Monday, July 25, 2005

Signs of the Economic Apocalypse 7-25-05

From Signs of the Times 7-25-05:

The dollar closed at 0.8293 on Friday, down 0.2% from last Friday’s close of 0.8308. That put a euro at 1.2058 dollars, compared to 1.2036 dollars a week earlier. Oil closed at 58.65 dollars a barrel, up a percent from $58.09 the previous Friday. In euros, oil would be 48.64 a barrel, up 0.8% from last week’s 48.26 close. Gold closed at 425.40 dollars an ounce, up 0.9% from $421.70 a week earlier. In terms of euros, that put an ounce of gold at 352.79 euros, up 0.7% from last week’s 350.37. The gold/oil ratio closed at 7.25 barrels of oil to an ounce of gold, down 0.14% compared to 7.26 on the previous Friday. In the U.S. stock market, the Dow Jones Industrial Average closed at 10,651.18, up 0.1% from 10,640.83 a week earlier. The NASDAQ closed at 2,179.74, up 1% from the previous Friday’s close of 2,156.78. The yield on the ten-year U.S. Treasury bond closed at 4.22 percent, up five basis points from 4.17 a week earlier.

The big news economically last week was the announcement by the Chinese government that they will remove the dollar peg from their currency and peg it instead to a basket of currencies. While it is too early to say what the consequences of this universally anticipated move will be, most observers think that it will lead to a weakening in the dollar and a rise in U.S. interest rates and inflation. The question is when and how bad. Here’s Paul Krugman:

China Unpegs Itself

By Paul Krugman

Thursday's statement from the People's Bank of China, announcing that the yuan is no longer pegged to the dollar, was terse and uninformative - you might say inscrutable. There's a good chance that this is simply a piece of theater designed to buy a few months' respite from protectionist pressures in the U.S. Congress.

Nonetheless, it could be the start of a process that will turn the world economy upside down - or, more accurately, right side up. That is, the free ride China has been giving America, in which the world's richest economy has been getting cheap loans from a country that is dynamic but still quite poor, may be coming to an end. It's all about which way the capital is flowing. Capital usually flows from mature, developed economies to less-developed economies on their way up. For example, a lot of America's growth in the 19th century was financed by investors from Britain, which was already industrialized. A decade ago, before the world financial crisis of 1997-1998, capital movements seemed to fit the historic pattern, as funds flowed from Japan and Western nations to "emerging markets" in Asia and Latin America. But these days things are running in reverse: capital is flowing out of emerging markets, especially China, and into the United States. This uphill flow isn't the result of private-sector decisions; it's the result of official policy. To keep China's currency from rising, the Chinese government has been buying up huge quantities of dollars and investing the proceeds in U.S. bonds. One way to grasp how weird this policy is would be to think about what a comparable policy would look like in the United States, scaled up to match the size of our economy. It's as if last year the U.S. government invested $1 trillion of taxpayers' money in low-interest Japanese bonds, and this year looks set to invest an additional $1.5 trillion the same way.

…The question is what happens to us if the Chinese finally decide to stop acting so strangely. An end to China's dollar-buying spree would lead to a sharp rise in the value of the yuan. It would probably also lead to a sharp fall in the value of the dollar relative to other major currencies, like the yen and the euro, which the Chinese haven't been buying on the same scale. This would help U.S. manufacturers by raising their competitors' costs. But if the Chinese stopped buying all those U.S. bonds, interest rates would rise. This would be bad news for housing - maybe very bad news, if the interest rate rise burst the bubble. In the long run, the economic effects of an end to China's dollar buying would even out. America would have more industrial workers and fewer real estate agents, more jobs in Michigan and fewer in Florida, leaving the overall level of employment pretty much unaffected. But as John Maynard Keynes pointed out, in the long run we are all dead. In the short run, some people would win, but others would lose. And I suspect that the losers would greatly outnumber the winners. And what about the strategic effects? Right now America is a superpower living on credit - something I don't think has happened since Philip II ruled Spain. What will happen to our stature if and when China takes away our credit card?

This story is still in its early days. On the first day of the new policy, the yuan rose only 2 percent, not enough to make any noticeable difference. But one of these days Chinese dollar purchases will trail off, and we'll find ourselves living in interesting times.

Politically the week also saw the visit of the Indian prime minister to Washington, leading to the announcement of a deal for the United States to help India develop peaceful nuclear energy capabilities, a move widely seen as a move by the United States to increase the prominence of India in the world, to strengthen the new alliance between the United States and India and to promote India as a counterweight to China in the world. Here’s Keith Jones:

In a joint statement Monday, Indian Prime Minister Manmohan Singh and US President George W. Bush proclaimed “their resolve to transform the relationship between their countries” into a “global partnership.” For several years now, Indian and US officials have been speaking of an Indo-US “strategic partnership,” including increased economic, scientific, technical and military ties. That this partnership has suddenly taken on global dimensions, with Bush and Singh touting it as a means to “promote stability, democracy, prosperity and peace throughout the world,” points to the rapidly shifting world geo-political and economic landscape.

The Bush administration is anxious to court India, hoping that through increased Indo-US economic, geo-political and military linkages, India can be transformed into a viable counterweight to China and one malleable to US objectives and pressure. Buoyed by India’s emergence as a major center for outsourced business processing, research and manufacturing operations and the country’s growing military prowess, India’s economic and political elite is eager, meanwhile, to lay claim to world-power status, including a permanent seat on the UN Security Council.

One can imagine the discussions in Washington: “Let’s have an alliance of Christians, Jews and Hindus against the Moslems!” This begs the question: Which way will the Confucians turn? To complicate matters in Asia, India has also been repairing relations with China, relations which used to be cool, to say the least. During the Cold War, U.S.-India relations were also cool, but that has been changing since the 1990s. Keith Jones again:

With the end of the Cold War and the growing crisis in India’s economy created by its relative isolation from the resources of world economy, the Indian bourgeoisie has since 1991 pursued a radically different strategy, aimed at soliciting foreign investment so as to make India a cheap-labor haven for world capital. The dismantling of the traditional nationally regulated economy and accompanying assault on the limited concessions made to the working class and oppressed masses in the first decades after independence has been accompanied by a major shift in India’s foreign policy. The US has emerged as India’s single largest trading partner and foreign investor and increasingly New Delhi and Washington have developed a gamut of ties, including joint military exercises.

The US for its part has increasingly embraced India as an ally. Already under the Clinton administration there was a major change in the US attitude towards South Asia, with Washington tilting away from Pakistan and toward India. Because of its apprehensions about the growing power of China, the Bush administration from the time it came to office in 2001 sought to place relations with India on a new plane. The US decision to invade Afghanistan and subsequent revival of Washington’s close relations with Pakistan, especially the Pakistani military, complicated the Bush administration efforts to draw India into a “strategic partnership.” But leading figures in the administration have indicated—as exemplified by Rice’s offer of help in making India a “world power”—that the pursuit of a partnership with India is central to its world geo-political strategy. In May, the number three man in the State Department hierarchy, Nicholas Burns, the Undersecretary for Political Affairs, said of US-Indian relations, “I think you’ll see this as a major focus of our president and our secretary of state, and it will be the area of greatest dynamic change in American foreign policy.”

India’s economy has been developing exremely fast since it’s decision to align with the United States. Economically what does the United States get from India? Cheap engineering labor for its corporations which strengthens U.S. corporate competitiveness and weakens U.S. labor power. But that can’t go too far without provoking a backlash as well as too much domestic economic weakness (the corporate elite seem to want the “just right” amount of domestic economic weakness for the time being). What India can do for the United States labor market (and for its strategic interests as well) is purchase advanced weaponry (whose manufacturing plants cannot be off-shored, for obvious reasons).

However, the most important feature of this week’s joint statement was an agreement between Washington and New Delhi that has as its aim the removal of the international ban on sales of civilian nuclear technology and fuel to India that has been imposed since 1974, when India first exploded a nuclear device.

The Bush administration stopped short of recognizing India, which officially proclaimed itself a nuclear weapons state in 1998, as a state having the legal right to possess nuclear weapons (a violation of the terms of the 1968 Non-Proliferation Treaty). But it has effectively announced that it favors India being accorded a special status in the international treaty and regulatory system governing nuclear technology—what the Bush-Singh statement calls a “responsible state with advanced nuclear technology”—so long as India agrees to certain restrictions and international oversight of its civilian nuclear program and the “other nuclear countries” and the US Congress agree. Indian government officials are proclaiming the statement a major advance. Foreign Secretary Shyam Saran boasted to a media briefing, “What has been achieved is recognition by the US that, for all practical purposes, India should have the same benefits and rights as a nuclear weapons state.”

India, which is heavily dependent on foreign oil, is eager to expand its nuclear power generation capacity and for this needs greater access to foreign nuclear technology and fuel. A second major consideration for both New Delhi and Washington is the fact that the sanctions imposed on India for being outside the international nuclear regulatory regime have included prohibitions on the sale of advanced US military equipment. The US-based intelligence report Stratfor says official Pentagon leaks have said India is poised to make up to $5 billion in purchases from US arms manufactures once the sanctions are lifted, including advanced anti-submarine and anti-missile technology to protect its Indian Ocean fleet.

The Bush administration has a double purpose in seeking to boost arms sales to India. Needless to say, it wants to boost the US arms industry, but it is also extremely anxious to render India dependent on US military technology.

In non-economic news the London Bombings remained the main story. The political push given the war on terrorism by the London bombings may be a plus for Bush’s gang in the short term, but the whole War on Terrorism will only highlight the precarious nature of the United States Empire: the dominant military power and the worlds greatest debtor nation. Here is Marshall Auerback :

For all of the good news emanating from the US recently, it is worth bearing in mind the huge ongoing financial strains the country continues to experience, as it seeks to confront the scourge of global terrorism.

…Much has been made of the improvement sustained in the May trade figures. But let’s keep this in context. As William Greider, national affairs columnist for The Nation, noted: “The United States is heading for yet another record trade deficit in 2005, possibly 25 percent larger than last year's. Our economy's international debt position - accumulated from many years of tolerating larger and larger trade deficits - began compounding ferociously in the last five years. Our net foreign indebtedness is now more than 25 percent of gross domestic product and at the current pace will reach 50 percent in four or five years .”

What about the fiscal position? Last year, talk of rising 'twin deficits' was widespread at the height of dollar pessimism. Markets generally tend to be less tolerant of external deficits when they are seen as being driven by the public sector.

However, in recent months the Federal deficit appears to be showing signs some dramatic improvement (a point that CEA head Ben Bernanke made last Wednesday). In the past three months, the 12 month running deficit has contracted by a $109bn to `just' $D335bn. In 3 month moving average terms, net tax receipts have risen a striking 21% year over year whilst net outlays have risen just a little over 6% year over year.

On the other hand, it is worth considering this “improvement” in the context of the overall 2004 Financial Report of the United States Government (the full document being available as a PDF file at The table published in the Overall Perspective on page 11 shows an $11.1 trillion annual deterioration in the government's net worth. As an aside, it is worthwhile noting the GAO's auditor's letter as to why they will not certify the statements. Explaining the discrepancy, financial analyst John Williams notes the following:

“The government's GAAP-based accounting generally is as used by Corporate America. It includes accrual accounting for money not yet physically disbursed or received but that otherwise is committed. The largest differences come from the bookkeeping related to Social Security and Medicare, where year-to-year changes in the net present value (discounted for the time value of money) of any unfunded liabilities are counted. In contrast, traditional deficit accounting is on a cash basis. It counts the cash received from payroll taxes (social Security, etc.) as income, but it does not reflect any offsetting obligations to the Social Security system.

For nearly four decades, officially sanctioned accounting gimmicks have masked federal deficit reality. Surpluses in trust accounts, such as Social Security, have been used to obscure the true shortfall in government spending. With less than one tenth of the actual deficit being reported each year, a cumulative negative net worth for the U.S. government has built up in stealth to a level that now tops $45 trillion, with total obligations of $47.3 trillion (more than four times annual GDP). The problem has moved beyond crisis to an uncontrollable disaster that threatens the existence of the U.S. dollar and global financial stability.”

If increased revenues come as a consequence of increased debt growth, then this doesn’t really resolve the underlying problem. Indeed, the most frightening thing about this long time build-up in debt is that it has largely occurred during a time of comparative political tranquillity… But, as events over the first part of the new century have demonstrated, this comparatively peaceful interregnum is now over and the tab for the US has mounted accordingly.

During Vietnam, the defence budget reached a peak of $439 billion (in inflation adjusted FY 2005 dollars). This budget supported about 550,000 troops in Vietnam, but it also kept hundreds of thousands of other troops forward deployed in Europe, Korea, Japan, the Philippines, Okinawa, and Guam; it funded a rotation in base in US to support these forward deployments, and funded hundreds of nuclear warheads on alert in missile silos, submarines at sea, and airplanes in the air.

Now compare this commitment to that of Iraq: To support the war in and Afghanistan, the United States will have a larger budget than at the peak Vietnam year, even if one removes the effects of inflation. The FY 2005 budget is in excess of $500 billion (in comparable FY 2005 dollars), once one factors in the $80 billion supplemental recently appropriated for Iraq. But America’s military is only about one-third the size of that fielded during Vietnam.

Weapons are projected to age even faster than during the Clinton Administration as the Bush Administration contemplates more cutbacks in future production (e.g., Joint Strike Fighter). US forces are clearly overstretched by a deployment of only 150,000 troops deployed to Iraq and about 15,000 deployed to Afghanistan as evidenced by the coercive personnel retention policies, such as the now notorious “stop-loss.” Militarily, America's forces are stretched too thin in Iraq, and they are showing signs of getting bogged down in a self-protection mode much like the Turks did in WWI.

That is a startling analogy: the Turks in World War I. That war saw the end of the once powerful Ottoman Empire. In the Paul Krugman column quoted above, he compares the U.S. empire to the Spanish Empire of Philip II. If American elites are starting to make these analogies, the situation must be dire.

And while basic needs of the fighting troops are not being met in a war of choice -- armour plate being the most infamous, the courtiers at the Pentagon are merrily throwing money at all sorts of cold-war inspired weapons (e.g., new attack submarines, ballistic missile defence, the F-22 and Joint Strike Fighters, the V-22 Tilt Rotor, etc.) which cannot possibly alleviate the situation for American troops enmeshed in a real Fourth Generation War.

That fact tells us that the people in charge of the war do not care about the people fighting it. They care only for the financial health of the corporations making money off the slaughter.

…Add to this, the near-guaranteed loss of much of what's left of the none-too-impressive "coalition" in Iraq in the next year -- the Italians have reiterated their intention to begin withdrawing their troops in September, the Poles have made similar noises, the Spanish are already out and even the British are planning a major drawdown relatively soon under the guise of redeploying in Afghanistan, hopefully to be replaced by the Australians. Consequently, the Bush administration is soon likely to find itself, standing very much alone in its mission, with a major domestic and international recruitment crisis on its hands.

According to The Guardian, the US military has stopped battalion commanders from dismissing new recruits for drug abuse, alcohol, poor fitness and pregnancy in an attempt to halt the rising attrition rate in an army under growing strain as a result of the wars in Iraq and Afghanistan. What’s next, emptying the jails?

…Of course, the tragedy of the London bombings may well prove useful to Bush, by recasting him again as a “war President”, even though it is interesting to contrast the respective approaches adopted in London and Washington to their respective terrorist attacks. The former seem far more inclined to treat this as a policing action, as opposed to a war (using the vocabulary of war, and the inflammatory “you’re either with us, or against us”, frankly co-opts tens of millions of Muslims into the camp of the west’s enemies, even though they might loathe some of the more odious leaders who head regimes in the Islamic world).

But as Europe begins to seem a more possible epicenter for further terrorist attacks, this may well provide further underpinning to the dollar, even though the war itself is now one of the major sources of imperial overstretch, which will ultimately undermine the greenback.

These are all dollar bear points for the medium to longer term. As we noted last week, the ongoing improvement in the Euroland data might point to a more immediate inflexion point in regard to the euro/dollar cross, as the markets begin to dismiss the notion of an imminent cut in the ECB discount rate. Last week, it was Germany whose data consistently surprised to the upside (and continues to do so to judge from an unexpectedly strong measure of investor confidence in the latest ZEW survey, which rose to a 10-month high of 37 in July from 19.5 in June). This week, it is France, where industrial production rose by 0.3% mom in May, posting the first increase in 4 months. Manufacturing production grew a more robust 0.5% mom; capital and intermediate goods were particularly strong.

The OECD’s composite leading indicator also points to a broadening of global economic activity. Soon to retire European Central Bank Chief Economist Otmar Issing has consistently iterated that the outlook for inflation in the dozen nations sharing the euro has deteriorated in the past month, suggesting the bank sees no scope to lower interest rates: “The outlook for prices has clearly worsened since June,” when the ECB last revised its inflation forecasts, said Issing in a dinner speech in Frankfurt last Thursday. Rates are still “appropriate” and “borrowing costs present no obstacle to growth in the euro region, rather quite the opposite,” said Issing.

So in many respects, the dollar’s current “success” on the foreign exchange markets appears to contain the seeds of its own destruction. Improved revenues appear largely a product of debt financed activity, which in turn are generating revenue gains that are probably unsustainable in the longer run. The strains of military overstretch is likely to exacerbate the problem and appear set to get worse as the “coalition of the willing” gradually becomes the “coalition” of the one. The dollar’s strength, therefore, appears no more than a summer respite. By the autumn, things may well look different to the forex markets again.

What makes the situation even more unstable is the breakdown of U.S. social structure with the polarization of society into extremes of rich and poor (or scared to death of becoming poor). Joseph Kay reflects on the polarization shown by two stories on one page of the Wall Street Journal.

A tale of two classes

By Joseph Kay

20 July 2005

Sometimes the real character of social relations in the United States manages to find its way into pages of the American press. Such was the case in Tuesday’s edition of the Wall Street Journal. The front page of the newspaper’s Marketplace section featured two articles, which when combined give a sense of the class division that cuts across American society. In “Keeping Up is Hard to Do,” Kris Maher tells the story of Mark and Donna Bellini, a typical working class couple from Pennsylvania. The Bellinis, who have two teenage sons, have a combined income of about $60,000 a year, which is roughly the median annual income for married couples. Indeed, the Bellinis are in many ways a very typical American family. However, this does not by any means guarantee them a stable living, and the Bellinis live under constant financial strains and the burden of debt. Maher notes that over the past several years, Mark Bellini’s pay has stagnated: “Mr. Bellini, a 51-year-old line technician for Comcast Corp., hasn’t received a pay increase in three years, since 2002. His wages have been stuck at $19.10 an hour while overall consumer prices have risen 8%.” The cost of basic necessities, particularly food and gasoline, has risen at a higher rate, and gas prices alone have jumped 55 percent since 2002.

The case of Mr. Bellini highlights an important fact: despite all the talk of an economic recovery and a resumption of growth, the conditions faced by most workers, even those who have not been laid off, have grown progressively worse. “Despite an economy growing at roughly 4%, healthy corporate profits and low unemployment levels, annual wages of workers in nonmanagerial positions—representing about 80% of the US work force—rose 2.7% in June from a year ago,” Maher writes. These increases have been entirely wiped out by inflation. In the most recent period, real wages have actually fallen.

As a consequence, fewer workers are able to amass any significant savings or put money away for retirement. Instead, they have been forced deeper and deeper into debt. For the Bellinis, more worrisome than the different life changes they have had to make to cut back on costs is the fact that “the couple counts almost no savings, and they haven’t, as once planned, been able to start a college fund for their two teenage sons. ‘The sense of security is gone,’ Mrs. Bellini says.” In order to get by, both Donna and Mark work full-time jobs, with Donna recently increasing her weekly hours from 24 to 38, at $10 an hour. After income and payroll taxes, the couple takes home about $3,200 a month, all of which is consumed by various expenses — utilities, a mortgage, property taxes, food and insurance, gasoline, clothing and other costs. Their credit card debts amount to $6,000, or the equivalent of nearly two months of take-home pay. Like so many American families, the couple lives “from paycheck to paycheck.” As Maher writes, Mr. Bellini “admits he doesn’t have a single dollar in his wallet and won’t until he receives his paycheck two days later.”

What will happen if something unexpected happens—a layoff, a health problem or a car accident? When considering the problems faced by the Bellinis, one understands the sudden surge in bankruptcy filings in recent years.

How is it possible to prepare for the future—including college costs and retirement funds—when current pay just barely covers current costs? Like many workers, Mr. Bellini has been forced to take loans against his 401(k) retirement account in order to pay bills. This, combined with a declining stock market, means that the Bellinis have less than $60,000 saved for retirement, the equivalent of only one year of their current income.

On the same page of the newspaper, Carol Hymowitz entitles her column: “To Rein in CEOs’ Pay, Why Not Consider Outsourcing the Post?” She begins by pointing out that while corporations have done everything they can to cut labor costs, including the outsourcing of jobs to countries around the world, pay for American CEOs has continued to rise, reaching levels far in excess of pay for executives anywhere else.

CEO pay—including salaries, bonuses and stock options—at major corporations routinely reaches into the tens of millions of dollars, hundreds of times more than the average worker at these same companies.

These pay packages are often justified on the grounds that they are necessary to retain top-quality executives. “What is galling,” Hymowitz responds, “is how rarely, even in a time of heightened governance sensitivity, compensation is linked to performance. Newly named CEOs are guaranteed a trough of money before they’ve done any work. When they fail and are dismissed, they are handed even more money.”

…Carly Fiorina, who had no trouble with poverty while CEO of Hewlett-Packard, nevertheless really hit the jackpot when she got pushed out earlier this year. Hymowitz notes that her severance package is $14 million, plus a $7 million cash bonus and $23.4 million in stocks and a pension.

Former Morgan Stanley CEO Phil Purcell received a severance and retirement package valued at more than $100 million when he got kicked out. “Former [Morgan Stanley] Co-President Steve Crawford is walking away with two years of severance estimated at $32 million after 3½ months on that job,” Hymowitz writes. Purcell’s package amounts to nearly 2,000 times the amount of money the Bellinis have in their combined retirement accounts.

…While Hymowitz points to these figures, she is at a complete loss to explain why something so irrational—such as the handing out of massive severance packages to failed CEOs—should be so prevalent. Reflecting the general bewilderment of the media establishment and a section of the ruling elite itself, she can only make an appeal at the end of her column for corporate boards that are more responsible.

In fact, the difficult situation of the Bellinis and the extreme wealth of the Purcells and the Fiorinas are inextricably linked. They are two facets of the same underlying process. On the one hand, the ruling elite in the US has responded to the crisis of American capitalism by furiously escalating attacks on workers, driving down wages, downsizing and outsourcing. On the other hand, under conditions in which the position of American manufacturing has plunged and profitable production has become more and more problematic, the corporate elite has increasingly resorted to outright theft.

When most people are struggling financially, when soldiers are sent to far away lands without the proper equipment, when the government is going broke and is rapidly becoming a failed state that cannot provide any of the basic functions to its citizens, what do you call it when failed CEO’s walk away with tens of millions of dollars in severance and moderately successful ones who sell their company to a larger predatory company walk away with hundreds of millions? It can only be described as massive theft, as plunder. The question to ask is why are they stealing so much now? Are they trying to purchase survival from the coming cataclysm? Are they attempting a staged crash followed by a grabbing of all world assets for pennies on the dollar? Or is it just compulsive greed and self-delusion?

Tuesday, July 19, 2005

Signs of the Economic Apocalypse 7-18-05

From Signs of the Times 76-18-05:

The U.S. stock market the Dow Jones Industrial Average closed at 10,640.83 up 1.8% from the previous week’s close of 10,449.14. The NASDAQ closed at 2,156.78, up 2.1% from the close of 2112.18 the Friday before. The yield on the ten-year U.S. Treasury bond was 4.17% on close of Friday, up seven basis points from 4.10 the week before. The U.S. dollar closed at 0.8308 euros on Friday, down 0.6% compared to 0.8357 the previous Friday. That puts the euro at 1.2036 dollars, compared to 1.1966 the week before. Oil closed at $58.09 a barrel, down 1.6% from the previous week’s $59.04. In terms of euros a barrel of oil would cost 48.26 euros, down 2.2% from last Friday’s close of 49.34. Gold closed at 421.70 dollars an ounce down 0.8% from $424.90 on the previous Friday. The gold/oil ratio (how many barrels of oil an ounce of gold would buy) closed at 7.26, up 0.8% from last week’s 7.20.

The U.S. stock market was up again on positive sentiment in the United States (Note to our non-United States readers: What can I say? We’re completely deluded optimists.).

U.S. Univ. of Michigan Sentiment Index Rose to 96.5 in July

July 15 (Bloomberg) -- U.S. consumer sentiment unexpectedly rose in July to the highest this year as sustained job growth and rising home values encouraged Americans, a private report showed.

The University of Michigan's preliminary consumer sentiment index for the month rose to 96.5 from 96 in June, to produce the year's first consecutive gain. A reading of 95 was forecast for the month, according to the median estimate in a Bloomberg News survey of economists.

Consumers have become accustomed to rising gasoline prices, which reached a record last week, economists said. They've also become adept at tapping into home equity gains, which may support spending and economic growth in the coming months.

“The recent uptick in gas prices hadn't been steep enough or sustained long enough to spook consumers, who've grown accustomed to prices going up and coming down,” David Huether, director of economic policy at the National Association of Manufacturers in Washington, said before the report.

The 55 forecasts in the Bloomberg News survey ranged from a high of 100.2 to a low of 91. The preliminary sentiment index is based on a phone survey of about 300 households. The final report for the month, due July 29, will reflect about 500 responses.

The current conditions index, which reflects Americans' perception of their financial situation and whether it's a good time to buy big-ticket items, fell to 112 in July from 113.2 in June. The expectations index, based on optimism about the next one to five years, inccreased to 86.6 from 85.

“A lot of what we've seen in consumer attitude surveys this year has been dictated by energy prices, specifically gas prices at the pump which people see on a daily basis,” Glenn Haberbush, an economist at Mizuho Securities USA Inc. in Hoboken, New Jersey, said before the report. Still, “it's a ‘watch what I do, not what I say’ kind of scenario because people are spending even as they're complaining.”

Energy Prices

The average price for a gallon of gasoline at the pump rose to a record $2.33 for the week ended July 11, compared with an average of $2.16 for June and $1.92 for the same week a year ago, according to the Energy Department. Oil prices reached a record $61.20 a barrel on the New York Mercantile Exchange July 7 on concerns that Hurricane Dennis might interrupt production in the Gulf of Mexico.

According to government reports issued the past two days, manufacturing in is improving and retail sales are on the increase. The data suggest inflation fears are receding and economic growth is strengthening.

An index of manufacturing in New York state, which provides an early clue to U.S. factory activity, rose to 23.9 in July from 10.5 last month, the Federal Reserve Bank of New York said today. In June, U.S. industrial production increased 0.9 percent, the most since February 2004, and U.S. wholesale prices were unchanged, other government reports showed today.

Inflation Tame

Prices U.S. consumers paid for goods and services were unchanged in June after declining 0.1 percent in May, the government said yesterday. U.S. retail sales surged 1.7 percent in June after decreasing 0.3 percent the prior month.

Hurricane Dennis, which struck the Florida Panhandle July 10, helped spur sales of food and emergency supplies in the southeastern United States, according to Wal-Mart Stores Inc. On July 9, the world's largest retailer said sales at its U.S. stores which had been open at least a year were rising within this month's forecast range of 3 percent to 5 percent.

Job growth and higher wages are encouraging spending, said David Abella, an analyst with Rochdale Investment Management in New York.

Job creation has averaged 181,000 a month this year, compared with 182,830 in 2004, which was the most since 1999. The unemployment rate fell to 5.1 percent last month, the lowest since September 2001, according to the Labor Department.

Consumer Spending

Consumer spending, which accounts for about 70 percent of the economy, will probably rise at a 3.2 percent annual pace this quarter after increasing 3.6 percent in the first three months of the year, according to the Bloomberg monthly economist survey published July 12.

“In spite of the spike in gas prices, consumer spending is holding up very well,” Ken Mayland, president of ClearView Economics LLC in Pepper Pike, Ohio, said before the report. “We know the job picture is better and we know stock price performance has been better and we know they both go into the confidence stew.”

Lower mortgage rates have also buoyed consumer attitudes, allowing many homeowners to refinance at lower borrowing costs and tap equity from increased home values, Mayland said.

Thirty-year fixed mortgage rates remain near the 14-month low of 5.53 percent reached in the the week ending July 1, according to Freddie Mac, the second-biggest purchaser of U.S. mortgages. The Standard and Poor's 500 Index reached 1223.29 July 13, its highest level since March 7.

“The shock has kind of worn off and people are finding that they can afford these oil and gas prices,” Nariman Behravesh, chief economist at Global Insight Inc., in Lexington, Massachusetts, said before the report. “Consumers are feeling pretty good and the numbers suggest they're spending at a decent clip.”

During this politically tricky time in the United States, the ruling class is doing everything it can to keep the economy expanding, even if it means a worse crash later. For example, nothing has been done to pull back the reckless lending into the housing bubble:

A Hands-Off Policy on Mortgage Loans ?
By Edmund L. Andrews

WASHINGTON, July 14 - For two months now, federal banking regulators have signaled their discomfort about the explosive rise in risky mortgage loans.

First they issued new "guidance" to banks about home-equity loans, warning against letting homeowners borrow too much against their houses. Then they expressed worry about the surge in no-money-down mortgages, interest-only loans and "liar's loans" that require no proof of a borrower's income.

The impact so far? Almost nil.

"It's as easy to get these loans now as it was two months ago," said Michael Menatian, president of Sanborn Mortgage, a mortgage broker in West Hartford, Conn. "If anything, people are offering them even more than before."

The reason is that federal banking regulators, from the Federal Reserve to the Office of the Comptroller of the Currency, have been reluctant to back up their words with specific actions. For even as they urge caution, officials here are loath to stand in the way of new methods of extending credit.

"We don't want to stifle financial innovation," said Steve Fritts, associate director for risk management policy at the Federal Deposit Insurance Corporation. "We have the most vibrant housing and housing-finance market in the world, and there is a lot of innovation. Normally, we think that if consumers have a lot of choice, that's a good thing."

Economically, the United States is now enjoying the benefits of massive war spending and the attendant deficit spending. This will always provide a short term stimulus. We should keep in mind the human cost as well as the long term risks, particularly if the war is a losing one. Here is Norman Solomon on the blood-soaked nature of U.S. economic growth:
Help the Economy: Invest Your Son
War and Venture Capitalism
By Norman Solomon

During the Vietnam War, one of the peace movement's more sardonic slogans was: "War is good business. Invest your son."

In recent years, some eminent pundits and top government officials have become brazen about praising war as a good investment.

Thomas Friedman's 1999 book "The Lexus and the Olive Tree" summed up a key function of the USA's high-tech arsenal. "The hidden hand of the market will never work without a hidden fist," he wrote. "McDonald's cannot flourish without McDonnell Douglas, the designer of the U.S. Air Force F-15. And the hidden fist that keeps the world safe for Silicon Valley's technologies to flourish is called the U.S. Army, Air Force, Navy and Marine Corps."

On Sept. 12, 2003, Secretary of State Colin Powell spoke this way as he defended the U.S. military occupation of Iraq: "Since the United States and its coalition partners have invested a great deal of political capital, as well as financial resources, as well as the lives of our young men and women -- and we have a large force there now -- we can't be expected to suddenly just step aside." He was voicing the terminology and logic of a major capitalist investor.

And so, it was fitting when the New York Times reported days ago that Powell will soon be (in the words of the headline) "Taking a Role in Venture Capitalism." The article explained that Powell is becoming a partner in Kleiner Perkins Caufield & Byers, a renowned Silicon Valley venture firm: "Mr. Powell acknowledged in an interview Tuesday that he has had any number of tempting job offers since leaving the State Department in January, but that the chance to work as a venture capitalist at Kleiner Perkins seemed too enticing to turn down."

Writ large, the balance-sheet outlook of venture capitalism is being widely applied to the current war in Iraq -- even while defenders of the war are apt to indignantly reject any claim that it's driven by zeal for massive profits. But let's take the corporate firms at their own words.

Last year, I went through the latest annual reports from some American firms with Pentagon contracts. Those reports acknowledged, as a matter of fact, the basic corporate reliance on the warfare state.

Orbit International Corp., a small business making high-tech products for use by the U.S. Navy, Air Force, Army, and Marines, had increased its net sales by nearly $2.4 million during the previous two years, to about $17.1 million -- and the war future was bright. "Looking ahead," CEO Dennis Sunshine reported, "Orbit's Electronics and Power Unit Segments expect to continue to benefit from the expanding military/defense and homeland security marketplace." In its yearly report to federal regulators, Orbit International acknowledged: "We are heavily dependent upon military spending as a source of revenues and income. Accordingly, any substantial future reductions in overall military spending by the U.S. government could have a material adverse effect on our sales and earnings."

A much larger corporation, Engineered Support Systems, Inc., had quadrupled its net revenues between 1999 and 2003, when they reached $572.7 million. For the report covering 2003, the firm's top officers signed a statement that declared: "As we have always said, rapid deployment of our armed forces drives our business." The company's president, Jerry Potthoff, assured investors: "Our nation's military is deployed in over 130 countries, so our products and personnel are deployed, as well. As long as America remains the world's policeman, our products and services will help them complete their missions."

The gigantic Northrop Grumman firm, while noting that its revenues totaled $26.2 billion in 2003, boasted: "In terms of the portfolio, Northrop Grumman is situated in the sweet spot' of U.S. defense and national security spending."

War. How sweet it can be.

This excerpt is from Norman Solomon's new book War Made Easy: How Presidents and Pundits Keep Spinning Us to Death, published in July 2005. For more information, go to:
Again, the economic benefits of a Spartan-like military state can continue only if the wars are successful. Military spending on losing efforts can only hasten sharp economic decline. And the resistance to the American Empire, in Iraq, in Latin America, in the statements of the leaders of China and Russia, do not bode well for continued expansion. The wishful thinking of the powerful can make it easy to overlook the beginning of the end of a system of exploitation. That end will often grow out of the areas that the dominant actor cannot comprehend. What is the one thing the corporations that embody late capitalism cannot understand? Empathy. They are pscyhopathic by nature and the psychopath cannot understand empathy and conscience. Here is Subcomandante Marcos of the remarkable Zapatista Movement describing the beginnings of their uprising:

And then our small history was that we grew tired of exploitation by the powerful, and then we organized in order to defend ourselves and to fight for justice. In the beginning there were not many of us, just a few, going this way and that, talking with and listening to other people like us. We did that for many years, and we did it in secret, without making a stir. In other words, we joined forces in silence. We remained like that for about 10 years, and then we had grown, and then we were many thousands. We trained ourselves quite well in politics and weapons, and, suddenly, when the rich were throwing their New Year's Eve parties, we fell upon their cities and just took them over. And we left a message to everyone that here we are, that they have to take notice of us. And then the rich took off and sent their great armies to do away with us, just like they always do when the exploited rebel - they order them all to be done away with. But we were not done away with at all, because we had prepared ourselves quite well prior to the war, and we made ourselves strong in our mountains. And there were the armies, looking for us and throwing their bombs and bullets at us, and then they were making plans to kill off all the indigenous at one time, because they did not know who was a zapatista and who was not. And we were running and fighting, fighting and running, just like our ancestors had done. Without giving up, without surrendering, without being defeated.
What the Zapatistas in Mexico, along with the Bolivian indigenous rebels and the Chavistas in Venezuela, are attacking is the heart of the system of capitalist exploitation: the alliance of international capital with local neo-feudal exploiters. But as important as the “attack” is their building of alternate systems of social welfare, their conceiving of alternate systems of economy, and even alternate systems of relating to other people globally. Here is Subcomandante Marcos again, describing the disillusionment that followed after the Mexican government decided not to honor its agreements with the Zapatista movement:

And the first thing we saw was that our heart was not the same as before, when we began our struggle. It was larger, because now we had touched the hearts of many good people. And we also saw that our heart was more hurt, it was more wounded. And it was not wounded by the deceits of the bad governments, but because, when we touched the hearts of others, we also touched their sorrows. It was as if we were seeing ourselves in a mirror.

What this indigenous movement saw was the similar suffering in communities around the world: a variety of different groups sharing the status of capitalist victims, of sufferers. As Bob Marley sang in “Babylon System:”
Babylon system is the vampire.
Sucking the children day by day.
Babylon system is the vampire,
Sucking the blood of the sufferers.
Building church and university.
Deceiving the people continually.
Me say them graduating thieves and murderers.
Look out now.
Sucking the blood of the sufferers.

Tell the children the truth.
Tell the children the truth.
Tell the children the truth right now.
Come on and tell the children the truth.

‘Cause we’ve been trodding on the winepress much too long.
Got to rebel, got to rebel now.
We’ve been taken for granted,
Much too long. Rebel.

Here is the Zapatista take on capitalism and neoliberalism:
Now we are going to explain to you how we, the zapatistas, see what is going on in the world. We see that capitalism is the strongest right now. Capitalism is a social system, a way in which a society goes about organizing things and people, and who has and who has not, and who gives orders and who obeys. In capitalism, there are some people who have money, or capital, and factories and stores and fields and many things, and there are others who have nothing but their strength and knowledge in order to work. In capitalism, those who have money and things give the orders, and those who only have their ability to work obey.

Then capitalism means that there a few who have great wealth, but they did not win a prize, or find a treasure, or inherited from a parent. They obtained that wealth, rather, by exploiting the work of the many. So capitalism is based on the exploitation of the workers, which means they exploit the workers and take out all the profits they can. This is done unjustly, because they do not pay the worker what his work is worth. Instead they give him a salary that barely allows him to eat a little and to rest for a bit, and the next day he goes back to work in exploitation, whether in the countryside or in the city.

And capitalism also makes its wealth from plunder, or theft, because they take what they want from others, land, for example, and natural resources. So capitalism is a system where the robbers are free and they are admired and used as examples.

And, in addition to exploiting and plundering, capitalism represses because it imprisons and kills those who rebel against injustice.

Capitalism is most interested in merchandise, because when it is bought or sold, profits are made. And then capitalism turns everything into merchandise, it makes merchandise of people, of nature, of culture, of history, of conscience. According to capitalism, everything must be able to be bought and sold. And it hides everything behind the merchandise, so we don't see the exploitation that exists. And then the merchandise is bought and sold in a market. And the market, in addition to being used for buying and selling, is also used to hide the exploitation of the workers. In the market, for example, we see coffee in its little package or its pretty little jar, but we do not see the campesino who suffered in order to harvest the coffee, and we do not see the coyote who paid him so cheaply for his work, and we do not see the workers in the large company working their hearts out to package the coffee. Or we see an appliance for listening to music like cumbias, rancheras or corridos, or whatever, and we see that it is very good because it has a good sound, but we do not see the worker in the maquiladora who struggled for many hours, putting the cables and the parts of the appliance together, and they barely paid her a pittance of money, and she lives far away from work and spends a lot on the trip, and, in addition, she runs the risk of being kidnapped, raped and killed as happens in Ciudad Juárez in Mexico.

So we see merchandise in the market, but we do not see the exploitation with which it was made. And then capitalism needs many markets...or a very large market, a world market.

And so the capitalism of today is not the same as before, when the rich were content with exploiting the workers in their own countries, but now they are on a path which is called Neoliberal Globalization. This globalization means that they no longer control the workers in one or several countries, but the capitalists are trying to dominate everything all over the world. And the world, or Planet Earth, is also called the "globe", and that is why they say "globalization," or the entire world.

And neoliberalism is the idea that capitalism is free to dominate the entire world, and so tough, you have to resign yourself and conform and not make a fuss, in other words, not rebel. So neoliberalism is like the theory, the plan, of capitalist globalization. And neoliberalism has its economic, political, military and cultural plans. All of those plans have to do with dominating everyone, and they repress or separate anyone who doesn't obey so that his rebellious ideas aren't passed on to others.

Then, in neoliberal globalization, the great capitalists who live in the countries which are powerful, like the United States, want the entire world to be made into a big business where merchandise is produced like a great market. A world market for buying and selling the entire world and for hiding all the exploitation from the world. Then the global capitalists insert themselves everywhere, in all the countries, in order to do their big business, their great exploitation. Then they respect nothing, and they meddle wherever they wish. As if they were conquering other countries. That is why we zapatistas say that neoliberal globalization is a war of conquest of the entire world, a world war, a war being waged by capitalism for global domination. Sometimes that conquest is by armies who invade a country and conquer it by force. But sometimes it is with the economy, in other words, the big capitalists put their money into another country or they lend it money, but on the condition that they obey what they tell them to do. And they also insert their ideas, with the capitalist culture which is the culture of merchandise, of profits, of the market.

Then the one which wages the conquest, capitalism, does as it wants, it destroys and changes what it does not like and eliminates what gets in its way. For example, those who do not produce nor buy nor sell modern merchandise get in their way, or those who rebel against that order. And they despise those who are of no use to them. That is why the indigenous get in the way of neoliberal capitalism, and that is why they despise them and want to eliminate them. And neoliberal capitalism also gets rid of the laws which do not allow them to exploit and to have a lot of profit. They demand that everything can be bought and sold, and, since capitalism has all the money, it buys everything. Capitalism destroys the countries it conquers with neoliberal globalization, but it also wants to adapt everything, to make it over again, but in its own way, a way which benefits capitalism and which doesn't allow anything to get in its way. Then neoliberal globalization, capitalism, destroys what exists in these countries, it destroys their culture, their language, their economic system, their political system, and it also destroys the ways in which those who live in that country relate to each other. So everything that makes a country a country is left destroyed.

Then neoliberal globalization wants to destroy the nations of the world so that only one Nation or country remains, the country of money, of capital. And capitalism wants everything to be as it wants, in its own way, and it doesn't like what is different, and it persecutes it and attacks it, or puts it off in a corner and acts as if it doesn't exist.

Then, in short, the capitalism of global neoliberalism is based on exploitation, plunder, contempt and repression of those who refuse. The same as before, but now globalized, worldwide.

But it is not so easy for neoliberal globalization, because the exploited of each country become discontented, and they will not say well, too bad, instead they rebel. And those who remain and who are in the way resist, and they don't allow themselves to be eliminated. And that is why we see, all over the world, those who are being screwed over making resistances, not putting up with it, in other words, they rebel, and not just in one country but wherever they abound. And so, as there is a neoliberal globalization, there is a globalization of rebellion.

And it is not just the workers of the countryside and of the city who appear in this globalization of rebellion, but others also appear who are much persecuted and despised for the same reason, for not letting themselves be dominated, like women, young people, the indigenous, homosexuals, lesbians, transsexual persons, migrants and many other groups who exist all over the world but who we do not see until they shout ya basta of being despised, and they raise up, and then we see them, we hear them, and we learn from them.

And then we see that all those groups of people are fighting against neoliberalism, against the capitalist globalization plan, and they are struggling for humanity.

And we are astonished when we see the stupidity of the neoliberals who want to destroy all humanity with their wars and exploitations, but it also makes us quite happy to see resistances and rebellions appearing everywhere, such as ours, which is a bit small, but here we are. And we see this all over the world, and now our heart learns that we are not alone.
Much of this critique of neoliberal capitalism has been said before. But notice what is new here: the explicit emotional appeal of empathy and community. That can be a powerful weapon against a system that makes everyone alone, isolated and powerless, a system incapable of empathy or human feeling.
What we want in the world is to tell all of those who are resisting and fighting in their own ways and in their own countries, that you are not alone, that we, the zapatistas, even though we are very small, are supporting you, and we are going to look at how to help you in your struggles and to speak to you in order to learn, because what we have, in fact, learned is to learn.

And we want to tell the Latin American peoples that we are proud to be a part of you, even if it is a small part. We remember quite well how the continent was also illuminated some years ago, and a light was called Che Guevara, as it had previously been called Bolivar, because sometimes the people take up a name in order to say they are taking up a flag.

And we want to tell the people of Cuba, who have now been on their path of resistance for many years, that you are not alone, and we do not agree with the blockade they are imposing, and we are going to see how to send you something, even if it is maize, for your resistance. And we want to tell the North American people that we know that the bad governments which you have and which spread harm throughout the world is one thing - and those North Americans who struggle in their country, and who are in solidarity with the struggles of other countries, are a very different thing. And we want to tell the Mapuche brothers and sisters in Chile that we are watching and learning from your struggles. And to the Venezuelans, we see how well you are defending your sovereignty, your nation's right to decide where it is going. And to the indigenous brothers and sisters of Ecuador and Bolivia, we say you are giving a good lesson in history to all of Latin America, because now you are indeed putting a halt to neoliberal globalization. And to the piqueteros and to the young people of Argentina, we want to tell you that, that we love you. And to those in Uruguay who want a better country, we admire you. And to those who are sin tierra in Brazil, that we respect you. And to all the young people of Latin America, that what you are doing is good, and you give us great hope.

And we want to tell the brothers and sisters of Social Europe, that which is dignified and rebel, that you are not alone. That your great movements against the neoliberal wars bring us joy. That we are attentively watching your forms of organization and your methods of struggle so that we can perhaps learn something. That we are considering how we can help you in your struggles, and we are not going to send euro because then they will be devalued because of the European Union mess. But perhaps we will send you crafts and coffee so you can market them and help you some in the tasks of your struggle. And perhaps we might also send you some pozol, which gives much strength in the resistance, but who knows if we will send it to you, because pozol is more our way, and what if it were to hurt your bellies and weaken your struggles and the neoliberals defeat you.

And we want to tell the brothers and sisters of Africa, Asia and Oceania that we know that you are fighting also, and we want to learn more of your ideas and practices.

And we want to tell the world that we want to make you large, so large that all those worlds will fit, those worlds which are resisting because they want to destroy the neoliberals and because they simply cannot stop fighting for humanity.

Monday, July 11, 2005

Signs of the Economic Apocalypse 7-11-05

From Signs of the Times 7-11-05:

The U.S. dollar closed at 0.8357 euros on Friday, down 0.5% from last week's close of 0.8397. The euro, then, went from 1.1908 dollars on July 1 to 1.1966 on July 8. Gold closed at 424.90 dollars an ounce, down 1% compared to $429.30 an ounce a week earlier. Gold in euros would be 355.09 an ounce, down 1.5% compared to 360.51 euros an ounce at the previous week's close. Oil closed at $59.04 up 0.5% compared to $58.75 a barrel on July 1. Oil in euros was unchanged this week at 49.34. The gold/oil ratio was 7.20, down 1.5% compared to 7.31 a week ago.In the U.S. stock market, the Dow closed at 10,449.14 up 1.4% from last week's 10,303.44, shaking off any terrorism effects even before the end of Thursday. The NASDAQ closed at 2112.18 up 2.7% from the previous Friday's close of 2057.37. The yield on the ten-year U.S. Treasury bond closed at 4.10 percent up six basis points from 4.04 on July 1.

The market reaction to the London bombings showed that "normal" terrorist events are now already factored into world market prices:

World economy defies new terror onslaught

Fri Jul 8 6:44 PM ET AFP
Global terrorism is now such a tragic fact of life that major economies will prove more resilient to the attacks on London than to the shock of 9/11, analysts said. Compared to the pandemonium that broke out on financial markets after the attacks in the United States of September 11, 2001, markets this time have quickly got back in their stride after Thursday's rush-hour carnage in London. Major European stock markets rose Friday with London's FTSE 100 index closing up 1.43 percent at 5,232.2 points. New York stocks also rallied strongly.

"Unfortunately, western societies have come to expect some type of terror attack somewhere from time to time," US broker Ryan Beck and Co. said in a research note. "As a result, terror risk premiums already exist in all financial markets," it said. Analysts at Claymore Research played down the wider impact of the four bomb blasts on London's public transport system Thursday morning, which killed at least 50 people and injured more than 700. "Many worry that terrorism threatens both the US recovery and the global economy," they said.

"But, if we look to 9/11 as an example, overall spending in the US economy was actually higher in November 2001 than it was in August. "While airlines and hotels suffered for years, other spending accelerated, and the US consumer rebounded quickly." On that reading, the British and other European economies will be barely affected as a whole by the carnage in London.

Indeed, there has been an upswing of economic optimism in the United States in the past week. This has come from some water-treading employment figures, strong retail sales (meaning a continued housing bubble) and, I believe, a reorienting of public attention away from probable felony indictments of Bush's top advisor, Karl Rove, away from a rapidly deteriorating situation in Iraq and Afghanistan for the U.S., and away from a collapse of support for Bush personally (below 40% approval ratings) which usually means political turmoil and uncertainty, towards the "war on terrorism" on Bush terms after the London bombing. The political boost given to Bush and Blair by the bombing (a godsend for them, really) and by the G8 summit where they could pretend to care about Africa on human terms and not on the next destroyed region ripe for predatory capitalist exploitation can only be good news for the capitalist system, still dominated by the Anglo-American axis (Axis of Mammon?). However, the problems we have been following here this year have not changed, and it is hard to see a bombing of the transit system of the center of the world finance system, no matter who did it, as in any way being good news.

So, first the good news:

Is the economy accelerating?

by Chad Hudson July 6, 2005

Throughout the first half of the year, the economic data has been ambiguous. Growth in the manufacturing sector has moderated from the rapid growth in 2004. Consumer spending has showed signs of abating, with unseasonable weather cited as the primary reason. Over the past week, economic data indicates that economic growth has started to accelerate.

ISM manufacturing survey rose 2.4 points to 53.8. This was the first gain in six months and higher than economists expected, which was no change from May. Most of the increase was due to the jump in new orders. New orders increased 5.5 points to 57.2, the highest level this year. The prices paid component dropped 7.5 points to 50.5. While this was the lowest the prices paid component has been since February 2002, this was the 40th consecutive month that manufacturers reported that prices had increased. After contracting in May, manufacturers reported that employment held steady in June, rising 1.1 points to 49.9.

The June non-manufacturing survey was also better than economists expected. Instead of a 0.2 point gain, the index increased 3.7 points in June to 62.2. Six of the components rose. The employment component increased the most, jumping 4.0 points to 57.4. This was the highest since February and the second highest level since the survey started in 1997. While manufactures said that prices stabilized in June, non-manufacturers reported that prices accelerated in June. The prices paid component increased 2.0 points to 59.8. This was the first increase this year.

Factory orders jumped 2.9% in May due to a 21.1% jump in transportation orders. Excluding transportation, factory orders declined 0.1% from April. While factory orders excluding transportation dropped 0.1% from April, orders were up 7.2% compared to last year. Orders for consumer goods rose 10.5% from last year, which was the strongest growth since November 2004.

June annualized vehicle sales reached 17.5 million units, which was better than the 17.0 million unit pace forecasted and the fastest selling pace this year. General Motors sales soared 47% after extending its employee discount to everyone. This incentive eliminated the rebates that GM had been offering and set prices at a no-haggle low price. It is interesting that this increased that average incentive by less than $500. According to Autodata, the employee discount increased the average incentive by $449 to $4,458. This week, GM announced it will extend the employee-discount pricing until August 1 and Chrysler announced that will also sell vehicles at the employee price. This forced Ford to match the offer.

Last week, the Federal Reserve raised rates by 25 basis points. More importantly it said monetary policy remains accommodative and further tightening will be measured. The statement also caused traders to reassess how many more times the Federal Reserve will increase rates this year. Before the meeting, Fed Funds futures were trading at 3.78% yield, meaning that traders expected the Federal Reserve to increase rates by another 50 basis points this year. Now, the December contract is trading at 3.895%, so now traders expects three 25 basis points hikes over the next four meetings this year.

Wal-Mart announced that its same store sales rose about 4.5% in June, slightly better than its plan of 2%-4%. Additionally, throughout June the retailer said that general merchandise was stronger than its food sales, which had been stronger in May. Last week, Target said that June same store sales were running above its plan of 4%-6% growth. Some analysts attribute the recent strength to the pent-up demand after poor weather hindered purchases of seasonal items. According to the International Council of Shopping Centers, retail sales increased 3.8% during the first week of July, from last year. It also expects sales to have increased by 4.5% in June. This would be the strongest year-over-year growth since February's 4.7% increase.

The uneven economic growth over the past six-months has caused economists to forecast a weakening economy. Similar to other "soft-patches", interest rates headed lower, which in turn ignited the already hot housing market. Recent economic reports have revealed that the economy has expanded at a faster pace than initially perceived. In the past, interest rates have moved higher on stronger economic news. While shorter-term bonds have increased, long-term interest rates remain close to two-year lows. If the employment number is stronger than the 198,000 gain economists expect, its likely that the bond market will start to price in a stronger economy.

In fact, the employment number was around 146,000, less than expected. While the unemployment rate dropped a bit in June, the June job growth numbers in the United States were still high enough to keep the economy from turning downwards.

US economy creates 146,000 jobs in June
AFP Fri Jul 8, 5:33 PM ET

The US economy created 146,000 more jobs in June, the government said, less than expected by Wall Street but still enough to reinforce evidence of healthy growth.

Analysts were expecting a June rise in the closely watched "non-farms payroll" figure of 195,000. But the Labor Department also revised up the data for previous months.

For May, the figure was raised to 104,000 from 78,000 given initially. The number for April was increased to 292,000 from 274,000.

US Treasury Secretary John Snow said the numbers "are a reminder that the American economy is thriving".

With the revisions thrown in, the June figure reads closer to a more satisfying rise of 190,000, Nomura chief economist David Resler said. "That is amazingly close to the average of about 183,000 for the past year and a half," he said. "Labor markets are in a steady state of growth, with wage rates offering no hint of inflation pressures."

The US unemployment rate fell to a four-year low of 5.0 percent in June, down from 5.1 percent in May, the Labor Department said.

But economists say the total number of jobs created is a more reliable indicator of the US economy's health than the jobless rate. They reckon that an average rise of 150,000 a month is needed to keep pace with population growth. The non-farms payroll data has been choppy of late. The May and April revisions come after February saw a big rise of 300,000.

Other data have given encouraging signs of growth in the world's biggest economy. First-quarter gross domestic product has been revised up to 3.8 percent, while industrial and services indicators have been solid.

The health of the jobs market is crucial for economic confidence, with consumer spending remaining the biggest motor of growth. In June, average hourly earnings rose three cents, or 0.2 percent, to 16.06 dollars. Earnings are up 2.7 percent in the past year. Job creation was concentrated in professional and business services, which added 56,000 posts, in healthcare and education (up 38,000) and leisure (19,000). Construction firms added 18,000 jobs. Employment losses were concentrated in the auto sector, which lost 18,000 jobs. Among 84 manufacturing industries, 35.7 percent were hiring in June, the lowest level since October 2003.

The report will feed into the Federal Reserve's thinking on interest rates when it next meets on August 9, analysts said. The figures inspired a powerful rally on Wall Street as share traders focussed on an economic scenario that is not too hot, but not too cold. "The US economy's performance may once again start inspiring the 'Goldilocks' metaphor, with growth and hiring both running at a pace that is nearly just right for the Fed," said CIBC World Markets analyst Leslie Preston.

Now for the bad news. The following article on the real U.S. budget situation is worth quoting at length:

Federal Deficit Reality: An Update

John Williams

July 7, 2005

John Williams is publisher of "Shadow Government Statistics" which looks behind the government's reported economic numbers.

When the U.S. Treasury reported the official 2004 federal budget deficit at a record $413 billion last October, the hisses and boos in the financial media were unrelenting. Two months later, the Treasury reported the actual 2004 deficit using generally accepted accounting principles (GAAP) to be an incredulous $11.1 trillion, up from $3.7 trillion in 2003, yet nary a word was heard in the financial media, from Wall Street or from any political denizen of that former malarial swamp on the Potomac. An exception, of course, was Treasury Secretary John Snow, who signed the government's financial statements, but the data release was as low key as physically possible.

The silence partially reflects the financial-market terror that would accompany an effective national bankruptcy. Such is the risk when a government's fiscal ills spin so wildly out of control that they no longer are containable within the existing system.

Consider the traditional solution of raising taxes. Putting the $11.1 trillion deficit in perspective, if the government raised individual and corporate income taxes to 100%, seizing all salaries, wages and profits, the government's 2004 operations still would have been in deficit by trillions of dollars. The deficit has moved beyond practical fiscal control! Many in government and the markets are aware of the underlying deficit reality, but few dare to sound the alarm, for the ultimate resolutions to the situation all are political or financial nightmares.

The government's GAAP-based accounting generally is as used by Corporate America. It includes accrual accounting for money not yet physically disbursed or received but that otherwise is committed. The largest differences come from the bookkeeping related to Social Security and Medicare, where year-to-year changes in the net present value (discounted for the time value of money) of any unfunded liabilities are counted. In contrast, traditional deficit accounting is on a cash basis. It counts the cash received from payroll taxes (social Security, etc.) as income, but it does not reflect any offsetting obligations to the Social Security system.

That type of accounting for Social Security would be fine as far as I'm concerned as long as they kept it separate from the rest of the budget, which they don't. That means that the payroll taxes paid into Social Security are considered income for the whole budget.

For nearly four decades, officially sanctioned accounting gimmicks have masked federal deficit reality. Surpluses in trust accounts, such as Social Security, have been used to obscure the true shortfall in government spending. With less than one tenth of the actual deficit being reported each year, a cumulative negative net worth for the U.S. government has built up in stealth to a level that now tops $45 trillion, with total obligations of $47.3 trillion (more than four times annual GDP). The problem has moved beyond crisis to an uncontrollable disaster that threatens the existence of the U.S. dollar and global financial stability.

Indeed, the unfolding fiscal nightmare likely will entail a U.S. hyperinflation and a resulting collapse in the value of the world's primary reserve currency, the dollar. With surviving politicians looking to restore public faith in the global currency system, a new system probably will be based on gold, the only monetary asset that has held public confidence for millennia.

This article updates and expands upon our original background piece on the topic, "Federal Deficit Reality", published in September 2004, and a special economic alert, "Financial Report of the United States Government (FY 2004)", which appeared last December. Portions of those articles are revised and incorporated herein.

While the official cash-accounting deficit for fiscal-year 2004 (year-ended September 30) widened by 10.0% to $413 billion, the broad GAAP-based deficit (including Social Security, etc.) blew up to $11.1 trillion (96% of GDP) in 2004, triple the 2003 deficit level of $3.7 trillion. Much of the increase in the broad GAAP-based deficit was due to a set-up charge from booking the 2004 "enhancements" to the Medicare system. Net of the $6.4 trillion one-time increase in net unfunded liabilities, the annual broad deficit was about $4.7 trillion, which still would have been a shortfall with 100% taxation.

Nonetheless, the total numbers reflect something close to true liability. The new Medicare charges show how quickly politicians can make an already impossible situation significantly worse. By adding features to Medicare without setting up full funding for same, the Administration and Congress helped increase the total net present value of unfunded federal government obligations by 31%, from $36.2 trillion to $47.3 trillion in just one year.

In like manner, any "fix" to Social Security, such as raising the retirement age, would result in a one-time change to the unfunded liabilities, but the ongoing annual shortfalls would be affected only minimally. An annual minimum broad GAAP-based deficit of $4.5 to $5.0 trillion appears to be in place.

Wall Street hypesters recently have been touting how the official 2005 federal deficit will narrow from 2004, and the Administration is promising ongoing deficit reductions from the official 2004 level. First, if the economy falls into recession, which it appears to be doing, all such projections are worthless. Second, even if the promised cuts came to pass, after full reductions in an about $4.5-trillion broad GAAP-based deficit, the mere billions saved would still leave the annual deficit rounded to about $4.5 trillion.

The impossibility of the current circumstance working out happily is why lame-duck Federal Reserve Chairman Alan Greenspan has been urging politicians in Washington to come clean on not being able to deliver promised Social Security and Medicare benefits already under obligation. He suggests, correctly, that there is no chance of economic or productivity growth resolving the matter. The funding shortfall projections already encompass optimistic economic assumptions.

The current circumstance also is why the Bush Administration has been pushing for Social Security reform, but the plans discussed do not come close to touching the magnitude of the problem. Most Congressional Democrats will not even admit there is a problem. Indeed, neither side of the aisle is willing even to mention the scope of the actual shortfall or talk about the Medicare problem, which is even worse than Social Security.

If the Administration and Congress were willing to address the unfolding fiscal Armageddon, only two very unpleasant general solutions are available:

* The first solution is draconian spending cuts, particularly in Social Security and Medicare, accompanied by massive tax increases. The needed spending cuts and tax increases are so large as to be political impossibilities.

* In the absence of political action, the second solution is tacit bankruptcy, with the U.S. government facing some form of insolvency within the next decade or so. Shy of Uncle Sam defaulting on debt, the most likely eventual outcome is the Fed massively monetizing the U.S. debt, triggering a hyperinflation. U.S. obligations then would be paid off in a significantly debased and devalued dollar at literally pennies on the hundred dollars.

These alternatives are politically unthinkable and unspeakable for the Administration and Congress, hence the silence. Yet, these same political bodies are responsible for the current circumstance, along with the acquiescence of the financial community and an uninformed or disinterested voting public.

Decades of Deception --

Historical Perspective Misleading accounting used by the U.S. government, both in financial and economic reporting, far exceeds the scope of corporate accounting wrongdoing that keeps making financial headlines. The bad boys of Corporate America, however, still have been subject to significant regulatory oversight and at least the appearance of the application of GAAP accounting to their books. In contrast, the government's operations and economic reporting have been subject to oversight solely by Congress, America's only "distinctly native criminal class."

Nearly four decades ago, President Lyndon Johnson's political sensitivities led him and the Congress to slough off some of the costs of an escalating Vietnam War through the use of accounting gimmicks. To mask the rapid growth in the federal government's budget deficit, revenues from the surplus being generated by Social Security taxes were added into the general cash fund, without making any accounting allowance for the accompanying and increasing Social Security liabilities. This accounting-gimmicked reporting was dubbed "unified" budget accounting.

The government's accounting then, as it is now, was on a cash basis, reflecting cash revenues versus cash expenditures. There were no accruals made for monies owed by or due to the government or to the government's trust funds at some time in the future.

The bogus accounting understated the actual deficit for decades and even allowed for claims of budget surpluses in the years 1998 to 2001. While there were extensive self-congratulatory comments between the President, Congress and the Fed Chairman, at the time, all involved knew there never were any actual budget surpluses. There has not been an actual balanced budget, let alone a surplus, since before Johnson and his cronies cooked the bookkeeping.

The doctored fiscal reporting complemented the short-term political interests of both major political parties. Additionally, the ignorance and/or complicity of Pollyannaish analysts on Wall Street and in the financial media -- eager to discourage negative market activity -- helped to keep the fiscal crisis from arousing significant concern among a dumbed-down U.S. populace.

…Dollar, Debt and Hyperinflation

The financial-market counterpart to the federal deficit is federal debt, where gross federal debt was $7.8 trillion as of June 30, 2005. That level was $7.4 trillion at the end of fiscal 2004, of which $4.3 trillion was borrowed from the public and $3.1 trillion was borrowed from the government (i.e. Social Security). Therein lies the problem. There is and will be too much debt from the U.S. government for the financial markets to absorb and remain stable.

The burgeoning deficit means the U.S. government will be increasing its debt level significantly for years to come. Near term, the amount borrowed will increase more rapidly than the markets are expecting, with the economy slowing down and entering recession. The ultimate question is who will lend the money to the U.S. Treasury? The answer is not U.S. investors.

The Federal Reserve's flow of funds accounts show that foreign investors, both official and private, owned 42.5% of U.S. Treasuries at the end of 2004, up from 18.2% at the end of 1994. In 2004, foreign investors bought 98.5% of new U.S. Treasury issuance. (See "A Look at Foreign Investment Behavior in the Latest Flow-of-Funds Data," courtesy of Gillespie Research Associates.)

Part of the reason for this relates to another deficit crisis the United States faces on the trade front, where an exploding trade deficit is throwing excess dollars into global circulation. By holding dollars and investing in Treasuries, instead of converting dollars to a local currency, foreign investors have been helping to fund much of the U.S. deficit.

The combination of the rapidly deteriorating trade and budget deficits guarantee this will change. At some point, willingness among foreign investors to hold dollars will evaporate along with the reality that currency losses are more than offsetting any investment gains. When sentiment shifts away from the greenback, not only are foreign investors going to stop buying U.S. Treasuries, but also they likely will dump their holdings of existing Treasuries along with the U.S. dollar. Such actions would lead to a sharp dollar decline, a sharp spike in interest rates and a sharp sell-off in equities. The question, again, is who is going to buy the Treasuries?

With new debt continually hitting the market, eventually the Fed will have to step in to buy the Treasuries -- as lender of last resort -- effectively monetizing the debt. The more the Fed monetizes, the greater will be the growth in the money supply, the greater will be the weakness in the dollar, the greater will be the rate of inflation.

Where the numbers already are there for this to happen, fiscal pressures will get even worse. Already, the Pension Benefit Guaranty Corporation looks like it needs a federal bailout. As the economy deteriorates, the Congress or the Fed will step in as needed to prevent the collapse of any major financial institution that would threaten the system. Such action, though, will prove fiscally expensive.

The Fed let the banks fail in the 1930s, which helped intensify a decline in the money supply. That in turn was given major credit for deepening the Great Depression. The Fed will try to avoid the mistakes of the 1930s, but, in the process, it likely will end up triggering a hyperinflationary depression.

…Such has been the traditional cure for countries that borrowed so far beyond their means that they ended up with a choice between bankruptcy and hyperinflation. Hyperinflation seems to be the easier political route, although, for the first time, it will involve the world's primary reserve currency.

In a hyperinflation, the currency very rapidly becomes worthless. In the classic case of the Weimar Republic of the 1920s, a 100,000-Mark note became more valuable as toilet paper than as currency; wheel barrows full of currency were needed to buy a loaf of bread; an expensive bottle of wine one night was worth even more the next morning, empty, as scrap glass. That is the eventual environment the United States faces because of its out-of-control fiscal madness.

For decades, "The deficit doesn't matter" and "The dollar doesn't matter" have been guiding principles in Washington. The deficit and the dollar do matter, greatly, as Washington, the U.S. public and the global markets will learn shortly.

A New Gold Standard?

The dollar, as we know it, soon will be history. Dollar inflation has been through a number of cycles since the founding of the Republic, but its current perpetual uptrend -- net of some bouncing during the Great Depression -- only began once the Federal Reserve was created in 1914. Now, with fiscal policy careening beyond any chance of containment, the Federal Reserve will get to oversee the U.S. currency's demise.

It is not that the Fed wants to monetize the federal debt and trigger a hyperinflation -- the U.S. Central Bank certainly will do its utmost to avoid that outcome -- but it will have no politically acceptable alternative. The system otherwise would tend to right itself anyway through the economic shakeout of a hyperinflationary depression. While the Fed might hope to mitigate and to control the disaster, given the Fed's nature, it is more likely to exacerbate conditions rather than to improve them.

When the dollar loses most of its value, through hyperinflation and/or currency dumping, the global currency system and economy will be in shambles, and a new currency system will have to be established. Those setting up the new system will need to establish its credibility, and there is only one monetary asset that can accomplish that: Gold.

Gold is the only commodity that has held up as a liquid store of wealth over the millennia. The amount of gold used to buy a loaf of bread in Ancient Rome still buys a loaf of bread today. In like manner, the amount of gold that bought a regular haircut for a man in 1914, still buys a similar haircut today. Where the public does not trust today's politicians and central bankers, it does trust gold.

Whatever structure evolves for the new currency system, it most likely will have gold at its base. That is one reason that central banks rarely have followed through on threatened gold sales in recent years. The threats usually were nothing but jawboning aimed at depressing current market prices. Those countries holding the most gold will have the greatest advantage in any new currency system, and the central bankers know that, including Mr. Greenspan.

Timing of Related Currency and Financial Market Troubles

Central banks, OPEC, corporations and investors, both foreign and domestic -- as holders of U.S. dollars -- increasingly will sense or realize the greenback is headed for the dumpster. It only is a matter of when, not if.

The dumping of the U.S. dollar and/or U.S. debt by investors likely will hit quickly, with little advance notice. All the official actions that in turn could trigger hyperinflation would follow rapidly, with a full-fledged dollar collapse and developing hyperinflation possibly unfolding in a matter of weeks.

When this will happen is the tough question. It could be years; it could be next week. Without knowing the precise proximal trigger of the shift in sentiment against the U.S. currency, the timing is impossible to call. Nonetheless, some early warning signs may be evident in unusual anti-dollar activity in the currency markets, or in unusually sharp and unexplained spikes in the price of gold.

It would be extraordinarily surprising if the ultimate dollar collapse can be held off a decade, let alone three-to-five years. The pending global financial crisis conceivably could break in the immediate future, triggered possibly by one or more of the following developments: action by China to peg its currency to a basket of currencies instead of the dollar, OPEC pricing oil using a basket of currencies instead of the dollar, a sovereign credit rating downgrade on U.S. Treasuries, a major terrorist act, a very bad monthly trade report, a misstatement by an Administration official or some other event that may appear obvious in retrospect.

The dire financial straits the United States government finds itself in, after decades of bleeding the financial health of the government and the society for the enrichment of a few, help explain the desperation of the foreign policy of the United States. It is the behavior of someone who is robbing a store to pay off huge gambling debts.

Tuesday, July 05, 2005

Signs of the Economic Apocalypse 7-4-05

From Signs of the Times 7-4-05:

Since Friday was the mid-point of 2005, let’s review the year so far. In the U.S. stock market, the Dow Jones Industrial Average closed at 10,303.44 on Friday, down 4.7% from 10,783 on December 31, 2004. The NASDAQ closed at 2057.37 down 5.7% for the year so far (from 2175). The yield on the ten-year U.S. Treasury bond was 4.04 percent at Friday’s close, compared to 4.22 on December 31, 2004 and 3.92 a week ago. The dollar rose from 0.739 to 0.840 euros so far in 2005, a rise of 13.7% (or 1.7% for the week compared to last week’s clsoe of 0.826). Gold closed at $429.30 an ounce, dropping 2.9% for the week (it closed at $441.60 a week ago) and dropping 1.8% for the year (compared to $437.10 on Dec. 31). Gold in euros closed at 360.51 euros to an ounce of gold on Friday, down 1.2% compared to 364.90 a week ago but up 11.8% for the year compared to the close of 322.32 euros per ounce of gold on Dec. 31. Oil closed at $58.75 a barrel on Friday, a rise of 35.2% for the year. Oil was down 1.9% for the week compared to $59.84 on the previous Friday. In euros, oil was up sharply for the year going from 32.09 euros on the last day of 2004 to 49.34 on Friday, a rise of 53.8% (but down slightly for the week from 49.45 a week ago). The gold/oil ratio (how many barrels of oil an ounce of gold will buy) went from 10.06 to 7.31 in 2005 (7.38 a week ago) a drop of 37.6% for the year.

Most surprising to me was the drop in the euro, which implies some strength in the dollar, but probably more weakness in the concept of the euro and of the European economy right now. Longer-term, however, the Euro Zone still has potential to serve as an alternative highly developed core to the United States, particularly if it can work out preferential access to oil from the Russian Federation. Competition for oil between China, Europe and the U.S./U.K./Israel/Japan/India axis, however, will be intense and the results will most likely be unpredictable.

I also expected gold to have risen in the first half of 2005, but, along with some sharp ups and downs, the price of gold in dollars fell 1.8%, also implying strength in the dollar. What this shows is that the United States has been able to keep its economy growing through continuing deficit spending and debt-driven, housing price bubble-driven consumer spending. How long that can go on with rising short-term interest rates in the United States and with signs, increasingly hard to ignore, of a military defeat is anyone’s guess.

Stephen Roach of Morgan Stanley is now saying that the bubble-like asset inflation economy of the United States could go on for a while longer, making the ultimate reckoning even worse:

I suspect the US interest rate climate is likely to remain surprisingly benign and, therefore, supportive of yet another wave of debt-intensive asset inflation. As a result, the housing and bond bubbles could well continue to expand, allowing asset-dependent American consumers to keep on spending. US economic growth, in that climate, may well remain surprisingly firm -- even in the face of $60 oil. All this would be a textbook example of another period of “bad growth” -- the last thing an unbalanced US and global economy needs. Likely by-products of another spate of bad growth include more debt, further reductions in income-based saving, and an ever-widening current account deficit. Eventually, the balance-of-payments constraint will take over -- triggering a renewed weakening of the dollar and a sharp back-up in real interest rates. But the emphasis, in this case, is on the word “eventually.” The bear case for rates that I now support is likely to come later rather than sooner -- and off lower levels of longer-term rates than I had previously thought possible. Because of that hiatus, there’s little to stop the Asset Economy for the time being.

Meanwhile, the excesses in the US property market are now starting to display all the classic symptoms of a mania -- underscoring the inherent vulnerability that Yale professor Robert Shiller has long warned of. It’s not just the growing profusion of exotic financing schemes -- the interest-only and negative-amortization mortgage loans that have become the rage in the hottest of real estate markets. Equally worrisome is evidence that “asset flipping” is now reaching Ponzi-like proportions. The latest rage is -- a website dedicated to creating an electronic market whereby “buyers of preconstruction condos resell or assign those condos to new buyers.” Debuting in Miami, expansion is set shortly for Las Vegas, Los Angeles, Dallas, Chicago, and New York. If you hurry, you may even be able to own a “Condo-Flip” franchise of your own. Five years later, this is nothing more than a reincarnation of the day-traders of the dot-com era.

As former Fed Chairman Paul Volcker noted recently, the saddest thing of all is that no one in a position of responsibility wants to put an end to this madness (see his 10 April 2005 op-ed in the Washington Post, “An Economy on Thin Ice”). Congress is focused on fiscal profligacy and China bashing. The White House is fixated on “transformational politics.” The Fed remains steeped in denial. And the rest of the US-centric world is begging for another spin around the track. Sadly, bad growth begets more bad growth -- until it’s too late. Following this week’s likely rate hike, the US central bank will have only 325 bp in its arsenal -- literally half the ammo it had five years ago when the first bubble popped. With the aftershocks of the property bubble likely to be far more worrisome than those of the equity bubble, this time the Fed may be ill equipped to face what is shaping up to be an increasingly treacherous endgame.

The future of the United States as an economic power, however, will most likely depend on its actions as a military power, and those, unless the Bush gang can be forced from power, will most likely prove disastrous.