Signs of the Economic Apocalypse 10-24-05
Gold closed at 468.80 dollars an ounce, down 0.7% from $472.20 at the previous Friday's close. The dollar closed at 0.8369 euros, up 1.1% from 0.8279 euros a week earlier. That puts the euro at 1.1950 dollars, compared to 1.2079 at the end of the previous week. Gold in euros, then, closed at 392.30 an ounce, up 0.4% from 390.93 on the previous Friday. Oil closed at 60.63 dollars a barrel on Friday, down 5.2% from $63.76 the Friday before. Oil in euros worked out to 50.74 euros a barrel, down 4.0% from 52.79 for the week. The gold/oil ratio closed at 7.73 up 4.3% from 7.41 at the previous Friday's close. In the United States stock market, the Dow closed at 10,215.22 on Friday, down 0.8% from10,292.31 for the week. The NASDAQ closed at 2,082.21, up 0.8% from 2,064.83 at the previous Friday's close. The yield on the ten-year U.S. Treasury note closed at 4.38%, down ten basis points (hundredths of a percent) from 4.48 the week before.
Workers in the United States have been stunned in the past couple of weeks by the new Delphi Auto Parts contract, which cut wages in half. Delphi used to be part of General Motors before it was spun off. The auto parts industry has been extremely competitive for the past generation with competition from numerous offshore suppliers and with the implementation of just-in-time inventory processes throughout the auto industry. With the last two remaining U.S. auto manufacturers, Ford and General Motors, losing billions, they have passed the pressure down to the suppliers, who employ a sizable percentage of the total auto manufacturing workers in the country. In previous generations, it was the auto industry that led the way to high paying industrial manufacturing jobs in the United States. It's founder, Henry Ford, gave his name to the era:, the Fordist era, where the wages of industrial workers, and by extension, white collar workers as well, were managed by the trade union system and by collective bargaining. These wages were set high enough for the workers themselves to propel the economy with consumer spending.
Now, all the mouthpieces of the ownership class are telling us that those days are over:
By a WSWS reporting team
15 October 2005
The bankruptcy filing of Delphi Automotive has set the stage for a historic rollback in the wages of American auto workers to levels, in real terms, not seen since the explosive struggles of the 1930s that gave birth to the industrial unions in auto and other basic industries. Delphi, the world's largest auto parts company, which was spun off from General Motors in 1999, filed for Chapter 11 bankruptcy protection a week ago, after demanding that the United Auto Workers union accept wage cuts of up to 60 percent, along with massive job cuts and brutal rollbacks in health and pension benefits.
Since then, Delphi Chairman and CEO Steve Miller has issued one provocative pronouncement after another on the theme that decent wages and benefits for auto workers - and manufacturing workers in general - are a thing of the past. One example: "Paying $65 an hour for somebody mowing the lawn at one of our plants is just not going to survive anywhere in Industrial America for very long. That's just a hard fact of life."
The Wall Street Journal hailed Miller's stand and took up the same theme in a column published Thursday under the headline "Showdown." The major organ of US finance wrote: "It marks a true reckoning for the traditional auto industry and the end of a 75-year-old way of life in America: that of the highly paid but unskilled worker."
Earlier in the week Miller announced that he would ask the bankruptcy court to void Delphi's contracts with its 33,000 unionized workers if the unions did not accept his demands, and predicted his wage cuts would be implemented by next spring.
These attacks will devastate industrial cities across the United States which have already seen tens of thousands of manufacturing jobs disappear over the last two decades. One of these cities is Dayton, Ohio, where Delphi employs 5,700 hourly and salaried workers. Four of Delphi's five plants in Dayton are on the company's list of "underperforming" facilities that face sale or closure.
Dayton has long been a center of auto parts manufacturing. In the early 1970s General Motors employed some 30,000 workers in the city making brakes, air conditioners, struts and other automotive parts. By 1995 that number had fallen to just 15,000. Following GM's spin-off of Delphi there was a further huge reduction in jobs.
Delphi workers currently contribute wages of $260 million annually to the local economy. In addition, dozens of Dayton-area companies employing thousands of workers are in the auto parts maker's supplier network. They could face bankruptcy if Delphi shuts down operations.
A WSWS reporting team visited the Delphi Chassis Needmore Road plant in Dayton and spoke to workers about the bankruptcy filing. Only some 1,200 workers remain at Delphi Chassis out of a workforce that once numbered 4,300. Because of years of downsizing, two thirds of Delphi workers have more than 20 years seniority. One of the central purposes of Delphi's bankruptcy filing is to obtain a court ruling terminating its pension obligations to unionized employees.
A Delphi worker, Robert, told the WSWS, "People are so stressed and sick of the situation that they can't get out of bed and come to work."
...The hefty bonuses awarded top Delphi executives prior to the bankruptcy evoked disgust from virtually every worker interviewed. Overall, there was a mood of anger and militancy, and a sense that the problem began with top management.The following remarks were fairly typical: "What they are doing here at Delphi is crazy. This bunch is no good. There is too much money at the top. Those people are paid millions and don't work. Delphi has taken the profits we made them and invested in China, which made them more money and put us out of work."
Patricia said, "The place to start is at the top, the ones that have it and want more, while we workers at the bottom don't have anything. I have worked in three auto plants and for all the blood and sweat we have given the company, our reward has been pain."
In this situation, the leadership of the United Autoworkers has done everything it can to demoralize workers and convince them that resistance is hopeless. In a flier recently distributed at the plant, the union said it would limit its opposition to the courts. UAW officials insisted that the company was within its legal rights to seek the cancellation of the union contract due to its bankruptcy filing.
...Given the prostration of the UAW, few workers look to the union for a solution. At the same time, there is a sense that the attack on Delphi workers is part of a broader social problem.
Paul, a worker in his late 40s with 28 years seniority, said, "It's a real bad situation. Everything workers fought for in the last 70 years is being taken away. In 1996, GM decided they would crush the UAW and send everyone to the bottom. The government has done nothing to help working people. Now it looks like I will have to work until I am 65."
Mike told the WSWS, "I have 28 years service and will be cheated out of my pension. There seems to be a global scheme to put all the wealth in the hands of a few people, and in order to get the money and power they are taking everything workers have."
He connected the latest attack on Delphi workers with the war in Iraq and the policies of the Bush administration. "I am against wars. If every worker took the position, 'I will not kill another worker,' we could do away with war.
"They have spent $350 million on war in Iraq. That money could have been spent on jobs. The war is about oil and control of the world by the US government and European governments will help the US. The assault on democratic rights is almost a done deal now with the Patriot Act and other antidemocratic laws."
As all this has been happening, we U.S. workers have had as consolation the fantasy of moving to Europe, where workers have guaranteed pensions, healthcare and eight weeks vacation. At least somewhere on the globe the average person gets a fair deal. But now global capitalism has begun to take those things away from European workers as well. France is holding on, thanks to citizens who take to the streets and shut down the country as soon as the elite discusses even the smallest cutback. The situation in Germany looks bad, however:
By Dietmar Henning
15 October 2005
The nomination Wednesday of the former North Rhine-Westphalian prime minister, Peer Steinbrück (Social Democratic Party - SPD), to the post of finance minister in Germany's new grand coalition is a clear signal that future government policy will involve new welfare cuts and a further redistribution of wealth from the needy to the rich. At the start of the week the leadership of the SPD agreed to form a grand coalition with the conservative union parties, the Christian Democratic Union (CDU) and Christian Social Union (CSU).
Steinbrück is a close political friend of the outgoing economics and labor minister, Wolfgang Clement (SPD). He is also a calculating apparatchik, who throughout his career has oriented his policies to the economic and financial guidelines laid down by Germany's employers' associations. He has little interest in the social implications of his decisions and could just as well have pursued his political career within the CDU.
...Already during his spell as economics minister in Schleswig-Holstein in 1993 Steinbrück promised a policy based on "continuity and reliability, freed from ideological blinkers" as well as an "economic policy without subventions."
Since then, Steinbrück has made a name for himself as a thoroughly dependable representative of the business lobby and has never sought to hide his affinities with conservative and "free-market" parties such as the Free Democratic Party (FDP) and the CDU. He is a financial administrator for whom balance sheets are far more important than social conditions. He describes his politics as "straightforward" and himself as a "man of the executive."
Steinbrück expressly defended the outgoing German government's attacks on welfare rights and the unemployed - the Hartz reforms. In 1999, in his function as NRW economics minister, he allowed the payment of non-tariff low wages as part of a pilot project aimed at an "effective struggle against unemployment."
In financial questions, Steinbrück is an advocate of drastic cuts. Along the lines of the motto: the state cannot spend more than it has, he gives precedence to budget cuts over increasing revenue by raising taxes for big business and the rich.
During his period as prime minister of North Rhine-Westphalia, Steinbrück introduced the largest budget-cutting package in the history of the state. The budgets for 2004 and 2005, which the NRW cabinet officially agreed in September 2003, contained cuts amounting to over €2 billion. Virtually all state departments were forced to accept drastic cuts, with many social institutions receiving much reduced subsidies. Steinbrück's finance minister at the time, Jochen Dieckmann (SPD), who shares Steinbrück's political views, admitted that these measures would lead to the loss of jobs.
Dieckmann and Steinbrück also ordered state officials to make their own "savings contribution." Working time was increased from 38.5 hours to 41 hours per week and holiday pay was cut. When confronted with numerous protests, Steinbrück defended his cuts by declaring there was "no alternative."
The Koch-Steinbrück commission
His determination not to give way to popular opposition is not the only qualification which Steinbrück brings to his new post as federal finance minister in a grand coalition. He also has direct experience in cooperating with the CDU.
Together with the prime minister of Hesse, Roland Koch (CDU), he developed the so-called Koch-Steinbrück commission paper. In September 2003 the two prime ministers submitted suggestions for the "biggest program for the dismantling of subsidies in postwar German history." The cuts were planned to take place over a period of three years and the paper was entitled "Dismantling subsidy based on consensus."
They proposed uniformly slashing virtually all department subsidies by 4 percent and stressed that the cuts could be extended beyond the initially proposed three years. The resulting cuts would have amounted to around €15.8 billion for the years 2004 to 2006 alone. Cuts in tax benefits for ordinary workers, amounting to savings of another €6 billion, were also in their sights. "However, we could obtain no agreement on these measures," Koch and Steinbrück were forced to concede two years ago.
Barely an area of administration was to be left untouched. A series of basic tax benefits for ordinary earners, such as travel allowances, were to be slashed. Even the "tax exemption for foreign orchestras and artistic groups" (savings of €5 million over three years) was included in the package.
Also lined up were cuts to subsidies for the coal mining industry, which has traditionally played a major role in the economy of NRW, as well as to the shipbuilding industry. Also targeted were subsidies for social facilities (including agencies for consumer protection, hospitals, rehabilitation centers, theatres, museums, institutes for vocational and apprentice training, juvenile welfare services and other welfare organizations). All in all, over €1.5 billion per year was to be saved in these various departments.
The "room for maneuver" created by the savings was to be used "for an additional lowering of taxes" which would be "at the same time an indispensable contribution to the stabilization of growth and jobs." In other words: cuts in social benefits would pay for windfalls for business interests and the well-off.
These cuts were to be implemented regardless of "resistance." The paper stated that "the organized resistance of groups and federations affected has succeeded time and time again in defending their own advantages at the expense of the general public." It continued: "[T]he current state of the public budget provides an opportunity and at the same time a challenge to implement subsidy dismantlement against such resistance."
Koch and Steinbrück were unable to introduce their policy a few years ago, but their proposals throw light on what can be expected from Germany's newly formed grand coalition: a further redistribution of wealth from the needy to the rich against the "organized resistance" of those affected.
The hopelessness of the situation for the EU countries is underlined by the fact that Steinbrück is a member of the socialist party and by the fact that the German voters rejected neo-liberal reforms in the last election.
And, to make the effects of falling wages even worse, inflation is up.
By MARTIN CRUTSINGER, AP Economics Writer
Inflation at the wholesale level last month soared by the largest amount in more than 15 years, reflecting the surge in energy prices that occurred following the Gulf Coast hurricanes.
The Labor Department reported that wholesale prices jumped 1.9 percent in September, led by surging prices for gasoline, natural gas and home heating oil after the widespread shutdowns of refineries and oil platforms along the Gulf Coast. Food prices, which had been declining, posted the biggest increase in 11 months as the price of eggs shot up by a record amount.
Excluding the volatile energy and food sectors, the so-called core rate of inflation also posted a worrisome increase of 0.3 percent after showing no increase at all in August.
The news on wholesale prices followed a report Friday that consumer prices had risen by 1.2 percent in September, the biggest one-month increase in a quarter-century as gasoline prices at the pump climbed by a record 17.9 percent.
While the core rate of inflation at the consumer level was well-behaved, rising by a tiny 0.1 percent, the worry is that the sizable increases in energy will soon begin to spill over into more widespread inflation pressures.
A number of Federal Reserve officials in recent weeks have expressed such concerns. In a speech in Tokyo on Tuesday, Federal Reserve Chairman Alan Greenspan said the jump in energy prices "will undoubtedly be a drag from now on."
Greenspan did not quantify how much of a slowdown will occur, but private economists are forecasting that the hit from Katrina and Rita could shave as much as a full percentage point from economic growth in the final six months of this year.
Analysts believe the Federal Reserve, which boosted interest rates for an 11th time last month, will keep raising rates in November and December in an effort to keep the energy price surge from becoming embedded in more widespread inflation pressures.
Notice here what Greenspan is really saying. The Federal Reserve will fight inflation by means of a serious recession. That is the only way to do it in an environment of stagflation, where there are simultaneously rising prices and falling employment and wages. In times of sharply rising energy prices, the only way to stop inflation is by engineering a steep drop in demand, which, with all the credit available to consumers, can only come with layoffs, pay cuts and bankruptcies. The political scandal, looming constitutional crisis and the losing war are not the only ways these times resemble the early seventies.
The 1.9 percent jump in wholesale prices matched a similar rise in January 1990. The 1.9 percent jump has not been surpassed since a 2 percent jump in November 1974, a period when the country was coping with surging energy prices following the 1973 Arab oil embargo.
Over the past 12 months, the Produce Price Index, which measures inflation pressures before they reach the consumer, has risen by 6.9 percent, the biggest 12-month change since a rise of 7 percent in the 12 months ending in November 1990.
For September, energy prices jumped by 7.1 percent, the biggest one-month gain since a 7.5 percent rise in October 1990. The increase reflected a 12.7 percent rise in the price of gasoline, a 9 percent increase in natural gas and a 4.8 percent increase in home heating oil.
The price of food shot up 1.4 percent last month, reflecting a record 49.3 percent increase in egg prices. Vegetable prices rose by 16 percent, reflecting big increases for snap beans, tomatoes, cabbage, potatoes and broccoli.
Outside of food and energy, the 0.3 percent increase in core inflation was the biggest rise since a 0.4 percent increase in July. Over the past 12 months, core inflation at the wholesale level is up 2.6 percent.
The price of new cars was up 0.9 percent in September with the price of light trucks up 0.5 percent.
The PPI showed inflation pressures showing up at earlier stages of production. The price of intermediate goods rose by 2.5 percent, the biggest increase in 31 years, while the price of crude goods jumped 10.2 percent, the biggest increase in more than two years.
The concern is that businesses, which so far have held the line on passing on the higher cost of their materials, may be forced to start raising prices to cope with surging energy costs.
These inflationary trends would be more worrying if there was more of a chance the economy would survive long enough for those trends to cause problems. The following article from Bloomberg has some pretty apocalyptic language when referring to the U.S. dollar and economy:
Oct. 13 (Bloomberg) -- The U.S. may be approaching a dangerous "tipping point'' in its international transactions.
At the end of last year, foreign investments in the U.S. were worth $2.5 trillion more than this country's investments in the rest of the world. Yet last year, those U.S. assets abroad remarkably still earned $30 billion more than the foreign assets here.
That stunning disparity in returns is one of many reasons why the huge U.S. current account deficits of recent years have been so readily financed. The sagging net investment position wasn't being compounded by an ever higher interest bill -- as is the case with the mounting U.S. government debt.
This year the game has changed.
Net U.S. investment income turned negative by $455 million dollars in the second quarter, marking a swift deterioration from a $15 billion surplus in the first three months of 2004.
If this trend continues -- and there's no reason to think it won't -- the U.S. will be paying a steadily rising net amount to foreigners, and those payments will both increase the U.S. current account deficit and worsen the country's net investment position.
In a recently published analysis, economists Pierre-Olivier Gourinchas of the University of California at Berkeley and Helene Rey of Princeton University warned this situation could have serious consequences for the U.S.
The Dollar's Credibility
"Reaching the 'tipping point' where the U.S. for the first time since the second World War ceases to have a positive net return on its net assets could be seen by the market as a significant blow to the credibility of the dollar," the economists say.
"In a context where the external net worth of the U.S. is negative and the return on its net assets also turns negative, market participants could start demanding a higher premium on their dollar assets."
That the U.S. has been able to sustain financing for its international deficits up to this point is primarily due to the American dollar being the world's principal reserve currency, the center of the global monetary system.
Gourinchas and Rey's analysis traces how over the past half century U.S. investments abroad came to pay far greater returns than foreign investments here. The paper, published by the National Bureau of Economic Research in August, is "From World Banker to World Venture Capitalist: U.S. External Adjustment and the Exorbitant Privilege."
The phrase "exorbitant privilege" was coined by French Finance Minister Valery Giscard d'Estaing in 1965. He used it to describe "the ability of the U.S. to run large direct investment surpluses, ultimately financed by the issuance of dollars held sometimes involuntarily by foreign central banks," the authors say.
In those days, economists regarded the U.S. as "the Banker of the World," lending for long and intermediate terms and borrowing short, they say.
"Since then, the U.S. has become an increasingly leveraged financial intermediary as world capital markets have become more and more integrated. Hence, a more accurate description of the U.S. in the last decade may be one of the 'Venture Capitalist of the World,' issuing short term and fixed income liabilities and investing primarily in equity and direct investment abroad," Gourinchas and Rey write.
U.S. Balance Sheet
Initially, U.S. assets shifted from long-term bank loans to direct investments, such as the purchase of foreign companies, and in recent years, toward equity investments. Meanwhile, foreign investment has favored low-yielding safer assets, including bank loans, trade credit and debt, particularly Treasury securities.
"Hence the U.S. balance sheet resembles increasingly one of a venture capitalist with high return risky investments on the asset side," the economists say. "Furthermore, its leverage ratio has increased sizably over time."
Nevertheless, all the advantages that accrue to the U.S. as the provider of the central currency in the global monetary system can't forever offset the impact of the country consuming more than it produces. What if a "tipping point" has been reached?
Gourinchas and Rey say their analysis "does not imply that the current situation can be maintained indefinitely."
The Possible Repercussions
"Foreign lenders could decide to stop financing the U.S. external deficit and run away from the dollar, either in favor of another currency such as the euro, or just as dramatically, require a risk premium on U.S. liquid assets whose safety could not be guaranteed any longer.
"In either case, the repercussions could be quite severe, with a decline in the value of the dollar, higher domestic interest rates and yields, and a global recession," they caution.
"In a world where the U.S. can supply the international currency at will, and invest it in illiquid assets, it still faces a confidence risk," they say.
Should confidence be lost, the value of the dollar could plunge, and a world financial crisis could ensue. At that point, even the U.S. could be forced to stop living beyond its means.
We are entering uncharted waters here, even when we can point to some disturbing historical parallels with other empires. Non-linear thinking is needed. Neo-classical, linear economics will not prepare us for the radical discontinuities ahead. Here is one "fractal economist," Gary Lammert, quoted on George Ure's site:
Linear thinking will persist in seizing the notion of a typical growth period for equity valuations going into December. The ongoing stark macroeconomic data is no match for this pervasive linear thought. This linear ideation existed in October 2000 for the over valued and over consumed high techs. The NASDAQ's valuation decline into December 2000 should serve as a warning.
The current best fractal solution for the primary decay sequence of equity valuations is a decline over the next 50 or so trading days. By current fractal analysis, nonlinearity is expected as part of this solution with a remarkable unanticipated devolution. As commented before, nonlinearity is part of nature's recurrent theme and common solution for aged structural conditions at critical stress points. Supernovae, nuclear fission, earthquakes, and death are common nonlinear events in an otherwise linearly operating universe. The stress point of credit deceleration and contraction in a house of cards financial system dependent on continuous credit expansion has resulted in the tremors and shaking of the US composite equity valuation since 3 August 2005. These rumblings have been the warning quakes of the deluge soon to come.
In several months, the probable valuation decline will, retrospectively, be seen to fit perfectly well with the emanating economic data that is now occurring and is so very apparent to those with eyes wide open: the bankruptcy of venerable smokestack and airline industries; the inflationary energy cost pressure placed on America's new bell weather distribution industry, Walmart; the outsourcing pressure on America's higher paying manufacturing and technological jobs; the saturation and overvaluation and higher property taxes associated with the Real Estate South Sea Tulip industry; the narrowing of long and short term interest rate spreads decreasing lenders' profitability; the recent bolus of bankruptcy filings; the massive current account deficits whose continuation is wholly dependent on the cash strapped American consumer and his now cresting housing valuation debit card; the sharply falling consumer sentiment and general confidence in the future; the empty sales rooms of American automobile distributors; the mass of hopelessly insolvent corporate and city pension plans; the overly generous entitlement programs whose sustainability are squarely based on continued consumer borrowing and spending and a lower paying service economy to maintain future GDP growth; the recent ongoing derivative dealer debacle which is but the tip of the iceberg, and the historically low cash reserves in mutual funds. How could anyone miss the ongoing macroeconomic data occurring in our ENRON nation?