Signs of the Economic Apocalypse, 9-24-07

From Signs of the Times:

Gold closed at 738.90 dollars an ounce Friday, up 2.9% from $717.80 at the close of the previous week. The dollar closed at 0.7097 euros Friday, down 1.5% from 0.7206 at the close of the previous Friday. That put the euro at 1.4091 dollars compared to 1.3877 the Friday before. Gold in euros would be 524.38 euros an ounce, up 1.4% from 517.26 for the week. Oil closed at 81.62 dollars a barrel Friday, up 3.2% from $79.10 at the close of the week before. Oil in euros would be 57.92 euros a barrel, up 1.6% from 57.00 for the week. The gold/oil ratio closed at 9.05 Friday, up 0.2% from 9.07 at the end of the week before. In U.S. stocks, the Dow closed at 13,820.19 Friday, up 2.8% from 13,442.52 for the week. The NASDAQ closed at 2,671.22 Friday, up 2.7% from 2,602.18 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.63%, up 17 basis points from 4.46 for the week.

Bank runs, a plunging dollar, skyrocketing gold and oil accompanied rising stocks and a sharp U.S. interest rate cut by the Fed this week. The Fed was in a bind. It needed to respond to the banking crisis caused by the housing collapse by pumping liquidity (money it creates) into the system and restoring confidence. But it can only do that by lowering interest rates which reduces the value of the dollar at a time when the dollar is poised at the brink of an abyss. So it lowered interest rates more than forecast on Tuesday. Stocks rose, but the dollar fell to record lows against the euro and gold and oil rose sharply.

As usual, Mike Whitney sums up the move best:

Bernanke, Rate Cuts and the "Greenspan Put"
The Era of Global Financial Instability

Mike Whitney

September 22 / 23, 2007

"Give me control over a nation's currency and I care not who makes its laws."
--Baron M.A. Rothschild

Wall Street loves cheap money. That's why traders were celebrating on Tuesday when Fed chief Ben Bernanke announced that he'd drop interest rates from 5.25% to 4.75%. The stock market immediately zoomed skyward adding 336 points before the bell rang. The next day the giddiness continued. By mid-morning the Dow was up another 110 points and headed for the stratosphere. Everyone on Wall Street loves Bernanke. He brings them candy and sweets and lets the American worker pay the bill.

So far, the scholarly-looking Bernanke has shown that he is no different than his predecessor Alan Greenspan. Facing his first crisis, the new Fed chief chose to reward his fat-cat friends at the hedge funds and investment banks by savaging the dollar. As soon as he announced his plan to cut the Fed funds rate by .50 basis points; gold soared to $736 per ounce, oil shot up to $82 per barrel, and the euro climbed to a new high of $1.40. These are all the predictable signs of inflation. Food and energy prices will surely follow. The bottom line is that the investor class has been bailed out at the expense of everyone else who trades in dollars.

Bernanke invoked the "Greenspan put", which means that he used his power to protect his friends from the losses they should have incurred from their bad bets. Now, the big market players know that he can be counted on to bail them out whenever they make poor investment decisions. He's also lived up to his nickname, "Helicopter Ben"; ready to deal with every new calamity by tossing trillions of freshly-minted US greenbacks into the jet-stream over the NYSE so elated traders can jack-up their PEs and fatten their bottom line . We think Bernanke should abandon the helicopter altogether and personally deliver pallet-loads of $100 bills to Wall Street's doorstep, just like Bush does with contractors in Iraq. That way the fund managers can keep stoking the market with cheap cash without dawdling at the Fed's Discount Window.

Despite the merriment on Wall Street, there is a downside to Bernanke's actions. The Fed chief has shown foreign investors that he WILL NOT DEFEND THE DOLLAR. That is a powerful message to anyone who hopes to profit by investing in the US. It alerts them to the fact that the "strong dollar" policy is a fraud and that they're better off getting out of US Treasuries and dollar-backed assets. Apparently, many have already gotten the message. Last month, foreign central banks and investors dumped $9.4 billion of US Treasuries and bonds compared to net purchases in June of $24.7 billion. That means that foreigners have stopped buying our debt which is currently $800 billion per year. That's the last leg holding up the wobbly greenback. The dollar will undoubtedly fall precipitously.

So, why would Bernanke weaken the dollar even more by lowering rates 50 basis points?

Is he crazy or did he panic?

We don't know, but we do know that this is the beginning of Capital flight---the sudden exodus of foreign investment from US debt and equities. Most likely, it will be accompanied by the hissssing sound of gas escaping from a punctured equity bubble followed quickly by a painful round of deflation, massive unemployment and the gnashing of teeth.

The size of the current account deficit, which peaked in 2005 at 6.8% of GDP, has dropped to 5.5% by the end of the second quarter of 2007. This is an indication that the maxed-out American consumer is running out of gas and that our foreign trading partners are slowing their intake of US dollars. Now comes the painful part. As the trade deficit shrinks, foreign investment will become scarcer and the dollar will tumble. That means interest rates will have to go up and American's will face an agonizing economic downturn.

This is all part of the Federal Reserve's master-plan for reorganizing the US economy and political system. Since Bush took office in 2000, the dollar has been deliberately weakened; losing more than 40% of its value when compared to the euro. (from $.85 per euro in 2000 to $1.40 per euro in 2007) It has fared even worse against gold. The Fed "rubber stamped" Bush's $400 billion per year tax breaks for the wealthy and looked on approvingly while $4 trillion of national wealth was transferred to foreign investors and banks via the current account deficit (the result of currency deregulation) Also, we now know that Alan Greenspan supported the plan to invade Iraq. He even shamelessly admitted that the war was really about oil which suggests that he was attempting to preserve the dollar's link to petroleum. That linkage is what maintains the dollar's position as the world's "reserve currency". These things indicate that the Central Bank plays a vital role in the policy decisions which are reshaping American life. We assume that the Fed's members are equally supportive of the repressive police-state measures which have been put in place in anticipation of problems that will undoubtedly arise from the economic meltdown they have painstakingly engineered.

The rate cuts tell us that the Fed is now planning to balance the current account deficit on the backs of the American middle class. Prices at the supermarket and gas pump will rise immediately; probably within the next few months if not weeks. It will be harder to get credit. Wages and living standards will decline. Stocks will fall. Consumer spending will shrivel.

…Bernanke is just prolonging the pain by not allowing the market to complete its cycle so that bad debts to be written off and industry can retool for the future. He's buying time for his banker-friends, but doing considerable damage to the dollar in the process. Jim Rogers, the chairman of Beeland Interests Inc. summed up the rate cuts like this:

“Every time the Fed turns around to save its friends on Wall Street, it makes the situation worse. The dollar's going to collapse, the bond market's going to collapse. There's going to be a lot of problems in the U.S.”

Rogers is not alone in his conclusions.

Even foreign leaders, like Venezuelan President Hugo Chavez, have commented recently on the worrisome state of US markets. Three days ago Chavez said on public television that we may be facing a "global financial earthquake" as the result of "irresponsible" US economic policies. Chavez quoted Nobel Laureate Joseph Stiglitz's warning that we may be facing a major economic disaster which could lead to "widespread misery, hunger and severe unrest. And the United State is to blame."

Chavez added that the Bush administration "has had to inject $300 US billion into the private banks this month to avoid a collapse of the dollar and the world economy .The dollar is going down, they don't see that it isn't supported by reality" and because it is "because its fiscal deficit is the largest in history."
Chavez's predictions appear to be accurate as we can see that gold has suddenly skyrocketed while the dollar continues to fall.

…We are now seeing the first signs that this enormous debt-bubble is beginning to unwind. There's very little the Fed can do to affect the inevitable crash that (we believe) they engineered. As defaults in housing continue to rise; the swaps and derivatives in the secondary market will implode. Trillions in market capitalization will vanish in a flash.

US GDP for the last 6 years has largely depended on transactions involving the exchange of massively over-levered assets. Production in the real economy has remained flat. The investment banks are at the epicenter of this controversial new system called "structured finance". We continue to believe that the banks that depended on mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) (as well as asset-backed commercial paper) for the bulk of their income; are in deep trouble. Robert E. Lucas alluded to potential bank-woes in an article in the Wall Street Journal, "Mortgages and Monetary Policy":

"There is an immediate risk of a payments crisis, a modern analogue to an old-fashioned bank run. Many institutions -- not just banks HAVE PAYMENT OBLIGATIONS THAT ARE FAR IN EXCESS OF THE RESERVES TO WHICH THEY HAVE IMMEDIATE ACCESS. Against these obligations they hold short-term securities that they believed could be liquidated on short notice at little cost. If some of these securities turn out not to be liquid in this sense (and especially if no one is sure who holds them) then everyone wants to get into Treasury bonds."

Its rare when we are in agreement with the far-right viewpoints of the WSJ's Editorial page, but in this case, Lucas nailed it. The banks have "obligations that are far in excess of the reserves to which they have immediate access." This is a direct result of the new market architecture of "structured finance" which stacks debt on debt until the whole system is pushed to the breaking point.

Low interest rates can't fix this "systemic" problem. Only fiscal policy can soften the blow of a deflating credit bubble. Economist Henry Liu offers this constructive "New Deal-type" proposal which is a sensible (and ethical) way to address the prospect of growing unemployment and increasing economic hardship for the middle and lower classes:

"A case can be made that what is needed under current conditions is not more cheap money from the Fed, but full employment with rising wages by government fiscal stimulants to boost consumer demand. The US government should make use of the money that the banks cannot find worthy borrowers to lend to, with money-cautious investors seeking to lend to the government, creating jobs for infrastructure rehabilitation and upgrading education to get the economy moving again off the destructive track of privatized systemic financial manipulation." ("Either Way, It could be an Unkind Cut" Henry C K Liu, Asia Times)

Liu is right. We should be enacting the policies which reflect our values on social justice and the equitable distribution of wealth. Instead, the system is being manipulated by an oligarchy of racketeers who have savaged the currency, drained our treasury, and paved the way for a painful cycle of deflation. The US consumer is now being blamed for the massive current account deficit; as if shopping at Walmart for the lowest prices was a crime. But the Fed is the real culprit. They have been opposed to protective tariffs or currency regulation from the very beginning. No country in the history of the world has ever allowed its industrial base to be so ruthlessly decimated (offshoring, outsourcing, factory closures) just to feed the insatiable avarice of its criminal elites.

The current account deficit is the logical upshot of "free trade". And, free trade is the Orwellian moniker used to describe the millions of decent paying jobs which are sacrificed on the altar of globalization. The workers had no part in creating this destructive self-aggrandizing system.

Nor did they have any say-so in the design of the modern market, which is often referred to as "structured finance". Structured finance has been promoted as a way of using capital more efficiency by distributing risk more evenly throughout the system. In fact, it has turned out to be a colossal swindle which is now threatening to break the banks and bring the stock market crashing down. It is essentially mortgage-laundering scheme concocted by the investment banks; winked-at by the so-called regulators, facilitated by the ratings agencies, and exploited by the hedge funds. The victims of this scam are the insurance companies, foreign investors, pension funds and over-leveraged homeowners. Their losses are liable to soar into the trillions of dollars.

Fed chief Alan Greenspan enthusiastically endorsed every dodgy "structured finance" idea; including subprime lending, ARMs, Mortgage-backed securities, currency deregulation, credit expansion and structural changes to the financial services industry. These are the pavers on the road to perdition carefully put in place by the Federal Reserve.

Historian Gabriel Kolko summed up "structured finance" in a recent article "The Predicted Financial Storm Has Arrived":

"We are at an end of an era ... Now begins global financial instability. It is impossible to speculate how long today's turmoil will last-but there now exists an uncertainty and lack of confidence that has been unparalleled since the 1930s-and this ignorance and fear is itself a crucial factor. The moment of reckoning for bankers and bosses has arrived. What is very clear is that losses are massive and the entire developed world is now experiencing the worst economic crisis since 1945, one in which troubles in one nation compound those in others.

Internationalization of finance has meant less regulation than ever, and regulation was scarcely very effective even at the national level. Greed's only bounds are what makes money. Existing international institutions-of which the IMF is the most important--or well-intentioned advice will not change this reality."

The people must take over control of their own currency again. The Federal Reserve must be abolished.

The past week also saw discussion of Naomi Klein’s new book, Disaster Capitalism. Klein argues that capitalism uses the same depatterning techniques pioneered by torturers and evil psychologists.

Can Radical Capitalism Survive the Disasters It Creates?

By John Gray, The Guardian

September 22, 2007

Over the past few decades, many of the ideas of the far left have found new homes on the right. Lenin believed that it was in conditions of catastrophic upheaval that humanity advances most rapidly, and the idea that economic progress can be achieved through the devastation of entire societies has been a key part of the neo-liberal cult of the free market. Soviet-style economies left an inheritance of human and ecological devastation, while neo-liberal policies have had results that are not radically dissimilar in many countries. Yet, while the Marxist faith in central planning is now confined to a few dingy sects, a quasi-religious belief in free markets continues to shape the policies of governments.

Many writers have pointed to the havoc and ruin that have accompanied the imposition of free markets across the world. Whether in Africa, Asia, Latin America or post-communist Europe, policies of wholesale privatisation and structural adjustment have led to declining economic activity and social dislocation on a massive scale. Anyone who has watched a country lurch from one crisis to another as the bureaucrats of the IMF impose cut after cut in pursuit of the holy grail of stabilisation will recognise the process Naomi Klein describes in her latest and most important book to date. Visiting Argentina not long before the economic collapse of 2002, I found the government struggling to implement an IMF diktat to roll back public spending at a time when the economy was already rapidly contracting. The result was predictable, and the country was plunged into a depression, with calamitous consequences in terms of poverty and social breakdown.

Klein believes that neo-liberalism belongs among "the closed, fundamentalist doctrines that cannot co-exist with other belief-systems … The world as it is must be erased to make way for their purist invention. Rooted in biblical fantasies of great floods and great fires, it is a logic that leads ineluctably towards violence." As Klein sees it, the social breakdowns that have accompanied neo-liberal economic policies are not the result of incompetence or mismanagement. They are integral to the free-market project, which can only advance against a background of disasters. At times, writing in a populist vein that echoes her first book No Logo, published seven years ago, Klein seems to suggest that these disasters are manufactured as part of a deliberate policy framed by corporations with hidden influence in government. Her more considered view, which is also more plausible, is that disaster is part of the normal functioning of the type of capitalism we have today: "An economic system that requires constant growth, while bucking almost all serious attempts at environmental regulation, generates a steady stream of disasters all on its own, whether military, ecological or financial. The appetite for easy, short-term profits offered by purely speculative investment has turned the stock, currency and real estate markets into crisis-creation machines, as the Asian financial crisis, the Mexican peso crisis and the dotcom collapse all demonstrate."

There are very few books that really help us understand the present. The Shock Doctrine is one of those books. Ranging across the world, Klein exposes the strikingly similar policies that enabled the imposition of free markets in countries as different as Pinochet's Chile, Yeltsin's Russia, China and post-Saddam Iraq. Part of the power of this book comes from the parallels she observes in seemingly unrelated developments. In a fascinating and alarming examination of the underside of recent history, she notes the affinities between the policies of shock therapy imposed in the course of neo-liberal market reform and the techniques of torture that have been routinely used by the US in the course of the "war on terror." Klein begins her first chapter with a moving account of a conversation she had with a victim of a covert programme of mind-control experiments, carried out in Canada in the 1950s, which used people suffering from minor psychiatric ailments to try out techniques of "de-patterning" that aimed to scramble and reshape their personalities.

Employing electroshock therapy, sensory deprivation and drug-induced comas, these experiments helped develop some of the "coercive interrogation techniques" that have been practised in Guantánamo Bay. Klein uses torture as a metaphor, and does not claim any cause-and-effect link between its re-emergence and the rise of neo-liberal shock therapy; but she does point to some disquieting similarities. Individuals and societies have been "de-patterned" with the aim of remaking them on a better, more rational model. In each case, the experiments have failed, while inflicting lasting and often irreparable damage on those who were subjected to them.

But has the free market experiment failed? As Klein sees it, free market shock therapy may actually have succeeded in achieving its true objectives. Post-invasion Iraq may be "a ghoulish dystopia where going to a simple business meeting could get you lynched, burned alive or beheaded." Even so, Klein points out, Halliburton is making handsome profits -- it has built the green zone as a corporate city-state, and taken on many of the traditional functions of the armed forces in Iraq. An entire society has been destroyed, but the corporations that operate in the ruins are doing rather well. Klein's message, then, seems to be that -- at least in its own, profit-centred terms -- disaster capitalism works…

It certainly does work for the sadists and psychopaths who are running things. Unless we can implement a new economic system, the rest of us don’t have much to look forward to, just one disaster after another with increasing subjection and deprivation.