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David Walker, comptroller general, warns of impending crisis
by max news
Email: mbatko (nospam) lycos.com
20 Aug 2007
Learn from the fall of Rome, the US is warned. There were striking similarities between America's current situation and the factors that brought down Rome including declining moral values, an over-confident and over-extended military and the fiscal irresponsibility by the central government.
(1) David Walker, comptroller general of US, warns of impending crisis
(2) Credit crunch - banks now bundle their loans & sell them to Pension
(3) "Peak oil" theory vindicated? - Wall Street Journal says Oil profits
(1) David Walker, comptroller general of US, warns of impending crisis
Learn from the fall of Rome, US warned
By Jeremy Grant in Washington
Financial Times Published: August 14 2007 00:06 | Last updated: August 14
The US government is on a burning platform of unsustainable policies and
practices with fiscal deficits, chronic healthcare underfunding, immigration
and overseas military commitments threatening a crisis if action is not
taken soon, the country's top government inspector has warned.
David Walker, comptroller general of the US, issued the unusually downbeat
assessment of his country's future in a report that lays out what he called
"chilling long-term simulations".
These include "dramatic" tax rises, slashed government services and the
large-scale dumping by foreign governments of holdings of US debt.
Drawing parallels with the end of the Roman empire, Mr Walker warned there
were "striking similarities" between America's current situation and the
factors that brought down Rome, including "declining moral values and
political civility at home, an over-confident and over-extended military in
foreign lands and fiscal irresponsibility by the central government".
"Sound familiar?" Mr Walker said. "In my view, it's time to learn from
history and take steps to ensure the American Republic is the first to stand
the test of time."
Mr Walker's views carry weight because he is a non-partisan figure in charge
of the Government Accountability
Office, often described as the investigative arm of the US Congress.
While most of its studies are commissioned by legislators, about 10 per cent
- such as the one containing his latest warnings - are initiated by the
comptroller general himself.
In an interview with the Financial Times, Mr Walker said he had mentioned
some of the issues before but now wanted to "turn up the volume". Some of
them were too sensitive for others in government to "have their name
"I'm trying to sound an alarm and issue a wake-up call," he said. "As
comptroller general Ive got an ability to look longer-range and take on
issues that others may be hesitant, and in many cases may not be in a
position, to take on.
"One of the concerns is obviously we are a great country but we face major
sustainability challenges that we are not taking seriously enough," said Mr
Walker, who was appointed during the Clinton administration to the post,
which carries a 15-year term.
The fiscal imbalance meant the US was "on a path toward an explosion of
"With the looming retirement of baby boomers, spiraling healthcare costs,
plummeting savings rates and increasing reliance on foreign lenders, we face
unprecedented fiscal risks," said Mr Walker, a former senior executive at
PwC auditing firm.
Current US policy on education, energy, the environment, immigration and
Iraq also was on an "unsustainable path".
"Our very prosperity is placing greater demands on our physical
infrastructure. Billions of dollars will be needed to modernise everything
from highways and airports to water and sewage systems. The recent bridge
collapse in Minneapolis was a sobering wake-up call."
Mr Walker said he would offer to brief the would-be presidential candidates
"They need to make fiscal responsibility and inter-generational equity one
of their top priorities. If they do, I think we have a chance to turn this
around but if they dont, I think the risk of a serious crisis rises
Commentar Max: he should know better than that... Rome was Gold-based - but
Fiat can never crash - since there is 'nothing' that cant collapse
(2) Credit crunch - banks now bundle their loans & sell them to Pension
Money market goes for broke
by David Uren
THE real economy and the financial economy are travelling in opposite
directions. In the real economy, 1.4billion Chinese are continuing to
consume vast quantities of steel and energy, companies the world over are
reaping record profits and there is work for all who want it. But in the
banking quarters of London, New York and Tokyo, fear stalks the streets.
Reserve Bank of Australia governor Glenn Stevens believes the fundamental
strength of the world economy will win out. He told the House of
Representatives economics committee yesterday: "We want to talk about the
volatility and why it is happening but remind people that underlying this is
an economy in good shape, corporate balance sheets are in good shape and
personal balance sheets are in most cases good. The economy is working well
and I think those fundamental forces will eventually reassert themselves."
Not everyone is convinced there will be a happy ending. The Swiss-based Bank
of International Settlements, which acts as banker and adviser to the
world's central banks, says no one should be deluded by the apparent health
of the real economy into thinking that all is fine.
"Virtually no one foresaw the Great Depression of the 1930s, or the crises
(that) affected Japan and Southeast Asia in the early and late 1990s,
respectively. In fact, each downturn was preceded by a period of
non-inflationary growth exuberant enough to lead many commentators to
suggest that a 'new era' had arrived," the bank said in its latest annual
Although politicians and the public have been mesmerised by the careening
share market, which has sliced about $100 billion from national
superannuation savings in the last month, the share slump has simply been
collateral damage from the ructions in financial markets.
Unlike the share dive in 1987, the tech wreck of 2000 or the great crash of
1929, share values are not particularly high compared with profits. The
Reserve Bank remarked in its review of the economy last week that earnings a
share for resource companies are at historically high levels and growth
prospects are sound. This is not a speculative share bubble that has been
pricked. Shares are in trouble because of fears for what will happen to the
real economy if central banks are unable to calm financial markets. No one
knows if they can.
European Central Bank president Claude Trichet announced on Wednesday that
financial markets were "progressively returning to normal". "What has been
observed can be interpreted as a normalisation of the pricing of risk," he
However, the panic appears to be spreading, with nothing normal about it.
What started as a reluctance by financial institutions to deal in securities
related to the US sub-prime market has become a generalised retreat by
lenders from all but the most secure government-backed bonds.
This financial crisis is completely different from any seen before because
of the transformation of the world's banks during the past 15 years. It used
to be the case that banks advanced loans to companies and individuals and
financed them by raising deposits on which they paid a lower rate of
interest. The loans remained on the bank balance sheet.
Now banks bundle their loans into parcels and sell them to investors. So the
Commonwealth Bank, for example, may gather together $7 billion of its home
mortgages and sell bonds that give the investor a right to the income from
its mortgage interest payments and the security of the property. These bonds
are taken up by pension funds across the world.
The advantage of this, from the bank's point of view, is that it makes fee
income from writing the loan but it does not have a 20-year mortgage on its
balance sheet. Since banks worldwide are required to keep capital reserves
of about 8 per cent of their at-risk loans, they can do more business
without having to hoard more capital reserves if they can sell their loans.
Banks still have a front door through which they offer loans, but the risk
goes out the back door into a vast global securities market populated by
pension funds, hedge funds and investment banks.
Ever more inventive securities have been devised to shift risk. One that is
in the eye of the present storm is called a credit-default swap. If you buy
a bond that represents a bundle of mortgages or company loans, you can also
buy a credit default swap, which effectively insures you against the company
or the mortgagees going broke. For the past four years, investors have
become increasingly eager to buy these and other securities, with the margin
for risk being steadily whittled away.
Some banks are leaving loans on their books but selling bundles of credit
default swaps so that the risk in the loan is taken up by someone else.
Even trickier securities, called synthetic collateralised debt obligations,
bundle lots of credit default swaps into different parcels. If there is $1
billion of mortgage loans to thousands of home buyers, one parcel exposes
investors to the slight risk that they all default and pays them a small
interest margin. Another may expose investors to the risk that only 3 per
cent go broke and provides them with no security but offers instead an
interest margin several percentage points higher.
This is the realm of the hedge funds, which pass the parcels among
themselves, with investment banks, and even repackage them into products
sold to retail investors. Where the ultimate risk resides, should a borrower
default, nobody knows. A bank may buy insurance for its loans from a hedge
fund, but the financial viability of that fund may depend on its continued
access to loans from the bank.
Hedge funds are largely unregulated managers of private investor capital
that try to take advantage of financial market movements, up or down,
looking for opportunities where they believe markets have mispriced a
security. They revel in markets for derivative products, such as credit
default swaps, and borrow heavily so that a 1 per cent difference in the
price of a security can be turned into a 20 per cent return to their
It is this world that has been thrown akimbo. What started as a withdrawal
from securities linked to the sub-prime mortgage market has become a
generalised retreat as investors and banks lose faith in the system.
The Reserve Bank's Stevens said yesterday he did not believe the US
sub-prime mortgage problems were serious enough, given how widely disbursed
the risk is, to sink any large financial institution, but banks do not share
Although credit risk - the chance that a borrower will default - can be
carved up and sold to hedge and pension funds, banks are the only suppliers
of liquidity, or ready cash, to financial markets.
During the past eight days, banks have become more reluctant to lend cash on
money markets to other banks. Central banks have stepped into the breach,
saying they will lend as much money as is required to keep cash rates
steady, and private banks have lapped up those offers by the billions.
But it is not clear the banks have been passing that guaranteed cash on to
their hedge funds and other customers. Pension funds and hedge funds are
also rattled and are no longer offering to take up new securities issues.
The only previous liquidity crunch in securities markets occurred in 1998
when the Long Term Capital Management hedge fund collapsed. However, this
lasted only a few days, as then US Federal Reserve chairman Alan Greenspan
was able to rustle up a half-dozen New York investment banks to stump up
$US3.5 billion to bail out the troubled fund, and the market proceeded as
usual. This time the problem is global, with thousands of hedge funds
controlling an estimated $US1500 billion ($1900 billion).
In a speech delivered to a BIS conference on the eve of the market crisis,
Bank of England deputy governor John Grieve said the wide distribution of
risk made it less likely that any individual institution would default. But
he added: "Risk sharing can also become risk spreading. Greater
interconnectedness increases the potential for contagion to spread because
it increases the chance that institutions withstanding the effects of an
initial problem will be exposed to defaulting counterparties, making them
vulnerable to a second round default.
"Such network interactions are likely to be non-linear and, if so, the
impact on system losses may be substantial. In a world of greater
interconnections, a crisis is likely to be bigger and more complex and
international than in the past."
If the credit squeeze continues, the result will be rising interest rates
and unemployment worldwide as credit availability is squeezed for all but
the most credit-worthy. So it is to be hoped that the RBA's Stevens is
correct in his faith that the fundamental strength of the economy prevails.
(3) "Peak oil" theory vindicated? - Wall Street Journal says Oil profits
From: "Sino Economics"
A new energy pessimism emerges
By Michael T Klare http://www.atimes.com/atimes/Global_Economy/IH18Dj01.html
When "peak oil" theory was first widely publicized in such path-breaking
books as Kenneth Deffeyes' Hubbert's Peak (2001), Richard Heinberg's The
Party's Over (2002), David Goodstein's Out of Gas (2004), and Paul Roberts'
The End of Oil (2004),  energy-industry officials and their government
associates largely ridiculed the notion.
An imminent peak - and subsequent decline - in global petroleum output was
derided as crackpot science with little geological foundation. "Based on
[our] analysis," the US Department of Energy confidently asserted in 2004,
"[we] would expect conventional oil to peak closer to the middle than to the
beginning of the 21st century."
Recently, however, a spate of high-level government and industry reports
have begun to suggest that the original peak-oil theorists were far closer
to the grim reality of global oil availability than industry analysts were
willing to admit. Industry optimism regarding long-term energy-supply
prospects, these official reports indicate, has now given way to a
deep-seated pessimism, even in the biggest of Big Oil corporate
The change in outlook is perhaps best suggested by a July 27 article in the
Wall Street Journal headlined "Oil profits show sign of aging". Although
reporting staggering second-quarter profits for oil giants ExxonMobil and
Royal Dutch Shell - US$10.3 billion for the former, $8.7 billion for the
latter - the Journal sadly noted that investors are bracing for
disappointing results in future quarters as the cost of new production rises
and output at older fields declines.
"All the oil companies are struggling to grow production," explained Peter
Hitchens, an analyst at the Teather and Greenwood brokerage house. "[Yet]
it's becoming more and more difficult to bring projects in on time and on
To appreciate the nature of Big Oil's dilemma, peak-oil theory must be
briefly revisited. As originally formulated by petroleum geologist M King
Hubbert in the 1950s, the concept holds that worldwide oil production will
rise until about half of the world's original petroleum inheritance has been
exhausted; once this point is reached, daily output will hit a peak and
begin an irreversible decline.
Hubbert's successors, including Professor Emeritus Kenneth Deffeyes of
Princeton, contend that we have now consumed just about half the original
supply and so are at, or very near, the peak-production moment predicted by
Since the concept burst into public consciousness several years ago, its
proponents and critics have largely argued over whether or not we have
reached maximum worldwide petroleum output. In a way, this is a moot
argument, because the numbers involved in conventional oil output have
increasingly been obscured by oil derived from "unconventional" sources
- deep offshore fields, tar sands, and natural-gas liquids, for example
- that are being blended into petroleum feedstocks used to make gasoline and
In recent years, this has made the calculation of petroleum supplies ever
more complicated. As a result, it may be years more before we can be certain
of the exact timing of the global peak-oil moment.
On tap: The tough-oil era
There is, however, a second aspect to peak-oil theory, which is no less
relevant when it comes to the global-supply picture - one that is far easier
to detect and assess today. Peak-oil theorists have long contended that the
first half of the world's oil to be extracted and consumed will be the easy
half. They are referring, of course, to the oil that's found onshore or near
to shore; oil close to the surface and concentrated in large reservoirs; oil
produced in friendly, safe and welcoming places.
The other half - what (if they are right) is left of the world's petroleum
supply - is the tough oil. They mean oil that's buried far offshore or deep
underground; oil scattered in small, hard-to-find reservoirs; oil that must
be obtained from unfriendly, politically dangerous, or hazardous places. An
oil-investor's-eye-view of our energy planet today quickly reveals that we
already seem to be entering the tough-oil era. This explains the growing
pessimism among industry analysts as well as certain changes in behavior in
the energy marketplace.
In but one sign of the new reality, the price of benchmark US light, sweet
crude oil for next-month delivery soared to new highs on July 31, topping
the previous record for intraday trading of $77.03 per barrel set in July
2006. Some observers are predicting that a price of $80 per barrel is just
around the corner; while John Kildruff, a perfectly sober analyst at futures
broker Man Financial, told Bloomberg.com, "We're only a headline of
significance away from $100 oil." New disruptions in Nigerian or Iraqi
supplies, or a US military strike against Iran, he explained, could trigger
such a price increase in the energy equivalent of a nanosecond.
A signal of another sort was provided by the government of Kazakhstan in
oil-rich Central Asia on August 7. It warned the private operators of the
giant offshore Kashagan oil project - in the Kazakh sector of the Caspian
Sea - to cut costs and speed the onset of production or face a possible
government takeover. In an interview, Prime Minister Karim Masimov said
threateningly: "We are very disappointed with the execution of this project.
If the operator can't resolve these problems, then we don't exclude their
Kashagan, it must be borne in mind, is not just any oil project: it is the
largest field to be developed anywhere in the world since the discovery of
Alaska's Prudhoe Bay some 40 years ago. With estimated oil reserves of 9
billion to 13 billion barrels, it is crucial to the hopes of its principal
developers - Exxon, ConocoPhillips, Shell, Total (of France), and Eni (of
Italy) - to increase their output in the years ahead.
Consistent with the "tough oil" aspect of peak-oil theory, Kashagan is,
however, proving dauntingly difficult to turn into a successful font of
petroleum. The oil reservoir itself is buried beneath high-pressure strata
of gas, making its extraction exceedingly tricky, and it contains abnormally
high levels of deadly hydrogen sulfide; moreover, the entire field is in a
shallow area of the Caspian Sea that freezes over for five months of the
year and is the breeding ground for rare seals and beluga sturgeon.
As a result of these and other problems, the Kashagan operating consortium
has seen the price tag for launching the project nearly double - from $10
billion to $19 billion - and has postponed the onset of initial production
from 2005 to 2010, infuriating the Kazakh government, which had hoped to be
earning billions of dollars in taxes and royalties by now.
A demanding world
And then there are those reports from high-level agencies and organizations
on the global energy picture, all coming to the same basic conclusion:
whether or not the peak in world oil output is at hand, the future of the
oil supply in a world of endlessly growing demand appears grim.
The first of these recent warnings, titled the "Medium-Term Oil Market
Report", was released on July 8 by the International Energy Agency (IEA), an
arm of the Organization for Economic Cooperation and Development (OECD), the
club of major industrial powers. Although filled with statistics and
technical analyses, the report, assessing the global oil supply-and-demand
equation through 2012, seemed to leak anxiety and came to a distinctly
worrisome conclusion: because world oil demand is likely to keep rising at a
rapid tempo and the development of new oilfields is not expected to keep
pace, significant shortfalls are likely to emerge within the next five
The IEA report predicts that world economic activity will grow by an average
of 4.5% per year during this period - driven largely by unbridled growth in
China, India, and other Asian dynamos. Global oil demand will rise, it
predicts, by about 2.2% per year, pushing world oil consumption from an
estimated 86.1 million barrels per day in 2007 to 95.8 million barrels by
With luck and substantial new investment, the global oil industry may be
able to increase output sufficiently to satisfy this higher level of demand
- but, if so, just barely. Beyond 2012, the production outlook appears far
grimmer. And keep in mind, this is the best-case scenario.
Underlying the report's conclusions are a number of specific fears. Despite
rising fuel prices, neither the mature consumers of the OECD countries nor
newly affluent consumers in the developing world are likely to curb their
appetite for petroleum significantly. "Demand is growing, and as people
become accustomed to higher prices, they are starting to return to their
previous trends of high consumption," was the way Lawrence Eagles, an oil
expert at the IEA, summed the situation up. This is clearly evident in the
United States, where record-high gasoline prices have not stopped drivers
from filling up their tanks and driving record distances.
In addition, oil output in the US and most other non-members of the
Organization of Petroleum Exporting Countries has peaked, or is about to do
so, which means that the net contribution of non-OPEC suppliers will only
diminish between now and 2012. That, in turn, means that the burden of
providing the required additional oil will have to fall on the OPEC
countries, most of which are in unstable areas of the Middle East and
The numbers are actually staggering. Just to satisfy a demand for an extra
10 million or so barrels per day between now and 2012, 2 million barrels per
day in new oil would have to be added to global stocks yearly. But even this
calculation is misleading, as Eagles of the IEA made clear. In fact, the
world would initially need "more than 3 million barrels per day of new oil
each year [just] to offset the falling production in the mature fields
outside of OPEC" - and that's before you even get near that additional 2
In other words, what's actually needed is 5 million barrels of new oil each
year, a truly daunting challenge, since almost all of this oil will have to
be found in Iran, Iraq, Kuwait, Saudi Arabia, Algeria, Angola, Libya,
Nigeria, Venezuela, and one or two other countries. These are not places
that exactly inspire investor confidence of a sort that could attract the
many billions of dollars needed to ramp up production enough to satisfy
Read between the lines and one quickly perceives a worst-case scenario in
which the necessary investment is not forthcoming; OPEC production does not
grow by 5 million barrels per day year after year; production of ethanol and
other substitute fuels, along with alternative fuels of various sorts, does
not grow fast enough to fill the gap; and, in the not-too-distant future, a
substantial shortage of oil leads to a global economic meltdown.
The missing trillions
A very similar prognosis emerges from a careful reading of "Facing the Hard
Truths about Energy", the second major report to be released in July.
Submitted to the US Department of Energy by the National Petroleum Council
(NPC), an oil-industry association, this report encapsulated the view of
both industry officials and academic analysts.
It was widely praised for providing a "balanced" approach to the energy
dilemma. It called for both increased fuel-efficiency standards for vehicles
and increased oil and gas drilling on land owned by the US government.
Contributing to the buzz around its release was the identity of the report's
principal sponsor, former Exxon chief executive officer Lee Raymond. Having
previously expressed skepticism about global warming, he now embraced the
report's call for the talking of significant steps to curb carbon-dioxide
Like the IEA report, the NPC study does claim that - with the perfect mix of
policies and an adequate level of investment - the energy industry would be
capable of satisfying oil and gas demand for some years to come.
"Fortunately, the world is not running out of energy resources," the report
Read deep into the report, though, and these optimistic words begin to
dissolve as its emphasis switches to the growing difficulties (and costs) of
extracting oil and gas from less-than-favorable locations and the
geopolitical risks associated with a growing global reliance on potentially
hostile, unstable suppliers.
Again, the numbers involved are staggering. According to the NPC, an
estimated $20 trillion in new investment (that's trillion, not billion) will
be needed between now and 2030 to ensure sufficient energy for anticipated
demand. This works out to "$3,000 per person alive today" in a world in
which a good half of humanity earns substantially less than that each year.
These funds, which can only come from those of us in the wealthier
countries, will be needed, the council notes, in "building new,
multibillion-dollar oil platforms in water thousands of feet deep, laying
pipelines in difficult terrain and across country borders, expanding
refineries, constructing vessels and terminals to ship and store liquefied
natural gas, building railroads to transport coal and biomass, and stringing
new high-voltage transmission lines from remote wind farms". Adding to the
magnitude of this challenge, "future projects are likely to be more complex
and remote, resulting in higher costs per unit of energy produced". Again,
think tough oil.
The report then notes the obvious: "A stable and attractive investment
climate will be necessary to attract adequate capital for evolution and
expansion of the energy infrastructure." And this is where any astute
observer should begin to get truly alarmed; for, as the study itself notes,
no such climate can be expected. As the center of gravity of world oil
production shifts decisively to OPEC suppliers and to state-centric energy
producers such as Russia, geopolitical rather than market factors will come
to dominate the energy industry and a whole new set of instabilities will
characterize the oil trade.
"These shifts pose profound implications for US interests, strategies, and
policymaking," the report states. "Many of the expected changes could
heighten risks to US energy security in a world where US influence is likely
to decline as economic power shifts to other nations. In years to come,
security threats to the world's main sources of oil and natural gas may
Read from this perspective, the recent reports from pillars of the
Big-Oil/wealthy-nation establishment suggest that the basic logic of
peak-oil theory is on the mark and hard times are ahead when it comes to
global oil and gas sufficiency.
Both reports claim that with just the right menu of corrective policies and
an unrealistic streak of pure luck - as in no set of major Katrina-like
hurricanes barreling into oilfields or refineries, no new wars in Middle
Eastern oil-producing areas, no political collapse in Nigeria - we can
somehow stagger through to 2012 and maybe just beyond without a global
economic meltdown. But in an era of tough oil, the odds tip toward tough
luck as well.
Buckle your seat-belt. Fill up that gasoline tank soon. The future is likely
to be a bumpy ride toward cliff's edge.
Note 1. For a review of Paul Roberts' The End of Oil, see Brave nightmare
world, Asia Times Online, January 14, 2005.