term prospects; for prorating the number of barrels of oil in Conoco’s oilsands’ portfolio suggests the buyers may have paid as little as 25¢/bbl for the oil in place at Clyden. Another factor in the buyers’ decision likely was the nearby location of Imperial’s still undeveloped Corner oilsands property. And with Imperial’s $12.9BN 110,000 bbld Kearl oilsands project having come on stream in April, albeit after a 50% cost overrun, & its development focus now having shifted to its 80,000 bbld Aspen project South of Kearl that won’t do so until 2019/2020, this acquisition looks more like a window-dressing reserve boosting-, than short-term development-focused-, move on the buyers’ part. This seemed confirmed by both Imperial’s CEO & its usual spokesman referring to it as “a strategic addition to our in-situ (oil sands) portfolio”.

The Canadian Institute of Actuaries (CIA) recently updated its pensioner mortality tables. The latest ones assume that the average 60 year-old Canadian will now live nearly three years longer than the old tables assumed (to 87.3 years in the case of males & 89.4 years of females). This will make many already underfunded pension plans even more underfunded (a bloody good reason to get interest rates up so that the PV of future liabilities will shrink). Meanwhile, rather paradoxically, while in recent decades Canadians have been living longer, they have come to expect to retire younger & earlier.

Canada’s Foreign Affairs Minister, John Baird, has recently become been a pro-active advocate of gay rights abroad (for what some think are personal reasons). This prompted criticism by Real Women, a right wing group that’s part of the original Alberta core support base of the Harper Conservatives, that doing so is out of step with the view of Canadian Conservatives. This in turn prompted the Prime Minister to seek to defend Baird by telling a New Brunswick audience that ‘Canadians expect his government to defend human rights” – there likely is far more support among Canadians for “defending” human rights abroad than for pro-actively proselyting them.

GLEANINGS II – 524

Thursday August 15^th, 2013

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SHUTTING DOWN A SHUTDOWN (National Review Online, Robert Costa)

$                Speaker John Boehner (R.-Ohio) & House Leader Eric Cantor R.-Va) have long tried to defuse the Tea Party idea of shutting down government unless Obamacare is defunded. But on August 9^th Cantor assured me they had talked their caucus away from the edge, saying “no one is now advocating a shutdown” (although some still do so sub rosa).

$                The Republican House leadership is driven not just by strategic considerations but by fear that seeking to defund Obamacare all at once could lead to an internecine Republican civil war, and by the realization that doing so would require the support of at least 14 Democrats in the Senate & that, as one Republican put it, “no one can explain how we can win a shutdown fight. Until this changes, it doesn’t make sense to have one.”

$                July 31^st was one of the last days before, & one of the last opportunities to avoid the shutdown chatter becoming a clamour during, the summer recess. So early that day Boehner told his caucus at a closed door session the right strategy was not to try & defund Obamacare in a single step but to do so gradually by “well-placed, targeted strikes that will ultimately dissolve the Obamacare coalition”, pointing as examples thereof to the recent votes on delaying the employer-, & employee-, mandates, both of which gained scattered Democratic support. So going forward the focus will be on avoiding the use of a shutdown threat as leverage & on switching to the debt limit & sequestration for legislative trade-offs, for instance by seeking a delay in Obamacare in exchange for a higher debt limit. Then at lunch that same day Cantor told a group of conservative lawmakers he was with them in wanting to tear the Obamacare law apart & delay it wherever possible but didn’t want to risk political capital in an all-out war that couldn’t be won. And although there were some disgruntled murmurs, he carried the day.

$                The upshot of it all was that the House Republicans’ “Big Four”, Boehner & Cantor, and Whip Kevin McCarthy (R.-Cal) & Conference Chair Cathy McMorris-Rodgers (R.-Wash), agreed to carry on with their ‘soft’ push to avoid a shutdown.   

The source being rightwing Republican, this is more than a trial balloon.

FEARS OF SLIMMER CATTLE HIT BEEF MARKET (WSJ, Ian Berry)

$                In the mid-90’s Merck introduced, & in 2006 the FDA approved, Zilmax as a feed supplement that, when fed to cattle in their last few weeks before slaughter, can add as much as 2% to their killing weight (so it was used for a decade without being approved? So much for food safety!). In recent years, due to sharply rising feed prices, its use has grown to the point it is now being given to 70% of all US feedlot cattle. But on August 7^th Springdale, Ark.-based Tyson Foods, the biggest US beef processor, that accounts for 25% of the nation’s beef kill, shocked the industry by announcing it would no longer buy Zilmax-treated cattle since it had received some that had difficulty walking & others that couldn’t walk at all). Merck, of course, denied Zilmax could have been its cause.

$         In 2012 the drought in Texas & other states reinforced the earlier effect of  high feed costs and the trend towards higher beef prices to a 6.4% annual rate of increase for beef & this climb is expected to continue even though in recent weeks corn prices have eased somewhat as crop prospects have improved..

Such news items will make Joe & Jill US Consumer that much more nervous about the quality of the food on supermarket shelves to the benefit of the organic food industry, the ‘Back to Nature’ movement & 100-Mile Diet, and, in extreme cases, vegetarianism and/or veganism. And while the FDA expects herd rebuilding to start in two or three years time, that process will in the first instance support higher beef prices since every heifer added to the breeding herd, or older mother cow not shipped for slaughter reduces the supply of slaughter cattle. As of last January 1^st, due to the drought the Texas beef cow herd was down 1MM YoY (i.e. 20%), the size of the nation’s cattle herd 1.6% to 89.3MM, down 7.5% from its 2007 cyclical peak & a post-1952 low, & last year’s calf crop 2.9% to 34.3MM, a post 1949 low. The number of beef slaughter plants is continuing to decline & Tyson’s beef plants operated at only 76% of capacity in 2012, vs . 84% in 2011 (with it now making most of its money from its pork-, & chicken-, processing operations).         

US RAIL, OIL INDUSTRIES OPPOSED SAFETY RETROFIT OF OLDER RAIL CARS

(AP/G&M, Matthew Daly)

$                It has been known since 1991 that railroad oil tanker cars have a tendency to split open in derailments. But the Association of American Railroads successfully argued that a refit of the tanker fleet would cost $1BN, not incl. lost-service time costs while “derailment costs totaled approximately $64 million over the past five years.” And while the industry voluntarily adopted, for oil tanker cars ordered after October 2011, the tough construction standards recommended by transportation experts after a deadly derailment cum explosion in Illinois two years earlier, it managed to delay for a year, until next month, a decision by the Obama Administration to boost safety standards on the type of oil tanker cars involved in the recent derailment cum explosion & fire tragedy at Lac Mégantic in Québec’s Eastern Townships.

Meanwhile the Federal Railroad Administration (FRA) has expressed concerns that inflammable liquids are being shipped in tank cars not designed to carry them, that railroads don’t have enough information about the goods they are hauling & that tanker cars are being overloaded, and has told the American Petroleum Institute that it is investigating whether some of the chemicals used in fracking make the resulting oil more hazardous & more corrosive (among others due to the inclusion of hydrochloric acid to dissolve minerals) than hitherto believed [with one industry technology consultant claiming that the hydrochloric acid used in fracking typically doesn’t return to the surface (oh, great!) & that “I have never seen anything stronger than a very, very weak vinegar come back in terms of acid.”] – chemistry is not my long suit but I have difficulty making the connection between hydrochloric acid & vinegar since one a chlorine molecule & other doesn’t.        

GOODMAN DITCHES BANK STOCKS FOR GOLD (Bloomberg/FP)

$          Ned Goodman is a billionaire contrarian investor who is founder & CEO, and owns a big piece, of Dundee Corp. which has AUM of $9.6BN and, at last report, had a 64% gain YOY (vs. the S&P’s 4.6%) & a 165% gain over the past five years (3x that of Warren Buffett whome he greatly admires). Since last March 31^st he has sold the last vestige of its holdings of Canadian bank stocks, $519MM-worth of shares in the Bank of Nova Scotia[5], to create more room in its portfolio for gold & organic beef[6]. His explanation : “Our whole modus operandi is to get involved in those industries and companies that will benefit from an inflationary event … the world is totally upside down – it’s totally crazy … I don’t know of a time when every major country in the world was printing money … it’s impossible for me to see the US getting out of trouble without printing money and … how Europe survives in the form it’s in.”

While past performance is not necessarily a good  indicator of future performance, the longer the time frame, the less that holds true. 

POLICE, WATCHDOG SPAR OVER NEW PROBE (G&M, Jill Mahoney)

$          André Marin (age 48) has law degrees in both common-, & civil-, law from the University of Ottawa.  A former assistant prosecutor, he has been Ontario’s ombudsman since 2005 (having been re-appointed for a second five-year term in 2010), after having been Canada’s first military ombudsman since 1998 where he did his  job so well, & annoyed the military & the government so much, that Harper wouldn’t extend his term). On August 8^th he announced, driven by the recent fatal shooting cum tasering of an 18 year-old on a Toronto street car, that he was reviewing the province’s guidelines for the police for de-escalating conflicts. Alok Mukherjee, the Head of the Toronto Police Services Board, the city’s civilian police oversight body, welcomed this move[7] & the Province’s Special Investigations Unit (SIU), that investigates all serious incidents anywhere in the province involving police officers & the staff of which consists almost exclusively of ‘brothers’, i.e. ex-police officers, & which Marin headed for a couple of years in the mid-1990’s said it didn’t envisage any problems with overlapping jurisdictions. Unfortyunately, the head of the Toronto Police Union was not of a like mind; for he accused Marin of “grandstanding” (last week it was noted that in 1994, both he & his brother had corruption charges against them dropped.

As noted last week many (short-sighted?) police officers prefer putting their wagons in a circle & “protecting their own” to transparency & having the ‘bad apples’ weeded from their midst, damage to their public damage be damned.

GOVERNMENT PAY WAY OUT OF LINE (Fort Nelson News, Jordan Bateman)

$                For some unknown reason the City of Burnaby needs a bartender on its taxpayer-funded payroll. In B.C. the minimum wage for bartenders is $10.25, but it is offering $$13.65 plus 12% in lieu of benefits, for a total of $15.29, plus tips. Richmond is advertising for an arena concession worker, typically a $10.25 minimum wage job; but its starting wage of $16.98 plus 12% in lieu of benefits per hour, for a total $19.02. And Kelowna is offering newly-hired lifeguards $20.95 which, when the 14% in lieu of benefits is added, amounts to $23.88/hour, while the local YMCA is paying $14.50.

$                                  This needs to be changed & all it takes is political will. Thus in Penticton, a city that has frozen its taxes for three years,a core services review in 2010 revealed it was paying its lifeguard & park maintenance staff $ 22.80 vs. the private sector’s $14.50 & $14.00 respectively. So when its CUPE contract came up for renegotiation, it managed somehow to have their  starting wage cut by nearly $5.

One can only wonder what it may have cost the city elsewhere for the union to agree to agree to some of its Penticton members to be sacrificial lambs. And while these may be extreme cases, this being in BC, there is quite a bit of empirical evidence in Canada, & even more in the US, that taxpayer-funded wages & benefits are unduly generous by private sector standards (the author, by the way is the BC Director of the Canadian Taxpayer Federation).

FIVE SUSPECTED MILITANTS KILLED IN ISRAELI DRONE STRIKE (AP, Ashraf Schweilam)

$          According to senior Egyptian security officials an Israeli drone strike killed five suspected Islamic militants & destroyed a rocket launcher five kms. inside Egypt’s Sinai peninsula a day after Israel had briefly closed the airport at the nearby seaside resort of Eilat (that once before had been targeted by rocket fire from the Sinai). But the Israelis remained quiet about it, presumably to avoid awkwardness for the Egyptian military (which denied such reports even though Egypt’s official news agency, MENA, reported an explosion had destroyed a rocket launcher near the Isreali border & killed five militants, four of them from the el-Menaie family of alleged terrorists). 

Israel is taking a leaf out of the American playbook for Pakistan (& likely will have the same result). And it compounded the error of its ways by announcing 2,100 more housing units for the settlements, with Construction & Housing Minister Uri Ariel (of the ultra-national, anti-peace party declaring on Army Radio “We will continue to build over the Green Line even during negotiations … Israel doesn’t need any special reason to build.” So much for the future of the Kerry-instigated, peace talks. For both moves will undermine them as well as contribute to a further cratering of global goodwill towards Israel. Nor will it help that the US keeps talking soothingly out of both sides of its mouth, with the State Department prattling that the White House doesn’t “accept the legitimacy” of any settlement construction & Kerry in Columbia counseling the Palestinians not to “react adversely” to the settlement building news (how can they not; for its is just the umpteenth demonstration of the Netanyahu government’s supercilious attitude towards them – bullies will always continue bullying until someone bops them in the nose!).

IRAN’S ‘OLIVE BRANCH’ FOREIGN MINISTER MAKES HIS CASE IN PARLIAMENT

(Radio Free Europe, Golnaz Esfandiary)

$          Mohammed Javadi Zarif is President Hassan Rohani’s choice of Foreign Minister. Since he studied International Relations at the San Francisco State University & has a doctorate in International Law from the University of Denver, and was Iran’s Ambassador to the UN from 2002 to 2007, some in the West portrayed his nomination as an “olive branch to the West’. At his August 13^th nomination hearing this was thrown in his face, with one lawmaker saying “he has to clearly announce that we don’t want to have relations with the US” & that “nuclear energy is our absolute right”.

$          In the half hour he was allotted for rebuttal, he laid his case out calmly & rationally. He quoted the Koran & the Supreme Leader, Ayatollah  Ali Khameni at length. He told the lawmakers “the message [of President Rohani’s election] is the determination of the great people of Iran for respectful interaction with the world, without withdrawing even one iota from Iran’s rights.” He ridiculed media reports that Kissinger had once praised his diplomatic capabilities, by asking “Is it bad if an [experienced] 80-year-old diplomat calls a 40-something-year-old child of this revolution a ‘worthy adversary’ ?”, And he sought to defuse claims he had been in the US this spring to apply for a Green Card by saying he had spent his Norouz (first day of spring) holiday pushing his mother’s wheel chair.

If the journalist’s report was anywhere close to reality, it’s easy to see why he impressed Kissinger with his diplomatic skills; for he seems to have talked a lot while saying nothing.

IRAN REDUCES MILITARY INFLUENCE IN CABINET (WSJ, Ian Solomon)

$          The Islamic Revolutionary Guard Corps (IRGC) over the years has gained control over more & more branches of the government & industry to the point it has almost become a hardline state within a hardline state (as such it thrived under Ahmadinejad, who, some claim, once was a Guard himself). But while half of Ahmadinejad’s Cabinet consisted of serving or recently retired senior IRGC officers, who were in the van in decision-making on Iran’s role in conflicts elsewhere in the region, observers expect Rohani’s new Cabinet to have as few as three. Since being elected President last month, apparently with the Supreme Leader’s (somewhat begrudging) blessing, Rohani has stressed his priorities are to revitalize the economy ravaged by Ahmadinejad’s blinkered economic policy decisions & to seek to roll back the UN-imposed, US-inspired sanctions that have more than cut the nation’s oil revenues in half. So his Cabinet is dominated by technocrats, many of them from the President Rafsanjani era of the 1990’s (who was the most externally focused of Iran’s post-Revolution Presidents & whom the Supreme Leader eliminated from the Presidential race, presumably because he had been too prominently associated with the so-called ‘reform’ movement).

While all this could be positive from a global perspective, any downgrading of the IRGC in national policy making entails risks for Rohani that may come back to haunt him if ever it were to come to a power struggle. 

CHINA’S NET OIL IMPORTS TO EXCEED THE US’ (AP/Taipei Times)

$          According to the EIA, in 2014 China’s net oil imports will exceed those by the US on an annual basis, with the crossover point coming this fall & the gap between them continuing to widen thereafter. This is due to the steady growth in China’s demand for oil, and the US’ higher oil output (due to fracking) & stagnant demand. More specifically, US oil output is expected to grow by 28% to nearly 13MM bbld between 2011 & 2014 & China’s by just 6% to 4MM bbld, while its demand for liquid fuels is expected to increase by 11% to 13MM bbld whereas that of the US is expected to remain flat at 18.7MM bbld, down from 20.5MM bbld in 2005.

$          China Business’ Li Dongchao said on August 12^th, “the [rising] independence of US energy will support the rejuvenation of US manufacturing … Improving the safety and operational efficiency of energy is a must for ensuring China’s energy and economic security.”

While there may be an element of truth in Li comments about the US, one could only wish it were that simple. And this appears to be another example where the EIA research appears mind-bogglingly simplistic. For China is supposed to be one of the world’s largest store houses of shale oil, possibly more so than the US; for by some accounts its reserves are as high as 48BN tonnes/200 BN bbls (30x those in the US’ Eagleford & Bakken formations combined) in some 80 individual deposits (that’s one of the reasons for their interest in companies in the Alberta oilsands : to learn from the masters!) 

ICELANDIC PM’s CAMPAIGN PROMISES DRAW IMF WARNING (WSJ, Clemens Bomsdorf)

$          On August 7^th it raised a flag of caution on the possible consequences of the costly campaign promises made by the 38 year-old head of the Progressive Party, Sigmundur Gunnlaugsson, its Prime Minister since last spring who had run on a platform that included cutting taxes & tackling household debt, and of its lack of progress in lifting its capital controls. It warned that its recovery remained fragile because of the former & the lingering after-effects of its 2008 banking crisis, and that its target of having a balanced budget in 2014 might not be reached.

$          Iceland introduced capital controls in the aftermath of its banking crisis to keep foreign capital from fleeing. And it has been loath to dismantle them out of fear that an outflow of foreign capital would fuel domestic inflation, although it has also said its goal is to have a freely-floating currency of its own rather than join the Eurozone. And its economy has performed remarkably well since the collapse of its banking system with help from the strong performance of its fishing & turism sectors, with unemployment in May down to 5.2% from its 9.2% peak in September 2010, although inflation at 3.3% has remained stubbornly above the government’s 2.8% target.

It’s hard to argue with success : after a disastrous couple of years, when its GDP declined by 7% in 2009 & again by half that in 2010, it grew by 3.1% & 2.7% in 2011 & 2012, although in the First Quarter of this year it was just 0.8% YoY. While said to have been largely due to strong performance by its fishing & tourism sectors, there are at least three other factors that played (a possibly larger) role. First & foremost, the popular decision, in two referenda, to tell the British & Dutch governments they could eat the losses incurred by their citizens as a result of the implosion of Iceland’s banking system. Secondly, by its government cocking a snook at all the high-priced advice from foreigners with doctorates in economics & charting its own common sense path. And thirdly, Beijng’s growing interest in using Iceland (as well as Ireland) as a portal into the EU. It is also interesting  to note that the new government believes that, despite the country’s recent experience, Iceland would be better off with a currency of its own than in a Euro straightjacket.