Monday, July 31, 2006

Signs of the Economic Apocalypse, 7-31-06

From Signs of the Times, 7-31-06:

Gold closed at 646.40 dollars an ounce on Friday, up 4.1% from $621.20 at the end of the previous week. The dollar closed at 0.7837 euros Friday, down 0.5% from 0.7877 for the week. That puts the euro at 1.2760 dollars compared to 1.2695 at the previous week’s close. Gold in euros would be 506.58 euros an ounce, up 3.5% from 489.33 for the week. Oil closed at 73.36 dollars a barrel, down 1.5% from $74.43 at the end of the previous week. Oil in euros would be 57.49 euros a barrel, down 2.0% from 58.63 for the week. The gold/oil ratio closed at 8.81 Friday, up 5.5% from 8.35 at the previous Friday’s close. In U.S. stocks, the Dow closed at 11,219.70 Friday, up 3.2% from 10,876.71 for the week. The NASDAQ closed at 2,094.14 up 3.6% from 2,021.68 at the end of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.99%, down five basis points from 5.04 for the week.

Another week where a fading superpower with a decaying infrastructure, in thrall to a racist settler state, attempted to extricate itself from two losing wars by starting World War III. Again, we see that the markets have not really registered the significance of recent events but are reacting instead to short-term macroeconomic factors. So far the markets have ignored the massive war crimes ordered by criminal psychopaths in power in the United States, Israel and Great Britain. The dollar fell, but not by much, and did so out of the feeling that the Federal Reserve Board is less likely to raise interest rates. Gold rose, but it is still lower than it was two weeks ago. My guess is that the players in the oil, gold, and currency markets do not yet know how this all is going to play out. Let’s help them: Israel and the United States have already lost the war in Lebanon by the flagrant slaughter of innocent civilians, just as the United States lost the Aghan war when they bombed the first village. It may take time for events to play themselves out, but the war is lost. Israel and the United States no longer have any moral authority whatsoever (as hard as it may be to imagine now, at one point those countries did have some moral authority in the eyes of the world). And, the United States has run out of money. A currency collapse followed by a sharp drop in power cannot be far behind.

Indeed, if the professional investors won’t read the writing on the wall, it seems that the average consumer can. Oddly, that just provided stock investors with an excuse to buy. That is rational behavior for short term traders, but the indications of stagflation do not bode well for longer term stock prices:
Wary consumers snuff 2Q economic growth

By Jeannine Aversa, AP Economics Writer
Fri Jul 28, 4:47 PM ET

The economy throttled back in the second quarter as consumers and companies turned cautious amid surging energy prices. Wall Street rallied on the hope that a break in two years of interest-rate pain may be in sight.

The nation's gross domestic product advanced at an annual rate of just 2.5 percent in the April-to-June period, less than half the pace of the previous three months, according to Friday's economic snapshot released by the Commerce Department.

The first quarter's lively 5.6 percent growth rate — the fastest in 2 1/2 years — reflected energetic spending and investment by people and businesses alike.

But in the second quarter, Americans felt the pinch of $3-a-gallon gasoline prices and higher interest rates.

"This expansion is getting a little frayed around the edges because of consumer exhaustion," said economist Ken Mayland of ClearView Economics. "Consumers are losing that extra mojo to spend" now that the slowing housing market is making people feel less wealthy, he said.

Still, stocks shot up. The Dow Jones industrials gained 119.27 points to close at 11,219.70. That helped the index post its best weekly point gain since May 2005.

Spending on home building nose-dived in the second quarter, contributing to the slowdown in GDP, which measures the value of all goods and services produced within the United States.

The second-quarter's performance — weaker than the 3 percent growth rate analysts were forecasting — marked the slowest pace since the final quarter of 2005. That's when the economy, suffering fallout from the devastating Gulf Coast hurricanes, expanded at a feeble 1.8 percent pace.

Even though the economy cooled in the second quarter, inflation heated up.

An inflation gauge closely watched by the Federal Reserve showed that core prices — excluding food and energy — advanced at a 2.9 percent pace in the second quarter — far outside the Fed's comfort zone. That was up from a 2.1 percent growth rate in the first quarter and marked the highest inflation reading since the third quarter of 1994, when core inflation rose at a 3.2 percent pace.

The inflation reading was taken before the latest run-up in energy prices. Oil prices, which had hit a record high in late April, soared to a new closing high of $77.03 a barrel in the middle of July.

In a separate report mined for inflation clues, the Labor Department said employers' costs to hire and retain workers climbed 0.9 percent in the second quarter, up from a 0.6 percent advance in the prior quarter.

Federal Reserve Chairman Ben Bernanke told Congress last week that he is concerned about rising inflation, but he also said that the Fed believes moderating economic activity will eventually lessen inflation pressures.

Given that assessment, Wall Street investors and some economists believe the Fed might take a breather in its two-year-old rate-raising campaign at its next meeting, on Aug. 8.

Some economists, however, continue to predict that rates will be boosted again at the August meeting to ward off rising inflation; after that, they think the Fed may move to the sidelines.

"This whole situation creates even more of a dilemma for Bernanke, who has to weigh the clearly slowing economy against accelerating and now uncomfortably high inflation," said Mark Zandi, chief economist at Moody's

On the one hand, the Fed doesn't want to hoist rates too much and cripple the economy; on the other hand, it doesn't want to take a respite too soon and let inflation get out of control.

The downshift in economic growth comes as President Bush is getting low marks from the public for his economic stewardship.

Consumers, a major force shaping overall economic activity, had a smaller appetite for spending in the second quarter. They boosted spending at just a 2.5 percent pace, down from a 4.8 percent growth rate in the first quarter. Much of that weakness reflected cutbacks on big-ticket goods such as cars.

Businesses also tightened the belt.

Spending on home building fell at a 6.3 percent pace in the second quarter, the deepest dip in nearly six years. Rising mortgage rates are clipping demand.

Businesses sliced spending on equipment and software at a 1 percent pace, the first cut in just over three years.

The government also issued annual revisions that showed the economy grew at an average annual rate of 3.2 percent from 2003 through 2005, or 0.3 percentage point less than previously estimated.

The news in the U.S. housing market was bad last week:
Foundations of US housing market start to look shaky
Claire Gallen, AFP
Sun Jul 30, 6:20 PM ET

Not so long ago in parts of the United States, new homes were often sold before their foundations could be laid.

But the home boom is now showing clear signs of waning -- and analysts say that has worrying implications for consumer spending in the world's largest economy.

Most economists agree that housing demand is likely to slow further in coming months, after recent interest rate hikes and soaring energy prices. But few are predicting the abrupt bursting of an overly inflated bubble.

In the past week, a government report highlighted that the number of unsold new homes on sale across the country swelled to a record high of 566,000 last month.

And on Friday, an International Monetary Fund report said that US property prices were "overvalued", just one of the headaches facing Federal Reserve policymakers.

Homeowners have benefited from double-digit annual rises in their property values to go on a credit-fuelled spending splurge. But now the picture is changing.

"Many individuals, who signed a (purchase) contract in what they had believed was a booming housing market, may now be backing out of those contracts," said Phillip Neuhart, an economic analyst at Wachovia Securities.

"Thus, the new home market is likely weaker than new home sales reflects," he said.

Home builders report that sellers are going as far as giving away cars, free kitchen upgrades and holidays to lure reluctant buyers.

The Commerce Department on Thursday said sales of new US homes declined three percent in June to a weaker-than-anticipated annualized rate of 1.131 million units.

News of the latest sales downturn, and the record number of new homes that are languishing unsold, followed an industry report Wednesday that showed existing home sales fell 1.3 percent in June.

On Friday, the government said that US economic growth slowed to just 2.5 percent in the three months to June as consumers turned nervous in the face of sky-high fuel prices and the cooling property market.

Economists are divided on whether the Fed will raise interest rates further at its August 8 policy meeting, but agree that 17 straight hikes of its key fed funds rate have squeezed the home market and buyers' enthusiasm.

The rate has now gone up to 5.25 percent, adding to the pain for more recent home buyers who took out interest-rate-only mortgages in their rush to get on the property ladder.

University of Maryland business professor Peter Morici said that "recession risks remain real and apparent".

"With the housing market cooling, consumers are no longer able to use the equity in their homes to finance ever-larger purchases of clothes, electronics and other goods and services," he said.

Joel Naroff of Naroff Economic Advisors observed that the number of homes on the market is up an "astounding" 39 percent since June 2005.

"From the huge jump in the housing inventory, it appears that anyone who has any hope of getting out has put their home on the market," he said.

Even housing market representatives say that sellers are no longer commanding the handsome premiums of recent years, as prospective buyers take longer to sign on the dotted line.

"Relative to the five-year housing boom, this year is a buyers' market in much of the country," observed David Lereah, the chief economist of the National Association of Realtors.

The government's latest figures support Lereah's outlook, but prices still remain stratospheric in some hot urban areas.

The median price for a new home fell 1.6 percent last month to 231,300 dollars from May. But buyers in New York, San Francisco and Washington would be lucky to find a family home for sale at double that price tag.

The increasing pessimism of the general public, fueled in part by high fuel prices and a shaky housing market, cannot be good for the economy. This pessimism is no doubt also fed by the frightening news out of the Middle East. It also may be fed by the unmistakable signs of global warming recently, including record high temperatures throughout the northern hemisphere and more severe storms with much higher rainfall. Fears of the consequences of climate change are exacerbated by the decaying social and material infrastructure in the United States.

Record heat, violent storms beleaguer US cities
150,000 in St. Louis still without power

By Cezar Komorovsky and Debra Watson

26 July 2006

Record-breaking heat continues in widespread areas of the contiguous United States, which, combined in many cases with official neglect and mismanagement, has produced considerable misery and social disruption. Power outages and lack of air-conditioning have led to deaths in several cities.

Unusually high temperatures in the US have forced thousands without air conditioning to flock to makeshift cooling centers to avoid the soaring temperatures. Twenty-nine deaths have been attributed to the heat wave in recent days. Seven deaths have occurred in Chicago, mostly among the chronically ill and elderly. One elderly man’s death in northern California was attributed to an air conditioning failure in the nursing home where he lived.

Four people died in St. Louis, Missouri after heavy rainstorms last week multiplied the debilitating effects of a heat wave that has gripped the metropolis.
A fifth victim in the St. Louis area, utility worker Robert Tackett, was electrocuted July 25 in a city suburb when he walked into brush where a live wire was hidden. Tackett, 56, a 13-year veteran at AmerenUE, who was working on restoring power to the more than 100,000 people still without electricity in the area, was killed instantly. Also on Tuesday, a contract worker with Kansas City-based Par Electric came into contact with an energized line in north St. Louis County. Hospitalized, he was expected to recover.

Every major metropolitan area west of the Rocky Mountains experienced record heat over the weekend. Phoenix, Arizona hit 114 degrees Fahrenheit (46 degrees Celsius) and Los Angeles 101 degrees (38C), while temperatures in Woodland Hills, California—a Los Angeles suburb—reached 119 degrees (48C) on Saturday. Rolling blackouts are expected in California as demand for electricity spikes. The National Weather Service has issued a new excessive heat warning for California, with temperatures predicted to reach 111 degrees (44C).

Wildfires, fueled by the dry, hot conditions, continue to rage in a number of areas, particularly in rural parts of San Diego County in southern California and in the Tonto National Forest in Arizona, east of Phoenix. Fires have already devastated over 4.9 million acres in the US in 2006, considerably more than the 10-year annual average of 2.7 million acres. The National Interagency Fire Center reported July 24 that this fire season was on pace to be the worst of the decade.

Eastern cities have not escaped major power outages. Thousands of homes and businesses in the New York City borough of Queens have been without electricity for more than a week. (See “The Queens blackout: the brutal human costs of Con Ed’s drive for profit”).

St. Louis, in the country’s mid-section, has been hardest hit by power outages. Nearly a week after summer storms punctuated a severe heat wave, some 150,000 residents were still without power Monday, out of a metropolitan area population of approximately two million people. The city has been declared a federal disaster area, and the governor has called out the National Guard.

The storms July 19 and July 21 did more than impact the electrical grid. Many homes, businesses, streets and roadways were damaged or covered in debris. Heavy rains, powerful winds of up to 80 miles per hour and lightning left behind neighborhoods with damaged buildings and houses due to fallen trees and branches, giving the appearance in certain areas of a war zone.

The first storm knocked out power to more than 500,000 Ameren customers; the second storm affected 200,000, including many whose power had barely been restored.

The storms compounded the effects of the already deadly heat on area residents. Temperatures in the St. Louis area have been hovering around or above 100 degrees Fahrenheit. Temperatures for the year are above normal and are expected to remain so for the rest of the week, reaching the 90s until at least Friday.

Hospitals and nursing homes were evacuated the day after the first storm. On July 20, St. Louis City firefighters evacuated about a hundred senior citizens from an assisted living complex. The residents had been without power throughout the previous night. But scores of other frail individuals were simply left to fend for themselves, unable to get to one of only two shelters or 14 cooling centers available in the city. One family that stayed in their home suffered carbon monoxide poisoning from running a generator inside their home in the blacked-out city.

By July 21 many streets and subdivisions in St. Louis County appeared abandoned, as residents took shelter in the South County Mall and other nearby shops. Many store parking lots were near capacity by noon, and long lines of cars and trucks congested gas stations.

St. Louis, the 17th largest metropolitan area in the US and the third largest in the Midwest, has a poverty rate of nearly 21 percent. The official (and underestimated) unemployment rate is 10 percent. Those with the worst health complications disproportionately fall into the ranks of the poor, without financial means to remedy their situation, or even to avoid a weather-related disaster. The social chasm renders precarious the lives of large numbers of people living in poverty.

On Monday Ameren officials were dismissive of residents’ desperate pleas for help. The utility company spokesperson said customers should have expected to wait three to five days for power to be restored.

The St. Louis Post-Dispatch’s web site noted, “While many customers without power remain hopping mad, St. Louis Mayor Francis Slay and Missouri Gov. Matt Blunt offered only mild, if any, criticism of Ameren at a news conference Monday.”

“They’re under a lot of pressure. They’ll remain under pressure to restore power,” Blunt told the media. “We’ll worry about any sort of after-action after power’s been restored to everybody that was impacted.” He added, “No response is perfect.” Republican Senator Jim Talent also praised Ameren’s recovery efforts.

The mayor of Bethalto, Illinois, however, across the Mississippi River from St. Louis, called for an inquiry into Ameren’s prioritizing of its efforts to restore power. Mayor Steve Bryant told the media that residents of his town weren’t seeing Ameren trucks, and that on Monday morning, three-quarters of Bethalto residents were still without power.

In a nice touch, Ameren had applied to the Missouri Public Service Commission July 7 for an increase in basic rates for electric service. The filing included a proposed average increase in electric rates of 17.7 percent, with a limit on the increase to residential rates of 10 percent.

In St. Louis proper, with a population of 350,000, chaos was evident as last week’s storms progressed. On the night of July 19, after the first storm hit, angry residents lined up at the few open gas stations. People scrambled for ice and drinks or anything else they might use to stay cool. Ice remains in short supply nearly a week after the blackout began. “Gas prices are going through the roof. Nobody’s got electricity. There’s not a single bag of ice in there. It’s like the end of the world,” resident James Burkett told the Post-Dispatch on Saturday.

While heat took the lives of two of the storm’s victims, one death associated with the storms was attributed to a downed power line in a public housing complex in impoverished East St. Louis, Illinois on the morning of July 20. Chester Chapman, 50, was electrocuted while walking from his home in the complex to a nearby vocational school, according to St. Clair County Coroner Rick Stone.

The mayor of Cahokia, Illinois said at least 50 homes had trees on them. Without power in the city on Saturday, the sewage treatment plant was affected.

Many of the storm and heat-related problems in the Midwest, where tornadoes and thunderstorms are common, could be averted if efforts were made to replace antiquated above-ground power lines with an underground system, thus ensuring their safety in violent storms.

The United States Federal Emergency Management Agency (FEMA) is getting a good start in preparing for this year’s hurricane season by instituting cuts in future emergency payments to disaster victims:

US: FEMA slashes emergency assistance for future disaster victims
Family payments to be cut from $2,000 to $500

By Kate Randall

28 July 2006

A month and a half into the 2006 hurricane season, the US Federal Emergency Management Agency (FEMA) has announced an overhaul in core disaster relief programs. The biggest change is a sharp cut in emergency cash assistance to families, which will be slashed under the new rules from the $2,000 previously allowed per household to $500.

In addition, states are being asked to foot 25 percent of the bill for the emergency cash, which will only be provided after an affected state signs off on the program. Other changes include more stringent identification of recipients and direct payment of emergency hotel and rental fees to property owners.

Payments to evacuees will no longer be made via debit cards, which FEMA says created conditions for fraud, but will made either by check, direct deposit to recipients’ bank accounts or in cash. The new guidelines take effect immediately.
The cuts are being justified by FEMA as an effort to curb abuse of aid by disaster victims. A Congressional audit of the emergency funds distributed last year following Hurricanes Katrina and Rita estimated that $600 million to $1.4 billion of the $5.4 billion in assistance may have been based on fraudulent, inaccurate or improper claims. FEMA’s response to the alleged abuse is to punish future disaster victims, as well as further burden the budgets of states still reeling from the effects of last year’s catastrophe.

FEMA director R. David Paulison, who took over after the resignation of former head Michael Brown, heavily criticized for his miserable performance following last year’s storms, expressed the federal government’s disregard for the effect the changes will have on future hurricane victims. “This is still going to be a compassionate organization,” he stated. “We simply have to do a better job of protecting the tax dollar.”

Paulison maintained that the cutbacks should not seriously affect evacuees, and that the money is only intended as a “stopgap” measure in any case. He further added—echoing the Bush administration’s perpetual promotion of “personal responsibility”—“When they have a lot of money, the temptation out there is to spend it.... When they receive a small amount at first, they will spend it on what they really need.”

While acknowledging that large households would receive the same amount as smaller ones, he dismissed suggestions that the funds would not be distributed equitably and said that provisions existed for dispersal of additional payments under extreme circumstances.

David Garrett, FEMA director of recovery, in response to criticisms of the cuts, commented that the funds are not intended to cover the cost of shelter, but are for emergency needs such as food, clothing and fuel. “Very few people need $2,000 to take care of those expenses for a week,” he claimed arrogantly. Critics have pointed out that tens of thousands of Katrina evacuees were displaced for weeks on end and lost everything. For a family of any size under these conditions, $2,000 is a small amount to cover such necessities.

The proposal for states to pay 25 percent of these emergency financial payments was met with widespread opposition by state authorities, particularly in Louisiana, the state hardest hit by Katrina. In 2005, the federal government paid all of the $1.5 billion in expedited assistance for Louisiana evacuees. Under the new regulations, the state would have had to pay $375 million.

The FEMA overhaul was also not discussed with state officials in advance, but presented as a fait accompli. Mark Smith of the Louisiana Office of Homeland Security and Emergency Preparedness, commented, “Historically, FEMA doesn’t make major changes until it’s at least talked to the states and tried to assess the impact. That hasn’t been done yet, and these changes need to be stopped in their tracks.”

FEMA officials have shrugged off such criticism from the state governments. Director Paulison reiterated that if the states were unwilling to commit to contribute a quarter of the funds, they would not get anything. “It’s their citizens,” he said during a news conference at FEMA headquarters. “If they don’t agree to it, we won’t do it.”

Mark Smith countered in a comment quoted in the New Orleans Times-Picayune, “If a catastrophic event like Katrina hits a poor state like Alabama, Mississippi or Louisiana, they most assuredly won’t be able to pay and the people will suffer. They are citizens of their states, but they are also citizens of the United States. Is [Paulison] saying the federal government will turn its back on its citizens, its taxpayers?”

Under the new rules, states will also not be reimbursed for the entire cost of debris cleanup done by the U.S. Army Corps of Engineers. The new rate will be either 75 percent or 90 percent of the total cost.

Other aid-program changes involve more careful identification of aid recipients. FEMA will begin registering people for assistance before a storm makes landfall, entering their names into the agency’s database to check their information. FEMA has contracted with ChoicePoint, a national data broker, to assist in recipient identification.

ChoicePoint does not come to the project with a distinguished record. Last year the company announced that it had mistakenly sold personal data on 145,000 people to identity thieves, and was fined $15 million by the Federal Trade Commission. Any mistakes in ChoicePoint’s cross referencing could result in legitimate victims being denied aid.

All these reasons for consumer pessimism put the U.S. Federal Reserve Board in a terrible position. They need to raise interest rates in order to prevent a wholesale currency collapse in the world’s reserve currency. But to continue to do so will destroy the engine of world economic growth: the borrow-and-spend habits of the U.S. population. Here’s Gary Dorsch:
The Fed’s Dilemma, Defend the US Dollar or US Home Prices

A slowdown in the US housing market is thought to have been a big reason why US retail sales fell 0.1% in June. Re-sales of single-family homes fell 1.5% in May to an annual rate of 5.82 million. Buyers are discouraged by 30-year mortgage rates that rose to 6.71% last week, the highest since May 2002. The supply of existing homes rose 5.5% to 3.6 million units or 6.5 months’ worth at the end of May.

Up to 40% of US home loans were of non-traditional types such as adjustable rate and no-money-down mortgages in 2005. "Some people will soon be faced with adjustable rate loans re-pricing under less favorable conditions," said Chicago Fed chief Michael on May 18th. Another Fed rate hike to 5.50%, would put a greater crunch on Americans who are borrowing more and saving less to support their shopping habits. The US personal saving rate as a percentage of disposable income, slipped to a negative 1.7% in May.

Housing accounted for a third of total US growth and about half of private payroll jobs created since 2001. Fed data shows home price appreciation helped add $5.2 trillion to consumers' balance sheets during the current expansion, or 68% of all wealth creation. So further rate hikes by the Fed to fight inflation carries a big risk of tipping the US economy into an outright recession.

The last three Fed rate rates under Bernanke’s watch, were initiated in defiance of an inverted yield curve, and did tremendous damage to US homebuilder shares. Fed officials have downplayed the predictive powers of the yield curve, and have pressed on with the rate hike campaign to defend the US dollar from speculative attack, and to contain surging gold and commodity prices. But after a 50% correction in the DJ Homebuilder index from record highs in August 2005, bargain hunters are sifting through the rubble of the once high-flying US housing sector.

As for the Fed’s next move on August 8th, the odds favor a pause in the rate hike campaign at 5.25%. Politics is becoming a key consideration now. A Bloomberg/Los Angeles Times poll on June 27th, showed by a 65% to 22% margin, that Americans oppose another rate increase by the Fed, worried about the value of their homes, and rising mortgage payments on variable loans. Therefore, the politically correct modus of operandi is to maintain a steady fed funds rate at 5.25% in August.

Interestingly, Dorsch claims that the recent stabilization of gold prices are evidence that traders believe that the Israeli invasion of Lebanon will not spread to Syria or Iran:

Gold has been on a wild rollercoaster ride this year, mostly tracking the direction of global stock markets for real-time clues about the health of the global economy and inflationary pressures. With the initial outbreak of war between Hezbollah and Israel, gold detached itself from the MSCI World index in mid-July, with the yellow metal moving higher, while global stock markets were tumbling lower.

After peaking at $675 on July 17th however, the fortunes of gold and the MSCI world index reversed, with gold sinking to as low as $600 /oz, and global stock markets rebounding higher. The reversal of fortunes was based on the perception that the Lebanon war won’t spread to Iran and Syria. After all the see-sawing, both gold and the MSCI World stock index have moved back into alignment. At other times, gold has tracked crude oil prices, blurring the focus of gold traders.

According to Dorsch, oil prices are where to look for reaction to the new round of destabilization of the Middle East:
Crude Oil and the Middle East Powder-keg

Bernanke is playing a dangerous poker hand by gambling on steady oil prices. Crude oil has entered into un-chartered territory, with prices climbing above psychological barriers, such as $50, $60, and $70 per barrel, then establishing these levels as a base of support, before mounting rallies into higher ground. Markets don’t trade in a straight line, they usually move up and down within a trend. Crude oil has been marching higher in an orderly fashion since the US conquest of Iraq, fueled by a razor thin difference between global supply and demand.

One wonders at the confidence of the traders that the war won’t spread to Syria and Iran. The neocons in the United States and Israel have been telling everyone who will listen that they plan to overthrow the regimes in Syria and Iran, and so far they have been able to implement every step of their plans, even when the previous steps have seemingly failed.

Monday, July 24, 2006

Signs of the Economic Apocalypse, 7-24-06

From Signs of the Times, 7-24-06:

Gold closed at 621.20 on Friday, down 7.1% from $665.40 at the end of the previous week. The dollar closed at 0.7877 euros Friday, down 0.3% from 0.7904 for the week. The euro closed at 1.2695 dollars on Friday compared to 1.2652 at the close of the previous Friday. Gold in euros would be 489.33, down 7.5% from 525.92 for the week. Oil closed at 74.43 dollars a barrel this week, down 3.2% from $76.80 at the end of the week before. Oil in euros would be 58.63 euros a barrel, down 3.5% from 60.70 for the week. The gold/oil ratio closed at 8.35 Friday, down 3.7% from 8.66 at the close of the previous Friday. In U.S. stocks, the Dow Jones Industrial Average closed at 10,876.71, up 1.3% from 10,739.35 for the week. The NASDAQ closed at 2,021.68 on Friday, down 0.8% from 2,037.35 at the end of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 5.04%, down two basis points from 5.06 for the week.

In spite of the frightening events taking place in Lebanon, Palestine, Iraq and Afghanistan, world markets continue to act as if they are being propped up. Gold fell sharply last week, about 7%, and oil fell about 3%. Of course, these drops were from highs last Friday that were reached as the implications of what Israel and the United States are doing became apparent. It seems that things are getting so crazy lately that crazy is the norm. Shocks wear off way too soon. If you could go in a time machine and visit your own self of six years ago, would you even believe what would take place? But since then we have become accustomed to global mayhem. Another reason for the lack of panic in U.S. markets, anyway, is the fact that the U.S. media has completely taken the side of Israel and is trying to portray the criminal attack as some sort of normal, justified defensive “operation.”

We have discussed the slow nature of the world economic and political collapse. It is slow enough that the word ‘collapse’ might seem inappropriate. George Ure makes an important point about what he calls the “piecemeal collapse:”
[T]here's a way that complex systems can degrade in piecemeal fashion, rather than single points of failure (SPF's) in such a way that the system collapses anyway. A couple of reasons to mention this, beyond my early subscriber paper "Death by JIT" and the recent mentions in the web bot runs about JIT being a factor in emerging "shortages": One is the power outages that have cropped up around the country including Queens, New York, and the St. Louis area. It's something for you to noodle on: How many small "piecemeal" collapses does it take before larger complex systems seriously degrade? And, how many people end up starving if a power outage (heat induced) were to hit at the peak of the picking/canning season in America's food belt states?

Molly Ivins last week wrote about the hedge funds/derivatives problem:

The Suicide of Capitalism

Posted on Jul 17, 2006
By Molly Ivins

Editor’s note: In this column, Molly Ivins notes that when the Long Term Capital Management hedge fund went belly up in 1998, it nearly wrecked world markets. So why, she wonders, are we allowing well-connected Republicans to prevent the SEC from staving off the next catastrophe?

AUSTIN, Texas—In case you haven’t got anything else to worry about—like war in the Middle East, nuclear showdowns, global warming or Apocalypse Now—how about the suicide of capitalism?

Late last month, the U.S. Court of Appeals struck down a new rule by the Securities and Exchange Commission requiring mandatory registration with the SEC for most hedge funds. This may not strike you as the end of the world, but that’s because you’ve either forgotten what a hedge fund is or how much trouble the funds can get us into.

These investment pools for rich folks are now a $1.2-trillion industry (known to insiders, I am pleased to report, as “the hedge fund community"). Hedge funds are now beginning to be used by average investors and pension investors. Back in 1998, there was this little-bitty old hedge fund called Long Term Capital Management. Because hedge funds make high-risk bets, Long Term Capital got itself in so much trouble its collapse actually threatened to wreck world markets, and regulators had to step in to negotiate a $3.6-billion bailout. A similar fiasco at this point probably would break world markets.

The Securities and Exchange Commission under William Donaldson (appointed after the Enron mess) had tried to regulate hedge funds. But Christopher Cox, current SEC chairman and no friend of regulation, said he would consult other members of the administration about whether to appeal the ruling, which “came on the same day as disclosures,” reports The Washington Post, that the feds “are investigating Pequot Capital Management, Inc., a $7 billion hedge fund, for possible insider trading.” Nice timing, judges.

This is the third time in less than a year the appeals court has blocked the SEC from acting beyond its authority. According to The Washington Post, “Former SEC member Harvey J. Goldschmid, who voted to approve the plan, yesterday urged regulators to appeal to the U.S. Supreme Court, members of Congress or both. In the Pequot case, a former SEC lawyer who worked on the Pequot investigation before being fired by the agency has written a letter to key members of the Senate banking and finance committees alleging that the SEC dropped the probe because of political pressure.” The lawyer said he was prevented by political pressure from interviewing a top Wall Street executive. Sources said the executive was John J. Mack, once chairman of Pequot and now chief executive of Morgan Stanley—and a major fundraiser for President Bush’s campaigns. I’d say the guy’s wired.

So what we have here is yet another case of ideological decision-making ("all government regulation is bad") being applied despite the most obvious promptings of common sense. Come to think of it, that’s exactly the pattern this administration has followed with war in the Middle East, nuclear showdowns, global warming and Apocalypse Now…

Actually, to give the devil his due, such a calling off of investigations into hedge funds is another example of how the world economy is being propped up by temporary measures. In other words, the investigation might cause what would be a normally healthy crash in hedge funds while calling off any regulation or investigation can buy a little time.

Here is a good graph that shows exactly how the world economy has been kept afloat for far longer than most of us doomsayers could have predicted: liquidity injections! And large hedge funds are a covert way for central banks to inject massive liguidity into markets, since they are seen as “too big too fail” and hence backed by central banks. Central banks have several ways to use large hedge funds for this purpose.

Now if the underlying factors all point to collapse, it can’t be propped up indefinitely, but it is starting to seem as if it is being sustained at current levels until something else of immense catastrophic importance takes place. In other words, the Powers that Be in normal times might already have pulled the world economy in the usual controlled demolition. But these aren’t normal times. If they know that something ELSE is coming, they do have the ability to keep things afloat for a few extra years. The question then becomes what is that something else? Candidates include: world war which goes nuclear, climate change leading to massive food shortages, earthquakes, meteor impacts, plagues, etc. They don’t call them the Four Horsemen of the Apocalypse for nothing.

All the usual idiots on United States Television are now talking excitedly about how World War Three has started. They shouldn’t be so excited because if it is the United States/Isreal will lose, and, as they are losing will be tempted to unleash nuclear holocaust. The blogger Billmon has this scenario:

Losing an Army

Earlier this week I linked to a commentary from William S. Lind in which he warned that war with Iran could result in the loss of the 140,000 man army America currently has bogged down in Iraq. This may have seemed far-fetched, given the enormous military disparity between the two sides. But Col. Pat Lang, a former intelligence officer, explains how and why it could happen:

American troops all over central and northern Iraq are supplied with fuel, food, and ammunition by truck convoy from a supply base hundreds of miles away in Kuwait. All but a small amount of our soldiers' supplies come into the country over roads that pass through the Shiite-dominated south of Iraq . . .

Southern Iraq is thoroughly infiltrated by Iranian special operations forces working with Shiite militias, such as Moqtada al-Sadr's Mahdi Army and the Badr Brigades. Hostilities between Iran and the United States or a change in attitude toward US forces on the part of the Baghdad government could quickly turn the supply roads into a "shooting gallery" 400 to 800 miles long.
(Christian Science Monitor, via No Quarter)

There's a saying: Amateurs talk strategy; professionals talk logistics. And in the case of the U.S. Army, they talk it about a lot. This has been true almost as long as there's been a U.S. Army. During the 1944-45 campaign in Europe, for example, each U.S. division consumed 650 tons of food, gas, ammo and other supplies per day -- roughly three times what the German Army managed to get by on. Logistical requirements have only exploded since then. Those lobster tails they're eating at Camp Victory don't grow on the trees.

If the supply lines back to Kuwait were to be cut -- or even seriously interdicted -- the U.S. military presence in Iraq would quickly become untenable. I'm not even sure the Army could scrounge enough gas to keep the tanks and Humvees moving, given that Iraq already suffers from a severe refining capacity shortage and must import most of its gasoline from Kuwait.

As Lang explains, an Army that loses its logistical "tail" quickly begins to lose combat effectiveness:

Without a plentiful and dependable source of fuel, food, and ammunition, a military force falters. First it stops moving, then it begins to starve, and eventually it becomes unable to resist the enemy.

Centcom could, of course, try to resupply forces from the air, ala the Berlin Airlift, but Lang is dubious whether that would prove any more effective than the German attempt to do the same thing for its beleaguered forces at Stalingrad:

In a difficult situation, the tonnages delivered could be increased, but given the bulk in weight and volume of the needed supplies, it seems unlikely that air resupply could exceed 25 percent of daily requirements. This would not be enough to sustain the force.

In other words, in the event of a real world war -- as opposed to the kind that pundits pontificate about on Fox News -- Centcom would either have to "pacify" the transportation routes through southern Iraq quickly and ruthlessly (which might not be possible, given the troops available and the possibility some Iraqi units might turn on their putative allies) or try to evacuate some or most U.S. forces from Iraq, either by air or ground.We're talking, on other words, about a potential debacle -- the worst U.S. military defeat since Pearl Harbor. Not because the Iranians are brilliant strategists or tough fighters (although they may be; we really don't know) but because the Iraq occupation has left the U.S. Army dangerously overextended, given its massive supply requirements.

Way back at the beginning of this war, I remember reading a quote from Air Force Col. John Warden, who fretted that the invasion and occupation of Iraq would leave the U.S. military holding "a very narrow beachhead in the midst of a billion undefeated Muslims." You don't have to buy into Warden's grandiose clash-of-civilization rhetoric to see how relevant his point may be now.

Last word this week on the war to George Ure again:
Pull up a chair and let's have us a nice friendly conversation about killing people. I don't usually suggest spending much time thinking the unthinkable, but given that there's now a better than even chance that the US will get sucked into an unwanted war with Iran due to Israeli's arguably over-zealous strikes on Gaza and Lebanon, at a time when US-based neocons have been pushing for just such events (ostensibly to support Israel, but coincident with republicorps in trouble in the fall elections here), now's as good a time as any to talk about killing humans. Besides the news events in the Middle East, don't forget that the web bot project sees rebellion/revolution breaking out around September 1st, and a Dow stricken to 1-10th - to as little as 1/-10th its (present) value by year's end. I'll try to stay to the economic track here, but remember: War is a generalized state of conflict and your first job when it breaks out is to figure out how to stay alive for the duration of the conflict. Your second job is to secure safety of your family and loved ones as best you can. Your third job is to know how to survive afterwards. And last, but not least, there's the need to retain knowledge. Like the old saying goes, "WW III will be fought with nukes. WW IV will be fought with sticks and stones." So this week, our three core concepts are: the selectorate theory of war, Self Organizing Collectives, and Knowledge Preservation.

Monday, July 17, 2006

Signs of the Economic Apocalypse, 7-17-06

From Signs of the Times, 7-17-06:

Gold closed at 665.40 dollars an ounce Friday, up 5.4% from $631.10 for the week. The dollar closed at 0.7904 euros on Friday, up 1.3% from 0.7806 at the end of the week before. That put the euro at 1.2652 dollars compared to 1.2810 at the close of the previous week. Gold in euros would be 525.92 an ounce up 6.8% from 492.66 for the week. Oil closed at 76.80 dollars a barrel Friday, up 4.1% from 73.79 at the close of the previous Friday. Oil in euros would be 60.70 euros a barrel, up 5.4% from 57.60 for the week. The gold/oil ratio closed at 8.66 Friday, up 1.3% from 8.55 at the end of the previous week. In U.S. stocks, the Dow closed at 10,739.35, down 3.3% from 11,090.67 for the week. The NASDAQ closed at 2,037.35 Friday, down 4.6% from 2,130.06 at the close of the Friday before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 5.06%, down seven basis points from 5.13 for the week.

Fears that Israel may have started World War III in the Middle East last week led to rises in gold, oil and a drop in U.S. stocks. The magnitude of the crimes being committed by Israel right now makes it hard to focus on the economy, but, since the economy is one front in this war of one human race (the psychopaths—those without a conscience) on the other human race (those with conscience), it may be worthwhile to pay some attention to it. The reality of this war can be seen in the year-later aftermath of Hurrican Katrina:

Ten months after Katrina: Gutting New Orleans

By Bill Quigley

Jul 8, 2006

Saturday I joined some volunteers and helped gut the home of one of my best friends. Two months after she finished paying off her mortgage, her one-story brick home was engulfed in 7 feet of water. Because she was under-insured and remains worried about a repeat of the floods, my friend, a grandmother, has not yet decided if she is going to rebuild.

Though it is Saturday morning, on my friend’s block no children play and no one is cutting the grass. Most of her neighbors’ homes are still abandoned. Three older women neighbors have died since Katrina.

We are still finding dead bodies. Ten days ago, workers cleaning a house in New Orleans found a body of a man who died in the flood. He is the 23rd person found dead from the storm since March.

Over 200,000 people have not yet made it back to New Orleans. Vacant houses stretch mile after mile, neighborhood after neighborhood. Thousands of buildings remain marked with brown ribbons where floodwaters settled. Of the thousands of homes and businesses in eastern New Orleans, 13 percent have been re-connected to electricity.

The mass displacement of people has left New Orleans older, whiter and more affluent. African Americans, children and the poor have not made it back – primarily because of severe shortages of affordable housing.

Thousands of homes remain just as they were when the floodwaters receded – ghost-like houses with open doors, upturned furniture, and walls covered with growing mold.

Not a single dollar of federal housing repair or home reconstruction money has made it to New Orleans yet. Tens of thousands are waiting. Many wait because a full third of homeowners in the New Orleans area had no flood insurance. Others wait because the levees surrounding New Orleans are not yet as strong as they were before Katrina and fear re-building until flood protection is more likely. Fights over the federal housing money still loom because Louisiana refuses to clearly state a commitment to direct 50 percent of the billions to low and moderate income families.

Meanwhile, 70,000 families in Louisiana live in 240-square-foot FEMA trailers – three on my friend’s street. As homeowners, their trailer is in front of their own battered home. Renters are not so fortunate and are placed in gravel strewn FEMA-villes across the state. With rents skyrocketing, thousands have moved into houses without electricity.

Meanwhile, privatization of public services continues to accelerate.

Public education in New Orleans is mostly demolished and what remains is being privatized. The city is now the nation’s laboratory for charter schools – publicly funded schools run by private bodies. Before Katrina the local elected school board had control over 115 schools – they now control 4. The majority of the remaining schools are now charters.

The metro area public schools will get $213 million less next school year in state money because tens of thousands of public school students were displaced last year. At the same time, the federal government announced a special allocation of $23.9 million which can only be used for charter schools in Louisiana. The teachers union, the largest in the state, has been told there will be no collective bargaining because, as one board member stated, "I think we all realize the world has changed around us."

Public housing has been boarded up and fenced off as HUD announced plans to demolish 5,000 apartments – despite the greatest shortage of affordable housing in the region’s history. HUD plans to let private companies develop the sites. In the meantime, the 4,000 families locked out since Katrina are not allowed to return.

The broken city water system is losing about 85 million gallons of water in leaks every day. That is not a typo, 85 million gallons of water a day, at a cost of $200,000 a day, are still leaking out of the system even after over 17,000 leaks have been plugged. Michelle Krupa of the Times-Picayune reports that the city pumps 135 million gallons a day through 80 miles of pipe in order for 50 million gallons to be used. We are losing more than we are using; the repair bill is estimated to be $1 billion – money the city does not have.

Public healthcare is in crisis. Our big public hospital has remained closed, and there are no serious plans to reopen it. A neighbor with cancer who has no car was told that she has to go 68 miles away to the closest public hospital for her chemotherapy.

Mental health may be worse. In the crumbling city and in the shelters of the displaced, depression and worse reign. Despite a suicide rate triple what it was a year ago, we have lost half of our psychiatrists, social workers, psychologists and other mental health care workers, the New York Times reports.

Mental health clinics remain closed. The psych unit of the big public hospital has not been replaced in the private sector as most are too poor to pay. The primary residence for people with mental health problems are our jails and prisons.

For children, the Washington Post reports, the trauma of the floods has not ended. A LSU mental health screening of nearly 5,000 children in schools and temporary housing in Louisiana found that 96 percent saw hurricane damage to their homes or neighborhoods, 22 percent had relatives or friends who were injured, 14 percent had relatives or friends who died, and 35 percent lost pets. Thirty-four percent were separated from their primary caregivers at some point; 9 percent still are. Little care is directed to the little ones.

The criminal justice system remains shattered. Six thousand cases await trial. There were no jury trials and only four public defenders for nine of the last 10 months. Many people in jail have not seen a lawyer since 2005. The Times-Picayune reported one defendant, jailed for possession of crack cocaine for almost two years, has not been inside a courtroom since August 2005 despite the fact that a key police witness against him committed suicide during the storm.

You may have seen on the news that we have some new neighbors – the National Guard. We could use the help of our military to set up hospitals and clinics. We could use their help in gutting and building houses or picking up the mountains of debris that remain. But instead they were sent to guard us from ourselves.

Crime certainly is a community problem. But many question the Guard helping local police dramatically increase stops of young Black males – who are spread out on the ground while they and their cars are searched. The relationship between crime and the collapse of all of these other systems is a one rarely brought up.

It has occurred to us that our New Orleans is looking more and more like Baghdad.

People in New Orleans wonder if this is the way the U.S. treats its own citizens, how on earth is the U.S. government treating people around the world? We know our nation could use its money and troops and power to help build up our community instead of trying to extend our economic and corporate reach around the globe. Why has it chosen not to?

We know that what is happening in New Orleans is just a more concentrated, more graphic version of what is going on all over our country. Every city in our country has some serious similarities to New Orleans. Every city has some abandoned neighborhoods. Every city in our country has abandoned some public education, public housing, public healthcare and criminal justice.

Those who do not support public education, healthcare, and housing will continue to turn all of our country into the Lower Ninth Ward unless we stop them. Why do we allow this?

There are signs of hope and resistance.

Neighborhood groups across the Gulf Coast are meeting and insisting that the voices and wishes of the residents be respected in the planning and rebuilding of their neighborhoods.

Public outrage forced FEMA to cancel the eviction of 3,000 families from trailers in Mississippi.

Country music artists Faith Hill and Tim McGraw blasted the failed federal rebuilding effort, saying, "When you have people dying because they’re poor and Black or poor and white, or because of whatever they are – if that’s a number on a political scale – then that is the most wrong thing. That erases everything that’s great about our country."

There is a growing grassroots movement to save the 4,000-plus apartments of public housing HUD promises to bulldoze. Residents and allies held a big July 4 celebration of resistance.

Voluntary groups have continued their active charitable work on the Gulf Coast. Thousands of houses are being gutted and repaired and even built by Baptist, Catholic, Episcopal, Jewish, Mennonite, Methodist, Muslim, Presbyterian and other faith groups. The AFL-CIO announced plans to invest $700 million in housing in New Orleans.

Many ask what the future of New Orleans is going to be like? I always give the lawyer’s answer, "It depends."

The future of New Orleans depends on whether our nation makes a commitment to those who have so far been shut out of the repair of New Orleans. Will the common good prompt the federal government to help the elderly, the children, the disabled and the working poor return to New Orleans? If so, we might get most of our city back. If not, and the signs so far are not so good, then the tens of thousands of people who were left behind when Katrina hit 10 months ago will again be left behind.

The future of New Orleans depends on those who are willing to fight for the right of every person to return. Many are fighting for that right. Please join in.

Some ask, what can people who care do to help New Orleans and the Gulf Coast? Help us rebuild our communities. Pair up your community, your business, school, church, professional or social organization with one on the Gulf Coast – and build a relationship where your organization can be a resource for one here and provide opportunities for your groups to come and help and for people here to come and tell their stories in your communities.

Most groups here have adopted the theme first used by Common Ground: "Solidarity not charity." Or, as aboriginal activist Lila Watson once said: "If you have come to help me, you are wasting your time. But if you have come because your liberation is bound up with mine, then let us struggle together."

For the sake of our nation and for our world, let us struggle together.

In the meantime, I will be joining other volunteers this Saturday, knocking out the mold-covered ceiling of my friend’s home and putting it out on the street – 10 months after Katrina.

Bill Quigley is a human rights lawyer and law professor at Loyola University New Orleans. You can reach Bill at For more information, see

What can the normal people do? Know the enemy. Look at their works in New Orleans, Iraq, Gaza and Lebanon. Those are potential futures for all of us. Learn about psychopaths and how to spot them. They are a minority (some say 6%), so if identified, the rest of us can limit the damage they can cause by, among other things, not following their orders, not allowing them to have positions of power either collectively or personally. That can only be done if we know who they are AND how they operate.

Monday, July 10, 2006

Signs of the Economic Apocalypse, 7-10-06

From Signs of the Times, 7-10-06:

Gold closed at 631.10 dollars an ounce on Friday, up 2.4% from $616.20 for the week. The dollar closed at 0.7806 euros Friday, down 0.2% from 0.7819 at the close of the previous week. That puts the euro at 1.2810 dollars compared to 1.2790 for the week. Gold in euros would be 492.66 an ounce, up 2.3% from 481.78 at the end of the previous week. Oil closed at 73.79 dollars a barrel, down less than 0.1% from $73.85 for the week. Oil in euros would be 57.60 euros a barrel on Friday, down 0.2% from 57.74 at the close of the Friday before. The gold/oil ratio closed at 8.55 on Friday, up 2.5% from 8.34 for the week. In U.S. stocks, the Dow closed at 11,090.67 on Friday, down 0.5% from 11,150.22 at the close of the previous week. The NASDAQ closed at 2,130.06, down 2.0% from 2,172.09 for the week. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 5.13%, down one basis point from 5.14 at the close of the week before.

Last week it was revealed that repulsive Vice President Richard Cheney is betting on a U.S. economic collapse. The following piece by Mike Whitney was run on the Signs of the Times page last week, but it’s worth rerunning:
The Veep's Curious Investment Portfolio
Is Cheney Betting On Economic Collapse?

By Mike Whitney
July 5, 2006

Wouldn't you like to know where Dick Cheney puts his money? Then you'd know whether his "deficits don't matter" claim is just baloney or not.

Well, as it turns out, Kiplinger Magazine ran an article based on Cheney's financial disclosure statement and, sure enough, found out that the VP is lying to the American people for the umpteenth time. Deficits do matter and Cheney has invested his money accordingly.

The article is called "Cheney's betting on bad news" and provides an account of where Cheney has socked away more than $25 million. While the figures may be estimates, the investments are not. According to Tom Blackburn of the Palm Beach Post, Cheney has invested heavily in "a fund that specializes in short-term municipal bonds, a tax-exempt money market fund and an inflation protected securities fund. The first two hold up if interest rates rise with inflation. The third is protected against inflation."

Cheney has dumped another (estimated) $10 to $25 million in a European bond fund which tells us that he is counting on a steadily weakening dollar. So, while working class Americans are loosing ground to inflation and rising energy costs, Darth Cheney will be enhancing his wealth in "Old Europe". As Blackburn sagely notes, "Not all bad news' is bad for everybody."

This should put to rest once and for all the foolish notion that the "Bush Economic Plan" is anything more than a scam aimed at looting the public till. The whole deal is intended to shift the nation's wealth from one class to another. It's also clear that Bush-Cheney couldn't have carried this off without the tacit approval of the thieves at the Federal Reserve who engineered the low-interest rate boondoggle to put the American people to sleep while they picked their pockets.

Reasonable people can dispute that Bush is "intentionally" skewering the dollar with his lavish tax cuts, but how does that explain Cheney's portfolio?

It doesn't. And, one thing we can say with metaphysical certainty is that the miserly Cheney would never plunk his money into an investment that wasn't a sure thing. If Cheney is counting on the dollar tanking and interest rates going up, then, by Gawd, that's what'll happen.

The Bush-Cheney team has racked up another $3 trillion in debt in just 6 years. The US national debt now stands at $8.4 trillion dollars while the trade deficit has ballooned to $800 billion nearly 7% of GDP.

This is lunacy. No country, however powerful, can maintain these staggering numbers. The country is in hock up to its neck and has to borrow $2.5 billion per day just to stay above water. Presently, the Fed is expanding the money supply and buying back its own treasuries to hide the hemorrhaging from the public. It’s utter madness.

Last month the trade deficit climbed to $70 billion. More importantly, foreign central banks only purchased a meager $47 billion in treasuries to shore up our ravenous appetite for cheap junk from China.

Do the math! They're not investing in America anymore. They are decreasing their stockpiles of dollars. We're sinking fast and Cheney and his pals are manning the lifeboats while the public is diverted with gay marriage amendments and "American Celebrity".

The American manufacturing sector has been hollowed out by cutthroat corporations who've abandoned their country to make a fast-buck in China or Mexico. The $3 trillion housing (equity) bubble is quickly loosing air while the anemic dollar continues to sag. All the signs indicate that the economy is slowing at the same time that energy prices continue to rise.

This is the onset of stagflation; the dreaded combo of a slowing economy and inflation.

Did Americans really think they'd be spared the same type of economic colonization that has been applied throughout the developing world under the rubric of "neoliberalism"?

Well, think again. The American economy is barrel-rolling towards earth and there are only enough parachutes for Cheney and the gang.

The country has lost 3 million jobs from outsourcing since Bush took office; more than 200,000 of those are the high-paying, high-tech jobs that are the life's-blood of every economy.

Consider this from the Council on Foreign Relations (CFR) June edition of Foreign Affairs, the Bible of globalists and plutocrats:

"Between 2000 and 2003 alone, foreign firms built 60,000manufacturing plants in China. European chemical companies, Japanese carmakers, and US industrial conglomerates are all building factories in China to supply export markets around the world. Similarly, banks, insurance companies, professional-service firms, and IT companies are building R&D and service centers in India to support employees, customers, and production worldwide." ("The Globally integrated Enterprise" Samuel Palmisano, Foreign Affairs page 130)

"60,000 manufacturing plants" in 3 years?!?

"Banks, insurance companies, professional-service firms, and IT companies"?

No job is safe. American elites and corporate tycoons are loading the boats and heading for foreign shores. The only thing they're leaving behind is the insurmountable debt that will be shackled to our children into perpetuity and the carefully arranged levers of a modern police-surveillance state.

Welcome to Bush's 21st Century gulag; third world luxury in a Guantanamo-type setting.

Take another look at Cheney's investment strategy; it tells the whole ugly story. Interest rates are going up, the middle class is going down, and the poor dollar is headed for the dumpster. The country is not simply teetering on the brink of financial collapse; it is being thrust headfirst by the blackguards in office and their satrapies at Federal Reserve.

Looking at the Great Depression of the 1930s, one of the biggest differences between now and then is that the stock market crash of 1929 came as much more of a surprise. Midway through 2006, we face the possibility of a world collapse that has been predicted off and on for three decades. Many people, including apparently Dick Cheney, are actively preparing for a future collapse, learning the lesson in advance. The generation who lived through the Great Depression kept saving tin cans and used rubber bands throughout the disposable consumer prosperity of the fifties and sixties. Most of us, facing a depression, are getting in one last spending spree before it all ends. No doubt it is best to learn the lesson in advance. We should have been saving tin cans and rubber bands throughout the nineties and two thousands. I stopped throwing away old clothes and shoes with holes in them.

So, if we want to learn the lessons in advance, what lessons should we learn? One lesson is to watch out for popular fascism and private armies. A new book by Newsweek journalist Jonathan Alter about Franklin Roosevelt’s first 100 days in office, The Defining Moment: FDR’s Hundred Days and the Triumph of Hope (New York: Simon and Schuster, 2006), paints a startling picture of the political climate in the United States in the dark days of early 1933. Among the political establishment, there was overwhelming support for a fascist dictatorship. Alter points out that in early 1933, the word ‘dictatorship’ had a positive connotation. It was a near miss, we almost had fascist America seventy years ago.

Here is Alter on the economic situation in March 1933:
The American economic system had gone into a state of shock, its vital organs shutting down as the weekend began. On Friday, the New York Stock Exchange suspended trading indefinitely and the Chicago Board of Trade bolted its doors for the first time since its founding in 1848. The terrifying “runs” that began the year before on more than five thousand failing banks had stripped rural areas of capital and now threatened to overwhelm American cities. At dawn on Saturday, only a few hours before FDR’s swearing in, the governors of New York, Illinois, and Pennsylvania signed orders closing the banks in those states indefinitely; which meant that thirty-four out of forty-eight American states, including the largest ones, now had no economic pulse…

As frightening as life had become since the Great Depression began, this was the bottom, though no one knew that at the time. The official national unemployment rate stood at 25 percent, but that figure was widely considered to be low. Among non-farm workers, unemployment was more than 37 percent, and in some areas, like Toledo, Ohio, it reached 80 percent. Business investment was down 90 percent from 1929. Per-capital real income was lower than three decades earlier, at the turn of the century. If you were unfortunate enough to have put your money in a bank that went bust, you were wiped out. With no idea whether any banks would reopen, millions of people hid their few remaining assets under their mattresses, where no one could steal them at night without a fight. The savings that many Americans had spent a lifetime accumulating were severely depleted or gone, along with 16 million of their jobs. When would they come back? Maybe never. The great British economist John Maynard Keynes was asked by a reporter the previous summer if there were any precedent for what had happened to the world’s economy. He replied yes, it lasted four hundred years and was called the Dark Ages.

Late in 1933, the journalist Earle Looker peered backwards several months to assess the Hobbesian states as FDR assumed office: “Capitalism itself was at the point of dissolution. Would men continue to work for profit as our forefathers understood it and as our people now understand it? This was a real question, for money was now useless. Would it be necessary soon to organize our families against the world, to fight, physically, for food, to keep shelter, to hold possessions?” (Jonathan Alter, The Defining Moment, pp. 1-3)

Most people at that time saw at only two paths out of the crisis of world capitalism: communism and fascism. A few saw social democracy as another way out. Roosevelt when he assumed the presidency was actually poised between fascism and social democracy, and, if Alter is to be believed, had enough support for either option that he was facing a free-will choice. It was a close call.
Roosevelt’s Inaugural Address had begun the process of restoring hope, but not everyone caught the new mood right away. The press coverage that morning largely downplayed or ignored FDR’s line: “the only thing we have to fear is fear itself.” The New York Times and most other newspapers relegated the line to their inside pages, while focusing instead on the vivid wartime allusions he employed five times during his speech—martial metaphors that suggested that there was, in fact, plenty to fear after all. The greatest applause line from the large crowd on the east side of the Capitol came when Roosevelt said that if his rescue program was not quickly approved: “I shall ask Congress for the one remaining instrument to meet the crisis: broad executive power to wage war against the emergency, as great as the power that would be given to me if we were in fact invaded by a foreign foe.”

The United States had not been “invaded by a foreign foe” since 1812, but this felt like it. Arthur Krock of the Times compared the mood in Washington on Inauguration Day to a ‘beleagered capital in wartime.’ For the first time since the Civil War, armed men patrolled the entrances to federal buildings, while machine gunners perched on rooftops. Editors knew that that the world war, just thirteen years in the past, had concentrated great power in the hands of Woodrow Wilson’s government. To them it looked as if FDR were proposing the same thing. And so the approving headline FOR DICTATORSHIP IF NECESSARY ran in the New York Herald-Tribune on March 5, with similar notes stuck in the Inaugural coverage of other major papers.

Exactly what was “necessary”? No one knew, including Roosevelt. Even before being sworn in, he had decided on a federal bank “holiday” (a festive term he preferred to Herbert Hoover’s “moratorium”) to give the people who now ran the country a few days to figure out what to do. Then what? Should he assume wartime authority on a temporary basis? Call out the Army to protect banks and maintain order? Mobilize veterans? Unrest was already growing in the farm belt, where mobs had broken up bankruptcy auctions. Four thousand men had occupied the Nebraska statehouse and five thousand stormed Seattle’s county building. The governor of North Carolina predicted a violent revolution, and police in Chicago clubbed teachers who had not been paid all school year. Everywhere bank runs threatened to turn violent. By the Inaugural weekend, police in nearly every American city were preparing for an onslaught of angry depositors. At least some were certain to be armed.

With so many banks involved, the U.S. Army—including National Guard and Reserve units—might not be large enough to respond. This raised the question of whether the new president should establish a makeshift force of veterans to enforce some kind of martial law.
The tempation must have been strong. It hardly seems a coincidence that FDR decided that the first radio speech of his presidency would be specially addressed to a convention of the American Legion, the million-member veterans’ organization co-founded after World War I by his fifth cousin Theodore Roosevelt, Jr. (Ibid., pp. 3-4)

The American Legion occupies a special place in the history of American Fascism. Alter found a draft statement that was handed to Roosevelt before his first radio address calling for such a fascist force:

The short speech was scheduled for that Sunday evening at 11:30 p.m. EST, with all the radio networks carrying it live across the country. In preparing for the broadcast, someone in the small Roosevelt inner circle offered the new president a typewritten draft of suggested additions that contained this eye-popping sentence:

As new commander-in-chief under the oath to which you are still bound I reserve to myself the right to command you in any phase of the situation which now confronts us.

This was dictator talk—an explicit power grab. The new president was contemplating his “right” to command World War I veterans—mostly men in their late thirties—who had long since reentered civilian life. It was true that they had sworn an oath to the United States on entering military service and that the 1919 founding document of the American Legion pledged members to help “maintain law and order” and show “devotion to mutual helpfulness.” But the commander in chief had no power over them. Here Roosevelt would be poised to mobilize hundreds of thousands of unemployed and desperate men by decree, apparently to guard banks or put down rebellions or do anything else he wished during “any phase” of the crisis, with the insistence that they were dutybound to obey his concocted “command.”

That word—“dictator”—had been in the air for weeks, endorsed vaguely as a remedy for the Depression by establishment figures ranging from the owners of the New York Daily News, the nation’s largest circulation newspaper, to Walter Lippmann, the eminent columnist who spoke for the American political elite. “The situation is cricital, Franklin. You may have no alternative but to assume dictatorial powers,” Lippmann had told FDR during a visit to Warm Springs on February 1, before the crisis had escalated.
Alfred E. Smith, the Democratic nominee for president in 1928, recalled with some exaggeration that “during the World War we wrapped the Constitution in paper, put it on the shelf and left it there until the war was over.” The Depression, Smith concluded, was a similar “state of war.” Even Eleanor Roosevelt, more liberal than her husband, privately suggested that a “benevolent dictator” might be what the country needed. The vague idea was not a police state but deference to a strong leader unfettered by Congress or the other inconveniences of democracy. Amid the crisis, the specifics didn’t go beyond more faith in government by fiat.

Within a few years, “dictator” would carry sinister tones, but—hard as it is to believe now—the word had a reassuring ring that season. So did “storm troopers,” used by one admiring author to describe foot soldiers of the early New Deal, and “concentration camps,” a generic term routinely applied to the work camps of the Civilian Conservation Corps that would be established by summer across the country. After all, the Italian Fascist Benito Mussolini, in power for a decade, had ginned up the Italian economy and was popular with everyone from Winston Churchill to Will Rogers to Lowell Thomas, America’s most influential broadcaster. “If ever this country needed a Mussolini, it needs one now,” said Senator David Reed of Pennsylvania, outgoing President Hoover’s closest friend on Capitol Hill. The speech draft prepared for FDR brought to mind Mussolini addressing his black-shirt followers, many of whom were demobilized veterans who joined Il Duce’s private army. (Ibid., pp. 4-6)

The propaganda machine, owned by the elite, was ready to be put into action in the defense of the property of the rich:
The most powerful American publisher, William Randolph Hearst, seemed to favor dictatorship. The Hearst empire extended to Hollywood, where Hearst that winter had personally supervised the filming of an upcoming hit movie called Gabriel Over the White House that was meant to instruct FDR and prepare the public for a dictatorship. The movie’s hero is a president played by Walter Huston who dissolves Congress, creates an army of the unemployed, and lines up his enemies before a firing squad. FDR not only saw an advance screening of the film, he offered ideas for script rewrites and wrote Hearst from the White House that he thought it would help the country. (Ibid., p. 6)

Now what would happen if the same economic conditions were faced by Bush and Cheney? In 1933, at least, the United States was lucky:
But on March 5, 1933, as astonishing thing happened—or more precisely, did not happen. The draft of that American Legion radio address was destined not for the ears of millions of veterans and other Americans, but for nothing more than the speech files of the Roosevelt Library, where it lay unexamined for more than seventy years. The five-minute speech that FDR delivered that night built on the military tone of the Inaugural. He argued for the ‘sacrifice and devotion’ of wartime and noted that it was ‘a mistake to assume that the virtues of war differ essentially from the virtues of peace.’ But there was no hint of the need for a private army.

No one knows who wrote the unused draft or why FDR discarded the suggested additions, but something inside the man kept him from moving in an extraconstitutional direction. Some combination of personal and democratic conviction set him on a different course, at once more traditional and bold. This most pragmatic of modern American presidents sensed the unworkable nature of untrammeled power, even in the hands of the only person he completely trusted—himself.

In the days ahead, FDR moved in the opposite direction, passing the word on Capitol Hill that he did not believe in a constitutional dictatorship and asking his friend Felix Frankfurter to tell Lippmann to stop hawking dictatorship and disrespect of Congress in his columns. (Ibid., p. 7)

Bush, of course, is chomping at the bit for his chance.

Monday, July 03, 2006

Signs of the Economic Apocalypse, 7-3-06

From Signs of the Times, 7-3-06:

Gold closed at 616.20 dollars an ounce on Friday, up 5.2% from $586.00 for the week. The dollar closed at 0.7819 euros on Friday, down 2.3% from 0.7996 at the close of the previous week. The euro, then, closed at 1.2790 dollars compared to 1.2507 at the end of the week before. Gold in euros would be 481.78 euros an ounce, up 3.9% from 463.61 at the previous week’s close. Oil closed at 73.85 dollars a barrel Friday, up 4.2% from $70.84 for the week. Oil in euros would be 57.74 dollars a barrel, up 1.9% compared to 56.64 the Friday before. The gold/oil ratio closed at 8.34, up 0.8% from 8.27 for the week. In the U.S. stock market, the Dow closed at 11,150.22 up 1.5% from 10,989.09 at the close of the previous week. The NASDAQ closed at 2,172.09, up 2.4% from 2,121.47 for the week. In U.S. interest rates the yield on the ten-year U.S. Treasury note closed at 5.14%, down eight basis points from 5.22 at the end of the previous Friday.

Friday was the end of the second quarter, so let’s look at the numbers for 2006 so far.

The price of gold in dollars went from $583.50 to $616.20 in the second quarter, an increase of 5.6%. For the year, gold went from $519.70 to $616.20, an increase of 18.6%.

Gold in euros was virtually unchanged in the second quarter, rising from 481.52 an ounce to 481.78. For the year gold priced in euros went from 438.60 to 481.78, a rise of 9.8%.

The dollar went from 0.8252 euros to 0.7819 euros in the second quarter, a drop of 5.5%. For the year, the dollar went from 0.8440 euros to 0.7819, a drop of 7.9%. The euro went from 1.1849 dollars to $1.2790 for the year and from 1.2118 for the quarter.

The price of oil in dollars went from 66.35 to 73.85 dollars a barrel in the second quarter, a rise of 11.3%. For the year, oil went from $61.04 to $73.85, a rise of 21.0%.

Oil in euros went from 54.75 euros a barrel to 57.74 for the quarter, a rise of 5.5%. For the year oil went from 51.43 euros a barrel to 57.74, a rise of 12.3%.

The gold/oil ratio went from 8.79 to 8.34 for the quarter (meaning the price of oil rose faster than the price of gold) a drop of 5.4%.

The Dow Jones Industrial Average went from 11,109.32 to 11,150.22 for the quarter, a rise of 0.4%. For the year it went from 10,717.50 to 11,150.22, a rise of 4.0%. The NASDAQ went from 2,339.79 to 2,172.09 for the quarter, a drop of 7.7%. For the year, it went from 2,205.32 to 2,172.09, a drop of 1.5%.

The yield on the ten-year U.S. Treasury note went from 4.85% to 5.14% in the second quarter, a rise of 29 basis points. For the year it went from 4.39 to 5.14, a rise of 75 basis points.

Looking at the year so far, a few things stand out. The price of oil has risen steadily. Gold has risen as well but not as steadily, given the recent correction which seems to have found a bottom in the mid-$580s. The dollar has been able to maintain its value, due in large part to rising short term interest rates by the U.S. Federal Reserve Board. As we will see, that may not last much longer.

So far no crash. That’s the good news. They have managed to keep the system afloat for another six months-- not a bad accomplishment. One might even be tempted to think “they” know what they are doing. Nick Beams, discussing the annual report of the Bank of International Settlements, argues that they don’t:

Bankers’ bank puzzles over state of world economy

By Nick Beams
30 June 2006

Recently in an email to the WSWS a reader drew a contrast between what she called the “explosive situation” in China—an “unregulated economy within a dictatorship”—and the United States where the economy is “regulated, open and handled by the best business-brains available.”

While not often stated so baldly, the views expressed here are quite widely held; that while there may be problems in what could be called the extremities of the world economy, the heart is basically sound and functions under the watchful eye of central bankers and financial regulators ready to intervene if necessary.

Anyone who subscribes to such a view would do well to examine the annual report of the Bank for International Settlements (BIS) published this week. Set up in the late 1920s to organise World War I reparations payments from Germany, the BIS is a unique body in the world of finance. Not tied to any particular national banking authority and functioning as a kind of “central bankers’ bank”, it often provides analyses of the world economy not found elsewhere.

The main press commentary on this year’s BIS report has focused on remarks by general manager Malcolm Knight that interest rates will have to be further tightened. “It would be imprudent,” he said, “to count on the happy combination of strong growth and low inflation lasting indefinitely. At some point, central banks may have to act more forcefully on policy rates than they have in the past few years.”

One of the report’s central themes was that while the recent period of low inflation resulting from globalisation has been beneficial, the low interest rate regime that has followed may have created other problems in the form of asset price inflation and global trade imbalances.

These problems are dealt with in some detail in the conclusion to the report. It makes clear that far from financial markets operating under the regulation of the “best brains”, they are wracked by a series of contradictions which central bankers do not really understand, much less know how to control.

For example, the report notes that the compression of interest rates between more secure and riskier assets “remains a puzzle”, the surge in equity and housing prices globally “seems hard to reconcile with wide differences in domestic growth prospects” and that the “explosion in merger and acquisition activity, particularly in Europe, also seems difficult to rationalise.”

Like many other financial institutions, the BIS insists that the present global imbalances, above all the growing US current account deficit and the continued accumulation of foreign currency reserves by China and the East Asian economies, are not sustainable in the long run. However, “given the complexity of the situation and the limits of our knowledge, it is extremely difficult to predict how all this might unfold.”

One scenario is a “bang” of market turbulence. Another is the “whimper” of a long period of slow growth.

There are a number of possible triggers for a market “bang”, including: the tightening of interest rates, protectionist legislation relating to China or Middle East oil exporters, or the sudden failure of a large firm with major financial interests. But it could be something else entirely, for, as the report points out, “the triggers for most of the financial crises observed over the last few decades were almost entirely unexpected.”

One of the major problems confronting would-be regulators is the exponential expansion of financial markets in recent years, especially because of the operations of hedge funds and the ever-more widespread use of derivatives. These are contracts which by their nature involve speculation about the movement of interest rates, currency rates, share prices, debt ratings among other indices. Accordingly, there are “several market-specific reasons” for concern. “In the main industrial countries, there are many new participants in financial markets and many new financial products, of increasing complexity and opacity. Market liquidity in this new environment has yet to be put to the test.”

In other words, while the use of complex derivatives is supposed to lessen financial turbulence through the spreading of risk, no one knows whether this is really the case. In fact, complex global financial connections mean that problems in one area may become amplified, rather than dampened, as trades unwind across the world. Accordingly, “there is a reasonable likelihood that if one market were to come under significant stress, it would spill over to others.”

The drop in the dollar and the rise in the price of gold last week were both attributed to the announcement by the U.S. Federal Reserve Board that it might stop raising interest rates:

Gold in New York Rises Most Since September 2001

June 30 (Bloomberg) -- Gold in New York surged the most since the Sept. 11 terrorist attacks in the U.S. after the Federal Reserve suggested it may take a break from raising interest rates, eroding the value of the dollar.

Gold jumped 4.6 percent to $616 an ounce after the Fed yesterday said more rate increases may be needed only if statistics warrant. The dollar fell against the euro on speculation the European Central Bank may raise rates faster than in the U.S. Gold is up 16 percent this year as the dollar fell 7.3 percent against the euro. Silver also gained.

Comments by the Fed are “very friendly to the gold market,” said Michael Guido, director of hedge fund marketing and commodity strategy at Societe Generale in New York. “All the sideline buyers are thinking this could be the bottom of the gold market for the year. There's a lot more confidence to adding to positions.”

Gold futures for August delivery rose $27.10 on the Comex division of the New York Mercantile Exchange. The 4.6 percent gain was the biggest since Sept. 14, 2001, the first day of trading after the terrorist attacks closed U.S. markets. The metal reached a 26-year high of $732 on May 12…

Rate Expectations

The Philadelphia Stock Exchange Gold and Silver Index of 16 companies rose, led by silver producer Coeur d'Alene Mines Corp. and Kinross Gold Corp. The index gained 2 percent to 143.57, the highest settlement since May 16.

Interest-rate futures show traders see 59 percent odds of a quarter-percentage point increase in the overnight lending rate between banks, to 5.5 percent, in August. Two days ago, the figure was 85 percent.

“The Fed's comments yesterday indicate there is going to be no more interest-rate increases and this is pushing up gold,”said Ron Schouten, a precious-metals trader at Hollandsche Bank-Unie in Amsterdam. “The stronger euro-dollar is also helping.”

Fed officials are trying to avoid a hard landing for the U.S., where higher t rates may restrain job growth and curtail spending. The Fed had increased rates for 17 straight times to curb inflation.

Inflation Pressure

U.S. consumer prices climbed at an annual rate of 5.2 percent in the five months ended May, up from 3.6 percent a year earlier. Excluding food and energy, so-called core prices rose at an annual rate of 3.1 percent, compared with a 2.4 percent gain a year earlier.

“The combination of inflation pressures and a slowdown in economic growth are positive for gold,”said Michael Widmer, an analyst at Macquarie Bank Ltd. in London. “There is limited scope for the U.S. dollar to move higher now. Some uncertainty has been removed.”

Investors buy gold as an alternative to the dollar.

“The psychology now is to sell the dollar and buy the euro and other currencies,”said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York.

Since April 1, the correlation between gold and euro has increased to 0.55, compared with 0.37 in the first quarter. The coefficient measures to what degree two variables move in lockstep. The dollar weakened to $1.2786 per euro at 1:17 p.m. in New York, from $1.2664 late yesterday, reaching the lowest since June 8.

European Confidence

A report today showing European confidence in the economy was the highest in five years “is fueling speculation the EU will have to speed up rate hikes in the region,”said John Licata, chief investment strategist for Blue Phoenix Inc., a precious-metals and energy firm in New York. “The dollar is under heavy pressure against the euro, which is causing a nice premium in gold prices.”
The Fed yesterday raised its overnight lending rate by a quarter-point to 5.25 percent. Some investors interpreted accompanying statements to mean the central bank may pause after nudging rates higher at each meeting for two years.

Gold as Insurance

“Gold looks more attractive,”said Zach Liggett, who helps manage $550 million in individual accounts and the Utopia Fund at Traverse City, Michigan-based Financial & Investment Management Group. “It's good to have gold as insurance in case central banks lose their nerve and slow down this tightening campaign.”

An end to the cycle of interest-rate increases by the Fed would leave the European Central Bank set to outpace its American counterpart, after ECB policy makers this week said they may quicken their pace of rate boosts.

“We've increased our investments on gold,”said Christoph Eibl, head of commodities trading at Tiberius Asset Management AG in Stuttgart, Germany. “There's dollar weakness and oil prices are strong.”

Crude oil rose for an eighth straight day, approaching $74 a barrel. Prices are up 21 percent this year.

Frightened by the prospect of a crash, it seems the Fed is reversing course. The problem they face is that the period of low interest rates we have not yet left has given the world excessive, asset bubbles, and global imbalances. Keeping interest rates low will only exacerbate those problems. Here’s Michael Shedlock on the continued expansion of credit:

Musical Chairs

I was recently asked if I saw anything whatsoever that suggested lenders are tightening at all in the face of declining collateral and rising debt service pressures on their customers.

The answer to that question is a resounding no. In fact the latest data shows the opposite: credit standards are still getting easier and businesses are still trying to expand or capture market share regardless of the consequences down the road.

Bank Lending Survey

According to the April 2006 Senior Loan Officer Opinion Survey on Bank Lending Practices

On net, 12 percent of domestic institutions indicated that they had eased standards on business loans to large and middle-market firms.

About 60 percent of domestic respondents, a notably larger net fraction than in the previous survey, reported that they had trimmed spreads of loan rates over their cost of funds for such firms.

Almost 40 percent of domestic institutions, again a larger net fraction than in the January survey, indicated that they had reduced the costs of credit lines over the past three months.

About one-fifth of domestic banks, noted that they had increased the maximum maturity of C&I loans or credit lines that they were willing to extend to their business borrowers.

For C&I loans to small firms, 7 percent of domestic respondents noted that they had eased lending standards in the April survey.

On balance, almost 50 percent of respondents indicated that they had narrowed spreads of loan rates over their cost of funds.

About 30 percent of respondents reported having reduced the cost of credit lines over the same period.

Most respondents reporting easing of their lending standards cited more aggressive competition as an important reason for having done so.

Perhaps lending standards have changed given the market downdraft in equity markets in May but I doubt it. Note that housing starts were up this month even though inventories are skyrocketing and buyer traffic is back at 1990 levels. "Have Funding Will Build" seems to be the homebuilder motto of the day.

Housing Starts

Here is another angle on housing starts:

Bloomberg is reporting Copper Rises After U.S. Housing Starts Gain More-Than-Expected.

Copper in London and Shanghai rose after home construction rebounded in the U.S. last month, spurring optimism for sustained demand in the world's second- biggest user of the metal.

Housing starts rose a greater-than-expected 5 percent to an annual rate of 1.957 million, the Commerce Department said yesterday in Washington. The average U.S. home contains about 400 pounds (181.4 kilograms) of copper wire and pipes, according to the New York-based Copper Development Association."

Prior to these numbers, there was some concern that the U.S. property market was cooling, but the announcement showed that is not the case," Cai Luoyi, a metals analyst at China International Futures (Shanghai) Co., said by phone.

So there was "some concern" about US housing but I see that one month of data removes all that concern. By any chance is Cai Luoyi the replacement for the rogue trader that cost China $200 million by shorting copper futures last year?

Flashback to November 25th. The Washington Post reported Losses on Copper Futures Have Leadership Spinning?

Fast forward to today:

There are now record numbers of unsold homes on the market. There were 565,000 new and 3.4 million existing residences for sale in April according to the National Association of Realtors and the Commerce Department. That is a lot of supply and home builders keep adding to it every month at a far faster pace than sales.Danielle DiMartino writing for the Dallas Morning News is asking Which builders will be left standing?

After I had mulled over the troubling 5 percent rise in May housing starts, a brilliantly simple explanation hit my inbox.

"Builders with no starts are 'unemployed,' " wrote James Bandy of Dallas, "and they will never be voluntarily unemployed."

Mr. Bandy said he recalls Texas in the mid-1980s well enough to recognize the sequel to the high-stakes game of musical chairs.Given that we all know how the game ends, it's hard to see why so many builders continue to be willing participants.

Yet they play on.

In case you've missed the most massive buildup since the Cold War, inventories of new and existing homes are at the highest levels ever recorded. Combine existing and new construction and you get a cool 4 million unsold units.

With this much supply, you'd think starts would be down by more than 3.8 percent from January's 33-year high.

Wouldn't it be smarter to show a bit of restraint and shelter what profit margins do remain? It's not as if retaining sales volumes to keep up appearances is still a legitimate excuse. Wall Street long ago pummeled homebuilder stocks.

In fact, the meltdown in share prices has freed homebuilders to shift their focus back to profits.

Rather than pile on more incentives to stanch plummeting demand, those with an eye on survival could simply cancel, or at least postpone, groundbreakings.

It's painfully apparent that, somewhere along the way, the industry abandoned concern for its customers' long-term well-being.

Maybe builders just don't appreciate how critical a role they play. Oversupply is but one issue when viewed in isolation – as is the risk to the labor market, as is the threat to the banking system.

Add them together, though, and we're not talking child's play. We're talking about a seriously brutal session of musical chairs.

One has to laugh about that musical chairs analogy but it goes beyond homebuilding into every aspect of this financial economy totally dependent on ever increasing amounts of risk. Not only are more and more players struggling to get into the game (with no additional chairs being added) those already in it are struggling to increase leverage.

…Let's look at one more interesting article from Danielle DiMartino. This one is called Not feeling at home with risk.

Three weeks ago the portfolio manager at Pacific Investment Management Co. sold his house and moved into an apartment with his wife. Though his wife wasn't exactly happy with the move, his sense is "she will look back on our sale and view it as a good one."

Curiously, Mr. Kiesel's specialty is corporate bonds, which he says have given him a unique perspective on the U.S. housing market.

"Rising home prices have been the key driver of U.S. economic growth, which in turn has played a major role in the tightening of corporate bond spreads," Mr. Kiesel said.Many of these companies are buying back their stock, which weakens bondholders' cash cushion on the balance sheet. "

In this environment, bondholders should be demanding covenant protection as well as higher spreads on homebuilder bonds."

Because housing has driven the economy for so long, the slowdown will bring, among other things, tighter lending standards, less willingness to take risk, lower asset price appreciation outside housing, less liquid financial markets and rising volatility.

"At that point, 'For Sale' will not just be a sign you see in front of your neighbor's yard," Mr. Kiesel added. "Investors may also put a 'For Sale' sign on risk assets as well."

Judging from the huge swings we've seen in emerging markets, stocks and commodities in recent weeks, big institutional investors have already started to shift away from risk, something that carries deeper implications for bondholders.

Junk bond spreads are widening, the Fed is still hiking, housing inventory is soaring, but builders are still building, companies are still wasting cash on share buybacks at inflated prices, and credit standards amazingly are still headed lower. It's not readily apparent right now but I suspect there will be a severe shortage of chairs when Bernanke's Big Band stops the rate hike music.