Monday, October 30, 2006

Signs of the Economic Apocalypse, 10-30-06

From Signs of the Times, 10-30-06:

Gold closed at 602.30 dollars an ounce on Friday, up 1.2% from $595.00 at the close of the previous Friday. The dollar closed at 0.7848 euros Friday, down 1.0% from 0.7926 for the week. That put the euro at 1.2742 compared to 1.2617 at the end of the Friday before. Gold in euros would be 472.69 euros an ounce, up 0.2% from 471.59 for the week. Oil closed at 60.75 dollars a barrel Friday, up 2.5% from $59.25 at the close of the previous week. Oil in euros would be 47.68 euros a barrel, up 1.5% from 46.96 for the week. The gold/oil ratio closed at 9.91 Friday, down 1.3% from 10.04 at the close of the Friday before. In U.S. stocks, the Dow Jones Industrial Average closed at 12,090.26 Friday, up 0.7% from 12,002.37. The NASDAQ closed at 2,350.62, up 0.3% from 2,342.30 for the week. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.68% down ten basis points from 4.78 for the week.

Oil and gold were up and the dollar was down as investors may have begun to reflect what the situation will be like after the U.S. midterm elections. The perception of many that oil prices have been kept unnaturally low by Bush’s friends in the oil industry can only lead to anxiety now that the election is near. Rumors of an attack on Iran after the election, the prospect of renewed oil price increases, and bad housing news cast a pall over even the good economic news these days. Interest rates dropped sharply in the United States as evidence mounted of a coming recession, though few want to use that word. Third quarter economic growth numbers were released last week and they weren’t very good:
U.S. Economy Expanded at a 1.6% Annual Rate in Third Quarter

Joe Richter

Oct. 27 (Bloomberg) -- Economic growth in the U.S. cooled to a 1.6 percent annual rate in July through September, the slowest since early 2003, as housing slumped and the trade deficit widened.

The government's first estimate of the quarter's gross domestic product, the value of all goods and services produced in the U.S., shows growth slowed from a 2.6 percent pace in April through June, the Commerce Department reported today in Washington. A measure of inflation watched by the Fed eased.

Homebuilding declined by the most in 15 years, while the trade deficit widened as an acceleration in personal spending increased demand for foreign-made consumer goods. The fallout for the rest of the economy has been limited, economists said, and recent gains in corporate and consumer spending support the Federal Reserve's outlook for “moderate” growth.

“Housing-market woes took a lot out of overall growth, but there are increasing signs that the worst may be behind us,” Chris Rupkey, chief financing economist at Bank of Tokyo- Mitsubishi UFJ Ltd. in New York, said before the report.

“Consumers continue to spend, and really have the wind at their backs now that gasoline prices have fallen.”

Economists expected a 2 percent gain in GDP last quarter, according to the median estimate of 78 estimates in a Bloomberg News survey. Estimates of growth ranged from 1 percent to 3 percent. The Commerce Department's report is the government's first estimate of third-quarter output. It will be revised twice.

Slump in Home Building

Residential housing construction fell at a 17.4 percent annual rate last quarter, the biggest decline since the first quarter of 1991, after shrinking 11.1 percent in the previous three months. The decline in homebuilding subtracted 1.12 percentage points from third-quarter growth, the most in almost 25 years.

The trade deficit widened to $639.9 billion from $624.2 billion in the second quarter. The deficit subtracted 0.58 percentage point from GDP.

Companies added to stockpiles at a $50.7 billion annual rate last quarter after adding to inventories at a $53.7 billion pace in the second three months of the year. The figures subtracted 0.1 percentage point from third-quarter growth.

Ford Motor Co., the second-biggest U.S. automaker, said car and light truck sales dropped 17 percent during the quarter. The Dearborn, Michigan-based company cut third-quarter production by 11 percent, and plans to slash output by 21 percent this quarter.

Peoria, Illinois-based Caterpillar Inc., the world's biggest maker of earthmoving equipment, said last week that dealers started cutting back inventory in the third quarter. Sales of construction equipment such as bulldozers will be less than the company anticipated as home construction slows down, and the company said it expects a “sharp drop” in sales of truck engines.

There is evidence the slowdown in the economy was temporary.

Consumer Spending Rebounds

Consumer spending, which accounts for about 70 percent of the economy, rose 3.1 percent at an annual rate last quarter, compared with a 2.6 percent pace in the previous three months. Rising incomes and lower energy prices helped consumers weather the effects of falling home values, economists said.

The price of unleaded gasoline this month has averaged $2.25 a gallon, down from $2.84 a gallon average in the second quarter and more than $3 in July.
Business Investment

Business fixed investment, which includes spending on commercial construction as well as equipment and software, rose at an 8.6 percent annual rate in the third quarter, after rising at a 4.4 percent rate from April through June. Spending on new equipment and software rose 6.4 percent.

“Growth of both real consumer spending and business fixed investment turned stronger in the third quarter, and substantial declines in fuel prices since August are expected to lead to further acceleration in the current quarter,” Robert Mellman, an economist at JP Morgan Chase & Co. in New York, said before the report.

Fed policy makers held interest rates at 5.25 percent for a third straight meeting this week.

The government's personal consumption expenditures index, a measure of prices tied to consumer spending, rose 2.5 percent after a 4 percent rise in the second quarter. The index excluding food and energy, a measure favored by Fed policy makers, rose at a 2.3 percent annual rate after increasing at a 2.7 percent pace.

Optimists seized on the record highs in U.S. stocks and the decision by the Federal Reserve Board to leave interest rates unchanged. Whether the bulls or the bears are right about the next few years depends to a large degree on what happens to housing prices. A “correction” is okay but a crash is not.
Restructuring the U.S. economy – downward

October 28, 2006

Dr. Kurt Richebächer

The deficit country is absorbing more, taking consumption and investment together, than its own production; in this sense, its economy is drawing on savings made for it abroad. In return, it has a permanent obligation to pay interest or profits to the lender. Whether this is a good bargain or not depends on the nature of the use to which the funds are put. If they merely permit an excess of consumption over production, the economy is on the road to ruin.
- Joan Robinson, Collected Economic Papers, Vol. IV, 1973

Finally, the greatest boom in American housing history is going bust. The impact on the economy has only just begun to be felt. Demand for homes is sharply down, while the number of vacant dwellings is ballooning - up more than 40% for existing homes and more than 20% for new homes year over year. At issue now is the severity of the impending bubble aftermath.

It does not seem, though, that there is a lot of worrying around. There appears to be a widespread belief that the U.S. economy is now out of trouble because the Fed decided not to raise interest rates. We presume the following interpretation:

1. This is not just a pause, but the end of all rate hikes.

2. In the absence of an overheating economy, inflation is yesterday’s issue.

3. Steady or lower interest rates will boost the stock market.

4. As the Fed no longer tightens, the possibility of a hard landing can be dismissed.

5. Abundant liquidity continues to underpin the markets.

Treating bad economic news as good for the financial markets, Wall Street is running wild with more aggressive speculation. “The world economy is on track to grow at a 5.1% rate this year, but the risk of a severe global slowdown in 2007 is stronger than at any time since the September 2001 terror attacks on the United States,” said the International Monetary Fund in a report to finance ministers, mentioning two possible triggers: a sharp slowdown in the U.S. housing market or surging inflationary expectations that would force central banks to raise interest rates.

Taking this forecast into account, the sudden plunge of commodity prices may not be totally surprising. On the other hand, prices of risky assets and mortgage-backed securities have, despite the obvious problems in U.S. housing and consumer finance, held steady. Stock prices of U.S. lenders up to their necks in subprime, interest-only and negative-amortizing mortgages have been rising 5-10% since late August. Since hitting bottom in June, emerging stock markets have rebounded 20%. Developed international markets have risen by 12%, and U.S. stock markets by around 8%. A vertical slide by the yen since May suggests that yen carry trade is back with a vengeance.

Given the growing talk of impending recession in the United States, all this may appear rather surprising. The underlying rationale seems to be the assumption that this recession will be just another soft patch forcing the Fed to what the speculative community likes most: a return to easier money.

There is talk of recession, but definitely no recession scare. Popular perception appears to trust that the U.S. economy will again prove its outstanding resilience and flexibility. And are the balance sheets of private households not in excellent shape, as rising asset valuations have vastly outpaced the rise in liabilities over the years? The possible scary parts of the new development, a deeper recession and a precipitous decline in economic growth, have not yet come to the fore.

Over the past five years of recovery from the 2001 recession, U.S. economic growth has been “asset driven,” according to colloquial language. More to the point, protracted sharp rises in house prices served private households as the wand providing them with prodigal borrowing facilities to increase their spending. For years, it was the economy’s single motor. The Fed estimates that mortgage equity withdrawals exceeded $700 billion, annualized, in the first half of 2006.

In 2005, the last full year for which data are available, new borrowing by private households amounted to $1,241.4 billion. Now compare this with the following spending and income figures. Disposable personal incomes grew $354.5 billion in current dollars and $93.8 billion in inflation-adjusted dollars. Spending increased $530.9 billion in current dollars and $264.1 billion in chained dollars.

We have presented these figures to highlight the paramount importance of the large equity extractions on the part of private households for U.S. economic growth during the U.S. economy’s current recovery. Plainly, it prevented a much deeper recession. Absence of any wealth gains could have easily induced private households to do some saving out of current income.

For the consensus, the U.S. economy’s shallow recession in 2001 is the most splendid justification of Mr. Greenspan’s repeatedly expressed idea that it is better to fight the bubble’s aftermath with easy money than to prick it in its prime. This is plainly a gross misjudgment, because America’s shallowest recession was followed by five years of the shallowest economic recovery, with unprecedented large and lasting shortfalls in employment, income growth and business fixed investment.

Actually, there have been major changes in the U.S. economy’s pattern of employment and resource allocation, but altogether changes for the worse, not for the better. These structural changes are bound to depress U.S. economic growth in the long run.

The striking feature of the housing bubble - distinguishing it diametrically from an equity bubble in this respect - is its extraordinary credit and debt addiction. The reason is that it requires borrowing for two different purposes: first, for driving up house prices; and second, for the cash out of the capital gains. Every single dollar for this purpose has to be borrowed.

Since end-2000, American households have offset their badly lacking income growth with an unprecedented stampede into indebtedness, up so far by $5.3 trillion, or 77%. But as soaring house and stock prices added a total of $15.6 trillion to the asset side of their balance sheets, households miraculously ended up with an unprecedented surge in their net worth from $41.5 trillion to $53.8 trillion in the first quarter of 2006.

Referring to this fact, Fed Chairman Bernanke noted in a speech on June 13 that “U.S. households overall have been managing their personal finances well.”

Manifestly, the rapid creation of the housing bubble in 2001 did prevent a deeper recession. But this should raise the further question of how the housing bubble and its financial implications have affected the U.S. economy from a longer perspective. In other words, are they in better or worse shape today than in 2001 to weather the aftermath of the housing bubble? Our answer is categorical: Underlying cyclical and structural conditions have dramatically worsened.

In 2001, the Greenspan Fed could cushion the fallout from the bursting equity bubble with the creation of the housing bubble. This time, manifestly, there is no alternative bubble available to be inflated to cushion the fallout from the housing bubble. Rather, there is a high probability that the popping housing bubble will pull the stock market down with it. That is the first ominous difference between 2001 and today.

The second ominous difference is that the economy and the financial system have accumulated structural imbalances and debts as never before in history. Vastly excessive borrowing for consumption and speculation has turned the U.S. economy into a colossus of debts with a badly impaired capacity of income creation.

And finally, equity and real estate bubbles are very different animals, of which the latter is manifestly the far more dangerous. In its World Economic Outlook of April 2003, the International Monetary Fund published a historical study, titled When Bubbles Burst, and explained differences in the effects between bursting equity and housing bubbles. It stated, in brief, the following:

First, the price corrections during housing price busts averaged 30%, reflecting the lower volatility of housing prices and the lower liquidity in housing markets. Second, housing price crashes lasted about four years, about 1 1/2 years longer than equity price busts. Third, the association between booms and busts was stronger for housing than for equity prices... Fourth, all major bank crises in industrial countries during the postwar period coincided with housing price busts.

The severe cases of bursting housing bubbles badly affecting the banking systems in the late 1980s were in England, the Nordic countries and Switzerland, not to speak of Japan, where, however, commercial real estate played the key role.

The seeming balance between good and bad economic news probably cannot last, as the hyper-complexification of financial markets will lead to instability and wild swings. Here’s George Ure:
GBO: Data Suggests Global "Weimarization"
Thursday October 26, 2006

GBO= Global Blow Off and The Fed, as we reported yesterday, didn't budge in their rate quandary - at least for now. As a result, the US dollar is down some this morning - and as the dollar goes down, the effective price of gold goes up - nearly $5 for a while this morning.

This is all indicative of the confusion caused by the most complex financial markets in history. Complexification, as we've called it, results in some very strange things. Last week, I explained how the bundling of nonperforming loans actually drove up the stock market (by securitization of bad debt into asset-backed securities [ABS's]). This week, we can consider the incredibly complex pressures on the dollar. And a phenomena that I'll just call Global Weimarization, named after the most explosive inflation in recorded history. A few to ponder:

· Global Hidden Hyperinflation is here. The dollar should be going down because of the continuously bloating federal spending - wars aren't free. By itself, this would argue for a declining dollar because we're just printing up more paper, but how much isn't clear since the Fed knew this was all coming and hid their M-3 broad monetary measure back in March of this year. Suckers and fools is what they must figure us for. But you know that inflation is running like a forest fire globally, right? Global inflation is immense - mind boggling. In the UK, for example, the rate of inflation is an annualized 14.1%! And Interfax reports today the money supply of Russia is up an amazing 28.2% (measured by the Russian equivalent of M-2) by 28.2% year to date!

· Other data points supportive of the "Global Weimarization" mere include Israel, where inflation has cooled off (!) to 12% a year, and China where inflation is percolating along at 16.8% year on year (YoY) on their equivalent of M-2.

· Of course, one way for the dollar to hold its own would be for the Fed to pay foreigners more money to hold our paper, but they couldn't do that at yesterday's meeting because of the pending elections. Thus, in December, don't be surprised at a Fed rate hike - which will lead to more pain in the housing industry - because the Fed needs others to buy our paper and a rate hike is an effective discount increase. As Mark Brandly writes for theLudwig von Mises Institute, the days of 12¢ hamburgers and $600 cars is just a dream when the printing presses are turned on globally.

· Oil is showing some of the effects of the slightly weaker dollar this morning. But, remember that on a utility value basis, oil is worth about the same now as always. It's needed for fuel, plastics, and the rest. But when the dollar drops in purchasing power, the price we pay for oil seems to go up because of the reduced wallop of the underlying dollars. It takes more "weak paper" to buy the same goods.

· And now - this interesting little revelation for you: There's a case to be made that if the dollar drops, at least initially, the stock market could be propelled upward. The reason? There was once a time when stocks were valued based on their ability to produce earnings and dividends (e.g. free cash) to owners. But lately, ownership of stocks has changed fundamentally. Stocks in some ways act like real estate insofar as you're not buying a dividend stream, you're buying a "property" and with that you're buying "market position" and "niche." Further, a stock - even a declining one - has securitization value - so you can roll more layers of debt into play.

Just as domestic inflation in moderation can drive up the price of an asset like an apartment building, so too can inflation (masquerading as the declining value of the dollar) drive up the price of stocks because they are now more valued as assets than free cash flow generators. As long as the future looks secure, there are probably more curious distortions ahead - thanks to derivatives and the whole process of complexification.

…If all of this is too complex for you, consider this: In the Weimar experience, the price of everyday goods and services went up. In the present GBO, fueled by derivatives and debt-piled-on debt, the financial markets where layers of paper feed more layers of paper, we might see a hyperinflation scenario where the bulk of inflation is contained within financial market, debt instruments, and the like.

Oh, by the way, if you or the folks managing your money get this wrong, your life savings could disappear. Stuff happens though, right? I think the von Mises folks call this the "Crackup boom."

The Cryptogon blogger, Kevin, points to manipulation and “plunge control” to explain the continued stability of stock markets:

The Eerie "Bid" in the Equity Markets

This thing is the greatest show on earth. You can calmly explain why these markets can't be viable---list a thousand sources, two thousand, whatever---and then just stand back as you watch the antics in the bigtop get more dangerous and incomprehensible.

Remember my recent ramble about short squeezes:

When so many people get short, it doesn't take much to shake them out of their positions and actually cause a strong (temporary) rally! All They have to do to cause a massive short covering rally is to start buying index futures, in a sustained way, for a few minutes and * boom * it's on. Many shorts will yield to the "unseen hand of the market" and cover their positions. It only takes a couple of hundred million leveraged dollars to touch off one of these moves. I've seen it happen dozens of times. TR and I used to have this radar thing scanning the market, looking for "weird" momentum, among other things. A couple of times, we got alarms on nearly the entire NASDAQ 100 and lots of lower tiered relatives.

Once, TR yelled out, "What the hell happened!?"

I said, "The 'unseen hand of the market' just slapped everyone across the face and said, 'I own this show.'"

The clinical term for this is buy program (or sell program) and if you have a way of visualizing the market, like we did, it's an awe inspiring thing. Most of the time, the market looks mostly like semi-random noise. Sometimes, you get more up trending noise. Sometimes, more down trending noise. Occasionally, though, nearly all of the money goes mostly one way or the other. These are the times when the wizard behind the curtain (Goldman Sachs, Morgan Stanley, Lehman Brothers, etc.) starts pulling the big levers.

Well, as usual, don't take my tinfoil tainted word for it. I mean, it's all conspiracy theory, right?

Let Raymond James Chief Investment Strategist, Jeff Saut, introduce you to the "mysterious buyers" concept... After he assures you that he's not a conspiracy theorist.

What's the matter, Jeff, tinfoil hat doesn't match your suit and tie?

...It's also worth noting that we're not conspiracy theorists, believing that Lee Harvey Oswald acted alone and that George W. Bush really did win the election. Yet, there remains an eerie "bid" in the equity markets since those July lows. For example, markets typically rally, then correct by about one-quarter to one-third of that rally's point gain, before beginning another rally phase. After that phase, they again correct by one-quarter to one-third before re-rallying. This, however, has not been the case recently. Indeed, every time it looked like the indices were about to correct, mysterious buyers materialized in the futures markets. Those "buyers" tend to widen the futures premiums so far above the cash markets that it attracts arbitrageurs. The arbs, in turn, short the futures and buy the appropriate baskets of stocks. That operation allows the arbs to "lock in" the spread between the futures price and what they paid for the basket of stocks, assuring them a risk-less profit and, in the process, driving stocks higher.


And,

This show would have already come down if it wasn't for the macroeconomic black ops. Rather than allowing this thing to die, it is being kept in an undead state for as long as possible.

With the debt closing in on $9 trillion, we're already living well within the realm of financial make believe. Could the debt reach $46 trillion or more? There's no purely economic reason why it couldn't. I don't see any difference between $9 trillion and $100 trillion. IT'S ALL FAKE AT THIS POINT.

Here's a list of things that are---unlike "Economics"---very real:

Water scarcity

Energy scarcity

Food scarcity

Raw materials scarcity

Weather cataclysms/global warming

In a word, 'Overshoot'

Any one of those issues could deliver a kill shot to this horror show we call the global economy. And, as I'm sure you already know, they're all starting to impact at the same time. But never mind all of that, just pay attention to "the terrorists." The terrorists! LOOK OUT!!! THE TERRORISTS!!!

AHHHHHHHHHHHHHHHHHHH!


The following Associated Press headline alone is scary enough:

GAO Chief Warns Economic Disaster Looms

Matt Crenson, AP National Writer

October 28, 2006

GAO Chief Takes to Road, Warns Economic Disaster Looms Even As Many Candidates Avoid Issue

AUSTIN, Texas (AP) -- David M. Walker sure talks like he's running for office. "This is about the future of our country, our kids and grandkids," the comptroller general of the United States warns a packed hall at Austin's historic Driskill Hotel. "We the people have to rise up to make sure things get changed."

But Walker doesn't want, or need, your vote this November. He already has a job as head of the Government Accountability Office, an investigative arm of Congress that audits and evaluates the performance of the federal government.

Basically, that makes Walker the nation's accountant-in-chief. And the accountant-in-chief's professional opinion is that the American public needs to tell Washington it's time to steer the nation off the path to financial ruin.

From the hustings and the airwaves this campaign season, America's political class can be heard debating Capitol Hill sex scandals, the wisdom of the war in Iraq and which party is tougher on terror. Democrats and Republicans talk of cutting taxes to make life easier for the American people.

What they don't talk about is a dirty little secret everyone in Washington knows, or at least should. The vast majority of economists and budget analysts agree: The ship of state is on a disastrous course, and will founder on the reefs of economic disaster if nothing is done to correct it.

There's a good reason politicians don't like to talk about the nation's long-term fiscal prospects. The subject is short on political theatrics and long on complicated economics, scary graphs and very big numbers. It reveals serious problems and offers no easy solutions. Anybody who wanted to deal with it seriously would have to talk about raising taxes and cutting benefits, nasty nostrums that might doom any candidate who prescribed them.

"There's no sexiness to it," laments Leita Hart-Fanta, an accountant who has just heard Walker's pitch. She suggests recruiting a trusted celebrity -- maybe Oprah -- to sell fiscal responsibility to the American people.

Walker doesn't want to make balancing the federal government's books sexy -- he just wants to make it politically palatable. He has committed to touring the nation through the 2008 elections, talking to anybody who will listen about the fiscal black hole Washington has dug itself, the "demographic tsunami" that will come when the baby boom generation begins retiring and the recklessness of borrowing money from foreign lenders to pay for the operation of the U.S. government.

"He can speak forthrightly and independently because his job is not in jeopardy if he tells the truth," said Isabel V. Sawhill, a senior fellow in economic studies at the Brookings Institution.

Walker can talk in public about the nation's impending fiscal crisis because he has one of the most secure jobs in Washington. As comptroller general of the United States -- basically, the government's chief accountant -- he is serving a 15-year term that runs through 2013.

This year Walker has spoken to the Union League Club of Chicago and the Rotary Club of Atlanta, the Sons of the American Revolution and the World Future Society. But the backbone of his campaign has been the Fiscal Wake-up Tour, a traveling roadshow of economists and budget analysts who share Walker's concern for the nation's budgetary future.

"You can't solve a problem until the majority of the people believe you have a problem that needs to be solved," Walker says.

Polls suggest that Americans have only a vague sense of their government's long-term fiscal prospects. When pollsters ask Americans to name the most important problem facing America today -- as a CBS News/New York Times poll of 1,131 Americans did in September -- issues such as the war in Iraq, terrorism, jobs and the economy are most frequently mentioned. The deficit doesn't even crack the top 10.

Yet on the rare occasions that pollsters ask directly about the deficit, at least some people appear to recognize it as a problem. In a survey of 807 Americans last year by the Pew Center for the People and the Press, 42 percent of respondents said reducing the deficit should be a top priority; another 38 percent said it was important but a lower priority.

So the majority of the public appears to agree with Walker that the deficit is a serious problem, but only when they're made to think about it. Walker's challenge is to get people not just to think about it, but to pressure politicians to make the hard choices that are needed to keep the situation from spiraling out of control.
To show that the looming fiscal crisis is not a partisan issue, he brings along economists and budget analysts from across the political spectrum. In Austin, he's accompanied by Diane Lim Rogers, a liberal economist from the Brookings Institution, and Alison Acosta Fraser, director of the Roe Institute for Economic Policy Studies at the Heritage Foundation, a conservative think tank.

"We all agree on what the choices are and what the numbers are," Fraser says.
Their basic message is this: If the United States government conducts business as usual over the next few decades, a national debt that is already $8.5 trillion could reach $46 trillion or more, adjusted for inflation. That's almost as much as the total net worth of every person in America -- Bill Gates, Warren Buffett and those Google guys included.

A hole that big could paralyze the U.S. economy; according to some projections, just the interest payments on a debt that big would be as much as all the taxes the government collects today.

And every year that nothing is done about it, Walker says, the problem grows by $2 trillion to $3 trillion.

…Why is America so fiscally unprepared for the next century? Like many of its citizens, the United States has spent the last few years racking up debt instead of saving for the future. Foreign lenders -- primarily the central banks of China, Japan and other big U.S. trading partners -- have been eager to lend the government money at low interest rates, making the current $8.5-trillion deficit about as painful as a big balance on a zero-percent credit card.

In her part of the fiscal wake-up tour presentation, Rogers tries to explain why that's a bad thing. For one thing, even when rates are low a bigger deficit means a greater portion of each tax dollar goes to interest payments rather than useful programs. And because foreigners now hold so much of the federal government's debt, those interest payments increasingly go overseas rather than to U.S. investors.

More serious is the possibility that foreign lenders might lose their enthusiasm for lending money to the United States. Because treasury bills are sold at auction, that would mean paying higher interest rates in the future. And it wouldn't just be the government's problem. All interest rates would rise, making mortgages, car payments and student loans costlier, too.

A modest rise in interest rates wouldn't necessarily be a bad thing, Rogers said. America's consumers have as much of a borrowing problem as their government does, so higher rates could moderate overconsumption and encourage consumer saving. But a big jump in interest rates could cause economic catastrophe. Some economists even predict the government would resort to printing money to pay off its debt, a risky strategy that could lead to runaway inflation.

Macroeconomic meltdown is probably preventable, says Anjan Thakor, a professor of finance at Washington University in St. Louis. But to keep it at bay, he said, the government is essentially going to have to renegotiate some of the promises it has made to its citizens, probably by some combination of tax increases and benefit cuts.

But there's no way to avoid what Rogers considers the worst result of racking up a big deficit -- the outrage of making our children and grandchildren repay the debts of their elders.

"It's an unfair burden for future generations," she says.


Notice that the establishment “consensus” is that U.S. citizens, who already have the worst benefit package of any wealthy country, must have their benefits cut further to solve the debt problem. Notice that they never suggested that the U.S. might save some money by not attacking any more countries. Military spending has most likely at least doubled during the Bush II years, with all the “supplemental” war spending included. If you include spending on the fascist “homeland security” category, it has probably tripled. What did the citizens ever get for all that money spent? The United States could easily avoid Medicare and Social Security cuts by reducing military spending to $100 billion a year (it is now over $500 billion). That would mean giving up the overseas empire, but it looks like the U.S. will have to give that up anyway. A quick, graceful retreat from world hegemon status would be much better for the United States than going down in a burst of flames. Empires in the fiscal shape the United States is in do not last.

Of course no political leader could do anything like that as things stand now. That’s no surprise, but the U.S. empire doesn’t even seem to have an establishment with enough foresight to act in it’s own and the system’s best interest. Or perhaps the establishment no longer has enough power to influence policy. Either the military-industrial-complex beast can no longer be tamed by anyone or there is some other group in control.

Finally, in the “Why am I not surprised?” department:

M.B.A.s: The Biggest Cheaters

MarketWatch

Thomas Kostigen

Graduate business students take their cue from corporate scandals

The corporate scandals that have plagued Wall Street in recent history are setting a fine example for young students looking to make their mark in the business world: They are learning to cheat with the best of them.

Students seeking their masters of business administration degree admit cheating more than any other type of student, from law to liberal arts.

"We have found that graduate students in general are cheating at an alarming rate and business-school students are cheating even more than others," concludes a study by the Academy of Management Learning and Education of 5,300 students in the U.S. and Canada.

Many of these students reportedly believe cheating is an accepted practice in business. More than half (56%) of M.B.A. candidates say they cheated in the past year. For the study, cheating was defined as plagiarizing, copying other students' work and bringing prohibited materials into exams. "

To us that means that business-school faculty and administrators must do something, because doing nothing simply reinforces the belief that high levels of cheating are commonplace and acceptable," say the authors of the academy report, Donald McCabe of Rutgers University, Kenneth Butterfield of Washington State University and Linda Klebe Trevino at Penn State University.

However, what's holding many professors back from taking action on cheaters is the fear of litigation. To that end, the academic world is becoming much more like the business world where those who walk with a heavy legal stick can swat others out of the way; it may be time to impose a whistleblower statute for students and teachers.

Yes, it seems to have come to that. With 54% of graduate engineering students, 50% of students in the physical sciences, 49% of medical and other health-care students, 45% of law students, 43% of graduate students in the arts and 39% of graduate students in the social sciences and humanities readily admitting to cheating, something must be done to correct course.

McCabe notes that many more students probably cheat than admit in the study. He and the others recommend a series of efforts based upon notions of ethical community-building be put into practice at the graduate-school level. The essence of an ethical community is that by doing wrong -- cheating in this case -- all of the stakeholders in the community are harmed, not just the wrongdoer.

Curriculum and education go along with the community-building, so there is greater awareness of actions and ramifications as well.

In the real business world efforts are being made to create greater transparency and show shareholders, for instance, that they are a community of stakeholders with a common vested interest. This should be obvious, but to many investors it isn't. Profit is achieved in a vacuum and the awareness of fellow shareholders (and their actions) is relatively nil.

Shareholder resolutions are items around which bands of investors can unite. But even while resolutions are on the rise only a minority of shareholders bother to vote on them.

In other words, shareholders, much like professors these days, largely choose to look the other way when it comes time to curb abuse. That is until after the fact when all those M.B.A.s get caught cheating in the real world.

Honor code

More has to be done to enforce ethical codes well before the bad act occurs. By then it is too late. Teaching graduate students that ethics matters in business should be a matter of course, not a direction to avoid.

Faculty, the authors say, should "engage students in an ongoing dialogue about academic integrity that begins with recruiting, continues in orientation sessions and initiation ceremonies, and continues throughout the program." It may also include initiating an honor code, preferably one that emphasizes the promotion of integrity among students rather than the detection and punishment of dishonesty.

Promote the good not the bad. Yet at the top of those companies most ensnared in ethical scandal sat a chief executive with an M.B.A.

Graduate students in journalism weren't singled out in the study. Interestingly, however, last week Newsweek announced that it is teaming with Kaplan Inc., the education service provider, to offer an online business degree called Kaplan University/Newsweek MBA.

Ethics in journalism meet ethics in business, and Styx be crossed.

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