Signs of the Economic Apocalypse, 7-16-07

From Signs of the Times:

Gold closed at 667.30 dollars an ounce Friday, up 1.9% from $654.80 at the close of the previous Friday. The dollar closed at 0.7255 euros Friday, down 1.1% from 0.7338 at the previous week’s close. That put the euro at 1.3783 dollars compared to 1.3628 the Friday before. Gold in euros would be 484.15 euros an ounce, up 0.8% from 480.48 for the week. Oil closed at 73.93 dollars a barrel Friday, up 1.5% from $72.81 at the close of the week before. Oil in euros would be 53.64, up 0.4% from 53.43 for the week. The gold/oil ratio closed at 9.03, up 3.4% from 8.99 the Friday before. In U.S. stocks, the Dow Jones Industrial Average closed at 13,907.25 Friday, up 2.2% from 13,611.68 at the close of the week before. The NASDAQ closed at 2,707.00, up 1.5% from 2,666.51 for the week. In U.S. interest rates the yield on the ten-year U.S. Treasury note closed at 5.10%, down 8 basis points from 5.18 at the end of the previous week.

Gold and oil rose sharply in dollars last week and also to a lesser degree in euros. In the U.S. retail sales were down and food prices continue to rise. In fact, the prices of most commodities are rising, or, to say the same thing in another way, all currencies are falling, some are just falling faster than others. The following piece illustrates the interconnected nature of world inflation and how the whole global bubble is dependent on the U.S. consumer:

Reaping the Whirlwind

Frederick J. Sheehan

July 9, 2007

The aspects of inflation are as varied as those of a diamond rotated in the sunlight. Each is illuminating, once one has the ability to distinguish between gemstones. To the untutored, higher oil prices cause inflation. This is similar to rotating a rhinestone, instead of a diamond. The connoisseur understands that too much money-cum-credit causes inflation.

The cost of energy is rising in dollars. Dollar production does not require exploration. The additional increment of energy is hard to find, difficult to evaluate, and susceptible to daily reevaluation upon further investigation (shale oil versus ethanol). Federal Reserve Chairman Ben Bernanke made the market call of the decade in 2002, when oil cost $25 a barrel: “Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation…the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper money system, a determined government can always generate higher spending, and, hence, positive inflation.”

Now to rotate the diamond. Bernanke did not address the printing presses in China, Russia, and Brazil. Americans spend more dollars buying goods shipped into the United States than foreigners pay for American goods that are sold abroad. The result is a mountain of dollars piling up in foreign countries. These extra dollars flow into those local economies. This causes an acceleration of production and consumption -- inflation. An example might be posed as a question: If Americans had spent a trillion dollars less on goods from China et al. over the past decade, would China now be a net importer of coal or India a net importer of grains? China would probably not be increasing its consumption of beef by 20% a year. The base off of which that growth rate is compounding would certainly be at a much lower level.

This elevated base and rate of consumption has accelerated at a much faster pace than the ability to ship and produce the structural material. For instance, one half of urban homes in China now own air conditioners; the power grid cannot compete with such indulgences.

The situation is a bit like the wedding feast at Cana. The caterer badly underestimated the amount of wine required to lubricate the happy glands and bonhomie of the gathered guests. The guests’ teeth were grinding to a halt. It was at this moment that Jesus arrived and produced wine for the multitudes.

We might pray for a miracle, but among other considerations, there is little money to be made from an instant solution. The early stages of discovery are chock-full of moneymaking (and capital-destroying) opportunities. Energy, dollar, and physical construction are inseparable from global hyperactivity.

An integrated specimen is the worldwide housing boom, any component of which involves energy. This pushes energy prices north. A facet of the integration: Russian housing starts have risen 70% over the past year. Russian central bank holdings of U.S. dollars have increased 50% over the past year. The two growth rates are very much related: The Russian central bank converts U.S. dollars received for Russian oil that was exported to the United States. In converting, the central bank prints rubles in exchange for the dollars. These rubles -- that had not and would not exist if not for American energy demands -- then make their way into the Russian economy. Real estate developers are mighty pleased.

We can turn the diamond slightly and see how higher energy costs have increased prices for milk and tortillas. The U.S. government’s solution to limited oil resources includes a vast commitment to ethanol. According to the game plan, the energy used to run cars will, in effect, replace gasoline with corn. The effort may be flawed, but government subsidies, once in motion, rarely come to a screeching halt.

The U.S. produces 11 billion bushels of corn a year. In 2005, 1.5 billion bushels were sequestered for ethanol production. This leapt to 2.3 billion bushels in 2006 and an estimated 3.3 billion bushels in 2007. The price of corn has risen. The Mexican diet is heavily tortilla-ized, especially at the lower income stratum. Riots scarred the early months of President Felipe Calderon’s term of office. He slapped price controls on tortillas. Borrowing from the book of Castro, Calderon warned, “We won’t tolerate monopolists and speculators.” His Cuban counterpart made more sense when he declaimed the “sinister idea of converting food into fuel.”

The little man is also exposed in the United States. Farmland and grazing land are being rotated to the highest-priced crop. Cows are no longer fashionable. Thus, domestic milk prices have risen 63% over the past year. According to Andy Lees at UBS in London, world milk prices have risen 60% over the past six months (measured by the price of skim milk powder, commonly used as the benchmark). The U.S. has no surplus milk powder. It had 2.7 billion pounds in storage in 1983; the last 27 million pounds were sold last year. European warehouses are empty. Other food prices are rising by double digits. (Most everyone knows the government trumpets a consumer price index that does not include food and energy. Less well known is the absence of commodities such as milk, eggs, butter, and cheese from the seasonally adjusted CPI number that does -- purportedly -- include food and energy.)

The pace of energy production required to catch up with energy demands leads to possibly regrettable decisions. Again, from Andy Lees: “Growing plants for fuel will accelerate the already unacceptable levels of topsoil erosion. By using crops for biofuels, we would effectively be ‘mining’ the topsoil, and there is only about six inches of this around the world, on average. Even the best places in North America have seen the topsoil erode from 18 to 10 inches over the past 50 years, but it would have been dramatically more had it not been for replacing it with fertilizer (fossil fuel based)…Fertilizers provide 28% of the energy crops need…” Topsoil erosion due to topsoil mining reduces yield levels. Thus, more fertilizer is needed at the cost of ever more energy just to remain static.

The production of fertilizers consumes energy. Since the cost of energy is rising, the cost of fertilizer production follows. PotashCorp of Canada thinks the cost of producing potash fertilizer in Brazil will rise by nearly 70% this year, due to increased demand for food and fuel. The ethanol binge thus consumes more energy in an effort to produce more energy. The cost of farming is rising, as is the cost of buying a farm: Over the past year, farm prices have risen 10% in Australia and 15% in the U.S.

…We’ll finish by dropping the diamond on the floor to see the world through Bernanke’s myopic view -- that is, from the United States, which is all he is permitted to consider. The amount of steel for apartment construction in Shanghai and Istanbul or the growing appetite for power and power plants around the world escapes his blinders. (Iran’s power plants cannot keep pace with demand; a good part of the increment is produced by consumer electronics imported from China.)

Forget about SUVs. The Toll Brothers (both of them), who manufacture the highest-cost houses in the U.S. (average price for new sale is $675,000 -- and falling), note that buyers opted for ceilings of eight feet in the 1980s. Then it was nine feet and now it is 10 feet. The basic house includes optional equipment. Toll house buyers are drawn to visual trinkets on the facade (e.g., Ionic columns in front of the doghouse), rather than additional insulation. The best-selling box is now “the Hampton,” a 4,800 square-foot pile. The best-seller five years ago was 4,000 square feet. These figures do not reflect the additional two feet of air to be heated and air-conditioned. Nationally -- with or without the Toll Brothers -- the fastest-growing house configuration between 1990-2005 was the five- (or more) bedroom model.

Energy output needs to work hard to keep up with such production, but even the Hampton falls short of rising consumption. Houses are bursting at the seams: The amount of self-storage used by Americans has grown 50% since 1995. There are now 1.89 billion square feet of self-storage space -- six square feet for every man, woman, and child. Much of it is climate controlled.

Many of the fastest-growing real estate markets are full of hot air (California, Las Vegas, Arizona, Florida) or cold air (New England to Washington). The Phoenix-Scottsdale, Ariz., population has risen from 2 million in 1990 to 4 million. Landowners and developers have staked out a rough plan for 8 million sun seekers in 2016. (The betting here is they will be sorely disappointed.) On hot days now, Phoenix uses more energy than New York City. SUVs can be traded for a Cooper; house consumption is here to stay (or rot). Looking abroad, the United Arab Emirates, now rolling in $850 billion of foreign currency reserves, will not be quick to delay construction of new aluminum plants, fertilizer plants, or refineries, not to mention Dubai’s 25-story, air-conditioned ski slope inside a glass bubble.

Naysayers will identify the ski slope as the ultimate bubble. They will also note the weak straw is of centrifugal dollar claims turning centripetal. Fair enough. However, there is probably less than $1 invested in commodities (inventory, common stocks, derivatives) for every $100 of claims on fancy derivatives. Some unfortunate investors are finding the world is not interested in buying CDOs supported by shrinking asset values, but the world needs another 10 million tons of fertilizer -- now.

The global inflationary bubble is driven by individual, corporate and governmental U.S. debt. The government continues to expand the money supply and borrow hundreds of billions. Consumers still play their part:

May consumer credit rises $12.9 billion

July 9, 2007

WASHINGTON (Reuters) - Americans reached for their credit cards with gusto in May after an April lull, sending overall U.S. consumer borrowing up by $12.90 billion -- more than twice the forecast rise, a Federal Reserve Board report showed on Monday.

May consumer credit rose at a 6.4 percent annual rate in May, and credit outstanding totaled $2.441 trillion. Wall Street economists polled by Reuters had forecast a May increase of $6.0 billion.

The May jump was back on the pace of March's increase of $12.94 billion. April's gain was much smaller at a revised $2.29 billion, initially reported as a $2.60 billion increase.

May revolving credit, made up of credit and charge card debt, rose $7.25 billion, or at a 9.8 percent rate, to $894.80 billion, marking the biggest increase since November 2006.

May non-revolving credit, comprising closed-end consumer loans for purchases like cars, boats, college educations and holidays, rose $5.65 billion, or 4.4 percent, to $1.545 trillion.

In spite of all that extra debt, retail sales were down. It may be that a lot of that debt was taken to pay utilities, increased housing payments, and to service other debt. Which means we may be coming to the end of the debt expansion.

Retail sales suffer steep decline

Martin Crutsinger, AP Economics Writer

July 13, 2007

WASHINGTON - Consumers put away their wallets in June, sending retail sales plunging by the sharpest amount in nearly two years. Sales of autos, furniture and building supplies all fell, highlighting the economy's weak spots.

The 0.9 percent drop in retail sales was the biggest decline since August 2005, the Commerce Department reported Friday. It was a far bigger setback than the flat reading that had been forecast.

Part of the weakness was seen as payback for a surprise on the upside in May, when sales surged by 1.5 percent. But the June decline was also viewed as an indication that consumers are cutting back under a barrage of higher prices and a recession in the housing industry.

"Consumers are increasingly cautious in the face of higher gasoline and food prices and slowing home price gains," said Mark Zandi, chief economist at Moody's Economy.com.

Two gauges of consumer confidence gave conflicting signals Friday. The RBC Cash Index fell to its lowest point in nearly a year while the University of Michigan/Reuters survey rebounded to a six-month high, an increase attributed to a temporary retreat in gasoline prices in late June and early July.

Capping a week that began with worries about the strength of consumer demand, Wall Street rose again on Friday as investors discounted the big drop in retail sales, choosing to believe it was a temporary stumble that will not derail prospects for continued economic expansion.

Both the Dow Jones industrial average and the broader Standard & Poor's 500 index set closing records for a second straight day. The Dow climbed 45.52 points to close at 13,907.25, after surging by 283 points on Thursday, the biggest one-day point gain since October 2002.

The economy slowed to a dismal 0.7 percent growth rate in the first three months of this year, but is believed to have rebounded significantly in the just-completed April-June quarter to growth above 3 percent.

Analysts said, however, that the dip in June retail sales would provide a weaker starting point for the current quarter and they forecast that growth in the second half of this year would slip to around 2.5 percent as the slump in housing persists longer than expected, acting as a drag on consumer spending.

Housing, which has been hurt this year by spreading troubles in the subprime mortgage market, has seen sales decline and prices fall in many formerly red-hot markets, where sharp price appreciation over the past five years had boosted consumer spending by making consumers feel more wealthy and also allowing them to take out home equity loans to finance purchases.

"Consumers have been living beyond their means and they are now starting to slow down," said David Wyss, chief economist at Standard & Poor's in New York.

Saturday was Bastille Day in France. The blogger who calls himself Badtux the Snarky Penguin had some interesting observations about that:

The blood of tyrants

July 14, 2007

Today is Bastille Day in France, a celebration of the overthrow of the French monarchy. Here is a song which celebrates the overthrow of tyrants. It is the French national anthem. Please go read the English translation of the lyrics and come back.

Okay, you're back. So what do you think? Suitably bloodthirsty? Not exactly your typical national anthem, eh, what with all that bit about bloodthirsty ripping of babes out of wombs and such.

Some say that we need our own Bastille Day to overthrow the tyrants who control our nation (who, I might add, are not our elected officials -- they are, for the most part, puppets of the real rulers of our nation, the wealthy elite that prefers to work behind the scenes). The problem is what happens next. Once a people becomes accustomed to blood, there is no end to the blood. Rule of law is over, and rule of gun is the only rule. The end result, typically, is that the worst amongst us come out on top -- those with the least morals, the most willingness to kill upon the slightest whim, the least consideration for the least amongst us.

For the French, the result of overthrowing the monarchy led inevitably to Napoleon, who killed millions during his quest to conquer Europe, including over a million Frenchmen whose lives he threw away. While it would certainly be satisfying to take the puppet George W. Bush to the gallows and stretch his neck, and past that point take all the rulers of America and stretch their necks -- Richard and Helen DeVos, the Olin family, the Bradley family, the Scaife family, etc. -- then what? That road inevitably leads down the same road that the garroting of the French royal family led down -- blood, misery, and millions of dead.

One of the geniuses of our founding fathers is that, by and large, they did not massacre the supporters of the English monarchy once the pro-monarchy forces lost and American independence was secured. Instead, they exiled those supporters to Canada. There was no bloodbath on American soil outside the blood of soldiers. Perhaps, if we are forced to fight a new war of independence against a new monarchy, that would be a reasonable solution for dealing with our own monarchs. Except instead of sending them to Canada (which undoubtedly would not want them), I have a much better idea. Send them to Iraq. Naked. With no possessions. No servants. No soldiers or guards. Drop them naked and alone into the middle of the Sadr City suburb of Baghdad. Hey, if it was good enough for our founding fathers... oh wait, I forget, our founding fathers didn't ship the supporters of monarchy naked to Canada. They tarred and feathered them first. Hmm... stock tip: buy stock in feather companies.

What the Snarky Penguin refers to as “the worst among us” we now know can be referred to as psychopaths or “the other human race.” Chaotic times with shattering social trauma are indeed times when those with the lowest morals can rise higher. And, as Andrew Lobaczewski points out in Political Ponerology, they often do it by infiltrating and taking over reform movements, turning them either into power bases that do not serve the goals they were founded to serve or into revolutionary movements that create the kind of violence and chaos that facilitates further takeovers by pathological elements.

With Sarkozy doing his best to implement Anglo-American style capitalism in France, it is a good time to remind people in France what they will get if they let him: a more psychopath-friendly society. Neoliberalism, when implemented, makes it easier for psychopaths to take over a society. This happens at several levels. At the level of individual businesses, Paul Babiak and Robert Hare spell it out in Snakes in Suits: When Psychopaths go to Work (New York: Harper Collins, 2006, 2007). According to Babiak and Hare, the shift to more unstable, entrepreneurial corporations in the United States during the past two decades presented new opportunities for “the other human race” or those without a conscience:

[D]uring the unstable period of the 1980s and 1990s, too many things changed, seemingly all at once, with little time to build supporting policies, procedures, and systems before the next changes came about. In contrast to old-style bureaucratic organizations that were built on stability, consistency, and predictability, the new transitional organizations were forced to give up these “luxuries,” having to become more fluid in the face of an unstable, inconsistent, and unpredictable future… At some point along the way, the concept of the “psychological contract” was challenged, and it eventually gave way to a world where the employee-employer relationship was seen as a transitory one rather than a long-term partnership. This dramatically affected executives, managers, and employees emotionally, psychologically, and socially—causing even the most confident people to feel that they had lost control of their lives. (Snakes in Suits, pp. 157-9)

Who succeeds in this environment, in this new culture of change? Most management experts agree that in order to survive the chaos, employees, managers, and executives must adopt constant change as a work style and lifestyle—the management term for this is embrace change. (p, 160)

Would someone with a psychopathic personality, turned off by earning an honest living in general, even be interested in joining one of these transitioning organizations? Unfortunately, the answer we found is yes, as organizations have become more psychopath friendly in recent years. Rapid business growth, increased downsizing, frequent reorganizations, mergers, acquisitions, and joint ventures have inadvertently increased the increased the number of attractive employment opportunities for individuals with psychopathic personalities—without the need for them to correct or change their psychopathic attitudes and behaviors.

What is it about these new organizations that make them so attractive to psychopaths? First, these “entrepreneurial pretenders” find change personally stimulating. Their thrill-seeking nature draws them to situations where a lot is happening and happening quickly. Second, being the consummate rule-breakers, they find the increased freedom to act tot heir liking. These pretenders capitalize on the lessened reliance on rules and policies and the increased need for free-form decision making that characterize organizations in a chaotic state. Third, as opportunists, they take advantage of others in ways that are not always obvious. In particular, the opportunity to get a leadership or management position is extremely attractive because these positions offer the psychopaths a chance to exert power and control over people and resources, they tend not to require involvement in the details, and they command larger-than-average salaries. Because a leader’s ability to get people to do things is often of more importance than his or her technical capabilities to perform work tasks, pretenders lacking in real work expertise are not disadvantaged; their talents are assumed and their phony or exaggerated backgrounds often accepted at face value. (p. 164)

Babiak and Hare think this is nothing more than an inadvertent result of other factors. What if it is the intended result? Babiak and Hare’s blindness to the larger macrosocial context is displayed in the following sidebar next to the previously-quoted passage:

Entrepreneurial or Just Plain Crooked?

In 2005, the Canadian government was rocked by a patronage scandal involving several hundred million dollars that were funneled by the party in power to advertising agencies. A judicial report on the scandal roundly criticized the party and the ad agencies, who had provided kickbacks for use by the party.

Recently, the Canadian Ethics Commissioner startled the country by stating that the affair could be viewed either as a triumph of theft” or as a “triumph of entrepreneurship,” depending on “how you look at these things.”

…Such ethical relativism is part of the reason psychopathic and other unprincipled “entrepreneurs” find it so easy to line their pockets with the unwitting contributions of those whose ethical standards are more fixed.

In an early 2006 election, the scandal-ridden political party was voted out of power.

What Babiak and Hare don’t mention is that the party that took power was a neoconservative one that backed the Bush regime’s foreign policy goals and backed the corporate globalist agenda in domestic policy, both of which further a psychopath-friendly agenda. The scandal may have been manufactured, more or less, to achieve just that result.

We noted a couple of months ago that countries that were taken over by the neoconservatives had the highest balance of payment deficits. Now we see that an entrepreneurial business culture in a society that has dismantled social insurance is also more psychopath-friendly. This is no accident. Clearly there is much more going on here than just a change in the nature of the corporation that just happened to offer advantages to psychopaths. In a whole range of areas, the way is being made straight for psychopaths to assume control. A society’s immune system is weakened before the move is made by the pathogen.

Once they pull the plug on the bubble economy and institute the crash, the pathocrats may believe that is their chance to take total control. However, the vast majority of normal people may decide they have had enough and stop obeying them. But, as Laura Knight-Jadczyk points out, that can only happen when normal people are fortified by knowledge of the true nature of their enemy:

There are only two things that can bring a psychopath under submission: 1) a bigger psychopath; 2) the non-violent, absolute refusal of all others to submit to their controls no matter the consequences. If every single normal person in the U.S. (and elsewhere) simply sat down and refused to lift a hand to further one single aim of the psychopathic agenda, en masse, if people refused to pay taxes, if soldiers refused to fight, if government workers and corporate drones refused to go to work, if doctors refused to treat psychopathic elites and their families, the whole system would grind to a screeching halt.

But that can only happen if the masses of people KNOW about psychopathy in all its horrible details. Only if they know that they are dealing with creatures that really aren't human can they have the understanding of what they must do. And only when they get miserable enough that the misery that the psychopath will inflict on them in the beginning of their resistance pales in comparison, will they have the will to do this.