May 2008: The Fall of the Greenback

The almighty US dollar is indeed afflicted.  The American currency has lost ground against other strong currencies such as the euro, the sterling pound, the Canadian dollar, and even the Mexican peso. The woes of the dollar mirror the staggering situation of the US economy.  Formerly worshipped by the whole world, the dollar is now snubbed by governments, investors, and bankers. Underpinned by foreign capital inflows, those flows are not now enough to keep the dollar afloat. This issue addresses the reasons behind the fall of the US dollar and how the slide of the US currency has impacted the Puerto Rican economy.

The sub-prime crisis in the US has led to record home foreclosures, some lenders going out of business, and financial institutions suffering multibillion losses as mortgage-backed investments went sour. Many argue that this has already unleashed a cascading effect throughout financial intermediaries and other areas of the economy. Though apparently not as severe as in the US, there is evidence that sub-prime lending did take place in PR and now the financial industry is facing this and other demons. The end result is that in a credit crunch, lenders stop lending and credit becomes tough to obtain. We attempt to answer the question whether we are currently in the midst of a credit crunch or not.

Undoubtedly, the PR economy is going through its worst time in the past twenty years. The poor performance in 2006 proved to be just the preamble of a lingering recession. The onslaught is coming from every direction: budget shortfalls, exhausted consumers, skyrocketing oil prices, gridlock between the Executive and the Legislature, anemic housing market and, to make matters worse, an economic slowdown in the US. With recession also looming in the mainland, the much-needed relief for Puerto Rico does not seem to be around the corner. This issue reviews the performance of both the US and the island’s economy in fiscal 2007. It also includes HCCG forecasts up to 2010, and surmises on the most likely scenarios and challenges ahead for PR.  This is an election year and the number one issue has to be the economy.

You cannot wear it or display it in your living room but black gold has experienced a similar trend as yellow or white gold. Yet, in each case the underlying reasons may be different. On September 2003, the price of crude oil in NYMEX was $25/barrel. After a series of events, the price kept escalating and by January 3, 2008, the price was $100.05/barrel, a 400% increase. As a result, gasoline retail prices in Puerto Rico rose from 30 cents per liter in 2003 to 78 cents by November 2007. What drives this trend? Is it China’s insatiable demand for oil, or war and conflicts in some producer countries, or bad weather, or the dollar depreciation, or diminishing oil reserves, among others? Find out in this issue, what is the principal cause of this price explosion, how this fact affects Puerto Rico, and what the future will bring us.

The PR milk industry is immersed in a crisis.  Despite government protection, all players – dairy farmers, processors, and even retailers– keep complaining and foretelling the end of milk production in PR The regulatory environment has failed to change the course of an industry that is heading to extinction.  This is the story of the many failures of the visible hand of the Government. The results are well known: fewer cows, less production, zero exports, fewer manufacturing plants, and higher retail prices.  In other words, we have reached the worst possible scenario. We have nothing to win by staying the same course. It is time to try a different route to save the milk industry and redeem the biggest loser in this game: the PR consumer.