“Del. searches for a way to recover - Delaware Online” plus 4 more

Del. searches for a way to recover - Delaware Online
It takes a village - Chillico Gazette
Leaders of 16 Asian nations meet in Thailand - Rock Hill Herald
Asian leaders seek to reduce Western trade ties - AsiaOne
China’s Dragons: Oil, Gold, and the U.S. Dollar - Seekingalpha.com

Del. searches for a way to recover - Delaware Online

Posted: 25 Oct 2009 08:22 AM PDT

Job losses and erosion of Delaware's mainstay industries have battered the state's economy, leaving government officials groping in uncharted territory for a means to recovery.

Although experts say the state and national economy appear to have hit bottom, the news for months has been bleak, and the numbers stark:

•Nonfarm jobs have fallen to 1999 levels.

•While the economic output of Maryland, Pennsylvania, New Jersey and Virginia continued to grow even through last year, Delaware's declined. Nationwide, only Delaware, Michigan and Ohio saw a real-dollar reduction in their gross state products between 2005 and 2008.

•Delaware's economy contracted faster last year than every state except Alaska, a stunning reversal from the 7 percent growth rate seen between 2004 and 2005, when Delaware enjoyed the nation's 4th fastest growth in total state output.

Some traditional mainstays of Delaware's economy have been weakened or broken. Virtually every other state, meanwhile, is chasing the same solutions as Delaware for growth and economic recovery.

The biggest challenge states face now, experts say, is the weakness of industries that have hauled Delaware out of other recessions.

Robert A. Raison, a Wilmington resident who lost his information technology job with DuPont Co. in 2005 and his next job in a corporate downsizing in March, said employment prospects are bleak.

"When I go to job fairs right now, they don't really even want to talk with you. There aren't any jobs," said Raison, who recently had to file for a benefit extension after regular coverage ran out. "They tell you to fill out an application on their Web site and then you never hear anything back."

Stimulus and economic development efforts are moving too slowly, he said, and are too narrowly focused.

"I don't feel like they're doing anything for me," Raison said. "I lost a job in 2005 because it was outsourced to India, and then I lost my other job in March because of the economy. But all I hear about is 'Let's help the auto industry. Let's not let them fail.' "

Shrinkage last year was heaviest in financial and insurance services, manufacturing and construction, sectors long considered part of Delaware's economic bedrock, and now viewed as unlikely ever to regain past levels of dominance.

The trend has cost the state dearly in areas long prized for employing skilled and highly educated workers with solid benefits and reliable prosperity in retirement.

Gov. Jack Markell, who campaigned on a goal of bringing 25,000 new jobs to the state during his first four-year term, said last week that job protection and creation have become a central focus.

One emphasis has been "green" jobs and businesses, new or expanded enterprises in the areas of energy efficiency, clean energy production and energy conservation.

The Obama administration is pouring billions into those sectors, hoping to put people back to work in jobs ranging from home weatherization to building efficient appliances, solar-powered homes and wind-turbine charged utilities.

Recently, though, Markell and Delaware Economic Development Office Alan Levin have been fighting to stop the bleeding, feverishly criss-crossing the state trying to reassure existing companies, chambers of commerce and businesses, and recruit them to serve as lookouts for development opportunities.

"There's no doubt we had a lot of eggs in the financial services sector, in the auto sector," Levin said. "These are all things that we thought would never go away. Yes, we still have the financial services sector and they are still a strong, very viable part of our economy, but we cannot rely upon them to be the growth factory they were."

Venture at Boxwood Road

A morale boost for the green economy push may be around the corner, with a California-based startup carmaker expected to announce soon that it will make plug-in electric hybrid cars at General Motors' idled Boxwood Road plant near Newport. Though risky and heavily subsidized, the venture could mean thousands of direct and spinoff jobs if Fisker Automotive's vision succeeds, giving Delaware a early foothold in a major sector of the clean energy economy.

On Friday, the state's other big, shuttered car factory moved toward an entirely different future.

The University of Delaware completed its $24.25 million purchase of the former Chrysler auto plant, which closed in December, aiming to convert it into an innovative technology research center. A portion of the 271-acre Newark car complex, spun off as part of the automaker's bankruptcy, also could be transformed into a local medical education campus, university officials have said. The medical program would be developed through an alliance involving Thomas Jefferson University, Christiana Care Health Systems and the Nemours Foundation.

Much more will be needed, though.

New Castle County Executive Christopher Coons said that even amid signs of hope, the state's economic woes are unprecedented.

"New Castle County and the state face really unprecedented economic challenges, in that all of those industries are at risk at the same time, and that puts us in a uniquely difficult place," he said.

Financial and insurance services, an area that accounts for about a third of the state's annual financial output and more than 10 percent of its jobs, declined by 5.74 percent between 2007 and 2008, manufacturing by 8.5 percent and construction by 7.63 percent.

Credit industries alone lost more than 2,000 jobs in one year. Professional and business service areas, including scientific professions, lost 7,000 jobs, or about 10 percent. Some 2,000 jobs in "management of companies and enterprises" disappeared over the same time.

Laurence S. Seidman, an economics professor at the University of Delaware, painted an equally grim picture.

"Right now we're in a very serious situation. We have unemployment forecast through 10 percent through next year, by most forecasts. That's going to be extremely hard, especially on new entrants to the labor force. I teach many of them. This is urgent."

A new world

In Newport, businessman Robert Adelman has watched the downward spiral with alarm.

Adelman's company, Crowell Corp., has made box-closing adhesive tapes and other sealers since 1904, and now employs more than 60 people. The company hopes an alliance with White Optics, a startup company that makes a high-tech, reflective coatings for light fixture upgrades, can vault Crowell into a new, healthy and growing industry.

Progress has been slow, however, while economic casualties continue to mount.

"We've seen very little new business. The market is still very weak. I'm very concerned about the state's economy," Adelman said.

Although officials with Crowell and White Optics have expressed disappointment at progress to date, Markell regularly touts White Optics as a promising example of a new, homegrown entry into the energy and conservation markets. He cites the company as an example of how renewable energy and green industry hold great promise of the state's economy.

"It's obviously a very challenging time, given the fact that, in this economic climate, two of our most important industries, automobiles and financial services, have really taken it on the chin," Markell said.

The governor's emphasis on gambling as a bright spot earlier this year has faded markedly. Court rulings quashed hopes for a near monopoly on sports betting and surrounding states are grabbing a piece of slots and table game action.

"Gambling was never going to be the centerpiece of our economic development efforts," Markell said.

Markell and Levin may have little choice in turning inward to small Delaware businesses and surviving industries, despite the victory with Fisker Automotive.

"Right now, there's not a horse that you could clearly put your money on," said John Stapleford, an economist with Moody's.com who closely follows Delaware. "For a long time, DEDO spent most of their resources recruiting firms from out of state, but that's just not where the action is. Most job growth comes from existing firms and small businesses."

James L. Butkiewicz, a University of Delaware economics professor, said industries springing up around clean energy and energy conservation could provide a boost for Delaware, but not necessarily a huge one.

"Every state is looking for answers -- some button to push, to accelerate the recovery," Butkiewicz said. "In the long run, our growth is limited by the growth of the national economy. No state is going to grow faster than the country, in the long run. You just don't want to be one of those that's always doing worse."

Delaware's unemployment rate, at 8.3 percent in September, is still well below the national and New Jersey average of 9.8 percent or Pennsylvania's 8.6 percent. Maryland at 7.2 percent and Virginia at 6.5 percent both are doing better, though.

"It's still difficult. Anytime you've got 35,000 people in Delaware who are not working, it's very difficult," Markell said. "Our job is to wake up every day and try to make it less difficult for all those people."

Ruth M. Kelly, a former Christina School District employee who lost her job at the Newark Post newspaper in a mass layoff after only three months, said she worries for those now hunting for work.

"I hear about green industries, but I keep wondering when all the jobs are going to become available," Kelly said. "I know they're hiring in health care and education, but there are so many people vying for any particular job."

"I think this recession is going to last a lot longer," Kelly said. "A lot of places aren't hiring at all. They say all of these things are coming, but they're not here, and people are running out of time."

About 1 out of every 16 Delaware jobs disappeared between June 2007 and mid-2009.

"It was pretty much unprecedented to lose jobs at this rate, but it's also unprecedented to gain them at that rate," said George Sharpley, senior economist for Delaware's Department of Labor. "It's pretty unlikely that we're going to have job gains as rapid as the losses."

Kevin A. Hassett, director of economic policy studies at the conservative American Enterprise Institute, said that the states and national government could go too far. Hassett and some other economists say the economy and markets eventually will right themselves and shift resources into growing areas without much intervention.

"I think you can over-tinker, and you certainly don't want to do something like invest in a cockamamie idea or technology and squander resources," Hassett said. "But it's very difficult for a politician to say, 'Let's do nothing, we'll be fine,' even though that's often the right answer."

Threats on the horizon

Delaware still faces some nightmare scenarios.

Congressional and national reformers have called for changes in financial services, securities and credit card laws that have propped up Delaware's economy for decades.

Others have called for national corporate charter provisions that would erode advantages enjoyed by companies now incorporated in Delaware. Those changes, state officials worry, could lead to a drifting away of corporate activities that now support large ranks of well-paid legal professionals, financial experts and support employees.

"There are concerns about business practices, and that's the impetus behind this talk of taking away Delaware's incorporation advantage," Butkiewicz said. "That certainly would be a big problem. We have a legal infrastructure in the state that employs quite a few people."

Corporate fees and taxes, bank franchise levies and other business-related levies account for $1.2 billion of the state's annual revenues.

Delaware Secretary of State Jeffrey W. Bullock said stakes are high both for the state and the nation.

Most current growth in state incorporation revenues comes from international businesses, including China. Moves that make incorporation in Delaware less attractive, he said, could easily make it more attractive to incorporate entirely outside the United States.

"I wouldn't sugar-coat it," Bullock said. "It's a tough political environment right now, tougher, probably, than I have seen in my 20-plus years in the public sector."

Markell, who said during his campaign that he would strive to make Delaware a leader in the new "green economy," has taken a broad approach both to the definition of green jobs and industrial leadership.

Every state now is battling for big pieces of emerging energy production, conservation markets and new technologies, such wind turbine manufacturing, solar panel production and related areas.

"I think there's an opportunity here," Markell said. "It has to do with Delaware companies participating as the economy goes green."

A proposal to build an offshore wind farm east of Rehoboth Beach immediately led to hopes that Delaware could become part of the foundation for a coast-wide industry. Congress recently appropriated $1 million to support a demonstration project, and state officials lined up agreements for training programs to prepare workers for jobs building and maintaining giant turbines perched more than 100 feet above the water, 10 or more miles offshore.

Ambitions even extended to the Evraz-Claymont Steel plant, a troubled scrap steel recycling facility that some hope can find new life producing turbine supports.

"I do think that there are exciting and real possibilities for Delaware and for New Castle County, in particular, in everything from power generation, with wind and solar, to transportation with electric vehicles and jobs indirectly related to energy, such as weatherization or efficient lighting, heating and cooling systems," New Castle County's Coons said.

The American Enterprise Institute's Hassett said that states have tended to oversell "green jobs" as a solution.

"The green jobs story is embarrassing. Anyone pushing it should be ashamed of themselves," Hassett said. "I'm not saying that we don't need a green economy, but the notion that we're going to somehow make a utopia by training people to build windmills is just crazy."

In recent months, Markell has pointed often to Bridgeville-based Miller Metals as a case study for pursuit of jobs and growth in both the old and green economies as the recession's grip eases. The company recently began fabricating metal parts for wind turbines, among other ventures.

Marty Miller, the Bridgeville company's owner, said that DEDO and other state officials helped the plant adopt new "lean manufacturing" methods that minimize waste, expenses and high inventory and paperwork costs.

The state also helped the company adopt and become certified in global industry standards for quality management and quality assurance, giving Miller a stronger position in competition for local and international work.

"We've had the best couple of months we've ever had in 25 years," Miller said. "I know that a lot of my competitors have gone out of business. The reason we've hung in is, we invested in new equipment a couple of years ago, laser cutters and machines. We're very flexible, we can do a lot of different things, and we can do more with the same number of people. We can actually compete against the Chinese now."

Markell refers to his small-business strategy as an effort to "let 1,000 flowers bloom."

"I don't care where that wind turbine goes. What I care about is the fact that people in Bridgeville, Delaware, have jobs because of that," Markell said.

Some flowers grow more slowly than others, however.

In Newport, Crowell Corp.'s Adelman said that the White Optics venture is promising, but has yet to catch on or put local people to work. The company claims its proprietary reflective coating improves the efficiency of light fixtures by 50 percent.

A startup launched in Delaware by former DuPont Co. employees, White Optics is currently having its materials produced out of the country. The company's products are scheduled to be used for energy upgrades in large buildings in Illinois and Maryland, but subsidies and economic incentives to use the same products in Delaware are only now kicking in.

"It's a good idea," Adelman said. "But there's a lot of work to be done, and it's expensive and time-consuming, and I think both companies are struggling."

More direct government help may be needed to boost interest and investment in lighting efficiency, he said.

Growing more slowly

Robert Chadwick, director of the New Castle County Economic Development Council, said Markell appears to be on the right track in cultivating home-grown business.

"We're very pleased with his focus on growing our own, on how we can help companies here in Delaware grow and expand, and not just focus on bringing in new companies," Chadwick said. "Everyone is used to asking in Delaware what the next big thing will be. We've had a lot of big things in the past. I think now it's going to be a lot of little things."

Much of the emphasis on small- to mid-sized employers is practical, Markell pointed out.

"We're not going to win the battle too often by being willing and able to write a check" for aid or subsidies to lure businesses away from Pennsylvania, New Jersey or other states, Markell said.

DEDO's Levin said that he and Markell have made dozens of trips around the state, assuring business owners that the state is ready to help.

"When you're a small state and have the ability to react faster, that creates an advantage if everybody is in the same boat," Levin said.

Coons, whose county administration also is pursuing new businesses and jobs, agreed.

"I think a generally understood business view is, cash incentives, whether they're training dollars or a grant or a great location, ought to be what closes a deal, not the foundation of the deal," Coons said. "You need to look for a great work force, a good facility, a responsive and predictable local regulatory environment."

Bullock said the administration recognizes that "we are not making the kinds of advances we used to be making, even when you factor out the recession."

Change and turnover, much of it affected by national trends and competition from aggressive economic development efforts by other states, has cost the state better-paying jobs, with gains coming in lower-paying areas.

Seasonally adjusted employment in construction and related jobs fell from 29,500 positions at the end of 2006 to 21,700 in September, a 26 percent decline. Trade, transportation and utility work employment plummeted from 82,800 jobs in January 2008 to 75,800 in September.

"We are now in a place where we have to think about what the Delaware economy is going to look like for the next generation," Bullock said.

Contact Jeff Montgomery at 678-4277 or jmontgomery@delawareonline.com.

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It takes a village - Chillico Gazette

Posted: 25 Oct 2009 08:22 AM PDT

The Ross County Network for Children wanted to know what City Council candidates hope to accomplish for children.

Janet Montgomery, acting director, hopes the network and others in the community can start partnering to assess and address the needs of the community's children.

"The thing is, it takes a village (to raise our children). That's the whole point we're trying to get to," Montgomery said.

While the Network's primary focus has been working with children and families from abusive situations, Montgomery said they have been working to expand services to address poverty. In addition to a toy drive for Christmas, the agency also has opened a clothing bank to help anyone in need, not just those in abusive situations.

"We don't know how bad the economy is going to get," she said.

Stresses caused from unemployment and finances is a contributor in many domestic violence situations, so providing help might provide some prevention.

Jeremy Siberell, 5th Ward Republican candidate, expressed concerns about the number of sex offenders in the area. He wants to ensure the offenders are not living in close proximity to schools or other child-centric places such as day cares and look at possibly requiring offenders to have a sticker or sign outside their home.

"(Something) to make sure our kids know that's not a place you want to hang out," he said.

Rebekah Valentich, 2nd Ward Democratic candidate, spoke about how her concern for keeping children in Chillicothe was a key reason she decided to run for office.

"The children are our future ...If we don't stand up and make sure to make this community kid-friendly, they're out," she said.

Bill Bonner, 5th Ward Democratic candidate, expressed a need for continued action against crime and drug dealers in the community. Neighbors are "the eyes and ears" who should continue making reports to police on suspicious activity, he said.

"It does take a village to raise a child, especially today," Bonner said.

Dustin Proehl, Democratic at-large candidate, wondered if there is a way City Council can help bring together groups such as Ross County Network for Children in an effort to effect greater change in the community.

Jim Owen attended the meeting from Morgantown in Pike County because of his concern for children, and agreed there needs to be more collaboration.

"This is the most worthy cause I've ever heard of in my life --children," he said, adding he advocates having meetings all over to bring people together for discussion. "We should network and get together ... solve our local problems."

In Morgantown, Owen said they have been reaching out to others through music in order to assess needs so they can then work toward addressing those needs. Owen feels it's imperative to vote for straight-line conservatives to get back to a more Christian society of "God, country, mom and apple pie" which will in turn help create a safer society.

Daniel Evans, 3rd Ward Independent candidate, disagreed voting straight along party lines is not necessarily good.

"I can not, in good conscious, make decisions based solely on the recommendation of somebody else, one group of somebody else ...All I can do is take the two points and make my own decision," Evans said.

Other candidates also spoke during the event including Bruce Arnold and Lois Tropea.

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Leaders of 16 Asian nations meet in Thailand - Rock Hill Herald

Posted: 25 Oct 2009 07:54 AM PDT

Asian leaders, a conference document said, noted that the region has shown signs of recovery from the global crisis and "regained its pace of economic growth."

"East Asia could therefore play a crucial role in driving global economic recovery and in reforming the international financial architecture," it said, noting that the Asian Development Bank recently revised its forecasts for East Asian economic growth from 3.4 to 3.9 percent this year and 6 to 6.4 percent in 2010.

The East Asia Summit followed Saturday meetings of leaders from the 10-member Association of Southeast Asian Nations with heads of government from China, Japan and South Korea. Sunday's expanded talks brought in Australia, New Zealand and India.

The 16 leaders represent almost half the world's population and more than a third of the global GDP, according to Australia's Prime Minister Kevin Rudd.

The three-day conference included the launch of Southeast Asia's first human rights watchdog, and talks on economic integration of ASEAN by the year 2015, disaster management, climate change and military-ruled Myanmar, an ASEAN member widely criticized internationally for its human rights violations.

Abhisit said Myanmar Prime Minister Gen. Thein Sein told other leaders that he welcomed signs of engagement from various regions, a reference to Washington's recent announcement that it would seek high-level dialogue rather than shunning the junta. Thein Sein also said that he was optimistic that democracy leader Aung San Suu Kyi, held in detention for 14 years, could contribute to reconciliation.

"ASEAN has always argued that engagement is the right approach. We feel that if everybody takes this approach we would be encouraging Myanmar in her successful implementation of her own roadmap (to democracy)," Abhisit said.

Southeast Asian leaders on Saturday called on Myanmar to conduct free and fair elections next year when the junta has promised to hold the first polls in two decades. Activists criticized the bloc for failing to take a tougher stand against one of the world's worst human rights offenders.

The conference signed or noted 43 documents, several focused on economic integration.

ASEAN countries have haltingly tried to integrate their economies, and are seeking to eliminate trade barriers within the bloc to bring about a European Union-style grouping by 2015.

"Over the past year we have proved that ASEAN continues to move forward. We have risen to the challenges of the times," Abhisit said, noting regional cooperation in coping with the global economic crisis, swine flu and several natural disasters in the region.

The next summits have been scheduled for Hanoi in April and October next year, when Vietnam assumes the ASEAN chairmanship.

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Asian leaders seek to reduce Western trade ties - AsiaOne

Posted: 25 Oct 2009 08:37 AM PDT

By Jason Szep and Martin Petty

HUA HIN, Thailand - Asia-Pacific leaders called on Sunday for regional-wide free trade and other measures to reduce dependence on the United States and big Western markets as Asia leads the way out of the global economic downturn.

Japanese Prime Minister Yukio Hatoyama urged Asian leaders to keep up fiscal and monetary stimulus measures even as their economies show mounting signs of recovery, saying there was "no room for complacency" and that the job market was still "dire."

"At the moment the global economy is showing signs of recovery, mainly in Asia," Hatoyama told the closed-door East Asia Summit of 16 Asia-Pacific leaders in the Thai town of Hua Hin, according to Foreign Ministry spokesman Kazuo Kodama.

At the meetings, held under tight security, Hatoyama found tentative support from his Asian counterparts for a proposed regional community inspired by the European Union that would account for nearly a quarter of global economic output.

"I think my long-term vision of forming an East Asia Community was largely welcomed by participants," Hatoyama told reporters. The bloc, however, would take more than 10 years to create and may include some sort of regional currency, he added.

Thai Prime Minister Abhisit Vejjajiva, host of the meetings, said Asia clearly needed a new growth model leaning less on big Western trading partners and more on Asia-wide trade pacts. The global financial crisis, he said, bore this out.

"The old growth model, where simply put we have to rely on consumption in the West for goods and services produced here, we feel will no longer serve us as we move to the future," Abhisit told a news conference.

Asia's leaders also called on North Korea to end its nuclear arms program and resume stalled six-country talks, and urged military-ruled Myanmar to ensure its elections next year were free and fair.

And they mostly agreed it was too early to end government spending and other measures designed to get Asia back on its feet, said Indian Prime Minister Manmohan Singh, at the helm of Asia's third-biggest economy.

"The world's eyes are on Asia as the region which can lead the global economic revival," he said.

REGIONAL TENSION

But there were signs that integrating Asia's wildly divergent countries -- from the economic powerhouses of Japan and China to the hermit state of Myanmar and impoverished regions of Southeast Asia -- is easier said than done.

Thailand, the world's biggest rice exporter, and the Philippines failed to reach agreement on the weekend in a row over import tariffs that could derail a trade pact at the heart of Southeast's bid to build an economic community by 2015.

A free-trade pact in Southeast Asia, a region of 570 million people, calls for Philippine rice import tariffs to be cut to 20 percent from 40 percent by January 1, and then be progressively cut further. But Manila says the tariffs should stay at 35 percent.

"The Philippines is not ready to change its figure as far as tariff rates are concerned because it has to protect its own farmers," said Philippine Trade Secretary Peter Favila.

There were other ways to propel the region's budding economic recovery, said Asian Development Bank President Haruhiko Kuroda, urging Asian leaders to keep stimulating domestic demand along with regional demand to become less dependant on the U.S. market.

"A rebalancing of the sources of growth in Asia is a very important challenge," he was quoted by a Japanese official as saying.

Japan's idea for an East Asian Community would encompass Japan, China, South Korea, India, Australia and New Zealand, along with the 10-member Association of South-East Asian Nations (ASEAN). Leaders from all those states joined Sunday's talks.

Australian Prime Minister Kevin Rudd pushed another idea for a new, separate forum of Asia-Pacific nations to respond to regional crises -- from natural disasters to security scares and economic meltdowns. His idea includes the United States.

The meetings followed an ASEAN summit that got off to a rancorous start on Friday, overshadowed by a diplomatic spat between Thailand and neighbor Cambodia, and marred by the absence of three leaders at the opening ceremony.

Host Thailand deployed about 18,000 security personnel backed by military gunships, determined to avoid a rerun of mishaps at past summits.

The summit was initially scheduled for December last year but was postponed when anti-government protesters shut down Bangkok's airports. It was moved to the Thai resort area of Pattaya in April but was subsequently aborted when a rival protest group broke through police and army lines and stormed the summit venue.

(Additional reporting by Nopporn Wong-Anan, John Ruwitch and Yoko Nishikawa; Editing by Jeremy Laurence)

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China’s Dragons: Oil, Gold, and the U.S. Dollar - Seekingalpha.com

Posted: 25 Oct 2009 08:37 AM PDT

Chart courtesy of Mint Software, Inc.

Together, Asian countries account for 60% of the earth's human population and control major portions of world resources such as corn, cotton, gold, rice, rubber, silver, water, and wheat to name only a few.

If the Chinese calendar had been invented more recently it might include more specific varieties of each animal, such as a gold dragon in the metal category and an oil dragon in the earth category, thus there would be seven celestial dragons rather than five.

The Oil Dragon

Total Asian demand for oil, lead by China's 7,880,000 bbl/day, exceeds US consumption. In fact, the consumption of just China, Japan, and the four Asian Tigers is greater than that of the entire EU. Taken as a whole, Asian demand for oil is more significant for the price of oil than the US or the EU. The price of oil in 2009 has risen as Asian economies began to recover, despite lower US consumption. Rising Chinese demand for oil is now a fixed feature in the otherwise changing global economic landscape. A weaker US dollar and a stronger Chinese yuan serve to guarantee that China will have the oil it needs.

Although not as hard hit by higher oil prices as less developed countries (which could be priced out of the market entirely) would be, the US economy could be crippled by high oil prices. As shown by the West Texas Intermediate Crude Oil index (WTIC), the price of oil is rising sharply.

Chart courtesy of StockCharts.com

Both the US and China import roughly twice as much crude oil as they produce. With a weaker dollar, US oil imports, currently roughly $400 billion annually, will represent a larger external drain on the US economy, which could prove to be disruptive. The reactionary US strategy is to increase domestic oil production and to develop alternative energy sources in order to reduce dependency on foreign oil. Unfortunately, US oil production cannot increase quickly enough or to high enough levels to ameliorate the impact of much higher oil prices. Presently, there is no alternative energy technology that can supply enough energy at a low enough cost to have a significant impact on US oil consumption in the near term. An anemic US economy combined with a weaker currency means that the US is ill equipped to absorb inevitably, much higher oil prices.

The Gold Dragon

Oil is the most important factor of the US dollar's value for two reasons. Since the founding of the Organization of the Petroleum Exporting Countries in the 1960s (currently Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela), oil has been priced in and sold in US dollars worldwide. Since the Bretton Woods system ended, the effect of the OPEC cartel's price fixing actions has been to establish an implicit commodity-based value for the US dollar. In other words, after the Bretton Woods system, the value and the world reserve currency status of the US dollar was implicitly supported by oil rather than gold. Any nation accepting US dollars in trade knew what the value of US dollars was measured in oil.

Once oil is no longer priced in US dollars, the US dollar, in practical terms, will no longer be the world reserve currency, i.e., US dollar transactions will decline sharply on a global basis. This conclusion has already been recognized by central banks. In the second quarter of 2009, US dollars accounted for only 37% of new central bank assets, compared with 70% in the past. Rather than US dollars, central banks favor Euros, Yen, and gold. Central banks have also become net buyers of gold or are repatriating gold reserves.

Following the replacement by Iran (the third largest oil producer) of the US dollar with Euros for foreign trade in September, 2009, rumors of secret talks between Arab states, China, Russia, Japan and France, allegedly regarding replacing the US dollar with a basket of currencies including the euro, Japanese yen, Chinese yuan, and gold. Talks between Russia and Iran regarding conducting oil transaction in rubles were officially acknowledged a few days later by Russian Information Agency Novosti (RIA Novosti). Neither development is at all surprising because world leaders have been calling for the replacement of the US dollar as the world reserve currency since 2008. It's safe to say that all of the BRIC nations, especially China and Russia (the world's 8th largest oil producer), oppose the petrodollar standard and are in favor of a new reserve currency (Brazil's largest trading partner, formerly the US, is now China).

It seems unrealistic to imagine that currencies tied to growing economies with higher production and lower levels of debt would not be preferred over those of stagnated economies. If political strength follows economic strength, the petrodollar standard will soon take its place in history alongside the defunct Bretton Woods system.

Setting aside all other considerations, the price of gold would be $815 per ounce today based only on US dollar monetary inflation using Paul van Eeden's AMS model, i.e., 30% below the spot price (approximately $1,060 US at the time of this writing). Mr. van Eeden has accounted for the increase in gold over time.

Chart courtesy of StockCharts.com

It is worth noting that the price of gold, when adjusted for inflation, is nowhere near its 1980 peak. The current situation is fundamentally different from the brief but acute 1980 gold price bubble. John Williams of Shadow Government Statistics maintains that the US government has understated inflation and recently said that "If the methodologies of measuring inflation in 1980 had been kept intact, gold [adjusted for inflation] would have to hit $7,150 to be the equivalent of the 1980 record,"

According to data from the World Gold Council (WGC) and metals consultancy GFMS, demand for gold is currently greater than the supply by as much as 1000 tons per year. The WGC and GFMS have correctly identified two distinct economic spheres comprising gold supply and demand. In the western economies, jewelry and industrial demand are weak, but investment demand is strong, while outside the western economies broad gold demand continues to grow. India remains the largest buyer, while gold demand in China is rising. China has been aggressively adding gold to its reserves and has not only made it legal for Chinese citizens to own gold but is encouraging gold ownership. The potential influence of increased, long-term Chinese demand on the price of gold cannot be ignored.

Monetary inflation and supply and demand considerations are not the whole picture. There is a much deeper reality. For nearly four decades, gold, priced in US dollars, was implicitly linked to oil and the resulting demand for US dollars moderated the affects of monetary inflation on prices in the US. The end of the petrodollar standard and the resulting global decline in demand for US dollars will cause the price of gold to rise significantly. The value of the US dollar changed qualitatively after 1971 when it became an irredeemable pure fiat currency, no longer backed by gold; a fact that has been masked by the petrodollar standard.

Higher demand for gold also reflects a growing recognition that the US dollar and other currencies currently being devalued are not reliable stores of value. In fact, the US dollar has not been a store of value at all for 38 years during which massive quantities of fiat money, including trillions of petrodollars, flooded the global economy. The weakness of the US dollar exposed by the financial crisis, i.e., its inability to function as a reliable store of value regardless of its utility as a transactional medium, points exactly to the strength of gold. The decline in international demand for US dollars, rejected as a failed store of value, indicates strong demand for gold in the foreseeable future.

18th-century French philosopher and writer Voltaire once said that "paper money eventually returns to its intrinsic value - zero". Understandably, Voltaire failed to consider a world where all money was purely transactional rather than a store of value, and where the relative values of currencies were managed in a loosely coordinated manner by central banks and governments through manipulation of the money supply, interest rates, etc. In theory, such a world could function indefinitely provided that currencies were relatively stable; provided that currencies were widely accepted and interchangeable; provided that large trade imbalances did not destabilize the system; and provided that currencies were not debased excessively, i.e., in a reckless or irresponsible manner, which would lead to a variety of economic problems. However, Voltaire's inability to imagine such a world may be insufficient cause to dismiss his observation.

It seems possible that Voltaire's superficially antiquated understanding was precisely that "paper money" can never function in the long run as a store of value, i.e., that it will inevitably, either by accident or by design, be mismanaged, and that it will always, eventually, be rejected, thus rendering its intrinsic value clear. History certainly supports Voltaire's view in that fiat currencies tend to perish. As recently as 1999, referring to the sale of British gold reserves, Alan Greenspan, then Chairman of the US Federal Reserve, said that "Fiat money paper in extremis is accepted by nobody. Gold is always accepted." As the Chinese discovered in the 11th century, money has a qualitative dimension and for "paper money" that dimension is confidence. In contrast, because it is a tangible asset that required an investment of human labor and other resources to produce, the value of gold does not ultimately, in extremis, depend solely on the unreliable subjective feeling of confidence.

Xiangqi (Chinese Chess)

There is increasing international recognition of the fact that there is no foreseeable end point to the devaluation of the US dollar. The inflationary policies of the US federal government and Federal Reserve have all but exhausted confidence in the US dollar both at home and abroad, above all as the world reserve currency. This entirely rational loss of confidence is the root cause of expanding multinational efforts to end the petrodollar standard and to eventually establish a new world reserve currency.

A reversal of the escalating challenge to the petrodollar standard and the movement away from the US dollar as the world reserve currency would require oil producers and industrialized nations, including China, to rally in support of the US, but it is precisely this group (a group that includes OPEC members, the BRIC countries, members of the G-20, and voting members of the IMF), that is seeking to free itself from US dollar hegemony. Rather than attributing the petrodollar standard and the status of the US dollar as the world reserve currency to the wealth, power and influence of the US, critics assert that the wealth, power and influence of the US is illegitimate and that it is the result of undeserved privileges; privileges that have been abused at the expense of nations that do not enjoy unfair advantages and that must now be forfeited.

Skeptics regarding the rise of China as a major economic power doubt that China can profit from a weaker US dollar through a stronger yuan or develop a sufficient domestic consumer market quickly enough to offset reduced exports. However, while China contributes to US consumption as an export-dependent supplier, as well as a financier, their exposure to losses resulting from a declining US dollar is limited. A stronger yuan would mean that, after a period of adjustment, China would import more goods and services and that, in real terms, wages of Chinese workers would increase, thus supporting a higher standard of living. What is more important is that a stronger yuan, implicitly backed by growing gold reserves (not to mention by a large and fully modern navy), is exactly what will guarantee China's oil supply.

The struggling US economy, burdened with excessive levels of debt, cannot support a sustained rise of the US dollar against the currencies of growing economies in Asia. Growing demand for resources, especially oil, as well as gold, contrasted with the inflationary policies of the US, will maintain the upward trajectory of commodity prices measured in US dollars indefinitely. In the near term, the end of the petrodollar standard will cause a sharp decline in the value of the US dollar and a marked increase in the prices of oil and of gold measured in US dollars.

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