Tuesday, February 08, 2005

Signs of the Economic Apocalypse 12/22/04

From Signs of the Times 12/22/04

I thought we would start with a quick run-through of the week’s US market trends. I choose to concentrate on the US here because, the US economy is driving the world economy at this time since the massive trade deficits, personal debt levels and budget deficits in the United States create tremendous demand for world goods. American consumer spending, encouraged by the aforementioned deficits, is keeping the world economy afloat. And, since the US bubble appears poised to burst, we can expect that after it does, it will pull down the rest of the world’s economies with it. Therefore we need to be specially attuned to signs of bursting bubbles in the United States. The dependence of the world’s economies on the excessive consumer spending of the US, is the reason why the dollar has not completely collapsed already. No other country could get away with the reckless economic policies that the United States has pursued without their currency collapsing. But in this case, the central banks of Europe and Asia do not want the dollar to collapse since they hold so many of them. On the other hand, they would like to slowly get rid of as many as they can without causing a collapse in value. A tricky dilemma for them. Not that the dollar’s collapse can be postponed indefinitely, however. And when it does collapse, the consequences will be all the worse for having been postponed.

After a review of some key weekly stats, we will look at possible triggers to an economic collapse, both endogenous (internal to the working of the economy) and exogenous (external causes, things like natural disasters, etc.).

For the week ending December 17, 2004, the Dow Jones Industrial Average opened at 10, 543 and closed at 10, 650, ending up one percent. The NASDAQ fell slightly from 2141 to 2135. The interest rate on the ten-year US Treasury Bond rose from 4.14% to 4.21%. The US Dollar as of December 19 is worth 1.33 Euros and 1.94 British Pounds. One ounce of gold costs $441, up somewhat during the last week but below early December’s highs of $455. What we see here is a holding pattern with trends heading gradually in the same direction as they have been for a while. The dollar losing value, gold and oil gaining value, US interest rates rising, nothing out of control. Yet.

Why am I so convinced that an economic collapse is so likely? First let’s look at the political reasons. The Bush administration’s policies can only be explained if you conclude that they are actively trying to collapse the dollar. However, the Bush Crime Family does not control the world economy, the Powers That Be (PTB) do. Leaving aside who these “powers” are, we can conclude by the fact that they allowed the Bush Family to steal another election that they want these policies to continue, in other words, that they want the US economy to collapse. If they had wanted political leadership in the US that could reassure central banks and currency markets, they would have allowed John Kerry to win.

Here’s another political reason. The other political and economic powers in the world, China, Russia, Europe, have no other way of stopping the crazed imperial policies of the Bush neocons and their Fourth Reich than economic ones. They can pull the plug on the dollar at any time, although, as we have noted, not without a lot of pain for their own economies. If the US showed any signs of reacting as any sane person would to the disaster in Iraq, the other powers of the world would work to keep the current system in place. However, we are seeing clear signs that, instead of learning from their mistakes, the Bush people are gearing up to invade more countries. This at a time when the Iraq disaster is costing the US government (officially, at least) over 100 billion dollars a year with no end in sight. Yet they want to invade Syria and Iran, and what reasonable person can conclude that they won’t be that foolish? What is even more alarming is that, while official sources claim that the federal budget deficit is reaching the $500 billion level, it may actually be worse. One former Bush insider claims that we should add about and extra $150 billion a year to account for various accounting tricks like off-the-books debt, raiding of various trust funds and contingency accounts (see AlMartinRaw.com for more on the distinction between GAAP or Generally Accepted Accounting Principles and what Al Martin calls BFLAP, or Bush Fantasy Land Accounting Principles).

The political reasons straddle the divide between endogenous and exogenous, so let’s look at a few more internal, economic reasons for an impending collapse. We have already mentioned the heavy indebtedness of families in the United States. Some of this is cultural. Having enjoyed a strong currency for its entire history as well as an optimistic outlook, people in the United States have always felt more comfortable with personal debt. In recent years, however, with wages stagnating or falling in real terms, Americans have borrowed on the one asset they have which has appreciated sharply in value: their own houses. Re-mortaging and home equity loans have been popular as interest rates hit 40-year lows in recent years. More ominously, though, many families have lowered their rates even more by taking out adjustable rate loans – not a wise thing to do in times of historic low interest rates. Now, with the dollar in trouble, the only way to make the dollar attractive to overseas holders is to raise US interest rates, which the Federal Reserve Board is now doing. Add to that the globalisers plan for sending high tech work to India and, later, China, a plan which has been keeping the wages of even high tech and management jobs from rising by keeping unemployment high and we can see that it won’t take much of an external or internal shock to kick off a wave of foreclosures and bankruptcies that will burst the housing price bubble in the United States.

What about external shocks? Most people are aware that global warming, whatever the cause for it is, is here now. Even linear analysis of what this means indicates that much more turbulent weather is in store. Severe hurricanes, droughts, floods, etc. can be devastating not only for millions of people’s lives but also for the insurance industry. The insurance industry is exposed to severe weather threats to such a degree that government bailouts would be unlikely, especially given the precarious nature of the United States government’s finances. Add to this large earthquakes and the types of devastation that can be caused by meteor impacts, and disease (either natural or bio-engineered) and it is not hard to see that the world economy is in a precarious position. It may not even take a shock, just a little nudge might do the trick. Then, the question becomes, do the PTB want to gently shove the economy off the cliff? If so, why?


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