Monday, March 28, 2005

Signs of the Economic Apocalypse 3-28-05

From Signs of the Times 3-28-05:

The dollar gained even more strength against the euro last week, closing at .7716 euros compared to last week’s .7510, a gain of 2.74%. Or, looking at it the other way around, the euro closed at 1.2960 dollars compared to last week’s 1.3314. Gold closed at $425.00 dollars an ounce, down sharply (3.46%) from last week’s $439.70. The price of gold rose in euros closing at 327.93 euros an ounce compared to 330.25 last week. Oil closed at $54.84 a barrel down 3.43% from last week’s close of 56.72 dollars a barrel. Oil in euros, however, was 42.31 down 0.69% from last week’s 42.60 euros a barrel. Comparing gold to oil, an ounce of gold on Friday would buy 7.75 barrels of oil, unchanged from last week. The Dow closed at 10,442.87 down 1.65% from last week’s close of 10,615.34. The NASDAQ closed at 1991.06 down 0.94% from last week’s 2009.79.

Most analysts see the dollar’s recent strength against other currencies coming about as a result of present and future interest rate increases by the Federal Reserve Board. U.S. stocks didn’t do so well, for the same reasons.

In case we are tempted in the United States to get a little optimistic based on short term rises of the currency, a look at the big picture is in order. This article by Phil Toler on Axis of Logic about the Neocon project is worth quoting at length because all the technical economic analysis means little for the United States when thinking of our economic future compared to the consequences of the Neocon project:

The Neocon Job May Backfire ... Big Time Redux
By Phil TolerMar 14, 2005

At the end of January 2004, my commentary entitled The Neocon Job May Backfire...Big Time was posted at While that site ceased to be updated shortly thereafter, it is still online and interested parties can read the full text of my piece. Briefly, it pointed out that US president George Bush had to bow to Grand Ayatollah Ali al-Sistani because of the fact that his people could not only make the occupation forces’ lives far more dangerous, they could also block the only real exit from Iraq into Kuwait. Therefore, it was clear the Neocons would have to agree to elections, whose outcome any schoolchild, possibly even Bush, could predict. But they figured that if they could rig two consecutive elections here at home, why not one in a country being occupied by US military forces? It appears they did fudge the numbers for the al-Sistani slate from close to 60% to below the point where there would have been a sufficient majority to instate a republic based on Islamic law. And so the Kurds were bolstered to the point that the train wreck would at least be slowed, for face-saving purposes if nothing else.

As with most ideologically-driven enterprises, not only have the wheels come completely off, but the dominos are assuredly now falling in quite the opposite direction as intended. The only reason the Neocons thought so little of the Shia is because they had been dominated for 1200 years by a Sunni minority. But they should have looked around the neighborhood a bit to see where this concept of ‘spreading Democracy’ (a backup rationale, though it was) would inevitably lead.

With Iran as a firm anchor, a now-aroused Shia majority in Lebanon and nothing but Shia majorities in between, it is patently clear the American adventures in the oil patch have backfired colossally. The Zionist dream to subjugate the entire area is now in tatters because everyone outside the US and Israel can easily see that the bluff has been called, and nothing short of all-out nuclear warfare, which, given the lad with his finger on the big trigger cannot be ruled out, will stand in the way of the completion of the Neocons’ greatest nightmare: an awakened Shia giant amidst the surrounding US-supported dictatorships that will lead, sooner or later, to collapse from within each client state.

Let us count the reasons for this prediction:

The US has been shown to be a paper tiger militarily by a few thousand ‘dead-enders’ in the Sunni triangle. Sure, the US military can level cities and massacre tens of thousands of non-combatants, but they have failed miserably to combat the element of the resistance that keeps it growing and becoming ever more successful. The Neocons have blundered into a trap from which there is no viable exit without a massive dinner of crow, a taste for which this crew has shown little appetite. The countdown has begun to the day a legitimate Iraqi government, dominated by the Shias, will politely ask the Americans to leave and take their bases with them. Once again, the spectre of a Sunni/Shia alliance with regard to the resistance would be too compelling to ignore. Thus, the Iranians know that there will be no general invasion of their homeland as long as their man in Iraq has the bulk of the US military locked down and using their long-time Sunni foes as the enforcers. The irony resonates on so many levels that I suspect historians of the future will have a difficult time suppressing a laugh or two as they contemplate the official beginning of the end of the American Empire.

The US is broke, and using the sentiment of the population as a gauge, it has only Israel to count on. This is a little like Dad counting on his kids when he goes broke betting it all at the track. The number of actors who are able to begin the US-dollar panic are hard to fully account for when one considers that Warren Buffet has made close to two billion in profits betting against the viability of US currency. With great regret, of course.

With an eroding industrial base, lagging agricultural output, and an insatiable consumer beast, the country is completely at the mercy of foreigners to sustain the illusion of a wealthy and economically healthy US. They will do this only as long as it takes to reduce their exposure to a vanishing dollar, which most central banks are quietly doing as I write. The Chinese are not-so-quietly turning their massive stockpile of US-dollar-based assets into commodities, such as Canadian mining and energy firms. It will be only be too clear when the time comes for foreigners to pull the plug on the credit-addicted US government and their equally leveraged citizenry, when the prop of having its currency as the world reserve standard collapses under the pressure of free-market traders, who know a thing or two about supply and demand. Many European houses no longer deal in US dollars at any exchange rate whatsoever!

As the dollar sinks, the price of oil will begin to affect ever-greater swaths of the US economy, and its legion of energy-hungry SUV owners. While oil company shills are shrilly promoting the ‘Peak Oil’ hoax to explain the crushing rise in energy costs, the reality is that the only thing that has peaked is cheap oil, and recovery costs are irrelevant to this equation. The simple fact is that the US and Britain have been using bribes and gun barrels to subsidize the cost of oil. When the Shia revolution set in motion by the Neocons spreads throughout the Middle East, tinhorn dictators from Kuwait to Qatar will escape to the West with whatever they can steal. At that point, oil will be priced to the advantage of the seller, as opposed to the buyer and oil-rich countries will impose their own version of an oil-depletion allowance. At that point, the American public will either go gently into that fascist good night, or stage a little rebellion of their own. For this question, I demure from a prediction.

The alliance of Europe, Russia, China, India, Brazil and Venezuela that has become a new reality, gives the lie to the myth of the US role as sole superpower. It is a fool who thinks the US can forcibly dictate to the combined economic and military power of that global anti-US bloc. The sad fact is that it really didn’t have to [come to] this, but Neocon arrogance once again undercut the old reliable divide-and-conquer strategy the US has counted on to keep these kinds of alliances from congealing. Now that Pandora’s Box is open, I suspect the US will be subject to some rather harsh repayment for its past behaviour. No doubt the Neocons will blame it all on Bill Clinton, who is, of course, a Neocon himself.

The United States, therefore, is a failure internationally. It is also turning into a “failed state” domestically as well. The Signs on Friday had a piece detailing the deterioration of the US infrastructure. The Black Commentator published an article showing how the Republican domestic political initiatives are characteristic of failed states:

The U.S. Is Becoming a “Failed State”

“Privatization of social security is a road to government abdication, the cause of failed statehood.” – Henry C.K. Liu, “The Business of Private Security,” AsiaTimes.

…Social Security – a public prize too fabulously rich to destroy, outright – is to be milked dry by Wall Street under one or another of the privatizing proposals floating around Republican and Democratic Leadership Council circles. “All these proposals have one thing in common,” writes Henry C.K. Liu, Asia Times contributor and chairman of the New York-based Liu Investment Group, in his series, “World Order, Failed States and Terrorism.” “They all try to change Social Security into social risk. The only party to benefit will be the financial-services industry that provides the investment advice and trades.”

Once entrenched in the system, it will be near-impossible to disentangle corporations from Social Security without trillions of dollars in indemnification by the federal treasury against corporate “losses.” This is part of what “social risk” – as opposed to private, corporate risk – is all about, and how the public sphere is swallowed whole and irrevocably. Don’t write your congressperson, after-the-fact. She won’t be able to do a damn thing about it.

No goods to deliver

We are witnessing the domestic version of a phenomenon well known in the Third World: the deliberate creation of “failed states,” national governments that have been maneuvered or coerced into impotence by the World Bank, International Monetary Fund, trade agreements with the United States – any combination of capital and military coercion. These states have become irrelevant to the needs of their own people and, therefore, in a very real sense, illegitimate. As Henry C.K. Liu explains, such states cannot deliver the goods: “Failed states provide only substandard political goods, if any at all. Weak failed states involuntarily forfeit, and strong failed states do so voluntarily, the responsibility for delivering political goods, and leave it to non-state actors, i.e. the private sector through the market mechanism. Privatization of the public sector is more than the outsourcing of state functions. It is the selling off of state prerogatives.”

The Bush regime has summoned the failed state chicken home to roost, with a vengeance, as it attempts to strip away every social obligation of the state to the people. However, the legitimacy of American governments at all levels has long been eroding, as defined by their capacity to provide political goods to the citizenry. For decades, heavily Black cities have busily sold off their “prerogatives” – their assets, tax bases and sovereign powers – to corporations or regional authorities. (See the five-part series, “A Plan for the Cities to Save Themselves,” beginning August 14, 2003.) Forty years after passage of the Voting Rights Act, the act of voting becomes ever more irrelevant to people’s everyday lives.

Even the coercive organs of the state – prisons, policing, the military – pass rapidly into private hands, evidence of advanced state failure. And no one should doubt that the American Gulag, comprising one quarter of the world’s prison inmates, half of them Black, is prima facie proof of massive state failure – a government that delivers incarceration, rather than liberty, to a huge portion of its citizens.

“Another political good,” writes Liu, “is the provision of universal health care and education, the maintenance of a vibrant economy of full employment at living wages that will allow workers to afford decent housing and secure retirement, and a clean environment, without which all rhetoric about liberty becomes irrelevant.” These are, in fact, fundamental attributes and aspirations of civilization as it has evolved in modern times.

Last week, in the context of social spending, we mentioned that corporations can be seen as psychopaths. Here’s a chilling example of the possible consequences of corporate psychopathy from a German biotech company from the book, Food for Thought by John Robbins:

A few years ago, a German biotech company genetically modified a common soil bacterium, Klebsiella planticula, to enable it to break down vegetative waste and produce ethanol.

It seemed like a huge accomplishment -- ethanol could be used as a gasoline alternative and the rest of the biomass as compost for farming. Hopes were high and it was field-tested at Oregon State University.

But when the genetically modified bacterium was added to living soil, the seeds planted in the soil (to produce the vegetable matter to be broken down) sprouted but then died. The genetically modified Klebsiella was a feisty little guy, knocking out a fungus that plants need to extract nutrients from the soil. Without it, plants can't survive.

More frightening, the genetically modified bacteria persisted in the soil. Had it been released, it could have become virtually impossible to eradicate, says author John Robbins in his newest book The Food Revolution (Conari Press, $28.95).

"It could have ended all plant life on this continent," geneticist David Suzuki says in the book. "The implications of this case are nothing short of terrifying."

These are the kinds of things corporations mess with just to make a profit. Here’s more from the same book:

Another problem is Monsanto's "terminator technology," in which seeds are rendered sterile after one planting. Currently 80 per cent of crops in developing countries use saved seeds, but with this new technology seeds must be purchased each year.

Robbins says another company has patented a genetic process that makes seed germination and growth dependent upon repeated doses of the company's own chemicals. Yet another patent turns off the genes plants depend on to fight viral and bacterial infection -- only the company's own chemicals will turn the genes back on.

Experiments in the biotech food industry have included inserting flounder genes into tomatoes, human genes into salmon, and rat and bacteria genes into broccoli. Labs around the world are researching splicing genes into fish from chickens, humans, cattle and rats.

When genes shuttle between a wide variety of species, they can take with them genetic parasites such as viruses, usually kept in check by species barriers, Robbins says. "It's deeply troubling."

The corporation as psychopath idea became widely discussed last year with the release of a documentary, The Corporation by Mark Achbar, Jennifer Abbott, and Joel Bakan and a book, The Corporation: The Pathological Pursuit of Profit and Power, by Joel Bakan (Free Press, 2004). The facts are hard to refute, even for pro-corporate outlets like The Economist :

The lunatic you work for

May 6th 2004

From The Economist print edition

If the corporation were a person, would that person be a psychopath?

TO THE anti-globalisers, the corporation is a devilish instrument of environmental destruction, class oppression and imperial conquest. But is it also pathologically insane? That is the provocative conclusion of an award-winning documentary film, called “The Corporation”, coming soon to a cinema near you. People on both sides of the globalisation debate should pay attention. Unlike much of the soggy thinking peddled by too many anti-globalisers, “The Corporation” is a surprisingly rational and coherent attack on capitalism's most important institution.

It begins with a potted history of the company's legal form in America, noting the key 19th-century legal innovation that led to treating companies as persons under law. By bestowing on them the rights and protections that people enjoy, this legal
innovation gave the company the freedom to flourish. So if the corporation is a person, ask the film's three Canadian co-creators, Mark Achbar, Joel Bakan and Jennifer Abbott, what sort of person is it?

The answer, elicited over two-and-a-half hours of interviews with left-wing intellectuals, right-wing captains of industry, economists, psychologists and philosophers, is that the corporation is a psychopath. Like all psychopaths, the firm is singularly self-interested: its purpose is to create wealth for its shareholders. And, like all psychopaths, the firm is irresponsible, because it puts others at risk to satisfy its profit-maximising goal, harming employees and customers, and damaging the environment. The corporation manipulates everything. It is grandiose, always insisting that it is the best, or number one. It has no empathy, refuses to accept responsibility for its actions and feels no remorse. It relates to others only superficially, via make-believe versions of itself manufactured by public-relations consultants and marketing men. In short, if the metaphor of the firm as person is a valid one, then the corporation is clinically insane.

There is a tendency among anti-globalisers to demonise captains of industry. But according to “The Corporation”, the problem with companies does not lie with the people who run them. Sir Mark Moody-Stuart, a former boss of Shell, comes across in the film as a sympathetic and human character. At one point, he and his wife greet protesters camped on the front lawn of their English cottage with offers of a cup of tea and apologies for the lack of soya milk for the vegans among them. The film gives Sam Gibara, boss of Goodyear, time to air his opinions, which are given a reasonably neutral edit. Ray Anderson, boss of Interface (which claims, with psychopathic grandiosity, to be the world's largest commercial carpetmaker) is given the hero treatment. Having experienced an “epiphany” about the destructive and unsustainable nature of modern capitalism, Mr. Anderson has donned the preacher's cloth to spread the religion of environmental sustainability among his peers.

The main message of the film is that, through their psychopathic pursuit of profit, firms make good people do bad things. Lucy Hughes of Initiative Media, an advertising consultancy, is shown musing about the ethics of designing marketing strategies that exploit the tendency of children to nag parents to buy things, before comforting herself with the thought that she is merely performing her proper role in society. Mark Barry, a “competitive intelligence professional”, disguises himself as a headhunter to extract information for his corporate clients from rivals, while telling the camera that he would never behave so deceitfully in his private life. Human values and morality survive the onslaught of corporate pathology only via a carefully cultivated schizophrenia: the tobacco boss goes home, hugs his kids and feels a little less bad about spreading cancer. Company executives and foot soldiers alike will identify instantly with this analysis, because it is accurate.

One wonders whether human values and morality really do survive corporate rule. No doubt it is true that all corporate officers are not themselves psychopaths, but those who are may find their rise to the top easier.

Here is where American Libertarianism runs aground. Libertarians in the United States believe that corporations should also enjoy liberty and that the only threat to our liberties comes from the government. On a day-to-day basis, our liberties are infringed upon much more by corporations than by government. Furthermore, corporate governance is authoritarian, not democratic. And when you add to that the fact that, in true fascist fashion, corporations control the government, there is not much liberty left, no matter what the Constitution says.

Monday, March 21, 2005

Signs of the Economic Apocalypse 3-21-05

From Signs of the Times 3-21-05:

The dollar regained a bit of strength last week. The euro closed at 1.3314 dollars, down 1% from last week’s 1.3454. That would make one dollar worth .7510 euros, compared to last week’s .7433. Gold closed at $439.70 down 1.4% from last week’s close of $445.90. That would make an ounce of gold worth 330.25 euros, down a bit (0.36%) from last week’s 331.43. Oil closed at $56.72 a barrel, up 4.2% from last week’s $54.43. Oil in euros would be 42.60 a barrel, up 5.3% from last week’s 40.46. An ounce of gold, then, would buy 7.75 barrels of oil compared to 8.19 last week. The Dow Jones Industrial Average closed at 10,615.34, down another 1.5% from last week’s 10,774.36. The NASDAQ closed at 2009.79, down 1.6% from last week’s 2070.61. The yield on the ten-year U.S. Treasury Bond was 4.50%, down from last week’s 4.54%.

A good week, then, for the dollar and a sharp increase in the price of oil were the stories this past week. The 1% increase in the dollar versus the euro did come after a 1.5% drop in the first half of March but it did reflect some good news on Tuesday that non-U.S. holdings of long-term, dollar-denominated securities increased sharply (50%) between December 2004 and January 2005. The Economist magazine, normally bullish on the United States, was quick to seize on that news, but also quick not to make too much of it:

[O]n Tuesday March 15th, keenly-awaited figures from America’s Treasury showed a big increase in net purchases by foreigners of American long-term securities. The net flow in January ($91.5 billion) was 50% up on December’s figure ($60.7 billion), way over January’s trade deficit of $58.3 billion. Hidden in the figures were some interesting trends: purchases of American shares picked up, for example—which suggests a genuine fondness for the dollar unlikely to be unwound soon. But so too did purchases from the Caribbean—home to even more hedge funds than The Economist’s own St James’s Street—which could be liquidated tomorrow. Mark Austin, chief of foreign-exchange research at HSBC, a British bank, points out that central banks bought about the same amount as before, while private-sector purchases increased sharply. Is that positive for the dollar or negative? The currency rallied, though questions persisted. The Treasury data tend to be volatile and in any event show only a portion of real flows. And one month does not a summer make. But taken together with other figures from the Federal Reserve showing an increase in February and early March in the securities it holds in custody for foreign owners, they do suggest two things. The first is that the full shock-horror scenario, in which Asian central banks dump the dollar and America promptly collapses, is way overdone. The second is that although Bretton Woods II is still in business, it is likely to change fundamentally.

The fact is that the markets are hyper-sensitive to these figures, and analysts pore over them like Kremlinologists. The fear that central banks are contemplating industrial action against the dollar—and the collective sigh of relief when it seems they are not—is part of a broader unease about the nature and solidity of America’s economic growth. Based, as it is, on mammoth consumption by both the private and public sectors—i.e., on big trade and fiscal deficits—it needs foreigners willing to suspend disbelief and buy shiploads of securities denominated in a currency that has steadily lost value for about 40 years.

So far, the foreigners—mainly Asians plus a few outliers, including Russia and Brazil—have obliged, permitting America to scoop up 75% of the world's surplus savings. Together, Asian central banks have accumulated about $2.5 trillion in foreign-exchange reserves, up almost a quarter in little more than a year, most of it in dollars; Japan and China alone have reserves of nearly $1.5 trillion between them.

…But the Faustian deal into which Bretton Woods II has turned—whereby America gets to spend beyond its means and Asia gets to invest in export-led growth, at the cost of recycling much of its earnings in America’s securities markets—turns out to have a shorter horizon than most people reckoned. It could turn sour at any time now. And confirmation of that came from another set of economic data, released on
Wednesday: America’s fourth-quarter current-account deficit widened to $187.9 billion, a record.

The dollar’s role as the reserve currency of discriminating central bankers everywhere has already lost ground. On figures from the Bank for International Settlements (BIS), the world held 76% of its reserves in dollars in 2000; by 2003, the proportion had slipped to 68%. Part of that reflects the dollar’s slide in value. But part reflects growing diversification, which is as it should be. Asian countries are trading more with each other these days, as well as with Europe. The euro now offers a liquid alternative to the dollar, and Europe shows no signs of wanting to flood the
world with its paper.

Russia, Indonesia, South Korea, India and Japan have all murmured significantly, if guardedly, about diversifying of late. Though figures are elusive, the best guess is that most are doing so already. At the end of February, officials and academics from all around Asia met in Bangkok to discuss the sliding dollar and concluded that they should move more definitively to their own advantage. There are repeated suggestions that regional payments systems should be set up, such as the gold dinar standard proposed for the Islamic world in 2002 by Malaysia’s prime minister.

It is possible that, this time around, OPEC and other oil exporters will channel their windfall profits through the Treasury’s books. But what will happen if a significant portion of countries decided not to add to their dollar holdings? More than the dollar would weaken. Big foreign buyers of bonds have been keeping interest rates down, perhaps by one percentage point, as Alan Greenspan suggests. That would change, for a start. Without this support, the yield on the ten-year benchmark Treasury bond could rise to more than 5%, pushing up interest rates on mortgages. That, in turn, could prick America’s house-price bubble and prompt a general deleveraging, with implications for economic growth both in America and elsewhere. Standard & Poor’s, a rating agency, warned on Monday that a weak dollar would substantially increase concerns about credit quality.

This is perhaps not the week to air such apocalyptic concerns, though they are much on Buttonwood’s mind. In the end, what foreign central bankers have it in their power to do is to reveal before all the world that the mighty American economic empire has no clothes...

Even the good news of the increase in foreign purchases of dollar instruments is a bit of spin, since that is the same as saying that U.S. indebtedness increased. And speaking of “apocalyptic concerns,” I couldn’t resist this headline from the New York Times: U.S. Added a Record $666 Billion to Its Debts Abroad Last Year.

If all it takes is a rise in interest rates on the ten-year U.S. Treasury Bond from 4.5% to 5.0% to start a worldwide plunge, as the columnist from the Economist wrote, then we are in trouble. Notice the non-emotional terms like “deleveraging” or “concerns about credit quality.” What they are talking about there is a massive amount of bankruptcies and foreclosures on homes.
For that reason, if you combine rapidly increasing oil prices (which cause inflation across the board and will lead to higher interest rates) with the outsourcing of high-paying jobs from the United States to India and China, which will also cause bankruptcies and foreclosures, the risk seems great, even in the relative short term. And, as the Economist pointed out, the consequences of this will be bad for the whole world, not just the United States. Here is what Paul Craig Roberts wrote about outsourcing this week:

Outsourcing Innovation... And Everything Else


A country cannot be a superpower without a high tech economy, and America's high tech economy is eroding as I write.

The erosion began when US corporations outsourced manufacturing. Today many US companies are little more than a brand name selling goods made in Asia. Corporate outsourcers and their apologists presented the loss of manufacturing capability as a positive development. Manufacturing, they said, was the "old economy," whose loss to Asia ensured Americans lower consumer prices and greater shareholder returns. The American future was in the "new economy" of high tech knowledge jobs.

This assertion became an article of faith. Few considered how a country could maintain a technological lead when it did not manufacture.

So far in the 21st century there is scant sign of the American "new economy." The promised knowledge-based jobs have not appeared. To the contrary, the Bureau of Labor Statistics reports a net loss of 221,000 jobs in six major engineering job classifications.

Today many computer, electrical and electronics engineers, who were well paid at the end of the 20th century, are unemployed and cannot find work. A country that doesn't manufacture doesn't need as many engineers, and much of the work that remains is being outsourced or filled with cheaper foreigners brought into the country on H-lb and L-1 work visas.

Confronted with inconvenient facts, outsourcing's apologists moved to the next level of fantasy. Many technical and engineering jobs, they said, have become "commodity jobs," routine work that can be performed cheaper offshore. America will stay in the lead, they promised, because it will keep the research and development work and be responsible for design and innovation.

Alas, now it is design and innovation that are being outsourced. Business Week reports ("Outsourcing Innovation," March 21) that the pledge of First World corporations to keep research and development in-house "is now passé." Corporations such as Dell, Motorola, and Philips, which are regarded as manufacturers based in proprietary design and core intellectual property originating in R&D departments, now put their brand names on complete products that are designed, engineered, and manufactured in Asia by "original-design manufacturers" (ODM).

Business Week reports that practically overnight large percentages of cell phones, notebook PCs, digital cameras, MP3 players, and personal digital assistants are produced by original-design manufacturers. Business Week quotes an executive of a Taiwanese ODM: "Customers used to participate in design two or three years back. But starting last year, many just take our product."

Another offshore ODM executive says: "What has changed is that more customers need us to design the whole product. It's now difficult to get good ideas from our customers. We have to innovate ourselves." Another says: "We know this kind of product category a lot better than our customers do. We have the capability to integrate all the latest technologies." The customers are America's premier high tech names.

The design and engineering teams of Asian ODMs are expanding rapidly, while those of major US corporations are shrinking. Business Week reports that R&D budgets at such technology companies as Hewlett Packard, Cisco, Motorola, Lucent Technologies, Ericsson, and Nokia are being scaled back.

Outsourcing is rapidly converting US corporations into a brand name with a sales force selling foreign designed, engineered, and manufactured goods. Whether or not they realize it, US corporations have written off the US consumer market. People who do not participate in the innovation, design, engineering and manufacture of the products that they consume lack the incomes to support the sales infrastructure of the job diverse "old economy."

"Free market" economists and US politicians are blind to the rapid transformation of America into a third world economy, but college bound American students and heads of engineering schools are acutely aware of declining career opportunities and enrollments. While "free trade" economists and corporate publicists prattle on about America's glorious future, heads of prestigious engineering schools ponder the future of engineering education in America.

Once US firms complete their loss of proprietary architecture, how much intrinsic value resides in a brand name? What is to keep the all-powerful ODMs from undercutting the American brand names?

The outsourcing of manufacturing, design and innovation has dire consequences for US higher education. The advantages of a college degree are erased when the only source of employment is domestic nontradable services.

According to the Los Angeles Times (March 11), the percentage of college graduates among the long-term chronically unemployed has risen sharply in the 21st century. The US Department of Labor reported in March that 373,000 discouraged college graduates dropped out of the labor force in February--a far higher number than the number of new jobs created.

The disappearing US economy can also be seen in the exploding trade deficit. As more employment is shifted offshore, goods and services formerly produced domestically become imports. Nothink economists and Bush administration officials claim that America's increasing dependence on imported goods and services is vidence of the strength of the US economy and its role as engine of global growth.

This claim ignores that the US is paying for its outsourced goods and services by ransferring its wealth and future income streams to foreigners. Foreigners have quired $3.6 trillion of US assets since 1990 as a result of US trade deficits.

Foreigners have a surfeit of dollar assets. For the past three years their increasing nwillingness to acquire more dollars has resulted in a marked decline in the dollar's value in relation to gold and tradable currencies.

Recently the Japanese, Chinese, and Koreans have expressed their concerns. Acording to Bloomberg (March 10), Japan's unrealized losses on its dollar reserve holdings have reached $109.6 billion.

The Asia Times reported (March 12) that Asian central banks have been reducing their dollar holdings in favor of regional currencies for the past three years. A study by the Bank of International Settlements concluded that the ratio of dollar reserves held in Asia declined from 81% in the third quarter of 2001 to 67% in September 2004. India reduced its dollar holdings from 68% of total reserves to 43%. China reduced its dollar holdings from 83% to 68%.

The US dollar will not be able to maintain its role as world reserve currency when it is being abandoned by that area of the world that is rapidly becoming the manufacturing, engineering and innovation powerhouse.

Misled by propagandistic "free trade" claims, Americans will be at a loss to understand the increasing career frustrations of the college educated. Falling pay and rising prices of foreign made goods will squeeze US living standards as the declining dollar heralds America's descent into a has-been economy.

Meanwhile the Grand Old Party has passed a bankruptcy "reform" that is certain to turn unemployed Americans living on debt and beset with unpayable medical bills into the indentured servants of credit card companies. The steely-faced Bush administration is making certain that Americans will experience to the full their country's fall.

What better sign of how far the United States has fallen economically than the near-bankruptcy of one of its flagship corporations, General Motors. And what is Wall Street’s advice to General Motors to turn things around? Innovate? Invest? No. General Motors is told to cut pensions and health benefits for retirees and employees. I don’t know what’s worse, the blatant class warfare from above or the total lack of imagination. Most of whatever profits General Motors had during the last decade came from its credit division, GMAC, see this from Joseph Kay:

GM announces sharply lower profit figures

Decline of auto giant highlights crisis of US manufacturing

By Joseph Kay18 March 2005

General Motors announced Wednesday that it faces a huge loss for the first quarter of the year and much lower profits than previously projected for all of 2005. The news from GM, the world’s largest auto manufacturer by sales, provoked a sell-off of the company’s shares on Wall Street.

Chief Executive Officer Rick Wagoner and Chief Financial Officer John Devine announced that the company expects to post a loss of about $846 million ($1.50 per share) for the first three months of 2005. This would be GM’s largest quarterly loss since 1992, when it was on the verge of bankruptcy. The company had previously announced that it would break even for the quarter. GM also revised downward its expected profits for 2005, from $4-$5 per share to $1-$2 per share, excluding one-time expenses.

Following the announcement, the price of GM stock plummeted, ending the trading day down by 14 percent. The sell-off eliminated some $12.7 billion in shareholder equity. It was the steepest decline of the company’s stock since the stock market crash of 1987. During trading on Thursday, share prices fell below $28, down from over $80 five years ago.

Indicating the lack of confidence of investors in the future of the company, GM’s bond rating was downgraded by all major ratings firms. Its bonds are now hovering just above junk bond status. A junk bond rating means investors are skeptical that the company will pay off its debts. If the rating is downgraded any further, GM will face sharply higher interest rates on the bond market, further eroding its bottom line.

A downgrading to junk status could trigger a sell-off with serious consequences for the broader bond market. One Wall Street Journal article on Thursday began by noting that the announcement by GM has prompted “investors [to reassess] the risk of lending money to US companies.”

…At the same time it announced its new profit figures, GM made it clear that it plans to place the burden of the company’s problems on the backs of its workers. All 38,000 North American salaried employees will be denied merit pay raises this year, and the company plans to reduce its contribution to retirement accounts for all workers by 60 percent.

To cut production, GM has scheduled for this summer the permanent closure of three assembly plants. They are located in Baltimore, Maryland; Lansing, Michigan; and Linden, New Jersey. The closing of the Lansing plant alone will result in 3,000 layoffs. Other plants are scheduled for temporary shutdowns, including the truck assembly plant in Janesville, Wisconsin.

These, however, are merely preliminary measures. Wagoner said that while the company “made a lot of progress on reducing structural costs, what we have saved on the operating side has been filled in by higher legacy costs...We need to be more creative and more effective in addressing legacy costs. They are kind of swamping a competitive operational performance.”

Put more simply, pension and health benefits that GM workers were able to win over previous decades are to be sacrificed to improve the company’s bottom line.
GM’s health care spending alone is expected to rise to $5.6 billion in 2005, up from $5.2 billion last year. Over 1.1 million Americans—including current workers, retirees and their families—are presently covered by GM health care obligations, making the company the largest private health care provider in the country.

In addition to benefits such as health care and pensions, GM workers have won the right to continue to receive compensation—at least 75 percent of their pay—after being laid off. From the perspective of management and Wall Street, all of these “legacy costs” are intolerable constraints on the company’s ability to radically restructure itself so as to once again become profitable.

Wall Street analysts are placing pressure on the company to take ruthless measures. Stephen Girsky, chief auto analyst at Morgan Stanley, argued, “The company’s market share doesn’t support its size. They have too many plants, too many workers, too many models, too many dealers and their employee benefits are too high.”

…A crisis of American manufacturing

The deep problems that have again come to the surface at General Motors are an expression of a protracted decline of profitability in American manufacturing. Once the paragon of the US economy, the auto industry has undergone a profound decay over the past several decades.

GM once claimed, “What’s good for GM is good for America.” It can be said today that what ails General Motors is what ails American industry. GM is now a symbol of the decline of American economic dominance.

The problem of profitability at GM is not new. Over the past two decades, the company has seen its US market share steadily erode, from a high of over 50 percent during the post-war period. As its manufacturing has declined, GM has increasingly relied on its financing arm, General Motors Acceptance Corp (GMAC), to remain profitable. In addition to auto financing, GMAC finances home mortgages and engages in other activities unrelated to the auto industry. In recent years, GM would have been consistently in the red if it were not for GMAC.

GM’s reliance on its financial subsidiary is indicative of the increasingly subordinate role played by manufacturing in the American economy. As profits from production have declined, the American ruling elite has turned to various forms of financial speculation that do not actually produce anything of value. At the same time, it has sought ever more systematically to shift production from the US to impoverished regions of the world where labor costs are far lower. This process is a concentrated expression of the increasing parasitism of American capitalism.

The crisis of General Motors reveals the underlying weakness of the American economy, which, in turn, provides an insight into the driving forces behind the explosive growth of American militarism. Internally corroded, American capitalism turns more and more to military violence to maintain its position of dominance and impose American-style “free market” relations in every part of the world.

I was amazed to see that more than a million people in the U.S. are covered by General Motors’ employee and retiree health insurance. Now they will be asked to pay more. Later, perhaps, it will be taken away. This shows the absurdity of having corporations provide safety nets and social spending. A corporation is designed by law and charter to be a psychopath, even to its own employees. Why would we want our health care and retirement income to be in the hands of psychopaths? A legitimate government is actually designed by law to have a conscience with regard to its own people (it is still, in a nation-state system, designed to be psychopathic to the rest of the world). If the government spent money on social insurance instead of invading other countries, then corporations could compete on efficiency without destroying the social fabric. We don’t, in the United States, have a legitimate government, though. Our government is completely beholden to psychopathic corporations, to the military death machine, and to a destructive system of exploitation of humanity and of the earth.

One thing you notice perusing writings on the economy is that the idea of “economic growth” is rarely questioned. Stan Cox pointed that out in a Counterpunch article last week:

While there are not enough members of Congress willing to oppose the building of roads in wilderness areas or the gutting of the Clean Air Act, many do take those positions. Such issues are OK to discuss in polite society. On the other hand, when did you last hear a national politician say, "This economy's growing too fast, and if elected, I'll work to cut growth!"?

They never say that, because they would be admitting that capitalism is
. There is no such thing as capitalism without growth. Capitalists -- a class of folks whose income is "unearned" (a term devised and used, with uncharacteristic clarity, by the IRS) -- have a well-understood role in society: to take a pile of money and turn it into a bigger pile of money.

But a bigger pile of money, once achieved, is not an end but another beginning. To the capitalist, that pile is useless unless it can be turned into an even bigger pile. As a result, more resources are used and wastes expelled this year than last, and even more next year.

Now, if you're a politician or, say, a liberal pundit, you can't very well tell working people, "I'm afraid that our capitalist class is going to be needing an increasingly
bigger share of our national income for a while -- well, um, actually forever -- and it's all going to have to come out of your paychecks."

Instead, you talk about economic growth and its seemingly miraculous ability to keep boosting the capitalist's return on investment while not completely wiping out the
workers who generated it. No problem: Money's imaginary, so bigger piles of it are always possible, and there is no biggest pile.

But, of course, we do have a problem. We have no infinite piles of the stuff (even the renewable stuff) that's needed to turn money into more money. There's a rule that no species can increase its resource exploitation infinitely, and Homo sapiens has not been granted a waiver. Fossil fuels, soil, salmon, and healthy ecosystems are real, and the rules that apply to money -- which is no more real than 'Monopoly' money -- don't apply on planet Earth.

… Those who want to square the circle, to have infinite economic growth on a finite planet, generally invoke greater efficiency. Technology is supposed to let businesses generate more monetary wealth while using and abusing less of the material world.

Now, nobody -- no CEO, no environmentalist, not even the Antichrist -- is going to argue against efficiency. But capitalism has a way of turning good things inside out.

If you're a business owner, and you find you can produce the same number of lawn chairs or helicopters while spending less on energy, materials, labor, or waste disposal, that's efficiency, and that means money in the bank for you. But it's your job as a good capitalist to get that money out of the bank, ASAP, and invest it in the real world, where you can turn more stuff into more money. (No matter if demand is down -- buy advertising!)

In a growth-dependent economic order, efficiency simply provides more opportunities for production and consumption. Relying on efficiency to make growth less destructive is like trying to run up a "Down" escalator that never stops accelerating.

Ecological economics, a heretical branch of the discipline, has demonstrated
conclusively that if we're to live within our material means, planet-wide, we must (1) limit our species' rate of reproduction, (2) hold our "throughput" of resources and wastes down to a sustainable level, and (3) set upper and lower limits on monetary wealth and income. These policies make up a package; following only one or two of them won't do the job.

While most ecological economists are not explicitly anti-capitalist -- that is, they do not advocate taking society's most important investment decisions out of the hands
of an unelected capitalist class and putting them into democratic institutions -- it is difficult to see how capitalists or capitalism could flourish in the kind of world they envision.

And there are ways of making investment decisions democratic. For example, in his book After Capitalism, David Schweikart outlines a vision of the future that we all would find familiar, with private property, buying, selling, profits, and entrepreneurs - but without capitalists! Letting all of society, not just a tiny sliver, decide how to
invest would not by itself stop the cancerous growth that's killing the ecosphere. But it's the necessary step.

The problem with Utopian economic and political schemes in the fallen world we live in is that they can easily be subverted if people do not wake up to some basic realities. If it is true that four percent of the population are psychopaths completely lacking a conscience, and if a full half of the people are irredeemably self-serving and mechanical, then no political or economic reform can truly take place without clear, objective awareness on the part of those who do have a conscience and a potential soul of the reality of a world where those who can lie without shame rise to the top of power hierarchies.

Monday, March 14, 2005

Signs of the Economic Apocalypse 3-14-05

From Signs of the Times 3-14-05:

The euro closed at 1.3454 dollars on Friday, which puts the dollar at .7433 down 1.6% compared to last week’s 1.3239 and .7553. Gold closed at $445.90 an ounce, up sharply (2.4%) from last week’s $435.30. Oil closed at $54.43 a barrel (40.46 euros) up 1.2% in dollars but virtually unchanged (up 0.4%) in euros from last week’s $53.78 (40.62 euros). An ounce of gold would buy 8.19 barrels of oil compared to 8.09 last week. The Dow closed at 10,774.36 down 1.5% from last week’s 10,940.55. The NASDAQ closed at 2041.60, down 1.4% from last week’s 2070.61. The yield on the ten-year U.S. Treasury bond was 4.54% a sharp rise from last week’s 4.31%.

After the pattern we noticed during the last two weeks in which the early part of the week saw some bad news about the economy released, only to see some report released on Friday with some good, short-term news to send people into the weekend optimistic, I was looking for the good news late Friday afternoon, since the news early in the week was especially bad. This is all they could come up with:

Consumer Confidence Jumps on Hiring Surge
WASHINGTON - Consumer confidence, which had plunged sharply in February, jumped by the largest amount in seven months in early March as Americans were heartened by a big surge in hiring.

The AP-Ipsos consumer confidence index rose to 84.2 in early March, a gain of 6.4 percent from a February reading of 79.1. It was the largest one-month gain since a 13.9 percent rise last August.

The March rebound came from stronger confidence about current economic conditions, job prospects and personal finances. The survey was taken the first three days of this week, following the news last Friday that the economy created 262,000jobs last month, the best showing in four months.

Analysts attributed the big jump in the index to the sharp rise in employment reported by the government last week. With job gains expected to continue in coming months, they forecast further increases in consumer confidence. However, they cautioned that rising oil prices, which are expected to push gasoline pump prices to new highs later this spring, could act as a damper on confidence.

"If job growth keeps improving, consumer confidence will improve as well," said Stuart Hoffman, chief economist at PNC Financial Services in Pittsburgh. "In my outlook, consumer confidence will move higher in coming months but holding it back somewhat will be the increases in gasoline and home heating oil prices."

Here is a sampling of the other headlines—all negative: Dollar catching Asian flu , U.S. Trade Deficit Grew to $58.3 Bln in January , , 30-Year Mortgage Rates at 7 Month High , Dollar Slips Again as Trade Gap Widens , Stocks Fall on Intel, Trade Gap and Oil , and so on.

The positive jobs report that sparked the increase in consumer sentiment hardly stands up to scrutiny itself. The types of jobs being created, when combined with fact that so many workers who might normally be unemployed are in Iraq or Afghanistan leaves less room for real optimism. Paul Craig Roberts, the former Reagan Treasury official, spells it out:

Turning Chinese

So Much for the New Bush Economy

The February payroll jobs figures released last Friday by the Bureau of Labor Statistics show a continuation of America's descent into a third world service economy.

The Bush administration cheered the creation of 229,000 private sector jobs (which still leaves Bush with a net private sector job loss during his reign). However, once we look at the details, the joy vanishes: 174,000 of the jobs, or 76% of the total, are in nontradable services.

Administrative and waste services (largely temporary help and employment services) account for 61,000 or 35% of the new service jobs. The remainder are accounted for by construction (30,000), retail trade (30,000), healthcare and social assistance (27,000), and waitresses and bar tenders (27,000).

The US has apparently lost the ability to create high productivity, high value-added jobs in tradable goods and services. The ladders of upward mobility are being dismantled by offshore production for home markets and outsourcing of knowledge jobs.

The BLS reports that the number of employed US technical workers has fallen by 221,000 in six major computer and engineering job classifications during 2000-2004. The largest drops were suffered by computer programmers, followed by electrical and electronics engineers, computer scientists and systems analysts.

So much for the new economy that economists promised would take the place of the lost manufacturing economy.

America's remaining job market is domestic nontradable services. While India and China develop first world job markets, the US labor market takes on the
characteristics of a third world work force. Only jobs that cannot be outsourced are growing.

The Bush economy has seen a loss of 2.8 million manufacturing jobs, a rise in the unemployment rate of 1.2 percentage points, and a stagnation in real weekly earnings.

How bad will things have to get before economists realize that outsourced jobs are not being replaced? Indeed, many American companies are ceasing to have any presence in the US except for a sales force.

Cisco's CEO, John Chambers, declared recently: "What we're trying to do is outline an entire strategy of becoming a Chinese company."

Cisco is establishing a new R&D center in Shanghai. The US corporation manufactures $5 billion of products in China where it employs 10,000 people.

That is just one company, and there are many doing the same thing. The result is abandonment of the American work force by American corporations. Little wonder the Bush administration is the first administration in 70 years to have a net loss of
private sector jobs.

If one US company or a few move offshore, their profits improve and consumer prices are lower. However, when work in general moves offshore, American lose the incomes associated with the production of the goods they consume. Domestic production is turned into imports, with the result that America draws down its accumulated wealth in order to pay for the imports on which it is dependent.

The dollar's value and status as reserve currency cannot forever stand the trade and budget deficits that are now part and parcel of America's economic policy.

Unless there are major changes soon, America's economic future is a third world work force with a banana democracy's worthless currency.

The fall of the dollar gained pace this week, falling 1.6% in just one week. The dollar suffered another shock on Thursday with the statement by Japanese Prime Minister Koizumi endorsing “diversity” in currency holdings. Despite the verbal backtracking of Asian central bankers last week, the abandonment of the dollar as a reserve currency continued, as we can see in this article in the Asian Times:

Dollar catching Asian flu

By Alan Boyd

SYDNEY - They may be telling a different story to money markets, but Asian central banks have been quietly switching their dollar holdings to regional currencies for at least three years, confirm global banking data. In a further, and so far the biggest, setback for the greenback's status as the undisputed reserve currency, Japan on Thursday said it might diversify its holdings, though monetary chiefs later sought to play down the prospect. South Korea rattled currency traders with a similar announcement late last month, followed by a similar backtrack.

China, India, Thailand, Indonesia, Taiwan, the Philippines and Hong Kong have already started a sell-off, despite a diplomatic show of solidarity for the greenback that is prudently designed to prevent a crisis of confidence in exchange systems. The likelihood is that much of this outflow will never return to US dollars as economic interdependence within East Asia and the widening shadow cast by China's trading conglomerates are slowly transforming the traditional market structure.

The Bank of International Settlements (BIS), which acts as a bank for the world's central banks, has just released a study showing that the ratio of dollar deposits held in Asian offshore reserves declined to 67% in September, down from 81% in the third quarter of 2001. India was the biggest seller, reducing its dollar assets from 68% of total reserves to just 43%. China, which directly links the yuan to the dollar and is under US pressure to allow a freer movement of its currency, trimmed the dollar share from 83% to 68%.

This shift conforms with global trends as central banks seek a buffer from the burgeoning US trade and budget deficits. A separate survey by European-based Central Banking Publications found that 29 of 65 nations surveyed were cutting back on the dollar and 39 were buying more euros. America's annual budget deficit of US$500 billion is largely funded by Asian purchases of US government bonds, mostly from China and Japan. The US trade and current account deficits are in a similar plight: it took $530 billion of foreign capital to finance US imports in 2003 and $650 billion last year. Projections for 2005 range up to $800 billion.

Export-led Asian central banks have been accumulating dollars for two decades or more to keep their own currencies competitive. Japan alone has stockpiled $841 billion of reserves to stop the yen from over-valuing as it searches for an economic stimulus. If the central banks pull out, the US may find it hard to borrow the cash it needs to keep the wheels of government turning. The conventional wisdom is that Asia is in too deep to quit, as to do so would invite huge exchange losses.

But some monetary chiefs have already decided there are greater risks in staying in bond markets as rock-bottom US interest rates - still only moderately above the 45-year low reached last year - have dragged yields to unappealing levels. China became a net seller of US government bonds in 2002, shifting much of its reserves to euros, Australian and Canadian dollars. Taiwan left the securities market in the same year and Hong Kong sharply reduced its exposure.

The factors causing the fall of the dollar are only increasing in power. The trade deficit is increasing, the U.S. budget deficit is increasing, the price of oil is increasing, and the Bush administration not only isn’t doing anything to fix any of those problems, but it seems to be actively encouraging them. Why?

To answer that question, I would like to quote some things Al Martin said early in Bush’s first term. In 2002, he wrote:

It's become very apparent that Congress, the White House and the government have abandoned any notion of fiscal responsibility or even rational political judgment. Washington has effectively become a free-for-all in which one senator gets up and says, "I can spend a hundred billion more than you can." These are politically popular spending programs, which are totally wasteful.

The Congress is completely out of touch with reality. The Bush Administration and Congress have essentially gone wild. There are no checks anymore. They're authorizing the expenditure of huge sums of money, which none of the agencies even want or have any idea of how to spend. It's a different environment now. Washington sees an opportunity to act the way it wants to act - without any restraints.

…Government spending amounts to at least $1.5 trillion in additional spending over five years, and all the numbers haven't been added up yet. This includes everything from defense to security to agriculture. We are literally plying government agencies with money that they don't want. They have said they don't want and don't even know how they're going to spend it. This is money that's going to get spent on tremendous weapons systems and help defense contractors. If you look at all the industries that are going to benefit - and individual companies that are going to benefit - you will understand why the Republicans are pushing it. This is Bush Cabal Heaven.

In other words, there will be a $1.5 trillion increase over five years (which is deficit financed) and two thirds or more of that spending will be effectively wasted. The deputy head of the GAO has already said so, and we are still in an economy that is $5.5 trillion in debt - with no foreseeable surpluses being generated in the near future.

In addition, interest rates have been lowered and the Bush White House is going to pressure Greenspan to keep interest rates artificially low longer than they should be. This will create an inflationary whammy down the road. We are in effect building a potential economics time bomb for this nation.

In other words, what is happening now was completely foreseeable, and many did foresee it. In fact, we have been foreseeing it for so long, some people question whether the crash is going to happen. A relative of mine told me that what I have been saying about the economy makes sense, but that I had been predicting a crash for three years and it hasn’t happened yet. This week’s news may be the turning point, though. I’m in good company here, though, since Stephen Roach has had to answer the same questions:

On this fifth anniversary of NASDAQ 5000, there is an eerie sense of déjà vu. Unlike the excesses in equities five years ago, today’s bubble is more of an interest-rate and currency phenomenon — complete with extraordinary compressions of interest-rate spreads in notoriously risky asset classes such as emerging-market debt, high-yield securities, and a broad array of credit instruments. In my view, these bubbles are joined at the hip, with today’s excesses very much an outgrowth of the post-equity-bubble defense tactics of America’s Federal Reserve. Excess liquidity and extraordinarily low real interest rates are indeed the “candy” of the current profusion of carry trades (see my 25 February dispatch, “The Instruments of Rebalancing”).

There’s another important similarity with the heady days of early 2000 — one that pertains more to the psyche of the markets. Emboldened by a recent outbreak of Goldilocks-type conditions in the macro space — namely, new hopes of inflationless growth — investors are becoming more and more combative at my rebalancing presentations. “You don’t get it,” they increasingly lecture me, “we live in a newly symbiotic world.” After all, they go on to say, as long as Asian central banks and their infinitely potent printing presses keep financing the excesses of the American consumer, why worry? “It’s in everyone’s best interest that this continues,” is the punch line I hear all too often these days. And, of course, that’s pretty much the way it has worked out so far, with the major nations of the world having managed to cope just fine with all the stresses and strains I seem so concerned about. I am getting challenged more and more these days as to why I believe imbalances will ever come to a head. Motive is not my concern. I certainly concede that it is in everyone’s best interests to put off the day of reckoning. The big question is, Can they?

The answer lies in what can be called the “paradox of stability” — the possibility that a seemingly tranquil status quo is, in fact, masking a dangerous build-up of tensions. That is a clear risk today, in my view. While it is possible and, for some, even easy to draw comfort from the appearance of a new symbiosis between debtor (America) and creditor nations (mainly in Asia), there is a worrisome undercurrent of tensions now building. Such signs are evident on the real side of the global economy, its financial underpinnings, and also in the political arena. Ironically, this confluence of forces could well be reaching a critical mass just when investors have mistakenly concluded that this new symbiosis — code words for yet another New Paradigm — is rewriting time-honored macro rules.

Back to Al Martin in 2002, one of the reasons the economic crash is so easy to predict, is that the Bushes are so predictable:

When George Bush II got into office, he immediately reverted to a Bush. He can’t help himself. He’s a Bush, so immediately he ratcheted up federal spending especially on defense ­ into a slowing economy. The slowing economy was not Clinton’s fault, and it wasn’t Bush’s fault. It was just a natural reaction of a speculative bubble that had been created in the internet industry.

When that bubble burst, the effects rippled throughout the economy, and the economy slowed down. Therefore Bush was put in a difficult political position. He knew the economy was slowing, yet being a Republican and being a Bush, he couldn’t help himself, but to spend more money on defense. Then he proceeded to institute the largest tax cut in the history of the country. People think that since they got their $300 check in the mail, that’s it. People must remember that this is not a one-time tax cut, but it’s a ten-year program, a $1.6 trillion tax reduction. It is the largest tax reduction package ever put through. It should also be remembered that 93% of the tax benefits of this package go to those earning $200,000 a year or more. Because of this tax cut and the dramatic increase in defense spending into an economy which is already slowing, Bush has taken what was a projected 10 year accumulated surplus of $2.2 trillion and turned that into a negative number. As of fiscal year September 30, 2001, when all previous surpluses had been exhausted, Bush is going to take a zero surplus economy (a break-even economy) and, by September 30, 2002, we’re looking at a $250 billion deficit. By September of 2003, we’re looking at a $400 billion deficit.

The reason they have been doing this is not stupidity but extreme Machiavellian cleverness:

The Bush Cabal has given up and all they're doing is trying to put in place as much of their agenda as possible.

They are appropriating money with reckless abandon and complete disregard for the economy - as if they don't care any more. Even the Washington Post has noticed, having published an article called "Spend spend spend."

Then, when everything falls apart in the United States, that money from Republican offshore accounts will be repatriated and the Bush Cabal will simply buy up all American publicly traded businesses and industries for ten cents on the dollar. We see this massive conversion of Republican scamscateer money into gold, in anticipation of further declines in the dollar.

According to Martin, the amount of money looted is massive:

Former FHA commissioner Catherine Austin Fitts points out that there is $3.3 trillion missing from the Department of Defense, HUD, etc. (See "The Missing Money: Working Harder and Getting Less").

The loss has been recently certified by House Committee, which is in charge of investigating this fraud, and she sent a letter to her Congressman Van Hilleary asking him what he plans to do about it.

Since then the Treasury Department and the Comptroller of the Currency have resisted accepting congressional certification because the Treasury Department has to sign off on it. The reason they're resisting obviously is because once the Treasury Department and the Comptroller sign off on it, the "missing" $3.3 trillion have to be added to the National Debt.

Because of this debt certification, I will revise my estimate of the total National Debt from $14 trillion to $18 trillion. That would include the $500 billion which Treasury Secretary O'Neill said he couldn't find. ( See "Imperial State Power in America").

The situation is truly chaotic. No federal agency can balance its books. The Treasury Department doesn't know how many treasury securities are outstanding. No one actually knows what the total debt of the United States really is. No one knows what the future debt or future contingent debt is. You're seeing the results of this in our domestic securities market. We're the only first world power which can not give a definitive accounting of its own debt.

If you look at the $18 trillion debt, about $12 trillion of it represents straight out and out fraud. When people ask where did the money go, I say look at the net worth statistics of the top 1% of the people of the United States from the year 1975 to the year 2000.

In 1975 the average per capita net worth of the top 1% of the United States was still only $5.3 million. By 2000, that average net worth on a per capita basis was $53 million.

Early in the Bush II administration there was some talk about cracking down on offshore money havens like the Cayman Islands and even Switzerland, the thinking being that terrorists would have a harder time financing their operations and drug cartels would have a harder time laundering their money. Of course that initiative was quashed because such havens are the prime means for the maintenance of the neo-feudal capitalist aristocracy. They have to have their money safe from the interference of any nation-state. In the United States it is customary to look down on Mexico because Mexico’s presidents are chosen by party insiders and retire from their six-year term with hundreds of millions of dollars in offshore accounts. What we don’t realize in the United States is the situation is exactly the same here (see Anthony Summers’s book on Nixon, The Arrogance of Power, for example). See also the interesting fact that George Bush the First actually made a donation to Yale University quite a bit larger than his reported net worth. If we really think about this it means there is no real distinction between the leaders of politics, the drug trade, terrorism and capitalist neo-feudal aristocrats.

When you explain this to people, most recognize that this is true. There are many cynics out there these days. But when shots are fired and flags are waving, people file away their cynicism and adopt a reverent, worshipful attitude towards heads of state. Is it the Stockholm Syndrome? Religious programming? Whatever it is, it sure is effective.

Monday, March 07, 2005

Signs of the Economic Apocalypse 3-7-05

From Signs of the Times 3-7-05:

The dollar closed at .7553 euros (1.3239 dollars per euro) up very slightly (0.03%) from last week's .7551 (1.3243). Oil closed at $53.78 (40.62 euros) on Friday, up 4.4% from last week's close of $51.49 (38.88 euros) . Gold closed at $435.30 an ounce (328.78 euros), down a dollar (0.23%) from last Friday's 436.30 (329.45 euros last week). An ounce of gold would buy 8.09 barrels of oil, down 4.7% from last week's 8.47, coninuing the trend of steeper oil price increases than gold price increases. The Dow closed at 10,940.55 (up 0.9% from last week's 10,841.75), setting a post 9/11 high. The NASDAQ closed at 2070.61, up 0.25% from last week's 2065.40. The ten-year US Treasury bond closed at 4.31% up significanly from last week's 4.26% and 4.13% a month ago.

The pattern we mentioned last week held for this week as well. Bad economic news mid-week followed by some good news on Friday to send everyone into the weekend optimistic. The good news on Friday is usually some report about growth or job creation that could be released any day of the week while the bad news come from serious long-term trends and world events. This week the good news was a jobs report leading to a rise in the US stock market. The bad news came from sharply rising oil prices, and from continuing nervousness about the deficits. The problem for optimists (bulls) is that all the good news comes from what happened in the near past and the bad news are usually things which portent a bad future.

A good example of the bad news portending poorly for the future is the news on US personal income and housing starts. That news came out early in the week, of course. Here is a AP wire service article from Monday, the 28th:

Personal Incomes See Biggest Dip in Decade

WASHINGTON - Personal incomes which had been bolstered by a large stock dividend payment in December plunged 2.3 percent in January, the sharpest decline in more than a decade. Consumer spending was flat, the government reported Monday.

The Commerce Department said the sharp January drop in incomes followed a record 3.7 percent jump in incomes in December with both months heavily influenced by a $3 per share dividend payment that computer software giant Microsoft made on Dec. 2.

Meanwhile, the number of new single-family homes sold in January fell 9.2 percent, the agency said in a second report.

The worse-than-expected performance pushed new home sales down to 1.11 million units at a seasonally adjusted annual rate in January compared to a revised December rate of 1.22 million units. Last week, the National Association of Realtors reported that sales of existing homes and condominiums had fallen as well in January, dipping a slight 0.1 percent to a seasonally adjusted annual rate of 6.8 million units.

Both sales of new and existing homes set all-time highs in 2004 for the fourth consecutive year. But economists are forecasting a retreat from those highs this year as mortgage rates are expected to start rising.

[...] Economists are looking for both overall economic growth and consumer spending to slow a bit this year as continued interest rate increases from the Federal Reserve dampen consumer demand. The Fed hiked interest rates for a sixth time in early February and a seventh quarter-point increase is expected when Fed policy-makers next meet on March 22.

The report on new home sales showed weakness in every part of the country except the West, where sales rose by 5.6 percent to an annual rate of 338,000 units.

The biggest decline was a record 40.3 percent plunge in the Midwest where sales dropped to an annual rate of 145,000 units. Sales fell 17.1 percent in the Northeast to an annual rate of 63,000 units and were down 3.3 percent in the South to a rate of 560,000 units.

The drop in new home sales was accompanied by a fall in prices. The median new home price — the point where half the homes sold for more and half for less — was $199,400 in January, down 13.2 percent from a median sales price of $229,700 in December. It was the lowest new home price since a median of $196,000 in December 2003.

Two things of note here. When you combine lower incomes for consumers with higher interest rates, there is trouble ahead. Also, the drop in new house sales might be a signal that the housing bubble will burst. Here is what Michael Kinsley said about that this week in the Los Angeles Times:

Top of the Market, Ma!
Michael Kinsley

February 27, 2005


That is the sound of the real estate bubble bursting. And it's a good thing. It is obvious to me that today's real estate prices are a speculative bubble that is about to burst. Of course, this has been obvious to me for about three decades, and I've been wrong almost all of that time. Nevertheless.

One piece of evidence is the Dinner Party Index. The boom is over when more people bored by real estate anecdotes ("My next-door neighbor got three times her asking price before she even put it on the market, from a professional mind reader who divined that she might sell … ") than have got new ones.

Another reason the value of your house is about to plunge is that the L.A. Times, the New York Times and the Washington Post all say that it isn't. A recent L.A. Times article reported that the median price of a local house had gone up only 17% in the last year. Headline: "L.A. County Home Prices Cool Slightly." Subhead: "Slowdown may not last." To describe a 17% annual increase as a "slowdown" assumes that gains of 20% or more are the norm. And the evidence for "may not last" comes from realtors whistling in the dark.

You've got a bubble when today's prices assume large future increases. If you think prices will be 20% higher in a year, you'll be willing to pay 19% more today. But if others share that assumption, today's price will already be 19% higher. Betting on future appreciation makes sense only if you are even more optimistic than other buyers. Right now, that is hard to be.

In Washington, where house prices have doubled over five years, the Post says, "Experts Predict Steady Gains in 2005, but More Moderate Than in Past Years." But whatever "experts" say, it is not the nature of price explosions to segue gracefully into more moderate growth. When today's run-ups are based on beliefs about tomorrow's run-ups, the self-feeding frenzy goes into reverse when those assumptions are dashed.

The New York Times also must be talking to experts. "In Housing Sales, Frenzy Is Giving Way to Balance," it says. And it reports from suburban Westchester County that "Housing Market Is Still Going Strong." In 2004, the median sales price rose from $564,000 to $645,000. "More and more families are seeing the residential real estate market as the best and safest place for their money," a realtor says. And the article adds chirpily, "Even the ongoing problem of a lack of houses for sale in Westchester eased somewhat last year." Like a roller coaster, a financial bubble has a moment of eerie stillness at the top. Buyers have adjusted, sellers haven't. So sales dry up. When the New York Times spins a surplus of unsold houses as a sign that "the ongoing problem of a lack of houses for sale" has been solved, it means that you had better not count on the New York Times to tell you when it's time to bail.

Let's step back a moment. All the housing in the U.S. is worth about $14 trillion. If the value of existing housing (not counting new construction) goes up 7% this year, which is the recent national average, homeowners will seem to be about $1 trillion richer. But will the nation be $1 trillion richer? No. These are the same houses, in the same place. That trillion comes partly from non-homeowners, who must pay more to buy in. And it is partly illusory. If many current homeowners tried to cash in, the drop in prices would quickly wipe out that trillion.

When the price of something goes up, two things happen: The economy starts to produce more of it, and existing units are worth more. For most of what we buy, the first effect overwhelms the second, and constrains it. An increase in the price of a can of tuna does not produce many self-satisfied anecdotes from people who have a third
of their net worth locked into Chicken of the Sea. But real estate is different, mainly because it requires land. As the cliche goes, they're not making any more of it.

Perusing the real estate ads like pornography and imagining what our houses are worth is the great American pastime. But a crash, if it comes, would have some advantages. The 19th century political economist Henry George explained how rising real estate values harm the economy by operating as a tax on both labor and capital.

When the price of labor goes up, people work harder. When the price of capital goes up, people save more. Both make the country richer. But when the price of land goes up, it just makes the owner richer. There are all sorts of qualifications. But the basic point is a good one.

People do foolish things under the impression they are getting richer because their houses are worth more. They save less, they spend more. Egged on by TV commercials, they "consolidate their debts" (i.e., buy a new boat) with a second mortgage.

And who really gains from soaring house prices? First-time buyers don't. Nor does anyone who plans ever to trade up. The only beneficiaries are those who are selling their last house, after a lifetime of appreciation. The bigger the house, the bigger the windfall. This is yet another thank-you from America to the so-called Greatest Generation. I'm not sure it's necessary.

And I'm not sure it will continue. In fact, I'm pretty sure it won't. So I'm going to sell my house right now, before it's too late. Right?

Are you kidding?

Another troubling sign in the US housing market is the large presence of speculative investors. According to the Chicago Tribune,

Real estate speculators are buying at a pace that far exceeds previous estimates of their influence on the housing market, according to a first-of-its kind report the National Association of Realtors released this week.

Collectively, investors and second-home buyers bought more than one of every three homes sold in last year's record market, the report said.

"I am astonished," said David Lereah, the association's chief economist. He said the data suggest a sea change in the role of real estate in the nation's economy.

"What we're seeing is that real estate is no longer just a place to live. It's a viable alternative to stocks and bonds," Lereah said. "Sept. 11 changed real estate forever, the way people look at it. They're nervous about stocks and bonds and they're placing money in real estate, which has proven to be a stable and wealth-building asset."

The report, based on two surveys, found that investors accounted for 23 percent of the nation's 2004 home sale transactions and second-home buyers made an additional 13 percent of all sales transactions. Previous estimates gleaned from other databases had suggested that 8.5 percent of all 2004 sales transactions were investments.

The report said that sales activity surged last year. Investor activity was 14 percent higher than in 2003, and second-home purchases topped the preceding year by nearly 20 percent.

Federal Reserve officials and other economists have expressed concern that scorching-hot investor activity in certain markets may be inflating home-appreciation rates artificially, which could lead to collapsing prices.

Fiserv CSW, a Cambridge, Mass., firm that tracks price appreciation, calculates that national home values, adjusted for inflation, have appreciated about 40 percent since 1995, and some metro areas, such as San Diego, are up as much as 160 percent.

[...] "It's kind of alarming," said Stiff. "I presume investor activity is concentrated in some metropolitan areas, such as southern California, Florida, Las Vegas and Phoenix. But even I am surprised that it's that high.

"It's at the end of a housing cycle that you start to see people investing irrationally," Stiff said. He singled out increasingly widespread reports about homeowners cashing out equity in their principal residences to invest in properties around the country.

"If anything is a sign of a price bubble, that is it."

All these micro- and macroeconomic factors would be disturbing enough without viewing them in the larger geopolitical context. Here, of course, is where things get really scary. A former Treasury official in the Reagan administration who worked for the Wall Street Journal and The National Review (no leftie, therefore), Paul Craig Roberts wrote the following in an article entitled, “The Last Waltz? The Coming End of the American Superpower”:

The US economy is headed toward crisis, and the political leadership of the country--if it can be called leadership--is preoccupied with nonexistent weapons of mass destruction in the Middle East.

The US economy is failing. The afflictions are serious. They could be fatal even if diagnosed and treated. America is losing the purchasing power of its currency and its ability to create middle class jobs.

The dollar's sharp decline and projections of continuing trade and budgetary red ink are undermining the dollar's role as reserve currency. A number of central banks have announced that they will be diversifying their currency holdings and will not be buying dollars at the same rate as in the past.

This will put more pressure on the dollar. At some point the flight will begin. Instead of buying fewer dollars, central banks will sell dollars hoping to get out before the dollar hits bottom.

Suddenly, the advantage of being the reserve currency becomes a nightmare as the world's accumulations of dollars are brought to market. An enormous supply and weak demand mean a very low exchange rate for the once almighty US dollar.

Overnight those cheap goods in Wal-Mart, which are the no-think economist's facile justification for Wal-Mart's decimation of communities, small businesses and employment, shoot up in price.

Interest rates will escalate as the government struggles to finance its endless red ink. Heavily indebted Americans with adjustable rate mortgages will attempt to sell homes just as rising mortgage rates reduce buyers. Real estate assets, the rising value of which have been keeping the economy going, will give back gains.

The US has lost its ability to create middle class jobs or for that matter any jobs. During the last four years the US has experienced a net loss of 760,000 private sector jobs (January 2001 - January 2005). Think what this means for graduating classes and people coming of age to enter the work force.

Moreover, the composition of jobs has changed away from high-value-added, high-productivity jobs in tradable goods and services toward lower productivity domestic service jobs that cannot be outsourced.

Even here in this last remaining area of employment for Americans, the US work force is losing job opportunities to foreign nurses and school teachers brought in on H-1b work visas as a result of budgetary pressures on local school budgets and hospitals.

No-think economists and politicians continue to propose unemployment insurance and education as remedies for the jobs problem. These proposals are mindless to say the least. The same incentive to outsource holds for all tradable skills. If truth be known, job outsourcing and offshore production sound the death bell for US higher education.

Americans unable to find jobs in export and import-competitive sectors find themselves searching for jobs in nontradable domestic services, where their inflow into those labor markets is augmented by illegal immigrants and foreigners on H-1b visas. Obviously, the pressure on wages is downward.

[...] Oblivious to reality, the Bush administration has proposed a Social Security privatization that will cost $4.5 trillion in borrowing over the next 10 years alone! America has no domestic savings to absorb this debt, and foreigners will not lend such enormous sums to a country with a collapsing currency--especially a country mired in a Middle East war running up hundreds of billions of dollars in war debt.

A venal and self-important Washington establishment combined with a globalized corporate mentality have brought an end to America's rising living standards. America's days as a superpower are rapidly coming to an end. Isolated by the nationalistic unilateralism of the neoconservatives who control the Bush administration, the US can expect no sympathy or help from former allies and rising new powers.

The United States is losing control of its economic future to Asia, and, nationalism aside, that may not be a bad thing. According to an analyst on Bloomberg, “These days, markets react more to rumors about Asian central banks selling U.S. debt than what Greenspan says about the economy.”

Alan Greenspan's predecessor as Chairman of the Federal Reserve Board, Paul Volcker said recently:
Below the favourable surface [of the economy], there are as dangerous and intractable circumstances as I can remember.... Nothing in our experience is comparable…But no one is willing to understand [this] and do anything about it… We are consuming… about six per cent more than we are producing. What holds the world together is a massive flow of capital from abroad… it's what feeds our consumption binge... the United States economy is growing on the savings of the poor… A big adjustment will inevitably become necessary, long before the social security surpluses disappear and the deficit explodes…We are skating on increasingly thin ice.

Marshall Auerback commented on that quote by spelling out how we are headed for something on the magnitude of the Great Depression:
At the time of the 1929 stock market crash, total US credit was 176 percent of Gross Domestic Product. In 1933 with GDP imploding and the real value of debt rising even faster, total credit rose to 287 percent of what was left of GDP…. In 2000 at the top of the late bull market, total credit was 269 percent of GDP. An extraordinary statistic to be sure, but dwarfed by today's figure, in which total credit stands at a whopping 304 percent of GDP…The obvious answer in such circumstances would be to restrain US consumption. But were Americans to begin to significantly pare their debt burdens, aggregate demand would likely collapse and trigger something not unlike the 1930s.
It may well be that people are starting to connect these dots. George Bush has had such a hard time selling the public on privatizing Social Security that even Republicans are trying to back off the plan. Bush, of course, will not back off but is intensifying his efforts to sell the plan, even to the point of setting up a “war room.” This shows the importance his administration places on this. The reason is two-fold. First, the Wall Street investment firms stand to make billions on fees for the private accounts. Second, and perhaps more important, the Bush administration follows a consistent policy of transferring government liabilities to the public, in order to free up government funds for militarization. The empire is starting to slip away from them and they are feeling desperate. Will the people wake up in time and put the top officials of the Bush administration on trial for treason and war crimes, or will another conveniently-timed terrorist event make people forget the crimes and support further crackdowns and wars? For now, since it has been over three years since 9/11, the people may be getting restless. Here is an account by Joseph Kay of a meeting with constituents held in Southfield, Michigan by the Democratic congressman, Sander Levin where the congressman was startled by the intensity of the anger against Bush:

Throughout the country, Congressmen from both the Republican and Democratic parties are holding “town hall” meetings on the Bush administration's plans for the introduction of individual private accounts to replace government-guaranteed Social Security pensions. The meetings—even those held by Republican politicians—have generally been an occasion for the venting of popular opposition to the reform of Social Security, the linchpin of the limited welfare system in the United States.

What was most noteworthy about the meeting held by Representative Sander Levin on February 24 was the contrast between, on the one hand, the deep hostility and concern about plans for Social Security reform coming from the audience and, on the other hand, the attitude of the Michigan Democrat. Levin, who is the leading Democrat on the Social Security Subcommittee of the House Ways and Means Committee, was more concerned about the possibility that the discussion might get out of hand—transcending the narrow boundaries in which he sought to contain it—than he was about the attack on pensions in the US.

[...] Many of those who asked questions or made comments voiced a desire to find some way to fight against the attacks, not only on Social Security, but all the policies of the Bush administration. One older woman worker declared, “Maybe what we need to do is converge en masse on Washington” to demand that Social Security be preserved. The Republicans, she said, were determined to destroy social programs in the US. “They have a plan in place.... If we lose Social Security, we'll return to what it was like during the depression, with people jumping off bridges because they have nothing to live on. People like the wealthy Republicans, the Bushes, they don't care” about us.

Others voiced similar conceptions, and the audience responded strongly to anyone who voiced such feelings. One individual declared, “We need to investigate Bush as a criminal.” There was clearly a social character to the anger expressed by many participants. The opposition to Social Security reform is part of a broader opposition to what is seen as a right-wing policy of the rich to loot what is owed to working people and the poor.

[...] Though many in attendance certainly had illusions that the Democratic Party would defend Social Security, some voiced a concern that the Democrats would not put up a fight on the issue. One audience member said, “Republicans are going to push, and the Democrats are going to fall all over themselves and compromise. This is the time for Democrats to go on the offensive.”

An elderly worker said, “Social Security was created for a purpose: for people who didn't have jobs, for poor people. When you worked and [the companies] didn't want to pay for [your retirement] you had something to count on. Why do you [Levin] let the Republicans steal our money?”

Levin's response to all of these comments was an attempt to diffuse the hostility and evade answering any challenge voiced against the right-wing policies of the Democratic Party. In response to any strong statement made by a member of the audience, he urged repeatedly that the meeting not be turned into a “political rally.” He said that he wanted “to have an intensive, thoughtful discussion. This is not a conspiracy [against Social Security]. It is a difference of opinion.” Levin never once suggested that the attack on Social Security was motivated by the interests of corporations or the wealthy.

It was clear that Levin was not prepared to “go on the offensive.” The last thing
that the Democrats want is the mobilization of mass opposition to the policies of the Bush administration. There is no doubt that Levin and the rest of the Democrats will prepare a compromise with the Republicans to avoid this.

Equally significant was Levin's repeated insistence that the war in Iraq not be a subject for discussion at the meeting; that it was completely separate from the question of the privatization of Social Security. This conflicted with the desire of many in the audience to discuss the issue.

One woman, who said she was 60 years old, declared, “I don't trust anyone [in the government].” Addressing not Levin, but the audience, she said, “I say no to the billions of dollars spent on the war in Iraq. What do you say?” The response was a unanimous and emphatic, “No!”

Levin insisted that the discussion not touch on Iraq because he is well aware of the enormous hostility to the war within his own constituency, a hostility that finds no expression in the Democratic Party. If Levin were to respond truthfully to the woman's question, he would have to reply with an equally emphatic, “Yes!” Levin voted for the October 2003 bill that granted $87.5 billion for emergency spending on the wars in Iraq and Afghanistan. He also voted for the $418 billion defense spending authorization bill passed in June 2004.

In their support for the war, the Democrats expose the worthlessness of any promise they might make to defend Social Security. The innumerable wars launched and planned by the American government, the growing attack on democratic rights and the assault on Social Security and other programs that help ordinary Americans are part of a single policy. The attack on social programs is mandated by the need to force working people to pay for the wars planned and executed in the interest of the American ruling elite. It is impossible to oppose these attacks while supporting the war.