Signs of the Economic Apocalypse, 11-6-06

From Signs of the Times, 11-6-06:

Gold closed at 629.10 dollars an ounce on Friday, up 4.4% from $602.30 at the close of the previous Friday. The dollar closed at 0.7863 euros Friday, up 0.2% from 0.7848 euros for the week. That put the euro at 1.2718 dollars compared to 1.2742 at the end of the week before. Gold in euros would be 494.65 euros an ounce, up 4.6% from 472.69 for the week. Oil closed at 59.14 dollars a barrel Friday, down 2.7% from $60.75 at the close of the previous week. Oil in euros would be 46.50 euros a barrel, down 2.5% from 47.68 for the week. The gold/oil ratio closed at 10.64, up 7.4% from 9.91 at the end of the week before. In U.S. stocks the Dow closed at 11,986.04 Friday, down 0.9% from 12,090.26 for the week. The NASDAQ closed at 2,330.79 Friday, down 0.9% from 2,350.62 at the close of the previous Friday. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.71%, up three basis points from 4.68 for the week.

Gold rose sharply last week while oil dropped. Oil is dropping in reaction to a number of reports indicating an economic slowdown. Stock prices may have also begun to reflect that as the Dow dipped below 12,000 last week after six days of losses.

Is a recession looming?

Chad Hudson
November 1, 2006

The economic news took a decidedly negative tone over the past week. The Commerce Department reported that economic growth slowed to 1.6% in the third quarter. This was below the 2.6% pace from the second quarter and lower than the 2.0% growth economists forecasted. Residential construction and the increase in imports were the two largest drags on economic growth. Residential construction dropped 17.4%, the largest drop since December 1991, and imports surged 7.8%. An increase in imports means that consumers purchased more goods produced oversees and not here, and this means that total economic activity was lower than total receipts would indicate. The record level of imports shaved 128 basis points off economic growth, while the drop in residential construction reduced growth by 112 basis points. This was the largest negative impact residential housing has had on economic growth since fourth quarter of 1981. Non-residential construction increased 14%, a deceleration from the 20.3% gain last quarter, and contributed to 88 basis points to the growth rate. While commercial construction has strengthened as residential construction has slumped, it has not been able to offset the full impact of the decline in residential construction.

Personal consumption accelerated in the third quarter, up 3.1%, led by an 8.4% increase in durable goods. A few economists have commented that a portion of this strength is attributed to the accounting treatment of automotive sales. Joe Carson, director of economic research at AllianceBernstein and former economists with the Commerce Department, said that the drop in wholesale prices of SUVs and light trucks as automakers cleared out 2006 inventory made production look stronger than it actually was. Without this distortion, economic growth would have only been 0.9%, and will be reversed this quarter, lowering reported GDP. The other item economists noted was the buildup of inventories. This will likely reduce fourth-quarter GDP as inventories have to be worked off, curtailing production.

Besides the weaker than expected GDP report, the ISM survey also showed that the manufacturing sector has decelerated. The survey of supply mangers fell 1.7 points to 51.2. Economists were expecting a slight increase to 53. The prices paid component was the largest negative factor. Prices paid dropped 14 points to 47, the lowest it has been since February 2002. Obviously the drop in energy prices fueled the plunge. Production and new orders also dropped, but remained over 50. Employment rose by 1.8 points to 50.8.

The tight labor market has supported consumer spending. The unemployment rate has remained low and income growth has accelerated over the past two years. On Monday, the Commerce Department reported that personal income increased 0.5% in September and has gained 6.8% over the past year. The wage & salary component has jumped 7.6% from a year ago. The report also revealed that spending increased only 0.1% in September and has increased by 5.9% over the past year. The string of negative savings rate continued for the eighteenth consecutive month, but is was the highest its been since May 2005.

Last month, the Labor Department reported that only 58,000 jobs were created in September. This was the lowest number of new workers since last October, which was skewed by the hurricanes. The ADP Employment Report showed that 128,000 jobs were added in October. This is close to the 120,000 new jobs economists are expecting. While most indications show that the labor market remains healthy, Friday’s reports will be very important considering the September report was much weaker than expected.

While most economic indicators point to a healthy labor market, the latest consumer confidence survey from the Conference Board revealed that consumers have gotten less optimistic. The percentage of respondents that said that jobs were hard to get jumped 1.1 points to 22.0, the highest since December 2005. This was one of main causes of the surprise decline in the survey. Economists were expecting confidence to increase to 108, but instead it dropped half-a-point to 105.4. September was revised higher by 1.4 points. Interestingly, the lower optimism regarding the labor market pulled down the present situation index 3.4 points to 124.7. But, expectations rose 1.6 points to 92.6. This is the highest level since December 2005. The present situation index fell 3.4 points to 124.7. This was the second lowest level this year. The weekly ABC News/Washington Post survey jumped four points to -3, the highest since January 2004. The decline in energy prices has been thought to be a leading reason for the jump in consumer confidence. But this might not be causing consumers to spend more. The buying climate component of the ABC News survey didn’t budge this week, but views on the economy and personal finances surged to multi-year highs.

Wal-Mart announced that its same store sales increased 0.5% in October, the smallest gain in six years. Retailers will report October same store sales on Thursday. The International Council of Shopping Centers estimates that October sales increased 3.0%. While this might be achievable, it appears consumers have started to tire. The past two weeks have seen a sharp declaration in same store sales. As energy prices declined since late summer the ICSC has reported that weekly chain store sales accelerated from the 2% level in late July and early August to the 4% level in September. Since topping out at 4.9% in mid-September, chain store sales increased only 2.3% last week. Part of the explanation is the strong sales experienced last year, making for difficult comparisons this year. These comparisons get even more difficult in November. Same store sales increased by more than 4% in three of the four weeks in November last year.

Richard Bernstein, Merrill Lynch’s chief economist, published a note this week commenting that according to its recession-risk indicator, which is based on New York Fed’s yield curve model that normalizes for the level of interest rates, the chance of a recession is 51% for the next year. The last time it surged past 50% was in 2001. Questions regarding the strength of the economy have heightened over the past few weeks and will likely continue into 2007. If the economy slips into recession that includes a slowdown in consumer spending, the economic downturn will be much more severe than the previous recession.

Thoughts like that led to the faltering of the stock market in the United States:

U.S. Stocks Snap Five-Week Winning Streak; Wal-Mart Declines

By Michael Patterson

Nov. 4 (Bloomberg) -- U.S. stocks fell this week, snapping the longest such winning streak since 2005, as reports on manufacturing and consumer spending suggested that the economy may slow enough to curtail profit growth.

Retailers led the decline after Wal-Mart Stores Inc. forecast its worst monthly sales performance in more than 10 years and a gauge of consumer confidence unexpectedly dropped. Telecommunications shares slumped as Verizon Communications Inc. reported earnings that trailed some analysts' estimates.

Data that showed rising labor costs and falling unemployment also damped optimism that the Federal Reserve may cut interest rates. The Dow Jones Industrial Average extended its retreat from a record for a sixth day, sliding below the 12,000 level it had crossed for the first time ever last month.

“The market has priced in a pretty rosy situation,” said Alec Young, an equity market strategist at Standard & Poor's in New York. “You've got a situation where growth is slowing, but the Fed is not riding to the rescue right away.”

For the week, the Dow industrials dropped 0.9 percent to 11,986.04. The 30-stock gauge has retreated every session since reaching a record on Oct. 26, the longest daily losing streak since June 2005.

The Standard & Poor's 500 Index declined 1 percent to 1364.30, its biggest drop in almost three months. Both the Dow average and the S&P 500 fell for the first time in six weeks.

A slump in shares of Whole Foods Market Inc. weighed on the Nasdaq Composite Index, which slid 0.8 percent to 2330.79.

November Retreat

Expectations that better-than-expected earnings and a drop in oil prices will support economic growth without spurring inflation had sent the Dow industrials to a record on Oct. 26, while the S&P 500 reached a level not seen since November 2000.

The gauges have stumbled since then as data showed the economy grew at the lowest rate in more than three years, manufacturing slowed and labor costs increased.

Manufacturing in the U.S. expanded at the slowest pace in more than three years last month, a private report indicated on Nov. 1. The Institute for Supply Management's factory index fell to 51.2 from 52.9 in September. Economists in a Bloomberg News survey expected 53. Readings above 50 signal expansion.
Separate data indicated that consumer spending unexpectedly slowed even as incomes rose.

The Commerce Department said personal spending increased 0.1 percent in September, down from a 0.2 percent gain the previous month. Economists expected a 0.2 percent rise. Incomes increased 0.5 percent in September.
Wal-Mart

The report, along with a forecast from Wal-Mart, suggested that oil's slide from a July record may do little to bolster household spending in the holiday shopping season.

Wal-Mart fell 6.3 percent to $47.53 for the worst performance in the Dow average. The world's largest retailer forecast that sales at stores open at least a year will be unchanged this month as disappointing clothing sales and disarray from store renovations hurt results. The estimate means Wal-Mart is headed for its worst performance since April 1996.

Whole Foods plunged 29 percent to $46.26 for the biggest slide in the S&P 500. The largest U.S. natural-foods grocer had its biggest one-day plunge ever yesterday after cutting its 2007 sales forecast.

Retailers Slide

The declines in Wal-Mart and Whole Foods helped send a gauge of food and household products merchants down 4.8 percent, the biggest drop among two-dozen S&P 500 industry groups.

A separate measure of retailers, including Gap Inc., slid 2.6 percent. The Conference Board said its index of consumer sentiment fell to 105.4 last month from a revised 105.9 in September. Economists had estimated a reading of 108.

Gap retreated 5.6 percent to $19.57. The largest U.S. clothing chain said that third-quarter profit was about 21 cents to 23 cents a share. Analysts expected 23 cents, the average estimate in a survey by Thomson Financial.

…Reports on labor costs and unemployment suggested that central bankers may have little room to cut interest rates even as profit growth decelerates.

U.S. wage costs increased at a 3.8 percent pace in the third quarter, the Labor Department said, exceeding economists' estimates for a 3.4 percent gain. Costs are up 5.3 percent in the 12 months though September, the biggest gain since 1982.

That data may undermine the Fed's statement last week that inflation is “likely to moderate over time.” Policy makers kept their target rate at 5.25 percent the past three meetings, after 17 straight increases.

‘Spooked’

“The market's kind of spooked, a little bit afraid of inflation right now,” said Todd Clark, director of trading at Nollenberger Capital Partners, a San Francisco-based brokerage firm.

The unemployment rate fell to a five-year low of 4.4 percent in October, while companies added more workers in previous months than indicated, the Labor Department said.

Before the jobs report, interest-rate futures showed traders saw a 14 percent chance the central bank would cut the Fed funds target rate to 5 percent by the end of January. Following the report's release, the odds of a rate cut in both January and February fell to zero…

The jobs numbers actually came in around 90,000 for October, yet it was announced that unemployment hit a five-year low. There was a lot of skepticism about the unemployment number, coming as it did just in time for Bush to tout a revived economy on the campaign trail. But it seems to me anecdotally that it might well be true that unemployment is at a Bush II era low. You tend to get a lot of people working when the government borrows hundreds of billions and spends it on a disastrous war. You also get a lot of people working when the people themselves have borrowed vast sums and spent it all.

Unemployment rate lowest in 5-1/2 years

Glenn Somerville

Fri Nov 3, 5:10 PM ET

WASHINGTON (Reuters) - The U.S. unemployment rate fell to a 5-1/2 year low in October and hiring in the two prior months was revised up, the government said on Friday, leading financial markets to slash bets on interest-rate cuts.

The U.S. unemployment rate fell to a 5-1/2 year low in October and hiring in the two prior months was revised up, the government said on Friday, leading financial markets to slash bets on interest-rate cuts.

The rosier-than-expected job picture, days before next Tuesday's congressional elections in which ruling Republicans are considered at risk of losing control, caused rejoicing among President George W. Bush's party but Democrats countered that most Americans still say household budgets are under pressure.

The Labor Department said 92,000 jobs were added in October. But it said hiring in each of September and August was far more vigorous than first thought, implying enough economic vigor to keep growing despite a housing-industry slowdown.

September's job-creation total was revised up to 148,000, nearly three times the 51,000 reported a month ago, and there were 230,000 new jobs in August instead of 188,000.

The unemployment rate fell in October to 4.4 percent from 4.6 percent in September. It was the lowest jobless rate since 4.3 percent in May 2001.

…Analysts said the jobs data adds to confusion about the economy's direction, since it comes just a week after the government reported the weakest expansion in more than three years in the third quarter. Gross domestic product slowed to a 1.6 percent annual rate of growth from 2.6 percent in the second quarter.

EARNINGS UP

Notwithstanding softer overall growth, the Labor Department said average hourly earnings in October rose 0.4 percent to $16.91 -- higher than the 0.3 percent that analysts had anticipated -- while the average workweek edged up to 33.9 hours from 33.8. Over the year, average hourly earnings have risen by 3.9 percent, the department said.

The combination of slower growth and rising wages has to be unsettling for economic policy-makers, analysts said.

“The Fed would have liked the unemployment rate to jump 0.2 percentage point and payrolls to have been revised downward,” said economist Joel Naroff of Naroff Economic Advisors in Holland, Pennsylvania. “They got the worst of all worlds and any thoughts of a near-term rate cut should be out the window.”

Hugh Johnson, chief investment officer for Johnson Illington Advisors in Albany, New York, said the report underlined a tightening labor market that could mean future rate hikes instead of reductions.

“There's tightness showing up in the decline in the unemployment rate and in the upward pressure on wages, which were stronger than expected,” Johnson said. “This will certainly give hawks on the Federal Open Market Committee some ammunition.”

The payroll report is calculated from two separate surveys of households and businesses. The household survey showed that a whopping 437,000 more people were employed in October.

The business survey showed most of the new hiring in October was in service industries, where 152,000 new jobs were created, while goods-producing industries shed 60,000 jobs.

The question is how long will this last? One sign of nervousness in those who can pump up the stock market is the recent announcement by the Securties and Exchange Commission (SEC) of a proposal to drastically reduce margin requirements, the amount a purchaser of securities must put up towards a purchase thus pumping more (borrowed) money into the markets:

Curious Change in Margin Requirements
Bob Hoye
October 31, 2006

Through the SEC, the Fed controls margin requirements and a recent announcement was described by the deputy director of the SEC as “a very significant change”. Remember that this is essentially the same Fed and SEC that argued that no increases were needed during the late 1990s' tech mania.

Now they are talking about lowering margin requirements for institutions on stocks, options, and futures. Now ranging from 25% to 50%, the proposal is to drop them to 15%.

…Traditionally, the Fed raised margin requirements as a stock boom matured and then lowered them near the end of the inevitable contraction. Despite the remarkable intensity of the 2000 mania, margin requirements were not increased. Perhaps the Fed rationalized this non-action as not wanting to be seen doing anything that could be construed as breaking the mania - a curious abandonment of touted contra-cyclical genius.

Why then the “significant change” in margin requirements now?

An answer could be found in reviewing the last time a senior central bank lowered margin requirements close to the peak of a boom, and that was in early 1990.

At the peak of the Tokyo mania, the Japan Times headline “Economists Believe The coming Decade Will Be A Golden Era” (December 26, 1989). Our May 1, 1990 edition reviewed the initial decline as follows.

The main problem is that everyone has always expected the Japanese government to support the stock market. With the first break in Tokyo, the authorities lowered margin requirements and margin accounts bought. So far as we can tell, most sharp breaks at the end of a Bull market are caused by the liquidation of speculative positions.

Usually with this, there is a reduction in margin debt. In Tokyo's case, the market sold off 20% with a substantial rise in margin debt. This is a very vulnerable stock market.

That edition pointed out that after such a mania the index could decline to about 18% of the high. The low in 2003 was 19.5% of the high.

Obviously, on the initial break, pain to big players was sufficient to prompt concerned policymakers to lower margin requirements. As noted at the time, this was a grave error and yet another example of naïve policymakers exacerbating natural market forces.

In looking at the senior indexes and credit spreads, the conviction is that nothing can go wrong. Essentially, this is based upon the short-lived folly that the last rate hike is a good thing.

Beneath the ebullient veneer is a serious problem in the housing market which, with a huge 50% of their assets committed to mortgages, will feed into commercial banks. The other problem is the threat of more blowups in hedge-fund-land.

Possibly these two threatening conditions have prompted the discussion about reducing margin requirements, which would likely be as impractical as the one at the end of the Tokyo bubble.

The stock market supposedly also likes divided government in the United States, so the political news of the past week, with the Democratic party poised to gain control of the House of Representatives but probably not the Senate, should have boosted the markets. The grave desperation of the politcal situation in the United States, however, does not bode well for the markets. The leading news organs of the four main branches of the military are all caming out with editorials Monday calling for Defense Secretary Rumsfeld to resign. This, coming the day before an election, is as close to a military coup as the U.S. has had in a long time. Yet Bush last week said that Cheney and Rumsfeld will continue at their posts for the rest of his term. Bush also in his deluded fashion keeps talking about “victory” in Iraq, but serious analysts are now discussing the best way to manage the defeat. The difference between a well-managed defeat and a chaotic, poorly managed one could spell the difference in whether or not the U.S. empire survives the second Bush administration. The scale of the disaster cannot be overstated, yet financial markets in the United States go on as if nothing out of the ordinary is happening:

“The American Era in the Middle East Has Ended”
Baghdad is Surrounded

By Mike Whitney

November 2, 2006

Don Rumsfeld is not a good leader. In fact, he is a very bad leader. Leadership is predicated on three basic factors: Strong moral character, sound judgment, and the ability to learn from one's mistakes. None of these apply to Rumsfeld. As a result, every major decision that has been made in Iraq has been wrong and has cost the lives of countless Iraqis and American servicemen. This pattern will undoubtedly continue as long as Rumsfeld is the Secretary of Defense.

Here's a simple test: Name one part of the occupation of Iraq which has succeeded?

Security? Reconstruction? De-Ba'athification? Dismantling the Iraqi military? Protecting Saddam's ammo-dumps? Stopping the looting? Body armor? Coalition government? Abu Ghraib? Falluja? Even oil production has been slashed in half.
Every facet of the occupation has been an unmitigated disaster. Nothing has succeeded. Everything has failed.

Everything.

Never the less, Rumsfeld assures us that “these things are complicated” and that we should just “Back off”.

It was Rumsfeld's decision to replace America's first Iraqi Viceroy, General Jay Garner after Garner wisely advised that we maintain the Iraqi military, leave many of the Ba'athists in the government (to maintain civil society) and convene leaders from the three main groups (Sunni, Shia and Kurds) to form a coalition government. This didn't square with Rumsfeld's plans to revolutionize Iraqi society and transform it into a neoliberal Valhalla; so Garner was unceremoniously dumped for Kissinger's protégé, Paul Bremer.

Once Bremer was installed, things started heading downhill fast and have only gotten worse ever since.

Apart from the immense damage to Iraqi society, the enormous human suffering, and the massive loss of life; there is also the astronomical cost of the war which has been purposely concealed by the Defense Dept. Originally, the war was supposed to “pay for itself in oil revenues”. (according to neocon Paul Wolfowitz) That, of course, never happened but, the real costs appeared in this week's Washington Post in an article by Jim Wolf called “Pentagon Expands War-funding Push”. The article states:

“With the passage of the fiscal 2006 supplemental spending bill, war-related appropriations would total about $436.8 billion for Iraq, Afghanistan and enhanced security at military bases, the non-partisan Congressional Research Service said in a Sept 22 report.this is in addition to the more than $500 billion sought by President Bush in his baseline fiscal 2007 national defense request.”

That's right; we're spending a whopping $1 trillion a year for a war that we're losing!

Still, don't expect accountability from the Pentagon where taxpayer dollars are carelessly flung into the Mesopotamian black-hole with utter abandon. Heads never role because no one in charge ever accepts responsibility for their mistakes.
So, “Back off”!

…A growing number of establishment-elites are frustrated with Rumsfled's bungling and are ready for a change. But that doesn't matter because the Sec-Def has the backing of powerful constituents in the banking, corporate and defense industries as well as neoconservative aficionados in many of Washington's preeminent think-tanks. He also has Bush's support, which is a mere formality since Cheney and Rumsfeld run the government anyway. The bottom line is, Rumsfeld is “here to stay”.

…Rumsfeld flattened Fallujah nearly 2 years ago thinking that the destruction of the city of 300,000 would “send a message” to the Sunnis; convincing them that it was useless to resist. His action, which was enthusiastically applauded by right-wing pundits and politicians in America, produced exactly the opposite response. The resistance is now stronger than ever, the attacks on American troops have increased dramaticaly, and al-Anbar province is no longer under U.S. control.

Anyone with even a superficial understanding of psychology could have predicted the outcome, but Rumsfeld blundered on with his iron-fisted tactics regardless of the facts.

Rumsfeld's over-reliance on force has spread turmoil throughout the Sunni-heartland making it virtually ungovernable. The sectarian violence is now so bad that a leaked-Pentagon report prepared by the US Central Command says the country is in a state of “chaos”. This is the logical corollary of the Rumsfeld approach and it is unlikely to change.

For American troops in Iraq, there is a worse scenario than chaos; that is defeat. Patrick Cockburn's 11-1-06 article “Baghdad is under Siege” provides the chilling details of an armed Iraqi resistance which has now cut off supply lines to the capital and threatens to make America's ongoing occupation impossible. Cockburn says:

“Sunni insurgents have cut the roads linking the city to the rest of Iraq. The country is being partitioned as militiamen fight bloody battles for control of towns and villages north and south of the capital.The country has taken another lurch towards disintegration. Well armed Sunni tribes now largely surround Baghdad and are fighting Shia militias to complete the encirclement. The Sunnis insurgents seem to be following a plan to control all approaches to Baghdad.”

Baghdad is surrounded and the predicament for American troops is increasingly tenuous. The battle is being lost on all fronts. So, what is Secretary Rumsfeld's response to these new and urgent developments?

Rumsfeld held a press conference in which he blasted his critics for “focusing too much on the bad news coming out of Iraq” and announced the launching of a new public relations campaign which will attempt to elicit greater support for the ongoing occupation. The Pentagon plans to “develop messages” to respond to the negative news-coverage and, as Rumsfeld said, “correct the record.”

“Correct the record”? Is the Pentagon planning to “repackage” the war even while the Resistance is tightening its grip around the capital?

What type of madness is this? This is not the behavior of serious men. This is just more of the same “faith-based,” public relations hucksterism which leads nowhere. The worsening situation in Iraq will not improve by ramping-up the propaganda-machine, appealing to American chauvinism, or attacking critics of the war. This is real life; not some skit that's been choreographed to dupe the Washington press corps. We need leaders who are capable of grasping the situation in realistic terms and initiating political dialogue with the warring parties. All the cheerleading and yellow ribbons in the world will not create a viable solution for the impending catastrophe.

The American people are way ahead of Rumsfeld on the issue of Iraq. Nearly 70% now believe that the war was a “mistake” and a clear majority is looking for candidates who will support a change in policy. A poll conducted by the New York Times/CBS News on 11-2-06 shows that “a substantial majority of Americans expect Democrats to reduce or end American military involvement in Iraq if they win control of Congress.” That tells us in stark terms that the public wants to “get out now”. The November 7 midterms will be a referendum on Bush's “war of choice” and a flat rejection of the conflict which Rumsfeld so desperately wants to popularize. So far, the Democrats are showing substantial leads in all the polls.

The media has been a steadfast ally to the Bush troupe and given them a “free pass” throughout the conflict. They successfully drew an Iron Curtain around Iraq and kept the public from knowing about the 650,000 men, women and children were savagely butchered in Bush's Petrol-War. Despite their best-efforts, however, public opinion has shifted away from the present policy and the American people are looking for an end to the fighting.

Rumsfeld's plan for “a new kind of war” that depends on high-tech, laser-guided weaponry, massive counterinsurgency operations, and a submissive “embedded” media has fallen on hard times. The tremors can already be felt from Baghdad to Washington D.C. As Richard Haass, President of the Council on Foreign Relations (CFR) said in the November issue of Foreign Affairs, “The American era in the Middle East, the fourth in the region's modern history, has ended.” All that's left is to sweep up the pieces of a failed policy and head home.

So the President of the Council on Foreign Relations says that “the American era in the Middle East… has ended.” Astonishing. It won’t be pretty when the markets realize what’s happening. And if an insane and desperate Bush decides to roll the dice and widen the war by attacking Iran…

The Worst is Yet to Come
The Third and Final Act: Attacking Iran

By William S. Lind

October 31, 2006

The third and final act in the national tragedy that is the Bush administration may soon play itself out. The Okhrana reports increasing indications of "something big" happening between the election and Christmas. That could be the long-planned attack on Iran.

An attack on Iran will not be an invasion with ground troops. We don't have enough of those left to invade Ruritania. It will be a "package" of air and missile strikes, by U.S. forces or Israel. If Israel does it, there is a possibility of nuclear weapons being employed. But Israel would prefer the U.S. to do the dirty work, and what Israel wants, Israel usually gets, at least in Washington.

That this would constitute folly piled on top of folly is no deterrent to the Bush administration. Like the French Bourbons, it forgets nothing and it learns nothing. It takes pride in not adapting. Or did you somehow miss George W. Bush's declaration of Presidential Infallibility? It followed shortly after the visit to the aircraft carrier with the "Mission Accomplished" sign.

The Democrats taking either or both Houses of Congress, if it happens, will not make any difference. They would rather have the Republicans start and lose another war than prevent a national disaster. Politics comes first and the country second. Nor would they dare cross Israel.

Many of the consequences of a war with Iran are easy to imagine. Oil would soar to at least $200 per barrel if we could get it. Gas shortages would bring back the gas lines of 1973 and 1979. Our European alliances would be stretched to the breaking point if not beyond it. Most people outside the Bushbubble can see all this coming.

What I fear no one forsees is a substantial danger that we could lose the army now deployed in Iraq. I have mentioned this in previous columns, but I want to go into it here in more detail because the scenario may soon go live.

Well before the second Iraq war started, I warned in a piece in The American Conservative that the structure of our position in Iraq could lead to that greatest of military disasters, encirclement. That is precisely the danger if we go to war with Iran.

The danger arises because almost all of the vast quantities of supplies American armies need come into Iraq from one direction, up from Kuwait and other Gulf ports in the south. If that supply line is cut, our forces may not have enough stuff, especially fuel, to get out of Iraq. American armies are incredibly fuel-thirsty, and though Iraq has vast oil reserves, it is short of refined oil products. Unlike Guderian's Panzer army on its way to the Channel coast in 1940, we could not just fuel up at local gas stations.

There are two ways our supply lines from the south could be cut if we attack Iran. The first is by Shiite militias including the Mahdi Army and the Badr Brigades, possibly supported by a general Shiite uprising and, of course, Iran's Revolutionary Guards (the same guys who trained Hezbollah so well).

The second danger is that regular Iranian Army divisions will roll into Iraq, cut our supply lines and attempt to pocket us in and around Baghdad. Washington relies on American air power to prevent this, but bad weather can shut most of that air power down.

Unfortunately, no one in Washington and few people in the U.S. military will even consider this possibility. Why? Because we have fallen victim to our own propaganda. Over and over the U.S. military tells itself, "We're the greatest! We're number one! No one can defeat us. No one can even fight us. We're the greatest military in all of history!"

It's bull. The U.S. armed forces are technically well-trained, lavishly resourced Second Generation militaries. They are being fought and defeated by Fourth Generation opponents in both Iraq and Afghanistan. They can also be defeated by Third Generation enemies who can observe, orient, decide and act more quickly than can America's vast, process-ridden, Powerpoint-enslaved military headquarters. They can be defeated by strategy, by stratagem, by surprise and by preemption. Unbeatable militaries are like unsinkable ships. They are unsinkable until someone or something sinks them.

If the U.S. were to lose the army it has in Iraq, to Iraqi militias, Iranian regular forces, or a combination of both (the most likely event), the world would change. It would be our Adrianople, our Rocroi, our Stalingrad. American power and prestige would never recover.

One of the few people who does see this danger is the doyenne of American foreign policy columnists, Georgie Anne Geyer. In her column of October 28 in The Washington Times, she wrote,

The worst has not, by any means, yet happened. When I think of abandoning a battleground, I think of the 1850s, when thousands of Brits were trying to leave Afghanistan through the Khyber Pass and all were killed by tribesmen except one man, left to tell the story.

Our men and women are in isolated compounds, not easy even to retreat from, were that decision made. Time is truly running out.

What would a catastrophic military defeat do to the economic optimism of the U.S. population, optimism that enourages the debt-driven consumption that has kept the whole world’s economy afloat for the past generation? Russia and China, defacto allies in blocking U.S. hegemonic ambitions, have become much more powerful since Bush came to office and accelerated the process of U.S. imperial overreach. What if Europe tilts towards the Russian/Chinese side in the aftermath of the “end of the U.S. era in the Middle East?”

Since Bush is so stubborn, the dilemma the elites face in the United States is that they can only prevent a catastrophic defeat by ripping the political fabric apart. Bush and the Neocons will not go easily. That is why the elite are placing such great hope on James Baker’s Iraq Commission recommendations. The Baker Commission is waiting for the election before recommending a soft partition of Iraq and, much worse for Bush, negotiating with Iran and Syria. For that reason, there is no chance that Bush will accept Baker’s recommendations unless forced to. But it’s their only hope of avoiding a political civil war and of limiting the damage of the United States’ defeat in the Middle East wars. A showdown is coming after the election and it has nothing to do with Republican-Democrat.

Whichever side wins will probably feel the need to enact a plan like this:

10-Year U.S. Strategic Plan For Detention Camps Revives Proposals From Oliver North

News Analysis/Commentary, Peter Dale Scott,

New America Media, Feb 21, 2006

Editor's Note: A recently announced contract for a Halliburton subsidiary to build immigrant detention facilities is part of a longer-term Homeland Security plan titled ENDGAME, which sets as its goal the removal of "all removable aliens" and "potential terrorists." Scott is author of "Drugs, Oil, and War: The United States in Afghanistan, Colombia, and Indochina" (Rowman & Littlefield, 2003).

The Halliburton subsidiary KBR (formerly Brown and Root) announced on Jan. 24 that it had been awarded a $385 million contingency contract by the Department of Homeland Security to build detention camps. Two weeks later, on Feb. 6, Homeland Security Secretary Michael Chertoff announced that the Fiscal Year 2007 federal budget would allocate over $400 million to add 6,700 additional detention beds (an increase of 32 percent over 2006). This $400 million allocation is more than a four-fold increase over the FY 2006 budget, which provided only $90 million for the same purpose.

Both the contract and the budget allocation are in partial fulfillment of an ambitious 10-year Homeland Security strategic plan, code-named ENDGAME, authorized in 2003. According to a 49-page Homeland Security document on the plan, ENDGAME expands "a mission first articulated in the Alien and Sedition Acts of 1798." Its goal is the capability to "remove all removable aliens," including "illegal economic migrants, aliens who have committed criminal acts, asylum-seekers (required to be retained by law) or potential terrorists."

…Significantly, both the KBR contract and the ENDGAME plan are open-ended. The contract calls for a response to "an emergency influx of immigrants, or to support the rapid development of new programs" in the event of other emergencies, such as "a natural disaster." "New programs" is of course a term with no precise limitation. So, in the current administration, is ENDGAME's goal of removing "potential terrorists."

It is relevant that in 2002, Attorney General John Ashcroft announced his desire to see camps for U.S. citizens deemed to be "enemy combatants." On Feb. 17 of this year, in a speech to the Council on Foreign Relations, Defense Secretary Donald Rumsfeld spoke of the harm being done to the country's security, not just by the enemy, but also by what he called "news informers" who needed to be combated in "a contest of wills." Two days earlier, citing speeches critical of Bush by Al Gore, John Kerry, and Howard Dean, conservative columnist Ben Shapiro called for "legislation to prosecute such sedition."

Since 9/11 the Bush administration has implemented a number of inter-related programs, which had been planned for secretly in the 1980s under President Reagan. These so-called "Continuity of Government" or COG proposals included vastly expanded detention capabilities, warrantless eavesdropping and detention, and preparations for greater use of martial law.

Prominent among the secret planners of this program in the 1980s were then-Congressman Dick Cheney and Donald Rumsfeld, who at the time was in private business as CEO of the drug company G.D. Searle.

The principal desk officer for the program was Oliver North, until he was forced to resign in 1986 over Iran-Contra.

When planes crashed into the World Trade Center on Sept. 11, 2001, Vice President Cheney's response, after consulting President Bush, was to implement a classified "Continuity of Government" plan for the first time, according to the 9/11 Commission report. As the Washington Post later explained, the order "dispatched a shadow government of about 100 senior civilian managers to live and work secretly outside Washington, activating for the first time long-standing plans."

Things may move quickly after the election. No doubt the economic landscape will look very different six months from now.