Monday, September 25, 2006

Signs of the Economic Apocalypse, 9-25-06

From Signs of the Times, 9-25-06:

Gold closed at 594.90 dollars an ounce on Friday, up 1.5% from $586.00 at the close of the previous Friday. The dollar closed at 0.7817 euros Friday, down 1.0% from 0.7895 for the week. The euro closed at 1.2792, compared to 1.2666 at the end of the previous week. Gold in euros would be 465.06 euros an ounce, up 0.5% from 462.66 for the week. Oil closed at 60.28 dollars a barrel Friday, down 5.1% from $63.33 at the close of the previous Friday. Oil in euros would be 47.12 euros a barrel, down 6.1% from 50.00 euros for the week. The gold/oil ratio closed at 9.87, up 6.7% from 9.25 at the end of the week before. In U.S. stocks, the Dow closed at 11,508.10 Friday, down 0.5% from 11,560.77 at the close of the previous Friday. The NASDAQ closed at 2,218.93, down 0.8% from 2,235.59 for the week. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.59% Friday, down 20 basis points from 4.79% at the close of the Friday before.

The manipulated nature of the economy is becoming more obvious lately, with the U.S. election related sharp drop in oil prices. A drop taking place amid swirling rumors of an imminent U.S. bombing attack on Iran, an attack that will surely interrupt Persian Gulf oil shipping. Interestingly, if letters to the editor and water cooler conversations are any guide, many people in the U.S. see the oil price drop as an election-season ploy by the Bush regime and its allies in Big Oil. And, since an illusionary improvement in the economy will not be enough to counteract the foreign policy disasters of the neocons in the public mind, rumors are swirling as well about an October Surprise. As the saying goes, that can’t be good.

But the drop has had its intended effect:

Economy Fades as Election Issue on Falling Fuel Costs
By Matthew Benjamin

Sept. 22 (Bloomberg) -- Plummeting gasoline prices and a buoyant stock market may be weakening the power of the economy as an issue for Democrats less than seven weeks before U.S. congressional elections.

A majority of Americans -- 54 percent -- say the U.S. economy is doing well, according to a new Bloomberg/Los Angeles Times poll. That's up 4 percentage points from the beginning of August, when the price of a gallon of gasoline was an average of 54 cents higher and the Standard & Poor's 500 stock index was 4 percent lower. President George W. Bush's approval ratings on handling the economy also rose.

Almost 1 in 3 poll respondents said lower gasoline prices have enabled them to spend more on other household items.

“If there's any way that voters link economic uncertainty with what they experience on a daily basis, it's through what they feel at the gas pump,” said Amy Walter, an election analyst for the nonpartisan Cook Political Report in Washington.

According to Gary Dorsch, oil traders’ feeling that war with Iran is not going to happen has helped to bring about weak oil prices. These traders have been looking at Europe for indications of an attack on Iran:

Unwinding the $15 per barrel Iranian ‘War premium”

The most influential driver behind the CRB’s plunge since August 8th however, was the unwinding of the Iranian “war premium” which had inflated the price of crude oil by as much as $15 per barrel this year. Iranian negotiators have skillfully split the British, French and the German coalition away from the Bush administration’s hard-line stance for economic sanctions against Iran.

Iran’s rulers have always relied on the Russian and Chinese veto to any economic sanctions, but now there are signs the Europeans are also seeking a way out, once the moment of truth had finally arrived. On Sept 13th, British Foreign office minister Kim Howells waved the white flag, “I can’t see a military way through this, and I’m not sure that even there’s an easy way for the UN to impose sanctions," he told parliament’s Foreign Affairs Committee.

Economic sanctions against Iran would jeopardize more than 10,000 jobs, the German Chamber of Commerce said on Sept 1st. “Economic sanctions against Iran would solve none of the political problems. But the German economy would be hard hit in an important growing market.” France’s oil giant Total is interested in a 10-15% stake in Iran’s Azadegan, seen as one of the largest unexploited oilfields in the world, said head of exploration Christophe de Margerie on Sept 12th.

On Sept 18th, Norwegian energy and aluminum giant Norsk Hydro, signed an oil exploration deal with the National Iranian Oil Company for the Khorramabad block in southwestern Iran. “If exploration proves to be successful, the period of the agreement will be 25 years,” Hydro said.

Iran’s chief nuclear negotiator Ali Larijani reportedly offered a 2-month suspension of Tehran’s nuclear enrichment program in talks with EU foreign policy chief Javier Solana, which sent crude oil plunging below $66 per barrel. Still, there are questions of whether or not Iran’s internal debate is over, and if the concession by Larijani is fully backed by the Ayatollah Khameinei and president Amadinejad in Tehran.

Without the imposition of UN sanctions or the threat of military action against Iran, crude oil succumbed to the laws of supply and demand. US stockpiles of crude oil were 327.7 million barrels last week, or 18% higher from two years ago, when crude oil was trading at $45 per barrel. Unleaded gasoline prices tumbled 65 cents a gallon since August 1st, and boosted US President George Bush’s approval ratings by 3% to 41% last week, with seven weeks left before mid-term US elections in Congress.

OPEC, which supplies 40% of the world’s oil, has been pumping 28 million barrels per day (bpd), since November 2004, when crude oil first touched a record $50 per barrel, but was unable to stop the surge in crude oil to a record $78.40 /bl in July 2006. But with a bearish market mood and unwinding of the Iranian “war premium”, crude oil traders seized upon OPEC’s Sept 11th pledge to leave its output unchanged at 28 mil bpd, and dumped oil to as low as $62 per barrel on Sept 15th.

Crude oil traders are beginning to view the Bush team as a paper tiger in dealing with Iran. Other traders think the gloves will come off after the US Congressional elections on November 7th, when whispers of a US military adventure could grow louder. In any case, China’s crude oil imports rebounded 15% to 11.8 million tons in August, which could put a floor under the market at $60 /barrel.

Of course, oil traders may have made the mistake of ascribing rational calculations to those who would be ordering the bombing of Iran. Colonel Sam Gardiner, in a recent paper for the Century Foundation reminds us that the Bush/Neocon decision-making process does not use the usual standards of self-interested diplomacy:

Unfortunately, the military option does not make sense. When I discuss the
possibility of an American military strike on Iran with my European friends,
they invariably point out that an armed confrontation does not make sense—
that it would be unlikely to yield any of the results that American policymakers
do want, and that it would be highly likely to yield results that they do not. I
tell them they cannot understand U.S. policy if they insist on passing options
through that filter. The “making sense” filter was not applied over the past four
years for Iraq, and it is unlikely to be applied in evaluating whether to attack
Iran.

We have written about the puzzling nature of gold in financial markets. Gold is both a commodity and a currency. Lately, since the U.S. dollar has been holding its value, gold has acted more like a commodity, dropping along with other major commodities. But the drop seems to have found its bottom lately with downward pressures from general commodity markets counterbalanced by upward demand pressures. Here’s Gary Dorsch in “What’s behind the Meltdown in the Commodity Markets:”

Gold Tumbles Under $600 /oz

Gold tumbled under $600 per ounce last week, in line with a weaker crude oil and CRB index, telegraphing lower headline inflation in G-7 oil importing countries in the months ahead. Gold has also been pressured by fears of by European central bank sales ahead of a Sept 26th fiscal year-end that limits sales to 500 tons per year. So far, European central banks have only sold an estimated 340 to 360 tons this year.

With central bankers coordinating their tightening moves, there has been little volatility in the foreign exchange markets to influence the price of gold. Instead, gold traders are focusing on crude oil and other key industrial commodities for clues about the future direction of inflation. Supporting the gold market however, is speculation of eventual Chinese central bank diversification into gold. Only 1% of China’s $954 billion of foreign currency reserves are held in the yellow metal.

The US current account, the broadest measure of trade with the rest of the world, includes both trade in goods and investment flows, widened in the second quarter to $218.4 billion, and remains a major risk for the global economy. The US deficit totaled 6.6% of gross domestic output, the same as in the first quarter. That compares with China’s current account surplus of 7% of GDP.

With pressure mounting on Beijing to revalue it yuan upwards, China could quietly build a gold position in a declining market. Fan Gang, a member of China’s central bank monetary policy committee said on August 29th, "The US dollar is no longer a stable anchor in the global financial system, nor is it likely to become one, therefore it is time to look for alternatives.”

We can probably expect weak gold and oil prices until the October Surprise, whatever it turns out to be and whoever is directing it. Be that as it may, if commodities are dropping in anticipation of reduced industrial demand, then why are stocks doing so well? According to Michael Nystrom stocks are reacting to one thing only: interest rates. Nystrom makes a useful distinction between the real economy (the economy of those who make things) and the financial economy. The real economy is doing very poorly in the United States, while the financial economy has been fine.

Imminent Decline Dead Ahead

A number of factors are converging this week that I think will lead to a substantial reversal. While I normally don't like to go out on such a limb, there are enough factors lined up this time that I think it is warranted, and if I am wrong, it should be immediately obvious. This week is do or die time for the market.

Ford's Example

Let's start off by looking at the chart of the Ford Motor Company. Last Friday, Ford announced big news and the stock got killed - down almost 12% in one day! The price action in Ford, I think, is a preview of what we're going to see going forward in the general stock market.


Since mid July, Ford's stock rallied over 50%. It was an impressive gain, but the price action was purely technical: It was a standard short-covering rally with prices advancing steeply over a short period of time on very little volatility. There was a jittery drop in mid-August but a quick recovery and resumption of the steady upward progress, culminating in a two-day price explosion just before Friday's big bomb. Why did Ford rally? For the past several years, and certainly through the entire recent rally, the situation at Ford was grim and getting worse: The company was/is/has been losing market share, losing money, has high costs, the wrong products, etc, and everyone knew it and had known it for years. There had been no change in Ford's fundamentals. The fuel for the brief, sharp rally was therefore provided by bears who were short and got caught in a typical short squeeze. In this case, the squeeze culminated in a mini buying panic that sent the stock up nearly 9% in just two days before the big drop on Friday. The funny thing in this case is that Friday's sharp drop was precipitated by news that Wall Street usually likes: Ford is laying people off, slashing jobs, slashing salaries, cutting costs and closing plants. Under Wall Street's standard logic, what is bad a company's employees is usually good for its stock price. (In this instance, however, Ford is also suspending its dividend, which is very bad for shareholders and a sign that things are very grim indeed.) Parallels to the General Market

Now I'd like to look at the lessons that Ford holds for the overall market, represented by the S&P 500 cash index. Like Ford, the SPX has had a decent rally from mid July to present - close to 8% - while the news for the real economy has been getting progressively worse. The housing market is really slowing down, the trade deficit just hit a record high, and corporate layoffs are surging. We've had no fundamental change in this story, and in fact things appear to be getting worse. But while the real US economy - the economy that is involved in making things - seems to be on the ropes, the financial economy - the one that is involved in using money to make more money - seems to be doing just fine, as measured by a single indicator: Interest rates. They're coming down. And the most recent data indicates that the Fed is done raising them. This single factor is the primary impetus behind the current rally. It is what has gotten the ball rolling, and short covering is taking care of the rest. But to see how this one is going to end, just refer back to the Ford chart above.

Look at the shape of the most recent rally, from the July lows. From a classical technical analysis perspective, this is called a rising wedge. From p. 189 of Edwards & Magee's technical analysis classic, we learn that:

Once prices break out of the Wedge downside, they usually waste little time before declining in earnest. The ensuing drop ordinarily retraces all of the ground gained within the Wedge itself, and sometimes more (p.189)



From an Elliott Wave perspective, this is called a rising diagonal or an ending diagonal:

An ending diagonal is a special type of wave that occurs primarily in the fifth wave position at times when the preceding move has gone "too far too fast," as Elliott put it…In all cases, they are found at the termination points of larger patterns, indicating exhaustion of the larger movement." (EWP , page 36) Furthermore, "A rising diagonal is bearish and is usually followed by a sharp decline retracing at least back to the level where it began." (EWP, p.39)
To make matters even worse for the bullish case, the index is right at resistance provided by both the upper end of the diagonal, but also by the recent May highs. Sustaining an advance beyond this resistance will not be easy. And Friday's price action was weak: The market hit its high in the first hour of trading, then spent the rest of the day giving back its gains. Based on the indicators I look at, this market is overbought at multiple levels of trend: monthly, weekly, and daily. Like with Ford, all it needs now is a trigger to set it off.
Talk about a “trigger” brings us right back to the October Surprise.
But what about the price of oil, you ask? Since it's falling, isn't that fundamentally bullish for the market? And since interest rates are falling, won't the housing bubble be able to reflate? The short answer is, no. Falling oil prices reflect falling demand, which signals a recession. And yes, the housing market may see a second wind due to falling interest rates, but it is likely to be no more than a dead-cat bounce. The top is already in.

CEO’s, in their capacity as managers of the real economy, that is, and not as participants in the financial economy, see recession ahead:
CEOs grow pessimistic about outlook
Business Roundtable index falls to lowest mark in three years
By Greg Robb, MarketWatch
Sep 18, 2006
WASHINGTON (MarketWatch) -- Chief executives at major U.S. corporations are more downbeat about prospects for the economy than at anytime in the past three years.

The Business Roundtable CEO economic outlook index fell to 82.4 in the third quarter from a reading of 98.6 in the second quarter. This is the lowest level since July-September 2003 for the survey, which had averaged 97.6 over the past year. Read full survey.

Seventeen straight interest-rate hikes engineered by the Federal Reserve as well as higher energy costs are beginning to slow growth, said Harold McGraw, chairman of the Business Roundtable and chairman and CEO of McGraw-Hill Cos.

Of those CEOs surveyed, 39% said they anticipate increasing their capital spending in the next six months, while half see no change in their spending plans and about 11% expect to cut their capital spending,

CEOs see "a much-slower second half that will logically continue into next year," said McGraw during a teleconference with reporters.

The nation's softening housing market has also been a burden, he said.

"The overall picture for the economy in the months ahead remains a bit unclear," in light of mixed variables, McGraw said.

Energy prices "remain the wild card." There has been some improvement in energy prices, but prices seem to be event-driven, he noted.

The biggest concern for big companies is the impact of energy costs and other inflationary pressures on profits.

There was a mixed response to a special survey question asking CEOs to assess if their companies are able to pass along higher energy costs.

Only about 21% of the companies said they have been able to pass increased energy prices to along their customers, while another 33% of CEOs said they were only partially able to pass along these increases.

The Mainstream Media also see problems ahead for stocks due to the clear bursting of the housing bubble:

Can Wall Street withstand weak housing?
Some experts say real estate slump may spell trouble for equities

Peter Coy
BusinessWeek Online
Sept 19, 2006

If your nest egg is made of 2-by-4s and you're watching the real estate slowdown with a mixture of fear and nausea, then this article is for you.

The question: If real estate tanks, will stocks follow? Or will the market ignore housing? Or maybe — just maybe — will a decline in housing trigger a rise in stocks? It's something you really ought to think about if you're trying to figure out where to put your money.

Conventional wisdom, and some historical evidence, suggests that a decline in housing is associated with a fall in stocks. Evidence of a slump continues to mount: On Sept. 18, the National Association of Home Builders said its monthly sentiment index fell to a 15-year low. And on Sept. 19, the Commerce Dept. said that housing construction fell 6 percent in August to its lowest level in three years — an annual rate of 1.67 million starts.

"If that's not meltdown, it's pretty close," Ian Shepherdson, chief U.S. economist of High-Frequency Economics, said in a research note. The prospect of stocks plummeting at the same time housing falls into a slump is bad for homeowners, because it means no port in the storm. But the case isn't completely closed: There's some tantalizing counter-evidence that stocks might do just fine in a housing downturn, or even benefit from it.

Time lag

Let's start with the main, bearish case. Making the rounds of investment advisers is a chart prepared by Merrill Lynch showing the Standard & Poor's 500 stock index overlaid on an index of homebuilding activity from the National Assn. of Home Builders. The chart shows that the S&P 500 goes up one year after the homebuilding index goes up, and goes down one year after the homebuilding index goes down. (The correlation is 0.8, which means it's pretty strong.)
The scary part: The homebuilding index has plunged over the past year. If you believe that history repeats itself, the S&P 500 is about ready for a nosedive.

Another chart — this one from InvesTech Research — correlates changes in private residential construction with recessions. Going back to 1968, it shows that with just one exception, every time there has been a downturn in residential construction, a recession has occurred at the same time or shortly after. (The exception: 1995.) That indicator, too, is flashing red, because residential construction has shrunk over the past year.

"Being a student of history, I would think I would want to play it very cautiously from a stock standpoint," says Standard & Poor's Chief Investment Strategist Sam Stovall.

Wealth effect

It makes some sense that a housing slump would be bad for stocks. First, there's the direct effect on jobs in construction, real estate brokering, mortgage lending, and so on. Goldman Sachs estimates that housing and related industries account for nearly 10 million jobs (payroll and nonpayroll combined).

Second, consumer spending has been buoyed by the housing boom. People spent more freely because they felt wealthier and because they turned their homes into piggy banks through home equity loans, cash-out refinancing, and other means. Take away jobs and consumer spending, and it's no wonder that many experts expect a housing slump to hurt stocks.

By this view, stocks aren't a good choice right now. What, then? Barry Hyman, equity market strategist for EKN Financial Services, says that the same rising rates that have squeezed housing have given investors a nice alternative: money market accounts, which are yielding better than 4 percent, and bank certificates of deposit, some of which yield 5 percent or more.

'Down But Not Out'

Super-bears on housing have different advice. John Talbott, author of the none-too-subtly titled "Sell Now! The End of the Housing Bubble," recommends avoiding not only the stock market, but banks, too, since lots of banks could be hurt by lax mortgage lending standards.

But not everyone is convinced that housing will crush stocks. Why? Some figure that the housing slump won't be severe or prolonged. Robert DiClemente of Citigroup argues that the adjustment to a slower rate of sales is well under way. He says that the issuance of building permits is actually 10 percent below the rate of new-home sales. This process "will clear the overhang of houses within the next six to nine months," DiClemente predicts in a recent research note. The headline on his report: "Down But Not Out."

Others say it's too soon to declare the stock market dead because of housing. "Summing it up, I'm in the camp that says I don't know and the jury is still out," says Jeffrey Saut, equity strategist for Raymond James Financial.

Back to the future

Then there are the outright optimists. Bob Carey, chief investment officer for First Trust Advisors in Lisle, Ill., says that the stock market is 20 percent to 25 percent undervalued at current levels and should reach full valuation by sometime next year, which means: Get ready for a heck of a bull market. Carey says the demand for housing is driven by incomes and jobs, and since corporate profits are extremely strong, the outlook for income and job growth is good. Says Carey: "It's hard to imagine Corporate America doing well and somehow people not doing well on the employment side."

Carey has seen Merrill Lynch's chart showing a tight correlation between homebuilding and the S&P, but he says the pattern dates back only a decade or so. Before then, there was very little correlation, and he says the economy might return to that older pattern.

It's also possible that the housing slowdown could prod the Federal Reserve into cutting interest rates, which could boost stocks. Maybe, too, speculative investors will go back to dabbling in stocks instead of real estate, the way they did before the dot-com bubble burst and the real estate boom began.

Clearly the bulls have been vastly underestimating the consequences of a housing bust. Here’s Michael Shedlock:

No Hard Landing
Monday, September 18, 2006

I have it on great authority that there will not be a hard landing in real estate.Who told me that? It was none other than Mike Morgan at MorganFlorida. Please listen in to what Morgan has to say.

Mike Morgan:

Will there be a hard landing? No!

Will there be a crash landing? Absolutely!

Despite September’s short covering of home builders and value buyers trying to cash in on low P/Es and stocks selling at or below book value, a hard landing is now out of the question. We’re in for a market crash. Read between the lines, or read actual comments for content.

Here’s what Robert Toll, CEO of Toll Brothers said at the Credit Suisse conference. “The market got ahead of itself in recent years, citing "greed on the part of buyers and sellers, and that the current level of speculative inventory is probably the largest ever.”

And how about Don Tomnitz, CEO of D.R. Horton. “We have never seen housing prices and demand slow as quickly as they have during this down cycle."

Take it a step further and look at the statistics. Never before have we seen inventories at these levels. Recently NAR finally admitted home price are coming down. Never before have we seen home prices fall. And RealtyTrac just announced that foreclosures are up 53% from a year ago.

For those “value investors” buying the home builders because the P/Es are so low, I ask, “What happens when there are no earnings?” And for those “value investors” buying for the book value, I ask, “What happens when the builders take massive write downs to land, and burn up cash with carrying costs of unsold inventory?”

But that’s not even the heart of the current problems. For the last two weeks I’ve been receiving daily calls from desperate mortgage brokers, real estate attorneys, insurance brokers, title companies and subcontractors looking for deals and work. This week I spoke with a real estate attorney closing his office and returning to the corporate world. And several of the smaller builders have called me offering triple commissions to entice sales of their inventory. It doesn’t end there.

Who will the housing crash effect? Everyone. Real estate agents will be first. As a group, they’ve made a ton of money during the housing boom, and they’ve spent millions on new cars, vacations, restaurants, clothes, and everything else that comes with excessive discretionary income. That’s over now. Agents are not buying the luxury items that helped feed the economic boom, and they are cutting back on business spending like advertising and marketing. That hits the vendors and newspapers revenues.

Take it a step further. With sales off 50% and more, all of the industries that have benefited from the boom, will suffer loss of revenue and jobs at accelerated rates and massive proportions. Home builders and condo developers have been announcing cancellations of projects and cut backs in spec building. The flippers fed the housing boom, and they’re washed up right now. In fact, they are making the crash much worse than it should have been.

Many flippers bought multiple properties. When in the history of the world have we ever seen the housing industry conduct business like a stock exchange. We had bidding wars. We had lotteries on new developments, just like we had allocations for new tech offerings during the late 90’s. And just like the tech boom, the buyers were not making decisions based on fundamentals. Take a look at the recent Vonage offering, where buyers don’t want to pay for their stock, because the price dropped after the public offering. The same thing is happening in the housing market, with thousands of buyers walking away from deposits, refusing to close on homes. That adds to the woes of the builders.

And just like we saw a tech crash with everyone rushing to sell, we’re now just starting to see flippers dump properties for 200-400% losses on their deposits. Add to the woes, the fact that interest rates are up and most flippers bought using creative financing and low rate ARMs.

But this is all old news for us. The other shoe is dropping now. Loss of hundreds of thousands of jobs created from housing will act like a virus and spread throughout our economy. As real estate agents, attorneys and mortgage brokers reign in their spending, it will effect restaurants, car dealers, advertising companies, jewelers, remodeling contractors, furniture manufacturers, bank profits, electronic retailers, clothing and the list goes on and on and on.

As the primary players are effected, and they cut back on spending, so will the secondary players in this market. These companies will be forced to lay off employees, and the cycle will grow like a virus. Is that it? Not a chance.

The housing market benefits most when rates are low and jobs are being created. With rates rising and job loss skyrocketing, the affordability index for homes drops in step. The buyers that are still in the market can not afford the same home they could a year ago. On average, with the rise in interest rates, the buyer that could afford a $500,000 home a year ago, can now only afford a $425,000 home. But with the loss of jobs growing, there are fewer buyers that can afford the $425,000 home and many existing homeowners that can no longer afford to make their monthly mortgage payments.

So now we have a third group of sellers scrambling for the ever dwindling buyers’market. You’ve got the flippers desperate to sell. You’ve got the builders stuck with inventory of unsold homes, and now you have the group of sellers that are being foreclosed or simply decide to sell because they can no longer swing the monthly mortgage payments after losing their jobs.

Nonsense? Hardly. I spoke with a real estate agent the other day that has not sold a home in three months. His wife works for a title company and was just laid off. He’s now sending out applications for a job in his former field of banking. Lots of luck. He’s been out of the field for five years, and he’s 54 years old. They have two kids in college and a hefty mortgage. Oh, by the way, did I mention they own three flip properties that they can’t sell.

How about the attorney that is closing his office and returning to the corporate world. He’s laying off six people in his office. And how about the builder that called me this week. He employs about a dozen people, as well as a small army of subcontractors. He’s closing up, and he has unsold inventory that he cannot sell at a profit. That means the dozen employees are out of work, and his army of subcontractors are out of work for the first time in four years.

And how about my office. I’ve decided to lay off one of my team members. She’s a single Mom, but as much as it hurts to break the news to her, I have no choice. If things don’t pick up within the next 30 days, I will be forced to lay off a second team member. When you do the math, the choice is survival. It doesn’t end there. Realistically, if things do not pick up within 90 days, I will close my office and concentrate on my other businesses. This is reality, and you’re hearing it from the horse’s mouth.

Multiply these four scenarios by thousands and you have a crash. A hard landing is out of the question at this point. The economists should be talking about how devastating the crash will be.

…When we last talked we were both laughing about the Senate Hearings on the Housing Industry. All of the negative comments were sugar coated. Both of us think this is the tip of the iceberg. This mess is going to spread to subprime lenders, mortgage companies offloading mortgages to pension plans, and all sorts of other fiascos that neither of us can clearly see at the moment. Senate hearings have just begun.

The USA Today is reporting More fall behind on mortgages.

Calls to the Homeownership Preservation Foundation, which provides free credit counseling, hit a record 2,464 in August, a 25% jump over July. More than half of the distressed callers had ARM loans."It's alarming. It really is," says Pam Canada, executive director of the NeighborWorks Homeownership Center in Sacramento. Her non-profit counseling center used to receive two or three calls a week from homeowners in financial quicksand; now, it's 20 a week.More homeowners with shaky credit are falling behind on their mortgage payments, especially in such states as Ohio, Alabama, Tennessee, Michigan and West Virginia, where job losses have struck the local economies, the Mortgage Bankers Association said Wednesday.The problem is the worst for those with subprime credit who pay higher-than-usual interest rates and who have adjustable loans that have been resetting to higher rates. About 12.2% of such borrowers were late paying their loans in April through June, the highest level since the end of 2003.

In Ohio, which has lost thousands of manufacturing jobs, the foreclosure process was already underway for 11% of homeowners with subprime ARMs — the nation's highest rate. In California, which had the nation's highest number of risky ARM loans, delinquency rates are still near historic lows. "There's no place to go but up," says Doug Duncan, the MBA's chief economist.

Foreclosures and delinquencies have "no place to go but up". That is the key message that Morgan, Duncan, and I have been saying for quite some time. No, there will not be a hard landing. We will crash.

Another major economic storm on the horizon is the future of the China boom.

Is China on the Brink?—and Why It Matters for the United States

September 18, 2006
Thomas Au

China is now feeling the strain of almost a decade of torrid growth. Although there are plenty of worrisome signs, the conventional wisdom is that things will be fine through the 2008 Olympics. I have a slightly different view of the timing of a pullback in that country’s economy, which could be especially bad, given likely upcoming developments in the United States (and elsewhere in the world).

One example of prevailing opinion is that of James Jubak, a street.com guest columnist, who thinks that the Chinese economy is headed for “a train wreck,” having just passed “the point of no return.” Cheap U.S money, operating through China’s mammoth trade surpluses and dollar reserves, has fueled a steroidal double-digit GDP growth that has even the local authorities worried. The result is that key industries such as cement and steel are seeing profit plunges because of price pressures caused by overcapacity. This is spreading to a number of areas, mainly the commodity producers dominated by state-owned-enterprises (SOEs), many of which are bankrupt in all but name, and are propped up by outstanding bad loans from state banks.

I disagree with Jubak about one important thing though, in my belief that the crisis in the Chinese economy will not take place in 2009, after the Olympics as Jubak opines; it will take place before, in late 2007 or early 2008. What has been driving the Chinese economy is not the 2008 Olympics per se, but rather the anticipation of the Olympics, which will mostly end in 2007. The infrastructure buildup in advance of the hosting of the games has been giving a one-time artificial, and foreign-based, stimulus to the economy, creating a gap that domestic demand cannot fill. By early 2008 on the other hand, investment for the Olympics will be winding down, as attention turns to last-minute fine-tuning of the event itself, likely causing a sharp drop in aggregate demand at that time. And markets often move on anticipation of major events, not necessarily on the events themselves. (“Buy on rumor, sell on news.”)

Jonathan Laing raised some related concerns in a recent Barron’s article. Runaway development is creating massive environmental problems, including calling into question the safety of air and water in much of the country. China needs five to six times as much energy to produce a dollar of GDP as the United States, so its energy use is now starting to approach ours, despite the vastly larger GDP stateside. And more of China’s energy is from pollution-creating coal. And there have already been spot shortages of essential commodities such as water and electricity. Given the country’s overloaded infrastructure, it wouldn’t take all that much to bring about a general shortage. Either this, or environmental problems, could quickly halt, rather than merely slow, growth.

In fact, one important question is how large is the size of the black hole of bad loans to SOEs, meaning how costly is it to keep the country more or less fully employed, thereby dampening social unrest. The official estimate of such bad loans is about $200 billion, an unpleasant, but manageable amount. But Ernst and Young did a study that initially pegged the true figure as closer to $900 billion, roughly the size of China’s foreign exchange reserves (the world’s largest), before the firm withdrew its findings under heavy pressure from the Chinese government. And as we learned from a painful experience with a company called Enron, America’s accounting firms tend not to overestimate the magnitude of problems. My guess is that China’s bad loans are north, rather than south of $1 trillion.

Moreover, there is widespread corruption at the banks that lend to the SOEs; officials at China’s second and fourth largest state banks were recently arrested for embezzlement and fraud. Less dishonest, but only slightly less troubling problems include the lack of underwriting standards and regulatory oversight, because of the banks’ social mission to prop up the SOEs, which provide the largest proportion of China’s jobs (because the private sector is more efficient, and hence less labor intensive).

Moral hazard is clearly at work, as rapid growth encourages a “get rich quick” mentality, causing people to cut corners and bend the rules, creating widespread discontent among the hundreds of millions of people who are not participating in, and are fact harmed by, the recent “economic miracle.” This is causing protests, riots, and other events that threaten social stability. In order prevent the details from getting out, China is passing laws forbidding the divulging of “government secrets,” particularly those about natural or other disasters, especially when reports about bureaucratic incompetence are involved. Even printing a critical article like this one, while legal in the United States, might soon be illegal under evolving Chinese law. When a government goes out of its way to suppress the truth (as it did in the former Soviet Union), it is a sign that the truth is probably too bad to tell.

All this wouldn’t seem so critical if it weren’t for the fact that I believe that the United States will have a recession in 2007. This would be a result of our own, somewhat milder version of China’s problems, which would start with the impending bursting of the consumer bubble (particularly in housing) caused by the Fed’s earlier easing and more recent tightening. Under ordinary circumstances, the U.S. economy should begin a comeback in 2008, after a cleansing period, although whether that would be enough to elect a Republican President would be very much open to question. (The muted 1992 recovery from the 1990-91 decline was not enough to re-elect George Bush Sr.)

But the timing and degree of a prospective Chinese crash raises the stakes. In 1931, the United States was in a recession that then-President Herbert Hoover reasonably thought would soon end. The impending recovery was derailed by the collapse of the German economy, then the second most important in the world, not only because of its sheer size, but because of its connections to other countries in Europe. China’s economy plays a similar “second most important” role today because of her ties in Asia and elsewhere, and because its swings are larger than those of other, nominally larger, economies such as those of Germany and Japan. If a collapse of the Chinese economy comes hard on the heels of a deep U.S. recession in 2007-2008, the result could be a prolonged slowdown of global growth such as we saw in the 1930s.

Monday, September 18, 2006

Signs of the Economic Apocalypse, 9-18-06

From Signs of the Times, 9-18-06:

Gold closed at 586.00 dollars an ounce on Friday, down 5.4% from $617.90 at the close of the Friday before. The dollar closed at 0.7895 euros Friday, up less than 0.1% from 0.7890 for the week. The euro closed at 1.2666, compared to 1.2674 at the end of the previous week. Gold in euros, then, would be 462.66 euros an ounce, down 5.4% from 487.53 euros for the week. Oil closed at 63.33 dollars a barrel Friday, down 4.6% from $66.25 at the close of the previous Friday. Oil in euros would be 50.00 euros a barrel, down from 52.27 for the week. The gold/oil ratio closed at 9.25, down 0.8% from 9.33 at the end of the week before. In U.S. stocks, the Dow closed at 11,560.77 Friday, up 1.5% from 11,392.11 for the week. The NASDAQ closed at 2,235.59 Friday, up 3.2% from 2,165.79 at the close of the previous Friday. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.79%, up two basis points from 4.77 for the week.

Happy days are here again! Oil and gold closed down sharply, stocks up, everything must be great. There’s an election coming up in the United States and it appears that good economic news will continue for about a month and a half.
Stocks at 4-month highs, oil at 5-month lows

By Kevin Plumberg
Fri Sep 15, 6:30 PM ET

NEW YORK (Reuters) - Major stock indexes hit fresh four-month highs on Friday after reports showed inflation was mostly contained while a drop this week in energy prices suggested cost pressures were easing.

The dollar also climbed, largely because traders pared positions against the greenback ahead of a weekend meeting of Group of Seven central bankers and finance ministers. But U.S. Treasuries gave up early gains on a bout of technical selling.

The consumer price index rose 0.2 percent in August, for both the overall and core readings, matching market forecasts. Core CPI excludes food and energy costs.

When the Federal Reserve meets next week, it is expected to keep the key federal funds rate steady at 5.25 percent after halting its rate-increase campaign in August on the view that slowing growth will moderate upward price pressures.

"The inflation news this morning was positive, and that continues to fuel the belief that the Fed is done tightening," said Mark Bronzo, managing director at Gartmore Separate Accounts LLC in Irvington, New York.

"Oil continues to trade down, and with energy costs coming down, a lot of people feel that's going to help the consumer."

The University of Michigan said separately that consumer expectations in September for inflation one year out are the lowest since March 2006.

The Dow Jones industrial average added 33.38 points, or 0.29 percent, to 11,560.77. The Standard & Poor's 500 Index gained 3.59 points, or 0.27 percent, to 1,319.87. The Nasdaq Composite Index rose 6.86 points, or 0.31 percent, at 2,235.59.

European stocks were slightly higher, with the FTSEurofirst 300 Index up 0.3 percent at 1,373.33.

In Tokyo, the Nikkei closed down 0.5 percent at 15,866.93, coming under further pressure after the government downgraded its view on private consumption and exports…

Oil Plumbs 5-Month Lows, Gold At 3-Month Lows

Falling commodity prices helped to bolster the view that inflation pressures are under control.

Oil slid briefly below $63 a barrel, touching its lowest level since March as U.S. fuel stockpiles grew ahead of winter and investors probed for a price that would trigger an OPEC supply cut.

U.S. crude dropped as low as $62.03 per barrel, the cheapest since March 23, before settling up 11 cents at $63.33. London Brent crude was off 21 cents at $63.33.

U.S. crude oil for October delivery closed down 18 cents at $63.40 a barrel.
"The psychology of the market has really turned. It looks like the market will be oversupplied next year unless OPEC does something," said Frederic Lasserre, head of commodity research at Societe Generale.

Gold futures in New York ended the session at a three-month low, as traders ditched more holdings after crude oil tanked and the dollar rose.

COMEX gold for December delivery was down $3.00 at $583 an ounce, after falling to $571.20, its lowest price since June 15.

And,
G-7 upbeat on world economic prospects

Elaine Kurtenbach, AP Business Writer
Sat Sep 16, 3:14 PM ET

SINGAPORE - The United States and other major economies are keeping global growth on track despite risks from high oil prices and other threats, finance chiefs from the Group of Seven industrialized nations said Saturday, while urging China to adopt more flexible currency policies.

The group also urged more action to combat terrorist financing and illicit activities by North Korea and Iran, U.S. Treasury Secretary Henry Paulson said.

"We should intensify our efforts against terrorist financing, money laundering and illicit finance — including the financial networks supporting WMD (weapons of mass destruction) proliferation," Paulson said in a statement after the daylong talks ended.

Despite a sharp slowdown in U.S. growth in April-June, the U.S. economy is growing solidly, underpinned by rising wages, healthy corporate cash flow and investment, he said.

The U.S. is "vigorously doing its part" to raise savings and cut its budget deficits, repeating a prescription for resolving trade imbalances long advocated by Washington and other members of the G7 — Britain, Canada, France, Germany, Italy and Japan.

…The G-7 statement was upbeat in its assessment of world economic prospects.
"In our economies, performance remains strong amid moderating growth in the United States," the statement said.

"The positive outlook, however, is not without potential downside risks, e.g., tight and volatile energy markets, rising inflation expectations in some economies, and the spread of protectionist tendencies," it said.

And the economy is that bad, as long as you don’t think about the future. It doesn’t feel great, though, looking ahead, as alluded to at the very end of the previous article . We non-billionaires in the United States can only feel anxious reading about the drop in housing prices and headlines like these:
Ford to cut one-third of work force
By Poornima Gupta
Fri Sep 15, 1:25 PM ET

DETROIT (Reuters) - Ford Motor Co. said on Friday it will slash $5 billion in costs and one-third of its work force as it warned its auto business would not make a profit in North America for another three years.

The automaker also ruled out an immediate sale of its Jaguar brand, disappointing investors who wanted Ford to press ahead with asset sales to raise cash.

Ford shares dropped as much as 15 percent Friday, the biggest single-day percentage decline in almost four years.

Ford also suspended its dividend and pledged to revamp its vehicle line-up, an area of weakness widely cited by analysts.

In its third turnaround plan in five years, the No. 2 U.S. automaker said it would close 16 North American factories by 2012, two more than originally scheduled.

Ford said it will cut 10,000 white-collar jobs on top of the 4,000 jobs already cut this year. All of Ford's 75,000 factory workers are being offered buyouts under a deal with the United Auto Workers union. Ford hopes to cut 30,000 factory jobs by 2008.

The steps were the latest sign of the financial stress on the traditional Big Three.
General Motors Corp. is on track to shutter 12 plants and cut $9 billion in recurring costs as part of its turnaround plan.

DaimlerChrysler AG's Chrysler Group said Friday it could lose about $1.27 billion this year, a much deeper loss than it forecast in July because of mounting inventory and slower truck and SUV sales.

Ford warned its North American operations would not post a full-year profit before 2009, a year later than first projected. It also targeted $6 billion in materials cost savings by 2010 by streamlining purchasing.

As Kate Randall put it,
That Wall Street responded so coolly to Ford’s bloodletting should be taken by workers as a warning of the unprecedented scale of the attacks on jobs and living standards that are coming, as American capitalism seeks to place the burden of its crisis squarely on the backs of the working class. These attacks will hit very broad sections of the working population, as demonstrated by Ford’s decision to slash an additional 10,000 white collar jobs, over and above the number it announced in January. These jobs are to be cut within a mere six months.

Jerome White, a socialist candidate for Congress in Michigan, has this to say:
Ford’s job massacre: A corporate crime
16 September 2006

Ford Motor Company’s plan to wipe out 44,000 hourly and salaried jobs and shut down 16 manufacturing facilities in North America is a brutal attack on the working class. Once again, tens of thousands of workers and their families are being forced to pay for the mismanagement and avarice of the corporate bosses and the crisis of American capitalism.

The human impact of these cuts will be devastating. In communities throughout the Midwest and South, as well as in Canada, many thousands will lose their incomes and their homes. They will be forced to pull their children out of college or go without health care. Public schools will be robbed of the tax dollars they depend on, and small businesses will be forced to close.

Michigan, which is already reeling from the downsizing of General Motors and auto parts maker Delphi, will be particularly hard-hit, with the idling of the Wixom assembly plant and the uncertain future of Wayne Assembly, the Michigan Truck plant, and other facilities.

Michigan’s 7.1 percent unemployment rate is the highest in the nation, and median household incomes have fallen 11.9 percent since 2000, the worst decline in the US. Auto industry centers like Detroit and Flint, which once ranked among the highest cities in the US in home ownership and per capita income, are now among the poorest.

Home foreclosures in the Metro Detroit area have soared 137 percent in the first eight months of the year. In Macomb County, the heart of my congressional district, foreclosures are up a staggering 234 percent! The rate of foreclosures will accelerate in the coming months as mortgage rates rise and home values decline.

Ford is targeting not only assembly line workers, but also white-collar employees, who were told that a college education and technical skills would guarantee them a secure job. At least 14,000 salaried jobs—one third of Ford’s total white-collar workforce—are being axed.

The slashing of these jobs will do nothing more than push Ford—once an international industrial icon—further down the road to oblivion. But the big Wall Street investors who have demanded such massive cuts are not concerned with the long-term health of the company. Their only concern is making as much profit as possible, as quickly as possible.

Over the last five years, most of corporate America has been enjoying a “golden age of profitability,” according to Wall Street analysts. The higher profit margins have been achieved at the expense of labor, which has seen its share of national income sharply decline.

Unsatisfied with the rate of return on its investments in the auto sector, the financial elite has demanded an end to the “social contract” in the auto industry, through which workers had enjoyed decent wages, a measure of job security, health care benefits, and pensions. Workers in the “new” auto industry are to be paid half as much, and will enjoy none of the benefits the previous generation had secured through decades of struggle.

When Ford announced last January its “Way Forward” plan—which included cutting 34,000 jobs in North America and the shutdown of 14 plants over the next seven years—Wall Street shrugged its shoulders and demanded more blood. To drive home their point, big investors drove down the company’s share value by $1.4 billion in the first six months of the year.

Ford’s directors responded by dumping William Clay Ford Jr. and handing the CEO position to Alan Mulally, the former Boeing executive who oversaw the destruction of thousands of jobs at the airline maker. Under the accelerated job-cutting program, dubbed “Way Forward II,” Wall Street investors expect to see their earnings rise by 25 cents per share for every 5,000 workers Ford throws onto the street.

The claim that there is no money to sustain decent living standards for auto workers is a fraud. Even as Ford was losing hundreds of millions of dollars last year, its top five executives raked in $26 million, including $13 million for William Clay Ford Jr.

Mulally will get $2 million in salary and expenses in his first two years. In addition, Ford agreed to pay him a $7.5 million signing bonus and an additional $11 million to cover performance pay and stock options he left behind when he retired from Boeing.

No ruling class in the world is as parasitic and corrupt as the American corporate oligarchy. Rather than investing the necessary resources to build safer, less expensive and more fuel-efficient vehicles, as well as to provide workers with economic security and a high level of education and training, the auto bosses and Wall Street investors would sooner destroy one of the world’s best known industrial companies as long as they can extract the maximum loot for themselves out of the ruins. This only underscores the socially destructive character of the profit system.

While the auto executives have acted with utter ruthlessness to defend their interests, the leaders of the United Auto Workers union (UAW) have responded with spinelessness and complicity. The UAW, which long ago abandoned the defense of the working class, has functioned as a junior partner with Ford, helping the company shutter plants and force out its older workforce. In exchange, UAW officials have been promised an opportunity to collect union dues from younger, lower-paid workers and continue at least some of the labor-management ventures that have provided a steady stream of income for the UAW bureaucracy.

My political opponent in the November election, twelve-term Democratic Congressman Sander Levin, has done nothing to oppose the unrelenting assault on auto workers’ jobs. An ally of the UAW bureaucracy, Levin has long sought to divert workers from a struggle against the corporate owners by blaming the loss of jobs on Asian and European imports and alleged trade barriers to US carmakers.

Like the UAW, Levin and the Democrats have tried to sell this bill of goods in order to pit American workers against their brothers and sisters in other countries in a race to the bottom, to see who will work for the lowest wages and worst conditions. “Standing up for the American auto industry” really means sacrificing the jobs and living standards of American workers to defend the corporate executives and their multi-million-dollar salaries.

I reject the national chauvinism of the union bureaucracy and Democrats and call for the international unity of auto workers to defend their jobs and living standards. Workers in every country face a common struggle against the global auto giants. Over the last month, for example, Volkswagen workers have been engaged in bitter struggles against mass layoffs in Brazil and Mexico.

Autoworkers are not responsible for the crisis of the auto industry. Under the capitalist profit system, the corporate executives and Wall Street investors have a monopoly over the decision-making process, but they are not the ones who pay for their disastrous choices.

The first step in protecting the interests of working people is to institute democratic control over all business decisions affecting work, safety, salaries, hiring, and hours. These decisions cannot be made by the wealthy few—whose interests are antithetical to the needs of working people—but by committees of factory floor workers, technicians and other experts committed to the interests of the working class. The establishment of industrial democracy presupposes the opening of the books of all corporations for inspection by the workers, and the ratification of corporate leadership by a democratic vote of all employees.

The massive industries upon which millions of workers and their families depend can no longer be the personal assets of America’s wealthy elite, who dispense with them as they see fit. If the auto industry is to be run for the good of society, not personal profit, it must be transformed into a publicly owned utility. This will not only guarantee a good standard of living for auto workers and their families, but the production of safe, high-quality and affordable vehicles for consumers.

The ongoing transfer of wealth into the pockets of the richest one percent in American society must be halted and the revolutionary advances in technology and globally integrated production put to use to meet the requirements and solve the problems of modern mass society.

That would require quite an awakening from the majority of people who have at least the potential of a conscience. A far deeper understanding of the enemy is needed than is offered by any left party, no matter how radical, before we can hope to accomplish a wrenching of economic and political power from the pathocracy (rule by those without consciences or psychopaths).

Monday, September 11, 2006

Signs of the Economic Apocalypse, 9-11-06

From Signs of the Times, 9-11-06:

Gold closed at 617.90 dollars an ounce Friday, down 2.6% from $634.20 at the close of the previous Friday. The dollar closed at 0.7890 euros Friday, up 1.3% from 0.7791 for the week. The euro, then, closed at 1.2674 dollars Friday compared to 1.2836 dollars at the end of the previous week. Gold in euros would be 487.53 euros an ounce, down 1.3% from 494.08 for the week. Oil closed at 66.25 dollars a barrel Friday, down 4.4% from $69.19 at the close of the week before. Oil in euros would be 52.27 euros a barrel, down 3.1% from 53.90 for the week. The gold/oil ratio closed at 9.33 Friday, up 1.7% from 9.17 at the end of the week before. In U.S. stocks, the Dow Jones Industrial Average closed at 11,392.11 Friday, down 0.6% from 11,464.15 at the close of the previous Friday. The NASDAQ closed at 2,165.79, down 1.3% from 2,193.16 for the week. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.77%, up five basis points from 4.72 for the week.

Oil prices dropped sharply last week, as did gasoline prices. Gas prices are down 50 cents a gallon in the U.S. from a few weeks ago. Must be an election coming up. That would account for all the fear they are trying to drum up around the fifth anniversary of 911. So for the next two months we will get low gas prices and fear, fear, fear, culminating in an election close enough for the Republicans to steal. Happy False Flag Day!

Recently we have been looking at the appeal of neoliberalism, the application of neo-classical economics (free-trade globalism based on multinational corporations) to achieve liberal goals, to the pathocracy. Because of that appeal United States seems to have wedded a neoliberal economic policy to a neoconservative foreign policy. To the neocons, the United States will achieve and maintain its status as a universal empire (“global hegemon” in today’s terminology) by imposing the opening of markets in the rest of the world to U.S. allied corporations using brute force or the threat of it. So which philosophy is driving the other? It seems clear that neoconservatism is. Neoliberalism acts as a cover for neoconservative goals. This is clear when you look at the reality of the United States’s drive for “global free trade.”
Trade Imperialism: Collapse of Doha and the Rise of Mercantilism

Most of the world’s advocates of free trade fault the US for the failure of the Doha world trade talks. Apart from Washington’s rhetoric calling for a ‘global free trade’ agreement in the current ‘Doha Round’, in practice it is pursuing a mercantilist policy of protecting non-competitive local producers and setting quotas on imports, which compete favorably with local producers. Washington subsidizes agro-export corporate ‘farmers’ and pushes the rest of the world, particularly Asian, African and Latin American countries to lower tariffs in manufacturing, services and agriculture to highly competitive US corporations. The breakdown of Doha trade talks in late July 2006, was almost unanimously blamed on the US which argued that the rest of the world should lower their farm import tariffs to US agricultural products, subsidized to the tune of $19 billion in 2005.

Even the neo-liberal Brazilian President Lula DaSilva, who shares the US position in reducing farm tariffs, blamed US intransigence on subsidies for the failure of the trade talks. Washington’s ‘trade reforms’ proposed at Doha in 2006 actually raise the ceiling for trade distorting subsidies $3.5 billion dollars over actual spending in 2005. Washington’s demand to saturate Asian rice markets, African cotton markets and Latin American soya markets with heavily subsidized agricultural products thus driving millions of Third World farmers and peasants into bankruptcy dampened the spirits even of the most ardent Third World advocates of ‘free markets’. Kamal Nath, India’s Trade Minister, pithily summed up the problem by saying, “Indian farmers con compete with US farmers but not with the US Treasury” .

Washington’s big trading partners in Brazil, India, China, South Africa and elsewhere have offered to lower or eliminate tariffs on manufactured goods, services (including high tech, low tech and information-based industries), financial and banking sectors, retail and wholesale commerce, pharmaceuticals and other sectors, sign on patent protection codes in exchange for the US ending its quotas and tariffs on labor-intensive industries, steel, textile and other light consumer goods industries and eliminating its multi-billion dollar agricultural subsidies. Washington has rejected a global free trade reciprocity agreement, and has instead pursued bilateral trade agreement with client regimes willing to sacrifice local farm and manufacturing producers.

For example, Washington has signed bilateral free trade agreements with Chile and Peru, which are largely mineral and raw material-exporting countries; it has signed a free trade agreement with tropical fruit and coffee-exporting Central America and Colombia – the latter a recipient of over $5 billion dollars in military aid over the past 7 years. Uruguay, another likely free trade partner with Washington, is banking on selling more beef, mutton and wool and hosting more highly contaminating paper mills. Mexico is a key ‘free trade’ partner, providing a cheap labor platform for US assembly plants re-exporting to the US, and exporting over 20 million low paid ‘temporary’ workers to the US over the past decade. In addition Mexico has lowered all investment barriers to the US takeover of its banking, transport, retail trade, fast food, telecommunications and agro-export sectors and opening its markets to the massive inflow of US-subsidized agricultural products.

While continuing to formally pursue a global free trade agenda, Washington, in practice, is building a series of satellite bilateral trade and investment pacts which extend the US economic empire.

Given the type of class warfare engaged in by the neocons, that of the crony-connected rich few against everyone else, their true economic philosophy may be Nazi-style fascism rather than neoliberal free-trade. In that system the way to get rich is to own weapons-producing firms or prison-making firms and to get as close to Power as possible. The Bush family has been doing it that for generations:
About Those Nazi Appeasers
Bush Family Values

By Michael Donnelly
September 7, 2006

It's astonishing to see how desperate our homegrown fascists have become. The entire cabal is in full-on media blitz mode with Rummy, Dick and Theodosius, er, Bush slamming their foreign opponents with the latest absurd tag "Islamic Fascists;" and, their domestic ones as "Nazi appeasers." Or, in the deranged mind of Condi Rice; domestic opponents are tantamount to folks who would have stopped the Civil War and allowed slavery to continue in the South.

It's not just desperate; it's monumentally moronic, given the real history. This bizarre trip on the Wayback Machine demands a deeper look--though don't look to the mainstream media. Given the opening, one would think that everyone by now would be fully informed that the Bush Family took "Nazi appeasement" to far greater heights and were actually part of an American faction of documented Nazi SUPPORTERS.

We're also unlikely to see much mainstream media analysis of the new "Islamic Fascist" branding of those opposing the Empire's designs on the Middle East. As Sir Winston Bush gets a media pass as he tries to conflate fascism, communism and Islam while also trying to ironically tie his criminal wars to WWII and the Cold War, it warrants our own trip on the Wayback Machine to see just what the Bush family was doing during those earlier "good wars."

Samuel Bush: arms merchant

George W. Bush's great-grandfather, Samuel Bush was charter member of the military/industrial complex. In 1918, he was chief of the Ordnance, Small Arms and Ammunition Section for the War Industries Board, with oversight responsibility for Percy Rockefeller's Remington Company. Rockefeller had helped get Bush's son, Prescott into Yale and Skull and Bones in 1916.

A 1926 Senate Munitions Inquiry (the Nye Committee) into the military/industrial complex's WWI windfall examined Samuel Bush's dealings with Remington as part of his War Industries Board duties. Virtually ALL of the records of Samuel Bush's efforts were destroyed by the National Archives "to save space."

Prescott Sheldon Bush; George Herbert Walker: Nazi collaborators

George W. Bush's grandfather, former Connecticut Senator Prescott S. Bush was a Wall Street banker with Brown Brothers Harriman. (Averill Harriman was also instrumental in getting young Prescott into Yale and S&B.) Bush's maternal grandfather George Herbert Walker was the bank's first president. Walker built the famed Bush family estate at Kennebunkport on Walker Point. Prescott Bush joined W. A. Harriman & Company in 1926 and became its CEO.

Harriman Bank was the official Nazi financial conduit in the US. Closely tied to Fritz Thyssen, who proudly claimed in his 1941 book "I Paid Hitler" that he was the Nazi Party's first and greatest financial backer. The Union Banking Corporation (UBC) was a subsidiary of Harriman created by Walker and it was used for Nazi financial matters. Thyssen provided 100,000 gold marks ($10 million in today's dollars) to the Nazis in 1923 just prior to Hitler's failed putsch. By 1941, UBC held a private Nazi stash of over $3,000,000 ($36 million in today's dollars) in its New York vaults.

After the war, a Treasury Department investigation reported that during the two years after the Stock Market crash; "Thyssen dedicated his fortune and his influence to the single purpose of bringing Hitler to power. In 1932, he arranged the now famous meeting in the Düsseldorf Industrialists' Club, at which Hitler addressed the leading businessmen of the Ruhr and the Rhineland. At the close of Hitler's speech, Thyssen cried, `Heil Herr Hitler'. By the time of the German elections later that year, Thyssen had succeeded in eliciting contributions to Hitler's campaign fund from all of the big industrial combines. He himself is reported to have spent 3,000,000 ($30 million today) marks on the Nazis in 1932 alone.

During 1933 Thyssen served as intercessor between von Hindenburg, von Papen, and Hitler. He brought them together at a secret meeting which laid the basis for the appointment of Hitler as Reichschancellor."

It was Thyssen, not Prescott Bush as some now claim, who was called "Hitler's Angel" by the New York Herald Tribune. He later fled Germany in 1939.
Even though Hitler had declared war on the US, it was still legal for UBC to conduct finances for the Nazis. But, after Pearl Harbor that outrage finally changed. After another ten months of Bush/Harriman/UBC work for the Nazis; in November 1942, under the Trading With the Enemy Act, all of the Harriman business interests were seized by the government, including UBC.

The assets were held by the government for the duration of the war and then quickly returned. Prescott Bush' interest in UBC consisted of One Share--worth $1,500,000 ($19 million in today's dollars) at the time UBC was disbanded in 1951. (The Harriman family garnered $4 billion!) It was the money used to start the Bush Family Texas oil empire.

Another Harriman subsidiary through Silesian Holding Co.; Consolidated Silesian Steel Corporation saw the Harriman-Bush group owning one-third of a complex of steel making, coal-mining, and zinc-mining activities in Germany and Poland. The other two-thirds were owned by Wehrwirtschaftsführer (Military Economy Leader) Friedrich Flick. Silesian Holding Company's president was George Walker and its sole directors were Prescott Bush and Averill Harriman.

Silesian Steel used slave labor from Auschwitz (even before the concentration camp was built there) in its coal, iron and zinc mining operations. At Nuremberg, Flick was sentenced to seven years for Silesian's role in building up the Nazi war machine. Harriman, Bush and Walker were never charged.

June 14, 1940, nine months after the Nazis conquered Poland, the IG Farben Company opened an Auschwitz factory and slave labor camp in occupied Poland, to produce artificial rubber and gasoline from coal. This was done in a partnership with Rockefeller's Standard Oil Company (EXXON).

The millions made off the labor of hundreds of thousands of Nazi victims were inherited by William S. Farish III, grandson of William S. Farish, the head of the IG/Standard cartel. Farish III is George H.W. Bush's best friend and the person who took over Bush's assets and managed them in a blind trust after Bush was elected vice-president.

Investigator John Loftus has said, "As a former federal prosecutor, I would make a case for Prescott Bush, his father-in-law (George Walker) and Averill Harriman to be prosecuted for giving aid and comfort to the enemy. They remained on the boards of these companies knowing that they were of financial benefit to the nation of Germany."

I've yet to take the Wayback Machine back to investigate Rice's whopper that decrying the carnage of the U.S. Civil War meant supporting leaving Slavery in place. But, I'm pretty certain that the same unsavory links to what John Trudell calls, "the colonial industrial class" were just as odious in the 1860s.

MICHAEL DONNELLY has numerous family members who fought in WWII against the Nazis while the Bush family was enriching themselves collaborating. He can be reached at pahtoo@aol.com

One result of a system run by such people is the habits of super-rich described in the article below:

The Jet Set's Shopping List Unmasked
How do the very wealthy spend their money? You may not want to know.

By Thomas Kostigen

MarketWatch

Private jet owners have an average annual income of $9.2 million and a net worth of $89.3 million. They are 57 years old. And 70 percent of them are men.

Hannah Shaw Grove and Russ Alan Prince, two researchers, surveyed the group to find out who they are, what makes them tick, and perhaps most interestingly, what they spend their money on.

The average jet setter spends nearly $30,000 per year on alcohol (wines & spirits). Grove and Prince note that this amount is about two-thirds of the median household income in the U.S. And that's the smallest category of spending they surveyed.

The next smallest was "experiential travel," which includes guided tours, such as photographic safaris, or hikes to Machu Picchu, or eco-tours to the Brazilian rainforest, or kayaking in Baja California during the gray whale migration. For these experiences, jet setters spend an average of $98,000 per year.

Travel

But these journeys are small potatoes when compared to how much these wealthy individuals spend on hotels and resorts ($157,000 a year), or events at hotels and resorts ($224,000 a year). Spa treatments even fetch more jet-set dollars than wilderness tours. The average jet setter spends $107,000 a year at spas around the world.

Not that many of these "global citizens," as they like to be called, would know: Just 34 percent of jet owners open their own mail and only 19 percent pay their own bills, Grove and Prince found. This results in a sort of detachment from the world and creates "the low level of awareness that most jet owners have about their finances," they say.

Indeed, it would take a curious psychological composition to comprehend spending $147,000 a year on watches, as the jet set do. Or $117,000 on clothes. Or a whopping $248,000 a year on jewelry…


Another result of such a ponerized system, one created by and for psychopaths, people without consciences, can be seen in this reaction by Kevin, the Cryptogon blogger to the Newsweek article on risky mortgages we quoted last week:

This Business Week article is pretty good, but I feel the need to take you much deeper down the rabbit hole. Try to get comfortable, it's not going to be pleasant.

I used to work for one of the oldest and largest financial services companies in the world. But you wouldn't have known it from looking at the sign on the outside of the building. You see, the firm kept its name out of public view when it came to this business: the sub prime mortgage lending racket.

Why?

This Wall Street firm, spoken about in hushed tones around country clubs and cocktail parties, DOES NOT want to have its name associated with the financial services equivalent of a chop shop or a whore house. Oh no. It just wants the money associated with this despicable operation, and none of the press. Questions in the media about the propriety of these activities might cause discomfort for investors. Certain public appearances need to be maintained, after all.

This firm premeditated the exit from the crash unfolding before our eyes, both legally and in terms of public relations, years in advance.

Here's what it did.

The firm's strategy was to acquire fly-by-night companies who were dealing in these dodgy (sub-prime) loans and making impossible to imagine amounts of money at it. The outward public appearances of these acquired companies did not change. Some of the fly-by-night, fast-and-loose, make-it-up-as-you-go and illegal activities were transformed into probably-no-jail-time best-practices. The CFO had a habit of putting me on hold without muting the headset. He always seemed to be talking about "scratch and dent deals" with someone else in his office. "Oh sh*t. They're not going to like this. *rhetorical chuckle* What's a few million dollars between friends..."

The Them.

Behind the scenes, however, executives who weren't decapitated on the spot as part of the acquisitions, started taking orders from Them, if you know what I mean. Entirely new computer networks were built that linked the systems of these up-start, sub-prime lending corporations that---if you're fortunate---you've never heard of, to what we called "The Mother Ship" in New York, a firm that just about anyone with a net worth of a million dollars or more would probably recognize.

I was present at one of these 3am infrastructure sessions (getting paid double time), in a machine room with servers stacked floor to ceiling, cooling fans screaming, and black coffee going down by the pot full. We were taking orders from the "global ops center" in New York. The blinking lights on the "big-iron" Cisco routers indicated that roughly US$5 billion in funny money was going to move between the red-headed stepchild operation I worked for and the polished halls of The Mother Ship each month.

US$5 billion per month.

This was just one tiny, fly-fart aspect of just one division of this diabolical corporation. And I was told it was chump change for them, and that it would be cut loose at the drop of a hat, if necessary, should any undue attention start coming their way.

A manager told me something like, "It's not worth the bad PR for them. They'll rake it in for as long as things can be kept quiet. But they won't tolerate any heat in the press."

I noticed that the scam seemed very similar to the way the CIA runs cut outs. Except with this, the firm was only concerned with its public image; it's no secret who owns whom in this game, if you know where to look, and everything had been done according to federal regulations that this firm probably wrote, so it's not a question of legal or illegal. When it comes time to shut down offices and roll up the operations, they want it to go smoothly. And if Joe and Jane Six pack start to wonder who actually sold them their dodgy loan, it won't be immediately apparent. And, if Joe and Jane Six pack read the fine print, they will find that they screwed themselves by signing on the dotted line anyway. When the press interviews these people, they will talk about how "Bob's-Dodgy-Loans-While-You-Wait" screwed them over, and how they didn't know, this, that and the other thing, etc...

But to where do all the fiber paths lead?

"Bob's-Dodgy-Loans-While-You-Wait" was just being used by the firm as insulation from the inevitable bad press, that is now emerging. "Bob's-Dodgy-Loans-While-You-Wait" will be shut down and forgotten after a few days or weeks. Joe and Jane Six Pack will get their clocks cleaned, as usual. They won't even know who was really behind it all. By this time, the Mother Ship will have found other front companies to hide behind and new victims to grind into cash.

The front company I worked for actually changed names twice over the course of a year. Both of them were owned by the firm. The old domain now forwards to some backwater page on the new company's domain that displays a date that is off by a couple of years. Of course, the parent firm is nowhere to be seen!

US$5 billion per month... You'd think they could get the webserver to display the right date. Nope. Too busy generating funny money.

The firm externalized the financial risks of being in this business by selling all of the paper they generated into the secondary mortgage market at the end of every month. This is an institutional marketplace that trades in commoditized mortgages, "debt paper." In other words, at the end of each month, the firm had none of the impossible-to-payback-negative-amoritization-no-money-down loans on their books!

I handled some issues for the secondary marketing department, even, would you believe, for the person who pulled the trigger on these paper dumps at the end of the month."

Who buys this stuff?" I asked.

"Oh lots and lots of people. Well, banks and insurance companies mostly. [Large European Bank name deleted] buys a lot of it."

I wonder if [Large European Bank name deleted] knew what I knew or cared about how those loans were generated. (Of course, they knew and didn't care. They'll sell this toilet paper debt to some other sucker down the line.)

See, I also handled issues for the used-car-salesman-type 'account executives'. Just before I left, the company switched loan origination systems. The people writing these loans were pissed because they were no longer able to get loans approved for people with fraudulent social security numbers. They would actually complain because the system was telling them that the would-be borrower was using a false/fake/invalid SSN."

The old system never gave me these problems. How am I supposed to get any work done?! I hate this new system."

But wait, there's more.

As part of my daily duties, I had to take remote control of the systems that these donkeys were using. Occasionally, (a couple of times per day, at least) I would see the credit summary screens for the loan applicants. The highest credit score I ever saw was something like 615. The lowest was 520. Sprinkled with bankruptcies, unpaid credit cards, default this, late that.

Every once in a while, I'd chuckle and ask the person on the phone, "And this guy can buy a $400,000 house with no money down!?"

Absolutely God damned right!

That's what this company did. All day. Monday through Friday.

Things started to get interesting when They sent a memo to all employees on what to say to anyone who presented themselves as auditors or investigators. We were to refer them to some flunkie.

I thought, "Oh goodie, we're going to get raided by a three-letter agency and guys wearing guns and blue wind-breakers are going to wheel the servers out on dollies! PHBs are going to be handcuffed and frog marched into a waiting paddy wagon!"

Sadly, that didn't happen. For me, the icing on the cake moment happened when the firm started offering these criminal loans to their own employees, and at deep discounts, to pad the numbers as business started to slow down! The memo actually said that because we were such valued employees---actually, I wasn't an employee, my title was IT-Outsourced-On-Site---we wouldn't be charged any "junk fees" associated with the origination of the loan.

WOW! No junk fees! Thank you, Master! Thank you, Master!


At the farther extreme of the system’s range of practices is outright murder. By those John Perkins called “the Jackals” in Economic Hit Men. Here is Wayne Madsen on a recent Jackal hit:
Sept. 4, 2006 -- The CIA's "Worldwide Attack Matrix" continues to target political leaders who stymie U.S. oil and natural gas company and other Bush-Cheney global plans. Created by then-CIA Director George Tenet in the aftermath of the 9-11 attacks, the CIA's "Worldwide Attack Matrix," a James Bond 007-style "License to Kill" designed to assassinate foreign "terrorists" regardless of where they live, has been used to eliminate troublesome rebel, progressive, and secessionist leaders who bear no threat against the United States but who threaten a number of U.S. energy company interests and other economic and political interests.

Former Baluchistan Governor and Chief Minister Nawab Akbar Khan Bugti, who served Pakistani leaders like President Zulfiqar Ali Bhutto (an ethnic Sindhi who was executed by a U.S.-backed military government) and ousted and jailed Prime Minister Nawaz Sharif, was recently brutally assassinated by the CIA- and US Special Forces-backed security forces of Pakistan's dictator General Pervez Musharraf (a so-called ally of the Bush-Cheney-Blair "Global War on Terror"). Bugti, the charismatic 79-year Baluchi leader, was killed after he went underground in support of Baluchi autonomist forces who have become increasingly opposed to Punjabi human rights violations against ethnic Baluchis. The Baluchi Liberation Army responded to Punjabi aggression against Baluchis by launching attacks against natural gas pipelines in Baluchistan -- tactics that immediately earned the wrath of the oil-centric Bush-Cheney regime. Against the wishes of Pakistan's political and intelligence establishment, Musharraf ordered his forces to kill Bugti and against Muslim traditions, Bugti's body -- likely mutilated in the air attack assassination -- has not been returned to the family for burial in accordance with Muslim religious tenets. Musharraf's actions received the full backing of the Bush administration, which defended the action as necessary to preserve a "strong and unified" Pakistan. The Bush crime cartel wants to clear Baluchistan of troublesome independence-minded tribal leaders like Bugti before construction gets fully underway on the Pakistan leg of the Central Asian Gas pipeline (CentGas) from Turkmenistan through Afghanistan and to the Arabian Sea in Baluchistan. The Bush cartel also wants to ensure that Baluchistan secessionists do not interfere in future military actions across the Pakistani Baluchistan border into Iranian Baluchistan.

It is noteworthy that Bugti was opposed to Musharraf's and the Inter Services Intelligence (ISI) support for local Taliban forces who are using the area around Quetta, the Baluchistan capital, as a base to launch attacks against U.S. "Coalition" forces in Afghanistan. For that reason, the assassination of Bugti earned the condemnation of the Hamid Karzai government in Afghanistan, as well as the government of India, which both realize that Musharraf and the ISI are the primary foreign backers of the Taliban. As the production of opium poppies reached an all-time high in the Afghan-Pakistan border areas, Bugti's opposition to the Taliban opium smuggling pipelines also did not sit well with either Musharraf, ISI, or people like Richard Armitage, Musharraf's chief Washington backer, who is no stranger to the global opium trade, having dealt with Taliban and Burma's Golden Triangle opium smuggling in support of off-the-books U.S. intelligence operations during his entire intelligence career.

The "Worldwide Attack Matrix" assassination of Bugti is the latest in a string of U.S.-sanctioned killings of secessionist and rebel leaders since 9-11. Others assassinated by U.S. intelligence assets include Theys Eluay, West Papuan independence leader killed by U.S.-trained Indonesian Special Forces in Nov. 2001 (Freeport McMoRan, a U.S. mining company, wants the West Papuan independence forces eliminated); Abdullah Syafii, Free Aceh Movement leader killed by Indonesian Special Forces in northern Sumatra in January 2002. (The Aceh independence movement threatened the interests of Exxo0n Mobil in the secessionist province); Nigerian Justice Minister and Attorney General Chief Bole Ige, a Yoruba leader who championed the interests of the southern Nigerian tribes (Igbo, Ogoni, and Yoruba) people opposed to the influence of oil companies like Exxon Mobil and Chevron Texaco. Ige was killed by unknown assailants Ibadan in Nov. 2001; Elie Hobeika, Lebanese Christian leader who was opposed to U.S. plans for an oil and military terminus in Lebanon, killed by a car bomb in March 2002; Benjamin Hrangkhwal, leader of the northeast India National Liberation Front of Tripura, assassinated in February 2002 by U.S.-trained and supported Indian paramilitary forces trained at a nearby jungle warfare training center; Mikael "Mike" Nassar, associate of Hobeika's, assassinated gangland-style in Brazil along with his wife; Archbishop of Cali, Isaias Duarte, opposed to U.S.- supported paramilitaries and their U.S. military trainers, gunned down in front of his church in Mar. 2002; Angolan UNITA leader Jonas Savimbi, killed by a Kellogg, Brown & Root supported Angolan Army unit in March 2002. Savimbi, Ronald Reagan's one-time "George Washington of Africa," threatened U.S. oil interests in Angola and was eliminated, his body gruesomely laid out on a slab and photos transmitted by U.S. intelligence around the world as a warning to others; Colombia's FARC leader Salvador "Silverio" Vargas Leon, killed by U.S. private military contractors and Colombian army units in March 2002. FARC threatened U.S. oil pipelines in Colombia; former Lebanese Prime Minister Rafik Hariri, assassinated in an October 2005 car bombing. Hariri was also opposed to neo-con military and oil pipeline terminus plans for Lebanon. Former Lebanese Communist Party leader George Hawi was eliminated in a carbon copy car bombing for the same reasons that Hobeika and Hariri were killed. Sudan Vice President and Sudan People's Liberation Movement leader Dr. John Garang, an ally of the United States, killed in a helicopter crash in July 2005 after he expressed opposition to U.S. oil company plans for southern Sudan. Assassination carried out with the support of Ugandan President Yoweri Museveni, one of the Bush administration's chief clients in the region.

The Worldwide Assassination Matrix program works closely with U.S. Special Operations psychological warfare operations (Psyops) in transmitting gruesome images of the bodies of the assassinated targets around the world in attempt to warn others what awaits them if they do not fall into compliance with the Bush-Cheney-Blair agenda. Bugti's body is claimed by his son Talal to be lying frozen in a hospital as some sort of trophy.

One final note. Here is some more evidence that fascist-nationalist aggressive militarism is bad for the economy of the average person:

Report reveals 1.6 million Israelis living in poverty

By Rick Kelly

6 September 2006

Israel’s National Insurance Institute (NII) last week revealed another annual rise in the country’s poverty rate. Nearly 100,000 people fell below the poverty line last year, raising the total number impoverished to more than 1.6 million, 24.7 percent of the total population. At 35.2 percent, Israel now has the highest child poverty rate among advanced capitalist countries. The figures demonstrate the depth of the social crisis in Israel, which will be further exacerbated by the government’s planned cuts to social spending in the aftermath of the war in Lebanon.

The NII, a governmental welfare body, attributed much of the rise in poverty to previous government cutbacks, particularly of child allowance payments. After coming to power in 2000, former Prime Minister Ariel Sharon and his finance minister, Benjamin Netanyahu, slashed family payments, a policy carried forward by the current Kadima-Labour coalition of Prime Minister Ehud Olmert.
The NII calculated that in 2005, child allowance cuts reduced the income of large families by 12 percent and families with two children by 6 percent. A total of 58 percent of large families were under the poverty line in 2005, up from 54.7 percent the year before.

Similar cuts to unemployment benefits have exacerbated the dire situation facing jobless Israelis. Unemployment is almost 9 percent, and the number of long-term unemployed has rapidly increased. In 2004, a quarter of all those out of work remained unemployed for more than a year, compared to just 6 percent in 1997. Only one in five unemployed people receive benefits, due to government restrictions and deliberately onerous bureaucratic procedures. Many who do receive payments are dragooned into menial “welfare-to-work” job schemes.

The NII also revealed the deep regional and ethnic disparities within the Zionist state. Arab-Israelis have a far higher poverty rate than Jews, with 52 percent of Arab families living under the poverty line. Poverty was the highest in Jerusalem, where 42 percent of residents and 56 percent of children were poor.

A striking feature of the NII report is the rise of the “working poor”. Poverty in Israel is by no means restricted to the unemployed, elderly, and disabled. As the country has become more closely integrated into the global economy, the wages and conditions of working people have been systematically downgraded. In order to maintain the profit rates of Israeli companies and to attract international investment, successive governments have privatised state industries, removed business regulations and lowered taxes for the wealthy.

These measures have had severe consequences for working people. “Despite overall economic growth, the percentage of poor families in which the head of the household was employed increased from 11.4 percent in 2004 to 12.2 percent in 2005, from 160,000 families to 177,000 families,” Haaretz explained. “The percentage of poor families among families with workers increased from 40.6 percent to 43.1 percent. Nearly 60 percent of the working poor held full-time jobs.”

A study conducted by the Adva Centre, “Workers, Employers, and the Distribution of Israel’s National Income”, examined recent changes in the social position of the working class. The report found that since 2003, 65 percent of all new jobs were part-time and predominantly low paid. An extraordinary 20 percent of all new jobs created for men in the past five years were generated as a direct result of the Palestinian uprising, in security and other non-productive industries. Despite productivity increases, average wages have declined since 2000 and two-thirds of workers now receive less than $US320 a week.

A Haaretz article published September 1 described the situation facing one family, the Vaknins. Chaim Vaknin works as a gardener for 30 hours a week and receives the minimum wage, while his wife Racheli looks after their four children. One-third of their income goes to paying a mortgage on their small two-bedroom apartment. Despite Racheli’s family responsiblities and chronic arthritis, authorities forced her into a “welfare-to-work” program in order to qualify for a small income assistance payment. “We receive charity,” she said. “We get our schoolbags and clothing second-hand. It’s very hard to live on our income.”

Proposed budget cuts spark political crisis

Israel’s offensive in Lebanon will worsen the poverty rate, both through direct reconstruction costs in the north and through cuts to social spending to fund the Israeli Defence Forces’ rearmament. According to the Israel Institute of Social and Economic Research, an additional 50,000 people will fall below the poverty line this year.

The Olmert government has proposed an initial round of budget cuts worth $1.7 billion. The measures advanced by Finance Minister Avraham Hirchson include further reducing child allowances, raising the age of entitlement to unemployment allowance from 20 to 28, increasing university tuition fees by 50 percent, cutting grants for discharged soldiers, firing public service workers and privatising the postal service.

The government intends to make the working class pay for the Lebanon war. Shortly after tabling his budget proposal, Hirchson wrote a grovelling letter to the Federation of Israeli Chambers of Commerce, assuring big business that tax cuts scheduled to take effect over the next four years would not be reversed.