Monday, February 14, 2005

Signs of the Economic Apocalypse 2-14-05

From Signs of the Times 2-14-05:

The dollar closed at .777 euros on Friday, essentially unchanged from last week with a euro buying 1.287 dollars. The Dow closed at 10,796.01, up 0.7% from last week. The NASDAQ closed at 2076.66 up 2% from 2035.83 last week. The interest rate on the ten-year US Treasury bond closed at 4.09% compared to 4.08% last Friday. Oil closed at $47.16 (36.64 euros) or up 1.5% from last week's close of $46.48 (36.11 euros). Gold went for $422.00 (327.89 euros) an ounce at Friday's close, up 1.5% from last week's $415.90 (323.15 euros). An ounce of gold, then, would buy 8.95 barrels of oil, unchanged from last week.

This week was touted as a strong week for the dollar and for the US stock market, as many investors pretended that Bush was going to do something about the US budget deficit. Before we look at the budget, let's take one more look at the jobs figures from January. While many analysts pointed to a small gain in jobs during Bush's first term, Paul Craig Roberts pointed out in Counterpunch last week that there was still a significant drop in private sector jobs in those four years. War-related government jobs accounted for the increase, which is not surprising, since the United States now resembles Sparta far more than it does Athens:

The January jobs report from the Bureau of Labor Statistics continues the bad news of the past four years. During President Bush's first term, the US economy had a net loss of three-quarters of a million private sector jobs. Despite three years of economic recovery, fewer Americans are employed in the private sector today than when Bush was first inaugurated four years ago. The slight decline in the unemployment rate reported for January is not the result of new jobs; it is the result of large numbers of discouraged people, many with university degrees, dropping out of the work force. They cannot find employment and have given up looking.

During Bush's first term, the once fabled US economy has been unable to create jobs in export sectors or in import-competitive sectors. January's 134,000 new private sector jobs are in domestic services that cannot be outsourced: couriers and messengers, food services and drinking places, health care and social assistance, educational services, temporary help, retail, and credit intermediation.

...America's growing dependence on imports reflects the outsourcing of manufacturing jobs and knowledge services. Every time a US firm outsources goods or services, it turns domestic production into imports. Half of the US trade deficit with China represents US offshore production for US markets.

Interest groups that benefit from outsourcing and their spokespersons who cloak themselves in free-trade rhetoric maintain that there is nothing to worry about. Outsourcing, they claim, strengthens the US economy and creates jobs. If that were true, wouldn't economic strength translate into dollar strength? If outsourcing creates US jobs, wouldn't some of those jobs be in the export sector? Average weekly pay in the US is declining in real terms. Obviously, if outsourcing is creating jobs, they are less good jobs than the ones being outsourced. Trading better jobs for worse ones is the road to poverty, not the road to wealth.

The dismal US performance in job and pay growth is despite the most stimulative monetary and fiscal policy in my lifetime. If the lowest US interest rates in memory, tax cuts and the biggest budget deficits in US history cannot create jobs and boost pay, what can?

How can this be spun as a positive? Al Martin claims that there is a strategy that combines distorting data in the positive direction to boost the markets and then correcting them some time later back downward. The Bush administration is also one of the best at putting their shills in positions of maximum media exposure:

Now on Feb 4, we're having yet another pro-Bush net media spin Friday, as the release of the January employment report. Market guesstimates were for the unemployment rate to hold steady at 5.4%; it actually dropped to 5.2%. Yet non-farm payroll gains, estimated to be up 200,000, came in up only 146,000, with December's job data revise 24,000 lower. Imagine their desperation! We saw CNBC with, of course, Larry "The Dow's Going to 50,000 under Bushonomics" Kudlow leading the charge in a desperate bid to spin this number.

They immediately brought on chief Bushonian economic calendar spinmeister Labor Secretary Elaine Chao. Despite the fact the numbers were horrendous, including the sub-component, wages up 2/10ths of 1% versus the expectation of up 3/10ths of 1%; average hourly work week, which was anticipated to rise to 33.9 hours, actually fell to 33.7 hours. There was nothing positive about the report. Yet every effort was made to concentrate investors' attention on the fact that the 5.2% headline number, or unemployment rate number, was actually down 2/10ths of 1%.

Then they showed e-mails that were sent in, and someone tried to remind Larry Kudlow that the reason the unemployment rate was lower, which has been the reason the unemployment rate has fallen for the last 18 months, is that the number of citizens being counted in the employment survey is diminishing. And, yes, in fact, in January, the Bureau of Labor Statistics dropped another million citizens from the payroll survey. That's the reason the unemployment rate is actually declining; while the number of unemployed citizens is actually increasing, as can be seen in the weekly continuing claims rates, which continues to hover around 3 million, hasn't moved in the last 12 months. Continuing claims means those citizens without jobs for more than 18 months.

...The net result of this well-coordinated spin, of an entire spinning machine that starts at the White House and ends up on CNBC, is that the markets were actually called 50 lower. The Dow is called 50 lower and is now trading 50 higher. And, as retail sucker– they even used the expression on MSNBC, as: "‘Retail sucker money,' emboldened by the news that the employment rate dropped 2/3rds of 1%, are flooding into the markets, as they should be."

But they don't even care. So now, 3 hours after the market opens, the disaster that the numbers are has been completely forgotten. It's completely out of the news, it's out of the headlines. And now, even on Dow Jones broad-tape news services, numbers officially construed as bullish when, at 8:30 this morning Eastern Standard Time when they came out, they were officially construed as bearish.

In conclusion, Joe Sixpack 300-share retail sucker money, which is supporting and propelling the market higher despite deteriorating economic fundamentals, should beware. Do not be taken in by this constant pro-Bush net spin that you hear on CNBC and increasingly, and unfortunately, on Bloomberg News as well.

Remember what Larry Kudlow said only a few years ago on CNBC, when Enron was at $70 a share; and he said, "Oh, you got to buy that Enron at 70; it's a good buy.

At the very same time, a partnership he was involved with had George Bush, Henry Kissinger, George Schultz, James Baker, Donald Rumsfeld–an offshore smart Republican money investment partnership–selling the stock.

But Kudlow always hits the 300-share sucker buyers when he says "You gotta buy 300 shares of that, you gotta buy 300 shares of this," because he knows the audience he's trying to reach. It's the sucker money audience.

What Kudlow's specific role has become, as you see him on CNBC, is to consistently spin bearish Bushonian economic fundamentals into something bullish and specifically address his remarks to the Joe Sixpack investor. That's why they have him on at lunchtime, and then at the 6-to-7 hour -- the time that the Joe Sixpack 300-share buyers most watch CNBC.

It's a deliberate strategy. "Oh, you know, stocks have always gone up in the last 50 years, and you don't have to worry about it. Just buy 300 shares of this and 300 shares of that. You'll be alright."

...We've had propagandists before, but not until the Bush-Cheney regime has such a mechanism been established between the White House, the Republican National Committee, George Bush dot-com, CNBC, MSNBC, and Bloomberg News.

Never has such a well-defined, coordinated mechanism been put together to constantly lie. That's what they're doing, lying. They're not misstating the numbers like happened with the gross domestic product last week; they're outright lying.

...It would probably be useful to remind our readers of who is Larry Kudlow? He was actually in the Treasury Department and held a variety of sub-cabinet level positions in the Reagan-Bush regime. But, more importantly, people forget how many of the great Republican stock frauds that Kudlow's name came up in during the 1980s.

There was Harken Energy [George W. Bush's company] of course. He was a big short in Harken Energy when we busted that. He was a big short at MCorp and Allied Band Shares. Texas American Bank of Commerce. He was a long in the Harcourt Brace takeover, which was an inside deal.

Larry was an investor in the Houston Energy Partnership Trust, which included, of course, George Bush Senior, included all of the sons of Bush's, included Prescott Junior, included Prescott's son Wally, James Baker, George Schultz, Henry Kissinger, Donald Rumsfeld, and Frank Carlucci.

If you simply look at all of the stocks that they were in from, let's say, 1984 to 1988, they were all the great Republican frauds.

Larry Kudlow made his bones in Republican fraud deals. How do you make your bones under a Bushonian regime? By shorting Enron at $70 when you're telling everyone else to buy it. Then you too can become an economic pundit for CNBC – and the chief economic shill for the Bush Regime.

Last week Bush proposed his budget and continued to push for partial privatization of Social Security. The frauds in both instances are so vast, it's hard to know where to begin, but let's look first at the Social Security plan. They have lied and distorted the truth for so long now about Social Security that they have convinced two whole generations that the system is in such danger that it will not be there for them when they retire. That is false.

They have also led people to think of Social Security as a retirement savings program. It was never that, it was a retirement insurance program. But the constant drumbeat of self-centered thinking promoted in the media and encouraged in the people have led to people to think in terms of getting back when they retire what they have paid into the system, plus a return on the investment. In fact, the program is one where today's workers pay today's retirees. Those who are working today will be paid in their retirement by the people working then.

The so-called crisis of a bankrupt Social Security system is only a temporary, easy to solve problem. It arises from the demographic bulge of the post WWII baby-boom generation. When they retire, they will have proportionally fewer workers paying into the system at that time. But in that very fact lies the salvation of the system, because when Generation X (those born in the seventies and early eighties when the birthrate was lower) retires they will have proportionally many more people working at that time, the newer baby boom of people born in the late eighties through the nineties.

Therefore we need only get past a fifteen-year period of relative shortfall, which would have been easy if the so-called trust fund had not been raided to make the general budget deficits look lower. In fact, the budget deficits themselves, have made the situation worse, because if the government had not cut taxes on the super-rich and started unnecessary wars, we could have been piling up surpluses which would have made it easier to borrow money to get over the retiring baby-boomer hump for Social Security (and Medicare and Medicaid).

It is amazing how many people think Social Security is "bankrupt" without really understanding what that means. The reason for this, obviously, is to transfer large amounts of money to the financial industry in the form of fees for the private Social Security investment accounts and to pump up the stock markets with hundreds of billions of extra dollars. They have sold this to the public, especially younger workers, by contrasting a mythical "rate of return" on the money you pay into Social Security, with historic rates of return of stocks. It is worth keeping in mind the Anthropic Principle here:

Suppose you're a young investor pondering whether to invest your retirement savings in bonds or equity. You are vaguely aware of some studies showing that over sufficiently lengthy periods of time, stocks have, in the past, substantially outperformed bonds (an observation which is often referred to as the "equity premium puzzle"). So you are tempted to put your money into equity. You might want to consider, though, that a selection effect might be at least partly responsiblefor the apparent superiority of stocks. While it is true that most of the readily available data does favor stocks, this data is mainly from the American and British stock exchanges, which both have continuous records of trading dating back over a century. But is it an accident that the best data comes from these exchanges? Both America and Britain have benefited during this period from stable political systems and steady economic growth. Other countries have not been so lucky. Wars, revolutions, and currency collapses have at times obliterated entire stock exchanges, which is precisely why continuous trading records are not available elsewhere. By looking at only the two greatest success stories, one would risk overestimating the historical performance of stocks. A careful investor would be wise to factor in this consideration when designing her portfolio.

Not only that, but, according to reliable sources like Paul Krugman, long-term returns on stocks can only be equal to the general rate of growth in the economy, which will probably average long-term about 3%, exactly the rate of return on the bonds issued on Social Security trust fund money. For Bush's plan to work, stocks would have to average a 6 or 7% return over 75 years, something that is not really possible without much higher than expected overall growth. The amazing thing about the Bush gang's argument is that the only way Social Security will go bankrupt by 2045 is if growth is slow, in which case privatization will be a disaster. If privatization is to work, growth will have to be high enough to actually make the present Social Security system financially healthy in the long term.

Of course the intent of the Bush people is not to provide us with comfortable retirements, it is to dismantle a popular Roosevelt-era government program while making their friends rich. Krugman again:

President Bush isn't trying to reform Social Security. He isn't even trying to "partially privatize" it. His plan is, in essence, to dismantle the program, replacing it with a system that may be social but doesn't provide security. And the goal, as with his tax cuts, is to undermine the legacy of Franklin Roosevelt.

Why do I say that the Bush plan would dismantle Social Security? Because for Americans who entered the work force after the plan went into effect and who chose to open private accounts, guaranteed benefits - income you receive after retirement even if everything else goes wrong - would be nearly eliminated. Here's how it would work. First, workers with private accounts would be subject to a "clawback": in effect, they would have to mortgage their future benefits in order to put money into their accounts.

Second, since private accounts would do nothing to improve Social Security's finances - something the administration has finally admitted - there would be large benefit cuts in addition to the clawback.

Jason Furman of the Center on Budget and Policy Priorities estimates that the guaranteed benefits left to an average worker born in 1990, after the clawback and the additional cuts, would be only 8 percent of that worker's prior earnings, compared with 35 percent today. This means that under Mr. Bush's plan, workers with private accounts that fared poorly would find themselves destitute. Why expose workers to that much risk? Ideology. "Social Security is the soft underbelly of the welfare state," declares Stephen Moore of the Club for Growth and the Cato Institute. "If you can jab your spear through that, you can undermine the whole welfare state."

By the welfare state, Mr. Moore means Social Security, Medicare and Medicaid - social insurance programs whose purpose, above all, is to protect Americans against the extreme economic insecurity that prevailed before the New Deal. The hard right has never forgiven F.D.R. (and later L.B.J.) for his efforts to reduce that insecurity, and now that the right is running Washington, it's trying to turn the clock back to 1932.

Medicaid is also in the cross hairs. And if Mr. Bush can take down Social Security, Medicare will be next.

The attempt to "jab a spear" through Social Security complements the strategy of "starve the beast," long advocated by right-wing intellectuals: cut taxes, then use the resulting deficits as an excuse for cuts in social spending. The spearing doesn't seem to be going too well at the moment, but the starving was on full display in the budget released yesterday.

Looking at the Social Security plan in the context of the budget proposed by Bush makes the whole enterprise even more obscene.

To put that budget into perspective, let's look at the causes of the federal budget deficit. In spite of the expense of the Iraq war, federal spending as a share of G.D.P. isn't high by historical standards - in fact, it's slightly below its average over the past 20 years. But federal revenue as a share of G.D.P. has plunged to levels not seen since the 1950's.

Almost all of this plunge came from a sharp decline in receipts from the personal income tax and the corporate profits tax. These are the taxes that fall primarily on people with high incomes - and in 2003 and 2004, their combined take as a share of G.D.P. was at its lowest level since 1942. On the other hand, the payroll tax, which is the main federal tax paid by middle-class and working-class Americans, remains at near-record levels.

You might think, given these facts, that a plan to reduce the deficit would include major efforts to increase revenue, starting with a rollback of recent huge tax cuts for the wealthy. In fact, the budget contains new upper-income tax breaks. Any deficit reduction will come from spending cuts. Many of those cuts won't make it through Congress, but Mr. Bush may well succeed in imposing cuts in child care assistance and food stamps for low-income workers. He may also succeed in severely squeezing Medicaid - the only one of the three great social insurance programs specifically intended for the poor and near-poor, and therefore the most politically vulnerable.

All of this explains why it's foolish to imagine some sort of widely acceptable compromise with Mr. Bush about Social Security. Moderates and liberals want to preserve the America F.D.R. built. Mr. Bush and the ideological movement he leads, although they may use F.D.R.'s image in ads, want to destroy it.
One of the most breathtaking frauds in the new budget is that THERE IS NO MONEY BUDGETED FOR THE IRAQ AND AFGHAN WARS. This is despite a defense budget approaching a half trillion dollars (compared to a third of a trillion under Clinton). The Bush mouthpieces say this is because they don't know exactly how much these losing wars are going to cost. Why not just put a placeholder of about $100 billion, for goodness sake. The money for these wars next year, just like this year, will come from "supplemental appropriations."
But if Bush put those numbers into his budget, he couldn't pretend that he is doing something about the deficit.

As far as Bush is concerned, there is no reason to worry about borrowing dollars, since they will be worthless soon. Why not borrow them to secure oil and military bases? But he can't come out and say this, so instead we get these kinds of games, according to Patrick Martin in an article entitled, "US budget slashes social spending to pay for war and repression":

The most important feature of the new budget released by the Bush administration on Monday is that it is not, in any serious sense of the word, a budget at all. It is a monumental fraud, aimed at concealing fiscal reality and usurping decisions on spending that, under longstanding US constitutional procedures, are reserved to Congress rather than the executive branch.

Many of the most expensive and politically contentious initiatives of the Bush administration are simply left out of the budget. By one estimate, the omitted costs come to $4 trillion over 10 years, an amount equal to about one-and-a-half year's spending at the current rate of $2.5 trillion a year.

There is no funding for the wars in Iraq and Afghanistan, although the costs are estimated at $5 billion a month even if the US troop presence in Iraq is reduced to 120,000 next year. White House budget director Joshua Bolten admitted that the war would involve major costs, but added, "It wouldn't be responsible for us to take a guess at what those costs are." (This argument apparently does not apply to the campaign for Social Security privatization, which Bush has sought to motivate through implausible and tendentious projections about the state of the system's finances 75 years from now).

The Bush administration has consistently refused to incorporate spending for its war policies into the regular budget, instead making use of supplemental appropriations bills rammed through Congress with demagogy about the need to "support our troops." The purpose has been to distance the social cuts imposed by the administration from the cost of its wars, and thus conceal their essential connection: millions are being cut off food stamps, student loans or health insurance to finance American military aggression.

There is no funding for Bush's Social Security privatization plan, although the cost of establishing new private accounts is projected at $754 billion over the first decade and trillions more thereafter. At a press conference Monday, Bolten gave the following explanation for why the Social Security costs had not been included: "The budget went to bed," he said, "before the president's proposals were announced."

The argument is preposterous, since Bush had made no secret of his plans during the election campaign. Moreover, the budget includes many other White House proposals which have yet to be fleshed out, let alone submitted to Congress. Bolten denied that the White House was concealing the enormous costs of Social Security privatization. In any case, he told reporters, the White House position was that "transition financing does not represent new debt."

The White House has also played fast and loose with its tax revenue projections. Most of the sweeping tax cuts for the rich enacted in 2001 and 2003 are scheduled to expire after 2009. The Bush administration is seeking to extend the cuts indefinitely, at a cost estimated at $1.1 trillion through 2015. (Repeal of Bush's tax cuts would provide more than enough money to resolve the projected budget gaps in Social Security and Medicare).

In order to avoid recording the cost of these tax breaks, the Bush administration has scrapped the traditional ten-year scoring of the cost of programs and tax cuts, in favor of a five-year projection that ends in 2010—just when the huge bonanza for the rich would be renewed.

And what is this aggression and repression that we will be paying for going to bring? Large scale death and destruction, most likely - especially if the United States or Israel attacks Iran. An anonymous person with some knowledge of military technology posted a piece speculating on the way an attack on Iran would play out:

How the attack plays out

After watching destruction of Iraq the Iranians will be forced to respond. Because Iran is already at total war footing the attacks escalate out of control in a matter of days.
  • Israel hits Iran's nuclear facilities
  • Iran goes to Alert One
  • Israel hits a US Carrier and blames Iran
  • US hits Iran's navy in northern Persian Gulf
  • Iran attacks with all it's missiles

Iran has already calculated their response and they realize their only option is a massive attack. Iran is sitting on a stockpile of Exorcet, Sunburn 22 and SS-NX-26 Yakhonts missiles. The Fifth Fleet sits at Qatar and it is within range of the Sunburn-22 and Yakhonts. Iran is said to have commercial freighters equipped with Exocets that will be in port at the time. Once Israel hits the US carrier (similar to USS Liberty ) then Iran will have no choice but to defend itself.

The 5th Fleet sits in a lake surrounded by Iran's rugged mountains and will be decimated by the missiles. The US fleet will arrive in the Indian Ocean but will be helpless because the straits of Hormuz will be a Phalanx of hundreds of Exocets.

At the same time Iraqi insurgents begin a counteroffensive. A major attack on the Green Zone would take out most of Iraq's foreign administrators. It's very possible that the Iraq occupation could turn deadly and costly.

Add to this, offensives on Iraq's isolated towns and the occupiers would be in a multiple quagmire – the occupiers are now surrounded. As supplies and ammunition begin to run out, the status of the US forces in the region will become precarious.

Straits of Hormuz

The occupiers will become the besieged... The US is cornered - if they try to escape they will be slaughtered in the Straits of Hormuz. With Iran's enormous missile capability the US will have two choices - either go to the UN for peace or an all out nuclear attack on Iran.

Flow of oil stops

With enough anti-ship missiles, the Iranians can halt tanker traffic through Hormuz for weeks, even months. With the flow of oil from the Gulf curtailed, the price of a barrel of crude will skyrocket on the world market. Within days the global economy will begin to grind to a halt.

Why does the only group that has the power to stop this, the Bush administration, want this to happen?


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