Signs of the Economic Apocalypse, 10-30-06

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

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

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

U.S. Economy Expanded at a 1.6% Annual Rate in Third Quarter

Joe Richter

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

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

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

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

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

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

Slump in Home Building

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

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

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

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

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

There is evidence the slowdown in the economy was temporary.

Consumer Spending Rebounds

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

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

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

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

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

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

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

Restructuring the U.S. economy – downward

October 28, 2006

Dr. Kurt Richebächer

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

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

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

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

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

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

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

5. Abundant liquidity continues to underpin the markets.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The seeming balance between good and bad economic news probably cannot last, as the hyper-complexification of financial markets will lead to instability and wild swings. Here’s George Ure:

GBO: Data Suggests Global "Weimarization"
Thursday October 26, 2006

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

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

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

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

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

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

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

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

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

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

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

The Eerie "Bid" in the Equity Markets

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

Remember my recent ramble about short squeezes:

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

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

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

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

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

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

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

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

And,

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

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

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

Water scarcity

Energy scarcity

Food scarcity

Raw materials scarcity

Weather cataclysms/global warming

In a word, 'Overshoot'

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

AHHHHHHHHHHHHHHHHHHH!

The following Associated Press headline alone is scary enough:

GAO Chief Warns Economic Disaster Looms

Matt Crenson, AP National Writer

October 28, 2006

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

M.B.A.s: The Biggest Cheaters

MarketWatch

Thomas Kostigen

Graduate business students take their cue from corporate scandals

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

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

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

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

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

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

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

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

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

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

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

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

Honor code

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

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

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

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

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

Signs of the Economic Apocalypse, 10-23-06

From Signs of the Times, 10-23-06:

Gold closed at 595.00 dollars an ounce on Friday, up 0.2% from $593.70 at the close of the previous week. The dollar closed at 0.7926 euros Friday, down 0.8% from 0.7992 euros at the close of the Friday before. That put the euro at 1.2617 dollars compared to 1.2513 at the end of the week before. Gold in euros would be 471.59 euros an ounce, down 0.6% from 474.47 for the week. Oil closed at 59.25 dollars a barrel Friday, up 0.9% from $58.70 at the end of the week before. Oil in euros would be 46.96 euros a barrel, up 0.1% from 46.91 for the week. The gold/oil ratio closed at 10.04 Friday down 0.7% from 10.11 at the close of the previous Friday. In the U.S. stock market the Dow closed over 12,000 for the first time, ending the week at 12,002.37, up 0.3% from 11,960.51 for the week. The NASDAQ closed at 2,342.30 Friday, down 0.6% from 2,357.29 at the close of the Friday before. In U.S. interest rates the yield on the ten-year U.S. Treasury note closed at 4.78%, down two basis points from 4.80 for the week.

The Dow Jones Industrial Average in the United States hit a record high this week. It was the same week that the Iraq War became so bad even the United States mainstream media couldn’t ignore the complete disaster it has become. The media makes sure to keep news of the war and news of the economy separate, but the contrast became inescapable this week.

Surges: the Dow and the Death Count

By Missy Comley Beattie

October 20 / 22, 2006

The Dow Jones Industrial average is surging. So is the death count in Iraq. Ten U.S. troops were killed on Tuesday and two died Wednesday, bringing the total for October to seventy-one. Almost 1,000 Iraqis have perished in the last 18 days.

Yet investors are happy. And according to one heavily eye-shadowed television anchor, the man on the street will be as well. There is optimism about corporate earnings.

Twelve families have just heard the words, "We regret to inform you." The Dow could skyrocket to the ozone but life for these families is filled with pain. Life is painful for all families who have lost so much in this senseless war of deception. Sympathy cards say, "May your memories bring you comfort." They don't. They bring a longing for days when those children inside the flag-draped coffins were alive, living their dreams and looking forward to their futures.

The stock market is surging. Sectarian violence has been surging for months. Iraq is in a civil war and no matter what George Bush says about our mission there, he is a failed president with the blood of hundreds of thousands of people on his hands. James Baker calls Iraq a 'helluva mess.' Bush says it's the central front in the war on terror. Experts now tell us that there will be no democracy in Iraq. They, also, have told us that this war has increased terrorism and we are less safe as a result…

Maybe the coincidence is more than dark irony. Maybe there is a direct relation between corporate profitability and wars. In fact, the line of causation probably goes in both directions. Wars are always good for corporate profits and corporate profits drive stock prices. But the disastrous Iraq War has created a political crisis in the United States just before an election. The entire political class (both parties), having spent over a decade pushing war on Iraq, must now be fearing a vengeful public. Better pump the economy with money and lower energy prices!

Where will the economy and the stock market go after the election? Some see more turbulence, with wild swings in different directions, sort of like what Earth’s weather will do.

Going, Going, Gold

by The Mogambo Guru

With a bleary, jaundiced eye, I wearily note that Total Fed Credit is up $4.4 billion, to a total of $829.64 billion, making it look like they are moving back into the "inflation or die!" mode. But maybe not, since judging by their track record for the last decade, TFC should be up to around $850 billion or so. Or more. But it ain't.

But this seeming lack of new TFC is important because, if you care to check, you will notice that the Fed stopped increasing TFC in February 2000, clearly coincidental with the crash of 2000, where lots of people lost tons of money. Now, something bad may get ready to happen again, and if the Fed doesn’t start jamming money down people’s throats pretty soon (and making them spend it) the stock market will soon be toast.

Not surprisingly, I also note that foreign central banks put a whopping $13 billion into their accumulated Fed holdings of US securities last week. Thirteen billion dollars! In one week! After taking out $12 billion the week before! This is the same worrying kind of turbulence that fluid systems exhibit right before breaking up in a chaotic, catastrophic event.

Putting words in the mouth of Sol Palha of the Tactical Investor, he thus notes in his essay "Dow 14660 Has Come And Gone" that the handsome, dashing, charming Mogambo was right, both about how his blue eyes merrily twinkle under the starlight, and about this chaos/ turbulence/ volatility thing, too, when he says, "The next few months are going to be packed with extreme volatility; expect the volatility to increase by a factor of two to three."

If you want a real piece of Federal Reserve stupidity, then tune in to MarketWatch.com to read what Fed chief Ben Bernanke said in a speech about the lack of household savings in America: "Unfortunately, many years of concentrated attention on this issue by policymakers and economists have failed to uncover a silver bullet for increasing household saving." Hahaha! What a moron!

I have a Hot Mogambo Tip (HMT) for this Bernanke birdbrain: How about not constantly increasing money and credit, which makes the monetary aggregates go up, which makes prices go up, which strains the family budget so that they have to spend more and more (and thus can save less and less) just to stay at a standard-of-living standstill? How about trying that for a change, you Fed morons?

And as if to underscore my fear, consumers now owe so much money that they are even having a hard time going deeper into debt! As astonishing as that sounds, News@yahoo.com reports "consumer borrowing rose at an annual rate of 2.6 percent in August, compared to a 4.3 percent rate of increase in July. Borrowing in the category that includes credit cards rose at an annual rate of 4.2 percent in August, following a gain of 4.7 percent in July." Nevertheless, "Total consumer debt rose by $4.99 billion at an annual rate to an all-time high of $2.35 trillion in August."

…One reason that these foreigners are in the debt soup is because prices are up, which is because, as Jim Willie CB of the Hat Trick Letter newsletter reports, "Central banks worldwide have grown the money supply in reckless fashion in the last year. The pace ranges from a seemingly modest 8.5% in [the] European Union, a modest 7.5% in Australia, and roughly 9% in the United States. Check this! Money supply growth is up to 18.4% in China, 19.1% in India, and a whopping 23.2% in South Africa. These are staggering numbers. Without fanfare, Russia has increased its money supply by almost 45%."

And why is this happening? Perhaps Bill Bonner at DailyReckoning.com has hit the proverbial “nail on the head” when he notes, "We did not expect the market to hold up as long as it has. Our error was one of over-estimating the good sense of our fellow man. He is a bigger blockhead than we ever thought. Given the lure of easy credit, ARMs, and 'stated income' lending - he took the bait greedily. Now, he's on the line for more money than any man in history...with no greater income than he had before to pay it off."

He goes on to say that "poor Mr. Typical has not had a wage increase since 1972, according to the U.S. Department of Labor's website. He earned the equivalent of $334.60 a week back 24 years ago. Now, the figure is just $277.96." Hahaha! Welcome to the world of inflation, Mr. and Ms. Typical! What do you think of the Federal Reserve now? Hahahaha! I thought so! Now you are on the path to achieving True Mogambo Enlightenment (TME)!

And when you are paying those outrageous credit-card bills and higher taxes with less real (inflation-adjusted) income, you will more completely understand it when reader Ed informs us that "the word 'usury' in the Hebrew concordance means 'the sting of the serpent' or 'snakebite.'" Thus, he says, "The interest on our national debt, our mortgages, and our credit cards are killing us."

… [Axel Merk, of the Merk Hard Currency Fund] goes on to say that the imbalances in the economy are so severe, thanks to the loathsome Federal Reserve financing the explosion in the size of the government, that "in the absence of an agreement on entitlement reform, the politically most convenient solution is a devaluation of the dollar. In such a scenario, nominal promises can be kept, but the purchasing power[s] of benefits erode. While this is a likely scenario, it is a risky one as side effects may include significant inflation."

Hahaha! Did he really say "may include significant inflation"? I stand tall to tell you the Transcendent Mogambo Truth (TMT)! It WILL be inflationary, as there is no other possible result from all that new money chasing a static supply of goods and services!

Of course, all this bidding up of prices is the horror of inflation that compels me to hide under the stairs, heavily armed, wearing a tinfoil hat and whimpering in fear; and it’s made worse by Richard Russell, of the Dow Theory Letters, when he writes "The current reasonably accurate inflation number is seven percent. The current estimation of the M-3 money supply is nine percent. The only thing holding back massive price inflation today is the massive over-supply of goods. So today we have the almost unprecedented situation of too much money confronting too many goods. The result is a highly unstable market with accompanying massive speculation and leverage."

But before I can really get up a good head of steam and vent some hysterical outrage about how massive deflation and roaring inflation will consume all of us in a bonfire of monetary stupidity, it suddenly occurs to me that not only can we smelly, stinky, lowlife peons now look forward to more and more suffering as inflation starts really catching fire, but we are ALREADY suffering. As Justice Litle Outstanding Investments newsletter reports, "U.S. corporations are bursting with cash, but that is because consumers' pockets have been voluntarily emptied. The talking heads have never bothered to examine this curious point: the biggest run of corporate profits in history and the biggest run of consumer borrowing in history happened at the same time. This is another monster imbalance, with [an] ultimately ugly consequence, that doesn't get much press."

…Jason Furman at CBPP.org is one the guys talking about the rise in the nominal Dow Industrial average, which conveniently neglects to adjust the Dow for the changes in the buying power of the dollar (inflation), or mention the other stock indexes.

Mr. Furman says, "The Dow Jones Industrial Average, adjusted for inflation, is down 17 percent from its all-time high on January 14, 2000. It would need to rise another 2,378 points to set a new record, adjusted for inflation. The broader stock market is even further below its 2000 peak. The Dow Jones Wilshire 5000, which tracks more than 5,000 stocks and is the most comprehensive measure of the U.S. Stock Market, is 23 percent below its record close on March 24, 2000, after adjusting for inflation."

Peter Schiff of Euro Pacific Capital notes that, "priced in British pounds, Canadian or Australian dollars, or euros, at 11,850 the Dow is still below its 2000 peak by approximately 25%, 26% and 32% respectively."

Michael Nystrom at BullNotBull.com is pretty hip to this black-box/computer program trading jazz, and says "So much of today’s program-based trading keys off momentum. This creates a positive feedback loop that sends stocks to new highs and buys any dips before they materialize...[so] after making a tentative new high on the Dow, phony or not, this market has the potential to move a lot higher." The lesson, he says, is to "never argue with new highs! Phony or not, what we have are new highs. If you’re a bear, get out of the way."

Biz.yahoo.com reports "Congressional estimators" are saying that "the federal budget deficit estimate for the fiscal year just completed has dropped to $250 billion." Hahaha! Lies, smoke and mirrors are one thing, so let's take a look at the actual Gross National Debt. Instantly, you notice that we are, thanks to Congress, $620 billion deeper in debt over the same "fiscal year just completed.” Hahaha! How in the hell can you be $620 billion deeper in debt and still say, without your tongue leaping out of your mouth in shame, that the "budget deficit" is only $250 billion? Do you mean that you meant to go into debt by $370 billion, and ended up borrowing $620 billion by accident or something?

But although they spent every dime and borrowed another $620 billion, tax receipts are up $253 billion, a big 12% over last year. What a lousy return on investment!

The budget is now about $2.7 trillion dollars, and with a population of only 300 million, that comes to $9,000 per man, woman and child in the country. So, for every family of three, the federal government is spending $27,000! And this does not even include how much money each little town, city, county or state is spending per capita by issuing bonds! And somehow we American idiots think that we can continue this stupidity indefinitely? I reiterate, "Americans are morons!"

Or, as Bill Buckler of the Privateer newsletter explains, with all the fudging, lying, and outright deceit running rampant today, "We are all in the middle of history's biggest ever 'Potemkin Village' - a prosperous looking facade designed and erected to disguise the financial ruins behind it."

For those who had the smarts to load up on gold in the recent downdraft, you did the right thing, as that trend will probably reverse, if I can surmise from Ambrose Evans-Pritchard of the Telegraph UK. He writes "Central banks may have dumped far more gold on the markets over the last three weeks than officially reported, accounting for the sudden plunge in prices that has stunned investors. Barclays Capital said Europe's banks had sold an extra 100 tonnes from reserves in a rush to meet a quota deadline on Sept 26, but had done so by selling through forward contracts that disguised the effect. The huge sales would help explain gold's brutal fall from $640 an ounce in early September to $559 an ounce this week, an effect compounded in recent days by hedge fund liquidation."

Philip Klapwijk, chairman of the precious metals group GFMS, has the opinion that bullion would soon resume its five-year bull market. "The game is not over for gold," he said. "We've still got a big dollar devaluation ahead."

Reader Larry J. has been connecting dots, too, and says that he thinks that there is something weird involving Toronto Scotia Mocatta Bullion, the Bank of Nova Scotia, and the Royal Bank, who are he says, having a hard time getting, or filling small investor's orders for silver. "The fact remains that when one of the world's largest bullion banks - on COMEX and the LBMA - cannot supply these small orders, then we can safely say that we are, [for] all intents and purposes, out of the metal."

Roger Wiegand Trader Tracks writes "The American stock markets are peaking for several reasons. First and foremost is the non-confirmation of the transportation index. If transports are lousy, the stuff they normally haul is not being hauled. If goods are not moved, this means no sales as buyers are gone. This is fact, not guessing. CNBS reported this morning Wal-Mart was off two percent. Wal-Mart is a retail sales proxy for all of America as they are the largest in the USA both for employment and retail sales. Trends are screaming stagflation as the economy stagnates while prices of food, energy, real estate taxes and services are racing higher."

SafeHaven.com gives us an "Interesting Picture of the US Bond Markets" by Pinank Mehta of Metier Capital Management. He says, "The current Long 'Open' Interest in 10-year US treasury bonds is greater than SIX Standard Deviations (12 SIGMA)!!!!!!!" Please note the use of the extremely rare seven exclamation points, a literary device to denote particular emphasis, in this case to alert you to prepare for the next sentence, which is that "the odds of a 6-Sigma event are one in 500 million, or 1.37 million years, so it will be exponentially higher for a 12 Sigma event." I don't know about you, but when I read that, sphincters tightened up.

From John William's Shadow Government Statistics we learn that "the broad outlook for a deepening inflationary recession remains in place. Confirming the extremely bleak employment picture, the August help wanted advertising index dropped to 31, from 32 in July, and from 34 in June. The August level is the lowest reading since April 1961." I gasp! 1961?

"Risks of recession continuing to rise, economy is slowing, showing warning flags" says Will Deener of the Dallas Morning News. He reports that "new-car sales are down about 5 percent from a year ago. This has happened six times over the past 40 years, and in every instance the economy was either lapsing into recession or already in recession."

In a related story, reader Titus N. writes, "I received an email from a friend whose friend works in a credit union and does car loans. She said that they do 15 applications per day on a normal day. Last week they did ZERO."

James Stack, a market historian and editor of InvesTech Research hears us talking about this recession stuff, and adds "Not one recession in the past 50 years was forecast in advance by a major poll of economic forecasters", but that the inversion of the yield curve did, and that "The yield curve shows an 88 percent probability of a recession beginning sometime between now and the end of next year."

The prospect of much greater economic dislocation may be one reason why the government has been quietly eliminating citizen’s rights under the guise of fighting terrorism: they may soon have to put down uprisings by foreclosed, unemployed, angry and hungry citizens, and not just in the United States, but also in social democratic Europe:

A devastating indictment of the former SPD-Green government

By Ulrich Rippert

20 October 2006

Stark figures from a still unpublished study by the Friedrich Ebert Institute (Friedrich Ebert Stiftung—FES), which has close ties to the Social Democratic Party (SPD), were revealed last weekend. The statistics immediately unleashed a torrent of debate. The FES report bears the headline “Society during the reform process” and makes clear that mass poverty is growing rapidly in Germany.

Eight percent of the population—i.e. 6.5 million people—are forced to live on an average monthly income of 424 euros (US$535) or less. Poverty is growing especially rapidly in the east of the country with up to twenty percent—other reports even speak of 25 percent—of the population living in poverty in the states of what was formerly East Germany (DDR).

Although the study originates from the SPD headquarters, the figures released so far represent a devastating indictment of the seven-year rule by Germany’s former SPD-Green government (1998-2005). This government, led by Gerhard Schröder and Joschka Fischer, was responsible for the most dramatic redistribution of wealth from the less well off to the rich and corresponding social disaster in the history of postwar Germany.

The job market “reforms” introduced by the SPD-Green government created conditions whereby those with relatively well-paid jobs, such as skilled workers, technicians or even engineers, could undergo a rapid descent into poverty should they lose their job. After just twelve or at the most 18 months of regular unemployment benefits, the jobless then become dependent on so-called Unemployment Pay 2, which corresponds to former levels of basic social welfare. At the same time such payments are only made if “need” is identified—i.e. when the unemployed person has expended all of his or her personal savings.

A thoroughly hypocritical debate

Following the publication of some of the FES report’s findings, representatives from Germany’s major political parties quickly expressed their concern and worries. The response to the report in the form of statements of concern and expressions of surprise over the extent of mass poverty in Germany has been characterised by utter cynicism and hypocrisy.

The chairman of the SPD, Kurt Beck, was one of the first to respond. He told the Frankfurter Allgemeinen Sonntagszeitung that he was “deeply concerned” about the emergence of a social “underclass,” which is unable to break out of a vicious circle of inadequate education, unemployment, poverty and frustration. His comments simply ignore the fact that, as the prime minister of the state of Rhineland-Palatinate for many years, Beck played a key role in the SPD executive in developing, defending against criticism and vigorously implementing the party’s so-called “Agenda 2010.”

A response to Beck’s comments came from the head of the conservative parliamentary fraction, Volker Kauder, who fulsomely stressed the importance of a debate over the “new socially deprived class.” He regarded the term “underclass” for such people as inappropriate and strictly rejected it. “This expression stigmatises and ensures that one can no longer reach these people. I prefer to speak of people with social and integration problems,” Kauder continued, and demanded “concrete assistance with integration.”

While politicians were arguing about the term “underclass,” the president of the German Chamber for Industry and Commerce, Ludwig George Braun, intervened in the debate to warn against any increase in social security benefits for the unemployed and the poor. The problem had to be tackled “at the root,” he emphasised and that means “more education and not more social welfare payments.” According to Braun the plight of those condemned to long-term unemployment and poverty has its origins in “an inheritance over decades of bad education.”

In light of the obvious responsibility of the Schröder-Fischer government for this situation, the outgoing chair of the German Trade Union Federation (DGB), Ursula Engelen Kefer, referred to that government’s “misplaced labour policy.” Kefer told German radio that the expansion of 400 euro (US$505) low-wage jobs and so-called “one-man companies” under the SPD and Greens had helped to expand “the low wage sector and poverty.”

Kefer failed to mention, however, that the trade unions had largely supported all the social cuts incorporated in Agenda 2010. Instead she declared that as a member of the SPD’s executive committee she was very pleased that her party was now beginning to address the problem. Another SPD deputy, Otmar Schreiner, who is speaker of the SPD working group for employee issues, made similar comments. He also spoke of a hopeful step being made by the SPD.

Fear of radicalization

In fact, the entire debate is politically farcical because the figures revealed by the FES study—based on what we know so far—are neither new nor surprising. The real reason for the phoney display of concern on the part of the politicians is due to the fact that the political consequences of the social crisis in Germany are increasingly obvious. Broad sections of the working population are turning away from the traditional parties.

Since the start of the “grand coalition” between the Social Democrats and Christian Democrats (CDU) at the end of last year—in fact, a conspiracy against the German working class—the two parties have lost a total of nearly 40,000 members. Since German reunification in 1990 the SPD has lost more than 40 percent of its membership (over 400,000).

In Senate elections held last month in Berlin, the SPD was able to improve its share of the vote by around one percent. However, when one takes into account the drastic decline in voter turnout, the party actually lost 57,718 votes. In elections in the state of Mecklenburg-Western Pomerania the SPD lost a total of 146,806 votes and in the national elections one year ago a total of 2.3 million votes.

For decades in Germany after the war political stability was guaranteed by a welfare state providing a large degree of social security, watched over by the so-called People’s Parties—the SPD, the Christian Democrats and the Christian Social Union (CSU)—representing a broad variety of political programs. The latest figures over social inequality and mass poverty make clear that this period is finally at an end.

Last year, when the SPD and Greens were still in government, an official report was published on poverty and wealth, which revealed that the proportion of the population officially living below the poverty line had risen from 12.1 percent in 1998 (the start of the government) to 13.5 percent—i.e. every eighth household (around eleven million people). The poverty line is based on those earning less than 60 percent of average income, i.e. under 938 (US$1,185) euros monthly.

A few months later the German Institute for Economic Research (DIW) actually estimated the level of poverty at 16 percent—based on statistics from the year 2004—compared to 11.5 percent in 1999. That figure, according to the Institute, increased by half a percent in the course of 2005 alone—to 16.5 percent. And, according to the DIW, the newly incorporated states of the former DDR were even worse off, with poverty rates of 21.5 percent.

At the same time, the concentration of wealth increased at the top of society. The richest ten percent of households control approximately 47 percent of private wealth, an increase of approximately two percent since 1998. Meanwhile the number of indebted households has increased from 2.77 to 3.13 million.

When these figures were made known at the end of last year the main political parties unanimously declared there was no alternative to the existing policies.

Since then the social divisions in Germany have become even more pronounced. The salaries of executive board members of the 30 enterprises listed on the DAX (stock performance index) rose 11 percent last year to an average of three million euros (US$3.8 million). According to a study published by the leading German association of private investors (DSW) earlier this week, the Commerzbank increased the salaries of its executive board members by a staggering 175 percent.

The biggest earners were to be found at the Deutsche Bank, where an ordinary member of the board earns 3.83 million euros (US$4.84 million—an increase of 26 percent), and chief executive Josef Ackermann takes home 8.4 million euros (US$10.6 million)—not including his share options and retirement funds. In second place were executives at the software producer SAP (3.18 million—US$4.02 million), ahead of Daimler Chrysler (nearly 3 million euros—US$3.8 million).

In the case of many companies and banks, these increases for leading executives are the reward for their role in implementing mass redundancies and cuts for their own employees.

The fact is that social decline and the increasing pauperization of ever-broader layers of population is the result of a deliberate policy, which was implemented against fierce popular opposition. Thousands took part in demonstrations and protests against the Agenda 2010 and Hartz IV laws.

Following increasing opposition to its anti-social policies and drastic defeats for the SPD in a series of local elections, chancellor Schröder called early elections with the intention of handing over power to the conservative opposition. Following the creation of the “grand coalition” in the winter of 2005, the SPD subsequently took over key ministries in order to press ahead with the social and welfare cuts embodied in its Agenda 2010 program.

The current debate over increasing social decline and instability does not mean that any change of political course will be undertaken—quite the opposite. Above all, the issue at stake for the ruing elite is how to suppress the anticipated resistance to such policies.

Calls for a strong state

Public confidence in existing political relations is declining rapidly. According to a recent joint report by the Federal Statistical Office and the Federal Centre for Political Education, certain layers of the population are increasingly disappointed with “democracy” and all of the political parties. In a recent poll, just 38 percent of those living in the states of former East Germany regarded democracy as the best system of government.

The report concludes that the state must intensify its intervention with regard to education and job provision. The gaps in the existing social fabric are too large and have to be systematically closed. Any guarantee of state subsidies had to be increasingly coupled to the readiness to work. The arguments employed in the report increasingly make the case for a type of national labour service.

A development arising from the globalization of production, which has already far progressed in many other countries, is now taking affect in Germany—after some delay—and proving to have explosive force. The ruling elite is very conscious of the social implications of such a development and is making the necessary preparations. Working groups have been established in the Ministries of the Interior, Justice and Defence for the purpose of changing the German constitution and permitting the use of the army for domestic interventions “for direct protection against attacks on the foundations of the community.”

Signs of the Economic Apocalypse, 10-16-06

From Signs of the Times, 10-16-06:

Gold closed at 593.70 dollars an ounce on Friday, up 2.7% from $578.00 for the week. The dollar closed at 0.7992 Friday, up 0.6% from 0.7941 euros at the close of the Friday before. That put the euro at 1.2513 dollars compared to 1.2594 at the previous week’s close. Gold in euros would be 474.47 euros an ounce, up 3.4% from 458.95 for the week. Oil closed at 58.70 dollars a barrel, down 2.1% from $59.91 at the end of the previous week. Oil in euros would be 46.91 euros a barrel, down 1.4% from 47.57 euros at the end of the week before. The gold/oil ratio closed at 10.11, up 4.8% from 9.65 for the week. In the U.S. stock market the Dow closed at 11,960.51 Friday, up 0.9% from 11,850.21 at the close of the previous week. The NASDAQ closed at 2,357.29 Friday, up 1.0% from 2,299.99 at the end of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.80%, up 11 basis points from 4.69 for the week.

Last week saw a bit of excitement as the Dow set records and approached 12,000:

Stocks gain as Dow hits another record high

By Chris Sanders
Fri Oct 13, 7:02 PM ET

NEW YORK (Reuters) - Stocks rose on Friday, driving the Dow to another all-time high as positive retail sales data helped the broader market, while a gain in oil prices pushed up energy shares such as Exxon Mobil Corp..

September retail sales unexpectedly fell on a record decline in gasoline sales. However, when the record 9.3 percent drop in gasoline sales was stripped out of the government data, retail sales actually rose 0.6 percent on strong clothing and department store sales. That sign of a healthy economy gave investors a solid reason to buy shares.

"It's no surprise the market is hanging in there," said Scott Wren, senior equity strategist at A.G. Edwards & Sons Inc. in St. Louis, adding that "people are out there spending money. If you look at the retail sales numbers and strip out the gasoline, they look pretty good and they should be in a good job market with falling energy prices."

Gains in recently out-of-favor large-cap tech stocks, including International Business Machines Corp. and Qualcomm Inc., helped boost the Dow and the Nasdaq, respectively. IBM rose 1.6 percent, or $1.38, to $86.08 on the New York Stock Exchange, while Qualcomm gained 2.3 percent, or 90 cents, to $39.84 on the Nasdaq.

The Dow Jones industrial average gained 12.81 points, or 0.11 percent, to end at a record 11,960.51, which also marked a fresh intraday all-time high. The Standard & Poor's 500 Index rose 2.79 points, or 0.20 percent, to finish at 1,365.62, just below a fresh 5 1/2-year high at 1,366.63. The Nasdaq Composite Index advanced 11.11 points, or 0.47 percent, to close at 2,357.29.

For the week, the blue-chip Dow average rose 0.9 percent, while the S&P 500 gained 1.2 percent and the Nasdaq climbed 2.5 percent.

WITH A LITTLE HELP FROM EXXON

U.S. crude oil futures ended stronger on Friday after jumping to a session high above $59 on news of oilfield shutdowns in Norway and indications that OPEC may meet next week to formalize a production-cut agreement, boosting energy shares such as Exxon Mobil and ConocoPhillips .

Exxon Mobil shares rose 1.1 percent, or 75 cents, to $68.40, while ConocoPhillips gained 2.1 percent, or $1.22, to close at $60.03 on the New York Stock Exchange. Exxon Mobil was the top-weighted gainer in the S&P 500 and also gave a major boost to the Dow average.

NYMEX November crude rose 71 cents to settle on Friday at $58.57 a barrel, off its session high at $59.45.

On Friday, the Dow's advance was curbed in part because conglomerate General Electric Co. posted third-quarter profit in line with Wall Street expectations.

Investors were concerned because GE, the U.S. economic bellwether with operations ranging from jet engine manufacturing to commercial lending, reported weak margins, particularly at its plastics and NBC Universal units.

GE's stock fell 0.7 percent, or 24 cents, to $35.98. In addition to being a major drag on the Dow, GE was the heaviest weight on the S&P 500 and helped limit its gains for the day.

OF MICROSOFT AND MOMENTUM

Investors' appetite for tech stocks, though, offset the worries about GE.

"The confirmation from Microsoft that (the operating system) Vista is coming and the delays are behind them has got them stirred up," said Joseph Battipaglia, chief investment officer of Ryan, Beck & Co. in Yardley, Pennsylvania.

"There is an expectation of some spending to come after that" Vista release, he added.

Microsoft's stock rose 0.5 percent, or 15 cents, to $28.37 on the Nasdaq. It's also a Dow component and in the S&P 500.

Aside from retail sales, the University of Michigan's preliminary reading of its October consumer sentiment index rose to 92.3, exceeding economists' forecast.

The evidence of strong consumer spending bolstered the perception that the Federal Reserve is not inclined to cut interest rates soon. That view prompted some investors to sell bonds.

The yield on the benchmark 10-year U.S. Treasury note , which moves in the opposite direction of its price, rose to 4.81 percent on Friday from 4.78 percent late on Thursday.

HOME FRONT BLUES

A drop in the shares of Centex Corp., the fourth-largest U.S. home builder, helped drive an index of home builder stocks down 4.1 percent. Centex shares declined 5.5 percent, or $3.03, to $52.06, a day after the company sharply cut its earnings outlook as a slumping housing market led to record home sale cancellations.

A negative brokerage recommendation prompted investors to sell the shares of Home Depot Inc., making it among the heaviest weights on the Dow.

Home Depot's stock dropped 2.6 percent, or $1.00, to $36.90 on the NYSE after Prudential Equity Group began coverage of the biggest retailers with an "unfavorable" rating and suggested investors reduce the proportion of Home Depot holdings.

Prudential cited high gasoline prices, higher interest rates and a deteriorating housing market.

Trading was active on the NYSE, with about 1.51 billion shares changing hands, below last year's daily average of 1.61 billion, while on Nasdaq, about 2.00 billion shares traded, above last year's daily average of 1.80 billion.

Advancing stocks outnumbered declining ones by a ratio of almost 7 to 5 on the NYSE and about 3 to 2 on Nasdaq.

The pre-election drop in oil prices has helped push optmistic sentiment beyond the circles of media pundits into the public at large.

Falling gasoline price bolsters U.S. consumers

By Burton Friers

Fri Oct 13, 10:16 PM ET

NEW YORK (Reuters) - Falling gasoline prices spurred U.S. shoppers last month and consumers' enthusiasm firmed in October as the drop in fuel costs left them free to spend elsewhere, reports showed on Friday.

Overall retail sales posted a fall of 0.4 percent in September, the Commerce Department said, but when a record 9.3 percent drop in gasoline sales was stripped out, they showed a healthy rise of 0.6 percent, helped by strong clothing and department store purchases.

Meanwhile, the University of Michigan said its index that gauges consumer sentiment jumped to 92.3 in October, higher than the reading of 86.5 economists had predicted in a Reuters poll and up from September's result.

"Happy days are here again," said Patrick Fearon, senior economist at A.G. Edwards and Sons in St. Louis, Missouri.

"Consumers' improved mood was largely tied to falling gasoline prices."

Analysts polled by Reuters were expecting a 0.2 percent rise in overall retail sales.

U.S. stocks ended higher as the retail sales data helped drive the Dow Jones industrial average to a record high.

U.S. Treasury debt prices slipped and yields rose, as the data reinforced the perception that the Federal Reserve is in no hurry to lower interest rates to stimulate economic growth.

SPENDING PULSE

The strength of Friday's figures was consistent with earlier reports from the retail sector showing growth in consumer spending after a difficult summer when gasoline prices were hovering near record highs.

Average gasoline prices slid from a peak of $2.92 a gallon in mid-August to $2.38 a gallon in late September, according to the Energy Department.

SpendingPulse, a retail data service of MasterCard Advisors, an arm of MasterCard Worldwide, said on Monday that Americans felt freer to splurge with the help of lower gasoline prices and a soaring stock market.

In dollar terms, it said September seasonally adjusted sales, excluding autos, reached $287.7 billion, up 5.3 percent from a year ago.

This followed reports last week from U.S. department stores and clothing retailers, who posted surprisingly strong September sales.

…"If September's sales are any indication, shoppers appear confident heading into the holiday season," the National Retail Federation said in a statement after the retail sales report.

"As gas prices dipped last month, consumers had more disposable income to spend on other items, especially back-to-school necessities like clothing and sporting goods."

The University of Michigan data also showed inflation expectations for the next year were lower, though they were slightly higher for the next five years.

A report from the Labor Department showed U.S. import prices dropped by a more-than-expected 2.1 percent in September, the largest decline in almost 3-1/2 years, due largely to the big fall in petroleum prices.

It was the first fall in overall import prices since March and was led by a 10.3 percent fall in petroleum prices while the cost of non-petroleum imports inched up 0.1 percent.

Some analysts have been trying to peddle the idea that the bursting of the housing bubble is now behind us. Wishful thinking, most likely. Here is “theroxylandr:” blogger:

Real estate bubble: why the worst is still ahead

Any bubble, including Nasdaq bubble of 2000, when the index lost 78% of its value after the bubble burst, follow the same psychological pattern of participants, i.e. bubble inflators. This pattern is:

1. euphoria
2. denial
3. recognition
4. panic
5. hope (optional)
6. capitulation

Btw, the lost wars usually follow the same pattern. Now let see the reported RBC Homeowner’s Survey, where homeowners expressed their ridiculous expectations:

· 75.6%: see their Home’s value climbing over the next few years
· 46%: expect a gain of 5% or more annually
· 30%: foresee a rise of 10% to 15% a year
· 70%: said their home’s value has risen 10% or more in the past 3 years
· 6% think their home’s value will sink in the next few years
· 7.8%: worry that their mortgage might exceed the value of their home

As you can see 46% of homeowners are in deep denial and 30% have plain brain damage. Only 6% are absolutely correct.

This stage is called denial, when obvious facts are still ignored by the majority of the market players. It is the same stage where Nasdaq was in early 2001. Please check the charts to see what happened next.

In fact, if the housing situation does stabilize, it can only happen by means of an even bigger replacement bubble in some other sector. Each time one bubble replaces another, the stakes get higher. Some are suggesting a derivatives bubble is being created to soften the impact of a housing bust world-wide. If so, that might be the last bubble; what could replace THAT?”

Bubble - Bubble Toil And Trouble

by Captain Hook
www.treasurechests.info

October 15, 2006

The study below originally appeared at Treasure Chests for the benefit of subscribers on Monday, October 2, 2006.

While I may be a bit premature about attaching a Halloween oriented motif to this piece, at the same time, it fits the situation better than any other in mind so we’ll just have to go with it. And to what does it refer, a witches brew perhaps? Well, in a way yes, that’s it in a nutshell all right. Of course alternatively one could just as easily characterize it as a ‘big mess’ in less dramatic terms. What mess is this to which we are referring? Why it’s the next asset bubble, in progress as we speak. Actually, it’s been there for quite some time now, but not too many see it for what it is in reality. It’s the bubble to replace the housing bubble, which of course was the bubble that replaced the tech bubble, all of which being a product of an insane credit bubble, undoubtedly the primary source of our undoing in the end. Which bubble is this then, after such a grand buildup? Why it’s the derivatives bubble of course. You know, the one that keeps growing like a mushroom still to this day.

According to the Bank for International Settlements (BIS), the combined turnover in the world's derivatives exchanges totaled USD 344 trillion during Q4 2005. No, that’s not a typo, that’s $344 trillion of notional value, where if one were to annualize a total, it doesn’t take long to figure out the world is now trading in excess of a quadrillion worth of this paper every year. Is that a big enough bubble for you? And it goes without saying this has been a boon to the brokerages and banks that deal in these formerly exotic financial instruments, where whether you realize it or not, even if you don’t participate in them directly, simply by owning a mutual fund, or a bank account for that matter, indirectly you too are captive to this trend.

Can derivatives be classified as ‘real’ assets however? Are they not just contracts, or promises to pay if you will? And if they cannot be considered ‘real’ assets then, how can they be characterized as a bubble? An interesting viewpoint, one a banker attempting to baffle you with bull-pucky would raise at an opportune time while reciting a rendition of ‘double speak’. But if this were true, then why are they ascribed value, traded for hard currency, and held on balance sheets? And why does the BIS itself count up all those values, notional as they may be? Answer: While it’s true the notional values of derivatives will never be realized, which of course is the larger part of the scam bankers perpetuate on savers who participate in them, and much like how the insurance industry prospers, ‘premiums’ are paid (but rarely collected on), which as mentioned above go directly to the bottom line of the writers, who for the most part just happen to be banks and brokerages. [i.e. and if not in principal (where they only take the sweet deals themselves), as agents.]

On the surface this may all appear fine and dandy to the unsuspecting, especially if you are one of the increasingly few who actually benefit from this trickery perpetuated under the guise of ‘free enterprise’, where to the victors go the spoils, right? And hey, myself I’m all for fair play. The only problem is the banks and brokers have become too powerful, where they routinely and not so inconspicuously put there own interests ahead of those (the ignorant public) they are suppose to be serving. Of course everybody wants to be a millionaire these days, where we have been conditioned to think this is possible, which is a very large part of the reason this ‘mess’ is allowed to continue growing. What’s more, in spite of a long and illustrious history in the manufacture of US paper, one that includes aiding in the Super-cycle collapse of US stocks back in 1929, I am willing to go out on a bit of a limb at this juncture and speculate the confidence men from Goldman Sachs are at the top of their game right now, evidenced in what appears to be ‘free reign’ in managing fiscal policy at home, while spearheading foreign initiatives designed to continue expanding the paper empire abroad.

With this in mind, and returning to the main topic at hand, it should be no surprise then that the use of derivatives around the world is still on the rise, and that if Mr. Paulson has his way, China will fall into the fold very quickly. One must realize that in order to be a good ‘western’ banker today, which he still is essentially, Hank wants to see China keep its economy humming along no matter what the cost, because he knows growth velocities at home are suffering, and that without accelerated US paper growth in the east, even the Wall Street Dawgs will begin to suffer soon. Here’s a scary thought. If the paper pushers are put out of work, much like those already rendered useless in the ‘real economy’ through the export of manufacturing jobs to Asia, the only ones left working will be government. And then, whom would they tax?

The lack of credible alternatives is a strong incentive to allow asset bubbles to continue growing, and largely explains why officialdom condones / promotes / supports such activities, but it’s getting harder and harder to find new ones. One has to wonder how it’s all going to end knowing growth rates in bubbles under construction will undoubtedly prove unsustainable as well.

This is why Hank is over in China attempting to keep the flow of paper heading overseas accelerating as long as possible, which is why one should not be surprised to hear about derivatives markets opening there too, where simply getting them indebted is not sufficient to support necessary growth in the larger credit bubble anymore. Nope, western bankers need them buying derivatives too, and right away in support of all the other bubbles. North American’s are already enslaved up to their eyeballs in debt and derivatives rendering little to no growth prospects at home in this regard. So, what do Wall Street capitalists do? They export the manufacturing base to China boosting worker’s wages so they can be enslaved in debt servitude, as well as creating markets for all the other paper Da Boyz want to send over. Genius no? The only thing is even the Chinese have growth limits, along with the fact they may be acting to slow, which poses risks to the western model. A slowdown here would not be good for the credit bubble, at large.

So, the big question is what if the Chinese do not embrace the use of derivatives in good measure? Will the derivatives bubble pop soon too if this is the case? For an answer to that question, along with being a window on the larger condition of the paper world in full measure these days, and like GM was considered a ‘bell weather’ when the US still had a manufacturing base, one might want to keep a watchful eye on Goldman’s stock, symbol GS on New York. While it appears to be pushing higher in deference to the ever-expanding derivatives / credit bubble(s), and the increased business that goes along with this trend, when the party is over for real, meaning growth in foreign markets is leveling off – Huston – we may have a problem. For now however, the top brass in China continue to see globalization as the pigs in Animal Farm would, an easy ride on the backs of others to good times. Thusly, we will have derivatives in China, and higher prices for Goldman’s stock price in all likelihood, as well.

In March I put out some thoughts on why the echo bubble in stocks likely had much further to go than some could contemplate at the time. Upon reviewing this piece, you will notice we centered our attention on the plight of GS shares back then knowing we would likely return one day, and here we are now expanding on these understandings. Back in March, GS was $150, and today its $170, apparently on it’s way to a Fibonacci (Fib) resonance defined target of approximately $190. Just as an aside, I use this price targeting method because it’s my belief movements within humans are still primarily a function of nature, no matter how much we attempt to separate ourselves from this reality.

That being said, and while this is all pure speculation, if the Fib based projection presented above is in fact correct, the implication in my mind is that both the derivatives bubble, and perhaps even the larger credit bubble itself, are approaching ‘critical mass’, and that ‘reversals of fortune’ are possibly at hand in the not too distant future. One thing is for sure, even if this were not the case, a good test will be seen once Fib resonance related resistance is achieved, so at a minimum, one might keep this in mind.

And what if this does turn out to be the real deal? You will be very happy in a few years if you take precautions now I will wager, because in a larger sense we are talking about the derivatives and credit bubbles here today, but it should not be forgotten all of our asset bubbles depend on co-existence, and that if growth rates begin to wane, the leveraged buyout bubble, the stock market echo bubble, ALL the other asset bubbles will undoubtedly feel the pinch.

Traveling a little further down the rabbit hole in expanding on the above, and narrowing our focus onto the US stock market in terms of how it fits into the grand scheme of things, as mentioned above, while growth prospects in domestic derivatives markets are likely to slow in coming days for a variety of reasons, and not ignoring the importance of credit based derivatives in the big picture, not only monitoring growth rates is important in measuring future health prospects, but also structure as well. To what structure do we refer and why is it important? In the case of equity based derivatives markets, we are referring to put / call ratios, where if you are unaware, open interest ratios happen to be the best reflection of investor sentiment in the market today based on our studies.

Further to this, and in attempting not take away from the main thrust of this piece, while at the same time covering a related aspect of the derivatives world that could hasten a popping of the larger bubble, it must be briefly mentioned that if US equity index options markets ever became disorderly (not liquid), such a condition would spread to credit and currency related contracts as well, potentially setting off a chain reaction of defaults that for all intents and purposes would shut down the global financial system. Moreover, considering the size and extent of the current derivatives bubble, if the above numbers are extrapolated into the future, very soon we will be dealing in multi-quadrillions of notional values within the totality of international markets. That’s one thing about bankers; they are very predicable, where if one quadrillion is good, ten will undoubtedly be viewed as better in maintaining paper empires. The only thing is, when a bubble of this nature (size) pops, there’s no coming back. Please note this whole train of thought is very consistent with conditions one would expect to see at a top of 'grand' proportions in human intercourse.

Now it’s time to throw some corny (in today’s world) and obvious truisms at you, which in retrospect a few years out, may be looked back on as ‘hitting the nail right on the head’. Here’s another. Whatever has a beginning also has an end. Sounds like Confucius, no? Relating to this, ‘whenever a more natural end is avoided, no matter what you are talking about, the result is usually violent’. Awe, there’s the rub. This is why we watch sentiment in US equity indices so closely, because one of these days open interest put / call ratios will drop across the board, and the floor that currently exists under prices will be gone. Why is this important? Answer: In spite of what you may think on the subject, US monetary authorities are not in a position to monetize the entire financial system, and if stocks were ever to start falling precipitously with options related support(s) removed, not only would they likely not be able to do much about it right away, it’s also likely panic and dislocations will spread to other markets as well. This is because today primary dealers not only deal in stocks in a big way, but also in debt / credit markets, and currencies, with the term ‘counter party risk’ potentially becoming applicable in cross-markets. Puff on that one for a bit.

This is why you want to step out of the paper game with some of your assets, not the least of which is the US dollar (think of China's growing $1 trillion holdings) considering it's poised to lose reserve status one of these days. What’s more, all should realize this is the biggest and most obvious contrarian play ever, where man has never been so far from his natural beginnings. One can only see this if looking through the right pair of glasses however, which was the purpose of this paper, to provide such a view, along with a warning. Much trouble of increasing complexity lies down the road for all, and only the prepared will fair well.

In the end then, it’s important to realize derivatives and debt are all forms of phony money, designed to artificially pump up an ailing financial system. Moreover, once more people not only begin to realize this, but act on this knowledge, gold, silver, and any of the other real ‘hard’ currencies you care to mention will come into their own, even if only to support new paper regimes ultimately as reorganizations are engineered in the future. Of course this eventuality is still years off, and when you see it, the trend towards tangible assets will be a lot closer to its end than beginning, along with rather substantial bubbles in gold and silver correspondingly.

The economic optimism in display in the U.S. recently can only be adopted if one puts on blinders and ignores the deficits, the debt, and, perhaps most importantly, the war. Without the Global War on Whatever They’re Calling it Now, the problems of debt and deficit in the zone of the world’s reserve currency would be bad enough. Wars, however, and most particularly unsuccessful imperial wars, exacerbate debt and deficit.

More reasons a monetary crisis is inevitable

Doug Casey

October 12, 2006

Doug Casey is the chairman of Casey Research, LLC., publisher of the highly acclaimed International Speculator.

Even a casual observer can see that the Fed is now caught between a rock and a hard place. If it lowers interest rates to head off the economic devastation that would come with a collapsed housing bubble—housing is estimated to have, directly and indirectly, contributed 57% of U.S. economic activity over the past 5 years—the Fed risks triggering a wholesale rush by foreigners to dump their trillions of U.S. dollars. But if it raises interest rates to protect the dollar, the Fed risks turning an economic downturn into the most serious recession since the 1930’s.

It is our view at Casey Research that, for a number of reasons, not the least being that we are soon to enter the presidential election cycle, the government will take the course of inflation.

A couple of other factors lead us to that view. One is demographic.

The first-born baby boomers are turning 60 this year, and they and their little brothers and sisters will soon have their hands out for the Social Security and Medicare entitlements they’ve been promised. But the boomers represent an extraordinary bulge in the age profile of the U.S. population. The bulge means that the share of the population receiving government retirement benefits will grow, while the share of the population paying for them will shrink. To paper over this gross imbalance and still keep the entitlement checks going out, deficits will have to increase at a stupendous rate—and the engine of monetary creation will have to ramp up to entirely new and increasingly dangerous levels.

The second factor promising more inflation is the “Forever War” against Islam—already being called World War Three in many quarters. As the chart by our own Bud Conrad shows, the dollar has been a casualty of every U.S. war. War costs are paid for with deficits, and the deficits translate into rising price inflation every time.

Contrary to Wall Street’s opinion, these aren’t problems the Fed can sweep under the rug. Fed Chairman Bernanke is an academic with a reasonable understanding of the technical details, but his career bias has been to dodge recessions by cranking up the presses that print all those $100 bills. “Helicopter Ben” is the nickname he earned for facetiously proposing to drop cash out of helicopters to stave off a deflation.

Given the options in front of him, and his bias toward monetary expansion, we are convinced that the Fed will return to loose monetary policies—masked by ongoing tampering with the CPI indicators and by obfuscating the truth about the money supply. That’s the path of least resistance. In the short run, no one gets hurt, and it delivers the U.S. government its daily fix of billions needed to keep the ship of state afloat.

Monetary expansion will buy some time, but then the real trouble starts. A loose monetary policy eventually produces price inflation. As the inflation becomes noticed, foreign holders will lose confidence in the dollar. Then, as they head for the exit, the Fed will face a stark decision: either raise interest rates to economy-crushing levels to save the dollar, or let the dollar collapse and tolerate even worse inflation a little further down the line.

There’s room in the Fed’s lifeboat for the dollar, and there’s room for the economy, but there isn’t room for both. Bernanke has already all but announced that it will be the dollar that gets thrown overboard.

While no one can say how long it will take for a monetary crisis to emerge or what will ultimately trigger it, now is the time to acknowledge the risk—and in fact the likelihood—that it will occur in the next few years. That potential is confirmed with each newsflash telling us that the housing slump is accelerating and that signs of recession are appearing. Those are code words for the Fed to begin pumping more paper money into the system.

Of course wars, even disastrous ones, make some people rich. They just benefit at the expense of their home society and currency. George Ure blames those fictive psychopaths, the corporations, and those real psychopaths who benefit from those corporations, for the chronic warfare that so damages the average people of the world:

The West is hostage to a view that is profit-oriented; power derives from money, and money flows from corporations. Corporations exist to grow - and without growth profits shrink, and without profits the whole of the Western paradigm is in trouble. When growth doesn't exist to increase standards of living, the excess production must be spent somewhere else, and wars are a fine place to blow up, burn up, and shoot up excess production. I note that as soon as the gunfire stopped Lebanon last month, in came the bankers to make money. It has been almost too pat, too smooth, too orchestrated, at least for my taste.

To get a better understanding of how the psychopaths in charge think and act, ponder the following economic experiment. The economy itself is a weapon in their hands:

Gaza as Laboratory
The Great Experiment

Uri Avnery
October 14-15, 2006

Is it possible to force a whole people to submit to foreign occupation by starving it?

That is, certainly, an interesting question. So interesting, indeed, that the governments of Israel and the United States, in close cooperation with Europe, are now engaged in a rigorous scientific experiment in order to obtain a definitive answer.

The laboratory for the experiment is the Gaza Strip, and the guinea pigs are the million and a quarter Palestinians living there.

In order to meet the required scientific standards, it was necessary first of all to prepare the laboratory.

That was done in the following way: First, Ariel Sharon uprooted the Israeli settlements that were stuck there. After all, you can't conduct a proper experiment with pets roaming around the laboratory. It was done with "determination and sensitivity", tears flowed like water, the soldiers kissed and embraced the evicted settlers, and again it was shown that the Israeli army is the most-most in the world.

With the laboratory cleaned, the next phase could begin: all entrances and exits were hermetically sealed, in order to eliminate disturbing influences from the world outside. That was done without difficulty. Successive Israeli governments have prevented the building of a harbor in Gaza, and the Israeli navy sees to it that no ship approaches the shore. The splendid international airport, built during the Oslo days, was bombed and shut down. The entire Strip was closed off by a highly effective fence, and only a few crossings remained, all but one controlled by the Israeli army.

There remained a sole connection with the outside world: the Rafah border crossing to Egypt. It could not just be sealed off, because that would have exposed the Egyptian regime as a collaborator with Israel. A sophisticated solution was found: to all appearances the Israeli army left the crossing and turned it over to an international supervision team. Its members are nice guys, full of good intentions, but in practice they are totally dependent on the Israeli army, which oversees the crossing from a nearby control room. The international supervisors live in an Israeli kibbutz and can reach the crossing only with Israeli consent.
So everything was ready for the experiment.

THE SIGNAL for its beginning was given after the Palestinians had held spotlessly democratic elections, under the supervision of former President Jimmy Carter. George Bush was enthusiastic: his vision of bringing democracy to the Middle East was coming true.

But the Palestinians flunked the test. Instead of electing "good Arabs", devotees of the United States, they voted for very bad Arabs, devotees of Allah. Bush felt insulted. But the Israeli government was ecstatic: after the Hamas victory, the Americans and Europeans were ready to take part in the experiment. It could start:
The United States and the European Union announced the stoppage of all donations to the Palestinian Authority, since it was "controlled by terrorists". Simultaneously, the Israeli government cut off the flow of money.

To understand the significance of this: according to the "Paris Protocol" (the economic annex of the Oslo agreement) the Palestinian economy is part of the Israeli customs system. This means that Israel collects the duties for all the goods that pass through Israel to the Palestinian territories - actually, there is no other route. After deducting a fat commission, Israel is obligated to turn the money over to the Palestinian Authority.

When the Israeli government refuses to pass on this money, which belongs to the Palestinians, it is, simply put, robbery in broad daylight. But when one robs "terrorists", who is going to complain?

The Palestinian Authority - both in the West Bank and the Gaza Strip - needs this money like air for breathing. This fact also requires some explanation: in the 19 years when Jordan occupied the West Bank and Egypt the Gaza Strip, from 1948 to 1967, not a single important factory was built there. The Jordanians wanted all economic activity to take place in Jordan proper, east of the river, and the Egyptians neglected the strip altogether.

Then came the Israeli occupation, and the situation became even worse. The occupied territories became a captive market for Israeli industry, and the military government prevented the establishment of any enterprise that could conceivably compete with an Israeli one.

The Palestinian workers were compelled to work in Israel for hunger wages (by Israeli standards). From these, the Israeli government deducted all the social payments levied on Israeli workers, without the Palestinian workers enjoying any social benefits. This way the government robbed these exploited workers of tens of billions of dollars, which disappeared somehow in the bottomless barrel of the government.

When the intifada broke out, the Israeli captains of industry and agriculture discovered that it was possible to get along without the Palestinian workers. Indeed, it was even more profitable. Workers brought in from Thailand, Romania and other poor countries were ready to work for even lower wages and in conditions bordering on slavery. The Palestinian workers lost their jobs.

That was the situation at the beginning of the experiment: the Palestinian infrastructure destroyed, practically no means of production, no work for the workers. All in all, an ideal setting for the great "experiment in hunger".

THE IMPLEMENTATION started, as mentioned, with the stoppage of payments.

The passage between Gaza and Egypt was closed in practice. Once every few days or weeks it was opened for some hours, for appearances' sake, so that some of the sick and dead or dying could get home or reach Egyptian hospitals.

The crossings between the Strip and Israel were closed "for urgent security reasons". Always, at the right moment, "warnings of an imminent terrorist attack" appeared. Palestinian agricultural products destined for export rot at the crossing. Medicines and foodstuffs cannot get in, except for short periods from time to time, also for appearances, whenever somebody important abroad voices some protest. Then comes another "urgent security warning" and the situation is back to normal.

To round off the picture, the Israeli Air Force bombed the only power station in the Strip, so that for a part of the day there is no electricity, and the water supply (which depends on electric pumps) stops also. Even on the hottest days, with temperatures of over 30 degrees centigrade in the shade, there is no electricity for refrigerators, air conditioning, the water supply or other needs.

In the West Bank, a territory much larger than the Gaza Strip (which makes up only 6% of the occupied Palestinian territories but holds 40% of the inhabitants), the situation is not quite so desperate. But in the Strip, more than half of the population lives beneath the Palestinian "poverty line", which lies of course very, very far below the Israeli "poverty line". Many Gaza residents can only dream of being considered poor in the nearby Israeli town of Sderot.

What are the governments of Israel and the US trying to tell the Palestinians? The message is clear: You will reach the brink of hunger, and even beyond, if you do not surrender. You must remove the Hamas government and elect candidates approved by Israel and the US. And, most importantly: you must be satisfied with a Palestinian state consisting of several enclaves, each of which will be utterly dependent on the tender mercies of Israel.

AT THE moment, the directors of the scientific experiment are pondering a puzzling question: how on earth do the Palestinians still hold out, in spite of everything? According to all the rules, they should have been broken long ago!

Indeed, there are some encouraging signs. The general atmosphere of frustration and desperation creates tension between Hamas and Fatah. Here and there clashes have broken out, people were killed and wounded, but in each case the deterioration was halted before it became a civil war. The thousands of hidden Israeli collaborators are also helping to stir things up. But contrary to all expectations, the resistance did not evaporate. Even the captured Israeli soldier has not been released.

One of the explanations has to do with the structure of Palestinian society. The Hamulah (extended family) plays a central role there. As long as one person in the family is working, the relatives, too, do not die of hunger, even if there is widespread malnutrition. Everyone who has any income shares it with all his brothers and sisters, parents, grandparents, cousins and their children. That is a primitive system, but quite effective in such circumstances. It seems that the planners of the experiment did not take this into account.

In order to quicken the process, the whole might of the Israeli army is now being used again, as from this week. For three months the army was busy with the Second Lebanon War. It became apparent that the army, which for the last 39 years has been employed mainly as a colonial police force, does not function very well when suddenly confronted with a trained and armed opponent that can fight back. Hizbullah used deadly anti-tank weapons against the armored forces, and rockets rained down on Northern Israel. The army has long ago forgotten how to deal with such an enemy. And the campaign did not end well.

Now the army returns to the war it knows. The Palestinians in the Strip do not (yet) have effective anti-tank weapons, and the Qassam rockets cause only limited damage. The army can again use tanks against the population without hindrance. The Air Force, which in Lebanon was afraid to send in helicopters to remove the wounded, can now fire missiles at the houses of "wanted persons", their families and neighbors, at leisure. If in the last three months "only" 100 Palestinians were killed per month, we are now witnessing a dramatic rise in the number of Palestinians killed and wounded.

How can a population that is hit by hunger, lacking medicaments and equipment for its primitive hospitals and exposed to attacks on land, from sea and from the air, hold out? Will it break? Will it go down on its knees and beg for mercy? Or will it find inhuman strength and stand the test?

In short: What and how much is needed to get a population to surrender?

All the scientists taking part in the experiment - Ehud Olmert and Condoleezza Rice, Amir Peretz and Angela Merkel, Dan Halutz and George Bush, not to mention Nobel Peace Price laureate Shimon Peres - are bent over the microscopes and waiting for an answer, which undoubtedly will be an important contribution to political science.

I hope the Nobel Committee is watching.

Uri Avnery is an Israeli writer and peace activist with Gush Shalom. He is one of the writers featured in The Other Israel: Voices of Dissent and Refusal. He is also a contributor to CounterPunch's hot new book The Politics of Anti-Semitism.