Tuesday, February 08, 2005

Signs of the Economic Apocalypse 1-10-05

From Signs of the Times 1-10-05:

Gold fell sharply on Friday, closing the week at $422.20, down 3.5% on the week from last Friday’s close of $437.10. The Euro closed at $1.305 down 1.3% from $1.354 . The Dow closed at 10, 604, down about 2% from last week’s close of 10,783. The NASDAQ closed at 2089, down about 4% from last week’s close of 2175. US interest rates were up, generally, with the 10-year Treasury bond closing 4.27% up from last week’s 4.22%.

Because of the instability of the dollar, I thought it would be helpful to cite the price of gold in Euros and the price of oil in Euros and gold as well as in dollars. An ounce of gold closed at 323.53 Euros up a bit from last week’s close of 322.32. Oil closed at $45.43 (or 34.81 Euros) a barrel up from $43.45. An ounce of gold, then, would buy 9.29 barrels of oil.

According to the US Bureau of Labor Statistics the US economy created 157,000 new jobs in December 2004, creating a small annual net rise in the number of jobs for the first time in the Bush II years. (http://www.bls.gov/news.release/empsit.nr0.htm) The official unemployment rate remained unchanged at 5.4%. The monthly gain in jobs was below the median predicted by analysts, but not bad nonetheless.
It was, all in all, a pretty good week in which to be optimistic for 2005, if you weren't looking at the other factors involved. But even mainstream analysts are still worried. Stephen Roach, an analyst for Morgan Stanley, a firm whose privately delivered forecast that the US had only a ten percent change of avoiding “economic armageddon" was leaked to the Boston Herald recently, writes:

For me, many of last year's lessons are interrelated — part and parcel of the general framework of global rebalancing that has guided my macro view over the past few years. First is the timeworn debate over global imbalances. In many respects, I have led the charge in arguing that imbalances matter — especially the unprecedented disparities between the world's current account deficits (mainly the US) and surpluses (Asia and, to a lesser extent, Europe). I still have deep conviction on that count. But I certainly have to confess that this call has gained only partial traction, at best, in world financial markets. When I speak with equity investors, they look at me as if I have come from a different planet. Suffice it to say, the resolution of global imbalances has hardly had a major impact on share prices. The same can be said of bond investors, as yields on longer-term securities barely budged in the face of unprecedented global imbalances. Of course, it was a different matter altogether in foreign exchange markets as
the dollar came under renewed pressure over the course of last year. The broad dollar index fell about 7% in real terms in the second half of 2004, bringing the cumulative decline from the early 2002 peak to about 16%.

Of course, when speaking with the general public, they use positive-sounding terms like “global balancing” rather than the more alarming “economic armageddon.” Like many of us, the healthy stock and bond markets last year puzzle Roach:

Take yourself back a year ago: If you had known that the Fed would tighten by 125 basis points (I publicly urged Chairman Greenspan to go by 200 bps), that the US core inflation rate would essentially double, that crude oil prices would shoot up into the mid-$50 range, that the US economy would grow by nearly 4.5%, that America's twin deficits (budget and current-account) would soar, and that the dollar would come under renewed pressure, the bearish call for longer-term US interest rates would have been a no-brainer. And yet yields on 10-year Treasuries basically ended the year where they began at approximately 4.2% — with a modest increase in inflationary expectations largely offset by a surprising decline in real interest rates (as captured in the inflation-indexed TIPS market). Hard as it may be to admit, this result basically turns the
art of interest rate forecasting inside out.

Again, no mention of political factors, the most important of which was the US election. In order to reduce the number of votes Bush had to suppress or steal, the Bush faction had to maintain the illusion that things were going tolerably well in the economy and in the war. For this, we can raise a martini glass to the non-US bondholders:

In the 12 months ending October 2004 (latest US Treasury data available), net foreign buying of long-term US securities totalled $850.6 billion, well in excess of the cumulative current-account deficit of $603 billion recorded over the four quarters ending in 3Q04. Yes, there was an increase in the share of dollar-denominated assets purchased by foreign central banks, from 18% to 27% over the past year; this was a conscious policy choice, largely aimed at preventing Asian currencies from rising and thereby impeding the region's export-led growth dynamic. But the bulk of the flows still came from non-US private investors seeking return and/or security in dollar-denominated assets.

And we can raise another toast to the US consumer:

[Another] lesson of 2004 bears on the power of the Asset Economy and the related resilience it has imparted to the seemingly unflappable American consumer — long the major engine on the demand side of the global economy. Despite sub-par wage income growth, anemic job creation, historical lows in personal saving, and record household sector debt loads, US consumption growth appears to have exceeded 3.5% over the four quarters of 2004. In my view, this latest
outcome — along with comparable results that have generally persisted since the late 1990s — is very much an outgrowth of an asset-driven spending dynamic. First, it was the equity wealth effect, then more recently the impetus from property markets. In ever-rising asset markets, consumers have chosen to substitute wealth accumulation for income-based
saving. This works for as long as asset markets do not go to excess and for as long as the interest-rate underpinnings of such markets remain favorable. With America's housing market now in bubble territory and with interest rate risks likely to tip to the upside, the staying power of its
asset-driven consumer could be tested in 2005. I was wrong on that view in 2004, but in large part, I believe that was because the interest rate test never occurred. If that test now comes to pass, the long-awaited capitulation of the American consumer could well be at hand.

Enough of the mainstream analysts, let’s hear from the alternative ones, since they don’t have to worry about actually triggering, by their analysis, the collapse they fear. Here’s what Al Martin (http://www.almartinraw.com/) said in his 2005 forecast:

The economic storm clouds on the horizon continue to gather as the planet sinks into a sea of red ink. The economic numbers are simply frightening as the scourge of Bushonomics, i.e., negative debt finance consumption, continues unabated, reaching all of the wrong kind of records, as it were. Total consumer debt is now 86% of GDP, a number never seen before, and a number, which classically cannot exist in Smithsonian capitalism, as in James Smithson, the father of modern day capitalism. The current regime is now consuming 84% of the planet’s entire net savings rate in order to finance Bushonian triple deficits–current account, budgetary and trade. Meanwhile the personal savings rate in the United States , is now a negative number, a statistic never before
seen. Supposedly the largest nation-state on the planet, accounting for 43% of global GDP, has a negative savings rate. …

The speculative bubble in residential real estate shows signs of bleeding air. The November data of “housing starts” is down 12%, the largest drop in 11 years. New home sales are down 13%, the sharpest 1-month decline also since 1994. Building permits are down sharply. Median home values now the lowest in 12 months, having fallen for 7 consecutive months. The national foreclosure rate is now at 6.54%, the highest since 1933 in the very depths of the Great Depression. The national property tax arrearage rate for residential properties is now at 8.9 months, also a record number. Never before has the national residential property tax arrearage rate exceeded 8.6 months. And now it does for the first time in history.

There are so many historical record numbers! A U.S. dollar, which continues to decline under a Regime who will do nothing to support it and everything to encourage its continuing decline under the belief, which is inherent in classical Smithsonian capitalism, that a cheaper currency spurs exports – this despite the fact that exports in real terms under this regime
have actually fallen.

The reason, of course, that a cheaper dollar is not spurring exports in this economic cycle, as they have classically done in the past, is that our major export partners, the 10 largest trade
partners that we export to have economies which are declining at even a faster rate now than is our own–something also that has never before happened. This then breaks the traditional post-war cycle of economic growth that had existed, the so-called tri-partite economic growth scenario that had long existed between Western Europe, the United States and Japan, where there would be revolving economic slowdowns.

While the mainstream folks keep hoping that “foreign investors and banks” will continue to balance the imbalance, few people are mentioning how indebted the whole world is:

This can be seen, for instance, by the increase in global debt and the increase in the negative net worth of the entire planet, which now stands at -$13 trillion. The planet is, indeed, literally sinking into a sea of red ink. In 2005, with Bushonian fiscal stimulus via tax cuts now gone and no further fiscal stimulus in the United States possible via more tax cuts, or nothing substantial certainly, due to the ever-growing size of budget deficits, that removes a stimulative factor that had existed under this Bush/Cheney regime from 2002 to date. Furthermore, monetary stimulus that had occurred under this regime through sharply declining interest rates is now over. We have now entered the period of rising interest rates.

As for the heroic efforts of the US consumer:

Therefore, for instance, consumption stimuli that was coming from mortgage refinancing, which was substantial, more than a hundred billion a year under this regime average–that was the average amount of consumable income that was being drawn out from refinancing mortgages into ever lower rates with ever higher equities due to rising real estate values–this whole scenario now has been reversed. Not only have refi’s dropped sharply and will continue to drop as interest rates rise, but the value of homes coming out of a speculative bubble that have been refinanced is now also declining.

For instance, here’s a frightening, frightening thought that former Federal Reserve Governor Lyle Gramley pointed out: there has been so much money under this regime taken out of home equity through refinancing or home equity lines of credit, etc., more than 1-1/2 trillion dollars taken out, that median equity versus mortgage debt in the United States has fallen to an all-time low fraction of only 43%.

This means that the median value of a home owned by a US citizen (because of refinancing and continuously taking money out of that equity without actually selling the home) is only 43% of that home’s current value. This is an all-time low.

To give you an idea, for instance: 30 years ago in 1974, the median equity of U.S. citizens in their home was 68%. Now it is 43%. This IS even more nerve wracking considering the five fold increase in median home prices which has occurred over the past 30 years.

The mainstream economic analysts, then, can be divided into three camps. First, those who carefully and cautiously warn about an upcoming disaster in ways so measured that their words don’t have much effect; second, those who publicly say all is well while privately saying and doing with their own money something different; and third, those who truly think things are going to keep getting better and better. But they are all united in one thing: the fundamental assumptions of neo-classical economics. What the Anglo world (United States, Canada, United Kingdom, Australia, and New Zealand) calls “mainstream economists,” the rest of the world calls “Anglo-Saxon, neo-liberal economists.” And they don’t mean that is a good way! The “liberal” in this case refers to 18th and 19th century classic liberalism that advocated free trade, free labor, free enterprise, and a society and economy bound by contractual relations between freely acting individuals. This economic ideology was discredited to an extent for much of the twentieth century, but it came back with a vengeance in the right-wing “neo-classical” economic reaction instituted by Margaret Thatcher and Ronald Reagan. While this type of economy has always been imposed at the point of a gun, the gun is much more visible now. Even the New York Times cheerleader for globalism, Thomas Friedman, said that “"The hidden hand of the market will never work without the hidden fist. McDonalds cannot flourish without McDonnell Douglas”. Now, in the beginning of the 21st century, the fist is not so hidden.

Classic liberal economics represent one branch of clear STS or Service to Self economic relations. Corporate-Fascist economics represents an alternate STS economic path. Both ideologies propose an ethos of getting as much as you can for yourself without concern for the other. The difference is, the “you” in liberal economic ideology is the “individual” and in corporate fascism the “you” that is maximizing personal benefits is the Nation or the State merged with the powerful corporations. Game Theory, with its rational self-interested actors and two-person games, is essential to both types of STS economic ideologies. What results, then, when societies make these theories and ideologies their fundament, is a culture of psychopathy, a culture where psychopathic behavior is rewarded. (see Laura Knight-Jadczyk’s “’Official Culture’ in America: A Natural State of Psychopathy?” ) and her Adventures with Cassiopaea series).

What is the end result? Bourgeois liberalism has always said that if each “rational actor” pursues his or her self interest, the greater good will result. The spiritual tradition, however, tells us that, while it is true that those who serve themselves end up serving others, they often end up working for their own ruin. The tradition also tells us that the serving of self may not even serve the interests of the human race. Even the standard Christian tradition would agree by saying that sinners end up working for the good of the God’s plan while working for their own ruin. Can this be true of whole societies? Is there an STO or Service to Others economics? Is that what Jesus meant by the Kingdom of Heaven? Can the cooperative movement and “localist” economics provide a model? Argentina, for example, has seen an explosion of cooperatives since their economic collapse of a few years ago (this was censored story number 23 in Project Censored’s Top 25 Censored Media Stories for 2004). Catherine Austin Fitts is working to build that kind of movement in the United States (see http://www.solari.com/). Can a distributed network like the Internet along with the Open Source software movement provide a model? Will creating an STO economy lead to a departure from the type of existence we have now? What the tradition does teach is that the change must first come from within and that it involves work. Here may be where it has most in common with classical economics which gave us the saying, “There is no such thing as a free lunch.”


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