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The Finance Round-Up: October 2nd 2007

Stoneleigh, The Oil Drum: Canada
An inflationary future is becoming conventional wisdom, but, as consensus takes time to develop, the stronger the consensus, the later it is in the trend. A consensus is a backward-looking phenomenon of little use – except as a general contrarian indicator – in detecting the inevitable discontinuities that can abruptly and painfully invalidate all one’s assumptions.

We have lived through a long period of inflationary credit expansion, and regard it as normal, but credit expansion is a self-limiting condition. Credit bubbles are merely the rediscovery by a new generation of the powers of leverage (see for instance A Short History of Financial Euphoria by Galbraith, Manias, Panics and Crashes by Kindleberger or Financial Armageddon by Michael Panzner). Every credit bubble that ever existed has eventually deflated, and this one will be no different.

We have essentially already reached the limit of debt serviceability that brings an expansion to an end. We are already seeing the tightening of credit standards, the refusal of banks to lend to one another, the frozen commercial paper, the bank runs, the redefinition of what constitutes a store of value, the rejection of financial alchemy, the debt defaults that reduce the money supply, the falling prices in the housing market, the lack of confidence – all of which unmistakably herald deflation. Central banks can do nothing more than paper over the cracks for a short time, at the cost of aggravating the eventual cost of deflation.
(2 October 2007)
Headlines and excerpts at original.

Finance Round-Up from TOD:Canada

ilargi, The Oil Drum: Canada
Et tu, Canada?

There’s a country just south of here that pretends to be the world’s richest economy, but in reality seems headed for the Halliburdened poorhouse. Et tu, Canada? Depends on where you look.

The papers’ front pages show Prime Minister Stephen Harper, knowing there’s no opposition left to speak of, though he leads a minority Cabinet. Stephen, too stiff to even play golf, shuffling the greens with Tiger Woods for a photo-op. Then a broad media smile: an alleged record federal budget surplus ($13.8 billion). To top it off, the new King of Nadamaskakas magnanimously hints at tax cuts. Little detail: it’s $35 per person per year, less than 10 cents per day. But it sounded good at first, right, tax cut? Bienvenue à la politique.

In the finance pages, a different take: lax laws have allowed trusts, funds and your pet parakeet to issue non-bank commercial paper (ABCP), to the tune of $40 billion (bank ABCP: $80 billion more). On August 16, the biggest gamblers tried hard to change this from short-to long term debt. Turns out, that won’t fly: nobody can even figure out where it is or what it’s worth. Caught in their own trap.

Québec’s massive Caisse de Dépot pension fund holds $20 billion worth of it, a sizable chunk of their $240 billion portfolio, and that’s just their domestic toilet paper. Our advice: Keep the day job. Till you’re, like, 95. Your pension has been gambled away.

About that federal budget surplus: Canada’s federal debt is $467 billion. Which, to our untrained eye, means the term “budget surplus” is the victim of acute and intense inflation. Harper actually said on TV that the surplus will be used to pay off the debt. On our untrained calculator, that would take, at the current rate, a negligible 33.8 years, or until 2041, providing no new debts are incurred, and inflation stops dead in its tracks. But we kid you not, at the moment of writing this, Harper’s on TV, saying he does this for future generations.

To finish off this sunny newscast, while TD Bank raves about the tar profits, despite royalty reviews, Big Oil has launched the first lawsuit against Canada under NAFTA law. We’ll see much more of that, soon, as in the Alberta royalty revision plans. Send your kids to law school.
(28 September 2007)
More headlines and excerpts at the original.

A Dollar beyond the eighties

Luís de Sousa, The Oil Drum: Europe
The US Dollar Index (USDX) is a measurement of the strength of the Dollar against six other freely exchangeable currencies. Since 2002 the Dollar embarked in a secular downward trend that brought the greenback to historic lows today.

…Looking ahead

Where will the Dollar end? Who knows, some say 70, others 60, others even hint at 40 with the full reversing of the “head-and-shoulders” previously formed. Unless there’s a serious steering from the current policy by the Federal Reserve the secular downward trend is here to stay. At least until the Trade Deficit is brought to the ground, or in a worse scenario until when most of the Dollar currency kept as foreign reserve currency is dumped in the market the USDX will keep going down.

The crossing of the Maginot Line was left unattended by most of the media, possibly because it is more a psychological barrier than a real minimum. But, even if it gets back to the previous trend, the Dollar will one day close below its all time low (78.33) possibly during the next months. And then we’ll see how weak it really is.
(1 October 2007)

Hold onto your wallet

Editorial, Toledo Blade
THE squeeze on the ordinary American promises only to get worse as the world price of oil goes up, the U.S. economy fails to create jobs, mortgage foreclosures increase, and the value of the dollar falls against other currencies.

… Now things promise to get worse. In the face of the credit squeeze, which depresses the housing market and everything associated with it – mergers and acquisitions, production and plant expansion, consumption – we are informed that world stocks of oil and gas are depleted and demand for petroleum will exceed supply. The Organization of the Petroleum Exporting Countries has promised to increase production to try to meet the need, but not by enough. So that almost certainly means even higher prices at the pump.

…To make things worse, other currencies are now piling on the dollar, driving its value relative to theirs down. One euro now costs around $1.42, close to an all-time high.

What that means is that imported goods Americans buy – think, more than 90 percent of the toys on the shelves, with Santa on his way – will cost more.

So, buy less, stay closer to home, and eat less imported food – good, nonfat stuff, of course. And grit your teeth.
(30 September 2007)