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
By MARTIN CRUTSINGER, AP Economics Writer

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

Pop!

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.