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NEW YORK: While the Cash for Clunkers trade-in program is a resounding success, it comes with borrowed money — and we’ll have to pay for it eventually.”They are thinking cash for clunkers is free money right now,” said Diane Lim Rogers, chief economist at the Concord Coalition, a group advocating fiscal responsibility. “They don’t really think of what the real cost of that is.”There’s little doubt the program is popular. Give Americans 4,500 for their old car that gets lousy gas mileage, and guess what — they’ll buy a new car. Cash for Clunkers has burned through its initial 1 billion in funding in less than a week, and the Senate is now considering pumping in another 2 billion.Auto dealers and car companies are happy that sales are flowing again, even if some warn that sales are simply being bumped up from the future. Environmentalists also don’t seem to mind. Although the program only requires that the new car get 22 miles a gallon for a 3,500 rebate — just four more than the “clunker” — most people are stepping up fuel efficiency in a big way. One report said the average new car bought under the program gets 10 to 12 miles more per gallon, about what is needed to qualify for the full 4,500.The new Clunkers money would come from the 787 billion allocated under the stimulus bill passed in February. Clunkers represents just a tiny portion of the total pie. Even so, the U.S. government is running a deficit, and as debt mounts, the result could ultimately be higher interest rates as investors in U.S. Treasurys get worried about the country’s financial state. According to Rogers, a 4,500 credit right now may ultimately cost the government 10,000 by the time its paid back with interest. The impact of higher rates would be far reaching. “We borrow money for homes, education, to put braces on our children’s teeth,” said Rogers. “If it gets really expensive to borrow it will be hard to live life as normal.”The government may also respond to its problem finding lenders by simply printing more money. That erodes the value of the dollar and makes things more expensive for everyone.0:00
/3:43Cash for clunkers’ sugar rushIt’s unlikely a mere 2 billion more for clunkers will trigger this economic doomsday-type scenario. Plenty of people support the program as effective stimulus as it sticks to a mantra heard often during the debate over stimulus this past winter — it’s temporary, targeted and timely.”It was smashing success in terms of stimulating auto sales,” said John Lonski, chief economists at Moody’s Analytics. “I think it will do its part in returning the economy to sustainable growth.”But even Lonski acknowledged the dangers in expanding the program too far beyond its current scope, or to other industries. “You’re leaning on the federal government to provide the lift,” he said, “and that can be a bad precedent.”

Source:CNN

BEIJING (Reuters) — On the surface, China presents a fiscal study in contrast with the United States, keeping a remarkably low ceiling on debt even as it spends its way out of the financial crisis.But when Chinese leaders meet their U.S. counterparts this week, they should pause for reflection before venting any criticism, because hidden liabilities mean China’s books are uglier — potentially much uglier — than at first sight.Thanks to successive years of fast economic growth and even faster government revenue growth, the official debt-to-GDP ratio was 17.7% at the end of last year, far lower than almost any other major economy.The trouble is that excludes local government borrowing, the current surge in loans backstopped by Beijing and bad assets cleared from the banking system but still floating about.When all are thrown into the pot, analysts estimate that China’s debt may be closer to 60% of GDP, putting it in virtually the same league as the United States, which was at 70% at the end of 2008 before it launched its massive economic stimulus program.To be sure, Washington is now set on a path of exploding debt that Beijing will largely avoid. The United States budgeted for a federal deficit of 12.9% of GDP this year, whereas China is aiming for just 2.9%.But China’s finances are deteriorating more quickly than the government expected, fueling a rise in the stock of both explicit and disguised debt that will constrict its wriggle room.”It is serious because, one, much of it is hidden and, two, local governments are currently doubling down on their bets,” said Stephen Green, economist at Standard Chartered Bank in Shanghai. “As with all fiscal deficits, it limits space for further stimulus.”This is probably a moot point, for now. With China’s economy back on track and private-sector investment kicking in, few think Beijing will need to ramp up spending beyond its existing 4 trillion yuan (585 billion), two-year stimulus plan. But the narrowing of options still discomfits Chinese leaders.”Our fiscal work is very grim,” Chinese Premier Wen Jiabao told officials last week.Eroding financesGovernment revenues declined 2.4% in the first half compared to a year earlier, well shy of the official goal of an 8% rise. Expenditures were ahead of target and set to surge in the second half on the back of infrastructure projects.Tax intakes are, of course, closely tied to economic activity, so China’s upturn should deliver cash to government coffers. But improvement in June came mainly from land sales, a one-off revenue source that masks the difficult road ahead.”Even when we are already factoring in relatively optimistic revenue growth due to the economic recovery, the deficit is quite sticky at around 5 % per year for the next three years,” said Isaac Meng, economist at BNP Paribas in Beijing.But the real worry is the thickening morass of indirect debt.Officials at the Ministry of Finance estimated earlier this year that local government debt already topped 4 trillion yuan, or 16.5% of GDP, much more than previously assumed.0:00
/0:49Strong growth in ChinaAbove and beyond that are 400 billion yuan in bad loans in banks’ hands and at least 1 trillion yuan in non-performing debt hived off their books and assigned to asset management companies. The buck stops with Beijing on all of these.The record surge in bank lending this year means that its sum of liabilities is about to swell in size.Banks have showered money on infrastructure projects that are seen as having iron-clad government guarantees. Green said he “conservatively” estimates that Beijing’s bill for covering loans issued this year alone will be 1.75 trillion yuan, enough to push its 2009 deficit to 10% of GDP.”Debt bomb”Most troublesome of all is the potential for a “debt bomb”, in the words of China’s Economic Observer newspaper, at lower levels of government as officials engage in financial engineering that is both opaque and highly leveraged.Rules prevent Chinese banks from lending to governments the equity capital which they need to obtain further loans for investment. But local officials and banks are now exploiting a vast loophole thanks to intermediaries known as trust companies.The process is simple enough. Trusts create specially designed “wealth products”, which banks sell to their clients. Banks then give the funds to the trusts and they, in turn, funnel them to governments as equity capital.Local authorities, in short, are piling debt on top of debt. The Chinese banking regulator has started to warn trusts and banks of the growing risks, state media recently reported.It was not long ago that bad loans in China’s banking system seemed to pose a massive debt threat to the wider economy. The core solution over the past decade was sustained double-digit growth, vastly expanding the denominator in debt-to-GDP ratios and generating the taxes to pay down the numerator.Beijing is already looking to raise taxes where it can — increasing the levy on cigarettes, for example — but a return to super-charged growth is again its principal debt reduction plan.In the meantime, China needs to fund its rising deficit.On that front, at least, the government can be supremely confident, even if it has to issue more than the planned 950 billion yuan in bonds this year and yet more to cover shortfalls in coming years.”There is so much saving and so much liquidity, so there is definitely not a problem that China will not be able to finance its deficit,” said Tao Wang, UBS economist in Beijing.

Source:CNN

‘Hidden cost’ of Colombian biofuel
By Margarita Rodriguez
BBC Mundo, Colombia
Colombia’s government proudly claims that it is the biggest producer of biodiesel and ethanol in Latin America after Brazil, but human rights groups do not share that enthusiasm.Critics warn that the cultivation of palm trees to produce biodiesel is a threat to Colombia’s indigenous groups and other minorities, including Afro-Colombians. In rural areas, there is evidence that some people have been forcibly displaced to make way for biofuel production. Last year, the United Nations stopped its investment in the sector in Colombia. But while ethanol production in Brazil has been pored over by experts and activists, the challenges faced by Colombia remain relatively unexamined. Colombia’s agriculture minister, Andres Fernandez, stresses that one of the main aims of President Alvaro Uribe’s administration is to keep the production of biofuels “on a growing path”. Mr Fernandez argues that this is “not one government’s policy, but State policy”. He dismisses accusations that the production of biofuels squeezes food output. “There are 4.5 million hectares of cultivated land and another 4.5 million of hectares of uncultivated land, [but] that land would not be used for food production – it would stay just as it is,” he says. Fuel or food?Last year, UN food chiefs warned that governments had to review urgently their policies on growing crops for biofuels. The UN Food and Agriculture Organisation (FAO) said biofuels were of “limited use” for solving the planet’s energy needs. At the same time, they pushed up food prices by diverting valuable crops such as sugar maize and oilseed from food use to energy use.
Mr Fernandez says he respects the UN viewpoint and its decision to suspend investment in biofuels in Colombia, but he says his country has its own perspective. He argues that bio-fuels have had a “wonderful effect” and have led to investment in deprived areas of the country benefiting peasants and minority groups. But this effect is not viewed quite as wonderfully by many rural workers in the Choco province, in north-west Colombia. They complain of being forced off their land to make way for palm trees – and accuse the government of being deaf to their pleas for help. One of the workers, Eustaquio Polo Rivera, told BBC Mundo that he lost his land after an incursion by right-wing paramilitaries in 1996. “We used to produce what we needed for ourselves: bananas, corn, rice. But one day, soldiers just arrived and took our land. They destroyed everything in the community,” he says. “They told me they needed the land to fight the guerrillas, but we soon realized that the point was to take our land. “We tried to resist, but the armed men warned us they would take no responsibility for the families who decided to stay.” Violations denouncedAccording to Mr Polo, more than 500 people fled immediately. “When we tried to go back, our land was planted with palm trees,” he says. “In my own community, there are between 30 and 40 hectares of palm trees. “The government hasn’t shown any interest in returning our land because the paramilitaries carry on moving from one location to another and the big companies have powerful allies.” Fidel Mingorance is chairman of Human Rights Everywhere (HRE), one of several NGOs denouncing the forced displacement of communities, often of African descent, to make way for palm trees. “It all started in Tumaco, in South Colombia, and now there are all sorts of violations – forced displacement, assassinations, property invasion,” he says. Leonidas Tobon, the director of technological development at the Ministry of Agriculture, accepts there was a case of forced displacement in Choco, but says it was a one-off. “The cultivation of palm trees is concentrated in four regions. Only 10% of it is in areas occupied by Afro-Colombians and 30% of land used to grow the trees belongs to small farmers in any case,” he says.
Source:BBC