Signs of the Economic Apocalypse, 4-30-07
Gold closed at 684.70 dollars an ounce Friday, down 1.6% from $695.80 at the close of the previous Friday. The dollar closed at 0.7325 euros Friday, down 0.5% from 0.7359 at the previous week’s close. That put the euro at 1.3652 dollars compared to 1.3589 the Friday before. Gold in euros would be 501.54 euros an ounce, down 2.1% from 512.03 for the week. Oil closed at 66.46 dollars a barrel Friday, up 3.7% from $64.11 at the close of the Friday before. Oil in euros would be 48.68 euros a barrel, up 3.2% from 47.18 for the week. The gold/oil ratio closed at 10.30 Friday, down 5.3% from 10.85 at the close of the previous Friday. In U.S. stocks, the Dow closed at 13,120.94 Friday, up 1.2% from 12,961.98 for the week. The NASDAQ closed at 2,557.21 Friday, up 1.2 % from 2,526.39 at the end of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.69%, up two basis points from 4.67 for the week.
There were more troubling signs for the U.S. economy last week in spite of record-high stock prices. GDP growth weakened sharply and the dollar hit a record low against the euro. And, not only did growth stall, but prices went up as well:
GDP growth weakest in four years
By Glenn Somerville
Fri Apr 27, 12:11 PM ET
WASHINGTON (Reuters) - Economic growth during the first quarter was the weakest in four years, hurt by a slumping housing market and deteriorating international trade, the Commerce Department reported on Friday.
At the same time, one price gauge in the GDP report posted its biggest jump in 16 years, sending a jolt of fear through financial markets that official interest rates will stay high.
Gross domestic product or GDP, which measures total goods and services output within U.S. borders, increased at a weaker-than-expected 1.3 percent annual rate in the three months from January through March.
That was half the fourth quarter's 2.5 percent rate and well below the 1.8 percent that Wall Street analysts had forecast. Vital consumer spending held up relatively well but there were signs in a later report that costlier gasoline and lower housing prices might cast a shadow on the outlook.
The Reuters/University of Michigan Surveys of Consumers sentiment index showed a reading of 87.1, down from 88.4 in March and the lowest in seven months. It was the third straight monthly fall in the index but the final April reading was not as low as forecast.
The U.S. economy powered ahead at a 5.6 percent rate in the first quarter of 2006, but has been slowing in recent months as a hard-hit housing sector has led to rising defaults and caused builders to scale back until inventories are reduced.
Residential spending shrank by 17 percent in the first quarter following declines of 19.8 percent in the fourth quarter and 18.7 percent in the third quarter last year.
The dollar continued its fall:
Dollar sinks to record low vs euro
By Kevin Plumberg
Fri Apr 27, 6:00 PM ET
NEW YORK (Reuters) - The dollar dropped to a record low against the euro on Friday after the weakest reading of U.S. economic growth in four years suggested the economy could be at danger of falling behind the rest of the world.
For the first time since its launch in January 1999, the euro rose above $1.3680 and was on track for its largest monthly gain since November.
Against the yen, the euro zone currency climbed to an all-time high above 163 yen, as solid expectations for economic growth in Europe contrasted with the mediocre pace of expansion in the United States and Japan.
Growth in U.S. gross domestic product was below its long-term trend for the fourth consecutive quarter in the first three months of the year, while a measure of inflation posted its largest rise in 16 years.
The data did little to shake the view among investors that the Federal Reserve will likely have to cut U.S. interest rates at least once this year, compared with forecasts for higher rates in the euro zone and Britain, among others, thereby reducing the relative appeal of U.S. fixed-income assets…
MORE OF THE SAME
The weakening dollar in the face of economic strength in Europe and Asia independent of U.S. demand unearthed the greenback's long-term enemies -- diversification of dollar-denominated central bank and portfolio holdings and concerns about financing the U.S. current account deficit.
"The U.S. is still trying to fund a $200 billion-plus quarterly current account deficit but the new twist is that growth has moved to a sub-2 percent pace," said Brian Garvey, senior currency strategist with State Street Global Markets in Boston.
"This could serve as a wake-up call to foreigners who have recently shown an increasing appetite for U.S. equities and U.S. corporate bonds," he said in a research note.
U.S. financial markets need to attract $3 billion every working day to cover the outflow of money due to the world's largest economy's trade deficit.
Next week, investors will have a steady flow of U.S. economic data to measure the dollar against. In particular, investors will likely focus on the March core PCE price index -- the Fed's favored gauge of inflation -- due on Monday and the monthly payrolls report due on Friday.
Significantly lower-than-expected jobs growth could seal the near-term fate of the struggling U.S. dollar.
"The new kid on the block is the potential for a weak labor market," said a money manager with a large currency overlay manager in London. "There's more dollar weakness to go."
It is increasingly clear that the United States’s economy is heading towards recession (at least), the rest of the world has been doing extremely well. The question becomes, will a collapsing dollar and a crashing U.S. domestic economy bring the rest of the world down with it, or will the rest of the world be able to cushion the impact?
24 April 2007
The latest reports on the state of the world economy by both the International Monetary Fund (IMF) and the World Bank paint a picture of a global boom, the like of which has not been seen in almost four decades.
The IMF’s World Economic Outlook (WEO), published earlier this month, predicts that the average world growth rate of 4.9 percent in the period 2003-2006 will continue at least for the next two years. According to IMF statistics, the only stronger spurt was the period 1970-1973, when world growth averaged 5.4 percent. If the current rate is sustained it will represent the most powerful six-year expansion of the world economy in the period since 1970.
The conclusions of the Global Economic Prospects report, published by the World Bank in December 2006, are not essentially different. While its figures are slightly below those of the IMF, due to different measurement techniques, the World Bank points to a “strong global performance” reflecting a “very rapid expansion in developing countries, which grew more than twice as fast as the advanced economies.” This was not just a result of the impact of the Chinese economy, which grew by 10.4 percent, but extended across the range of developing countries. Altogether 38 percent of the increase in global output originated in these regions, well above their 22 percent of world gross domestic product (GDP).
The World Bank noted that if the past 25 years were divided in two periods—1980-2000 and 2000-2005—average growth in developing countries had accelerated from 3.2 percent in the first period to 5 percent in the second. While this acceleration was not shared by all countries, neither was it merely the result of increased growth in China and India.
The IMF’s WEO was filled with similar reports of economic success. Economic activity in Western Europe had “gathered momentum” in 2006 with GDP growth in the euro area reaching 2.6 percent, almost double the rate for 2005 and the highest figure since 2000. “Germany was the principal locomotive, fuelled by robust export growth and strong investment generated by the major improvement in competitiveness and corporate health in recent years,” it stated. Overall the unemployment rate had fallen to 7.6 percent in the euro area, its lowest level for 15 years.
There was even good news from Japan, where the economy was virtually stagnant for more than a decade following the collapse of the share market and real estate bubble in the early 1990s. Despite an unexpected decline in consumption in the middle of 2006, the “economy’s underlying momentum remains robust with private investment expanding—supported by strong profits, improved corporate balance sheets, and the resumption of bank lending—and rising export growth.” Real economic growth in Japan was expected to remain at above 2 percent.
While the growth rate in Latin America was expected to ease to 4.9 percent this year, from 5.5 percent in 2006, the years 2004-2006 were “the strongest three-year period of growth in Latin America since the late 1970s.”
In so-called “emerging Asia” economic activity “continues to expand at a brisk pace”, supported by “very strong growth in both China and India.” In China, real GDP expanded by 10.7 percent in 2006, while in India the growth rate was 9.2 percent, the result of increased consumption, investment and exports.
Growth in Eastern Europe accelerated to 6 percent in 2006, while in Russia the growth rate of 7.7 percent in 2006 was expected to ease only slightly to 7.0 percent in 2007 and 6.4 percent in 2008.
The report described the economic outlook for Africa as “very positive” against a backdrop of strong global growth, increased capital inflows, rising oil production in a number of countries and increased demand for non-fuel commodities. “Real GDP growth is expected to accelerate to 6.2 percent this year, from 5.5 percent in 2006, before slowing to 5.8 percent in 2008.”
One area of immediate concern was whether this expansion in the rest of the world would be pulled back by the slowing of the US economy due to the significant decline in the housing market. Latest figures showed that housing starts and permits were still headed downwards, with stocks of unsold new homes at their highest levels in 15 years. It has been estimated that over the last three quarters of 2006 the sharp contraction in residential construction took an average of 1 percentage point off real GDP growth in the US.
With the US economy having “slowed noticeably over the past year”, the central issue concerning the IMF was “whether this weakness in growth is a temporary slowdown ... or the early stages of a more protracted downturn.” It concluded that a “growth pause still seems more likely at this stage than a recession”. While the growth forecast for the US has been lowered to 2.2 percent (compared to a prediction of 2.9 percent last September), the economic expansion was “expected to gradually regain momentum, with quarterly growth rates rising during the course of 2007 and returning to around potential by mid-2008.”
While setting out what one well-known economist called “the single most optimistic official forecast I have ever seen for the global economy,” the IMF report did voice some concerns, especially with regard to financial markets.
The continued drive for increased yield had resulted in greater risk-taking in less well understood markets and financial instruments. “While this strategy has been successful when markets remain buoyant, price setbacks, rising volatility and emerging loan losses could lead to a reappraisal of investment strategies and a pull-back from positions that have become overextended. Such an unwinding may have serious macroeconomic consequences,” it stated.
The report also sounded a warning about the recent upsurge in leveraged buyouts often led by private equity firms, but in the end concluded that the risks to global growth “now seem more balanced than six months ago.”
Without providing a great deal of analysis, both the IMF and the World Bank pointed to the integration of the global markets, the opening up of the economies of China and India, the expansion of the world labour supply and the impact of information and communications technology as the main factors behind the upturn in world economic growth.
According to the World Bank, over the last quarter century, a time of unprecedented integration for the global economy, sharp falls in transport and communications costs, together with reductions in barriers to trade, have paved the way for productivity increases associated with the integration of emerging markets into global markets.
…In the special section devoted to the globalisation of labour, the IMF report estimates that the effective global labour force has risen fourfold over the past two decades—a “growing pool of global labour [which] is being accessed by advanced economies through various channels, including imports of final goods, offshoring of the production of intermediates [partially completed goods], and immigration.”
Most of this increase in labour supply took place after 1990 with East Asia contributing about half and South Asia and the former Eastern bloc countries accounting for smaller proportions. While most of this cheaper labour comprised less-educated workers, the report noted that the relative supply of workers with higher education increased by about 50 percent over the last 25 years, mainly from the advanced countries, but also from China.
Neither the World Bank nor the IMF draw any historical parallels, but the vast structural changes associated with the latest phase of capitalist globalisation recall the opening of the 20th century when profit rates and economic growth in the major capitalist countries received a significant impetus from the cheap raw materials, minerals and other resources that came from the colonies.
Together with the introduction of new technologies, the vast expansion in the global labour force over the past two decades has resulted in a significant boost to profits. Since the beginning of the 1980s, it is estimated that in the advanced capitalist countries the share of GDP going to labour has declined by about 8 percentage points.
Both organisations regard the latest upswing in growth as a sign of the health and stability of world capitalism ... but there are some nagging doubts. In the words of the World Bank: “While the soft landing is the most likely scenario, the global economy is at a turning point following several years of very strong growth—and such periods are fraught with risk. Indeed ... the last century began under similar auspicious circumstances characterised by an extended period of strong growth buoyed by technological change and ample liquidity. Rather than continuing forward as anticipated by leading economists at the time, the world plunged into the Great Depression. Thus, while much in the current environment is reassuring, a note of caution is merited.”…
I think a lot more than “a note of caution” is merited. So does Mike Whitney who discusses the reasons why a collapse in the U.S is likely and why it will threaten economic growth world-wide:
"Is It Too Late to Get Out?" Housing Bubble Boondoggle
April 24, 2007
Treasury Secretary Henry Paulson delivered an upbeat assessment of the slumping real estate market on Friday saying, "All the signs I look at" show "the housing market is at or near the bottom."
Paulson added that the meltdown in subprime mortages was not a "serious problem. I think it's going to be largely contained."
Paulson knows full well that the housing market is headed for a crash and probably won't bounce back for the next 4 or 5 years. That's why Congress is slapping together a bailout package that will keep struggling homeowners out of foreclosure. If defaults keep skyrocketing at the present rate they are liable to bring the whole economy down in a heap.
Last week, the Senate convened the Joint Economic Committee, chaired by Senator Charles Schumer. The committee's job is to develop a strategy to keep delinquent subprime mortgage holders in their homes. It may look like the congress is looking out for the little guy, but that's not the case. As Schumer noted, "The subprime mortgage meltdown has economic consequences that will ripple through our communities unless we act."
Schumer's right. The repercussions of millions of homeowners defaulting on their loans could be a major hit for Wall Street and the banking sector. That's what Schumer is worried about---not the plight of over-leveraged homeowners.
Every day now, another major lending institution unveils its plan for bailing out the housing market. Citigroup and Bank of America have joined forces to create the Neighborhood Assistance Corporation of America which will provide $1 billion for the rescue of subprime loans. This will allow homeowners to refinance their mortgages and keep them out of foreclosure. The new "30- year loans will carry a fixed interest rate one point below the prime rate, putting it currently at 5.5 percent. There are no fees, and the banks pay all the closing costs."
But why are the banks being so generous if, as Paulson says, "the housing market is at or near the bottom." This proves that the Treasury Secretary is full of malarkey and that the problem is much bigger than he's letting on.
Last week, Washington Mutual announced a $2 billion program to slow foreclosures (Washington Mutual's subprime segment lost $164 million in the first quarter) while Freddie Mac committed a whopping $20 billion to the same goal. In fact, Freddie Mac announced that it "would stretch the loan term to a maximum of 40 years from the current 30-year limit."
40 years!?! How about a 60 or 80 year mortgage?
Can you sense the desperation? And yet, Paulson says he doesn't see the subprime meltdown as a "serious problem"!
Paulson's comments have had no effect on the Federal Reserve. The Fed has been frantically searching for a strategy that will deal with the rising foreclosures. On Wednesday, The Washington Post reported that "Federal bank regulators called on lenders to work with distressed borrowers unable to meet payments on high-risk mortgages to help them keep their homes".
When was the last time the feds ordered the privately-owned banks to rewrite loans?
That gives us some idea of how bad things really are. The details of the meltdown are being downplayed in the media to prevent panic-selling among the public. But the Fed knows what's going on. They know that "U.S. mortgage default rates hit an all-time high in the first quarter of 2007" and that "the percentage of mortgages in default rose to a record 2.87%". In fact, the Federal Reserve and the five other federal agencies that regulate banks issued this statement just last week:
"Prudent workout arrangements that are consistent with safe and sound lending practices are generally in the long-term best interest of both the financial institution and the borrowerInstitutions will not face regulatory penalties if they pursue reasonable workout arrangements with borrowers."
Translation: "Rewrite the loans! Promise them anything! Just make sure they remain shackled to their houses!"
Unfortunately, the problem won't be "fixed" with a $30 or $40 billion bailout scheme. The problem is much bigger than that. There is an estimated $2.5 trillion in subprimes and Alt-A loans---20% of which are expected enter foreclosure in the next few years. Any up-tick in interest rates or unemployment will only aggravate the situation.
Kenneth Heebner, manager of CGM Realty Fund (Capital Growth Management), provided a realistic forecast of what we can expect in the near future as defaults increase.
Heebner: "The Greatest Price Decline in Housing since the Great Depression" (Bloomberg News interview)
"The real wave of pain and foreclosures is just beginning.subprimes and Alt-A are both in trouble. A lot of these will go into default. The reason is, that the people who took these out never really intended to fully service the mortgage---they were counting on rising home prices so they could sign on the dotted line without showing what their income was and then 2 years later flip into another junk mortgage and get a big profit out of the house with putting anything down
"There's a $1.5 trillion in subprimes and $1 trillion in Alt-A the catalyst will be declining house prices which is already underway. But as we get a large amount of these $2.5 trillion mortgages go into default, we'll see foreclosed houses dumped on an already weak market where homebuilders are already struggling to sell there houses. The price declines which have started will continue and may even accelerate in some of the hotter markets. I would expect that housing prices in "2007 will decline 20% in a lot of markets".
"What you are going to see is the greatest price decline in housing since the Great Depression. The one thing that people should not do, is go near a CDO or a residential mortgage backed security rated Triple A by Moody's and S&P because these are going to get down-graded by the hundreds of millions---because they are secured by subprime and Alt-A mortgages where there'll be massive defaults".
Question: "Will the losses in the mortgage market exceed those in the S&L crisis?"
Heebner: "They're going to dwarf those losses because the losses could easily approach $1 trillion---that dwarfs anything that has ever happened. Enron was $100 billion---this will be far greater than that..The good news is that most of these loans are owned by Hedge FundsYou hedge funds buying these subprime and Alt-A loans and leveraging them at 10 to 1. They buy a pool of mortgages at 8% and they borrow against it in yen for 3% and then lever it at 10 to 1so you have a lucrative profit And the hedge fund you are running, the manager is going to get 20% of the gain---so even if it's a year before you go broke; you get rich until the fund is shut down".
Heebner added this instructive comment: "The brokerage firms created "securitization" they know the products are toxic. I don't think they are going to suffer losses; they simply passed them on to everyone else. The only impact this will have is the profits that flow from it will get less.But it is less than 3% of revenues in even the most exposed brokerage firm so THEY'RE NOT GOING TO GET CAUGHT."
Although Heebner believes the brokerage houses will do fine; the same is not true for the small investor. Nearly 70% of subprimes have been securitized. That means that the vast number of shoddy "no down payment, no document, interest-only" loans (that are headed for default) have been transformed into securities and sold to hedge funds. As the housing market continues to falter, these funds will plummet at an inverse rate to the amount of leverage that has been applied. That may explain why, (according to Bloomberg Markets) the "wealthiest Americans have been bailing out" of hedge funds at an alarming rate. A report in last Thursday's New York Times stated:
"Americans with a net worth of at least $25 million, excluding the value of their primary homes, reduced their exposure to hedge funds in 2006"-- The amount of money held by wealthy investors in hedge funds has dropped dramatically-- "The average balance, which was $2.8 million in 2005, was just $1.6 million last year, a 43 percent decline".
So, what do America's richest investors know that the rest of us don't?
Could it be that the over-leveraged hedge funds industry is about to get hammered by the subprime implosion?
If so, it won't be the brokerage houses or savvy insiders who get hurt. It'll be the little guys and the pension funds that take a drubbing.
In Henry C K Liu's "Why the Subprime Bust will Spread" (Asia Times) the author states that the bursting housing bubble will trigger a major pension crisis. After all, who are the "institutional investors? They are mostly pension funds that manage the money the US working public depends on for retirement. In other words, the aggregate retirement assets of the working public are exposed to the risk of the same working public defaulting on their house mortgages". (Liu)
The origins of the housing bubble are complex, but they are worth understanding if we want to know how things will progress. The housing bubble is not merely the result of low interest rates and shabby lending practices. As Liu says, "the bubble was caused by creative housing finance made possible by the emergence of a deregulated global credit market through finance liberalization. The low cost of mortgages lifted all US house prices beyond levels sustainable by household income in otherwise disaggregated markets". The deregulated cross-border flow of funds (via the yen low interest "carry trade" or the $800 billion current account deficit) have played a major role in inflating the US real estate market.
Liu adds, "Since the money financing this housing bubble is sourced globally, a bursting of the US housing bubble will have dire consequences globally."Since nearly 50% of "securitized" mortgage debt is owned by foreign investors; the subprime meltdown is bound send tremors through the entire global financial system.
The housing decline is further complicated by Wall Street innovations in derivatives trading which has generated trillions of dollars in "virtual" wealth and is affecting the Feds ability to control inflation through interest rate manipulation. As Kenneth Heebner said, "You have hedge funds buying these subprime and Alt-A loans and leveraging them at 10 to 1. They buy a pool of mortgages at 8% and they borrow against it in yen for 3% and then lever it at 10 to 1so you have a lucrative profit."
In other words, low interest foreign capital has flooded US markets and contributed to distortions in housing prices.
In her recent article "War Drags the Dollar Down", Ann Berg refers to Wall Street's "swirling galaxy of exotic finance" which has "worked magic for the government and the elite", but has yet to weather a severe downturn in the economy.
But how will market deal with sudden downturn in the hedge fund industry? Will the dodgy subprimes and shaky collateralized debt obligations (CDOs) trigger a crash or has the risk been wisely dispersed through derivatives trading?
No one really knows.
As Berg says, "Derivatives numbers are staggering. The Bank for International Settlements estimates that the notional amount of derivatives traded on regulated exchanges topped a quadrillion dollars last year and that the outstanding unregulated off-exchange (called over-the-counter OTC) amount stood at $370 trillion in June 2006. Because the OTC market is composed of endless strings of bilateral transactions the systemic risk is unknown."
The comments of the President of the New York Fed, Timothy Geithner, help to clarify the abstruse activities of the modern market:
"Credit market innovations have transformed the financial system from one in which most credit risk is in the form of loans, held to maturity on the balance sheets of banks, to a system in which most credit risk now takes an incredibly diverse array of different forms, much of it held by nonbank financial institutions that mark to market and can take on substantial leverage."
Geither's right. The markets now operate as unregulated banks generating mountains of credit through massively leveraged debt instruments---a monster credit bubble larger than anything in the history of capitalism.
So, where is all this headed?
No one really knows. But when the housing bubble crashes into Wall Street's credit bubble,; we can expect the "big bang". That may explain why America's wealthiest investors are running for cover before the whole thing blows. (A number of investors have already cashed out and put their holdings into foreign funds and currencies)
One thing is certain ---time is running out. With $1 trillion in subprimes and Alt-A loans headed for default the system is facing its greatest challenge. US- GDP has been revised to a measly 1.8%, foreign investment is down, and the dollar is losing ground to the euro on an almost weekly basis.
Falling home prices have already precipitated a number of other problems. For example, Gene Sperling reports in "Housing Bust Meets the Equity Blues" that "The Fed data showed an amazing expansion (in Mortgage-Equity Withdrawal). In 1995, active MEW had been $37 billion. By the fourth quarter of 2005, it soared to $532 billion annualized, a 14-fold expansion". These equity withdrawals have translated into consumer spending which accounts for at least 1 full percentage point of GDP. Declining house prices means that extra boast for the economy will now disappear.
Foreclosures are soaring and expected to get worse for the next two years at least. In California foreclosure filings jumped 79% in March alone. Other "hot markets" are reporting similar figures.
The glut of new homes for sale on the market has slammed sales of the nation's major builders; most are reporting profits are down by 40% or more.
The collapse of the subprime mortgage market is also pushing some big U.S. homebuilders toward Chapter 11. According to Bloomberg News, "Some builders are staying out of bankruptcy by relying on the profits they made when sales boomed" in 2004 and 2005. Starting next year they must begin to repay $3.6 billion in public debt in what will certainly be a falling market. The prospects don't look good.
Also, Credit card debt is way up (nearly 7% in one year) and economists are predicting that the trajectory will continue now that home equity is vanishing. Americans savings rate is in negative numbers and the steep increase in credit card debt (with its high interest rates) only compounds the problem. The American consumer has now compiled more personal debt than anytime in history.
The Grim Reaper Meets the Housing Bubble
Those who follow developments in real estate have heard many of the wacky anecdotes related to the housing bubble. Stories abound of young people buying homes just to pay off tens of thousands of dollars of collage loans with their "presto"-equity ---or low paid construction laborers securing 105% loans without any proof of income and a poor credit history. One of the stories that got national attention was about Alberto and Rosa Ramirez, who worked as strawberry pickers in the fields around Watsonville each earning about $300 a week. They (somehow?) qualified for a loan of $720,000 which paid for a "new" four-bedroom, two-bath house in Hollister.
It's sheer madness!
Obviously, those days are over. The speculative frenzy that was generated by the Fed's low interest rates, the banks lax lending standards, and the deregulated global credit market is drawing to a close. The fallout from the collapse in subprime-loans will roil the stock market and hedge funds, but, as Heebner says, the investment banks and brokerage firms will escape without a bruise.
Where's the justice?
Despite Hank Paulson's cheery predictions, we are no where "near the bottom". In fact, a recent survey showed that only 1 in 7 Americans believe that house prices will go down. Even now, very few people grasp the underlying issues or the potential for disaster. We're on a treadmill to oblivion and they think it's a merry-go-round.
As housing prices tumble, more homeowners will experience "negative equity", that is, when the current value of their home is less than the sum of their mortgage. This is the very definition of modern serfdom.
We can expect to see an erosion of confidence in the market, a rise in inventory, and a steady increase in defaults.More and more people will walk away from their homes rather than be hand-cuffed to an asset that loses value every day. This could transform a "housing correction" into a nation-wide financial calamity.
Many peoples' futures are linked directly to the "anticipated" value of their homes.It is impossible to determine how shocked they'll be when prices retreat and equity shrivels. The housing flame-out has all the makings of a national trauma"another violent jolt to the fragile American psyche.
So far, we're still in the first phase of a process that will probably play out for 10 years or more. (Judging by Japan's decades-long decline) None of the bailout plans are large enough to make any quantifiable difference.The numbers are just too big.
Housing prices are coming down and the real estate market will return to fundamentals. That much is certain. The law of gravity can only be ignored for so long.
Just don't count on a "soft landing".
Last week a milestone in the decline of the United States was reached: Toyota surpassed General Motors as the world’s largest auto manufacturer:
Toyota surpasses GM in global auto sales
26 April 2007
During the first three months of 2007, Toyota sold more cars and trucks worldwide than General Motors for the first time ever, as the Japanese company moved closer to becoming the world’s largest automaker in terms of annual global sales. With the exception of individual years in the 1970s and 1980s when production was cut due to labor strikes, General Motors has held the number-one spot for every year since 1931—during the depths of the Great Depression.
The long-awaited eclipsing of General Motors is symbolic not only for what it says about the demise of the once-mighty manufacturing giant, but also for what it reveals about the historic decline of the world position of American capitalism. For most of the twentieth century, GM was synonymous with the power and innovation of US industry. Today, the Detroit-based auto manufacturer—which has been steadily losing market share for three decades and posted more than $12 billion in losses over the last two years—is retrenching its operations, shedding tens of thousands of jobs and shuttering its factories.
In 1955, GM accounted for half of the American auto market, at a time when four out of every five cars in the world were being produced in the US. Emerging from war-torn Japan, Toyota was a small company that only produced 23,000 cars, compared to 4 million manufactured by GM in the US. Today, Toyota is increasing its production worldwide and in North America, where the Japanese auto company first introduced its vehicles 50 years ago. Toyota is steadily grabbing market share from the US carmakers, including GM.
Toyota’s first-quarter sales rose 9.2 percent to a record 2.35 million vehicles, the company reported Tuesday. Last week, GM reported it sold 2.26 million vehicles in the January-to-March period. Fifty years after Toyota entered the all-important US market, the company controlled 15.6 percent of the share, up from 9.3 in 2000, while GM’s share fell to 23.1 percent in 2006—its lowest percentage since the 1920s—down from 28.1 percent just seven years ago.
Globally, GM outsold Toyota 9.1 million to 8.8 million in 2006. But the Japanese auto company’s sales rose 8 percent last year, and it expects to sell 9.34 million vehicles in 2007, in large measure due to growing demand in the North American market. Toyota has six assembly plants in North America with a total production capacity of 1.8 million vehicles a year, and it expects output to rise to 2.2 million by 2010 as two more new plants come on line. Meanwhile, GM is cutting North American production by 1 million units.
While expanding sales in some emerging markets, particularly in China, GM officials have resigned themselves to a permanent loss in US market share. In November 2005, GM launched a major restructuring that called for closing 12 plants by 2008 and slashing its workforce by more than 34,000 employees.
At its peak, GM employed more than 600,000 American workers, including 459,000 members of the United Auto Workers (UAW) union. With the new round of cuts, GM will reduce its blue-collar workforce to 86,000 US hourly workers by the end of 2008, roughly the number of people it employed in Flint, Michigan, alone in the 1970s.
Workers in dozens of GM’s manufacturing centers—such as Detroit, Pontiac, Saginaw and Flint in Michigan; Dayton in Ohio; and Kokomo and Muncie in Indiana—once enjoyed the highest pay of any industrial workers in the country and record levels of home ownership. Today, these cities are littered with empty factories and face a rash of home foreclosures, personal bankruptcies and requests for emergency food and healthcare assistance.
In addition to GM, the other “Big Three” auto companies are hanging on by a thread. Number-two carmaker Ford lost a record $12.7 billion in 2006 and is in the process of closing plants in the US and Canada and eliminating the jobs of 38,000 autoworkers.
Two months ago, DaimlerChrysler reported huge losses at its North American Chrysler Group division and said it would wipe out 13,000 jobs. The German company also revealed plans to spin off its money-losing US operation, opening the way to the carve-up of the 82-year-old company by Wall Street speculators who are anxious to slash workers’ wages and benefits and sell off the company’s most profitable assets. All told, US automakers and suppliers eliminated 150,000 jobs in the US in 2006.
The virtual collapse of the Big Three US auto companies has been a drawn-out process. In the post-World War II period—while Japanese and German industries were still rebuilding after the ruin of the war—GM and other manufacturers boasted that their costs per unit were the lowest in the world, despite paying workers the highest wages. By the 1970s and 1980s, however, profit margins began to fall, and more efficient and innovative Japanese and German manufacturers began to challenge the US monopoly over auto production and penetrate the American market itself.
The response of the auto corporations was to launch an unrelenting assault on the jobs, working conditions and living standards of autoworkers, which continues to this day. Rather than opposing this attack, the UAW collaborated in the shutdown of factories and the destruction of 600,000 Big Three jobs since 1979.
Preaching labor management cooperation, the UAW suppressed the opposition of rank-and-file workers and joined the auto bosses and Democratic Party politicians in promoting anti-Japanese chauvinism in order to divide US workers from their brothers and sisters in Japan and other countries.
US auto executives—who themselves pocketed tens of millions in compensation despite the record losses at their companies—relied on high-profit SUVs and other gas-guzzling vehicles to satisfy big investors, while driving fewer and fewer workers in the factories to produce more and more, and outsourcing production to lower-wage factories in the US and overseas. Rising gas prices and widespread economic insecurity have caused a sharp fall in demand for these bigger vehicles, eliminating a major source of profit for the auto companies. Under pressure from Wall Street investors, GM is looking to slash labor costs again, using as its model the low-wage, nonunion plants Toyota operates in the southern US.
In a speech on Monday in Louisville, Kentucky, GM Vice Chairman Bob Lutz warned that the entire automotive sector would be further hit by the downturn in the housing market and the meltdown in the home mortgage industry. “A lot of people are finding themselves in a position of reduced affordability and that has had an impact, not just on us, but across the industry.”
Add a collapse of the U.S. economy and the dollar to a military defeat in Iraq and Afghanistan, and you will get a drastic fall in the position of the United States in the world. Will the world be able to manage the collapse of the United States as peacefully and absorb the consequences as effortlessly as it did the collapse of the Soviet Union?