Econ 101: Supply, Demand, and the Gas Tax Holiday

Basics of Supply and Demand
Anyone who has taken a survey econ course has seen diagrams like the one above, commonly called a supply and demand diagram or supply and demand curves.

The horizontal axis (Q) is Quantity supplied of a product. Q2 is a larger quantity (greater supply) than Q1. The vertical axis (P) is Price to purchase the product. P2 is a larger price than P1.

The blue line labeled S is a supply curve for our product. As with most supply curves, it increases monotonically and tells us that, as the price P rises, the quantity Q of the product supplied also rises. This makes intuitive sense: if someone will pay a lot more for a hamburger, more people go into business selling hamburgers and the supply increases.

The red line labeled D1 is a demand curve for our product. As with most demand curves, it decreases monotonically and tells us that, as the price P falls, the quantity Q of the product demanded rises. This also makes intuitive sense: if the price of hamburgers drops, more people buy them.

These are typical supply and demand curves. There are others. These are representative supply and demand curves, they do not represent any specific product and market. It is possible (given the right sort of data) to generate actual supply and demand curves for actual products.

The point where S crosses D1 is a market equilibrium, where the supply of and demand for our product are equal. At this point, the market price is P1 and the quantity supplied is Q1. Equilibrium indicates that the price and supply will stay there once they are there. If the price is below the equilibrium, less of the product will be supplied (a shortage) and the price will be bid up. The higher price will encourage entry of other suppliers (or current suppliers will increase production if possible), the quantity supplied will increase and the price will drop toward the equilibrium.

The red curve labeled D2 is an alternate demand curve. Suppose that our product is made available to a new market: at any given price, more people want to buy our product, and the demand curve is shifted right, representing an increase in demand. With this increase in demand comes a new equilibrium, where D2 crosses S. Notice that both the price and quantity produced have increased at this new equilibrium: price from P1 to P2 and quantity from Q1 to Q2.


Markets
"Free markets" are amazing things. Left to themselves, they establish price and production amounts magically, without human intervention. Or do they?

"Free" market sounds like something that is unfettered, unconstrained, unregulated, and well, unreal. Markets are unable to operate without certain preconditions: good governance, stable currencies, security, confidence, etc. Without security and stability, markets fail. Without contract enforcement mechanisms, markets fail. Without producer and consumer confidence, markets fail.

Free marketeers often complain about government regulation. Economists (and remember, there's a reason why economics is called "the dismal science") will use supply and demand curves to show you that almost any government intervention (taxation, price supports or caps, etc.) distorts the free market and generates inefficiencies. And according to the theory, they are correct. However, honest economists will also admit that there are good reasons for governments to regulate markets (pdf), reasons which may go beyond economics.

Market Failures
One of the biggest reasons for government to regulate markets is "market failure". We've just seen an enormous one in the US, the so-called "subprime meltdown". The Long-Term Capital Management fiasco of the late 1990s also comes to mind.

Market failures include things like:

• Monopoly: where a producer has market power
• Monopsony: where a consumer has market power
• Externalities: where a producer or consumer doesn't pay the "real" cost of a good
• Public Goods: where a producer can't be properly compensated for the real benefit of a good
• Asymmetric Information: where one side of a transaction lacks relevant information

McCain's Gas Tax Holiday Proposal

John McCain wants to suspend federal gasoline taxes for the three months of the summer holiday. Specifically:

McCain urged Congress to institute a "gas-tax holiday" by suspending the 18.4 cent federal gas tax and 24.4 cent diesel tax from Memorial Day to Labor Day. By some estimates, the government would lose about $10 billion in revenue. He also renewed his call for the United States to stop adding to the Strategic Petroleum Reserve and thus lessen to some extent the worldwide demand for oil.
Combined, he said, the two proposals would reduce gas prices, which would have a trickle-down effect, and "help to spread relief across the American economy."

What would such a "gas-tax holiday" actually do, economically, to supply and demand? Since economists aren't physicists, it's impossible to say for sure, but here are a couple of the more believable scenarios:

• Assuming we are currently at a market equilibrium (a questionable assumption, considering the constant change in gas prices), reducing the price of a gallon of gas by 18.4 cents to the consumer would increase demand for gas. Increased demand should increase supply, but the summertime supply of gasoline in the US is relatively fixed, so the supply cannot increase. As a result, the price will resume the starting equilibrium -- and the total value of the tax reduction will accrue to the oil companies.
  
• The tax reduction will be split between the producers and the consumers, as apparently happened in Illinois in 2000, when gas hit $2/gallon for the first time. In the case of a real reduction in price to consumers, demand for gas will rise, raising the price of gasoline, but not as much as in the first scenario. However, gasoline usage will also rise, increasing the US carbon footprint.
  

Realistically, the gas-tax holiday will have little effect upon the average American. The price of gas might go down, but if it does, the amount of gasoline used will go up, pushing prices back up and increasing the flow of carbon into the atmosphere.

Sounds like a losing proposition to me, on the merits.

But it does appear to be pretty good political theatre.

NOTE: Nothing in this post should be construed as an endorsement of any Democratic candidate for president. It is an article with facts and opinions about politics. I have not made up my mind, and GNB is not endorsing any candidate prior to there being a clear nominee.

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Tax Day

Tax filing is due by midnight tonight.
(In almost all cases.)

If you're not filing your taxes today, file an automatic extension.

The tax burden in the United States is one of the lowest of any first world nation.

PAY YOUR TAXES.

The "rebate" you are getting -- the so-called economic stimulus package -- is coming off of your next year's (2008's) tax refund. Seriously. It is not a gift, unless you are so poor you don't normally pay taxes. It is an advance.

Thank you, Bush Administration. Yes, they are screwing you over yet again, on their way out the door. Why are you even slightly surprised?

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“It's Stupid's Economy”

It Burns. The Stupid And God Knows, The Money.

For the first six-and-a-half years of the delusional Bush presidency, in the face of a sea of blunders—The War in Iraq, Katrina/FEMA, The destruction of confidence in the Justice Department, to name but a few—the one thing he was able to point a poop aroma-ed finger at with a modicum of feel good-ism was “the economy”.

Now, saying the economy was “doing great” was always a dervish-necessary job. Regular folks' financial states have long been a red-headed stepchild to Wall Street performance numbers. They've also been eminently taffy-like when projected against often subjective pulse-taking through prisms like consumer confidence levels and the like. That said, there were just enough numericals out there to spout that could gloss over the pains that “Johnny Lunchpail” and “Susie Run-in-her-stocking” were experiencing while trying to make ends meet from month to month.

Bush himself was saying that the economy was “robust” as recently as five months ago, when it was evident to anyone with eyes and a wallet (which when opened, moths would fly from sickly) that our collective money situation was not “funny”.

(AFP) — US President George W. Bush predicted in an interview Tuesday that the battered US dollar will get stronger because the US economy is robust.

“If people would look at the strength of our economy, they'd realize why, you know, I believe that the dollar will be stronger,” Bush told the Fox Business Network.

Yes, Mr, President. If, if, if. And if your mother had wheels? Ma-a-a-a-a-a-a-nnnnnn, she'd be a bitchin' locomotive, too.

I'm no economic expert. I'm just a person like everyone not in the “Pioneer” rolodex who has felt the pinch for the last year or so, unlike those shielded from the reality of the price of a quart of milk's having gone up. This president would fail that test worse than his spiral-eyed father did when confronted with a question on it during his fateful re-election run. Ask Dubya the price of a “quart” and he'd probably say “Who cares? It's worth whatever you pay 'em when they hand you the presidency! (Insert all-too-familiar, wheedling “Muttley”-esque laugh here)

It's the little things you see, and have to live with—that hammer our country's financial health and then send it swirling turd-like down the “Trainspotting” toilet of insolvency. (NSFW)

There are the homes in the neighborhood that I've seen two families moving out of under cover of night, only to see a few days later a foreclosure sticker plastered on the front door. Those are the ones i saw. It doesn't include the houses I've simply seen the stickers on after being vacated.

There are the people like the man on my block whose SUV has sat in his driveway for the last five months or so. When I saw him this past Saturday as I walked to the park, I asked him if his car was alright. Did it have a problem? I knew a mechanic who was trustworthy and decently priced. But he demurred. “Gas costs too much”, he said. “What was I gonna do, pay for gas or oil heat this winter? I don't sleep in the car.”

Which made sense to me.

“You lookin' to buy? It's only got 16,000 miles on it.”

No thanks, br'uh.

That uptick in the price of gas. No...“uptick” isn't the right word. It's a patriotic, bald eagle-like soar into the clouds. The lowest-priced gas in the neighborhood is at the Hess station five blocks away, at $3.43 per gallon for Regular. $3.65 for Premium. The jitney cars who run their cabs up and down the main drag here have upped their prices for the run to the subway station. A Town Car packed with five passengers was $1.50 per rider up until the end of January. Had been since I moved here in 2001.

It's $2.00 now. The increase was pegged to the rising price of gasoline. That gas price rise is something that registers not a whit in the hereditary hand-down of real-world economic stupid that our vapor-like president shares with his father.

During a White House news conference Thursday morning, President Bush said the country is not headed into a recession, noting that the government has acted "robustly." His view of the economy, however, is far more chipper than that of many economists, who fear the country is entering a recession (or may even already be in one. In fact, when asked by a reporter about what advice he'd given an average American, who is faced by the prospect of $4 gallon gas, the President responded: "That's interesting. I hadn't heard that. ... I know it's high now."

The gas prices effect everything. There are signs in local eateries citing rising costs for meals due to pass-alongs from wholesalers and delivery outfits. Even the local White Castle. An argument there late one night arose from a customer's being angry over having come in late with exact change for a combo she'd evidently been getting with regularity. She would be short this night—by about thirty cents. After a heated argument with the countergirl, said countergirl said “All our stuff comes in on a trailer. Gas went up. I'm sorry...there's nothing we could do”. Another patron generously handed the woman the thirty-cent difference, but for her it was about “principle”.

“And when gas comes down, are your prices gonna come down?”, she asked angrily.

The man in front of me and behind the angry woman harshly laughed out a snappy response.

“The fuck makes you think it's gonna come down?”

“Ba-doomp-boomp. Psssssh.”

It's real. As real as a person's money not being right when the price of a 2 1/2 inch burger goes from 54¢ to 59¢. Or a jitney ride the price goes up on. The car you can't afford to drive. A mortgage you skip lunches to pay. It's not some hazy, head game people are being mass hypnotized into believing—a desperate lie uttered ironically by one of the chief practitioners of the talking point / mass hypnosis game.

How did that old toy commercial go? “Some kids go, whooooo-woop! When they sit and spin...” Take it away Ms. Matalin.

Today on NBC’s Meet the Press, host Tim Russert pointed to a new CNBC poll showing that 83 percent of the American public rates the U.S. economy as only fair/poor. Right-wing strategist Mary Matalin tried to brush off that number, stating that most Americans are nevertheless happy about their personal finances.

When liberal strategist Bob Shrum pointed out that her statement is false, Matalin switched to the well-worn tactic of blaming the media for the problem:

MATALIN: Well, there’s an element of cognitive dissonance there, because if you ask them how their own personal finances are going, those numbers completely switch. Yes — he’s looking around. Those numbers are completely true. They absolutely switch on their own personal finances.

SHRUM: I think most people are getting very insecure about their personal finances.

MATALIN: That’s because they’re berated with these numbers.

As Johnny Carson would have said, “Wrong, rusty machete face!”

The numbers...are real: Painfully, brutally real. Via the Times today...

The consumer spending slump and tightening credit markets are unleashing a widening wave of bankruptcies in American retailing, prompting thousands of store closings that are expected to remake suburban malls and downtown shopping districts across the country.

Since last fall, eight mostly midsize chains — as diverse as the furniture store Levitz and the electronics seller Sharper Image — have filed for bankruptcy protection as they staggered under mounting debt and declining sales.

But the troubles are quickly spreading to bigger national companies, like Linens ‘n Things, the bedding and furniture retailer with 500 stores in 47 states. It may file for bankruptcy as early as this week, according to people briefed on the matter.

Even retailers that can avoid bankruptcy are shutting down stores to preserve cash through what could be a long economic downturn. Over the next year, Foot Locker said it would close 140 stores, Ann Taylor will start to shutter 117, and the jeweler Zales will close 100.

The surging cost of necessities has led to a national belt-tightening among consumers. Figures released on Monday showed that spending on food and gasoline is crowding out other purchases, leaving people with less to spend on furniture, clothing and electronics. Consequently, chains specializing in those goods are proving vulnerable.

The numbers are reality. The mortgage collapse, called by Atrios for many months before it would be acknowledged by the press and government. “Big Shitpile” he dubbed it. Could there be a more apt phrase for it? Companies we've come to see as part of the daily fabric of things shimmer and practically disappear like something transporting away on the Starship Enterprise. Bear Stearns. Nationwide. Beamed into insolvency.

Jobs? Matalin brooch-ugly. The country needs to rack up approximately 200,000 per month just to keep up with attrition. We went through months on end of numbers coming in between 50 and 120 thousand—some months under 20,000 created, equalling a net loss—then a few break-even months as the news from big name companies grew rank like a mystery dead mouse behind a wall. “Where's that smell coming from?”

And then, the first three months of 2008. The mystery death-stink concentrates in one spot.

January 2008: A loss of 76,000 jobs.

February 2008: A loss of another 76,000 jobs.

March 2008: A loss of 80,000 jobs.

NET LOSS INCLUDING FINAL REVISIONS OF THE JANUARY AND FEBRUARY NUMBERS:
232,000.

Real. And painful. As late as the end of 2007 and this president (yes, I lower-case this man's shitmire of a tenure intentionally) was still hanging on to the foggy-brained lie that things were good economically. But what do you expect from a man who strums his way through a great American city's drowning, then upon looking at bloated bodies floating like bars of liquefying soap in the floodwaters, only to proclaim a “Heckuva job” was being done by those doddering incompetents in place to fix it. And as recently as forty days ago, this increasingly irrelevant “man” proudly proclaimed that we were not entering a recession...but rather, “a slowdown”

There's this guy who works for you Mr. Bush. His title is that of Federal Reserve Chief. Drop him a line sometime and get your Pollyanna-on-Wild-Turkey ass acquainted.

WASHINGTON - Ben Bernanke knows a recession when he sees one, and he’s starting to sound like that’s just what he expects to see.

A student of the Great Depression, the Federal Reserve chairman once served on the very panel of experts that unofficially determines when recessions begin and end — a finding that usually comes well after the fact.

Now for the first time, Bernanke as Fed chief acknowledged on Wednesday that the U.S. could reel into recession from the powerful punches of housing, credit and financial crises.

And so it sits. Reeking. The one thing...The one God-awful thing this president could halfway spin as if not a success, then not a Hindenburgian failure—the economy he trumpeted—goes up in a ball of flames. Thanks to his negligence. Shortsighted-ness. Tax-cut handouts to his rich friends and a dollar-gobbling sinkhole of a war. Yes...I got that same insulting little piece of...mail you got last month.

“Stimulus package”. Woo-Goddamn-hoo. The mumble-mouthed sorry after the two-by-four to the head and the steel-toed kick 'tween the posts.

The legacy is complete. Let the mortgage-burning party begin, ironically as the companies burn along with it. You own it in total Mr. Bush. This white elephant, money-pit of an economy. On your watch. Resulting from your over-action and simultaneous in-action. Enron, and HealthSouth, and Tyco, and all manner of corporate-kleptocracy fostered and profited from by your friends who gigglingly fucked hundreds of thousands—perhaps millions of people out of their money as you “hooked 'em up”. You own that. No “shell” corporation. You. Di-rectly.

Yours, oh now-reigning king of “the ownership society” you so crowed about.

What do they say? “Membership...has its privileges”?

Enjoy the “perks”.

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What Condition Our Condition Is In

They call Economics "the dismal science". If you've ever taken a basic econ class, you'll know why. The assumptions upon which economics are built are known to be faulty (people do not act "rationally" as defined by economists), the conclusions are often depressing, many of the important questions are left unasked, and the ability of economists to agree on how the world works (or an economy works) is extremely limited. These problems notwithstanding, we spend an appalling amount of time thinking about the economy, worrying about the economy, trying to effect the economy, trying to predict the economy, and generally obsessed with the economy.

So let's take a look at a few current "conditions"

Pricing the War

Joseph Stiglitz and Linda Bilmes suggest that the Iraq War is going to cost $3 trillion or even more. You can see the current direct costs of the war for the US, states, towns, or congressional districts at the National Priorities Project.

The Economist weighs in, largely with quotes from others, so I won't quote it. But check out this blog entry by Robert Reich.

According to the St. Petersburg Times, "Barack Obama says the war costs each household about $100 per month." Here's the math:

• Amount requested by the Bush Administration for 2008 War Funding: $196,400,000,000 (that's $196.4 billion)
• Number of households in the US: 126,316,181 (that's 126 million)
• Annual Cost per Household: $196,400,000,000 / 126,316,181 = $1554.83
• Monthly Cost per Household: $1554.83 / 12 = $129.57

That $1550 annual cost is the whole War on Terror, not just the Iraq War. What could you do with $1550 in your household? Of course, it's not evenly distributed. People who pay more taxes bear more of the direct cost.

But we all bear the secondary costs, like current and future interest expense for the money we're borrowing to pursue the war. We also all bear the opportunity cost. According to the National Priorities Project site, taxpayers in the state of Washington (my nearest US neighbor) will spend $1.9 billion for Iraq War funding in FY 2008. That money could have bought:

• health care for 300,000 people
• health care for 767,000 children
• Head Start for 214,000 children
• 35,000 public safety officers
• 30,000 music & art teachers
• 31,000 elementary school teachers
• 317,000 scholarships to university
• 179 elementary schools
• 25,000 port inspectors for shipping containers
• 10,000 affordable housing units

In FY 2009, projected spending for the taxpayers of Washington state will be $3.2 billion (168% of the FY 2008 spending.

According to Zachary Coile of the Chronicle:

In historical perspective, the Iraq conflict is already one of the most expensive conflicts in U.S. history.

The price tag in Iraq now is more than double the cost of the Korean War and a third more expensive than the Vietnam War, which lasted 12 years. Stiglitz and Bilmes calculate that it will be at least 10 times as costly as the 1991 Gulf War and twice the cost of World War I.

Only World War II was more expensive. That four-year war - in which 16 million U.S. troops were deployed on two fronts, fighting against Germany and Japan - cost about $5 trillion in inflation-adjusted dollars.

In early 2003, White House Office of Management and Budget Director Mitch Daniels said a war with Iraq could cost $50 billion to $60 billion. Even Congressional Democrats suggested it would cost only $93 billion (although they specifically excluded peacekeeping costs).

The Economist article linked above is quick to note that "suggestions that the war is responsible for current economic malaise are misguided--to the contrary, given under-utilised capacity, the war is probably helping to keep the economy moving". Their contention is that we're not using our full production capacity because of current problems with the dollar and demand and the credit crunch and so keeping the machines operating by having a war is reducing our economic problems. IF that is correct, and I doubt it is, surely we could do at least as well by spending that money here in the US, perhaps fixing some of the crumbling infrastructure in which Republicans don't believe we should invest money.

Home Foreclosures

California, Nevada, Colorado, and Florida are experiencing foreclosure rates of more than 1 in 150. If you click through to the zoomable map, you can examine your region, or downtown Tampa, or wherever. Some neighborhoods are getting very hard hit. Absolutely great map.

During the peak of the Great Depression (1932-33), foreclosure rates reached roughly 10% (pdf). That's 10% of all mortgages, not 10% of all houses. Our current rate is about 1% of all households. About 1.3 million homes entered foreclosure in 2007, with 1 to 2 million households predicted to face foreclosure in the next 18 months or so. The US home-loan market was about $3 trillion in 2006. About 1 million new single family homes were sold in 2006. The average house sold in 2006 cost $305,000. If all houses were fully financed (not likely), $3 trillion / $300,000 = 10,000,000 houses sold in 2006. If 1.3 million homes entered foreclosure in 2007, that's equal to 13% of the houses sold in 2006. If half of all home purchase costs were financed, then $3 trillion / $150,000 = 20,000,000 houses sold in 2006 and 1.3 million foreclosures represents about 6.5% of the houses sold in 2006. Without better data I can't get more precise, but we appear to be below the 10% foreclosure rates of the Great Depression, but within an order of magnitude and possibly in the vicinity of half of those rates. Too close for my comfort, certainly.

Real Wages

Real wages are down for this generation of adult Americans. Taking men in their 30s as a generational proxy, real wages are 12% less than in 1974. According to the EMP American Dream Report, released in May 2007 (WSJ article quoted here, gated version here):

Beginning with a comparison of men ages 30-39 in 1994 with their fathers' generation, men ages 30-39 in 1964, we see a small, but fairly insignificant, amount of intergenerational progress...Adjusting for inflation, median income increased by less than $2000 between 1964 and 1994, from about $31,000 to under $33,000 -- a 5 percent increase (0.2 percent per year) during this thirty-year period.

The story changes for a younger cohort. Those in their thirties in 2004 had a median income of about $35,000 a year. Men in their fathers’ cohort, those who are now in their sixties, had a median income of about $40,000 when they were the same age in 1974. Indeed, there has been no progress at all for the youngest generation. As a group, they have on average 12 percent less income than their fathers’ generation at the same age.

Bottom line, our condition ain't everything it should be. It's pretty clear that the experiment in relatively unbridled capitalism over the last 30 years or so has failed many Americans. It's time for change.

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The Great Depression (v2.0) Starts Now

Brown Bear. photo San Diego Zoo. Click for LARGE.

Neo-Cons Cause Current Exploding Depression

Let me start, by saying clearly that I am speaking for myself. This is my assessment. You should make your own assessment and act as you see fit. I am not a lawyer, stockbroker, or financial adviser. What actions you take, are your own, including any tax consequences. I am not responsible for what you do in any way.


The next year will continue the U.S. slide into the worst depression since the Great Depression of 1929.

The Neo-Cons caused this.

Bush, Cheney, Karl Rove's political boys, Rumsfeld's war in Iraq, and the Administration's failure to adequately regulate the markets let Wall Street run wild, bubbles inflate, and the greatest wealth transfer in history happen. Money flew from people like you and I into the pockets of the richest 1% in the world.

Now the real-estate bubble, built on lies (the homes and land were never worth what they were said to be worth; had the Bush/Cheney regulators done the job they are sworn to do, this could not have happened) is collapsing, indeed, imploding and the financial markets world-wide are imploding with the collapsing real-estate bubble.

At the bottom of the real-estate markets are the stock-markets. After the stock-markets are the banks. After the banks is the United States Government and the Federal Reserve Bank, determined not to let the banks fail, determined to not let the stock-markets fail. If for no other reason than to --literally -- prevent armed revolution in the streets and neo-cons hanging from lamp-posts, which would no doubt happen were the banks and the stock-markets to fail. Even Bush/Cheney, living in bubbles, know that.

Which is why Chairman Ben Bernanke has stepped in and saved Bear Stearns. That is, allowed someone else to purchase its assets at a fire sale, while guarantying its liabilities through the government.

What matters to us is that the Great Depression I have been speaking of in these pages since the start of Group News Blog, has arrived.

The Agonist

by Numerian

Bear Stearns collapsed because it was as highly leveraged as any hedge fund – roughly $30 in assets for every $1 of capital. It only takes a 5% loss on the assets to wipe out all of the capital of the firm. Bear Stearns succumbed because its assets were especially prone to losses since they consisted of mortgage related securities. But losses are now occurring on much safer assets, and since all Wall Street firms have leverage to the degree Bear Stearns did, all of them are exposed to failure.

There are hundreds of companies in the same position. In the past 15 years the credit worthiness of corporate America has deteriorated to the point that 70% of all corporate bonds are now junk debt, meaning these companies have excessive amounts of debt. Less than 10 companies in the U.S. carry a Aaa rating. As those companies with excessive debt are unable to roll over or replace their debt, and as the economy slows, they are going to have a hard time surviving.

This problem is already going global, hitting the U.K., Australia, and other countries that experienced housing booms. Ultimately the credit implosion will fell China and India, two countries that have built their economic engines on highly shaky debt pyramids. Already the stock market in China has begun a collapse that looks remarkably similar to the fall of the NASDAQ in 2000.

Deleveraging is a term economists are using for this process of shedding assets to avoid more serious market losses eroding one’s capital. As hedge funds, banks, corporations, and individuals increasingly rush to deleverage, the losses are exacerbated, and many just won’t make it. This is how systemic risk is bred and how it destroys credit creation. Without credit, a modern economy starves.

Ben Bernanke certainly knows this and has put Bear Stearns on life support in order to stop the contagion from spreading. Bear Stearns – which isn’t even a commercial bank and is not under the Fed’s jurisdiction – is too big to fail in the view of the Fed. It has too many relationships with all the rest of the market to be allowed to go into receivership.

But is this a losing battle? History certainly suggests that systemic crises have a way of rumbling on until all the excess debt is wrung from the system, resulting in enormous economic pain. One of the characteristics of a systemic crisis is the loss of confidence in the financial system, and we saw this on display in the Bear Stearns collapse. Early in the week executives at the bank were saying their liquidity situation was sound despite all the market rumors. Suddenly on Friday it was announced by these same executives that their liquidity situation had deteriorated markedly “within the past 24 hours.”

Perhaps this is true – executives face severe personal penalties for lying publicly about their company’s situation. But the market was understandably skeptical, which means that the next bank which says publicly it is highly liquid will have to overcome widespread suspicion and doubt. Already rumors are cropping up about other Wall Street firms and large global commercial banks. This is the real battle Bernanke is facing – the confidence battle. All banks exist only to the extent the public is confident the banks can meet their obligations – this is the Achilles heel of leverage. Once confidence is lost, many banks can fail not because their balance sheets are riddled with bad loans, but because of a bank run.

Bear Stearns failed because it hadn’t the resources to survive a bank run. The odds are reasonably high that it will be joined by other Wall Street banks, whatever Ben Bernanke does. He can keep these firms on life support to protect the market, but in doing so he is transferring the risk and the losses to the federal government, thereby nationalizing these banks. It is not difficult to imagine that when all the excess leverage and all the bad debts are eliminated from the system, the federal government will own most of the Wall Street banks, many large commercial banks, and also Fannie Mae and Freddie Mac. As this becomes evident to the markets, the dollar will not survive on the international exchanges, and U.S. Treasury rates for long term debt such as bonds will rise sharply. The U.S. will almost certainly lose its Aaa rating for its debt.

Which brings us back to the question of a Depression. As the banking system is nationalized, and credit dries up, growth in the economy will cease. Already the U.S. is in a recession, but the decline in GDP is about to accelerate significantly to Depression levels of 10% or higher. Unemployment will soar. The true unemployment rate in the economy, counting all the workers who want jobs but are currently being left out of the statistics because they haven’t sought work for awhile, is probably around 8% to 9%. This rate will easily double. The asset deflation that is now ravaging home values will spread not only to other physical assets, but to services and commodities. Nothing will be safe from the pressure to reduce prices and costs. As this process unfolds, the stock market will finally come to terms with the economic reality, and a stock market crash will ensue. This Depression could last somewhat over a year, or be much more prolonged if the Fed keeps too many firms on life support. The Japanese did that in the 1990s during their bout with deflation, and it took at least ten years before the economy started to grow again.

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The Bonddad Blog

Bear Stearns had a stock-market value of about $3.5 billion as of Friday -- and was worth $20 billion in January 2007. But the crisis of confidence that swept the firm and fueled a customer exodus in recent days left Bear Stearns with a horrible choice: sell the firm -- at any price -- to a big bank willing to assume its trading obligations or file for bankruptcy.

"At the end of the day, what Bear Stearns was looking at was either taking $2 a share or going bust," said one person involved in the negotiations. "Those were the only options."

I was listening to Bloomberg this morning and someone commented that Bernanke is a student of the great depression and that knowledge was serving him well. I agree with that sentiment. I have made a great deal of fun at Bernanke's expense over the past few months. Frankly, I feel a great deal of empathy for him because he is between a rock and hard place.

However, I understand his reasoning for taking these moves. Simply put, Bernanke is trying to prevent a financial sector meltdown.

The central problem the Fed faces right now is their tools are not designed for the problems we face. What we have right now is a collateral and counter-party crisis. That means two things.

1.) The collateral crisis means that collateral on bank's balance sheets isn't performing as well as advertised. Basically, any bond backed by mortgages is in trouble because homeowners aren't paying their mortgages. That means banks who hold mortgages aren't getting the payments they should be getting. As a result, banks balance sheets -- which serve as the basis for their ability to extend credit -- are in serious trouble. That means...

2.) Anyone who might take out a loan might not pay it back. This is called counter-party risk. It simply means that everyone is at risk of defaulting on a loan right now. That means loans aren't getting made. In an economy like the US economy where credit is a prerequisite to everything, that is the kiss of death.

The Fed can provide plenty of money. Over the last 9 months they have flooded the market with cash. But that does not good if people aren't willing to use it. And right now, no one wants to loan anybody any money. That's the central problem -- and so long as that exists there will be a mis-match between the Fed's policy tools and the market's problems.

The Agonist

by Stirling Newberry

The Neo-Conservative Plutocracy

For years economists in the US thought that US policy makers had learned from Japan and we would not repeat the results of their "Bright Depression." However, this view was excessively optimistic, and rooted in a time when there was a bipartisan liberal consensus in Washington that the good of the public came first. When the right wing came to believe that it could have a military machine without mass mobilization, but instead with a high tech smaller force, it also did not see the need to keep most Americans happy. Instead, their new vision was of a small, permanent and highly mobilized base, which included a core of military-industrial contracting, supported by a security apparatus and getting votes from a combination of resource extraction, disorganized labor, the wealthy, franchise owners, and theocrats. Their idea was expressed in the Project for A New American Century, and in Karl Rove's political apparatus. People who were a danger to this thesis were removed by whatever means necessary. While being a heavily socialist enterprise, in the right wing sense of being a national socialism, it relied on a propaganda of libertarianism. This propaganda relied on creating the meme of the late 19th century as the legendary golden age, where laissez-faire economics combined with piety, plutocracy, and military empire, in that times case the conquest of the West to create a rising America. In truth America during the late 19th century was far from its peak, and much of the gleaming apparatus of capitalism came much later. People were made to, by means of framing, impose the gleaming rise of the City skyline, with a time when there was no building taller than 12 stories in the US other than a few church spires and the Brooklyn Bridge.

This neo-conservative plutocracy was intended to take the place of the Liberal Democracy. It had a war without end as its mandate, a Christianist ethnocentrism as its meaning to create context, and a monetary system which would, after the invasion of the Middle East, be based on a direct imperial control over oil. The oil would be sent back to the US, indirectly in the sense that it would be sold to other nations, thus freeing up supplies closer to the US for our consumption, along with the enormous free cash flow that the oil business creates. Iraq was to be annex of Texas.

The Adventures of Captain Carnage

In 2001, as soon as he was made the economic advisor to Bush, I stated repeatedly that Ben Bernanke would be made the Federal Reserve Chairman after Greenspan, and that he would be a disaster. This was based on a reading of his academic work, which was, essentially, a series of attempts to prove that such a neo-conservative system could avoid the collapse that lead to the Great Depression. No Great Depression, no FDR. No FDR, no situation where the rich would have to accept regulation and restriction in return for bailing out. In essence the first problem is the "Great Contraction." The United States and other nations, to attempt to re-impose the Gold Standard after allowing it to lapse for the First World War, had to at a certain point accept prices at the new levels, or had to dramatically reduce the money supply. They chose the later, creating a massive contraction of the money supply. This was done in the face of a downturn, because it was feared that a downturn would lead to easy money, and this to hyper-inflation of the kind witnessed in Germany, or very high inflation, as seen after the First World War. For them, coming after a two generation period where deflation was the norm during the classical gold standard and the consolidation of the first Conservative Era, globally, inflation was a horror.

Bernanke and others, argued that the Great Depression was not in any way a structural event, but strictly a macroeconomic monetary event. That strictly macroëconomic policy measures could have been used to effect the bailout. There were two major intellectual problems. One of them is the point where monetary policy is "pushing on a string." Or what Bernanke called "the zero point". The "bold" steps turn out to be the same sort of maneuvers used in the first decade of this century: finding deep pockets and hiding the losses.

Bernanke's failures begin as economic advisor to the President and continue in his time on the Federal Reserve. The culminate with his failure to either deal with the liquidity crisis, or to face inflation head on. By allowing the housing bubble, and the financial bubble built on it, to explode he set up the very circumstances. By dragging his feet on raising interest rates, and then by ignoring the expanding monetary crisis, Bernanke has set the stage where neither he, nor anyone else, is in a position to act. With a President who is content to give imaginary orders to imaginary armies, there is no center of power that can move. It also indicates that the opposition party has made a series of gross miscalculations about the situation, believing the rhetoric that things were going well, and that they were getting the best deal they could. They were facing people who were bluffing all the way, and are now realizing that there is no rush to give way on anything.

The "slow" rate raising campaign was a double disaster, it neither headed off inflation nor did it keep credit easy enough. This is because the problem was not the level of interest rates, per se, but what we were spending the money on. As many, many, many commentators, many, many times have pointed out, the US was consuming too much, and exporting too little. The Neo-Conservative happy monsters said that this could go on for ever, giving other people our paper for their oil and goods.

While it is possible that we will emerge from this functional, the likelihood is that we are going to see a continued fall for the next 9 months, as the crisis deepens, a die hard illegitimate executive burns his last brands on our skin, and a feckless opposition folds its cards over and over and over again, allowing ordinary people to bear the brunt of the continued contraction.

We are riding this bucket down a ways farther, because there is nothing to right the equilibrium, and without the stimulus from war spending, on which we are so dependent, there will be no pick up in business activity soon. There will be some increased exports, but not sufficient to take the place of the cratering of housing.

What needs to be done? Regregulation is obvious. Making the Fed serve elected policy makers is a no brainer. Restating numbers to prevent the white washing of bubbles is essential, a public sense of ownership of the financial system as part of the "high ground of the economy" seems essential. Firing Ben Bernanke is a pink do this to day post it note.

But most essentially there needs to be a change in the basis of money, simply because the obvious stability of real estate assets in the United States will no longer be enough.

There's more...

We've told you before, the feces are hitting the oscillating rotator. Stock up on food, water (a good water filter with extra filters), medicines, fuel, essential clothing. At least a six-month supply of everything, and a year's supply would be smart.

If your home is underwater, sell now. A year from now will be too late. Slash your debt to the bone.

I expect in one year, including everyone who has given up looking for work, one in six to one in five Americans will be out of work.

If you can legitimately and legally leave the U.S. for the next five years, move.

The Great Depression of our life, is here.

There's more...

Americans say Save Money, Get Out of Iraq

68%

of Americans said a pullout would help fix the country’s economic problems “a great deal,” or that "it would help at least somewhat". -- via ThinkProgress.

Americans, not quite as dumb as John McCain thinks they are.

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More bad news in the economy as Yahoo cuts 7%

IN more bad news for the USA economy...

Yahoo Set to Cut 1,000 Jobs
Morning Edition, January 30, 2008 · A day after reporting a 23 percent drop in quarterly profits, Yahoo says it will cut about 1,000 jobs as early as next month. That's about 7 percent of the Internet portal's work,force. The aim is to cut costs and focus on the company's most important business: online advertising.

and more in detail at Portfolio.com (where the ominous photo above was posted)

It is time to start talking about the "R" word and what comes next. It is going to be a long, hard year and it looks like we are heading back into a period of "It's the Economy, Stupid."

There's more...

"We Were the Trend"

...a trend was a trend only because people thought it was, and in thinking so, they made it so. Winston had regarded benchmark stocks only as predictors of what the people in the market would do, and for him trends were always psychological, predictors of how people would follow an artificial model, not the performance of the model itself...

And in selling off Citibank, Columbus had activated a little alarm in its own computer-trading system....

Winston patted him on the shoulder. "Save that for later, Mark. I can see it was a good play."

"Anyway, we were ahead of the trends all the way. Yeah, we got a little hurt when the calls came in and we had to dump a lot of solid things, but that happened to everybody—"

"You don't see it, do you?"

"See what, George?"

"We were the trend."
-- Tom Clancy, Debt of Honor, 1994.

In Clancy's Debt of Honor, a computer attack against US stock exchanges is triggered by an unwitting trading company, the fictitious Columbus Group. Columbus was formerly headed by supertrader and all-around good guy George Winston, who is the first to realize that not only was the computer wiping out of all trade data an active attack instead of a bug, but that a major downturn on the exchange was deliberately engineered using his company. That makes him mad.

Clancy has at least one prophetic disaster to his credit already, and last week it looked like he may have gotten another as Société Générale (aka SocGen), the second largest French bank '...incurred a $7.2 billion trade loss from an "exceptional fraud" perpetrated by a rogue trader.' SocGen's discovery of the fraud led them to spend Monday (21 Jan) "...unwinding an absolutely massive long position in equity futures".

Starting Monday (21 Jan) morning, Asian markets crashed. European markets followed. How bad was it? Pretty bad. Some described it as "the worst financial crisis since World War II", others as "the worst post-war recession" or "the most serious recession since World War II". Bank of America's Q4 profit was down 95% and Wachovia lost 98% of its profits. By last Thursday (24 Jan), gloom and doom was easy to find online.

What happened?

First, let me dispense with the idea that we can definitely determine causation for the recent market turmoil. We can't. Nobody can. Worldwide financial markets are just too complex a system for us to fully understand. Even if micro- and macro- economics were hard sciences with singular theories about human and market behaviour, the magnitude of the system and its sensitivity to initial conditions means full predictive or explanatory power eludes us, and probably always will. There will be many opinions, and there will be one or more "conventional wisdoms" about what may be known as The Black January of 2008. One conventional wisdom has already been pretty well established: last weeks mess was at least partly a result of US subprime mortgages. Other conventional wisdoms are competing for survival: it was Bush's lame stimulus package, or it was a "rogue trader".

So, having told you that we will never know exactly what happened, what happened? :-)

Rogue Trader Hypothesis
Jerome Kerviel, a futures trader with SocGen, "breached five levels of computer security controls" to make unauthorized trades in European market futures. These trades were unauthorized in that they were over his trading limits and not approved by higher-ups. The unauthorized trades were discovered on or about Saturday the 19th and the company prepared to close them (that is, pay them off now instead of waiting for them to come due, at which point they might be too large for the bank to pay off).

Unfortunately, on Friday the 18th, Christian Noyer, governor of the Bank of France, gave an interview to IHT. In that interview, Noyer said "...he has been assessing the balance sheets of banks like Societe Generale and BNP Paribas before they reveal their 2007 results...". That sentence has been removed from the IHT website, but is archived at Paul Kedrosky's blog. I can't find any suggestion that Noyer suspected these banks specifically, and current supposition indicates that Noyer selected those banks simply as two large French banks, not because he knew anything specific about SocGen's problem.

But "The wicked flee when no man pursueth", says Proverbs 28:1 (King James Bible), and the supposition goes further that SocGen officials feared that Noyer knew something about their exposure in European futures, so on Monday the 21st they dumped "the overwhelming proportion of their huge long position in one day".

And that set off the markets. SocGen was already considered vulnerable the previous week because of US subprime exposure, so rumour and action came together to create reality

It all comes together into a very pleasant story with a villain and even probably some heroes. But is it right? We're missing one critical connection: how did the Australian and Asian markets know something was especially wrong at SocGen? And how do we distinguish between what was happening to SocGen on Friday the 18th (when SocGen was down 8%) and the following week?

It's possible that the problems at SocGen leaked. You don't need special technology to assume that someone noticed unusual activity at SocGen's Paris offices:

On Saturday, Kerviel was hauled into the bank’s Paris offices, where he was questioned by Jean-Pierre Mustier, SocGen’s head of investment banking, and confessed to making a series of unauthorised bets on CAC, DAX and the EuroStoxx 50.

Working through Saturday night and Sunday, the disgraced trader helped SocGen staff to uncover his hidden punts.

and made a phone call, sent an email or an IM, or posted an as-yet-undiscovered message somewhere on the Internet. Because:

On Sunday night, while the bankers worked feverishly in Paris, the Australian stock market had already begun a downward spiral, taking it to its biggest one-day fall in 20 years.

Implications
Let us suppose, as a thought experiment, that the "rogue trader" hypothesis is at least largely true. So far was we can tell, Kerviel was not malicious or even venal. He doesn't appear to have squirreled any of the $7 billion away for himself and once he was caught he seems to have come pretty clean. And yet he destroyed billions of dollars of value.

According to the WSJ, Kerviel 'was able to skillfully circumvent controls...because he had worked in the "back office" and had an intimate knowledge of how trades are processed and monitored.' That implies a failure of security in SocGen's systems.

That security failure is the scariest implication. If a knowledgeable insider can disrupt worldwide markets while trying to make money, what could an attacker do with the intent of damaging our networked economy? 9/11 cost New York alone nearly $100 billion, although direct costs may have been as little as about $30 billion. Swiss Re calculated that 9/11 was responsible for $35 billion to $55 billion in insurance payments and another $50 billion of losses on the capital markets, reducing insurance industry equity by $100 billion.

If someone took a hard shot at the networked economy through a collection of malicious Kerviels, we could be looking at economic shocks many times that of 9/11, and scattered all over the world instead of concentrated in America.

There's more...

Stocks Continue Fall; Bonds Rise.

Dow Down 200 Points At Opening
Broader Market Also Declined

Yesterday's Fed rate cute cut of 3/4 points held off the bears for one day, and then the selling resumed.

In Europe, the Central Banks refused to join the Fed in cutting rates, and markets continue to fall.

AP News via MyWay

NEW YORK (AP) - Stocks fell in another rocky opening Wednesday, with investors uneasy about the health of the economy and corporate earnings after disappointing reports from big names like Apple Inc. (AAPL) and Motorola Inc. (MOT) In the first minutes of trading, the Dow Jones industrial average fell 261.10, or 2.18 percent, to 11,710.09.

Broader stock indicators also declined. The Standard & Poor's 500 index fell 28.97, or 2.21 percent, to 1,281.53, and the Nasdaq composite index slid 53.19, or 2.32 percent, to 2,239.08.

Bond prices rose sharply as investors sought the safety of government-backed debt.

Wall Street also fell in tandem with markets in Europe, which pulled back after European Central Bank President Jean-Claude Trichet indicated that the ECB would not follow the Federal Reserve's lead and cut interest rates, according to Dow Jones Newswires. The Fed's decision Tuesday to cut its federal funds rate by 0.75 basis points to 3.5 percent eventually helped calm U.S. markets, but it was already clear that investors had doubts about the potency of the Fed action. Rate cuts typically take months to work their way into the economy.

Bond prices rose sharply, the beneficiary of investors' search for safer places for their moeny. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.32 percent from 3.41 percent late Tuesday. The dollar was mixed against other major currencies.

In afternoon trading in Europe, stocks dropped sharply. Britain's FTSE 100 fell 3.44 percent, Germany's DAX index fell 4.76 percent, and France's CAC-40 fell 4.02 percent.

Reuters

TREASURIES-Bonds rise as stocks fall on recession fears

NEW YORK, Jan 23 (Reuters) - U.S. Treasuries rose on Wednesday, with the benchmark yield briefly touching its lowest since June 2003, as fears of a global slowdown and more write-downs at European banks spurred a flight into bonds from stocks.

Global equity markets resumed their sell-off, adding to the appeal of ultra-safe Treasuries, as the positive jolt from the Federal Reserve's surprisingly bold 75-basis-point rate cut on Tuesday faded. Attention again turned to worries about a U.S. recession and its global repercussions, plus banks' exposure to subprime mortgages, traders said.

"When the Fed cuts 75 basis points, stocks are supposed to go up. That's not happening. There's a lot of dread out there," said T.J. Marta, fixed income strategist at RBC Capital Markets in New York.

The stock market pared its losses because financial shares rose after their initial plunge, in which the Nasdaq .IXIC opened down 2.4 percent into bear market territory.

"Any support stocks show, long-end (yields) will come back off their lows," said Mary Beth Fisher, director of interest rate strategy at UBS Securities in Stamford, Connecticut.

The price on the benchmark 10-year note was up 19/32 at 107-22/32 after an earlier high of 108-1/32. The 10-year yield, which moves inversely with its price, was last at 3.35 percent, down 7 basis points from late Tuesday.

There's more...

I'm fully out of the market, as of the end of trading yesterday.

Everything is liquid, cash, money-market accounts, certificates of deposit. All backed up with the full faith and force of the U.S. Government. Could I get hurt? Yeah. Inflation could hurt. I might move 10-15% to physical gold, but I should have done that two years ago. I knew it then too, when I saw this coming. I just didn't have the cash then to buy gold in any real volume. I still don't, actually.

Here's what I predict. TAKE THIS AT YOUR OWN RISK. I am not a broker or a licensed professional of any kind. It's your money, not mine.

Oh... and if you are going to read one person, read this guy, The Bonddad Blog, who not only has his own blog but publishes at Huffington Post as well. Bonddad isn't saying what I am saying. (I am responsible for my analysis.) But I like his thinking.

I believe China is way over-extended. They have been keeping their economy over-heated and will try to keep it up and looking good through the Olympics. At some point, for sure after the Summer 2008 Olympic games, possibly before, China's economy is going to melt down. When that happens, they won't be positioned to keep loaning the United States $2 billion dollars a day in the bond market.

China will go into their equivalent of the U.S. Great Depression, and take the rest of the world with it, including the U.S. I believe this will happen about mid-2009, roughly 18 months from now. Lots of people will be out of work, everywhere. Could it happen sooner? Sure. Later? Yep. Could I be wrong? You bet.

Do I think I'm wrong? No. And I'm putting my money and actions behind what I'm telling you. But take my analysis at YOUR OWN RISK. I don't back anything I'm telling you up with a damn thing. It's all on you to check this out for yourself, and make up your own mind what to do.

The most important thing will be to have a six-month supply of food and clean water (or better, a good water filter) stocked up. I'm not kidding. Then have gold and silver, which have real value which will hold, even as paper money inflates away. Physical tools of good value. A good bicycle you can get to work on. An adequate supply of medicines. If your home mortgage is underwater, make sure you've sold it before spring a year from now. Hard times are a-coming. Prepare for them. If you're going to ride things out where you're currently living, a wood stove to heat the place wouldn't be a bad idea, and make sure it had enough room on top for you to cook, maybe even including an oven.

Do I know this is going to happen. Of course not. No one knows the future to a certainty. But just as we can be sure that earthquakes will happen along known fault-lines at some point in the future, I look at what the Fed is doing, the over-heated economy in China, the defaulting mortgages all across the land, and even someone as ignorant about money as I am, can say, hard times they are a coming. We've been living in a bubble for a while, and it's going to burst in a big way.

If I'm wrong, well, you'll miss out on some upside appreciation in the market. Oh well. If I'm right, you just saved yourself possibly losing a third or more of your life savings which you have in the market, plus made sure your family has enough to eat, tools to make a living with, and a warm house during the cold months, a year or two from now when it gets tough.

That's what I'm doing. And that's what I'm advising those close to me to do.

Historical note of interest: Three years ago I got pretty crazy for about six weeks. This is back when I wasn't myself due to the pain meds. During that time, I predicted we'd have $100 oil by the end of 2006. Turns out "I" was wrong. It was two days into 2008. I was off by a year and 2 days.

Historical note #2. About two-three years ago, I purchased gold for the first time in my life. It was around $220, 230 bucks an ounce. I took home one ounce, all I could afford. Stuck it in a glass jar. I predicted -- just as I'm predicting now about the future world economy -- that gold was going to go up. Some months later, I was broke one month, so I marched right back down to the same store, and sold it off. Made a $30 dollar profit, even with the spread. Gold now is something like $800+ an ounce. And going up. I think it will top well over $1k, maybe as high as $1.5k if China goes into a full-blown depression as big as what the U.S. had in the 1930s.

Finally, here is this to think about. In the 1930s, the United States had FDR. He led us through the Great Depression, and brought us into the Great Society, and then took us through World War II. At the end of which the United States was the undisputed leader of the world, the USSR not withstanding. We did that with much less than our current 300 million people. We did that with our brains and our technology and our vast natural resources.

China has 1 Billion people. They have brains, they are rapidly gaining technology to knock everyone's socks off, and they have vast, vast natural resources. If they do indeed go through a great depression, look for them to emerge after 10-15 years, as the leader of the world, while the United States sinks back after 10-15 years of being in a serious depression and the U.S. dollar no longer being the reserve currency, as being a respected leader, but no longer the leader. Like Great Britain before World War II.

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Blu-ray Wins!

Warner Brothers Backs Blu-ray.
Universal No Longer Exclusive to HD DVD.

The fight is over. Hooray hooray hooray.

Last week Warner Brothers picked sides. Blu-ray.

There are alternate stories going around why.

Warner Brothers blamed gas prices and the economy:

Reuters

LAS VEGAS (Reuters) - Fears of a deteriorating U.S. economy and falling DVD industry sales helped drive Warner Bros's decision to back Sony's Blu-ray next generation DVD format exclusively, a top executive told Reuters on Monday.

Hollywood's biggest seller of home movies tipped the balance of power on Friday in favor of Sony (6758.T: Quote, Profile, Research) in a fight for the next generation of DVDs between the electronics giant and Toshiba Corp. (6502.T: Quote, Profile, Research), developers of the HD DVD format.

"We've typically been recession proof," Warner Bros Entertainment Group President Kevin Tsujihara said in an interview at the annual Consumer Electronics Show in Las Vegas.

"But the thing that we saw in the fourth quarter...was gas prices beginning to affect sales. And since we're considered an impulse purchase, it's beginning to impact us," he said.

Tsujihara said the company needed to quickly erase consumer and retailer confusion over dueling DVD formats before economic conditions deteriorated.

Warner executives said the consortium of companies backing Blu-ray, including five of the seven big Hollywood Studios, could spend more than $50 million in 2008 to convince consumers to upgrade, or more than the amount spent by the backers of both HD DVD and Blu-ray in the 2007 holiday season.

That's the official word.

Here's the unofficial word...

Pittsburgh Post-Gazette

by Don Lindich

Warner Bros. publishes on both HD DVD and Blu-ray and found the "format war" was not only slowing the adoption of high-definition discs, but also hurting their regular DVD sales -- clearly an untenable situation for them. They wanted to bring the format war to a quick close by picking a side.

If they chose HD DVD, studio support would be roughly equal but would likely go HD DVD's way eventually, as Warner is the biggest producer of high-definition discs. If they chose Blu-ray, studio support for Blu-ray would be lopsided and the war would end more quickly.

When rumors started flying publicly, I e-mailed Jim Noonan, a Warner Bros. vice president, who immediately replied that they had not decided to change their policy. A WB executive in New Zealand issued an even stronger public statement denying imminent changes.

Obviously, they had decided to change -- they just didn't know the direction. Given their long partnership, Warner gave Toshiba an opportunity to lure a Blu-ray studio to HD DVD, in which case they would go HD DVD exclusive and give HD DVD a clear studio advantage. A deal was nearly secured with Fox, which had been having trouble with Blu-ray disc production due to the lack of manufacturing infrastructure. At the 11th hour, Fox went to Sony with its concerns and received a reported $120 million payout to stay with Blu-ray.

With no studio joining them on the HD DVD side, Warner's hand was forced and it went with Blu-ray, receiving a reported $500 million for doing so.

Now add that to Variety's story.

Variety

Daily Variety has confirmed that Universal's commitment to backing HD DVD exclusively has ended. And Paramount has an escape clause in its HD DVD contract allowing it to release pics on Blu-ray after Warner Bros.' decision to back that format exclusively.

Neither studio is ready to throw in the towel immediately, however. On Thursday, Universal broke its silence about the matter to say that it plans to keep supporting the format for the time being, a pledge Par made earlier in the week. And in any case, U is committed to a series of HD DVD promotions in coming months.

Should Toshiba concede defeat on the format, the decision to drop HD DVD would be made for both studios. But Toshiba doesn't appear ready to do that. At the Consumer Electronics Show, the manufacturer reaffirmed its commitment to the format, noting strong sales during the fourth quarter and indicating it would continue marketing its hardware through 2008.

But retailers may force the HD DVD camp's hand: They're unlikely to keep devoting premium shelf space to a dying format, and at this point, the odds are not in HD DVD's favor. With Warners' defection, only Par and U remain in the HD DVD camp; Sony, Disney, Fox, Lionsgate remain ardent Blu-ray backers. Warner sister companies New Line and HBO are also shifting allegiance to Blu-ray.

Last summer, Blockbuster also threw its weight behind Blu-ray, though some HD DVD discs remain in stores.

Bottom line?

It's over. As fast as Universal can finish up its contracted commitment, it's all Blu-ray, all the time.

If you've been waiting to see what kind of DVD player to buy, you need wait no longer. (Just don't forget to buy a Region-Free player, so you can can get a DVD which is released only in England, or in Australia.)

There's more...

Dispatches From The Line

What The WGA Strike Is About...And Then Some.

If you didn't already know, I suppose I should tell you—that when I'm not doing the nine-to-five gig to pay bills, I have been known to collect a check or two as a professional television writer. I've had a hand in writing seventy-plus episodes of television programming, so you'd be correct in assuming that the present Writers Guild Strike hits not just close to home, but square in the middle of my living room, with blast and singe marks reaching well past the kitchen, and knocked not a few tiles out of the ol' bathroom wall.