Signs of the Economic Apocalypse, 4-13-07

From Signs of the Times:

Gold closed at 689.90 dollars an ounce on Friday, up 1.5% from $679.40 at the close of the previous Friday. The dollar closed at 0.7390 euros Friday, down 1.2% from 0.7475 at the previous week’s close. That put the euro at 1.3532 dollars compared to 1.3378 the Friday before. Gold in euros would be 509.83 euros an ounce, up 0.4% from 507.85 for the week. Oil closed at 63.41 dollars a barrel Friday, down 1.3% from $64.25 at the close of the Friday before. Oil in euros would be 46.86 euros a barrel, down 2.5% from 48.03 for the week. The gold/oil ratio closed at 10.88 Friday, up 2.9% from 10.57 at the close of the previous Friday. In U.S. stocks, the Dow Jones Industrial Average closed at 12,612.13 Friday, up 0.4% from 12,560.20 at the close of the week before. The NASDAQ closed at 2,491.94 Friday, up 0.8% from 2,471.34 for the week. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.76%, up one basis point from 4.75 at the end of the previous week.

The dollar was under pressure last week, falling against the euro and gold.

Euro rallies strongly at dollar's expense

By Neil Dennis

Fri Apr 13, 5:10 PM ET

The euro rallied strongly this week as the dollar was battered from all sides and expectations about global interest rates shifted.

Expectations of further monetary tightening supported the euro and sterling while the dollar was stung by the growing perception that the next move in US interest rates will be lower.

US producer prices data on Friday added to this sentiment - core output prices were flat in March.

Wednesday's minutes from the Federal Reserve's last open market committee meeting contrasted with the hawkish language used this week by Jean-Claude Trichet, president of the European Central Bank.

The mixed tone of the Fed's statement led economists to conclude that US interest rates will either be cut later in the year or stay on hold at 5.25 per cent for the foreseeable future.

"We still expect the Fed to cut rates to 4.5 per cent by the end of the year," said Paul Ashworth, US economist for Capital Economics.

In a press conference after Thursday's ECB policy meeting, at which eurozone rates were left at 3.75 per cent, Mr Trichet said the bank would monitor inflation risks and act in a "firm and timely manner".

Although the central bank omitted the term "strong vigilance", which indicates a rate increase at the next policy meeting, the language was hawkish enough to indicate a June rise at least.

"The Fed is clearly on hold and could be lowering rates this year, while growth outside the US, particularly in Europe and the UK, gives a differing direction in monetary policy," said Michael Wool­folk, senior currency strategist at the Bank of New York.

Tensions between the US and China also weighed on the dollar this week after the US trade department complained to the World Trade Organisation over what was described as Beijing's failure to protect intellectual property rights.

A "strongly displeased" Beijing subsequently declined Germany's invitation to attend this weekend's G7 meeting in Washington.

Selling pressure on the US currency sent the euro to a two-year high of $1.3554 on Friday.

A late dollar rally pushed the euro back to $1.3509 but the single currency remained 1 per cent higher on the week.

Sterling was also up on expectations of near-term rate rises as house price inflation picked up unexpectedly while robust consumer spending and strong wage growth lent support.

The pound was up 0.8 per cent over the week to $1.9818 against the dollar.
Against the euro, sterling fell 0.1 per cent to £0.6812.

…The dollar fell 0.1 per cent over the week to Y119.10 against the yen.

The danger is not a weaker dollar but a complete collapse of the dollar. Or, if interest rates are raised to prevent the dollar from collapsing, a complete collapse of the U.S. economy. In the past, a collapse of the domestic U.S. economy would have been seen as a problem by those profiting from the economy. Now, however, those who own don’t need those who work to actually do much consuming. As Joe Bageant put it:

Free market capitalism may have been a fraud from the git-go, but at least there was once a version which accepted the notion that any market needed customers. Once upon a time business in the industrialized world needed its citizen laborers as customers, as consumers, which implied they be paid at least enough to buy the products of the businesses and corporations that beat their asses into submission along America's assembly lines and hog slaughtering plants. That was called American opportunity and prosperity and it looked pretty damned good to millions of war ravaged Urpeen furiners trying to decide whether to eat a wharf rat or the neighbor's cat for dinner. As for the Third World, they could eat dirt and do native dances for what few tourists existed then (otherwise called the rich), but mainly they should stay out of the way of "our" natural resources in their countries.

At any rate, when the citizen labor force, by their sheer numbers, held most of the dough in their calloused mitts, there was no avoiding them by the business classes. But now that so much of not just this nation's, but the world's wealth, has become concentrated in the hands of so few, that is no longer a problem for the rich. People are cheaper than ever and getting more plentiful by the minute. So work'em to death, kill'em, eat'em if you want to. Who the f*** cares? The international rich, the managers and controllers of the new financial globalism and the world's resources and the planet's labor forces, whether they be Asian "Confucian capitalists," masters of Colombian Narco state fortunes or Chinese Tongs, New York or London brokerage and media barons, or Russian oligarchs, hold increasing and previously unimaginable concentrated wealth. They look to be a replacement for the mass market, indeed even a better one with fewer mass distribution problems, higher grade demand and at top prices.

The chances of avoiding the collapse of the economy or the collapse of the dollar (which will collapse the economy, too, until the U.S. starts making things again) are slim since indebtedness at all levels are at previously unimaginably high levels. That we have reached this point is no accident of poor policy making, human nature, or unintended consequences. It was all done for a reason, according to Mike Whitney, to put all the wealth in the hands of a few:

Doomsday for the Greenback?
Dollar Madness

Mike Whitney

April 10, 2007

The American people are in La-la land. If they had any idea of what the Federal Reserve was up to they'd be out on the streets waving fists and pitchforks. Instead, we go our business like nothing is wrong.

Are we really that stupid?

What is it that people don't understand about the trade deficit? It's not rocket science. The Current Account Deficit is over $800 billion a year. That means that we are spending more than we are making and savaging the dollar in the process. Presently, we need more than $2 billion of foreign investment per day just to keep the wheels from coming off the cart.

Everyone agrees that the current trade imbalances are unsustainable and will probably trigger major economic disruptions that will thrust us towards a global recession. Still, Washington and the Fed stubbornly resist any change in policy that might reduce over-consumption or reverse present trends.

It's madness.

The investor class loves big deficits because they provide cheap credit for Bush's lavish tax cuts and war. The recycling of dollars into US Treasuries and dollar-based securities is a neat way of covering government expenses and propping up the stock market with foreign cash. It's a "win-win" situation for political elites and Wall Street. For the rest of us it's a dead-loss.

The trade deficit puts downward pressure on the dollar and acts as a hidden tax. In fact, that's what it is--a tax! Every day the deficit grows, more money is stolen from the retirements and life savings of working class Americans. It's an inflation bombshell obscured by the bland rhetoric of "free markets" and deregulation.

Consider this: In 2002 the euro was $.87 on the dollar. Last Friday (4-6-07) it closed at $1.34-- a better than 50% gain for the euro in just 4 years. The same is true of gold. In April 2000, gold was selling for $279 per ounce. Last Friday, at the close of the market it skyrocketed to $679.50---more than double the price.

Gold isn't going up; it's simply a meter on the waning value of the dollar. The reality is that the dollar is tanking big-time, and the main culprit is the widening trade deficit.

The demolition of the dollar isn't accidental. It's part of a plan to shift wealth from one class to another and concentrate political power in the hands of a permanent ruling elite. There's nothing particularly new about this and Bush and Greenspan have done nothing to conceal what they are doing. The massive expansion of the Federal government, the unfunded tax cuts, the low interest rates and the steep increases in the money supply have all been carried out in full-view of the American people. Nothing has been hidden. Neither the administration nor the Fed seem to care whether or not we know that we're getting screwed --it's just our tough luck. What they care about is the $3 trillion in wealth that has been transferred from wage slaves and pensioners to brandy-drooling plutocrats like Greenspan and his n'er-do-well friend, Bush.

These policies have had a devastating effect on the dollar which has been slumping since Bush took office in 2000. Now that foreign purchases of US debt are dropping off, the greenback could plunge to even greater depths. There's really no way of knowing how far the dollar will fall.

That puts us at a crossroads. We are so utterly dependent on the "charity of strangers" (foreign investment) that a 9% blip in the Chinese stock market (or even a .25 basis point up-tick in the yen) sends Wall Street into a downward spiral. As the housing market continues to unwind, the stock market (which is loaded with collateralized mortgage debt) will naturally edge lower and foreign investment in US Treasuries and securities will dry up. That'll be doomsday for the greenback as central banks across the planet will try to unload their stockpiles of dollars for gold or foreign currencies.

That day appears to be quickly approaching as the 3 powerhouse economies are overheating and need to raise interest rates to stifle inflation. This will make their bonds and currencies all the more attractive for foreign investment; diverting much needed credit from American markets.

Just imagine the effect on the already-hobbled housing market if interest rates were suddenly to climb higher to maintain the flow of foreign capital?

The ECB (European Central Bank), Japan and China are all cooperating in an effort to "gradually" deflate the dollar while minimizing its effects on the world economy. In fact, China even waited until the markets had closed on Good Friday to announce another interest rate increase. Clearly, the Chinese are trying to avoid a repeat of the 400 point one-day bloodbath on Wall Street in late February 07.

Japan has also tried to keep a lid on interest rates (and allowed the carry trade to persist) even though commercial property in Tokyo is "red hot" and liable to spark a ruinous cycle of speculation.

But how long can these booming economies avoid the interest rate hikes that are needed for curbing inflation in their own countries? The problem is, of course, that by fighting inflation at home they will ignite inflation in the US. In other words, by strengthening their own currencies they weaken the dollar--it's unavoidable.

This is bound to hurt consumer spending in the US which will ripple through the entire global economy.

The problems presented by the falling dollar can't be resolved by micromanaging or jawboning. In truth, there's no more chance of a "soft landing" for the dollar than there is for the over-bloated real estate market. Greenspan's bubble economy is headed for disaster and there's not much that anyone can do to lessen the damage. As housing prices fall and homeowners are no longer able to tap into their equity, consumer spending will slow, the economy will shrink and the Fed will be forced to lower interest rates.

Unfortunately, at that point, lowering rates won't be enough. Interest rates need at least 6 months to take hold and, by then, the steady drumbeat of foreclosures and falling real estate prices will have soured the public on an entire "asset class" for years to come. Many will see their life savings dribble away month by month as prices continue to nose-dive and equity vanishes into the ether. These are the real victims of Greenspan's low interest rate swindle.

The Federal Reserve is fully aware of the harm they have inflicted with their low interest rate boondoggle. In a 2006 statement the Fed even acknowledged that they knew that trillions of dollars in speculation was being funneled into the real estate market:

"Like other asset prices, house prices are influenced by interest rates, and in some countries, the housing market is a key channel of monetary policy transmission."

"Monetary transmission" indeed?!? Trillions of dollars in mortgages were issued to people who have no chance of paying them back. It was a shameless scam. Still, the policy persisted in a desperate attempt to keep the US economy from collapsing into recession. The upshot of this misguided policy was "the largest equity bubble in history" which now threatens America's economic solvency.
Author Benjamin Wallace commented on the Fed's activities in an article in the Atlantic Monthly, "There Goes the Neighborhood: Why home prices are about to plummet"and take the recovery with them":

"Let's assume for a moment that enough people get fooled, and the refinancing boom gets extended for another year. Then what? The real problem hits. Because if you think Greenspan's being cagey on refinancing, the truth he's really avoiding talking about is that we're in the midst of a huge housing bubble, on a scale only seen once before since the Depression. Worse, the inflated housing market is now in an historically unique position, as the motor of the rest of the economy. Within the next year or two, that bubble is likely to burst, and when it does, it very well may take the American economy down with it."

Or this from Robert Shiller in his "Irrational Exuberance":

"People in much of the world are still overconfident that the stock market, and in many places the housing market, will do extremely well, and this overconfidence can lead to instability. Significant further rises in these markets could lead, eventually, to even more significant declines. The bad outcome could be that eventual declines would result in a substantial increase in the rate of personal bankruptcies, which could lead to a secondary string of bankruptcies of financial institutions as well. Another long-run consequence could be a decline in consumer and business confidence, and another, possibly worldwide, recession".

If it is not handled properly, the housing collapse could result in another Great Depression. America no longer has the (manufacturing) capacity to work its way out of a deep recession. While the Fed was sluicing $11 trillion into the real estate market via low interest loans; America's manufacturing sector was being carted off to China and India in the name of globalization. Without capital investment and increased factory production, economic recovery will be difficult if not impossible. The so-called "rebound" from the 2001 recession was due to artificially low interest rates and easy credit which inflated the housing market. It had nothing to do with increases in productivity, exports, or paying off old debts. In other words, the "recovery" was not real wealth creation but simply credit expansion. There's a vast chasm between "productivity" and "consumption" although Greenspan never seemed to grasp the difference.

A penny borrowed is not the same as a penny earned"although both may cause a slight bump in GDP. Greenspan's attitude was aptly summarized by The Daily Reckoning's Addison Wiggin who said, "GDP measures debt-fueled consumption--it really only measures the rate at which America is going broke".

Bingo.

America's biggest export is its fiat-currency which foreigners are increasingly hesitant to accept.
Can you blame them?

They have begun to figure out that we have no way of repaying them and that the "full faith and credit" of the United States is about as reliable as a Ken Lay-managed 401-K retirement plan.

The fragility of the US economy will become more apparent as Greenspan's housing bubble continues to lose air and consumer spending remains flat. As we noted earlier, home equity withdrawals are drying up which will slow growth and discourage foreign investment. The meltdown in subprime loans has drawn more attention to the maneuverings of the banks and mortgage lenders and many people are getting a clearer understanding of the Federal Reserve's role in creating this economy-busting monster-bubble.

The 10% to 20% yearly increases in property values are unprecedented. They are "pure bubble" and have nothing to do with increases in wages, demand, productivity, capital investment or GDP. It was all "froth" generated by the world's greatest Frothmeister, Alan Greenspan.

As Addison Wiggin notes, "There is only one real source of wealth: a healthy and competitive environment involving the exchange of goods coupled with control over deficit spending."

Elites at the Federal Reserve and in the Bush administration have steered us away from this "tried and true" course and put us on the path to debt and catastrophe. It won't be easy to restore our manufacturing base and compete again in the open market, but it must be done. Strong economies require that their people produce things that other people want. This is a fundamental truism that has been lost in the smoke and mirrors of Greenspan's shenanigans at the Fed.

Regrettably, we are probably facing a decades-long economic downturn in which the dollar will weaken, stocks will fall, GDP will shrivel, and traditional standards of living will decline.

The trend-lines in the real estate market will most likely be the inverse of what they have been for the last 10 years. This will dramatically affect consumer spending (70% of GDP) and put additional pressure on the dollar.

The dollar is already in big trouble--the only thing keeping it afloat is foreign purchases of US debt by creditors who don't want to be left holding trillions in worthless paper.(US debt is Japan's single greatest asset!) These "net inflows" have created a false demand for the dollar which will inevitably dissipate as central banks continue to diversify.

Last week the IMF issued a warning that there would have to be a "substantial" decline in the dollar to bring the trade deficit to sustainable levels. That, of course, is the intention of the Fed and Team Bush"to reduce the debt-load by deflating the currency. It's a crazy idea. No one destroys the buying power of their currency to pay off their debts. It just illustrates the recklessness of the people in charge.

Also, on March 20, 2007 the Governor of China's Central Bank Zhou Xiaochuan announced "that China will not accumulate more foreign reserves and will cut a small amount of current reserves for the formulation of a new currency agency". Zhou's statement is a hammer-blow to the dollar. The US needs roughly $70 billion in foreign investment per month to cover its current trade deficit. China is one of the largest purchasers of US debt. If China diversifies, then the dollar will fall and the aftershocks will ripple through markets across the world.

The Chinese are very careful about how they word their economic statements. That's why we should take Zhou's comments seriously. Three weeks ago he issued an equally ominous statement saying, "China will diversify its $1 trillion foreign exchange reserves, the largest in the world, across different currencies and investment instruments, including in emerging markets." (Reuters)

This should have been a red flag for currency traders, but the media buried the story and the markets dutifully shrugged it off. The truth is that our relationship with the Chinese is changing very quickly and the days of cheap credit and a "high-flying" dollar are coming to an end.

70% of China's currency reserves are in US dollars. The effect of "diversification" will be devastating for the US economy. It increases the likelihood of hyperinflation at the same time the housing market is in its steepest decline in 80 years. When currency crises arise at the same time as economic crises; the problems are much more difficult to resolve.

Doomsday for the Greenback

It is impossible to fully anticipate the effects of the falling dollar. The dollar is a currency unlike any other and it is the cornerstone of American power"political, economic and military. As the internationally-accepted reserve currency, it allows the Federal Reserve to control the global economic system by creating credit out of "thin air" and using fiat-scrip in the purchase of valuable manufactured goods and resources. This puts an unelected body of private bankers in charge of setting interest rates which directly affect the entire world.

Iraq has proven that the US military can no longer enforce dollar-hegemony through force of arms. New alliances are forming that are reshaping the geopolitical landscape and signal the emergence of a multi-polar world. The decline of the superpower-model can be directly attributed to the denominating of vital resources and commodities in foreign currencies. America is simply losing its grip on the sources of energy upon which all industrial economies depend. Iraq is the tipping point for America's global dominance.

When foreign central banks abandon the greenback the present system will unwind and the "unitary" model of world order will abruptly end.

This may be a painful experience for Americans who will undoubtedly see a sharp fall in current living standards. But it also presents an opportunity to disband the Federal Reserve and restore control of the nation's currency to the people's legitimate representatives in the US Congress.

This is the first step towards removing the cabal of powerbrokers in both political parties who solely represent the narrow ambitions of private interests.

The War on Terror is a public relations ploy that is intended to disguise the use of military and covert operations to secure dwindling resources to maintain dollar supremacy. It is a futile attempt to control the rise of China, India, Russia and the developing world while preserving the authority of western white elites.

The strength of the euro portends increasing competition for the dollar and a steady decline in America's influence around the world. This should be seen as a positive development. Greater parity between the currencies suggests greater balance between the states--hence, more democracy. Again, the superpower model has only increased terrorism, militarism, human rights violations and war. By any objective standard, Washington has been a poor steward of global security.

The falling dollar also suggests growing political upheaval at home brought on by economic distress. We should welcome this. America needs to remake itself"to recommit to its original principles of personal freedom, civil liberties and social justice--to reject the demagoguery and warmongering of the Bush regime"to reestablish our belief in habeas corpus, the presumption of innocence and the rule of law. Most important, we need to reclaim our honor.

Big changes are coming for the dollar; it's just a matter of whether we allow those changes to bog us down in recriminations and pessimism or use them to create a new vision of America and restore the principles of republican government. It's up to us.

The collapse will most likely be far worse than the Great Depression that Mike Whitney compares it to. During the Great Depression of the 1930s a far greater percentage of the world’s population grew their own food. The entire world economy has reached “cliff risk” status, according to Michael Panzer, and the consequences are unimaginable. We cannot depend on historical parallels:

Cliff-Risk Nation

Michael J. Panzner

April 10, 2007

In the credit derivatives market, certain instruments are exposed to what is known as “cliff risk.” This ominous sounding phrase describes a situation where the last in a series of adverse developments obliterates the value of what was only recently viewed as a triple-A-rated security. Up until that point, however, rating agencies, investors, and bankers assume that circumstances will eventually right themselves and that the principal will be paid in full, in spite of whatever bad news might have come along beforehand.

This latter way of thinking is not confined to the nether world of complex securities with tongue-twisting names like CDOs-squared. In many respects, it describes a point-of-view that permeates many aspects of modern financial life. Increasingly, Americans have taken it for granted that good times beget more of the same and they have acted accordingly. If bad news comes along, the damage is absorbed. Unlike with some toxic derivatives, however, many believe that if circumstances do manage to take a turn for the worse, something can always be done about it.The massive build-up of public and private debts, unfunded pension promises, and other obligations underscores this perspective. Rather than coming to terms with untenable liabilities taken on because of past miscalculations, the mindset has been “don’t worry about it now.” If financial problems don’t disappear of their own accord, they can be restructured, rolled over, refinanced, or even renamed. One way or another, the thinking goes, the situation will be resolved, because there are any number of options that are readily available.

This mindset probably explains why we haven’t seen the type of response to a growing list of negatives that wizened old-timers would have expected. In the past, significant trade deficits and other unstable imbalances, myriad signs of a looming recession, talk of a subprime meltdown-inspired credit crunch, and the inevitability of down cycles following periods of historically high profit-margins and overextended uptrends would have had money managers scrambling to batten down the hatches by now.

Instead, mutual fund cash levels are near record lows, margin debt and leverage-based speculation are at euphoric extremes, and risk spreads reflect an extraordinary degree of complacency. Every data point, whether good or bad, is seen as another reason for heads-I-win, tails-you-lose optimism.

Nowadays, many would probably argue that it makes little sense to worry or even plan ahead for disaster, because there are numerous escape routes available if things do actually come to a head. Liquid markets, electronic trading and other modern technology, innovative financial products, hedging and stop-losses, and an unfailingly supportive Federal Reserve are seemingly permanent fixtures of today’s financial landscape that will no doubt counteract any unwelcome adversity.

At the same time, the belief exists that there is still big money to be made from taking out-sized risks, and incentives remain heavily skewed to the upside. Practically speaking, current performance is all that matters, with nary a thought given to longer-term returns — or concerns. What might be lost through aggressively geared-up bets on repeated rolls of the dice seems to pale in comparison to what can be realized if everything goes exactly according to plan
Many Americans have adopted a somewhat similar perspective in their day-to-day financial lives. Don’t make enough to keep up with the Joneses? Just charge the credit card. Don’t have enough to buy a home? Borrow 100% of what you need — higher property prices in future will make the extravagance worthwhile. Interest rates are too high? Sign up for adjustable-rate financing with ultra-low up-front teaser rates. Can’t afford to make all your monthly payments, or even survive on your paycheck? Refinance what you owe or simply borrow what you need.

In fact, the mantra seems to be: “Why be defensive at all?” With a support system supposedly in place that can theoretically postpone the day of reckoning more-or-less indefinitely, the rational response is to push the envelope to its extremes. Combine that with the constant bullish squawking and tom-tom thumping by banks and other financial institutions, retailers, policymakers, politicians, and the media, and it adds up a siren song of short-sightedness and self-indulgence that is hard to resist.

Governments at all levels are in the same thrall. How else can you explain politicians who talk, talk, talk about fiscal responsibility, but who continue to advocate ever-escalating spending and borrowing nonetheless? Or who insist on using almost Dickensian pay-as-you-go accounting systems that ignore mind-boggling financial obligations that our children — and our children’s children — will ultimately be responsible for? One problem, of course, is that many have drunk the Kool-Aid that says we can grow our way out of each and every mess. In that delusory state, they carry on as before.

Corporate America is also mired in the here and now, with little apparent trepidation about any challenges that lie ahead. Managers seem mainly focused on slashing costs and paring back investment, instead of longer-term planning, when they are not feathering their nests, of course. Corporate policies, including executive compensation plans, are strongly aligned with short-term performance goals. Even in economically sensitive industries, borrowing levels are going up while reserves are kept to a minimum. You would have thought the best and the brightest would know better.

Yet everywhere you look, people are unwilling or unable to stop what they’ve been doing, especially in recent years, because it seems to have worked so far and for so long and everyone else is playing along, too. Many economic and financial squalls have passed without causing serious disruptions, at least in the aggregate, and it’s hard to refute the optimists when they argue that the times are as good as they’ve every been.

And yet, one day, as is likely to happen ever more frequently with CDOs-Squared and other toxic new age monstrosities, the “event” that really matters will come along. A paradigm-killer that sets in motion a chain reaction that completely undermines the apparently never-ending stability that everyone has gotten used to. By then, people will realize very quickly that America, once viewed as the world’s foremost economic superpower, is nothing more than a cliff-risk nation.