Monday, March 20, 2006

Signs of the Economic Apocalypse 3-20-06

From Signs of the Times, 3-20-06:

Gold closed at 554.70 dollars an ounce on Friday, up 2.2% from $542.50 for the week. The dollar closed at 0.8203 euros at Friday’s close, down 2.4% from 0.8396 euros at the end of the previous week. The euro, then closed at 1.2190 dollars, compared to $1.1910 at the end of the week before. Gold in euros would be 455.05 an ounce, down 0.1% from 455.50 the week before. Oil closed at 62.89 dollars a barrel on Friday, up 4.9% from $59.96 for the week. Oil in euros would be 51.59 euros a barrel, up 2.4% from 50.34 the week before. The gold/oil ratio closed at 8.82, down 2.6% from 9.05 at the end of the previous week. In U.S. stocks, the Dow closed at 11,279.65 on Friday, up 1.8% from 11,076.34 at the close of the previous Friday. The NASDAQ closed at 2,306.48, up 2.0% from 2,262.04 at the end of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.67%, down 9 basis points from 4.76 at the end of the previous week.

Not too bad, all in all. Oil was up in dollar terms but still less than it was two weeks ago ($63.67/bl.). Gold is also lower than it was two weeks ago ($567.20/oz.). Why do market levels seem so normal when the underlying economic foundation seems so unstable? Could it be that military spending will take over the role of demand stimulant from consumer spending? Could it be that “the economy” will continue to look heathy while the average person sinks into servitude? While U.S. consumers are getting squeezed between lower wages and rising cost of debt and basic goods, deficit military spending is going through the roof:
U.S. War Spending to Rise 44% to $9.8 Bln a Month, Report Says

March 17 (Bloomberg) -- U.S. military spending in Iraq and Afghanistan will average 44 percent more in the current fiscal year than in fiscal 2005, the nonpartisan Congressional Research Service said.

Spending will rise to $9.8 billion a month from the $6.8 billion a month the Pentagon said it spent last year, the research service said. The group's March 10 report cites “substantial” expenses to replace or repair damaged weapons, aircraft, vehicles, radios and spare parts.

It also figures in costs for health care, fuel, national intelligence and the training of Iraqi and Afghan security forces -- “now a substantial expense,” it said.
The research service said it considers “all war and occupation costs,” while the Pentagon counts just the cost of personnel, maintenance and operations.

The House approved emergency funding that includes the military spending last night by a vote of 348-71. The measure authorizes $72 billion for war costs and almost $20 billion for hurricane relief. The Senate is expected to pass it next month.

Congress already has approved $50 billion in supplemental war funding for the current fiscal year, which ends Sept. 30, after spending $100 billion last year. To date, Congress has approved about $337 billion for the wars since Sept. 11, 2001.

This extra demand stimulant provided by military spending may make up, at least for a while, the loss from things like this:

Mortgage delinquencies rise in Q4
Report comes as mortgage rates cool in latest week
By Robert Schroeder, MarketWatch
Last Update: 4:54 PM ET Mar 16, 2006

WASHINGTON (MarketWatch) -- Consumers had greater trouble meeting their mortgage obligations in the fourth quarter, as borrowers faced higher energy prices, interest rates and continuing difficulties from Hurricane Katrina, a mortgage bankers' group said Thursday.

Delinquencies on residential properties climbed to 4.70% in the fourth quarter of 2005, up from 4.38% a year ago, according to a Mortgage Bankers Association survey. In the third quarter, delinquencies were 4.44%, the group said.

Doug Duncan, the bankers' group's chief economist, said the increase isn't surprising.

"We have been expecting an up-tick in delinquencies due to a number of factors," he said in a statement. He cited increased amounts of adjustable-rate and sub-prime mortgages, rising energy prices and climbing interest rates.

The group's report comes as mortgage-finance company Freddie Mac released new figures showing home loans are getting cheaper.

The benchmark 30-year fixed rate mortgage average fell in the week ending Thursday, Freddie said, to 6.34% from 6.37%. The 15-year loan also fell, to 5.37% from 6%. One-year and five-year rates also fell, the company said.


The problem is that the media seems to be doing its best to frighten us with two seemingly inevitable horrible near-future events: the U.S. attack on Iran and a Bird Flu Pandemic, both of which would ruin the world economy. There are many different thinks that could bring on doomsday in the near future. Why concentrate so much on an influenza epidemic? It would only make sense if you wanted to spook the markets. Indeed, the stage seems to be set for a currency collapse for the dollar. Just in Time supply chain techniques and global sourcing of most goods make the U.S. economy more vulnerable than every to catastrophic shortages in key items should travel and shipping restrictions be put in place in the event of a pandemic.:
Is Business Ready for a Flu Pandemic?
By Elisabeth Rosenthal and Keith Bradsher
March 16, 2006

Rome — Governments worldwide have spent billions planning for a potential influenza pandemic: buying medicines, running disaster drills, developing strategies for tighter border controls. But one piece of the plan may be missing: the ability of corporations to continue to provide vital services.

Airlines, for instance, would have to fly health experts around the world and overnight couriers would have to rush medical supplies to the front lines. Banks would need to ensure that computer systems continued to move money internationally and that local customers could get cash. News outlets would have to keep broadcasting so people could get information that might mean the difference between life and death.

"I tell companies to use their imagination to think of all the unintended consequences," said Mark Layton, global leader for enterprise risk services at Deloitte & Touche in New York. "Will suppliers be able to deliver goods? How about services they've outsourced — are they still reliable?"

Experts say that many essential functions would have to continue despite the likelihood of a depleted work force and more limited transportation. Up to 40 percent of employees could be sick at one time.

Indeed, the return of the bird migration season has touched off new worries over how a serious outbreak could interrupt business in many parts of the world simultaneously, perhaps for months on end.

…"A pandemic flu outbreak in any part of the world would potentially cripple supply chains, dramatically reduce available labor pools," the report said. "In a world where the global supply chain and real-time inventories determine most everything we do, down to the food available for purchase in our grocery stores, one begins to understand the importance of advanced planning."

…Some of the most important planning involves not employee health, but how to continue to deliver vital services in a crisis. Time Warner's Cable News Network is making preparations to stay on the air from different locations.

"If there should be something that quarantines the production center here in Hong Kong, we could hand off to London and Atlanta," Stephen Marcopoto, president of Turner International Asia Pacific, a Time Warner unit in Hong Kong, said.
Time Warner is also working to create a mechanized cart that could automatically load tape after tape into a satellite transmission system, so it could keep stations like Cartoon Network on the air — a boon if children were homebound for months.

Nice to know we will still get cartoons.

The skillfully choreographed Fear of Flu pandemic (Remember last summer when Bush claimed to be reading a book about the 1918 flu pandemic? That certainly was a signal for what was to come.) is taking place at a time triple deficits are increasing at a rapid rate, central banks are quietly shifting funds away from the dollar and the United States is losing control of its imperial semi-periphery in Latin America. According to Bill Van Auken:
There is no doubt a profound objective significance to the coming to power of a series of Latin American regimes that in one way or another identify with the “left” and voice opposition to US economic and political policies.

In US ruling circles there is growing disquiet over the region. Thus, the latest issue of Foreign Affairs carries an article entitled “Is Washington Losing Latin America?” Its author is one Peter Hakim, head of the Inter-American Dialogue, a big business-funded think tank that promotes Washington’s version of free trade in the region.

He condemns both the Clinton and Bush administrations for benign, or not so benign, neglect toward the region, allowing “... US policy on Latin America [to] drift without much steam or direction” after a period in which he claims Latin America was headed in “the right direction.”

In reality, reduced US influence in Latin America is neither merely a matter of foreign policy mistakes nor the result of subjective decisions by this or that politician. Rather, it is bound up with changes in the world economy as well as the catastrophic effects of the US-backed policies introduced during the period when Hakim claims the region was headed “in the right direction.”

These changes in the world economy brought on by globalization include the relative decline in the position of US capitalism vis-à-vis Western Europe and, increasingly, as we have discussed in previous reports, China.

The Monroe Doctrine—the seminal US foreign policy of opposing any outside power extending its influence into the Western Hemisphere—has effectively become a dead letter. For nearly 200 years, successive governments in Washington invoked this doctrine as the justification for US interventions in the region and, throughout the twentieth century, for the imposition of military dictatorships to suppress the revolutionary movement of the working class. For most of that period the doctrine was embraced by national bourgeois regimes that subordinated themselves to US imperialism. This consensus has been shattered by changed economic relations.

US rivals gain economic influence

The European Union has in the course of the last decade eclipsed US capitalism as the principal source of foreign direct investment and trade in South America. The US remains first in terms of trade within the Latin American region as a whole, thanks to its close ties to Mexico under the 1993 NAFTA accord. Two-thirds of US exports to the region go to Mexico, and much of these consist of parts sent across the border to the maquiladora plants set up to exploit cheaper Mexican labor in the production of goods for the US market.

Even more disturbingly for Washington, China is playing an increasingly assertive role south of the Rio Grande. Chinese President Hu Jintao and the country’s vice president, Zeng Qinghong, have made two tours of Latin America in the course of the last two years, signing trade pacts and military-to-military agreements. The region has become an increasingly important source of raw materials for China’s industries. China’s imports from the region have increased six-fold over the past six years and are expected to reach the $100 billion-a-year mark by the end of this decade.

To secure access to scarce strategic resources, China has pledged to invest $100 billion in the building of roads, ports and other infrastructure over the course of the next decade. Beijing is pursuing a number of major projects, including initiatives aimed at securing access to Venezuelan oil, Bolivian natural gas and key minerals.

The US Congress has held two hearings on what is perceived as a Chinese menace in this longstanding US sphere of influence and semi-colonial domination. Testifying before Congress last year, then-Assistant Secretary of State for Western Hemisphere Affairs Roger Noriega vowed that the administration would be “attentive to any indication that economic collaboration will feed political relations that could run counter to our key objectives for the region.”

In short, these changes in global economic relations mean that US capitalism is by no means the only game in town—nor in many cases the most profitable one—as far as Latin America is concerned, and the growing economic relations between the region and America’s rivals have provided the region’s regimes with room to maneuver that goes beyond that which was associated with the Cold War balancing act performed by many nationalist regimes between Washington and Moscow. This is one of the key material foundations of the so-called turn to the left. In some ways this trend could perhaps better be described as a turn to the euro and the yuan.

The loss of U.S. imperial control over Latin America cannot be separated from the loss of the Iraq War and the alienation of the rest of the world from U.S. policy. Around the world, the United States is despised more and feared less than it was five years ago. With the Dubai/U.S. port controversy, a new factor was added. The economic nationalism of U.S. citizens, fueled by years of the neocon and fundamentalist demonizing of Arabs and Muslims, has provoked a reaction against the dollar (and the empire it symbolizes) in the Middle East:
Arab central banks move assets out of dollar

By Philip Thornton, Economics Correspondent
14 March 2006

Middle Eastern anger over the decision by the US to block a Dubai company from buying five of its ports hit the dollar yesterday as a number of central banks said they were considering switching reserves into euros.

The United Arab Emirates, which includes Dubai, said it was looking to move one-tenth of its dollar reserves into euros, while the governor of the Saudi Arabian central bank condemned the US move as "discrimination".

Separately, Syria responded to US sanctions against two of its banks by confirming plans to use euros instead of dollars for its external transactions.

The remarks combined to knock the dollar, which fell against the euro, pound and yen yesterday as analysts warned other central banks might follow suit.

Last week the US caused dismay after political opposition to the takeover of P&O by Dubai Ports World forced DPW to agree to transfer P&O's US port management business to a "US entity" .

The governor of the UAE central bank, Sultan Nasser al-Suweidi, said the bank was looking to convert 10 per cent of its reserves, which stand at $23bn (£13.5bn), from dollars to euros. "They are contravening their own principles," he said. "Investors are going to take this into consideration [and] will look at investment opportunities through new binoculars."

Hamad Saud al-Sayyari, the governor of the Saudi Arabian monetary authority, said: "Is it protection or discrimination? Is it okay for US companies to buy everywhere but it is not okay for other companies to buy the US?"

Syria has switched the state's foreign currency transactions to euros from dollars, the head of the state-owned Commercial Bank of Syria, Duraid Durgham, said.
Last week the White House told US financial institutions to terminate all correspondent accounts involving the Commercial Bank of Syria because of money-laundering concerns. Mohammad al-Hussein, Syria's finance minister, said: "Syria affirms that this decision and its timing are fundamentally political."

The euro rose a quarter of one percentage point against the dollar to a one-week high of $1.1945, although it retreated in later trading.

Monica Fan, at RBC Capital Markets, said: "The issue is whether we will see similar attitudes taken by other Middle Eastern banks. It is a question of momentum."

In such conditions, how are we to think the dollar can maintain its value? Brad Delong published this Plato-style dialogue last week:
Global Imbalances

Agathon: You look tired.

Kapelikos: Freshly back from the other coast. Airline load factors are just too high.

Agathon: Who were you talking to?

Kapelikos: MegaBankCorp--their investors.

Agathon: What were you talking about?

Kapelikos: The usual--global imbalances.

Agathon: And what did you say?

Kapelikos: That the global economy is unbalanced--that current patterns of trade are unsustainable--that things that are unsustainable eventually, somehow, stop. What else can you say?

Agathon: And the argument on the other side? I'm not sure I understand it.

Kapelikos: I know I don't.

Agathon: Is it roughly this? "U.S. real GDP is growing at about $400 billion a year. At a capital-output ratio of 3.5-to-1, that means $1.4 trillion of new America-located wealth each year. We can sell off $1 trillion of that every year to foreigners in order to finance our import bill. And still be richer than we were last year. What's unsustainable about that?" Is that the argument?

Kapelikos: Could be. But that's incoherent--it misses the difference between the trade deficit and the current account. Ten years down the road the current-account deficit is not $1 but $1.4 trillion--$1 trillion of net imports and $0.4 trillion of interest, rent, and profits owed on foreign-owned property here. To hold the annual current-account deficit at $1 trillion requires that the trade deficit shrink, which requires that the dollar decline, which means that foreigners investing in America are making bad decisions.

Agathon: And when do your models predict the dollar will fall?

Kapelikos: 2003.

Agathon: Three years ago?

Kapelikos: Yep.

Agathon: But as long as people believe the argument on the other side, the dollar doesn't decline, and the argument looks correct?

Kapelikos: Yep--for one more year.

Agathon: How many more yars are you going to be saying, "Wait just one more year"?

Kapelikos: Until I can say, "I told you so."

Agathon: Can't you be more specific than that?

Kapelikos: Ok. How about this. International financial crises tend to come--currencies crash--when interest rates rise in the world economy's core. The Bank of Japan has just joined the ECB and the Federal Reserve in raising interest rates.

Think of the damage caused by currency crashes in recent decades in middle-level economies (Thailand, Argentina, Mexico, etc.) Imagine what the effects would be of a collapse of a currency which happens to be the world’s reserve currency, in a country which also happens to be the imperial hegemon and whose consumers drive world consumption.

1 Comments:

Blogger Postman said...

Very convincing. Every crash seems to follow a massive overhang, a state of suspended belief or suspended animation ... like the road runner going over the cliff as he paddles air before plummeting.

1:12 PM  

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