Naked Businessmen and Businesswomen Flee China, Russia

Large numbers of China's wealthy businesspersons and government officials have already moved their families and much of their assets overseas. Such persons are known as "naked officials" and "naked businessmen" in the parlance of rumours and off the record conversations about China trends.

Now more and more of these naked men and women are angling to join their families overseas, and renouncing their Chinese citizenship.

According to the 2011 Private Wealth Report, 27% of Chinese entrepreneurs worth more than 100 million RMB ($15.9 million) have already emigrated, while another 47% say they are considering doing so. The number of these so-called “naked businessmen” is massive. The main reasons for businessmen emigrating are: their children’s education, protecting assets, and preparing for retirement.

Increasingly, the general Chinese public has grown aware of this dramatic trend. Last year, out of 5,000 investment immigration visas issued by the U.S., Chinese people accounted for two-thirds of them.

Undoubtedly, the most dazzling fact in all of this is that over 70% of China’s privileged have either emigrated or are on the way to emigrate. It is definitely not normal for 70% of a country’s wealthy class to want to leave the place where they were born and made their fortune. When we connect this piece of news to another study conducted a few years back in which it was said 80% of China’s wealth is in 20% of people’s hands, then it is easy to imagine the scale of the loss of China’s national wealth. _BI

The same phenomenon has been taking place in Russia, since the coming of the Putin power grab and persecution of perceived competitors over the past several years. London has been a particular destination for these naked Russians -- and Putin is not happy about it.

A failing Russian economy is fuelling a brain drain in favour of the British capital, while the City of London’s reputation for light-touch regulation is proving another draw.

...The relative ease of London life means that many Russian businessmen with interests in their home country prefer their families to live here while they make the four-hour commute to Moscow by executive jet. They are also keen to send their children to British schools such as Eton – half a dozen sons of oligarchs started there this year.

“The Russians come to London because it is pleasant and safe,” says Andrew Wordsworth, partner in the Mayfair-based private investigators GPW, whose clients include British-based Russians.

... In the eyes of Vladimir Putin, president of the Russian Federation, Britain’s willingness to provide sanctuary for that group of disaffected Russians known as the London Circle, headed by his friend-turned-mortal-enemy Boris Berezovsky, makes it a hostile power. _Telegraph

These trends are not particularly auspicious omens regarding the futures of China and Russia. But if one is well connected to the corrupt power centres of either country, it is still possible to milk their tattered carcasses.

China Times reported that according to a recent study conducted jointly by the Hurun Research Institute and Bank of China, 60% of China’s richest, (i.e. with assets worth of more than 10 million RMB - $1.6 million) are either applying to emigrate or have already done so.

“Only half a million dollars is enough to obtain a Green Card through the EB-5 Immigrant Investor Program. That’s the price of a Beijing apartment. It’s worth it!” confided a man called Zhang.

Giving their children a better educational environment, safeguarding their wealth, and preparing for their retirement are the three major reasons given by these naked businessmen, according to South Weekly.

...According Austar, one of China’s biggest emigration agencies and also one of China’s most prosperous businesses in recent years, the six most popular destinations for China’s naked businessmen were Canada, United States, Australia, New Zealand, Singapore and the U.K.

In 2009, of all the investment visas in the U.S., 53% came from China. While in 2008, Canada approved more than 10,000 investment visas, of which 70% came from China. _WorldCrunch

More: Why is China suddenly starting to unravel?

"The China Economic Boom Will Cease . . . . . "

A Turning Point for China

After a long run of good luck, modern China is experiencing multiple crises, each of which threatens to topple China from its important role as one of the world's main economic drivers.

China appears to be facing multiple crises, each exacerbating the other. China could have its turn at instigating global recession. The rest of the globe should expect turbulence and uncertainty.

There is a political crisis arising from the fact that the leadership transition is clearly not going as smoothly as planned: The party appears riddled with acute factionalism, heads are falling, but opacity remains. The dramatic fall of the powerful princeling Bo Xilai and his wife and their sordid scandal eroded the party’s legitimacy. The unexplained disappearance of the presumed incumbent to the presidency before his sudden reappearance two weeks later raised serious questions about the secretive party’s mode of operation.

The most profound crisis, one that lies at the heart of all the other crises, is the social crisis. In discussions with Chinese intellectuals in recent weeks, the word that keeps emerging is “anger.” People are angry at inequality, injustice, corruption, pollution, flagrant abuse of privilege, exorbitant prices of real estate driven by speculation. Social unrest is expressed through increasing number of demonstrations over quality-of-life issues, for example recently in Dalian, over a toxic chemical plant, and by a hyperactive blogosphere.

China’s environmental crisis, with the world’s highest levels of pollution and permanent urban smog, fuels the social crisis. The economic crisis arises not so much because of a 2 percent, or more, fall in the growth rate, but in a surprisingly widespread pessimism in respect to the future. The state is too bullying, the financial system is byzantine, the education system fails to provide needed quality, and the goals of innovation and higher value-added set out in the 12th Five Year Plan appear unattainable because of the party’s refusal or incapacity to carry out reforms.

The social and economic crises are rendered more acute by China’s looming demographic crisis as the population rapidly ages and the proportion remaining active in the labor market diminishes.

In some respects perhaps the most dangerous of all the crises is the geopolitical. Needless to say, it’s exacerbated by the simultaneous economic, social and political crises. China is currently in a state of territorial conflict with at least three neighbors – Japan, Vietnam and the Philippines – while relations with a number of major powers, notably India, Russia and the US, are tense. These are further fueled by increasingly strident rising nationalism, now being ramped up with anti-Japanese demonstrations and display of military might. Though war still seems a reasonably remote possibility, by no means can it be ruled out totally.

The world should take notice.... The China economic boom will cease; developing countries should anticipate a possibly steep decline in demand for commodities.

China will likely become more protectionist, reflecting the paralytic state of the global trade agenda and retaliation for likely protectionist measures from others, notably the US. _Asia Sentinel

These are all topics which have been discussed here routinely over the past few years, but are just now making their way into mainstream discussions at think tanks, among academics, and by government analysts.

For example:

... corruption and unreliable economic data is causing growing financial problems in China. There has been massive overbuilding, which has been impossible to hide. All those unoccupied residences and commercial buildings are very obvious. These were all built with loans from state-owned Chinese banks. The government refuses to reveal how badly the banking system has been hurt by all the obvious (and less obvious) bad loans.

There is a lot of corruption in China and several provinces and one major city (Dongguan) are talking about bankruptcy because they cannot borrow enough money to keep their unprofitable operations going. Sort of like what happened in Greece, but on a much larger scale. A major financial crisis could limit the loans needed to keep economic growth going. But it's become clear that much of the economic growth in the last decade was created by building stuff that was not needed and is non-productive. Manufacturing and exports are declining and, despite the absence of government data, there is growing unemployment. The Chinese stock market has declined 20 percent in the last year and the holdings of the richest Chinese have gone down by a third in the same period. _StrategyPage

No one can predict the exact sequence and timing of the coming changes in China, and the resulting consequences for China's trading partners and the global economy. It is safe to say that wise planners and investors will build a good deal of flexibility into their future plans.

Will Commodities Prices Collapse by 2015?

China economist and observer Michael Pettis expects commodities prices to crash by up to 50% over the next few years. Here is a rough outline of his argument:

China currently is the leading consumer of a wide variety of commodities wholly disproportionate to its share of global GDP.　 The country represents roughly 11% of global GDP if you accept the stated numbers, and substantially less if you believe, as I do, that growth has been overstated because of the difference over many years between reported investment, i.e. its input value, and the actual economic value of output.　 China nonetheless accounts for between 30% and 40% of total global demand for commodities like copper and nearly 60% of total global demand for commodities like cement and iron ore.

The only reason China has provided such an extraordinarily disproportionate share of global demand for hard commodities has been the nature of China’s growth model.　 While China may represent only 11% or less of the global economy, it represents a far, far greater share of the world’s building of bridges, railroad lines, subway systems, skyscrapers, port facilities, dams, shipbuilding facilities, highways, and so on.　

Over the next decade, two things are going to change.　 The first is increasingly recognized, and that is that Chinese growth rates will drop sharply.　 The second is that China will rebalance its economic growth away from its appetite for commodities.

Which Way Can Prices Go?

For these reasons I am very pessimistic about hard commodity prices and expect them to drop substantially further in the next two to three years.　

Production capacity for hard commodities is rising much too quickly, in a belated response to the unexpected surge in demand just under a decade ago. Expected economic growth rates in the country that has been biggest source of new demand – virtually the only source – have fallen sharply and commodity prices have fallen with them.　 Historical precedents and the arithmetic of rebalancing suggest, however, that the current consensus for medium-term Chinese growth is still too optimistic.　 Expected growth rates will almost certainly fall further in the next two years.

Beijing has finally become serious about rebalancing China’s economy, and rebalancing means shifting Chinese growth away from being disproportionately commodity intensive.　

Instead of representing 30-60% of global demand for most hard commodities, Chinese demand will shift to a more “normal” level.　 Remember that even a very limited shift – from 50% of global demand, for example, to a still high 40% of global demand – represents a sharp drop in global demand.

There has been so much stockpiling of commodities and finished goods with implicit commodity content in China that the country could well become a net seller, and not net a buyer, of a wide variety of commodities in the next few years.

This is going to come as a shock to many people. 　In my discussions with senior officials in the commodity sectors in Brazil, Australia, Peru, Chile and even Indonesia, it seems to me that many analysts have been insufficiently skeptical about the Chinese growth model and are unaware of how dramatically the consensus has changed in the past two years.　

They have failed to understand how deep China’s structural problems are and how worried Beijing has become (this worry may be best exemplified by the extraordinary growth in flight capital from China since early 2010).

Under these conditions I don’t see how we can avoid a very nasty two or three years ahead for commodity producers.　 This isn’t all bad news, of course.　 What will be a disaster for hard commodity producers will be great news for companies and countries that are commodity users or importers.　 One way or the other, however, we are going see a big change in the distribution of winners and losers. Read more at http://globaleconomicanalysis.blogspot.mx/2012/09/by-2015-hard-commodity-prices-will.html#VS6Z04Tib0oovfOx.99 _Michael Pettis _ via _Mish

More at the link above.

More: 6 Signs of China's Deteriorating Economy

We have looked at exactly this issue previously in relation to both oil prices and the commodities markets generally. China is the second largest national economy in the world, and the champion of the emerging nations known as the BRICs. Many people thought that China was ready to lead the world as a replacement superpower hegemon to the US.

Many people still believe in the idea of China as global leader, continuing to support exponentially growing global demand for oil, commodities, food, etc.

But it might be best to use caution when investing in any venture that is dependent upon continued massive economic growth in China. Only a fool bases expectations upon extrapolations without limits, constraints, and qualifications.

Can Oil Prices Rise Indefinitely Without Strong Economic Recovery in Europe and the US?

Clouds of recession hover over Europe and are threatening the US, unless significant policy changes are enacted from those existing now. Most advanced nations also suffer from both exploding debt and a demographic decline of their core populations.

Unless the world's wealthy nations resume the buying spree of the "economic bubble period" of the 1990s and early 2000s, rapid economic growth in exporting nations of the emerging world and third world nations remains in doubt.

What would be the effect of such a "top-down economic stagnation" on global oil and commodities prices?

The article below, which considers that question in an oblique fashion, is adapted from an article previously published on Al Fin Energy blog

Why are oil prices so much higher now than they were prior to the 2000s? Much of the difference has to do with the steady stealth devaluation of the US dollar, reflecting the US government's massive debt and deficit spending practises.

Compared to the price of oil in 2010 dollars -- or to the price of oil in gold -- prices prior to the year 2000 were not so much lower as we might think. Two price spikes prior to the year 2000 were comparable to -- or higher than -- our current inflated oil prices.

But there is more to the story than the pitiful performance over time of the US dollar. An explosion of demand for oil from emerging nations -- from the late 1990s to the present -- explain a great deal of the ongoing oil price bubble. Particularly when one takes into account government subsidies for oil which hold the cost of oil use artificially low from Mexico to Venezuela to many MENA countries, China, India, and beyond.

This explosion in demand was the natural result of exploding populations in those countries combined with an emerging consumption sense within those populations fed by global media and a subsequent growing sense of entitlement.

Oil in Nominal vs 2010 Dollars

Comparing oil prices in "dollars of the day" vs. oil priced in either standardised 2010 dollar or gold, brings out more aspects of the dynamic than are generally discussed.

Oil in Dollars vs Gold

In addition to the ongoing stealth dollar devaluation and the demand explosion from the emerging world, oil has become a deeply emotional repository of value for many investors -- reflecting a widespread belief in oil scarcity -- or "peak oil". Savvy traders have exploited this superstition by helping to bring about multiple whiplash spikes and troughs of oil price -- which in the aftermath often leave the smart traders richer, and the superstitious true believers that much poorer.

Of the three drivers of higher oil prices mentioned above, the most likely candidate for the "largest" contributor, is demographic change. Let's look at why this "largest contributor" may not end up being the most important long term contributor to changes in oil prices.

We all know that commodity prices depend upon both supply and demand, as well as a number of somewhat arbitrary and changeable government policies, mandates, regulations, taxes, prohibitions, and other caprices of the generally clueless political class.

Demographic change affects both supply and demand, but demand is the more immediate factor affected by the type of population growth we have seen recently. The explosion of both populations and demand in emerging nations shook the ability of national oil companies to respond -- in large part due to a corrupt failure to pay for necessary maintenance and technological upgrades in oil production. And since most conventional oil reserves fall under the control of corrupt national oil companies, the demand explosion was not immediately accompanied by an equivalent explosion in supply. This mismatch pushed oil prices upward.

But population growth without the ability to pay for more commodities, will not necessarily convert to higher demand, and higher prices. If the regions of population growth cannot pay for more commodities, they will either go without or will be the recipient of unearned aid from wealthier countries.

This is what we are beginning to see across Africa, much of Asia, and other parts of the third world and emerging world. As advanced world demand for the products of emerging and third world nations drops, the ability of third world nations to pay for imported commodities likewise drops.

It so happens that the prospects for advanced world economies is looking more and more dim, while the other bubble -- the demographic bubble -- deflates.
More:

Between the Baby Boom of 1945-1964 and the “baby bust” that followed it, the result is a projected ballooning in the relative numbers of the elderly. From 12% of the population today, the proportion of those over the age of 65 is forecast to rise to 25% by 2030 — and stay there for decades afterward.

We are about to be hit by a double whammy, in other words. On the one hand, a rapid escalation in public spending — not so much for pensions, though that is part of it, but for health care. Not only will more of the population be over 65, but a greater proportion of them will be living past 80, 90 and beyond. And the longer they live, the more they tend to cost. _NP

Old people do not typically use as much oil and other commodities, they do not build as many houses, or buy as many cars -- as a rule.

Demographics are economics. The advanced countries with the worst demographics problem and the advanced countries with the most uncertain economic futures are often the same. High social spending promised to aging generations that aren't supported by enough young workers leads to the kind of debt crises, economic stagnation, and political upheaval that we can see sweeping Europe -- and might yet lie ahead for a country like Japan. This is ironic, in a way. Two centuries ago, Malthus said that growing populations would tax growing economies. In fact, it's stagnating populations that constrain economic growth in rich countries. _Atlantic

With the contraction of demand from economies in the advanced world, comes a reduction in ability to pay for both luxuries and necessities -- including commodities -- in the emerging and third worlds.

That is not the worst of it. Piling on top of the debt and demographic problems of the sinking nations of the advanced world, is an amazingly destructive dysfunctional energy ideology which threatens to sink many of these nations -- both individually and in groups -- beneath the waves.

Intelligent people understand that the intermittent unreliable energy sources such as big wind and big solar, cannot supply more than a small portion of grid power, without destabilising the grid itself.

Nations of the advanced world -- the ones that thrive -- will discover and develop more sources of energy, and will learn to do more with less at the same time. Improved efficiencies and productivity will contribute to the declining demand for imported commodities which will also be driven by the declining demographic.

Increasing use of robotics and other automation will help to raise productivity, even as core populations decline. But energy will always be key. Newer, cleaner, cheaper, safer generations of nuclear energy will be a long term solution, but we will need to utilise our large supplies of conventional and unconventional hydrocarbons to get us there.

Which is why the energy starvationists -- from Merkel to Obama to Gillard and beyond -- will have to be moved out to make way for a better future.

Reality Check: What Does Chinese Economic Growth Really Mean?

China promoters have long touted the admittedly amazing economic growth numbers coming out of China. And even now, in the middle of a global downturn involving both Europe and China, investors' eyes still turn to China when scouting for isolated patches of growth:

China has long been seen as the country with the biggest potential to prevent the world from falling into another 1930s-style depression, helping to offset contraction in North America and Europe. Admittedly, China is highly dependent on markets in both regions for exports, and thus for wages and domestic consumer spending. And admittedly, the economic data coming out of Beijing have been called into question. Yet growth there will still be the most robust of anywhere in the world, according to forecasts from Oxford Economics via Datastream – real GDP should grow 7.5 percent in China this year. But that’s almost anemic compared to the country’s recent track record of annual double-digit GDP advances. _Fiscal Times

But even if one takes the Chinese economic growth figures at face value, there are any number of details which could devil your dreams, should you decide to make big and bullish bets on China.

News of a slowdown in China’s economic growth has been building of late, and many disparate theories have been offered in explanation of the phenomenon. One issue facing the country has been debated particularly heatedly. Commentators cannot seem to reach a conclusion on whether the Chinese economy is a victim of over-investment.

...The story, in simple terms, begins with the restrictions China places on the maximum deposit rates allowed by banks there. These restrictions, though slightly relaxed earlier this month, leave borrowers accepting very low rates on deposits, because of lack of other investment opportunities.

The low rates allow money to flow to borrowers, who pay very low rates on their loans. That means householders are effectively losing money to subsidize the borrowing of investors. The Chinese financial system is being used as a machine, that allows this to happen.

The borrowers in China are the local and central government agencies, real estate developers, corporations, and other infrastructure investors. Because their investments are effectively subsidized, they face lower repercussions than borrowers face in free market conditions.

...China’s low interest rate constraints mean investment that is concentrated in a single area, and therefore provides economic growth in the short term, has its cost spread across the entire country through the household financial system.

The cost of building the infrastructure is much higher than the benefits that come from it. This is over-investment. The scourge is exacerbated by the structure of the country’s financial system. The subsidized lending leads to worse decisions being made because market realities are not in force.

China’s per capita income and worker productivity mean that the level of capital stock in the country should land at a much lower equilibrium level. Advanced infrastructure is not saving labour as much as it does in Germany or the United States. China is over-investing.

...Politics in China is undergoing its most egregious challenges in decades this year. The succession plans for the replacement of the country’s leaders have already been rocked by scandal. Something special will be needed to avoid the worst effects of the over-investment problems that have been created in recent years.

That is unlikely to come from these appointments. China is still conservative when it comes to reform, even when faced with economic slowdown. The recent tremors in the party’s system of choosing successors, could bring to the fore a more open method of investing leaders but it is not likely to do so.

China’s government has allowed over-investment to become rampant in the east Asian giant. It is not a sustainable situation. If something is not done at the highest levels in the country there will be a market readjustment that will shake China and the rest of the world.

Pettis also makes a startling statement on China:

” A mainland think tank, Unirule, estimated in 2011 that monopoly pricing and direct subsidies may have accounted for as much as 150 percent or more of total profitability in the state owned sector over the past decade. I calculate that repressed interest rates may have accounted for another 400 to 500 percent of total profitability over this period.?Monopoly pricing, direct subsidies, and repressed interest rates all represent transfers from the household sector.”

_Value Walk

China Financial Markets _ Michael Pettis' blog

Another look at threats to economic stability in China from Patrick Chovanec

Inbred Chinese State Owned Enterprises Hope to Monopolise Coming Shale Gas Boom in China

Meanwhile, belated news of coal and other commodities stockpiles growing to record levels, and reports of faked electricity utilisation data being leaked to financial media, suggest that someone in China may be trying to project a false impression.

The political class in China benefits from the massive economic inequality fueled by corrupt state owned enterprises. As long as Chinese wage earners cannot invest outside of China, corrupt insiders have the means of re-distributing hard-earned funds from the pockets of wage earners, into the pockets of political insiders and the well-connected.

How is that different from the situation existing in western countries? In western countries, citizens can invest overseas, can move to other countries relatively easily, and are generally not being held as captive blood donours to the same extent as their counterparts inside China.

How long can this China scam of massive malinvestment continue? Time will tell.

BRICs: Can the Tail Wag the Dog?

Ever since the 2008 collapse of the great global economic bubble, the hopes of the chattering economic classes have ridden on the BRICs -- the emerging economies of Brazil, Russia, India, and China. Aside from Russia, the BRICs have population heft and momentum, something most of the more advanced nations cannot claim. There is also a sense in those countries that it is somehow "their turn" to excel.

But what if the BRICs are only the tail to the global dog? If the dog is sick, can we really expect the tail to do everything the dog would normally be able to do?

The BRICs have been exporters to the more developed economies. But the more developed economies are sinking under dysfunctional policies and leaders. Can the BRICs succeed and prosper without developed markets to buy their resources and products?

Champions of the Submerging World
China is economically dependent upon exports to Europe and North America -- markets that have not been doing well over the past few years. Brazil is economically dependent upon not only Europe and North America, but is very much dependent upon Chinese demand as well.

As goes China, so goes Brazil. China's insatiable appetite for oil has benefited Brazil over the past few years. If China's economy continues to lose momentum because of the European crisis, that will impact Brazil ... even if Brazil doesn't have as many direct ties to Europe's consumers and banking system.

"Brazil is a play on China. There are concerns that Brazil is overexposed to China," said Carlos Constantini, head of research at Itaú BBA, an investment bank in São Paulo. That's a big reason why Brazil's benchmark Bovespa stock market index is down more than 6% year-to-date.

India's sharp decline is perhaps the most surprising since that economy was thought to be the least exposed to Europe. Russia, however, could really suffer if the global economy doesn't show some signs of life soon. Crude oil prices have plunged below $100 a barrel to the mid-$80s. Crude prices are now down more than 20% from their highs of the year. And oil could dip further if the Euro-wreck leads to significantly lower demand for crude worldwide.

"Russia was a darling for awhile and there was all this talk about how oil would never fall below $100 a barrel. Their economy is so levered to oil and commodities and they haven't been able to diversify." Mata said. _Thick as a BRIC

Cracking BRICs
It is true that India's economy -- despite minimal exposure to the European crisis -- is starting to slump. India is still desperately poor, after all, and its government is abysmally corrupt. Nothing kills a nascent economic boom so quickly as greedy governments.

One interesting development out of all this economic turmoil, is that Russia's Putin is turning to the Russian far East and to Russia's relationship with China, in an attempt to hedge his global bets.

Much of Putin's far East and China strategy should be seen as wishful thinking: China's population is still on the ascendancy, looking for lebensraum, while the ethnic Russian population is steadily shrinking away and leaving a huge void.

Putin's attempts to engage China in joint industrial and technological enterprise are likewise built on shifting sands. China has always appropriated the intellectual property of its "partners," and proceeded to to make pirated and counterfeited products. Russia is feeling the sting from multiple thefts of designs of planes, ships, submarines . . . If Putin proceeds with his farcical plans (see above article link), Russia will feel that sting yet again . . . and again . . . and again . . .

When Putin attempts to lock China into a long-term gas contract at today's inflated prices, he will be bucking the tide of China's development of its own vast shale gas resources. Somehow, it is unlikely that China's leaders will be amused at Putin's condemnation of the "fracking" process, which China is using to develop its tight gas deposits. Particularly when Russia is using the exact same fracking process to develop its own shale resources in Siberia.

An attempt by BRIC nations to circle the wagons and to feed each others' prosperity -- without outside input from the more developed economic world -- is not likely to succeed at this early stage. But it is possible that the US will eject the anti-free market and anti-energy policies of the Obama administration, in November's election. And it is possible that at least some countries of Europe will turn away from demographic decline and the green dieoff agenda.

If those things should happen, the health of the dog may be restored, and the tail may be set to wagging once again.

Oil Price Bubble vs. Demand Destruction and Decline

The following article was first published at Al Fin Energy

The ongoing bubble in global oil prices is fighting for its life against declining demand across the developed world -- and the threat of a near to intermediate-term collapse in demand from emerging nations such as India and China.

Fundweb: Decline in Demand Occurring First in Developed World

...a volatile mix of factors is in play. There is an appetite for risk, he says, but based around demand for a futures position, the buying of paper contracts, not the physical demand for petroleum. Real economic demand for oil, by contrast, is in retreat, and a thin support for current prices.

...More generally, the International Energy Agency (IEA) has forecast shrinking demand for oil from developed nations for 2012, and modest growth in the developing world of 2.8%.

“We are seeing a bit of a bubble, understandably connected to the take on Iran and the embargo,” says Evans.

...The popularity of the Peak Oil theory...has helped to bake-in continually bullish expectations about higher prices. In other words, it has helped create an ongoing foundation for speculation.

Government intervention in the form of monetary policy also seems to have played its role in higher prices. As part of a strategy of “reflation” of asset prices after the 1990s equity collapse and economic downturn, Alan Greenspan, the then Federal Reserve chairman, lowered interest rates to record lows, leading in turn to a new phase of dollar value depreciation from 2002 to the present.

As new capital sought to hedge against a depreciating dollar and inflation, a paradox was created, some argue. As commodity prices rose, capital inflows created the inflation it sought to avoid as a certain amount of passive “buy and hold” money entered the market and rolled over contracts on a regular basis.

...Greater credit there has driven growth, in turn driving up demand for raw materials and commodity prices.

“However, there is a fairly convincing argument that the aggressive loosening of monetary policy everywhere has seen authorities shooting themselves in the foot,” says Neumann.

Consumers in the countries where quantitative easing (QE) has been introduced face higher petrol prices and inflation, for example. More generally, it is not difficult to see why rising oil and therefore petrol, fuel and heating costs, and inflation in general, are causing concern.

With stagnant or declining real wages, and high unemployment in many parts of the developed world, living standards are already coming under pressure. Inflation adds to the cost of living and, of course, has a more serious impact on the poorest of the world in the developing nations.

At the same time, higher oil prices mean higher production costs for a whole range of industries – agriculture, transport, manufacturing, and so on – which, to one debatable degree or another, may be passed on to consumers via higher prices.

Not surprisingly in this context, analysts and economists are trying to quantify the impact of certain oil price levels on economic growth more generally.

...Each type of crude oil – ranging from the heavy varieties in the Middle East, which can be easily extracted, to the lighter North American types – needs to sell for a certain price for profits to be made. The costs of producing a barrel of Canadian Tar Sands oil before profit are thought to be about $40-50.

In this context a higher sale price for oil is likely to have encouraged rising production in America, where production costs are high.

If bullish forecasts are to be believed, America is on the verge of energy self-sufficiency within a decade, given the huge shale oil deposits it has, and the possibility of using the same technology developed for shale gas – hydraulic fracturing, or fracking.

An estimate is that such oil deposits contain two trillion barrels of oil. For comparison, America consumes roughly 19m barrels of oil a day.

...One of the paradoxes about the oil and broader energy market is that, in economic, operational and technological terms, the market has been relatively successful at the basic in supplying half of the world with the energy it has been demanding to raise living standards. The future does not seem too terrible, either, for technological breakthroughs and further development.

According to the US Energy Information Administration, there is enough oil worldwide to meet demand for the next 25 years.

... instability in the [oil] market is...being introduced from the financial and geopolitical sides.

Discussions about reform in the financial area are underway. The US Commodity Futures Trading Commission is considering ways to stop excess liquidity and speculation in futures markets from distorting price discovery and affecting the physical market and real economy.

It plans to implement “position limits” in the futures markets, for example. Ex-futures traders are some of the most strident critics of the system. In his book, Oil’s Endless Bid: Taming the Unreliable Price of Oil to Secure Our Economy, Dan Dicker, an energy analyst and ex-oil trader, explores how financial markets have become more divorced from the practical and productive activities in the physical oil industry.

The problem might be broader still. A further analysis might look at what is happening with broader money creation, the excess liquidity and price instability problems stemming from the central bank objectives of “reflation”, and their impact on the oil market. _Fundweb

Read the entire article linked above for much more detail, provided in a relatively even-handed and broad overview.

The article fails to consider what will happen if propped-up and subsidised demand from emerging nations such as China and India should decline -- either gradually as in the developed world, or abruptly in the form of demand collapse.

Global demand for energy is increasing at the same time that demand for crude oil -- at its currently inflated prices -- seems to be declining. Europe, Russia, and parts of East Asia are experiencing demographic implosion, which can only lead to a future drop in demand for oil. The only parts of the world still exploding in population are the parts of the world that can least afford to buy expensive commodities -- but are instead more likely to sell their birthright commodities in order to supply corrupt leaders and their families with European townhouses and extended vacations.

Global energy markets involve far more than crude oil. Rapidly improving technologies of fuel and energy substitution are likely to further diminish the importance of crude oil as a controlling influence of national and international economies by the 2020s.

If you don't mind losing your shirt again and again, the peak oil religion may be appropriate for you. Otherwise, a bit of nuance may be called for.

China's Economic Problems Deepen; World Is Not Immune

“We’re reaching a tipping point where land sales are dropping much faster than before, developers are losing more access to bank financing, and housing prices are showing weakness,” Nomura’s Zhang said in an interview in Beijing yesterday.

...The price of land in Beijing slumped 76 percent in August from a month earlier, while in Guangzhou it plummeted 53 percent, according to Soufun. Land auction failures surged 242 percent in the first seven months of this year because of government curbs on the property market, the Beijing Times reported Aug. 3.

...Funding problems are just “the tip of the iceberg” and “sharp declines in property sales and prices are likely in the next two to three months,” said Shen Jianguang, an economist at Mizuho Securities Asia Ltd. in Hong Kong.

...“The risk of China replaying the hard landing of 2008 is increasing as the property sector cools and exports weaken,” Shen said. “ I fear that once the real economy deteriorates and officials do loosen policies, it will already be too late.” _Bloomberg

When global markets contracted in the 2008 crash, China lost a huge portion of its export income. Without its economic mainstay, China was forced to create an artificial real estate boom inside its own borders, to boost GDP and support employment. China's ongoing construction and real estate bubble has consumed a huge proportion of global commodities production -- helping to support the economies of commodities producing nations.

When China's internal bubble collapses, the repercussions will spread around the globe, adding to the ongoing economic turmoil.

In Europe, the situation may be more dire as the inability of policymakers to solve Greece's debt crisis over the last two years has allowed its problems to ripple into Italy, Spain and other struggling economies.

The stock market's slump this week resumes the sell-off that slammed share prices in early August. The Dow dived 2,000 points, or nearly 16%, from July 21 to Aug. 10. _LATimes

China's government is brittle, and difficult to change. When state policies fail and threaten to create massive disruption, China's brittle ruling apparatus may find itself at a loss.

In democracies, economic shocks typically result in electoral defeat for the incumbent government, which at least provides the public with someone to blame, and a test of the hypothesis that the crisis was the result of mismanagement.

In a closed oligarchy like that of China, there is no such mechanism. The system could break down from within, as factional disagreements within the central committee spill out into the broader party and the public at large. Alternatively, large-scale public protests, combined with disagreements over the extent to which repression is desirable and feasible, could bring about a rapid breakdown. _NationalInterest

The empire is still riding on its vast cash reserves, built up during the golden days of exporting. The clout from these reserves has allowed China to push Russia around in many ways, and to work its way into positions of strength and influence on several continents. But the economic equation is shifting and changing in several ways, both subtle and unsubtle. If China cannot shift and flow with the changing currents, terrible troubles may soon confront the celestial kingdom.

China has had a gigantic bubble. Now, will it collapse or will it just slow down, that is a different issue but some sectors of the economy will collapse," [Faber] said. _IndiaTimes

When BRICs Crumble, Will Commodity Prices Collapse?

Common wisdom assumes that commodity prices, including oil prices, will continue to rise on exponential demand from emerging nations, such as China, India, Brazil, Turkey, Russia, etc. But under the sheen of those rosy projections, exists a growing excremental stench of corruption and decay. If the magical trajectory of the BRICs should falter, how far would commodities prices fall? And what would be the repercussions for already stressed world financial markets, desperate for safe havens and hedged to the hilt?

China's property bubble is set to implode, and when it does, the Chinese economy will cool far more than anyone thinks, taking commodities along for the ride. Commodity producers like Australia and Canada are at extreme risk as well. _Mish

Not just Australia and Canada are at extreme risk. Two BRICs -- notably Russia and Brasil -- are gambling on continued high commodity prices into the indefinite future. Corruption in all of the BRICs is hampering genuine market-based growth, but economic dependence on raw commodities prices is particularly bad in Russia.

When commodity prices dive, Russia may well grow desperate.

Prime Minister Vladimir Putin, the country's uncrowned czar, has linked his legitimacy to the economy's performance by offering the Russian people a grand bargain: submit to his increasingly autocratic rule and the state will compensate with economic goodies like higher incomes and hefty social-welfare spending. Now that the economy is faltering, Putin is under intensifying pressure from a discontented public to restore Russian democracy, potentially destabilizing Russian politics. He has already faced protests in Moscow against his rule amid the economic downturn. There's also a risk that leaders in Moscow will resort to nationalistic appeals to distract the public from problems at home, escalating tension with Russia's neighbors, the rest of Europe and the U.S. _Time

Russia's ongoing demographic collapse, and the threat of losing much of Eastern Siberia to Chinese influence, is not helping the mood in Moscow. But without the clout that comes from high energy prices, Russia becomes an angry dancing toy bear with nuclear weapons.

Venezuela, Iran, the Arab states of MENA, Mexico, and many countries in tribal Africa and Asia, are also pathologically dependent on high commodity prices, due to internal corruption having squeezed natural markets to death. How will their people deal with the many difficulties and hardships they will face when their governments cannot feed, clothe, house, or water them?

Even the US is vulnerable to a fall in commodities prices. The US is the world's third largest oil producer. The recent boom in US shale oil & gas production is one of the few bright lights in an otherwise dim Obama economy. And although the jobs, housing, manufacturing, and other sectors in the US economy continue to sag, Obama has not had enough time to entirely destroy the US private sector.

Few readers of this blog understand the precarious state of China's economic house of cards. That is because almost all of the economic information coming out of China is closely controlled, and coated with a shiny facade. But it is time for readers to begin asking themselves about the global repercussions of a more sustained commodities price slump than they have seen.