It's probably fair to say that regardless of how much oil is found, there will never be another Saudi Arabia

From The Atlantic:

Lisa Margonelli

Jun 4 2009, 10:36AM

Uganda: The Next Saudi Arabia?

Uganda is a landlocked country of 32 million that's a bit smaller than Oregon. GDP: $1100. And, according to this report of a meeting with a representative of the US Department of Energy, may have reserves that "rival" those of Saudi Arabia.

(For reference: Saudi Arabia produces well over 10 million barrels of oil a day and has reserves estimated at 267 billion barrels.)

The DOE expert says Uganda could produce 3.5 million barrels a day, and possibly much more, and then offers US help with environmental and governance issues.

I have no way of knowing how accurate the prediction of Uganda's oil reserves is, but even if there is a lot of oil there, there's no doubt that the place and oil source we call Saudi Arabia was the product of a particular moment in world history, and a particular relationship between the US as the emerging post-colonial world power and the kingdom of Saudi Arabia, which needed protection as the Cold War heated up. In other words: More than oil made Saudi Arabia what it is today.

By contrast, this moment in history is a dramatically different petri dish. As this article shows, Uganda is actually considering NOT exporting its oil, which would mean that the reserves, no matter how large they are, would not realize their full value. Furthermore, Uganda is seriously looking at doing deals with both Iran and China--both in their own ways emerging powers without the baggage that the US has.

And the US has neither the diplomatic suasion nor the air of military invincibility that it had 50 years ago, or even 10 years ago. The US military, through AFRICOM, has a complex relationship with the government of Uganda and rival groups in nearby Democratic Republic of the Congo. Earlier this year, AFRICOM helped plan a horrifically botched raid on rebels who turned around and killed 900 civilians.

It's probably fair to say that regardless of how much oil is found, there will never be another Saudi Arabia, willing to invest so much of its income in creating spare capacity to keep America's vision of the world afloat with cheapish oil. For the US, chasing Saudi Arabias and oil reserves around the world has been part of our 20th century version of manifest destiny. But with incredible speed, the whole venture --both the good and the bad--is changing. "

Me:

Don the libertarian Democrat June 4, 2009 12:43 PM

"The US military, through AFRICOM, has a complex relationship with the government of Uganda and rival groups in nearby Democratic Republic of the Congo. Earlier this year, AFRICOM helped plan a horrifically botched raid on rebels who turned around and killed 900 civilians."

That's true, but you should have also mentioned this:

"UN says rebel hunt disaster for Congolese but must go on
09 Feb 2009 19:23:26 GMT
Source: Reuters
By Joe Bavier

DORUMA, Congo, Feb 9 (Reuters) - An offensive against Ugandan Lord's Resistance Army rebels in Congo has had catastrophic consequences for civilians but must go on to drive out the rebels, the U.N. humanitarian chief said on Monday.

Lord's Resistance Army (LRA) fighters have killed nearly 900 people in northeastern Democratic Republic of Congo, mostly since the start of a multinational campaign on Dec. 14 led by Ugandan forces.

"It's true that the humanitarian consequences have been catastrophic," U.N. Emergency Relief Coordinator John Holmes told reporters in Doruma, where at least 13,000 civilians have taken refuge after a spate of attacks by the rebels.

"I think they need to see the operation through. I don't know how long that will take...but I think there is no point in putting a premature end to it," Holmes said.

The decision lay with the Congolese and Ugandan governments, he said.

"We, meanwhile, will try to pick up the pieces as best we can."

I might also note the following:

"May 22nd, 2009 by alison in: Conflict Watch, Main Site
This week two US Senators and three Representatives banded together to introduce the LRA Disarmament and Northern Uganda Recovery Act, marking a watershed moment in our efforts to permanently end one of Africa's longest running conflicts. The bipartisan legislation has the potential to bring unprecedented levels of attention to this issue and spur our leaders to take the steps needed to stop LRA atrocities and help put northern Uganda on track towards lasting peace.

Stay tuned in the coming weeks for more details about the legislation and what it will take to make sure Congress and President Obama approve and implement it. Just yesterday Resolve Uganda joined with 21 civil society groups from the US and central Africa to voice our support for the legislation, but we know in the end it will take action on the part of people like you to push it past the finish line. "

investors’ short-term deflationary fears are slowly giving way to long-term inflationary worries

TO BE NOTED: From Alphaville:

"Oil at six-month high Posted by Izabella Kaminska on May 29 12:27.

Crikey, that’s quite a spike in WTI oil futures on Friday:

Interestingly, this is how the dollar is trading versus the euro on Friday:

Dollar index:

No similarity there at all, huh?

Related links:
So who says there’s no oil/dollar correlation - FT Alphaville
The coming oil-equity disconnect or the end of efficient markets theory? - FT Alphaville
Oil, the great inflation hedge - FT Alphaville

This entry was posted by Izabella Kaminska on Friday, May 29th, 2009 at 12:27 and is filed under Capital markets, Commodities. Tagged with Dollar, nymex wti futures, oil."

"So who says there’s no oil/dollar correlation? Posted by Izabella Kaminska on May 19 13:57.

When oil behaves irrationally at the moment, it seems there’s usually only one explanation offered: it’s trading in an opposite direction to the dollar.

RBC Capital sums up the return of this significant correlation in the following chart:

As can be seen, it appears the correlation slipped out of place from October 2008 until February 2009 - the peak of the financial crisis - and since then has increasingly been coming back into play.

Barcap’s David Woo, meanwhile, makes a similar observation, but this time charts oil’s performance versus EUR/USD specifically:

Interestingly he concludes (our emphasis):

If the key drivers behind the spike in the EUR/USD-oil correlation in the middle of last year were aggressive interest rate cuts by the Fed and the strong consensus at the time about decoupling, what is driving up the correlation now? In our view, the context is different but the reasons are the same. In recent weeks, sentiment towards global growth has improved, and in particular, the acceleration of the Chinese economy has fuelled hopes that Asia and some parts of Latin American will recover before the US.

At the same time, investors are concerned about the lack of a credible exit strategy from QE and the potential long-term consequences of the massive buildup of US government debt and contingent liabilities. The fact that inflation breakevens on TIPS are widening and gold prices remain above $900 an ounce (Figure 4) despite the dramatic abatement in risk aversion is consistent with the hypothesis that investors’ short-term deflationary fears are slowly giving way to long-term inflationary worries. Related links:
The coming oil-equity disconnect or the end of efficient markets theory? - FT Alphaville
Oil, the great inflation hedge - FT Alphaville
A commodity anchor, or oil as money - FT Alphaville
BNY Mellon’s fx team: Ultimately, buy gold - FT Alphaville

This entry was posted by Izabella Kaminska on Tuesday, May 19th, 2009 at 13:57 and is filed under Capital markets, Commodities. Tagged with Dollar, inflation, WTI."

to build informed societies that are better able to avoid the pitfalls of the past

TO BE NOTED: From the Guardian:

"Preparing for Africa's boom

This charter could help nations profit from their resources, rather than being undermined by them

• 
• • Paul Collier
  • The Guardian, Monday 25 May 2009
  • Article history

'Never again" is, of course, a ­sentiment that is now ­widespread in economic policy circles. I hear it too from Africa's ­economists, but then it refers to the resource curse.

The global commodity boom that ended abruptly in September was the second since African independence. Africa has yet to diversify from dependence on primary commodity exports, so these booms were huge opportunities, pumping far more money into some governments than aid will ever do. Last year, Angola alone received from oil and diamonds more than double the entire aid inflows to Africa. The first commodity boom, in the 1970s, was in large part an opportunity missed. Indeed, far from being harnessed for sustained development, it sowed the seeds of decline. It doesn't have to be like that: Botswana succeeded in using diamond revenues to lift the society out of poverty. But for every Botswana there are several Sierra Leones. In the short term, a commodity boom always helps the economy, but the long-term impact depends on policy choices. These usually go wrong: the norm is that they undermine economies rather than build them up.

Having blown its first commodity boom, Africa had to wait 20 years for the second. It may have blown that one as well, although the jury is still out. That is what "never again" is about when voiced by people such as Louis Kasekende, the chief economist of the African Development Bank. Before the next boom, African societies must get prepared. So what does being prepared actually mean?

Transforming assets beneath the ground into sustained prosperity for ordinary citizens requires integrity and astuteness. Without integrity the assets get looted, and without astuteness they get squandered. Neither is easy to achieve, but integrity is at least easy to understand. The Extractive Industries Transparency Initiative (EITI) is an international standard to which governments can make a commitment. Introduced in 2003, it was the right place to start in the struggle to break with the past. But it would be the wrong place to stop: ­integrity is not enough.

Enter the Natural Resource Charter, an attempt by academic economists, lawyers and political scientists to distil professional knowledge into a form readily accessible to governments and societies in resource-rich countries. It is distinctive both in content and process.

The content tries to do for astuteness what the EITI has done for integrity. Its summary version is a list of 12 precepts spanning the chain of decision. It covers management of the discovery process, taxing extraction companies, investment, and how rich countries could be more supportive. Anyone, even the busy president of a resource-rich country, can spare the few minutes it takes to digest. A fuller version is designed as a citizen's guide – say, for a broadcaster on community radio wondering whether that deal her government just struck with an extraction company is likely to be a good one. The full monty version is for practitioners: the permanent secretary in the ministry of mining can find out about why auctioning off concessions is likely to generate a better deal for the country than relying solely upon negotiation.

The process of putting the charter together has been a cross between the EITI and Wikipedia. An international group of academics worked together, without official sanction or finance. We consulted with likely stakeholders, holding meetings around the world as best we could, and incorporating scores of suggestions for revision and improvement. Revision will continue. For this reason, unlike the EITI, the charter is not designed as a com­mitment. The objective is not to get governments to sign an endorsement but to build informed societies that are better able to avoid the pitfalls of the past.

Depending on your world view, for academics to provide this unsolicited advice to resource-rich societies is neo-colonial arrogance, a delusional distraction from our proper jobs, or potentially useful. Ten years ago it would not have been feasible: change always had to come from governments. Now the internet has opened up a new way of achieving better policies. Citizens get up to speed on issues previously considered too technical, and governments have little option but to follow along behind. For many low-income societies with valuable natural assets, turning "never again" from resolve into reality is the critical challenge of the next decade."

If I were running the Chinese central bank, I'd buy oil, wheat and zinc. Which is what folks there are already doing.

TO BE NOTED: From Jim Rogers:

"April 16, 2009

Chinese Central Bank Buying Commodities?

If I were running the Chinese central bank, I'd buy oil, wheat and zinc. Which is what folks there are already doing.

(Newsweek, April 2009)"

MEND's three-year old campaign of violence has cut oil output from Nigeria

From Reuters, let's check in on Nigeria:

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LAGOS (Reuters) - The main militant group in Nigeria's oil-producing Niger Delta threatened on Wednesday to end its ceasefire and attack military targets in retaliation for the killing by soldiers of a gang leader in the region.

"MEND has decreed today every soldier in uniform inside the Niger Delta region as a fair target," the Movement for the Emancipation of the Niger Delta (MEND) said in an e-mailed statement.

"Our first spectacular urban attack on a military patrol will announce the end of the ceasefire."

The military said on Tuesday it had shot and killed a gang leader who spearheaded violent clashes between rival factions over control of a lucrative trade in stolen oil.

Tubotamuno Angolia, also known as "Boy Chiki", was arrested in the Bakana district of Rivers state but was shot when he tried to escape( COME ON ), Lieutenant Colonel Sagir Musa, spokesman for the joint military taskforce in Rivers, said.

MEND rejected that version of events, saying Angolia had been handcuffed, urinated and spat on before being executed.

It said Angolia was not a member of MEND, but said such killings by the security forces were becoming "a common practice endorsed by the Nigerian government" in the Niger Delta.

The militant group, which has been holding two British oil workers hostage( WAR CRIME ) for four months, began a unilateral ceasefire in the Niger Delta in late September following a week of clashes with the military and attacks on oil industry installations.

MEND's three-year old campaign of violence has cut oil output from Nigeria, the world's eighth biggest exporter, by around a fifth.

It has threatened in the past to end its September ceasefire but has so far not launched any significant attacks."

This needs some input now before things get out of hand.

"I want to assure everybody that I will be president for all. There will be no discrimination,"

From Reuters, news about the election results in Ghana. But this first:

"(Reuters) - John Atta Mills of Ghana's opposition( HE WAS NOT IN POWER ) National Democratic Congress has won the presidential election in the West African country, the electoral commission said on Saturday.

He will succeed President John Kufuor, who is due to stand down on January 7 after the maximum two terms.

Here are some facts about Ghana.

GEOGRAPHY: Area is 239,460 sq. km. (92,440 sq. miles), a bit smaller than Britain. Ghana is bordered by Burkina Faso (to the north), Ivory Coast (west), and Togo (east). The Atlantic Ocean lies to the south.

LANGUAGE: English is the official language, but local languages include Akan, Ga, Fanti, Hausa, Fanteewe, Gaadanhe, Dagbandim and Mamprussi.

POPULATION: 23 million. There are seven main ethnic groups, including the Akan (Ashanti and Fanti), 44 percent, in the mid-southern part of the country. There are Mossi-Dagomba, Ewe and Ga-Adangbe minorities, among others.

RELIGION: Christianity 50 percent, traditional African religions 32 percent, Islam 13 percent.

ECONOMY:

* World's No. 2 cocoa( YES ) grower after neighboring Ivory Coast, producing around one fifth of world supply. Government plans to increase output by around half to 1 million tonnes by 2010.

* Africa's second biggest gold( GOLD ) miner after South Africa, with 2007 output of nearly 2.5 million ounces.

* Britain's Tullow Oil and private-owned Kosmos Energy plan to start producing 120,000 barrels per day (bpd) of crude oil offshore in late 2010, rising later to 250,000 bpd.( OIL )

* Economic reforms under Kufuor's administration are credited with boosting growth and helping secure billions of dollars in debt relief( NB ).

* Economic growth forecast at 6.5 percent for 2008, slowing to 5.8 percent in 2009/10, then accelerating to 6.8 percent by 2013, according to the IMF.

* Annual inflation has eased since an 18.4 percent peak in June, and the cedi currency has stabilized after falling 17 percent against the dollar in the first seven months of 2008.

* $750 million Eurobond issue in 2007 was sub-Saharan Africa's first outside South Africa.

* Ghana's stock exchange is one of the top-performing markets in 2008 with the all-share index up around 60 percent, although trade is illiquid( HARD TO DO ) with as little as 600 cedis worth of trade in one session in October.

* Power shortages in recent years have added to business costs, curbing mining output and forcing the closure of the VALCO aluminum smelter, which the government wants to sell.

HISTORY:

* Ghana was named after a powerful West African empire that ended in the 12th century and based its power on gold. None of modern day Ghana lies within the ancient empire.( THAT'S INTERESTING )

* From the 17th to the 19th century, Ghana was the seat of the powerful Ashanti empire, which was defeated by the British.

* In 1957 the former British colony of Gold Coast became the first country in black Sub-Saharan Africa to shake off colonial rule, inspiring liberation struggles around the continent.

* Independence leader Kwame Nkrumah was a founding father of Pan-Africanism and a figurehead among Africa's independence leaders with his concept of African socialism( TRUE ).

* But the economy collapsed, Nkrumah became increasingly authoritarian and many celebrated when he was overthrown by a coup in 1966 while he was on a state visit to China.

* Ghana then tottered from one military coup to the next before holding its first democratic elections in 1992.

* Former President Jerry John Rawlings, who seized control in a coup in 1979 and again in 1981, left office in 2000 but remains a popular and charismatic critic of the government."

Now the election results:

1 of 9Full Size

Related News

TIMELINE: Mills wins Ghana presidential election run-off

6:46am EST

FACTBOX: Third time lucky for Ghana election winner Mills

6:46am EST

FACTBOX: Ghana, built on gold, looks to future with oil

6:46am EST

By Kwasi Kpodo

ACCRA (Reuters) - Ghana's opposition leader John Atta Mills won a last run-off vote and was declared president-elect on Saturday, sweeping his party back to power after eight years.

Results of voting in a final constituency on Friday showed Mills, of the National Democratic Congress (NDC), narrowly defeated Nana Akufo-Addo of the ruling New Patriotic Party (NPP). The NPP lost its parliamentary majority last month.

"I want to assure everybody that I will be president for all. There will be no discrimination," Mills said in a victory speech to thousands of NDC supporters who thronged the streets around his office in the capital Accra.

The poll, one of the closest leadership elections in Africa, has raised tensions in the gold- and cocoa-exporting country whose political stability has attracted growing numbers of foreign investors as it prepares to produce oil( OIL ) in late 2010.

Legal challenges and accusations of violence by both main parties had threatened to mar a vote seen as a chance to bolster Africa's battered democratic credentials after flawed and bloody polls in Zimbabwe and Kenya. Mills took a conciliatory tone.

"I would want to congratulate all other contestants, especially Nana Akufo-Addo, for giving us a good fight. It is my hope that we will be able to work together to build a better Ghana," he said. Then an aide popped open a bottle of champagne.

There was no immediate reaction from Akufo-Addo's camp. International monitors say voting has been mostly peaceful( GOOD ).

Announcing the results at a news conference in the capital Accra, Electoral Commission Chairman Kwadwo Afari-Gyan said turnout in the run-off vote, which was held in most of the country on December 28, was 72.91 percent.

Mills won 50.23 percent of the votes against 49.77 percent for Akufo-Addo, whose party had no immediate comment.( WOW )

Neither candidate won a majority in the original December 7 poll and run-off voting in all but one of the West African country's 230 constituencies last Sunday was inconclusive, so the election was decided by Friday's voting in the farming constituency of Tain.( HOW INTERESTING )

FROM RULING PARTY TO LOSING PARTY

The NPP, which lost its parliamentary majority in the December 7 poll but remains in power until President John Kufuor steps down on January 7, boycotted the Tain vote over security concerns but failed to prevent the poll taking place.

Outside Mills's office, a woman dragged an effigy of an elephant -- the NPP's campaign mascot -- in a mock funeral as other NDC supporters chanted "Elephants, go back to the bush!."

"You have cause to celebrate, but let's not do anything to provoke disunity. We must know that this is only one day in a journey of a million miles," Mills told his supporters.

Each side has accused the other's activists of violence and irregularities and appealed to the electoral commission to review some of the results from last Sunday's vote.

Afari-Gyan said the commission had found no evidence to call the results into question and declared Mills president-elect.

"I think there is demand for change ... power outages and corruption in the NPP have really been the key issues for people, "Kissy Agyeman, Africa analyst at London-based consultancy Global Insight, told Reuters before the result was announced.

The center-left NDC has promised change after eight years of NPP rule, though analysts say there are few policy differences.( OK )

Kufuor was voted to power when Mills's NDC ally, former coup leader Jerry Rawlings, gave up power in early 2000 as required by the constitution which his own administration had introduced.

Kufuor's pro-market rule has seen Ghana's economy become one of the most attractive investment destinations in the region.

But critics say his administration has failed to tackle widespread corruption, including smuggling of cocaine and other drugs in which administration officials have been implicated( LIKE EVERYWHERE ELSE ON THE PLANET."

"As shown, the 10-Year Treasury Note is up a whopping 21% this year, prompting the majority of market participants to call it the next bubble."

A couple of year end posts from Bespoke:

"Dow Jones Worst Years: 1900 - 2008

It looks like it is going to come down to a photo finish for where 2008 stacks up in terms of worst years since 1900. With a decline of 36.04% through 12/29, we are unlikely to catch up with the 53% decline in 1931. And with only two days left this year, we would also need a lousy last two days of trading to even catch up with 1907's 37.7% decline.

It's a bit ironic that the declines of 2008 are so close to 1907, as that was also a year that the market had to deal with a credit crisis. The situation was so bad back then that they even wrote a book about it! When all is said and done about the current period, you can bet there will be no shortage of books about this one.

Click here to subscribe to Bespoke Premium today!

"2008 Performance of Stocks, Oil, Dollar, and the Long Bond

Below we highlight the year-to-date performance of the S&P 500, oil, the dollar, and the long bond (10-Year Treasury Note). While it has been a horrible year for stocks (S&P 500 down 39%), it's been much worse for oil, which as we all know was up nearly 50% for the year back in July. While most asset classes are down big, the US Dollar has risen 6%, and Treasuries have skyrocketed. As shown, the 10-Year Treasury Note is up a whopping 21% this year, prompting the majority of market participants to call it the next bubble.

Nicholas Kristof on Darfur in the NY Times:

"A New Chance for Darfur

By NICHOLAS D. KRISTOF

If Barack Obama wants to help end the genocide in Darfur, he doesn’t have to look far for ideas of how to accomplish that. President Bush and his top aides have been given, and ignored( TRUE ), a menu of options for tough steps to squeeze Sudan — even destroy its air force — and those will soon be on the new president’s desk.

The State Department’s policy planning staff prepared the first set of possible responses back in 2004 (never pursued), and this year Ambassador Richard Williamson has privately pushed the White House to squeeze Sudan until it stops the killing.

Mr. Williamson, who is President Bush’s special envoy to Sudan, wrote a tough memo to Mr. Bush this fall outlining three particular steps the United States could take to press Sudan’s leader, President Omar Hassan al-Bashir:

•

The United States could jam all communications in Khartoum, the Sudanese capital. This would include all telephone calls, all cellular service, all Internet access. After two days, having demonstrated Sudan’s vulnerability, the United States could halt the jamming. ( I AGREE )

•

The United States could apply progressive pressure to Port Sudan, from which Sudan exports oil and thus earns revenue. The first step would be to send naval vessels near the port. The next step would be to search or turn back some ships, and the final step would be to impose a quarantine and halt Sudan’s oil exports. ( I AGREE )

•

The United States could target Sudanese military aircraft that defy a United Nations ban on offensive military flights in Darfur. The first step would be to destroy a helicopter gunship on the ground at night. A tougher approach would be to warn Sudan that unless it complies with international demands (by handing over suspects indicted by the International Criminal Court, for example), it will lose its air force — and then if it does not comply, to destroy all its military aircraft on the ground.( I WORRY ABOUT THIS ONE. MAYBE )

Officials frustrated by the administration’s passivity shared these possible steps with me, partly to make clear that Mr. Obama can do more if he has the political will.

Mr. Williamson has been one of the unsung heroes of the Bush administration, fighting tenaciously and secretly — even twice threatening to resign — to redeem American honor by confronting genocide. President Bush himself seemed open to tougher action, officials say, but Secretary of State Condoleezza Rice and Stephen Hadley, the national security adviser, always resisted, backed by the Pentagon. Ms. Rice and Mr. Hadley tarnished their own honor and America’s by advocating, in effect, acquiescence in genocide.

The naysayers’ objection was simple: Those are incredibly serious steps, with grave repercussions( NOT GOOD ENOUGH ).

They’re right. But then again, genocide is pretty serious, too.

That’s something that Mr. Obama and his aides understand. Partly for that reason, Sudan fears the Obama administration, and now for the first time in years, there’s a real chance of ousting President Bashir and ending his murderous regime.

Several factors are coming together. The leaders in Khartoum feel their government wobbling, particularly after rebels clashed with government soldiers on the outskirts of Khartoum earlier this year. They know that the International Criminal Court is expected to issue an arrest warrant for President Bashir, probably in February, but that no other top leader will be indicted after Mr. Bashir.

China, which for years has been President Bashir’s most important international supporter, now seems to be backing away — just as it eventually abandoned genocidal friends like Slobodan Milosevic and the Khmer Rouge. And an Arab state, Qatar, is now leading a serious diplomatic initiative to try to end the slaughter( GOOD FOR THEM ).

Thus there are growing whispers that key figures in the Sudanese regime may throw Mr. Bashir overboard in the coming months. The other leaders are ruthless and have blood on their hands as well, but some of them have in the past proved more willing to negotiate deals than Mr. Bashir has.

Hovering in the background is the risk that the north-south war in Sudan will resume, leading to a slaughter even worse than Darfur. One ominous sign is that Sudan is now stockpiling cash and weapons, apparently so that it can wage war on the south even if Port Sudan is blocked.

Mr. Williamson has suggested providing surface-to-air missiles to the separate government of South Sudan. Such weaponry would reduce the chance that Sudan would attack the south( YIKES. MAYBE. ).

If Mr. Obama and his aides can work with Europe, China and Qatar to keep the heat on — and to make clear that Sudan has no choice but to hand over President Bashir once the court issues the arrest warrant — then we just might avert a new war and end the first genocide of the 21st century in the new year."

My only problem is with increasing arms in the area and our military involvement. However, if I could be persuaded that these would be competently done, I would support them. Letting this happen is an international disgrace.

"making the 2008-2009 contraction in consumer spending the longest since WWII."

Rebecca Wilder on News N Economics:

"Beating down the consumer

Consumers have been under extreme duress throughout 2008. Energy prices surged on oil until it fell below $100/bbl in September, which is the month when the labor market took a significant turn for the worse, and the housing market continues to tumble. Not surprisingly, consumers are pulling back. They would have pulled back more were it not for those credit cards, and the decline may continue for two more quarters (three consecutive quarters), making the 2008-2009 contraction in consumer spending the longest since WWII.

(Click to enlarge chart)

The chart illustrates annualized real personal consumer spending (PCE) growth on a quarterly basis spanning the years 1947:1 to 2009:2 and includes Macroeconomic Advisers’ latest forecast (see their website, which must be opened in Explorer and is a paid subscription; email me if you would like a copy). Going forward, consumer spending is expected to mark three consecutive quarters of decline: 2008:3, -3.8%; 2009:1, -2.6%; 2009:2, -0.1%. Sicne 1947, this would mark the first time that consumer spending fell three consecutive quarters.

It is remarkable that the depth of the decline in consumer spending does not make history as well. The forecasted accumulated loss of 1.1% (not annualized) is smaller than the 2.4% that occurred in Q1 and Q2 of 1980, when real PCE fell by an annualized 8.6% in the second quarter. Nevertheless, consumers are cutting back, and will continue to do so into 2009. Note: an annualized growth rate is the annual rate of growth that would occur if each quarter averaged the same amount of quarterly growth. The accumulated growth is the total reduction in spending over the consecutive quarters of PCE decline (the total % loss over Q1 and Q2 in 1980 for example).

Consumers are stressed in 2008 and 2009

Prices, labor, and housing have kept consumers on edge. Oil hit its peak in July and remained above $100/bbl throughout September. Energy prices seriously restricted consumer purchasing power, and spending was cut (reluctantly). Since September, job loss has quickened. The carnage that occurred in the labor and housing markets – around 1.3 million jobs lost since September and the ongoing destruction of housing wealth - is passing through to consumer spending. Consumers are getting a break at the pump – oil was just $34/bbl ending on 12/19/08 – but that is only a minor offset the negative forces currently underway.

Prices played their part

This chart illustrates monthly nominal and real PCE growth from January 2007 to November 2008. In the spring of 2008, nominal and real PCE growth turned negative on average. This was a sharp turn for the worse relative to the average positive PCE growth in 2007.

Seesawing prices have certainly played their part. From January 2008 through August 2008, real PCE growth was greater (less negative) than nominal PCE growth because prices were rising quickly and consumers were holding on as best they could. Since September, weak economic conditions and a masive job loss have driven down headline prices (-1.7% in November), and real PCE gains were smaller than expected. Nominal spending dropped relative to real spending, which grew just 0.6% on the sharp price declines (PCE price index fell 1.1%). Whatever the underlying catalyst, consumers are cutting back hard.

Why has consumer spending not fallen by more? Credit cards

This chart illustrates consumer bank lending, credit card and other (non-revolving) loans, since Christmas of last year. During the first half of 2008 through June, revolving credit was rather stable and other consumer loans were growing. However, since July revolving credit has surged, and other consumer credit has stabilized, if not declined. Many consumers are living on their credit cards, and have been since July.

It is possible that consumer credit takes a stochastic tumble, which would drag down the forecast of consumer spending (see forecast chart above).

Consumers are in trouble. The economy is in trouble. No wonder SpendingPulse called the 2008 holiday shopping climate one of the worst in modern times. It is not surprising that consumers are cutting back: prices, credit, labor, and housing have wreaked havoc on consumer spending. But this cutback is setting up to be the worst in modern history."

Rebecca Wilder

I'm not as negative going forward for a few reasons:
1) Falling prices have actually increased some people's buying power.
2) Some savings increase is a good thing.
3) I believe that employment will pick up next year.
4) Some kind of stimulus will occur next year.
5) Refinancing of homes will lower some people's debt and payments.
6) The Fear and Aversion to Risk will abate next year.
7) At some point, people will realize that this is not as bad a time as the early eighties.
8) Housing prices will stabilize, and, in some markets, begin rising again.
9) The Bush Administration will be history.
10) The Saver Countries will make great efforts to preserve this current unbalanced system, which will remain in place indefinitely because it suits us.
11) The government guarantee will be total.
12) Prosecutions for Fraud will increase.
13) The war in Iraq will begin winding down for us.
14) Spreads on Bonds will have drastically decreased helping funding as the Fear and Aversion to Risk subsides.
15) Inflation will begin, making people feel that they're back in familiar territory.
16) Investment that had been going into housing will go into areas that have been lacking funding.
17) The CDO and CDS markets will functioning.
18) Millions will have read this blog and believe me.

"Consumer spending in the U.S. fell less than forecast"

Interesting news on Bloomberg:

"By Bob Willis and Courtney Schlisserman

Dec. 24 (Bloomberg) -- Consumer spending in the U.S. fell less than forecast as cheaper gasoline left Americans with more cash( GOOD NEWS ), while jobless claims climbed to a 26-year high( BAD NEWS ), signaling purchases will keep sliding into 2009.

Spending dropped 0.6 percent in November, and rose for the first time in six months after accounting for inflation, the Commerce Department said today in Washington. First-time unemployment benefit claims jumped to 586,000( BAD NEWS ), and durable-goods orders declined less than anticipated( GOOD NEWS ), other reports showed.

The deteriorating job market means consumers will probably further rein in spending( TRUE ); economists including those at Morgan Stanley estimate more than 400,000 people will lose their jobs this month. The outlook forced Sears Holdings Corp., the largest U.S. department-store company, earlier this month to abandon its earnings forecast for the rest of the year.

“The economy continues to struggle and unfortunately the first half( I AGREE ) of 2009 does not look very good,” said Carl Riccadonna, a senior U.S. economist at Deutsche Bank Securities Inc. in New York. “We look for a further contraction and a continued acceleration in the pace of layoffs.”

Gasoline prices fell by a total of 50 percent in October and November, and discounts by retailers from Toys “R” Us Inc. to Wal-Mart Stores Inc. helped prevent a bigger drop in purchases last month. Today’s Commerce report also showed that the gain in spending adjusted for inflation was the biggest in almost two years( GOOD NEWS ).

Spending Outlook

“The increase in real spending is unlikely( UNLIKELY IS FINE ) to be sustained with the job losses we are seeing,” said Benjamin Reitzes, an economist at BMO Capital Markets in Toronto. The gain last month “was more a technicality based on the drop in gasoline prices( HOWVER<>

Stocks were little changed after today’s reports. The dollar remained lower, while Treasuries advanced. The Standard & Poor’s 500 Stock Index was up 0.2 percent at 864.56 at 10:14 a.m. in New York, benchmark 10-year note yields slipped to 2.17 percent from 2.18 percent late yesterday, and the dollar lost 0.5 percent against the euro to $1.3994.

A separate Commerce report showed orders for durable goods in November fell 1 percent( NOT BAD ), after an 8.4 percent decrease in October that was bigger than previously reported. Excluding a slump in transportation gear, orders for goods designed to last several years unexpectedly increased.

Capital Goods

Bookings for non-defense capital goods excluding aircraft, a measure of future business investment, increased 4.7 percent( GOOD NEWS ), the most since September 2006, after a 6.6 percent slump in October. Shipments of those items, used in calculating gross domestic product, rose 0.2 percent( GOOD NEWS ).

“Orders were so down in the previous months that there’s probably a little payback for that( WE'LL TAKE IT. HOWEVER, THIS WOULD SUPPORT MY VIEW THAT WE WENT DOWN MORE THAN WE WOULD FUNDAMENTALLY HAVE DUE TO THE FEAR AND AVERSION TO RISK ),” Robert Stein, senior economist at First Trust Advisors in Lisle, Illinois, said before the report.

Today’s Labor Department report showed that the four-week moving average of claims, a less volatile measure, also was the highest since 1982, at 558,000 for the week to Dec. 20. Initial claims were projected to increase to 558,000, according to the median of 32 forecasts in a Bloomberg News survey.

The number of people staying on benefit rolls fell to 4.37 million in the week ended Dec. 13 from 4.387 million.

Rising joblessness contributed to a drop in personal income last month. The Commerce figures showed income fell 0.2 percent in November after being unchanged the prior month( NOT GOOD ).

Hit to Income

“Given the further increase in jobless claims,” wage and salary income “is likely to further decelerate in the near term,” Deutsche’s Riccadonna wrote in a note to clients.

The drop in consumer spending last month extended declines to a record fifth consecutive decline, the Commerce Department said. Economists forecast unadjusted spending would fall 0.7 percent, according to the median of 64 estimates in a Bloomberg News survey.

Today’s report also confirmed inflation is retreating as demand wanes. Prices plunged 1.1 percent, also the biggest since records began in 1992. The gauge increased 1.4 percent from November 2007, the smallest gain in six years. The Fed’s preferred price measure, which excludes food and fuel, was unchanged for the second consecutive month, the first time that’s happened since 1999.( TRUE )

Gasoline Price

The average price of unleaded regular gasoline at the pump fell by $1 to $2.11 in November from the prior month, according to AAA, leading the drop in overall prices.

The decrease in spending pushed the savings rate up to 2.8 percent from 2.4 percent in October. A positive rate suggests consumers are restraining spending to boost savings( THIS RATE IS FINE ).

Even after the bump in November sales, retailers are concerned about the holiday shopping season, which brings in one- third or more of annual revenue. The International Council of Shopping Centers and Goldman Sachs Group Inc. said yesterday that November-December sales may fall as much as 2 percent. The ICSC had previously projected a drop of as much as 1 percent.

“Given the current economic and retail environment, we will carefully evaluate alternatives that provide financial flexibility in the near-term,” Sears’s interim Chief Executive Officer W. Bruce Johnson said in a statement.

Consumer spending dropped at a 3.8 percent annual pace in the third quarter( NOT GOOD ), the biggest plunge since 1980, revised Commerce figures showed yesterday. The economy shrank 0.5 percent. Economists surveyed by Bloomberg forecast the economy will contract through the first half of 2009."

A better report than expected.

"Inflation will alleviate some economic problems; prolonged deflation will aggravate them."

Casey Mulligan making sense:

"I'm Glad that Gas is Cheaper

The CPI fell 1.7 percent between October and November. That's a lot -- if that continued for 12 consecutive months, the annual inflation rate would be -18 percent!

However, essentially all of the drop was reduced energy prices. As a net oil importer, the U.S. is better off when oil is cheaper relative to the goods that we produce.

Nevertheless, I would like to see the Federal Reserve take bigger steps to keep INflation going. Inflation will alleviate some economic problems; prolonged deflation will aggravate them."

I agree, although the drop in energy prices seems just that, and is worrisome for deflation only in that it comes in a downward shift in prices that seems to confirm deflation to many. Otherwise, who's buying those bonds at almost no interest.

"I think there are at least three arguments for the canary theory and against the domino theory."

Here's a post on The Baseline Scenario about Subprime Lending and its role in the crisis by James Kwak:

"Asking whether subprime lending caused the crisis raises all the questions about agency and causality that I’ve raised before. On the agency question, insofar as there was a problem in the subprime lending sector - and few would deny that there was - does the fault lie with borrowers who took on loans they had no chance of repaying, perhaps sometimes without understanding the terms; with the mortgage lenders who lent them the money without doing any due diligence to determine if they could pay them back; with the investment bankers who told the mortgage lenders what kinds of loans they needed to package into securities; with the bond rating agencies who blessed those securities while taking fees from the investment banks; with the investors who bought those securities without analyzing the risk involved; or with the regulators who sat on their hands through the entire process? Note in passing that it may have been perfectly rational, as well as legal, for an investor to by an MBS even knowing that the loans backing it were going to default, but making a bet that he could resell the MBS before the price fell, under the “greater fool” theory of investing. (It may have been rational for an investment bank to do the same, but not necessarily legal, given the disclosure requirements relating to securities. Goldman Sachs is being sued over precisely this question.) Readers of this blog know that my opinion is that, although there is blame to be shared along the chain, the greatest fault lies with the regulators, for a few reasons. First, although the desire to make money may cause problems, it can be no more be said to be a cause of anything than gravity can be said to be the cause of a landslide; second, bubbles are inevitable, at least in an unregulated market; and third, there is a difference in kind between the mistake made by an investor, who is foolish and loses some money, and the mistake made by a regulator (or a legislator who votes to reduce funding for regulators), whose job is to serve the public interest."

I don't agree with this.
1) The desire to make money is always there, but there isn't always Fraud, Negligence, Fiduciary Mismanagement, and Collusion. That is an essential element of this crisis.
2) Bubbles are not inevitable.
3) The markets were not unregulated. Indeed, one also has to remember that there are professional codes that might have also been violated here as well as criminal ones.
4) There's plenty of research that Regulators act as Private Actors do. ( I'm thinking of James Buchanan )

I believe that the Banks and other Financial concerns in general are the most responsible, including the Credit Rating Agencies and Mortgage Brokers, for example.

"But that was all the preamble, because today I want to talk about the question of causality.

I think it’s generally accepted that the crisis we know today first appeared in the subprime lending market, where an increase in delinquency rates triggered a fall in asset values. Those problems were clearly visible early in 2007 (it’s impossible to say exactly when they were first visible, because some people had been warning of the problem for years, to little effect), and over the next year the main entertainment in the financial sector was watching banks and hedge funds suddenly realize they had large subprime exposures and either take writedowns or fold. But I think there are three ways to understand the relationship of subprime and the current crisis:

1. Subprime was the first place where various structural problems appeared, but those problems existed elsewhere, where they only appeared later. If the subprime lending boom had never happened, we would still be roughly where we are today. Call this the “canary in the coal mine” theory.
2. Subprime was the first place where various structural problems appeared, and the subprime crisis generated additional pressure that exposed those problems in other areas. For example, subprime concerns caused a pullback in lending, which caused a leveling off in home prices, which caused a reduction in housing construction, which slowed economic growth, etc. Call this the “domino” theory.
3. Subprime was a necessary cause of the crisis. Without subprime, the levels of housing prices, indebtedness, and risk in the system would have been sustainable indefinitely. Call this the “prime mover” theory.

Only under the prime mover theory can subprime truly be said to have caused the crisis. Under the domino theory it played the role of a precipitating but unnecessary cause. Under the canary theory it is just a leading indicator.

In my opinion, subprime was probably the canary, and possibly the first domino. There are various arguments against the prime mover theory:

• The U.S. subprime sector is simply not big enough. Although the numbers have been shifting in the last couple of years, roughly 80% of outstanding residential mortgages in the U.S. are prime; the other 20% is split between subprime and Alt-A. About 50 million homeowners have a mortgage, of which about 7 million have subprime mortgages. The idea that an increase in the delinquency percentage among 7 million U.S. homeowners (total mortgage value about $1-2 trillion, so losses on foreclosure - assuming a 100% foreclosure rate - about $0.5-1 trillion) could have by itself caused the largest economic downturn in the world since the 1930s is hard to credit.
• In absolute terms, losses in the subprime sector will be dwarfed by losses in the prime sector. Credit Suisse is now forecasting 8.1 million foreclosures by 2012, over 5 million of those outside of subprime. Current-month foreclosures among prime mortgages have already caught up to and passed (see chart on p. 4) foreclosures among subprime mortgages.
• The U.S. and global economies bumped along passably for over a year from the beginning of the subprime crisis. The U.S. recession did begin in December 2007 (Econbrowser for a good post on recession dating), but most of the numbers don’t start falling off cliffs until the second half of 2008. By the time Lehman went bankrupt in September, it’s probably true that all of the bad news about subprime was already priced into the various markets. What’s happened since then is new bad news about every other market.

Deciding between the canary and domino theories is tougher. The canary theory is that there were lots of boulders perched precariously on a cliff and subprime was just the first one to fall. The domino theory is that the subprime boulder knocked into a lot of much bigger boulders and knocked them off, but something else could have knocked them off just as easily. The domino theory could go something like this: Subprime caused writedowns and instability in the financial sector and nervousness in the housing market; nervousness in the housing market caused housing prices to start to fall, making it harder to refinance and increasing delinquencies on all kinds of mortgages; expanding writedowns caused a liquidity run on banks such as Bear Stearns and eventually Lehman; falling house prices and the consequent wealth effect reduced U.S. personal consumption, slowing economic growth; reduced consumption had the usual multiplier effect, reducing incomes and creating a recessionary cycle; the the recession hurt the value of every other type of debt (commercial mortgages, credit cards, etc.), triggering a full-scale banking crisis; and the fear created by the banking crisis led to the sharp downturn in credit and in consumption that put us where we are today.

I think there are at least three arguments for the canary theory and against the domino theory.

First, there is the issue of timing. The subprime crisis took an awfully long time to blossom into a full-fledged global recession and, as I said above, by the time the latter occurred the full scale of the subprime problem was more or less known to everyone. On that principle, the other boulders withstood the bump they got from the subprime boulder.

Second, once we had a housing bubble, it was inevitable that it was going to pop one way or another. So one question to ask is whether subprime lending was the reason for the housing bubble. Even at the peak of housing prices in 2006, subprime loans only made up about 20% of total mortgage origination volume. (Everyone cites Inside Mortgage Finance, but you have to pay for their data; here’s an NPR primer on subprime with a chart.) Could that 20% have have been solely responsible for the bubble? I suppose it’s possible, depending on the shape of the supply curve, but count me as skeptical.

Third, there is another good explanation for what pushed all those boulders down. James Hamilton thinks that the economy was structurally fragile, and the shock that knocked the boulders down was the oil price spike.

My view is that we were teetering on the edge of a cliff last summer, and the oil price shock may have been just enough to tip us over the edge. As we did so, the financial disaster that had always been a potential became a reality.

The trouble is, now that the economy is in free fall, it’s going to take more than $2 gasoline to pull us back up.

Ultimately, I think this question (canary or domino) is not definitively answerable, like many historical counterfactual questions, but I’m on the side of the canary.

One final note: Blaming subprime can have a disturbing overtone of blaming poor people for reaching beyond their means. First of all, it’s not true that subprime has more than a vague correlation with income. In the words of the late Tanta:

The capacity C of traditional underwriting was, of course, always relative to the proposed transaction. A lower-income person buying a lower-priced property was, you see, not a case of subprime lending; assuming a reasonable credit history, it was a prime loan. People with quite good incomes and stellar credit histories who tried to buy way too much house got turned down by the prime lenders.

More often, however, people in gentle society realize it’s not proper to blame poor people, so they take aim instead at the Community Reinvestment Act and liberal politicians generally for attempting to extend homeownership to people who couldn’t afford it. This line of attack was most recently exhibited on the New York Times op-ed page. I will leave the rebuttals to the experts:

• Mark Thoma (2 separate posts, with additional links)
• Barry Ritholtz (2 separate posts)
• Randall Kroszner (cited by Ritholtz)"

I suppose I also accept the Canary Theory, in that there were other investments that could have triggered this crisis. The lowering of capital requirements infected a number of investments. The complexity of the investments also contributed as well. In general, there was a mountain of Wishful Thinking that infected a whole range of investments.

"Gold is really the only commodity holding up at all, although it continues in a downtrend."

From Bespoke, some Commodities recent performance:

"Bespoke's Commodity Snapshot

Below we highlight our trading range charts of ten major commodities. The green shading represents two standard deviations above and below the commodity's 50-day moving average. As shown, oil continues its epic collapse along with most other commodities. Natural Gas hit new lows today as well and even had a 5 handle for awhile. Gold is really the only commodity holding up at all, although it continues in a downtrend.

"More than 10,000 Nigerians have died in sectarian violence since civilian leaders took over from a former military junta in 1999."

Many people don't know about the Sectarian problems in Nigeria. From the NY Times:

"JOS, Nigeria (AP) -- Mobs burned homes, churches and mosques Saturday in a second day of riots, as the death toll rose to more than 300 in the worst sectarian violence in Africa's most populous nation in years.

Sheikh Khalid Abubakar, the imam at the city's main mosque, said more than 300 dead bodies were brought there on Saturday alone and183 could be seen laying near the building waiting to be interred.

Those killed in the Christian community would not likely be taken to the city mosque, raising the possibility that the total death toll could be much higher. The city morgue wasn't immediately accessible Saturday.

Police spokesman Bala Kassim said there were ''many dead,'' but couldn't cite a firm number.

The hostilities mark the worst clashes in the restive West African nation since 2004, when as many as 700 people died in Plateau State during Christian-Muslim clashes.

Jos, the capital of Plateau State, has a long history of community violence that has made it difficult to organize voting. Rioting in September 2001 killed more than 1,000 people."

This is a terrible problem in Nigeria:

"Authorities imposed an around-the-clock curfew in the hardest-hit areas of the central Nigerian city, where traditionally pastoralist Hausa Muslims live in tense, close quarters with Christians from other ethnic groups.

The fighting began as clashes between supporters of the region's two main political parties following the first local election in the town of Jos in more than a decade. But the violence expanded along ethnic and religious fault lines, with Hausas and members of Christian ethnic groups doing battle.

Angry mobs gathered Thursday in Jos after electoral workers failed to publicly post results in ballot collation centers, prompting many onlookers to assume the vote was the latest in a long line of fraudulent Nigerian elections.

Riots flared Friday morning and at least 15 people were killed. Local ethnic and religious leaders made radio appeals for calm on Saturday, and streets were mostly empty by early afternoon. Troops were given orders to shoot rioters on sight.

The violence is the worst since the May 2007 inauguration of President Umaru Yar'Adua, who came to power in a vote that international observers dismissed as not credible.

Few Nigerian elections have been deemed free and fair since independence from Britain in 1960, and military takeovers have periodically interrupted civilian rule.

More than 10,000 Nigerians have died in sectarian violence since civilian leaders took over from a former military junta in 1999. Political strife over local issues is common in Nigeria, where government offices control massive budgets stemming from the country's oil industry."

That's right. 10,000 people in 9 years.

"That translates into as much as $300 billion in stimulus - more than 2% of gross domestic product"

Good post on the WSJ:

"Economists and politicians have been raising the stakes on fiscal stimulus to keep the U.S. out of a severe recession.

Yet very quietly, the cavalry has already arrived in the form of a roughly $90-a-barrel drop in oil prices over the past four months, slashing costs on everything from gasoline and home heating to business energy expenses. That translates into as much as $300 billion in stimulus - more than 2% of gross domestic product - without lifting a finger or adding to the budget deficit.

“I’m amazed that not more is being made out of it,” said Nariman Behravesh, chief U.S. economist at IHS Global Insight.

Behravesh’s forecasting rule of thumb is that every 10-cent drop in gasoline prices is equal to a $12 billion tax cut - one that’s aimed at lower- to middle-income households that pay a higher share of their incomes for energy. Businesses benefit, too, of course.

With gasoline prices now about $2 a gallon below their record highs, that translates into $250 billion to $300 billion for households and businesses, Behravesh said."

I've been saying that this is a stimulus.

Here, for example:

Don the libertarian Democrat Says:
October 26th, 2008 at 11:44 am

“This example brings us to the final crucial area that the last stimulus package did not address, which is infrastructure investment. I urge this body to strongly consider including funding for infrastructure projects in a second package.’

I believe that this should be the major thrust of the new stimulus package. Declining oil prices can be seen as giving the consumer a bit of a stimulus."

And here:

"Tobias Levkovich, a Citigroup equity strategist, said lower gasoline prices would act like a more than $150 billion stimulus for U.S. consumers."

This would seem to favor a government stimulus directed at infrastructure, say, since the drop in the price of oil has, in effect, given a tax break or stimulus to the consumer.

10/25/2008 11:06:42 AM"

"Chris Varvares, president of Macroeconomic Advisers, estimates the effect on consumers alone from the drop in energy prices at around $135 billion. Mark Zandi, chief economist at Moody’s Economy.com, estimates that if oil prices just stay under $75 a barrel - December crude settled just below $55 Monday - it’s worth the equivalent of a $200 billion stimulus. If oil prices were to eventually fall to around $50 a barrel, hardly a farfetched notion, the stimulus would climb to $250 billion.

“It’s not widely talked about,” Zandi said, since “that benefit is getting overwhelmed by all the other costs” from the credit crunch and negative wealth effect on asset values.

Still, economic officials are missing out on a golden opportunity to talk up the economy’s sole bright spot during the most critical spending season of the year, especially given that their policy actions seem aimed as much at improving psychology as anything else.

Though the drop in energy prices will likely stick, “it’s happened so quickly it still hasn’t sunk in people’s minds,” said Georgia State University forecaster Rajeev Dhawan, who pegs the stimulus at $200 billion for consumers and businesses."

Here's my comment:

Actually, thank you for spotting this. It is a stimulus, and should be taken in to account in deciding how the government stimulus being considered be spent.

For example, maybe spending more on infrastructure.

Comment by Don the libertarian Democrat - November 18, 2008 at 1:58 am

"The cost of living in the U.S. probably fell in October by the most in almost sixty years"

Well, Bloomberg says this:

"The cost of living in the U.S. probably fell in October by the most in almost sixty years, while manufacturing and homebuilding sank deeper into a recession, economists said before reports this week.

Consumer prices probably dropped 0.8 percent last month, the most since 1949, according to the median estimate in a Bloomberg News survey. Builders broke ground on the fewest houses in at least a half century and factory output weakened further, other reports may show.

Commodity costs plunged in October when the economy, which descended last quarter, went into freefall as credit and financial markets collapsed. Slumping sales are forcing retailers to lower prices, giving the Federal Reserve scope to keep cutting interest rates to limit the damage.

``Tumbling energy and commodity prices have altered the inflation landscape,'' said Ryan Sweet, a senior economist at Moody's Economy.com in West Chester, Pennsylvania. ``More rate cuts are needed as the economy is sinking deeper into recession.''

The Labor Department's consumer-price report is due Nov. 19. Fuel, clothing and auto costs probably dropped last month as sales at U.S. retailers fell 2.8 percent, the most since records began in 1992, economists said.

The slump in crude oil is feeding through to prices at the pump. The average cost of a gallon of regular gasoline plunged 17 percent last month to $3.08, according to AAA."

Here's the thing: Shouldn't the drop in the price of gas and other commodities act as a stimulus?

"Commodity Deflation

``We are seeing the fallout of global recession on inflation,'' said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts. ``In commodity prices, it's leading to deflation.''

Core prices, which exclude food and energy, rose 0.2 percent last month after a 0.1 percent gain the prior month, according to the survey median.

A report from the Labor Department on Nov. 18 may foreshadow the drop in retail costs. Wholesale prices fell 1.8 percent last month, the most since records began in 1947, according to economists surveyed.

As sales fall, manufacturers are cutting output and firing workers. Ford Motor Co. plans temporary shutdowns at nine North American plants this quarter after an 18 percent drop in U.S. sales this year, Angie Kozleski, a spokeswoman for the Dearborn, Michigan-based automaker, said last week.

Auto cutbacks probably pushed down manufacturing output last month, economists said a report from the Fed tomorrow may show. Overall industrial production, which includes factories, mines and utilities, rose 0.2 percent in October, led by a resumption of work at Gulf Coast refineries after Hurricane Ike shut down oil rigs the prior month, economists forecast."

I'm going to post about Yves Smith's post on this.

"Hurricane Rebound

A report from the New York Fed the same day may show manufacturing in the state contracted this month at the fastest pace since at least 2001. A similar report from the Philadelphia Fed on Nov. 20 may show regional activity shrank for an 11th time in 12 months.

The economic slump will intensify this quarter and persist into the first three months of 2009, making it the longest downturn since 1974-75, according to economists surveyed this month.

The housing recession at the heart of the economic downturn shows no signs of letting up. New-home starts in October dropped to a 780,000 annual pace, the lowest level since records began in 1959, the Commerce Department is forecast to report Nov. 19."

Here's a case where a weather word can be used both literally and metaphorically.

"Outlook Dims

A gauge of the economy's course will point to continued weakness, economists project a private report on Nov. 20 will show. The New York-based Conference Board's index of leading economic indicators probably fell 0.6 percent after increasing 0.3 percent in September.

Central bankers are battling to cushion the economy from the worst financial crisis in seven decades.

``Policy makers will remain in close contact, monitor developments closely and stand ready to take additional steps should conditions warrant,'' Fed Chairman Ben S. Bernanke said Nov. 14 at a panel discussion in Frankfurt hosted by the European Central Bank.

Heads of state of the Group of 20, which represents almost 90 percent of world output, met in Washington Saturday to lay the framework for coordinated actions to stem the global recession."

They must be reading Roubini.

"Abdullah Hajeri led a march on the Emir's palace in Kuwait last week"

Speaking of the Gulf. Bloomberg, again:

"The region's rulers are under pressure from citizens to shore up investors, not just banks, as they try to fend off what may be the worst economic crisis since December 1998, when oil at $10.35 a barrel forced them to slash spending. Crude prices have fallen 50 percent from a record $147.27 in July, and stock indexes in Dubai and Saudi Arabia are down by as much this year.

Gulf economies are more susceptible to financial turmoil than in the past because of their greater dependency on international expertise, investment and tourists to diversify away from oil. While Dubai, home to the world's tallest building and the man-made Palm Island, is considered most at risk, no part of the Persian Gulf will go untouched."

Where have we encountered this conundrum before? Citizens who don't like only the banks getting a bailout? Now that's globalization. We're all alike.

"There aren't many international investors left in the region, he added.

Regional competition to attract investors and tourists from around the world led to a surge in record-breaking projects."

Put those on hold, just like everywhere else, there's an economic credit hoovering back home going on.

"The emirate has almost 8 percent of the world's oil reserves and a sovereign wealth fund with assets between $250 billion and $875 billion, according to a range of estimates compiled by the International Monetary Fund. Even with its decline, oil still averages $110 a barrel for the year.

Residents of the region are used to government intervention. All Gulf countries are run by unelected rulers who maintain political power through tribal allegiances and marriages. Generous state welfare programs have traditionally damped demands for more political participation.

How the region's rulers cope with the turmoil may define relations with their people in the future, as they try to wean their subjects off state handouts and encourage them to find jobs and embrace market capitalism.

``There's no question that it sets back the move from socialist, paternalistic societies toward more modern capitalist states,'' said Gabriel Stein, a director at London's Lombard Street Research, which provides economic analysis to investors and companies. ``It is a trend that we have seen all over the world. The immediate reaction is that you told us to do this, so now things are going wrong it's up to you to help us out.''

Ah yes, governments will grow larger for the near term. However, helping citizens through economic downturns needn't be seen as a rush towards socialism. Nor, apparently, massive government interventions in the economy. So don't go all marxist quite yet.

``The U.S. financial crisis has ramifications for all countries, including the Gulf,'' U.S. Deputy Secretary of Treasury Robert Kimmitt said this week during a speech in Dubai, where he met representatives of sovereign wealth funds. ``Our capital markets are more integrated than ever before, allowing opportunities, but also financial difficulties, to spread rapidly across borders.''

We did some good before, look at all your wondrous buildings, so please don't blame us for this financial crisis which we started.

"Of the Gulf states, Dubai may be hardest hit by a global economic slowdown because it has borrowed more to finance its transformation from a Persian Gulf trading post to a financial and tourist hub, and has only 4 billion barrels of oil reserves.

Government-controlled companies owe at least $47 billion, more than Dubai's gross domestic product, and they will continue to accumulate debt faster than the economy grows, Moody's Investors Service estimated in an Oct. 13 report. It concluded that Dubai may need financing help from Abu Dhabi."

Let's change that from 'may' to 'will'.