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.


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