Signs of the Economic Apocalypse 4-11-05

From Signs of the Times 4-11-05:

The euro closed at 1.2928 dollars on Friday, up 0.18% from the previous week's close of 1.2904. The dollar then fell to .7735 euros from the previous week's .7750. The ten-year U.S. Treasury bond closed at 4.47% compared to 4.45% the previous Friday. Gold closed at $429.00 an ounce, virtually unchanged from last week's $428.80. Gold in euros, then, would be 331.84 euros an ounce, down 0.14% compared to the previous week's 332.30. Oil closed at 53.32 dollars a barrel down 7.4% from the previous week's close of $57.27. Oil in euros would be 41.24 euros a barrel. An ounce of gold on Friday would buy 8.05 barrels of oil, up 7.4% from the previous Friday's price of 7.49 barrels an ounce. The Dow closed at 10,468.44 up 0.61% from the previous week's 10,404.30. The NASDAQ closed at 2000.63, up 0.8% from the previous week's 1984.81.
There are increasing signs that the housing bubble in the United States is about to burst. One sign is stagnating rents with still-rising housing prices. See this article from CNN:

Why rent matters
Rental prices hint at whether a housing market is riding on fundamentals or speculation.
By Sarah Max, CNN/Money senior writer

April 7, 2005: 1:17 PM EDT
SALEM, Ore. – If home prices in your area are riding high and you're wondering whether it's because of dangerous speculation or a reasonable increase in demand, turn to the rental market.

In most markets, rentals prices have not risen anywhere near as fast as home prices, and in many, markets rents have fallen or remained flat.

Nationally, owning costs 7 percent more each month than renting, according to Torto Wheaton Research. The gap isn't huge but it is the widest it's been in more than a
decade.

In a balanced market, say economists, the cost of renting should closely track the cost of owning. When the cost of owning is dramatically higher than the cost of renting similar property, you can guess that buyers are speculating on higher home prices.

This relationship is similar to the price-to-earnings ratio used to evaluate company stocks, said Gleb Nechayev, a senior economist with Torto Wheaton Research. In real estate, this ratio is determined by dividing the price of a house by the annual rent it could bring in given the current market.

"In some places ratios are clearly out of their historical bounds signaling slower growth in home price as interest rates rise," said Nechayev. Renting is generally more affordable than owning, he said, but the degree to which renting is more affordable in some markets "does make one wonder what's driving home prices and whether there is some speculation."

In Las Vegas and San Francisco, monthly mortgage costs on the median-priced home is nearly twice the monthly cost of renting the typical two-bedroom apartment -- and that's assuming buyers have a 20-percent down payment and finance with an interest-only loan.

In Southern California, the gap between owning and renting is also substantial, though rents there have been rising at a healthy pace.

In Atlanta and Dallas, on the other hand, it may actually cost less to own than to rent.

Add to this a slowing economy, even under the best-case projections of mainstream economists in the mainstream media, and it's hard to imagine that there won't be a crash in real estate. As for the slowing economy, see this article from Bloomberg:

Economists Lower Second-Half U.S. Growth Forecasts, Survey Says
April 8 (Bloomberg) -- Rising energy prices and higher interest rates will take a larger bite out of consumer spending and cause the U.S. economy to slow later this year, a Bloomberg News survey of economists found.

The economy is projected to expand at an average 3.5 percent annual pace from July through December after growing an estimated 3.9 percent in the first six months, according to the median of 62 economists surveyed by Bloomberg News from April 1 to April 7. Economists last month forecast growth for the second half of 2005 at almost 3.7 percent.

"It's more a return to moderation than an outright collapse," said Gina Martin, an economist at Wachovia Corp. in Charlotte, North Carolina. Economists at Wachovia project the economy will grow 3.4 percent in the last six months of the year after expanding 4.1 percent from January through June.

Record gasoline prices will siphon cash from consumers' pockets that could otherwise be spent on other goods and services, economists said. Higher fuel costs are stoking inflation and will prompt Federal Reserve policy makers to raise their interest-rate target more than previously thought, the survey also showed.

Central bankers will raise the target for the benchmark overnight bank lending rate, currently at 2.75 percent, to 3.75 percent by the end of the third quarter and it will finish the year at 4 percent, according to the survey median. Both estimates are a quarter percentage point higher than last month. The forecast for the end of this quarter held at 3.25 percent.

Federal Reserve

The Fed's rate increases are expected to lead to higher rates on mortgages and other consumer loans. The increased costs will further restrain refinancing and keep homeowners from tapping into home equity to boost spending. Refinancing helped sustain consumer purchases as the economy was recovering from the last recession.

"Housing, which is the most interest-sensitive part of the economy and has been incredibly strong, should eventually start cooling," said James O'Sullivan, a senior economist at UBS Securities LLC in New York. "The single biggest change in the economy later this year will be the turnaround in housing."

Consumer prices will rise 2.5 percent this year, compared to last month's 2.3 percent estimate, the survey showed.

"The risks to inflation seem all aligned on the upside," said Joseph Abate, a senior economist at Lehman Brothers Inc. in New York.

"This upcreep in inflation makes the Fed increasingly intolerant of above-trend economic growth."

Gasoline Prices

The average price for a gallon of gasoline at the pump rose to a record $2.26 in the week ended April 4, according to figures from the Energy Department. Gasoline has tracked a rally in crude oil, which accounts for about half the retail fuel price. Crude oil prices in New York surged to $58.28 on April 4, the highest since the contract was introduced in 1983.

Retail gasoline prices, based on a monthly average, may peak at $2.35 a gallon in May, the Energy Department said yesterday in an annual forecast. It's up from $2.10 estimated last month for the peak driving season, which runs from April through September.

Inflation is apparent "in many, many commodities," James Tisch, chief executive of New York-based Loews Corp., an owner of insurance, tobacco and energy businesses, said in an interview April 6.

"At some point in time that's going to push its way through from producer prices to
consumer prices," Tisch said. "My guess is that will happen starting in the second half of the year, and then that will give the bond markets and the Fed some real cause for concern."

Spending Forecast

The high cost of gasoline is already dampening consumers' spirits. A weekly index of consumer confidence in the state of the economy fell last week to the lowest since June, according to a survey by ABC News/Washington Post issued two days ago.

After growing at a projected 3.4 percent annual pace in the first three months of 2005, consumer spending is expected to slow to 3.1 percent this quarter and average 3.2 percent in the last six months of the year, the survey showed. In the March survey, economists expected spending to rise 3.3 percent in the last half.

It's hard to see why the facts cited in the article don't point more to a collapse than just the "moderation" mentioned by the Wachovia economist quoted in the article. Notice how they characterize the weakest point now in the U.S. economy: the fact that much of the consumer spending that is keeping the economy afloat comes from borrowing on the paper gains in housing prices. The economists talk about a "cooling" of housing prices. Economists, however, are laboring at a disadvantage when trying to read the signs due to their inability to incorporate non-linear analysis. For a good exposition of this problem by an economist, I recommend Steve Keen's Debunking Economics: The Naked Emperor of the Social Sciences (Zed Books, 2001). See also his web site with supplementary materials. According to Keen:

Virtually every aspect of conventional economic theory is intellectually unsound; virtually every economic policy recommendation is just as likely to do general harm as it is to lead to the general good. Far from holding the intellectual high ground, economics rests on foundations of quicksand. If economics was truly a science, then the dominant school of thought in economics would long ago have disappeared from view. (Keen, p. 4)

According to Keen, the real damage is done when policy makers adopt the recommendations of economists, who recommend policies that tend to make the world fit their impoverished models and that tend to do harm to real economies.

Economists would contend that these changes have made the world a better place, not because economists have actually verified that the changes have been beneficial, but because the changes have made the real world look more like the hypothetical world of the economic textbook. Since, in economic models, the hypothetical pure market performs better than the mixed economy in which we live, economists are confident that economic reform makes the world a better place. Where problems have occurred, economists normally assert that this was because their advice was not followed properly. (Keen, p. 8)

Keen claims that if the standard, neo-classical economic model is self-contradictory, and he argues the contradictions are "extreme and pervasive," then their prescriptions will make things worse:

Thus, the economic conditions imposed to achieve monetary union in Europe could enforce a permanent recession upon Europe, and compromise the ability of its governments to counteract any severe downturn in world economic activity. Trade liberalization could reduce global economic welfare because the rapid opening up of markets could destroy productive capacity. The abolition of price subsidies could retard economic growth by amplifying class conflict in the highly unequal societies of the Third World. Rapid economic change could lead to social breakdown, rather than the development of vibrant market economies. And America's middle class could find its retirement nest-eggs eliminated by the collapse of a wildly speculative stock market.

What if, however, these results are not the accidental results of the misguided applications of faulty theories, but rather are intended? Maybe neo-classical economics is a way of selling these policies to the public and rallying a class of technocrats behind policies whose results they wouldn't otherwise support. The Signs of the Times for April 9th reprinted an article by Mike Whitney laying out exactly why all these so-called "unintended consequences" are actually intended. Here's an excerpt:

The country has been intentionally plundered and will eventually wind up in the hands of its creditors as Bush and his lieutenants planned from the very beginning. Those who don't believe this should note the methodical way that the deficits have been produced at (around) $450 billion per year; a systematic and orderly siphoning off of the nation's future. The value of the dollar and the increasing national debt follow exactly the same (deliberate) downward trajectory.

This same Ponzi scheme has been carried out repeatedly by the IMF and World Bank throughout the world; Argentina being the last dramatic illustration.(Argentina's economic collapse occurred when its trade deficit was running at 4%; right now ours is at an unprecedented 6%.) Bankruptcy is a fairly straight forward way of delivering valuable public assets and resources to collaborative industries, and of annihilating national sovereignty. After a nation is successfully driven to destitution, public policy decisions are made by creditors and not by representatives of the people. (Enter, Paul Wolfowitz)

...The Bush administration is mainly comprised of internationalists. That doesn't mean that they "hate America"; simply that they are committed to bringing America into line with the "new world order" and an economic regime that has been approved by corporate and financial elites alike. Their patriotism extends no further than the garish tri-colored flag on their lapel. The catastrophe that middle class Americans face is what these elites breezily refer to as "shock therapy"; a sudden jolt, followed by fundamental changes to the system. In the near future we can expect tax reform, fiscal discipline, deregulation, free capital flows, lowered tariffs, reduced public services, and privatization. In other words, a society entirely designed to service the needs of corporations.

The idea is not to have a "vibrant market economy" or to serve the general good. The goal is to consolidate ALL wealth in a very few, loyal hands. The corporations are just a means to that end. This is one of the things the Bush family has been doing for a long time. Al Martin shows how it is done:

How Government Debt Consolidates Wealth and Power... Particularly if you're a rich
Republican.

(Apr 4) - On January 20, 1981, the day that the Reagan-Bush regime came to power, the aggregate national debt stood at $1.54 trillion–approximately on that date, $3,786 per capita.

When the subsequent Bush-Quayle regime left office, on January 20, 1993, aggregate debt stood at approximately $14.3 trillion, or approximately $43,570 per capita.

What is interesting to note, however, is that on the day the Reagan-Bush regime came to power, the top 1% of the nation being approximately 3/4 Republican, owned 37% of all of the private wealth in the nation. On that day that the subsequent Bush-Quayle regime left office, said top 1%, still being approximately 75%Republican, as the fraction has been for a hundred years, owned no longer 37% but, indeed, now owned 57% of all of the private wealth in the nation.

There is a direct effect between the issuance of massive amounts of government debt and how it relates to and, indeed, is a key component of the Bushonian agenda, to use the words of George Bush Senior, of the continuous consolidation of power and money into ever higher, tighter and 'righter' hands; namely, that when government debt is used as it was, particularly from 1984 to 1992, to pay for an endless series of disproportionate tax cuts wherein the bulk of the value of those tax cuts inured to citizens earning more than $200,000 a year, that that debt is essentially paying for the transfer of wealth, a phenomenon that we are once again seeing under the Bush-Cheney regime

....Where are we in the present in this cycle? We start with this Bush Cheney regime. When this regime came into office, January 20, 2001, at that time, in that month, actually, the top 1% of the people owned 61.9% of all of the private assets in the United States.

As of January 2005, said top 1% of the people of the United States now own 70% of all of the private wealth of the nation. This is a record concentration of wealth in the United States, never seen before in the history of the Republic. For those who are followers of the Malthusian theorem, we know that the 70% wealth-concentration number is also historically significant and has been so for thousands of years.

Where are we in this cycle? We are in a place wherein the Bush-Cheney regime, which has also proffered a series of multi-trillion-dollar disproportionate tax cuts wherein more than 2/3 of the value of those tax cuts has inured to those citizens earning $200,000 a year or more. Indeed less than 1/4 of the value of those tax cuts has inured to those citizens earning less than $100,000 a year. That's why these tax cuts, which are sold to the public under the concept that tax cuts are supposed to be economically stimulative, have not been stimulative because they haven't stimulated consumption.

Real wages are falling and consumer installment debt at $2.25 trillion has doubled under this regime to already a record. Furthermore, the national savings rate, which was 6.9% when the regime came into office, is now a negative number.

The only reason consumption has been maintained is through ever-increasing use of credit. But we now see that there is no more credit to use, in other words. And with falling real wages, you can't expand consumption. Furthermore, the regime cannot now proffer any further tax cuts, simply because of enormous budget deficits, which are actually going to exceed $600 billion on a so-called 'real' basis in 2005

....Now, that is a great Republican mantra -- you start out in life and you work hard, you build up a little stake and you see an opportunity, you know it's the right thing to do, you seize on it, and you ride the winner. As you know, that's a great Republican mantra.

But the practicality of it is different, if you look at wealth in Washington, the great Republican wealth, including the Bushes. Yes, there was a generation, three generations back, that didn't start out with much. But how is that wealth continually perpetuated? Is it perpetuated through hard work or knowledge of the markets? No. It's perpetuated through an endless series of insider transactions that are essentially guaranteed deals -- and the legislative impact of benefits, those with ever larger amounts of wealth.Most of the fortune that the Bushes have today wasn't built on oil that came out of the ground. It was built on insider transactions within oil companies. It had nothing to do with producing any oil. The money isn't taking oil out of the ground. It's all financial manipulation and legerdemain.

The biggest money that was ever made by Harken Energy wasn't the oil they took out of the ground. As a matter of fact, most of their leases, most of their production was losing money. As an operating company, they lost money for year after year after year. That isn't the reason why anyone, so saying, with Harken made money.

The reason why Harken became a wealth-builder is through pump-and-dump deals. The greatest wealth-builder of all isn't the great Republican mantra, which is what you hear Larry Kudlow saying: "Well, if you bought this stock 20, 30, 100 years ago… Wise and sound and prudent management."

Nonsense! It wasn't wise and sound and prudent management that made the officers, principals and directors their money. It wasn't what made those who traded the stock the money. It was the pump-and-dump deals that made the money.

People asked me, "How did the Harken stock perform?" And I said, "Oh, it lost money continuously since it's been in business. But it was a great wealth-builder." But you had to be on the inside or have information to know when it was going to be pumped and to know when it was going to be dumped. That's how the wealth is built. It's not what the company does. It's not the dividends they pay

....The way to look at it is that the Enrons and WorldComs were huge wealth-builders. Look at who was short at the top. Look at who was short Enron in $90. The Bush-Family-controlled Pilgrim Investment Trust, the Cheney-Family-controlled, and equally shadowy DLC Trust. Ken Lay himself was short the stock as it was falling. Henry Kissinger. George Schultz. James Baker....What somebody ought to do is to write a series of books of the Bushonian fraud. But how it would have to be– Volume One, Bushonian Banking Fraud. Volume Two, Bushonian Securities Fraud. Volume Three, Bushonian Insurance Fraud. And so on.

The reason why it won't be investigated is that Democrats won't do it. Just like they didn't do it with the Iran-Contra hearings or the Iraqgate hearings or anything like that, because they know that gets around the edges (as my Attorney Marc Sarnoff used to say) of 'The Great Republican Abyss'. And anyone who has ever gotten around the edges, like I did, and looked over into that Abyss and has seen 'The Way Everything Works And What It's Really All About," hasn't faired so well. You never want to look into that Abyss because in that Abyss is the Ultimate Truth that the United States was purposely designed in the post-war years to continuously concentrate wealth and power.

Unfortunately, I fear the Abyss is deeper than just consolidating all wealth; That may be only the first step.