February 5-11, Finance and Economics: Oil, Inflation, Spanish Saving. Ole!

This blog is for you. You know who you are. You read "Leaders". You read "The Americas". You peruse "Lexington" and "Banyon". You probably get as far as "Bagehot", flip through the "Briefing", end up on "Finance and Economics" and then bam - done - this week's "The Economist" is cast away by your ink-stained fingers, tattered, wrinkled, rolled, and only half-loved. I'm with you. This week, you might have caught the articles on Somali piracy, US Health Care, and Egypt, but, you lazy bums, because you won't explore the nether regions of everybody's favorite hebdomadaire, you missed a few gems, and this blog will wrap them up nice and neatly for you - at least until the Economist makes me take the site down.*

This week is a doozy. For one thing, the Economist loves Germany, probably at the expense of the Spanish. Secondly, inflation seems to be a problem - so buy those beers now. Finally, never you fret about Egyptian democracy's effect on your SUV road trip. So - we have articles on:

• A fascinating analysis of how much oil exactly flows through the Suez (along with a cool map) and why concerns about the effects of political turmoil on oil supplies might be overblown.

• Everything you wanted to know, and probably forgot, about inflation
  
• More depressing news about America's housing market
• Look out - Savings and Loan trouble hits Spain's Cajas?
  
• Felonious larceny of carbon credits- a doozy of a heist
  
• ...and one for the "did you know" category - Citi now owns the Beatles via EMI. Shocking.
• Let's not forget the Economics focus piece -a big salute to the German economy. (continuing The Economist's ill-concealed love affair with the Teutons.)
  

This Week's Fun Economic Facts:

• Egypt exports very little oil, and actually imports some, but 4% of the global supply transits the Suez canal.
• OECD oil inventories currently cover up to 59 days of consumption
• The most recent war in Iraq only disrupted global oil supplies for three weeks
• Inflation in India, nearly 10%, is still below last year's high
• The U.S. federal government currently guarantees 85% or more of newly issued resident mortgages
• Of the $50 billion allocated to the Home Affordable Modification Program (part of TARP) in 2009, only one billion has been spent, representing modifications to only 522,000 mortgages
• Home ownership in the U.S. fell to 66.5%, the lowest since 1998
• For the first time eastern Germany has a lower unemployment rate than California.

Let's do a quick run through after the break (don't abandon me now!):

Protests and the Pump: Although President Mubarak stepped down yesterday, there is some concern about the stability and security of oil flows through the Suez Canal. 4% of the global supply, or 4 million barrels a day transit the Suez or the SUMED pipeline. Concerns can be put to rest, however, because, well, first and foremost, the Egyptian security apparatus doesn't want to see it shut down, and according to the article, protesters really don't have the means (which is now moot anyway.) The important thing here, current events notwithstanding, is that even if the canal shuts down, the pipeline can carry most of the displaced oil. So good news in Egypt for global oil supply and gas prices. Now, if the entire region starts to fall apart, we'll see - but as noted above, OECD inventories now cover up to 59 days of consumption.

Suspended Animation: As republicans have taken over the House, new questions arise about government guaranteed mortgage financing. While it's not really too difficult to see the Federal Housing Administration (FHA) continue to guarantee mortgages for low income families, the debate starts to focus on how much support should be given to the middle class. The Department of the Treasury will be laying out options for proceeding, including what to do with the two mortgage finance agencies Freddie Mac and Fannie Mae. One option will be to sell guarantees to lenders, another is to nationalize the two FM's. The repubs meanwhile want to reduce government involvement. Yet to be seen where this goes, but evidently the longer the government on both sides waits, the more we can expect to see foreclosures and downward pressure on housing prices. One area I'm still not clear on is the relationship between Treasury and the FHA. Even though the USG took a controlling interest in the Freddy and Fannie, presumably by providing funding, evidently the FHA still controls the two as an independent agency, meaning that the U.S. Treasury Department can't make them take certain actions such as "writing down" mortgage principal. This essentially shifts the risk burden from the FHA to the U.S. Treasury (i.e. the taxpayer).

Roll Up, Roll Up: In Spain, the pressure is on for Spanish lending banks to increase their capital ratios (up to 8% by September) or face nationalization. To help out, the Government of Spain has created a fund, the FROB - or Fund for Orderly Bank Restructuring, and a Deposit Guarantee Fund, which will provide billions by way of convertible preference shares, which are shares of fixed income that can be converted to stock. (See a definition here.) Evidently, there is still some funny business with bad home loans, which is a problem for the banks in question, the cajas, because real estate occupies a big proportion of the volume of their assets. This is a vulnerability that could make attracting private capital to meet requirements more difficult. I think the bottom line here is that some of these banks are going to go under or be nationalized, and perhaps that's a good thing for banking sector reform in Spain. Will I ever care again after this article? Too soon to tell, but I won't be buying a house in Malaga any time soon anyway.

Green Fleeces, Red Faces: Now this is a cool article for this section - check it out: Criminals have been stealing carbon credits from companies in Europe, cracking an egg right on the face of the European Commission, which runs the Emissions Trading Scheme. Evidently, thieves stole about 3 million carbon credits, worth about 45 million Euros, by breaking into company accounts and transferring credits to other accounts, then selling them. The problem seems to be the ease with which impostors can open a registry. (Seems to me that it would be pretty easy then to register a fake company to get carbon credits to begin with, and then just sell them all at a great profit. Maybe my retirement plan?)

Magical Misery Tour: Uh oh - the private equity firm Terra Firma seems to have gotten into more it could handle when it bought EMI, the British music label that has the catalog of Beatles albums. We learn that the economy made it difficult for Terra Firma to pay off EMI's debts, and after an abortive attempt to sue Citigroup for tricking them into the deal, Citi took over the company and wiped out its debt from 3.4 to 1.2 billion pounds. Citi reportedly wants EMI to look more attractive to future private equity firms since Warner Music may be on the selling block soon as well. Meanwhile, Terra Firma has 2 billion euros left to invest, but the EMI deal could have complicated their ability to raise any more funds from shaky investors. Oh, Yoko.

Economics Focus: Man the Economist loves Germany. And why not? Germany's economy is outpacing everybody, with a growth rate of 3.6% in 2010 (after a pretty dismal rate throughout the preceding decade). Germany's population also actually decreased, leading to higher GDP per capita - the fastest growing GDP per capita in the G7! Unemployment is also lower now than at the beginning of the decade (also a leader in the G7) and has a lower jobless rate than California. There is no housing bubble in Germany. And everybody is blond with blue eyes. Ok, maybe not - and there may be some stormy clouds on the horizon. An inflated German trade surplus makes it vulnerable to recessions around the globe - and also to protectionist policies in places where it has had just a little too much success getting into the market. Germany under-consumes at home. We also learn that Germany has used its over-stuffed current account surplus to make poor investments in American and Greek bonds (not very savvy Fraulein!) and, shockingly, productivity sucks in the services sector due to government regulation. But, the article closes with some good news too - the higher wages and lower unemployment from growth will lead to more domestic consumption over time. And I intend to help by heading to Oktoberfest one of these days.

Parsing Prices: But the big story this week appears to be about inflation. Articles about inflation are showing up in the Wall Street Journal and other periodicals and blogs, both arguing that it's a problem (at least in emerging markets), and others countering that it may not be. The politics of Qauntitative Easing make it a sticky debate in the U.S. The most worthwhile nugget of economics education this week comes in the article "Parsing Prices", which describes the phenomenon of cascading effects caused by inflation - with price rises, workers ask for higher wages, firms raise prices again...and you see where this is going.

But the magic of a high unemployment rate is that the second stage of the cycle is almost eliminated. While we see above double digits in the Euro zone, 9% in the US, and 7.9% in the UK, wages have only increased by 1-2% in all three labor markets. The article quotes and HSBC analyst who points out that workers don't ask for higher wages when unemployment is so pervasive. However, in emerging markets, the cycle seems to continue - but, as the magazine again notes, this is not necessarily a bad thing to see growth and increasing wages in markets like China's, especially as marginal labor productivity has been on the increase (i.e. workers are producing more as prices go up, but wages have not kept pace.) There is some indication in the BRIC (minus Russia) that central banks are getting antsy - raising rates by as much as 2.5 % in Brazil, but evidently, even so, the policy rates in emerging economies remain at their lowest level since 2000 (lots o' cheap money.)

And final thoughts:

Our favorite magazine is calling for help in updating the Big Max Index.

I was going to start a weekly slam of the dumbest letter, but evidently dumb people don't write in to the Economist.

Also, Dan Snyder needs to be stopped. Please support the Washington City Paper.

Finally, for anybody who has dealt with a sports slump, you know what I'm going through with the Colorado Avalanche. As if staying up until 1AM wasn't bad enough, watching your team lose game after game is exhausting. It's as if they lose because you are watching, and they just seem, so, well, bad at every aspect of the game. At least Peter Forsberg is back.

*NB: I need to point out that I am not writing this blog for an audience, but I do have some good friends who will probably stick with it for a few weeks. I don't think it's unethical to try to capture the basics of the articles for my own edification and to promote a discussion with people who may know more about the principles discussed than I. I don't think I need citations, because all of the articles are from the Economist and I would never claim to be the author of the ideas or the content - nor would I suggest I'd done the research. I also remind the readers that I am not an expert or even a professional in these areas - I am more like somebody who has started going to the gym again. I am going to keep building my mental fitness until I'm somewhat literate in these issues, primarily so that I can have a semi-coherent discussion with my wife who is in business school. Satis verborum.