Monday, October 24, 2005

Signs of the Economic Apocalypse 10-24-05

From Signs of the Times 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:

Ohio Delphi workers denounce company plan to halve wages and slash jobs

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:

Right-wing Social Democrat Steinbrück named finance minister in German grand coalition

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.

Inflation Soars on Surge in Energy Prices


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:

U.S. Investment Income Close to 'Tipping Point': John M. Berry

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."

'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?

How indeed?

Monday, October 17, 2005

Signs of the Economic Apocalypse 10-17-05

From Signs of the Times 10-17-05:

Gold closed at 472.20 dollars an ounce on Friday, down 1.3% from $478.30 a week earlier. Oil closed at $63.76 a barrel, up 3.1% from $61.84 a week earlier. The euro closed at 1.2079 dollars on Friday, down 0.4% from $1.2124 at the previous Friday’s close. The dollar, then, would be worth 0.8279 euros, compared to 0.8248 the week before. Gold in Euros then, would be 390.93 euros an ounce, down 0.9% from 394.50 a week ago. Oil would be 52.79 euros a barrel, up 4.2% from 50.64 a week earlier. The gold/oil ratio ended at 7.41 down 4.3% from 7.73 the Friday before. In the U.S. stock market, the Dow Jones Industrial Average closed at 10,287.34 down .05% from 10,292.31 at the previous Friday’s close. The NASDAQ closed at 2,064.83, down 1.2% from 2,090.35 the Friday before. The yield on the ten-year U.S. Treasury note closed at 4.48%, up 13 basis points from 4.35 the week before.

If you haven’t listened to the Signs of the Times podcast this past weekend, where a eurozone banker is interviewed on the coming crash, click here. It really says all that needs to be said about the situation we find ourselves in. The banker points to the complete lack of any value in any of the usual kinds of assets. The collapse, when it comes, will be no mere "downturn." It will be the complete collapse of a world economic system centuries in the making, and one which will be impossible to for individual families to avoid or survive using any of the usual means of financial prudence. What is worse, he argues, the people who do have enough knowledge and power to prevent such an event, are actually pushing the pedal to the floor of the economic bus so that, when it goes off the cliff, there is no hope of saving it. That is the reason why the economy keeps chugging along far past the point where any analysis of the fundamentals would indicate a crash. Like that bus, we may have already left the road at the cliff but we may still be traveling forward for that brief moment before the drop.

What we can do is keep our wits about us, hold our space and not be deceived. Since we are entering times for which there is little precedent, our normal instincts and reactions cannot be trusted; we need to stay open to different possibilities that may appear if we can maintain our discernment.

This past week, Gold lost the ground it gained the week before, due in part to the release of some dubious "good news" on Friday:

Budget gap narrows to $318.62 billion

WASHINGTON (Reuters) - The U.S. budget deficit narrowed to $318.62 billion in the 2005 fiscal year on a big rise in revenues, the Treasury Department and the White House budget office said on Friday.

The budget deficit was 2.6 percent of gross domestic product, a Treasury Department official told reporters.

The deficit was the third-largest on record, smaller than the record $412.85 billion shortfall in fiscal 2004 and the $377.58 billion gap in fiscal 2003.

September's budget surplus rose roughly in line with expectations to $35.76 billion after a surplus of $24.61 billion in September 2004, Treasury said.

Revenues climbed to $2.154 trillion in the fiscal year on a surge in corporate tax collections, up from $1.880 trillion in fiscal 2004. The 14.6 percent gain in receipts was the biggest increase in 20 years, the Treasury and the White House budget office said in a joint statement.

Outlays rose to $2.473 trillion from $2.293 trillion.

Spending on reconstruction and aid after havoc-wreaking hurricanes on the Gulf Coast added an estimated $4 billion to spending in September, a Treasury official said.

"While the effects of Hurricanes Katrina and Rita will be felt in the short term, we remain on a path to meet the president's goal of cutting the deficit in half by 2009," Treasury Secretary John Snow said in a statement.

Stronger-than-expected revenues improved the budget picture considerably. The administration had originally forecast a deficit of $427 billion, and in a mid-year report put the likely shortfall at $333 billion.

U.S. deficits have averaged 2.1 pct of GDP since fiscal year 1960, the Congressional Budget Office said on Thursday.

It’s hard to take such numbers seriously, but they did provide an excuse for a small drop in gold and rise in the dollar last week as people wait to see whether the Bush Cheney regime in the United States can survive the fierce behind-the-scenes struggle going on now within the kleptocracy, that is coming to the surface with the Plamegate investigation and the collapse in Bush’s popularity, with large percentages of United States citizens favoring impeachment. There are even rumors of a split between Bush and Cheney as the political class speculates about which figure’s chief assistant will be indicted first. We seem to be in a poker game in which most of the cards are wild.

Here’s Steven Lagavulin:

My money says what we're watching are the symptoms of a developing civil war within the corporatocracy as the globalist-empire agenda begins to falter. On one side is the committed-and-cornered Neo-Con faction, which pridefully thrust itself to the forefront and now has to find a way to salvage a project that's coming apart at the seams. On the other side of this same coin are the corporatists who didn't expose themselves quite so blatantly. They see the desperation of the situation and are now trying to backpeddle, blamestorm, and cover their butts so they can continue with business as usual. But of course retreat is never that simple. So in the process they need to jettison the Neo-Cons as a scapegoat for the public sacrifice....and the Neo-Cons undoubtedly have no intention to playing that patsy.

Now how the insurgencies within the various intelligence agencies and military departments play into all this is anybody's guess. But one thing is for sure: the break-away move, one way or the other, will happen in the Middle East.

…And the pressures don't stop with the White House, either. Other imminent deadlines and tipping-points that are coming soon include:Winter Fuel prices are already up over 50% and won't stop there. Gasoline prices have destroyed Bush's approval-ratings and consumer-confidence levels. Further disruptions from Katrina and Rita are working their way down the pipeline, notably in industrial producers like the chemical and plastics industries.

Much of world is already dumping U.S. dollar-denominated assets, and the next leg down for the dollar is widely expected to begin soon.

Iran is...well, Iran is Iran.... They're fundamentalist-ically opposed to the U.S., they won't stop their nuclear program, and they've got an oil-exchange waiting to be bombed before March.

The internet may begin to be split apart next month - the world doesn't think the U.S. can be trusted with it any longer. It turns out the ultimate symbol of distributed architecture and redundant processing was actually just a centralized monopoly all along. Hmm. Go figure.

All in all, many analysts including myself remarked late last year that 2005 was shaping up to be a fundamental turning point for human society. Well, those suspicions are certainly bearing out. And the many significant "shocks" we've experienced so far have really done nothing at all to halt the increasing pressures. So for instance, if we look at the major story for 2005--the destruction of New Orleans by Hurricane Katrina--we see that the over-arching social "lesson learned" might have been "Together as Americans, we can overcome great tragedy". But it wasn't. The over-riding lesson was something more along the lines of "Oh my God, there's No One at the helm!". Thus the shock to our system didn't serve to lessen or resolve any of the societal anxieties or pressures. It actually increased them.

Monday, October 10, 2005

Signs of the Economic Apocalypse 10-10-05

From Signs of the Times 10-10-05:

Gold continued its rise last week, closing at 478.30 dollars an ounce, up 1.3% from $472.20 at the previous Friday's close. Oil, however, closed at 61.84 dollars a barrel on Friday, down 7.1% from $66.24 at last week's close. The dollar closed at 0.8248 euros on Friday, down 3.9% from 0.8319 euros the week before. The euro, then, closed at 1.2124 dollars, compared to 1.2021 the previous Friday. That puts oil at 50.64 euros a barrel, down 8.8% from 55.11 at the previous week's close. Gold would be 394.50 euros an ounce, up 0.5% 392.66. The gold/oil ratio closed at 7.73, up 8.5% from last week's 7.13. In the U.S. stock market the Dow closed at 10,292.31 on Friday, down 2.7% from 10,568.70 the week before. The NASDAQ closed at 2090.35, down 2.9% from 2151.69 at the previous week's close. The yield on the ten-year U.S. Treasury note closed at 4.35%, up two basis points from 4.33 the week before.

Oil prices dropped last week as did U.S. stocks and the U.S. dollar. For oil and the dollar that signified a pause in steady growth over the last several months. For U.S. stocks, concern about a whole range of issues with the U.S. economy, including rising interest rates, rising inflation, falling consumer confidence and falling confidence by the public in U.S. political leadership put downward pressure on prices, pressure that does not seem to have an end. More and more prognosticators are looking toward a sharp drop in U.S. stock prices over the next year.

The likelihood of a severe crash has increased lately, not only due to economic fundamentals (which are bad enough) but also due to the fact that more and more people believe that one will take place. Here is Steven Lagavulin:

I want to highlight a handful of the many signs that are flooding in to indicate that the first significant "wave" of social crisis appears to be breaking upon us.

I've always been a believer that it is not always the actual facts and tangible problems that make a Crisis so much as it's a society's recognition of and response to those facts. I inherited this view from my time in the investment markets.

…The movement in Gold has been catching my eye of late, and after watching it rebound so smartly from the bashing it took early this week...well, I believe this is a major signal that things are slipping "out of hand" (which is actually a double entendre if you believe the price of gold has been manipulated down in recent years...). It appears that the broader shock waves from Katrina are now making themselves apparent to the public consciousness (I use that term loosely), sapping the insanely high feelings of "consumer confidence" that have prevailed in recent years, and introducing the sobering realization that the party may well be over. Because there are many methods used to enhance the public's sense of well-being, but all aim for the same result: pump the economy full of money. And it looks like the pump is finally being shut down.

Before I go much further, I feel the need to say (for what it's worth) that I'm not especially pessimistic by nature. A person's "written image" is almost always very different from their actual one (which might be for the best in some cases), and I certainly write about rather dark subjects in this weblog. But in truth, I don't take any delight in watching the world we know collapse. Like probably most of the regular readers of this sight, I have very mixed feelings about what we face. Yes, there's a part of me that has little love for modern Western culture, with it's isolation, anxiety, ambiguous anger and wage-slavery hypnosis....a culture which experiences perhaps more deeply than any other that we have a kind of hole inside, but then we can't for the life of us seem to grasp that there might actually be something better to fill that hole with than flat-screen TVs and Arby's 5-for-$5's.

But I also experience a healthy and understandable sense of dread over the coming collapse, precisely because I know that it will not unfold in the way I believe it will. So the purpose of this weblog has always been to help me see the approaching storm as clearly as possible, so that I can make the best effort I can to be prepared. Because I firmly believe that through the very act of striving to see things more clearly the solution or answer or course of action will present itself. And it usually does.

I've always had a very strong drive to see the truth in the world, which is why I became interested in financial markets in the first place: it seemed to be the only area in (worldly) human activity that encourages and rewards greater comprehension and understanding. But of course I eventually found that that wasn't really the case at all--or at least not at all times. A well-known quote by guru George Soros is telling:

"Economic history is a never-ending series of episodes based on falsehoods and lies, not truths. It represents the path to big money. The object is to recognize the trend whose premise is false, ride that trend and step off before it is discredited."

This became a kind of vision-statement for a whole generation of young turks who started trading their way to glory in the 1990's. A bizarre sort of ego-trip emerged from believing that you could somehow see through those "falsehoods and lies" better than anybody else. You would not be fooled. You would therefore be one of the "masters of the universe", to quote Tom Wolfe's descriptive summation. And certainly the lies were everywhere....

Of course the ultimate irony was, why the hell did anyone even want to enter into this system of perpetual falsehoods and lies in the first place? And actually, if you can grasp the deepest impulses which lie behind that question you'll have a handle on one of the essential "character-flaws" driving modern Empire Culture toward its destiny. And you may also discover the path beyond Marlin the Fish's paralyzing fear and anxiety of the unknown, and enter into a place of Hope...and even perhaps interestedness.

But I digress.... Where was I? Oh yeah...everything falling apart...wailing and gnashing of teeth..."there's no light...where is the light..."?

Pretty much everyone is feeling comfortable enough to dump on the U.S. right now, and the Neo-Con administration as well (Item #1, Item #2, Item #3). Dan Rather and at least a couple other reporters are getting the balls to openly talk about the "atmosphere of fear" that pervades the mainstream media (even the phrase "mainstream media"--shortened by many to just "MSM"--has come to mean "the PTB's Bi-atch"). Even reporter Judith Miller is waking up to the realization that her firm has had her playing the patsy for the losing team....

The hyper-inflation of the dollar is now an open assumption as well...most recently the Australian Central Bank is predicting a global collapse over it, and the IMF has announced it may be time to play hard ball with America's debt situation--which, for those of you familiar with third-world lending means a lot of those loans that went to pay for the flights and fancies of people in power will now start being garnished somehow from the individual taxpayers. Which seemingly justifies why the Bush administration would back the most massive debt-berg in human history with one hand while continually cutting taxes for corporations and wealthy taxpayers with the other. Because they know these chickens will be coming home to roost soon, and they don't intend to be "home" when it happens. C'est la vie en l'Empire....

Meanwhile the war that was declared over, and then went on to become unwinnable, is, I dunno...a complete friggin' free-for-all. And yet it's worth sending in 20,000 new troops from the 101st Airborne. And still another telling issue is the analogous chaos between the Neo-Cons and the Old-Guard at various military-intelligence agencies (even Newsweek called the CIA "an agency version of the Jerry Springer show"). We've probably all known someone that we'd describe as having "an air of chaos surrounding them, and following everywhere they go". That fits this administration to a T. Of course, when you know someone like this, the only rational thing is to keep as much distance between them and you as possible...because the vortex of chaos will suck you in, despite all your efforts to resist....

All in all, I've been growing more and more convinced in recent months that what we're seeing are the battle-lines of a broadly-drawn civil war within the Corporatocracy. On one side there's the Neo-Con administration, now backed-into an increasingly "loan-ly" corner, watching their troops desert, and facing the rising backbone of many formerly "third-world" countries (that phrase may become obsolete soon) and the Iranian Oil Exchange coming online in March. They may be feeling the need to gamble it all on one final, decisive act right now...or lose the reins of power altogether. On the other side there are the more complacent Captains of Industry, who undoubtedly never really felt quite the pseudo-religious fervor of the Neo-Con's they nominated to lead the charge. They may not really wish to stake the whole game on the coin-flip of World least not at this time, not at these odds. They'd probably like to draw back, wave the flag of humanitarianism, carpet-bag the U.S. as they buy some time, and then re-coup the ground they've lost on another day.

So why, then, is the dollar rising? Marshall Auerback echoes Lagavulin's statement about the markets being based on perceptions of which lies are believed:

We conclude that today's dollar strength is simply another symptom of the incredibly trending and unstable market environment in which we operate. What has prompted and sustained this shift in foreign private portfolio preferences toward US government securities, even as spreads between US government securities and comparable maturity foreign government securities shrank (and actually inverted in some cases), even as currency losses started to eat away at foreign investors returns, and even as US yields approached 40-year lows, (suggesting immense risk of capital losses should the level of US interest rates ever mean revert)? Was this simply the flip side of intense risk aversion to US equities and corporate bonds that built up in 2002?

There is no simple answer. One is essentially speculating on the proclivities of speculators, rather than assessing underlying fundamental trends (rather like Keynes's old notion of the stock market being similar to a beauty contest, in which participants seek not to determine the most beautiful, but to adjudge which contestant the other participants will view as the prettiest). The expansion of market moral hazard, the so-called "Greenspan Put", have both played their respective roles, as have the Asian central bankers as "dollar sub-underwriters of last resort" (although this has been less a factor in 2005, as the statistics suggest a diminishing tendency on the part of these central banks automatically to recycle their surplus forex reserves back into greenbacks).

But more generally, markets in the 21st century are rife with destabilizing speculation and possess no wisdom whatsoever. As we have explained in earlier pieces, today's markets are driven to an unprecedented degree by a combination of impulses from an ignorant public and amplifying actions by herding institutional money managers who have left their brains on the doorstep. Trend following portfolio managers have exacerbated a speculative bubble in the US bond market and have lifted the dollar against the euro in the process.

Nevertheless, Auerback has been prominent among those who say that reality can be ignored for a while but not indefinitely. Surveying the traditional ways in which such huge financial imbalances are corrected, Auerback sees many of these paths blocked. He concludes, in his final column for

Ultimately, it would not surprise us to see various restrictions imposed in regard to the holding of foreign currencies and gold. As recently as the early 1970s, Arthur Burns, then Fed Chairman, railed against the "unsound practice" of Americans having foreign currency bank accounts. This notion may seem far-fetched in today's high-tech financial world, but the story of the US, particularly post-9/11, has been a steady erosion of economic and political freedoms. As virtually every encroachment on personal liberty in the US these days is rationalized on the grounds that it constitutes a necessary measure in support of the "war on terror", we have little doubt that any such future restrictions would likewise be justified in this manner.

In any case, the strategic options for the US are beginning to close down. The large relaxation of fiscal stimulus has largely been played out, especially after making allowances for the recent Hurricanes Katrina and Rita-related binges, (the sheer magnitude of which has finally induced some consternation amongst the hitherto somnolent Republican Congressional majority that has rubber-stamped the President's huge rise in discretionary budgetary expenditures). Additionally, on the budget front, the US has lost a degree of flexibility as a consequence of misconceived tax policy. Through four decades and through administrations as diverse as Lyndon Johnson's and Ronald Reagan's, federal tax revenue had stayed within a fairly narrow band. From 1962 to 2002, when federal revenues were low they were around 17.5 percent of GDP, and when they were high they neared 20 percent. Once, they went even higher: to 20.8 percent in Clinton's last year, driven there by higher tax rates and by capital-gains revenue from the bubble economy. The 2001 changes pushed tax receipts down toward 16 percent - the lowest level since 1959. The Bush tax cuts of 2001, 2003 and 2005 pushed it out of that safety zone, reducing it to its lowest level as a share of the economy in the modern era. And they did so just when the country's commitments and obligations had begun to grow.

Personal savings have already gone negative, because of the spectacular increase in net lending to the household sector. The housing boom has had much to do with this: Robert Shiller, an economist at Yale, was ahead of most other observers in predicting the collapse of the tech-stock bubble of the 1990s and the personal-real-estate bubble a decade later. In a paper for the National Bureau of Economic Research, published in 2001, he and two colleagues observed that the housing boom intensified the savings collapse. Every time homeowners heard that a nearby house had sold for an astronomical price, they felt richer, even if they had no intention of selling for years. That made them more likely to go and spent their theoretical gains – in effect, allowing the housing sector to do their saving for them. There are increasing signs that the housing boom is on its last legs, which does create doubts about the sustainability of this dynamic.

Which leaves the external sector: A far greater degree of dollar devaluation would seem to offer a conventional remedy to the problem of chronic US imbalances, but this entails a process of global rebalancing and cooperation that has hitherto not been evident amongst the relevant players in the international economy. To be fair to the Asians in particular, America's current foreign policy stance certainly does not create a context in which this could occur easily.

The US could introduce punitive tariffs against countries it deems to be conducting "unfair trade practices", such as China, but antagonizing a major foreign creditor hardly seems like a benign way of resolving this problem. A less conventional, but somewhat less contentious course of action involves introducing non-selective import restrictions under the aegis of the WTO.

Or the US could simply brazen out the current crisis through the expedient of debt repudiation, which could easily bring down the whole edifice of trade liberalization that has governed the global economy for the past half century. Considering that the great bull market in US financial assets and, by extension, the dollar, has been largely predicated on the notions of trade liberalization and financial deregulation, it is hard to make a case for its perpetuation if and when these policies are repudiated by its longstanding champion. In any event, none of these options are particularly attractive; but those hoping for a benign "market-based" solution at this juncture are probably Pollyannaish in the extreme.

The elite are speaking more and more openly of extreme outcomes. Al Martin believes that the 2008 elections will be canceled due to the economic crisis:

It becomes more likely that this regime would use its Patriot Act powers to cancel the 2008 elections. They, of course, wouldn't come out and cancel them. What they would do is formulate some sort of incident where they could invoke Patriot Act powers to 'suspend' the elections, which would, in fact, be a permanent cancellation. I think anybody with any brains would understand it. Because the economic situation in the nation and, by extension, the planet, would likely be so dire by November '08 that the regime would feel compelled to remain in power to control the subsequent economic collapse.

Remember what Walker pointed out about likely economic collapse post-2009 because, simply put, Bushonian budget deficits could not be financed after that time. And there's no other way to generate the capital, so it would mean de facto repudiation of debt.

The actual economic crisis at that point might be a reason for "postponing" the election. Let's put it this way. If the Dow-Jones were trading between 3000 and 4000 by the Fall of 2008, they would declare a national emergency. Of course, it would be Bushonomics that caused it to happen.

The Bush Cheney Regime would probably feel absolutely compelled to remain in power. It would need to control the subsequent economic collapse because, if a politically hostile regime were to follow it, i.e. Democrats, they would feel that in a post-economically collapsed environment, given the mess that they would inherit, that they wouldn't have anything to lose by telling the American people the truth.

Unlike the decisions the Clinton Regime made in early 1993, a Q1 2009 Clintonesque regime would have nothing to lose by telling the people the truth about the Bushonian Cabal and Bushonomics and begin to indict people in order to deflect criticism and to give the people something to focus their attention on because it would take a massive educational effort to tell the American people what Bushonomics was all about.

During the Great Depression, for instance, Roosevelt heavily blamed both Calvin Coolidge and Herbert Hoover, particularly Herbert Hoover. Because Hoover had made the problem worse in 1930 by the Smoot-Hawley Trade Acts, which effectively brought U.S. trade to a standstill, thus making the coming depression far worse. But Roosevelt to some degree was being disingenuous because he knew it is not politically popular during perceived times of plenty and a strong economy to start to act with fiscal prudence.

Calvin Coolidge didn't want to do it. Neither did Herbert Hoover. Because you know it's politically popular to have debt finance consumption, which is at the very heart of Bushonomics. Eventually, however, debt finance consumption, when it no longer can be sustained, becomes a negative, i.e. negative debt finance consumption, which is Bushonomics. This leads to recessions, depressions and in this case, a likely economic collapse -- because we've gone far beyond where we have ever been before in terms of relative budgets, trade deficits and their relationship to GDP. The numbers are now so astounding – total debt-to-GDP is now approaching 350%. At the end of the Second World War, in September 1945, the number reached the then highest ever at 129%.

Classically, the debt-to-GDP ratio should not rise above 100% except in times of war, when wars have to be financed. But, in this regime, we cannot simply put it into words. It's hard to put it in a way that the unwashed would understand, the incredible extent of the fiscal deterioration of the United States, which has occurred over the past 5 years.

Not only are the numbers unprecedented, but they are clearly unsustainable. We have reached levels of debt in this country that, statistically speaking, no other nation in the history of the planet has reached. And yet we're still in business. The only reason we are still in business is because we are the predominant power. We are still 45% of the world's GDP. And the rest of the world must keep the United States in business. They must lend us as much money as it takes to finance Bushonian imprudence fiscally, i.e. in order to keep the United States in business because if the United States goes out of business, so does the rest of the planet.

I believe that if Bush-Cheney are not impeached within the next couple of months (with all the converging investigations going on that is not as far-fetched as it would have seemed a few months ago, but still hard to imagine) it will be too late.

Monday, October 03, 2005

Signs of the Economic Apocalypse 10-3-05

From Signs of the Times 10-3-05:

Friday was the last day of the third quarter of 2005, so let's review the numbers for the quarter and for the year.

The U.S. dollar closed at 0.8319 euros, up 0.2% from 0.8306 for the week, down 1.0% from 0.8400 for the quarter and up 12.6% from 0.7390 for the year. Oil closed at $66.24 a barrel, up 3.2% from $64.19 last week and up 12.7% from $58.75 at the end of Q2 and up 52.5% from $43.45 for the year. Oil in euros was 55.11 euros a barrel, up 3.4% compared to 53.31 a week ago and up 11.7% from 49.34 at the end of the second quarter and and up 71.7% from 32.09 at the beginning of the year. Gold closed at 472.20 dollars an ounce on Friday, up 1.0% from $467.40 a week earlier and up 10.0% from $429.30 for the quarter and up 8.0% from $437.10 for the year. In euros, gold closed at 392.66 euros an ounce, up 1.1% from 388.21 last week and up 8.9% from 360.51 for the quarter and up 21.8% from 322.32 for the year. The gold/oil ratio closed at 7.13 barrels of oil per ounce of gold, down 8.3% from 7.28 last week and down 2.4% from 7.31 for the quarter and down down 41.1% from 10.06 for the year. In the U.S. stock market, the Dow closed at 10,568.70, up 1.4% from 10,419.59 last week and up 2.6% from 10,303.44 at the end of the second quarter and down 3.5% for the year so far from 10,783 on December 31, 2004. The NASDAQ closed at 2151.69 on Friday, up 1.6% from 2,116.84 on the previous Friday and up 4.6% from 2057.37 at the end of Q2 and down 1.1% from 2175 at the beginning of the year. The yield on the ten-year U.S. Treasury note closed at 4.33 percent, up from 4.25 the week before, up from 4.04 at the end of the second quarter and 4.22 on Dec. 31, 2004.

Here are some charts showing trends for 2005:

The big story for the year so far is the rise in the price of oil and gold. Oil rose 53% in dollar terms and a whopping 72% in euros. The euro lost ground against the dollar so far this year, falling 12.6%, something I did not predict at the beginning of the year. This in spite of the fact that the United States is in the process of losing two wars, wars which were financed by borrowing money from foreign central banks. Some of this loss in value for the euro may end up being attributed to the rise in the price of oil, which must be purchased in dollars, but some may be due to the fact that European voters have wisely rejected neoliberal prescriptions for their societies, causing consternation among the elite. If the euro lost, however, that did not mean that the dollar gained, since the dollar lost 8% of its value compared to gold. The euro lost 22% of its value compared to gold.

The United States was able to keep its economy from crashing during the third quarter of 2005, in spite of the ongoing disasters in Iraq and Afghanistan and the embarrassing fiasco in New Orleans. At the end of the previous quarter I wrote the following:

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."

It looks like Roach was right. But it also looks like the "eventually" is here, with interest rates rising and the dollar weakening (against gold).

Why is gold rising so sharply now? No paper currency looks good at the moment. Take the Yen, for example:

Japan's National Debt Hits US$ 7.1 Trillion

Japan's government debt, already the highest in the industrialized world, rose 1.7 per cent to a record high of 795.8 trillion yen ($7.1 trillion US) at the end of June, according to a report released by the Finance Ministry.

The latest figure marked an increase of 14.3 trillion yen from the end of March, the ministry said Thursday. The amount is equivalent to about 6.24 million yen ($55,900) for every Japanese.

Japan has relied on government bond issues to make up for falling tax revenues, turning into one of the world's most indebted countries.

Japan's public debt burden is almost 160 per cent of its GDP and already the highest in the industrialized world.

As Kevin at Cryptogon put it:

How does this show stay up on a day to day basis? HOW!? Japan is keeping the U.S. afloat by buying up U.S. debt. But who's buying Japanese debt to the tune of 7.1 trillion?

Don't get caught without a chair when the music stops playing.

And the euro is in bad shape as well. Marshall Auerback has this to say concerning the German election and the recent increases in the price of gold:

Political fragmentation induced by economic malaise and high unemployment has finally tipped the euro zone's largest economy into a full-blown political crisis. Although gold has long been viewed as the correlative of a weaker dollar, we have always felt that its long term viability as a genuine safe haven alternative rested on a broadening loss of confidence in paper currencies in general. To the extent that Germany's current political stalemate creates further long term doubts about the future viability of the euro zone, it helps to underpin the gold price in euro terms.

Let us be clear: there is no imminent prospect of the European Monetary Union imploding. But the euro zone economies have continued to grow very slowly, probably not much more than 1% a year. Unemployment in Germany is 10% and is almost as high in the rest of much of Europe. France, Germany and Italy are all running significantly higher deficits than the original Stability pact authorized and they have a mockery of the agreement's legitimacy as a consequence. And the increased doubts about the euro's long term viability are creating a highly propitious psychological backdrop for bullion.

...For all of the talk of Chancellor Schröder's unexpected success in converting an anticipated landslide defeat into a Parliamentary cliffhanger, the reality is that both major parties performed abysmally, as smaller parties ate into their traditional constituencies. In fact, this election marked the first time since 1949 that the SPD and CDU failed to garner more than 70 per cent of the votes collectively. The result appears to reflect the disillusionment of the German electorate with the tired and overused idea of "reform," correctly understanding that there is not much if anything in it for them the way it was presented by either of the two major parties. As such the outcome represented a repudiation of Germany's political class. It amounted to a declaration by the voters that the solutions on offer for Germany's problems and the ideas on offer for Germany's future were unacceptable.

At some point the German electorate could well put two and two together and realize that it is this very political class which junked the D-mark, and legislated away arguably the most successful experiment in post-war monetary management without even the hint of a referendum. This is a problem for Germany's leadership and for the other member states, because the single currency project has over-promised and under-delivered. Indeed, the manner in which Germany's post-war monetary institutions and currency were casually discarded is symptomatic of the profoundly undemocratic nature of the European Union itself. Its concept of democracy amounts to the will of the collective trampling down individual national interests - a collective without even a language in common, which also explains why the French and Dutch voters in the roundly rejected referenda on the European Constitution held earlier this year. Denied similar opportunities to express their views on the constitution and the single currency before it, Germany's voters have taken the only route open to them and rejected their leadership.

What does this mean for the euro and gold? Criticism of the single currency project has long been a taboo topic in Germany, although this is no longer the case in other euro zone countries. The issue of euro withdrawal has been broached in Italy, of all countries. Ironic, because Rome has effectively had a free ride in the euro zone's integrated bond markets for years, obtaining Germanic levels of interest rates (as a consequence of Germany's historic record of fiscal prudence), despite maintaining historically retaining profligate levels of public sector expenditure and debt to GDP ratios well in excess of most of the other founding member states in the monetary union.

But were Italy to withdraw ultimately from the euro zone, this would expose other countries to Italian competition, especially as this would almost certainly be accompanied by a significant devaluation of the newly restored Lira. Other countries with a dominant manufacturing base, such as Germany, would almost certainly come under pressure and the whole system could, in these circumstances come under threat. Where would investors turn at that juncture? The resultant financial chaos could be considerable, given the lack of a "plan B" in the event that monetary union came under threat.

To a limited degree, the markets already intuit this. It is noteworthy that the start of gold's most recent rise has been coincident with the French and Dutch referendum results on the EU constitution last spring. Germany's political crisis has provided yet another blow to confidence in the euro zone and whilst the euro may be under no imminent threat of dissolution, its manifold structural weaknesses are becoming increasingly evident to the markets. Gold's rise is a politically incorrect reminder that the euro zone rests on the tenuous foundations of bureaucratic legerdemain, with no economic, cultural or political anchorage to sustain it longer term.

The fundamental problems of the dollar have been well-documented, with snowballing deficits reaching the point where even Alan Greenspan says, of a Republican government, that the deficits are "out of control." After last week, with the indictment of U.S. House Majority leader Tom DeLay for political money laundering, the ongoing investigations into DeLay's close associate, Jack Abramoff for a whole range of gangster-like activity, including murder of a former business partner, the SEC investigation into Senate Majority Leader Bill Frist for massive inside trading, and the mysterious drop in the stock price of Diebold, you have the real possibility of a complete falling away of any confidence by the U.S. population in the government, now seen more in terms of an organized crime takeover.

Since the rest of the world has already lost confidence in U.S. political leadership, the only reason the dollar has any value is pure fear.

With the present moment being so precarious, the near term future looks frightening. Contrary to the initial reports, Hurricane Rita has seriously damaged the U.S oil refining and shipping infrastructure, an infrastructure already insufficient to meet demand. Here is what one industry insider (anonymous) was quoted as saying on Urban Survival:

OK, it's bad. There are dozens of rigs and platforms damaged, missing or sunk. Katrina put the whammy on production platforms, and Rita slammed the drilling rigs...Some of the rigs are upside down, others are twisted and destroyed, still others are just plain gone...either sunk or drifting.

As I have been telling anyone willing to listen, there really is no such thing as Peak Oil, as far as I can tell. The real problem is a complete lack of infrastructure for moving and refining oil and gas, as well as a serious shortage of drilling rigs, tankers and refineries. The situation was close to dire before the storms. It is critical now.

Over the past couple of decades, there has been little investment in tankers, new drilling rigs and refineries. As a consequence, we may be running out of gasoline while drowning in oil. This is the cause of the disconnect recently between pump price and barrel cost. All the storage areas are full of oil, the problem is there is no scalable means to refine it and/or ship it. Even starting this minute, the supply can not be increased by even one percent for the next three to five years.

Should the next storm hit shipping, I can almost guarantee the pump lines we recently saw in Houston will be nationwide. I am fairly sure that we will see them by Christmas, as it is. A cold winter will virtually ensure radical price hikes in natural gas, electricity and heating oil.

While this may sound alarmist, I assure you that I am taking the best information from offshore interests, as well as what I know about the industry into account. The outcome will most likely not be pleasant, and the time frame for the unpleasantness to start is about one month, maybe slightly more. When you hear Bush taking steps to limit gasoline usage in the White House and encouraging people to conserve, you can bet that he knows what's coming.

...These are just prudent suggestions. I see no reason to panic about the situation. It will progress quickly, but those who are looking for the signs will know when things start to go down hill. Until you have spent days looking for a gas station, or gone grocery shopping when nothing was on the shelves, or gone five days without electricity during a heat wave, you can not appreciate the situation.

...To summarize, the GOM (Gulf of Mexico) oil and gas industry has been hit pretty hard. ALL oil and 80% of natural gas production is shut in. Four refineries are seriously damaged, needing about a month or more to repair. Dozens of rigs and platforms are sunk, missing or damaged. There is currently about a month's supply of refined petroleum products in storage, and they are decreasing rapidly. Your readers would do well to consider prudent preparations for a severe disruption in energy by year's end.