What's Important in the Financial World (7/20/2012)

The drought in the Southwest and Plains States has not gotten any better. Based on weather reports, it probably will get worse. The byproducts of the drought have worsened in the past few days. Soybean and corn prices continue to soar, which will eventually be passed on to consumers in the form of higher food prices. Reuters reports that there is another unanticipated consequence. Farmers have started to abandon their crops and collect insurance. The news service reports:

… farmers who have amped up their insurance coverage may be giving up on their crops early rather than to trying to save them.

Crop insurance has become a moral hazard.

Insufficient U.K. Austerity

Government borrowing in the United Kingdom has grown. That means austerity measures may not be aggressive enough, and the level of tax collection not great enough, to close the national deficit at forecast rates. The Office of National Statistics issued preliminary June data that includes the following information:

Public sector net borrowing was £14.4 billion in June 2012; this is £0.5 billion higher net borrowing than in June 2011, when net borrowing was £13.9 billion.

Bloomberg’s consensus forecast for the figure was for a deficit of 13.4 billion pounds. The U.K. government, like many throughout Europe, quickly has found that the fruits of austerity may not be a drop in deficits at all. This will increase calls for stimulus packages to kick-start economic growth and, hopefully, the tax receipts that should accompany it.

AMR vs. US Airways

The battle between management at bankrupt AMR and the management of US Airways (NYSE: LCC) about a possible takeover of the troubled carrier continues. Public comments by US Airways CEO Doug Parker have their foundation in the assumption that AMR cannot stand on its own. AMR has too many labor problems, and it can no longer compete effectively with mega-carriers such as Delta (NYSE: DAL) and United (NYSE: UAL). AMR chief executive Tom Horton argues that because Chapter 11 will strip his carrier of debt and excess airplane inventory, he will have a balance sheet among the strongest in the industry. Eventually the bankruptcy judge will decide if US Airways can make a bid. In the meantime, the public fight is meaningless.

Douglas A. McIntyre