Signs of the Economic Apocalypse 1-3-05

From Signs of the Times 1-3-05:

Since Friday was the last day of the year 2004, let’s review the whole year. In 2004, the Euro rose 8% against the dollar. The price of crude oil rose 33.6% in dollars, with the price of New York light crude closing 2004 at $43.45. The main indices of the United States stock market finished up for the year, with the Dow Jones Industrial Average closing at 10,783 up 3.2% for the year. The NASDAQ rose 8.6% finishing at 2175 while the S&P 500 ended up 9%, closing at 1212 on Friday. As for the price of gold, here’s something interesting. The price of gold was up in US dollars (up almost 22 dollars an ounce to close at $437.10, or 5.3%) but DOWN in Euros (closing at 322.32, down 7.64 or 2.3%). 2004 was certainly the year of the Euro, as the new European currency took advantage of the world’s loss of confidence in the American Empire and its currency, the dollar, to position itself as a likely future reserve currency.

The housing bubble in the United States continued throughout 2004. According to Doug Noland of PrudentBear.com (thanks to the reader who sent in this link), in the United States,

…rampant liquidity excesses stoked extraordinary housing speculation and inflation, especially along the coasts and virtually everywhere “upper end.” The California housing Bubble evolved into a full-fledged mania. OFHEO’s index of national home values posted a year-over-gain of 13% during the third quarter. This compares to the 6.0% y-o-y gain reported during the third quarter of 2003, and was the strongest national housing inflation since 1979. During the third quarter, y-o-y price gains jumped to 22.72% in the Pacific region, up from 8.9% during comparable 2003. Mid-Atlantic price gains rose to 15.7%, up from 8.0%, while New England rose to 15% from 7.9%. Third quarter South Atlantic prices rose at a 14% rate, up from 6.4%, and Mountain prices inflated at an 11.4% rate, up from Q3 2003’s 3.7%. Through November, total combined new and existing home sales were running almost 9% above 2004’s record pace. And with real estate
inflation driving consumption, it is no surprise that Personal Spending is increasing at a 5.9% rate, while Personal Income is lagging at a 4.9% pace. )

The odd thing about 2004 is that with so much that happened, so little happened economically. Noland argues that disasters were avoided by pumping way too much liquidity into the market:

From my analytical framework, liquidity excess is having profound and all-encompassing effects on the financial markets and real economy. Never has over-liquidity been so conspicuous, not even with the technology boom. Crude oil prices rose 34% and energy prices surged during the year; import prices are now up 9.5% from one year ago; CPI and PPI moved solidly higher; and home prices inflated at a pace last seen in the late-70s. Accordingly, a strong case can be made that 2004 deserves the designation "The Year of Inflation’s Serious Reemergence." Inflation expectations have certainly returned with a vengeance. Speculative interest in a wide range of hard assets – including real estate, commodities, art, myriad collectables, and precious metals - took firm hold during the past year. And, importantly, once such market psychology manifests, significantly tighter monetary conditions are required to quell the resulting Monetary Disorder… And over-liquidity also can also take Credit for inspiriting The Year it Didn’t Matter. Crude prices ran to $55, but it didn’t matter to the bond market. Commodity markets on fire – didn’t matter. Sinking dollar – nope, didn’t matter. Heightened inflationary pressures – didn’t matter. Fed raising rates – didn’t matter. Fannie and Freddie with major accounting irregularities – didn’t matter. And that was the kind of year it was: major fundamental developments developed with respect to the dollar, inflation, and the integrity of our financial system but all were trumped by rampant system liquidity excess.

Noland concludes by saying that, if 2004 was the year none of this mattered, 2005 should be the year when it does.

At the Centre for Research on Globalisation, James Petras predicts the following for 2005:

World developments in 2005 will be determined by the major events and tendencies in 2004. First and foremost, 2004 demonstrated in the most dramatic and definitive manner that the US imperial military machine could be defeated.

The Iraqi resistance has proven that the US Empire is not invincible. With over 1500 combat deaths, close to 25,000 disabled soldiers and over 35,000 suffering severe "mental illnesses", the US occupation army is incapable of bringing the colonial war to a victorious conclusion. The US colonial forces and their satellites face over 100 attacks a day throughout the country. Reliable reports from returning soldiers suggest that demoralization and disaffection is all pervasive. In contrast, the Iraqi resistance is growing, as thousands of new volunteers enter into combat – 95% of which are Iraqis… During early 2005 the US economy will continue to expand based on external financing and speculative earnings. The precipitous decline of the dollar in 2004 will accelerate in 2005, leading to greater flight from dollar reserves. By mid-2005, we can expect a major crisis in the dollarized economy, a severe decline in US stocks and a general sell-off of devalued dollars by Japan, and possible China. This is likely to provoke a general economic crisis, which will weaken the domestic foundations of the US Empire.

But for now, the lower oil prices and all the other happy economic news published in the mainstream press over the last month has led to a strong increase in Consumer Sentiment in the United States:

Consumer Confidence Highest in 5 Months
By SETH SUTEL,AP Business Writer

NEW YORK - A widely watched indicator of consumer confidence jumped in December, reversing four months of declines and reaching the highest level since July, a private research group reported Tuesday. The Conference Board, a New York-based business information group, reported that its index of consumer confidence leapt by nearly 10 points to 102.3 in December from 92.6 in November. It was the highest level for the indicator since its reading of 105.7 in July and well above the level of 94 that investors had been expecting. "It's a significant jump," said Lynn Franco, director of the Conference Board's research unit. The upbeat reading ends the year on a high note and bodes well for consumer spending going into 2005. The indicator of consumer confidence is widely watched by economists since spending by individuals makes up about two-thirds of all economic activity in the United States. The monthly report on consumer confidence is based on a survey of 5,000 U.S. households, and the preliminary figure for December reported Tuesday was based on the roughly 2,700 responses that were received by Dec. 20. The sharp rise provided a lift for stocks. In the first hour of trading, the Dow Jones industrial average rose 73 points to 10,849. The yield on the 10-year Treasury note, which tends to rise on indications of economic strength, climbed to 4.35 percent after the report was
released, compared with 4.30 percent late Monday.

This shows the brilliance of detaching economic analysis from political analysis. Or even geologic analysis, as the natural (?) disasters of the past week shows. How can consumers in the United States be optimistic when last week’s news contained headlines like this one: “Russia and China to hold joint maneuvers" (Associated Press, Dec. 27, 2004) or “Venezuela and China Sign Oil Deal"? Or this from James Ridgeway in the Village Voice:

Running below the surface of the year-end self-congratulatory assertions of American supremacy (as in Monday's Washington Times: "The world really is becoming more 'American' ") are warnings, often ignored, of our decline. The steady loss of the dollar against the euro is one. The spiraling trade deficit is another. And in the past weeks, there were two serious economic signs signaling momentous change, if not outright decline. The first concerns China's invasion of Canadian oil fields, heretofore a U.S. energy fiefdom. The second came in the form of an all-but-hidden report from the Department of Agriculture that America, the breadbasket of the world, is now a net importer of food.

What about the past week’s earthquakes, floods and tsunamis? Again, if you separate economics from politics, or from any moral sense whatsoever, there is little need to worry. The newspaper USA Today reported last week that, since the Tsunami hit mostly poor areas, the insurance companies won’t suffer much since ‘those people’ don’t have insurance. Not only that, but disaster aid comes with stipulations to buy supplies from companies connected with each donor country, so that destruction should supply some stimulus. But what if the next one hits more developed areas?

When we said in an earlier post that it is a fallacy to see economic events as being shaped solely by some sort of natural laws, it does not mean that natural laws are not in some sense determinate, but that if they are, they are in the long term. The short term offers ample scope for political manipulation. Just as the gold bugs have alleged manipulation of the gold markets by a cartel dedicated to supporting the main exchange currencies, so also can the oil market be manipulated in the short term. It has been alleged that the Saudi royal family promised George W. Bush that they would keep the oil prices low before the election, and while it seems that bad news from Iraq made that difficult, their efforts to increase production seem to have stabilized oil prices since the peak of October 2004:

New York crude surges 33.6 percent in 2004

NEW YORK, Dec 30 (AFP) - New York's main oil contract soared 33.6 percent in 2004 despite slipping on the final day's trade as the shock of Saudi car bomb attacks wore off.

New York light, sweet crude shot up 10.93 dollars, or 33.6 percent, over the year to finish at 43.45 dollars a barrel. On Thursday alone, the key contract for delivery in February slipped 19 cents. The contract pierced 40 dollars a barrel for the first time in May on concerns over gasoline supply in the US summer. Later in the year, insurgent attacks on Iraqi pipelines and within Saudi Arabia fueled concerns of shortfalls even as producers pumped at nearly full capacity, straining to meet hot global demand, particularly from China. World prices have
eased, however, since the New York oil contract shot to a record 55.67 dollars a barrel at the end of October. "We are moving into a stage, particularly as we are going to the Iraqi elections in January, where there will be lots of bad news," said Mike Coulten, analyst at the London-based Energy Information Centre. "It won't be bad in any real sense but in the sense that it might cause some fears. But with the greater cover and the Saudis bringing more production, I don't think it is going to have much effect and I expect to see a continuing softening of the oil price," he said.

Two things of note in that wire-service article: the role of the Saudis in keeping oil production up and the price down and the real political danger the Saudi regime is in. We have seen signs throughout 2004 of an active insurgency in the Saudi kingdom.

While the American Empire has relied on the Saudi royal family to keep oil prices stable, the Empire’s other actions in the Middle East have lead to the growth of a popular movement in Saudi Arabia to overthrow the corrupt collaborationists that could, if successful, lead to the Empire’s downfall. Try to imagine the effect of the fall of the House of Saud on the value of the US Dollar. It is rumored that there are plans to invade the Saudi oil fields if the government falls into the hands of those not friendly to the United States. What would happen then, with the US bogged down in Iraq and threatening Iran? It may be the law of unintended consequences coming into operation here, but who is to say that, from the point of view of Israel and the Neocons, the fall of Saudi Arabia and of the United States is not an intended consequence? In any case, those who manipulate short-term events for their own advantage are often blinded by hubris and wishful thinking. For them, “unintended consequences” are not beneficial. And those, like George W. Bush, who are gamblers too easily willing to risk everything, may eventually place one high-stakes bet too many and lose everything.