Bank for International Settlements admits that banks are the big gold shorts


Pouring oil on troubled economists

William Keegan
The Observer, London
Sunday, October 10, 2004,6903,1323678,00.html

Geore Bush has got my fingerprints. It did not take
him, or rather his genial representatives at Dulles
airport, long. What took the time was a two-hour
wait in the passport queue to reach him. A number
of us aliens will have something to say next time a
US official or economist lectures us on the need
for structural reform and greater flexibility in Europe.

I imagine the Chancellor of the Exchequer had an
easier passage through passport control, and I have
no idea whether his fingerprints were taken too, just
in case he might despair of ever winning approval for
his ambitious schemes for relieving poor countries
of their debt, and be tempted to take up terrorism

For James D. Wolfensohn, the president of the World
Bank and one of the stars of last weekend's annual
meetings of the World Bank and International Monetary
Fund (IMF) in Washington, terrorism and poverty are
closely connected. 'Recent research suggests that a
lack of economic opportunity, and the resulting
competition for resources, lies at the root of most
conflicts over the last 30 years, more than ethnic,
political, and ideological issues,' says Wolfensohn.

The retiring president adds: "This research supports
the intuitive idea that if people have jobs, and if they
have hope, they are less likely to turn to violence."

Gordon Brown did not get nearly as far as he would
have liked last week with his "debt initiatives." It was
not just recalcitrant Germans who were the problem.
An official involved commented: "The US won't budge.
Apart from anything else, the IMF itself has a
financing problem, and is not going to sell gold to
finance the chancellor's debt-relief plans."

We shall see. Group of Seven finance ministers
referred the various proposals for further study. The
Bush administration is more interested in debt relief
for Iraq, where unemployment is said to be well over
50 percent, and evidence that the US/UK invasion
has created a breeding ground for terror becomes
stronger by the day.

Although he did not get far on debt, the Chancellor
was widely praised for his handling of the IMF's key
policy committee, of which he is a chairman. At the
subsequent press conference he expressed surprise
that there had been no questions about oil, because,
without doubt, oil was one of the key topics at official
meetings and fringe seminars.

Those with long memories will recall that the Third
World debt crisis began after the 'oil shocks' of the
1970s. What used to happen at IMF meetings in those
days was that governments would encourage the
"recycling" of the spare millions (even billions) that the
newly rich oil-exporting countries had to invest, and
bankers -- eager to make a turn -- would not ask too
many questions about the viability of African
economies to which they offered money.

It was the financial markets' rather belated discovery
that Britain possessed North Sea oil that led to an
embarrassing surge in the pound in 1977, within
months of Denis Healey's having to turn back at the
airport to face a major sterling crisis. (He never got
to the 1976 IMF meeting. They sent a team to him.)

My sense of last weekend's meetings is that there is
an atmosphere of suppressed panic about the oil
price, and about the danger of a serious crisis. This
is over and above the well-publicised concerns about
potential storms in the foreign-exchange markets
when the financial world finally becomes nervous
about the mani festly unsustainable US budget and
balance-of-payments deficits -- a nervousness which
may well surface shortly after the presidential election.

Oil prices loomed large in the statement by G7
finance ministers and central-bank governors, which
conceded: "Oil prices remain high and are a risk. So
first, we call on oil producers to provide adequate
supplies to ensure that prices remain moderate.
Second, it is important consumer nations increase
energy efficiency. Third, it is important for consumers
and producers that oil markets function efficiently and
we encourage the IEA (International Energy Agency)
to enhance its work on oil data transparency."

The call for "adequate supplies" is an obvious sign of
concern. The call for increased efficiency contrasts
with all those complacent analyses we have seen
recently suggesting that the world is much less
vulnerable to an oil shock that it was in the 1970s and
1980s. Efficiency? According to the US Energy
Information Administration, US oil consumption rose
by 16 percent between 1973 (the year of the first oil
shock) and 2003, whereas in France it dropped 21
percent. (France, of course, invested heavily in nuclear

I am not forecasting that oil prices are going to remain
at $50 a bulk barrel or even rise a lot higher. But the fear
is there. And I can report that the price of oil has been
obsessing Federal Reserve chairman Alan Greenspan.
One regular visitor to his office said that, although the
chairman's desk was covered as usual by sta tistical
papers, this time they were not about interest rates but

The other big worry in Washington was the poor
performance of business investment in recent years, at
a time when, in the words of one official, "consumers
have been spending virtually everything they have, and
the savings rate is down to 1 percent."

"The reasons are not economic," said one senior official
on the investment scene. "When people are depressed,
they go out and spend," is one popular explanation, and
there was much talk of the impact of those notorious
Enron-style scandals on the animal spirits of

But to return to oil -- because everybody I met seemed to
return to oil. While officials tried endlessly to place their
faith in the improved techniques of the oil industry and
better extraction results from individual fields, the fear of
terrorism was marked.

Back in England, the first items of economic news to grab
one's attention were the poor recent figures for industrial
production here, and the warning by the president of the
European Central Bank, Jean-Claude Trichet, that the oil
price posed threats to the already very modest recovery
of the eurozone.

Oh, and by the way, I had my fingerprints taken only
once, but at Washington National Airport, on my way to
interview Professor Galbraith, I was told at the security
desk: "Your airline has selected you for additional
screening." There was the option of enjoying this extra
privilege in private. What, in George Bush's America?
They must be joking.


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