Tuesday, February 08, 2005

Signs of the Economic Apocalypse 2-7-05

From Signs of the Times 2-7-05:

The dollar closed at .777 euros last week or 1.287 dollars per euro, representing a rise of about 1.2% in the dollar from last week’s close of .768 euros or 1.302 dollar per euro. The Dow Jones Industrial Average closed at 10,716.13 up 2.8% from last week’s 10, 427.20. The NASDAQ closed at 2086.66 up 2.5% from 2035.83 last week. The interest rate on the 10-year US Treasury Bond closed at 4.08%, down significantly from last week’s 4.15%. Oil closed at $46.48 (36.12 euros) a barrel, down 1.4% from last Friday’s close of $47.15 (36.16 euros). Gold closed at $415.90 dollars an ounce or 323.15 euros, down significantly (2.6% in dollar terms) compared to last week’s $426.80 or 327.10 euros. An ounce of gold would buy 8.95 barrels of oil, compared to last Friday’s 9.05.

Some people would look at last week’s numbers and shout: “USA! USA!” Not us, of course. We may not get much more of a warning about a crash than we already have. Things didn’t look too bad in mid 1929, either. That is how crashes work. What we need to guard against is taking comfort from short-term numbers. A reader wrote in with an excellent summary of the talking points he heard in the US media trying to reassure us that a crash won’t happen. For those of you living outside the United States, believe it or not, this is what we in the US are hearing:

1. There is no problem having a federal deficit because the federal deficit as a % of GDP as been higher in the past than it is now. Reagan proved that deficits don't matter. As long as GDP growth is strong, the deficits will disappear in time as the U.S. grows its way out of the revenue shortfall. (No mention that the total debt picture is a combination of household, business, and government debt or that household debt has driven a consumption buying spree, or that 70% of GDP is comprised of personal consumption expenditures with another 5% in housing. Both these areas have been "growing" due to credit creation.)

2. There is no problem having a 50-60 billion dollar trade deficit each month because it shows how high the U.S. standard of living is. The U.S. way of life is a beacon of light to the world. If more countries copied the U.S. system, they could enjoy a better lifestyle too.

3. Foreigners loaning the U.S. 2 billion per day to finance the deficits shows that they regard the U.S. as the safest place to put their money.

4. Gold prices are not historically high, so that means the dollar is not losing any value. It's a myth that the U.S. dollar is becoming unstable.

5. The U.S. is the engine of world economic growth and expert economists see no reason for concern about U.S. deficits or debt loads being excessive. The Bush tax cuts will supply the capital needed to reduce all the deficits within the next few years.

6. The event of 9-11 changed everything and had it not been for that there would be a federal surplus. The federal deficit spending is the sign of a responsible government that takes the steps needed to deal with the crisis and protect the people and the system.

7. Record high levels of mortgage debt are not actually debt; it's really unrecognized wealth. It's a myth that the housing sector in the U.S. is experiencing a price bubble. Price growth is the sign of a healthy real estate market. Ask any economist that's paid by the real estate or homebuilders associations if you don't believe it. The prices of houses have gone up so the debt loads of households are of no concern. People can let their homes serve as savings accounts. House prices never go down and the Bush administration will make sure that economic growth is strong so that everyone can own a home.

Still people are starting to take notice and the talking points quoted above are starting to sound a little desperate. The syndicated columnist, Charley Reese (http://reese.king-online.com/Reese_20050204/index.php) had this to say:

What about the record deficit? Well, [Bush] still plans to cut it in half in five years, but no details yet.

What about the falling dollar and the massive trade deficit? Well, he says, we're for freedom. I'm for freedom, too, especially freedom from the poorhouse, which, if the dollar collapses, a lot of us could be occupying. A pension in dollars that are only worth 2 cents in purchasing power isn't much of a pension. It's not that bad yet, but it's getting there.

In the meantime, Europeans and Asians, holders of billions of U.S. dollars because of the trade deficit, are starting to buy up America. One Frenchman just bought an entire island off the coast of Florida and all the mansions on it. I'm sure Bill O'Reilly will be happy to hear that. Maybe some Frenchman will buy Fox News. If that happens, then O'Reilly will say what a fictional Riley used to say on a radio sitcom: "What a revoltin' development this is."

In all seriousness, the trade deficit and the federal deficits are real crises that are looming on a not-very-distant horizon. The only way to correct the trade deficit is to sell more stuff overseas, but that's hard to do when the administration is encouraging manufacturers to export jobs instead of products.

We cannot live as consumers, no matter how much easy credit there is available. To keep consuming, we have to produce and earn and save. American consumers are already $2 trillion in debt. How are these consumers going to keep the economy going while paying off that amount of past consumption?

More people are echoing Sy Hersh’s hope that the collapse of the US economy will prevent Bush’s plan for World War III. No doubt that is an indication of the desperate straits we are in. Protests won’t prevent another war, voting won’t prevent it, nor will opposition from establishment heavyweights. The Xymphora (http://www.xymphora.blogspot.com/) blogger wrote:
The Chinese, who are desperately trying to get somebody in the Bush Administration to pay attention to the American economic problem, have had to resort to making a public announcement of their lack of confidence in the American dollar (something central bankers never do, particularly if they are holding massive amounts of these rapidly depreciating dollars). This is their vain attempt to find someone in the Bush Administration who would help them let the dollar down in an orderly way that won't ruin the American economy and the golden goose of the consumer demand of Americans for cheap Chinese consumer goods. When it comes to responsible economic policies, no one in the Bush Administration is at home. Americans find themselves in the odd position that their only hope is that their economy tanks sufficiently quickly to save them from the warmongering stupidities of their own government. Unfortunately, they'll probably get both the wars and the ruined

Last month’s jobs report came out, showing some 146,000 new jobs created, a disappointing number for most economists who had expected a much larger number. It was, however, gratifying to Bush since he can now claim a very small net gain in jobs in his first term (reason enough to be suspicious of the numbers).

It was amusing to hear the mainstream analysts express puzzlement at the anemic rate of job creation in what they see as a strong economy. To those of us working in Cubicle Land, it is no mystery. It’s the outsourcing. Here’s a small example from personal experience. The company I work for is developing some new enterprise-level software products for which there is strong demand in the market. Other companies are practically begging for the right to pay for these products, but first they have to be finished. At the beginning of the year we did not have near enough engineers to do it. In the nineteen-nineties that would have led to a hiring boom. Now, however, we hired one or two new people in the United States and about twenty new people in Bangalore, India. Then we contracted out more engineering work to other firms, who then hired even more engineers in India and Pakistan.

The interesting thing is that all the outsourcing has led to a six to eight month delay in completing work compared to hiring US engineers (of which there is a large unemployed supply) at the outset. The total cost would have been less to do it locally. When that was brought up to upper management, they were told that they had to make "the model" work even if it means delays and lost contracts. "The model" being massive outsourcing of engineering work and business process work to low cost countries.

Is it because the real "model" is simply to lower wages of workers everywhere? Or are they trying to crash the economy? This is not to say that it is not a good thing to have high tech development in South Asia. It is a good thing, not just for them but also for the whole world. But, when the stability of the world economy depends on the continuing excessive spending of American workers, if the United States loses the type of high-paying, high-tech jobs that have made the earlier exodus of manufacturing jobs manageable, all it will take to plunge the world into a depression is the bursting of the US housing bubble from persistent unemployment and stagnating wages.

Last week saw the product launch of the "Ownership Society" of George Bush. What this really means is that THEY will own US. Ostensibly this is a plan where there will be accounts set up from which we citizens of the United States can all pay for our medical expenses, retirement, education of our children using our own saved money without help from that pesky government. Which might work if they paid us enough. Since they only pay a small fraction of the population enough to be able to afford those things, this is a cunning plan to shift the blame for their low pay to the victims.

Last week, for example, it was reported that in the United States, medical expenses accounted for half of the personal bankruptcies. People in the rest of the developed world can only shake their heads in amazement. The thing is, we Americans only have ourselves to blame for being such sheep. In France, whenever the government proposes some small cut in medical benefits or education benefits the, citizens rush out in the streets and start burning cars. In the United States, they take away our pensions, our healthcare, cut our pay, and now they want to take away Social Security, and no one raises a peep.

In the past, in the United States, social progress only came when people began threatening the destruction of the property of the owner class. The inner cities were ignored and pumped with destructive drugs throughout the nineteen eighties. It wasn’t until the Los Angeles riots of the early nineties that the political elite began to say, "maybe we should do something about the cities." Note that I am in no way advocating violent protests. While they can bring about some reform, they are also used by the elite to scare other citizens into supporting deeper crackdowns. What I am advocating is that the elite should not wait until that happens to spread some social health around.

If that doesn't happen, and it certainly looks like the Bush Administration is moving in the opposite direction, the possibility of violence becomes very real. Could that be the real reason for "Homeland Security"?


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