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.


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