Monday, October 29, 2007

Signs of the Economic Apocalypse, 10-29-07

From Signs of the Times:

Gold closed at 787.50 dollars an ounce Friday, up 2.5% from $768.40 at the close of the previous week. The dollar closed at 0.6948 euros Friday, down 0.7% from 0.6994 at the close of the previous Friday. That put the euro at 1.4393 dollars compared to 1.4298 the Friday before. Gold in euros would be 547.14 euros an ounce, up 1.8% from 537.47 for the week. Oil closed at 91.86 dollars a barrel Friday, up 3.7% from $88.60 at the close of the week before. Oil in euros would be 63.82 euros a barrel, up 3.0% from 61.97 for the week. The gold/oil ratio closed at 8.57 Friday, down 1.2% from 8.67 at the end of the week before. In U.S. stocks, the Dow closed at 13,806.70 Friday, up 2.1% from 13,522.02 for the week. The NASDAQ closed at 2,804.19 Friday, up 2.9% from 2,725.16 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.40%, up three basis points from 4.37 for the week.

Oil and gold continued to rise sharply last week. The dollar continued its slide. The ongoing collapse of the dollar has significance far beyond economic matters. It represents not only the end of the reign of the dollar as the world’s reserve currency but also the end of the reign of the U.S. empire as the hegemonic world power. All due to a series of incomprehensible blunders by the Bush administration.

From a LEAP bulletin:

This “end of the Western world as we’ve known it since 1945 “ anticipated by LEAP/E2020 in February 2006, is the collapse in all its dimensions (economic, monetary, financial, diplomatic, intellectual and strategic) of the central pillar of the 20th century world incarnated by the US. It is indeed in this country that is to be found the centre of the financial and banking crisis that has been affecting the whole planet since the middle of last summer. The pillar now lies on quick sands, and this of course implies that the global architecture is altogether subsiding, and then will collapse piece by piece.

…Central bankers are surrounded by all sorts of experts and specialists. The problem is that these experts were invariably mistaken over the past year while LEAP/E2020 anticipated correctly the fall of the US dollar, the collapse of US real-estate, the subprime crisis, the bursting of the financial bubble, the ongoing crash of Spanish, French and British housing markets, etc… At the beginning of last August, most of these experts were still negating the event of any severe crisis. Their incapacity in anticipating the real world’s evolution lies in two very simple (and non-exclusive) reasons: either they cannot tell what they really think because they are hired to say that “everything is fine” (this is the case for most specialised and mainstream media, as well as for ministers and ministries of economy and finance), or they are incapable of understanding the profound nature of this crisis as it does not specifically belong to the financial and economic sphere, but relates to the collapse of the geopolitical system created after 1945. In both cases, due to these conceptual limitations (of expression or understanding), experts are at best useless for the months to come and at worst dangerous, their
advice being completely disconnected from reality.

One of the main obstacles preventing experts and decision-makers from understanding the current crisis relates to the fact that they all have a natural tendency to conceive the future on the basis of the past. By the way, this flaw is in line with a specific school of intellectual education (one that is about to fall victim of the ongoing crisis too) which prevailed in the West over the past thirty years and which, based on the method of case-studies, pretends to anticipate the future using the past mostly.

Yet, according to LEAP/E2020, each great crisis is a systemic crisis, that is to say a crisis calling into question all the hypotheses underlying a contemporary system. As time passes by, these hypotheses become certainties for the executives born and grown inside the dominant power structures, while little by little they turn into illusions. In fact, it is precisely this widening gap between the ruling elites’ idea of the world and the world itself which generates systemic crises. Being able to observe how much “reality is no longer what it used to be” (to paraphrase a famous sentence with humour), requires a large dose of field-experience and independent mindset rarely cultivated among academic and administrative circles.

…Since 1945, and increasingly since the collapse of the Soviet bloc in 1989, the US economy became the single pillar of the entire international financial and banking system. After the August 15, 1971 severing of the US dollar convertibility to gold (or to any other physical counterpart, thus available in limited quantities), the amount of US dollars in circulation worldwide increased dramatically. The emerging of new centres of industrial, technological and service production throughout the world, combined with weakening human resources training (and therefore productivity competitiveness) in the US, resulted in a dramatic increase of the US debt (public and private). Thanks to the creativity of financial operators, with the more of less naive complicity of the entire banking and financial chain (central banks, quoting agencies, financial media, politicians, economists, etc…), this debt progressively became the US main production.

With G.W. Bush and his ideological or business partners in Washington, the production of this type of “value” (debts) increased even more dramatically, under the active auspices of the Fed’s president of that time, Alan Greenspan: public debt, real-estate debts, car debts, credit card debts,... in every field debt grew on as the good “produced” in greatest amount by the so-called dominant economy.
Meanwhile the entire world kept on buying this new “made in USA” good, western elites in particular being completely fascinated by the incredible creativity of Wall Street and its backyard, the City of London.

For many years though, anyone owning two eyes to see (i.e. neither experts nor policy-makers whose eyes only read reports on reality and press releases) and crossing the United States could observe that, contrary to Europe or Asia, the country was in a process of generalised impoverishment: escheated infrastructures, free-falling education, growing poorly-trained immigration, increasing dependence on foreign energy, multiple technological retardation,… This statement inevitably raised a fundamental question: who would pay back, and how, this constantly growing colossal debt?

However, until September 11th, until the catastrophic invasion of Iraq, until Katrina and the partial destruction of New-Orleans, and more recently until the Mississipi bridge collapse, everyone – in line with those “experts” - seemed willing to believe in the figures published by the system itself selling them its “debt” product, figures which of course guaranteed that all was well and the average debtor was solvent.

Then, little by little, with an acceleration starting a year ago, reality – this annoying parameter that often disturbs all equations carefully elaborated by experts and ideologists - invited itself to the financial and banking system. Bubble after bubble (Internet, housing, subprime), the attempts to increase the production of debt continued, with the hope that either the real economy would catch up with the level of the debt produced, or the rest of world would endlessly keep on buying US debts refinanced with new US debts (always more sophisticated, such as those famous CDOs, Collaterized Debt Obligations, invented to share risks while in fact they de facto infected the entire system).

However the bursting of the housing bubble triggered a fatal sequence, as the GEAB anticipated month after month since February 2006, progressively leading to mid-2007 and to banking and financial operators becoming aware that the ultimate debtor of this huge debt-producing plant (the US), i.e. the average US consumer, was either already insolvent or about to be, in a context of US recession.

From spring 2007 onward (tipping point of the global systemic crisis – see GEAB N°12 – February 2007), these large institutions began to try and evaluate their exposure, without taking the full measure of the crisis because, there again, habits, conformism, made them believe that there would be a “rebound in US economy,” that “the fall in housing prices would not last,” that “employment would stand firm,” that “corporate investment would respond”,” etc… All of us read or heard these elements of wishful thinking presented as serious arguments by the big financial media and central banks themselves.

In the middle of summer 2007, large international banks had to admit it: a large proportion (though unquantifiable, the exact measure of the ongoing crisis being impossible to evaluate) of all those debts would never be paid back.

…Given that the real economy is already infected not only in the US but all over the world, the collapse of the British, French and Spanish housing markets is next on this year’s agenda, while Asia, China and Japan are about to face the simultaneous collapse of their exports to the US market and of the value of all their UD dollar-denominated assets (US currency, treasury bonds, corporate shares, etc…).

And, in the U.S., the housing collapse continues, and is now acknowleged by nearly everyone:

Report: 2 million homes to foreclose

McClatchy/Tribune newspapers

October 26, 2007

WASHINGTON - Two million subprime-mortgage foreclosures are likely to occur by 2009 if home prices continue their downward spiral, a congressional report said Thursday.

The report also estimated that $71 billion in housing wealth will be destroyed and states will lose $917 million in property tax revenue because of foreclosures.

The report was released by Joint Economic Committee Chairman Sen. Charles Schumer (D-N.Y.) and other lawmakers."

State by state, the economic costs from the subprime debacle are shockingly high," Schumer said in a statement. "From New York to California, we are headed for billions in lost wealth, property values and tax revenues...

Or, as Ambrose Evans-Pritchard put it, “the sky has already fallen.”

If you are a bear, you must accept that you will always be wrong in polite society, and you will continue to be wrong all the way down to the bottom of recession. That is the cross that bears must bear.

Over the last three months we have seen a rolling collapse of speculative debt and real estate across half the global economy, yet friends still come over to my desk at the Telegraph, with that maddening look of commiseration on their faces, and jab: “so when is the sky going to fall then, eh”?

Well, excuse me. The sky has fallen. The median price of US houses has crashed from a peak of $262,600 in March to $211,700 in September. This is an 18pc drop nationwide.

Yes, the year-on-year slide is still just 4.2pc, but that will soon change as the base effect catches up.

Merrill Lynch has just confessed to a $7.9bn write down on CDO subprime debt and assorted follies, nearly double what it suggested three weeks ago.

This is what happens when a bank values its CDO debt at “mark-to-market” rather than “mark-to-myth”, as some of Merrill’s rivals are still trying to do.

Merrill’s Q3 loss of $3.5bn has cut the group’s equity capital by a fifth. This has consequences. The bank’s lending multiples will have to shrink.

In Britain, we have had the first bank run since the City of Glasgow Bank collapsed in 1878. The Fed has cut the interest rates a half point and vastly increased the pool of eligible collateral for Discount operations. The European Central Bank has injected over €400bn of liquidity in the biggest intervention since the euro was created.

Japan is in recession. Housing starts fell 23.4pc in July and 43.4pc in August.

The US dollar has fallen below parity with the Canadian Loonie for the first time since 1976, and to all-time lows on the global dollar index.

All it will take now for a full-fledged rout is a move by the Saudi and Gulf states to break their dollar pegs, which they may have to do to prevent imported US inflation causing havoc; or for the Asian banks stop buying US Treasuries – as Vietnam, Singapore, Korea, and Taiwan, have gingerly begun to do.

And for good measure, the Bank of England has just
warned in its Financial Stability Report that lenders are still in serious trouble, that there is a risk of commercial property crash, and that equities are “particularly vulnerable” to a downturn. It is said there may well be a repeat of the summer crisis, “potentially on an even larger scale.”

What more do you want?

It is true that stock markets have once again decoupled from the realities of the debt markets. But they did this in the early summer, when the Bear Stearns debacle was already well under way. They caught up famously in August.

Nobody I talk to in the City credit trenches believes for one moment that the crunch is safely over. Indeed, they think that we are edging back to extreme stress levels, and the longer it goes on, the worse the damage.

...The DOW is down 500 points or so since peaking in early October, and it looks wobbly.

Even so, equities have not begun to reflect the reality that the 2006-2007 credit bubble has popped and cannot be easily reflated at a time of stubborn, lingering inflation. Spare me the mantra that the “fundamentals” are sound. Credit is the ultimate fundamental.

Woe betide Wall Street if the Fed fails to slash rates dramatically over the Winter, starting on October 31.

Woe betide the dollar if it does.

The bankers, politicians, and policy elites, who have spent their lives in the world system that is coming to an end, cannot be relied upon to respond to the challenge of the collapse. It is up to the people to take a different path. If we don’t, many cities in the U.S. (and perhaps throughout the western world) will look like the following pictures (republished with permission of the photographer whose work can be seen at dETROIT fUNK) of the once-great city of Detroit.

The world economic system produces a massive surplus. That is what is used to fund the war machine, trillions of dollars worth. Just think what kind of world could be created if those resources were put to creative and humane uses.

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Monday, October 22, 2007

Signs of the Economic Apocalypse, 10-22-07

From Signs of the Times:

Gold closed at 768.40 dollars an ounce Friday, up 1.9% from $753.80 at the close of the previous week. The dollar closed at 0.6994 euros Friday, down 0.8% from 0.7053 at the close of the previous Friday. That put the euro at 1.4298 dollars compared to 1.4178 the Friday before. Gold in euros would be 537.42 euros an ounce, up 1.1% from 531.67 for the week. Oil closed at 88.60 dollars a barrel Friday, up 5.9% from $83.69 at the close of the week before. Oil in euros would be 61.97 euros a barrel, up 5.0% from 59.03 for the week. The gold/oil ratio closed at 8.67, down 3.9% from 9.01 at the end of the week before. In U.S. stocks, the Dow closed at 13,522.02 Friday, down 4.2% from 14,093.08 for the week. The NASDAQ closed at 2,725.16 Friday, down 3.0% from 2,805.68 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.37%, down 31 basis points from 4.68 for the week.

Another scary week with oil rising 6% in dollars, briefly passing the $90 mark, gold rising 2%, the dollar falling to more record lows and, this time, even U.S. stocks began to falter, with the Dow falling 4.2%, more than half of that on Friday. Much of this can be attributed to the housing crash in the U.S. and the Bush administration in its death throes threatening to unleash World War III.

Crude Oil Breaches $90 a Barrel on Dollar Drop Against Euro

Bill Murray

Oct. 19 (Bloomberg) -- Crude oil breached $90 a barrel in New York for the first time as the dollar traded near a record low against the euro, enhancing the appeal of commodities as an investment.

Investors purchased oil on speculation the Federal Reserve will cut borrowing costs to bolster the U.S. economy when policy makers meet on Oct. 31. Oil futures set records the past four days on concern supplies from northern Iraq may be disrupted if Turkey takes military action against Kurdish rebels.

“The weak dollar is pushing the price higher,” said Simon Wardell, energy research manager with Global Insight Inc. in London. “It’s hard to see how this is going to turn around quickly.”

Crude oil for November delivery rose to $90.07 a barrel in after-hours electronic trading on the New York Mercantile Exchange, the highest since trading began in 1983. Prices were up 9 cents on the day at $89.56 at 1:29 p.m. in London.
Brent crude oil for December settlement traded at $84.66 barrel, up 7 cents.

Turkish lawmakers this week cleared Prime Minister Recep Tayyip Erdogan to authorize one or more military assaults against Kurdish rebel bases in Iraq within a year. Iraq will halt its oil exports through Turkey if attacked, Foreign Minister Hoshyar Zebari said yesterday.

“The search for explaining the price development during this week leaves three elements outside the market fundamentals namely, the role of speculators, geopolitical developments in the Middle East and the weakness of the dollar,” PVM analysts led by Johannes Benigni wrote in a report today.

Falling Dollar

Concern over the conflict between Turkey and the Kurdish rebels spreading to other parts of Iraq and the region is also supporting the oil price, said Wardell.

The U.S. currency fell to $1.4302, from $1.4279 yesterday, and traded at a record low of $1.4319 earlier in the day.

A lower dollar makes oil cheaper in countries that use other currencies. In U.S. dollars, West Texas Intermediate, the New York-traded crude-oil benchmark, is up 46 percent so far this year. Oil is up 35 percent in euros, 40 percent in British pounds and 42 percent in yen.

“This is a financially driven market,” Luis Giusti, the former head of Venezuela’s state oil company, said in an interview. “Investors are going into crude futures to hedge against a weakening dollar.” Giusti is a board member of the London-based Centre for Global Energy Studies.

…The Organization of Petroleum Exporting Countries, agreed last month to produce an extra 500,000 barrels a day starting on Nov. 1 to meet rising demand. World oil consumption peaks in the fourth quarter, when refiners make heating fuel for winter.

“Additional output from OPEC won’t affect the market that’s reacting to non-fundamental factors,” Maizar Rahman, Indonesia’s OPEC governor said in Jakarta today. “The weakening U.S. dollar is prompting investors to move funds to commodities futures from currencies.”

And the bad news in the U.S. housing market continues:

Vital Signs: Housing Drag Won't Let Up

On tap: September figures on home sales and durable goods, October consumer sentiment, and more earnings reports

James Mehring

October 18, 2007

How low can housing go? Early this year it appeared as if conditions were settling down, but the situation has changed dramatically in the past six months. Indeed, its drag on the economy shows few signs of letting up. According to Federal Reserve Chairman Ben Bernanke in a speech on Oct. 15, "the further contraction in housing is likely to be a significant drag on growth in the current quarter and through early next year."

This week, the September figures for both new and existing homes are released, and the consensus view is that conditions kept deteriorating. Falling sales has led to a ballooning level of unsold homes on the market. In August, there were over eight months worth of unsold new homes available and 10 months worth of existing homes up for sale.

This building supply of homes will force home prices to keep falling and drive builders to rein in building activity even further. Making matters worse is that falling home prices could keep potential buyers on the sideline as they patiently wait for better deals, thus completing what is shaping up to be a vicious cycle in housing.

Conditions in the credit market, touched off by bad subprime mortgages, are also making it tougher for those who would like to buy a home. Credit standards have been raised and mortgage rates are above levels seen before the credit market turmoil.

A big concern among Fed officials and Wall Street economists is that the ongoing contraction in the residential market will erode consumer confidence and spending. While the popular gauges of confidence haven't tracked very well with actual spending of late, they do provide some measure of apprehension. After all, people aren't just dealing with a housing recession, but also elevated energy costs heading into winter, a softer job market, and the increased uncertainty over the health of the U.S. economy.

In advance of this week’s release of nationwide housing numbers, housing sales in one of the prime bubble markets, northern California, look especially bad:

Bay Area home sales down 40%

From the Associated Press

October 19, 2007

September home sales in Northern California sank to their lowest level in two decades as mortgages became harder to get, a real estate research firm said Thursday.

A total of 5,014 new and resale homes and condominiums were sold last month in nine San Francisco Bay Area counties, a 40.1% drop from the same period a year earlier, according to DataQuick Information Systems.

Last month was the slowest September since the firm began keeping records in 1988.

Sales plunged 31.3% from August as lenders, stung by a nationwide credit crunch, put the brakes on many "jumbo" loans above the $417,000 mark.

Some large mortgages are still being written, but credit requirements have tightened, DataQuick reported.

The median price paid for a Bay Area home in September was $625,000.

There are also increasing signs of a flight from the dollar which could intensify a U.S. currency crisis:

The Turning Away?

Max Fraad Wolff

October 19, 2007

The US dollar has been steadily and consistently falling against major floating currencies. The last few months have been as hard on dollars as they might have been on investor nerves. Generally, the prevailing market sentiment has been positive, if thin and prone to wild swings. The steady rise of the VIX (CBOE volatility Index) speaks to the rising oscillation. American markets and pundits have remained upbeat in their self assessment. Our wealth allocation and indeed world allocation, is increasingly being bet in the opposite direction. We get a lot of reassurance and markets have soared back up and over their pre-July highs. Attention has not been paid to the data that tell us how people are allocating their wealth between nations. This data is released monthly by the US Treasury Department and is called the Treasury International Capital System(TICS). It reveals- with a 1-2 month lag- the net US and foreign purchases of long term US and foreign securities. The data is a good way to check if the money is following the “wisdom.” Lately, the money and the “wisdom” have parted course. We have seen this before. It can not last. Sooner- not usually later- the two move back into harmony.

The newest TICS numbers are for August 2007. The data reveal something very disturbing and important. The rest of the world sold US assets at a rapid clip across August. Our friends and neighbors abroad sold about $35 billion worth of long term US securities. This number includes all major categories of long term securities and all countries and areas. Across the recent past we have been seen massively and generally increasing foreign net purchases of US securities. Last year, 2006, was a record year as foreign entities purchased $1trillion in net long-term securities. Net foreign purchasing has risen since 1993 and was rising very rapidly from 2003 until June 2007. In 2003 purchasing was just under $600 billion rising to $876 billion in 2005. This number dramatically turned negative in August. We have been getting along by selling our future to those far enough away from the everyday realities on the ground to believe what we tell them. The latest figures on gross external debt reveal a grand total of $12.25trillion. This is an impressive gain over last year’s figure of $10.3trillion. America has experienced 18% year over year increase to gross external debt from 6/30/06-6/30/07.

The fire sale atmosphere is enhanced by The Incredible Shrinking Dollar Policy appears to be emerging. Pieces of our firms, future tax receipts, future home mortgage payments and future business profits are on the tender block. Treasuries, the IOUs of the Federal Government, are regularly sold to foreign and domestic institutions and individuals. Economically it would be fair to see government offering of Treasuries as the sale of future tax receipts for cash today. Uncle Sam would gladly pay 520 Tuesdays from now for some hamburgers today! Corporations also sell bonds. They are selling their future ability to pay interest and principle for capital today. Firms issue shares of stock. When these shares pay dividends, firms are offering a fraction of future earnings for capital today. When shares don’t offer dividends, they offer- hopefully- a chance to monetize the future growth of the firm’s earnings. The sale of mortgage backed securities (MBS) represents selling the future mortgage payments of American households.

If you combine the two preceding paragraphs you come up with the following, America has been selling its future household earnings, profits and tax receipts at a rapid and accelerating clip. Starting in August, the rest of the world’s appetite for our future seems to have diminished. Gee whiz, what could possibly explain that? Well all those future revenues are US Dollar revenues and the US dollar has been doing rather poorly of late. This does not help. We live in a magical nation where taxes are cut routinely but spending grows. The last 6 years have seen this long simmering problem flare up. The government revenue story has been defined by massive tax cuts and surging spending. This may rile some buyers. There seems to be some indication that American homeowners are and will continue to have trouble repaying some of the mortgage borrowing they have done. Thus, the currency in which foreign nationals will be paid is in decline. At the same time the certainty of repayment is in greater question than many had expected. America’s future looks less bright to some foreign asset buyers. Here American investors agree with foreign investors. The Net Purchase of foreign securities by Americans has been rising very rapidly since 2004.

Maybe they decided to watch what the Americans were doing with their money? Maybe the have bought some much American debt simple prudence and portfolio diversification mitigate against growing US exposure? Maybe they agree with every large bank, and international institutional forecast that sees the US under growing many other nations?

The position of the US in the world economy will move with the position of US Dollar assets in the world economy. We are huge net borrowers from the world. Across recent years we have been borrowing between 60%-70% of globally available international funds. We run on debt and selling assets to foreign investors. If that is trending down- let alone turning negative as in August- it is cause for real concern. One month does not a pattern make. The last 3 months have raised many daunting prospects. No looming risk is more serious than a possible turning away from US asset purchase.

Piling on are the IMF and the Japanese establishment:

IMF says dollar ‘overvalued’

Chris Giles

October 17 2007

Currency traders were given a green light to continue selling the US dollar on Wednesday, as the International Monetary Fund said the greenback “remains overvalued” and rejected claims the euro had risen too far.

Contradicting Rodrigo Rato, the outgoing IMF managing director, who last week said “right now the dollar is undervalued”, the fund’s staff conclude the dollar is still too high. The multilateral lender also forecast slower growth in 2008 at 4.75 per cent, compared with 5.2 per cent expected this year.

The IMF’s new stance on the dollar will counter the arguments to the contrary made by France and some other eurozone members at this weekend’s meetings of the Group of Seven leading economies and the IMF’s governing body. They have been urging a change in language to temper the fall in the dollar, which dropped by more than 4 per cent against the euro in September alone.

The IMF, however, has little sympathy for struggling eurozone exporters hit by the currency’s rise. It says that even after its recent rise, the euro “continues to trade in a range broadly consistent with medium-term fundamentals”.

Apart from the dollar, the IMF’s economists also think sterling is overvalued, while the Japanese yen and the Chinese renmimbi remain too cheap compared with other currencies.

In some of its strongest language to date, the fund’s officials call on China to let its currency appreciate. Repeating its demand for “greater flexibility” of China’s managed currency, the IMF added that such action was in China’s best interests.

“Further upward flexibility of the renminbi, along with measures to reform the exchange rate regime and boost consumption, would also contribute to a necessary rebalancing of demand and to an orderly unwinding of global imbalances,” the World Economic Outlook argued.

Even with slower growth forecast for the US and a weaker dollar, the IMF sees little improvement in the world’s huge trade imbalances, embodied in the US trade deficit and corresponding surpluses in Asia and in oil exporters.

The Fund thinks that the US current account deficit will remain close to 1.5 per cent of world output until 2012, raising the likelihood of a disorderly plunge in the dollar and protectionism growing over the next few years.
Sakakibara Says Dollar May ‘Plunge,’ Forcing Response

Stanley White and Kazumi Miura

Oct. 18 (Bloomberg) -- The dollar may ‘‘plunge’’ in 2008, prompting the U.S., the European Union and Japan to intervene in foreign exchange markets, said Eisuke Sakakibara, Japan’s former top currency official.

U.S. economic growth may slow to less than 1 percent next year as losses on loans to homeowners with poor credit erode consumer spending and bank earnings, he said in an interview today in Tokyo.
Sakakibara, 66, was dubbed “Mr. Yen” because of his ability to influence the currency market during his 1997 to 1999 tenure at the Ministry of Finance.

“Should growth fall below 1 percent, we could see a plunge in the dollar,” said Sakakibara, who is currently a professor at Tokyo’s Waseda University. “Some form of intervention would be necessary to stop it, and that would require coordinated effort from all three major economies.”

The dollar’s 7.3 percent decline against the euro this year and a global credit market slump will be the focus of discussion when Treasury Secretary Henry Paulson hosts policy makers from Group of Seven countries tomorrow in Washington. French Finance Minister Christine Lagarde has called for discussions over whether the European Central Bank should sell the euro to protect exporters’ earnings.

Greenspan Bullish

Former Federal Reserve Chairman Alan Greenspan doesn’t expect a rapid drop in the dollar should nations sell more U.S. Treasuries, according to people attending a forum in Seoul today. Japan, China and Taiwan sold U.S. government bonds at the fastest pace in at least five years in August.

Greenspan is “of the opinion that holdings of foreign- exchange reserves tend not to be moved easily,” said Kim Gyung Rok, chief investment officer of Mirae Asset Investment Management Co. in Seoul, who attended the presentation.

Sakakibara said falling U.S. interest rates will put off foreign investors. The Federal Reserve may follow its Sept. 18 interest rate reduction with a further cut before the end of the year to stem fallout from subprime mortgage defaults, Sakakibara said. It is likely to keep the target for the overnight lending rate between banks on hold at 4.75 percent on Oct. 31, he said.

The dollar fell to $1.4247 against the euro at 8:24 a.m. in London from $1.4208 late yesterday and approached a record low of $1.4283 reached on Oct. 1. It bought 116.50 yen from 116.68. The U.S. currency may fall beyond $1.45 per euro in 2008 and even further depending on the U.S. economy’s slowdown, Sakakibara said.

Intervention History

The International Monetary Fund yesterday cut its forecast for 2008 expansion in the world’s biggest economy to 1.9 percent from 2.8 percent. “There are serious risks ahead” because of the financial market turmoil, Simon Johnson, the IMF’s chief economist, said at a press conference in Washington.

Policy makers intervene in currency markets by arranging purchases or sales of foreign exchange. Japan hasn’t sold its currency since March 16, 2004, and last bought yen in 1998.

While Paulson has said repeatedly that a strong dollar is in America’s interest, he says the value of currencies should be set by the market. Under President George W. Bush, the Treasury has never intervened in the currency market.

The ECB bought euros in November 2000, seeking to boost the currency as it fell below 90 cents, following its launch in the previous year. ECB President Jean-Claude Trichet urged politicians to show “verbal discipline” on currencies in an interview with CNBC broadcast on Oct. 15.

The yen may approach 100 against the dollar next year as sentiment worsens for the U.S. currency, Sakakibara said. Japan’s currency climbed as high as 111.61 on Aug. 17, the strongest in more than a year.

“There’s more risk for the yen to strengthen next year, as the dollar’s problems grow,” Sakakibara said.

Beyond financial markets, worse storm clouds are appearing on the horizon: famine and pestilence. The pestilence part comes with frightening news that anti-biotic resistant staph infections are spreading in the U.S. While this may not end up being a Black Death-level plague, conditions are ripe for such an event. The Black Death of the fourteenth century followed three centuries of unprecedented economic growth, population growth and world trade and was preceded by growing food shortages in the decades before 1349.

Drug-Resistant Staph Infections Reaching Epidemic Levels in Some Parts of U.S.

By Steven Reinberg

Oct 19, 7:00 PM ET

FRIDAY, Oct. 19 (HealthDay News) -- Infections with the drug-resistant staph germ called MRSA are approaching epidemic levels in some parts of the United States, a federal epidemiologist says.

Methicillin-resistant Staphylococcus aureus infections, which are potentially deadly, are now responsible for an estimated 12 million outpatient visits each year for skin infections, said Jeff Hageman, of the U.S. Centers for Disease Control and Prevention.

Hageman blamed the increase on rising numbers of infections -- a trend that has probably been under way for several years -- and greater awareness of the problem.

"MRSA is epidemic in some regions of the country," he said. "The highest rates are in the southern parts of the U.S., including Atlanta, Los Angeles and Texas. We first began noticing MRSA in 1999 when there were four child deaths in Minnesota and North Dakota."

"Most of these infections are minor and go away without any medical treatment," Hageman said. "It's not clear why some progress to life-threatening disease."

While most MSRA infections occur in hospitals, the number and severity of infections in the community appears to be increasing. "Some 30 percent of people have staph bacteria on their skin," Hageman said. "The extent to which it is growing in the community is just being defined."

Hageman's assessment of the problem follows publication this week of a study in the Journal of the American Medical Association that found that MRSA staph infections are more common, both in and out of hospitals, than experts had once thought. More people died in 2005 from MRSA infections in the United States than from AIDS, the journal noted.

And it follows news reports that students in school districts in at least six states have been infected with MRSA, and three of the children have died. Ashton Bonds, 17, of Bedford, Va., died Monday as a result of infection. Preschooler Catherine Bentley of Salisbury, N.H., and Shae Kiernan, 11, of Vancleave, Miss., both died from infections last week, Fox News reported.

Also, six football players at one North Carolina high school, seven students at three West Virginia schools and two teens in Connecticut have been diagnosed with MRSA infections.

MRSA infections are the leading cause of skin and soft tissue infections among hospital patients, and can result in severe and even fatal disease. These infections account for almost 19,000 deaths and more than 94,000 life-threatening illnesses each year in the United States.

Dr. Pascal James Imperato, chairman of the department of preventive medicine and community health at the State University of New York Downstate Medical Center in New York City, said there's a growing awareness of MRSA infections, particularly those occurring outside of hospitals.

"But there is also an increase in the number of cases, especially in the community," Imperato said. "That has come about because of changes that have occurred in MRSA in the community where, at the biological level, the organism had mutated and can cause serious illness, whereas before it didn't."

Many people carry the MRSA bacteria on their skin. But it has only become a problem since the increased use of antibiotics, which has caused the bacteria to mutate into a drug-resistant form, according to the CDC.

MRSA is resistant to methicillin, which includes several types of penicillin. MRSA infections are treated with newer antibiotics, such as vancomycin, teicoplanin and glycopeptide, although newer strains of the bacteria are becoming resistant to these antibiotics as well. This is one reason health officials warn against the over use of antibiotics, the CDC said…

The famine part is coming with increased food costs and food shortages:

Food Set To Become The Next Big Global News Story

October 14, 2007

At the beginning of the summer, the National Farmers’ Union of Canada put out a press release that included the headline Global food crisis emerging.

The release is scary reading. Based on early predictions by the United States Department of Agriculture on world grain supply and demand for the 2007-08 crop year, the NFU’s director of research, Darrin Qualman, broadcasts a dire warning that “we are in the opening phase of an intensifying food shortage.”

Qualman means a worldwide shortage.

As the world went into the Northern Hemisphere’s summer, total grain supplies were the lowest in the 47 periods for which data exists and were quite possibly at their lowest levels in a century. This crop season would mark the seventh year out of the past eight in which global grain production fell short of demand.

“The world is consistently failing to produce as much grain as it uses,” Qualman said.

Despite the so-called “green revolution,” the miracle of fertilizers, irrigation techniques, and disease-resistant grains, the world, once again is in danger of not feeding itself. There are all kinds of reasons for this: population growth, climate change, a shift to feeding livestock instead of using grain directly for food, which is a less efficient way of feeding people, and growing demand for ethanol.

There are no easy solutions and there are other potential problems. The collapse of cod supplies is well-known, but many edible fish species are also in danger. Qualman says one-third of ocean fisheries are already in collapse and scientific journals estimate that two-thirds may be in collapse by 2025.

Climate change may exacerbate grain shortages. Global warming has been largely associated with drier conditions in grain-growing areas, but that is far from universal. Some areas in North America have been having unusually wet weather in spring — ideal conditions for scab, or head blight. Scab hit Nebraska wheat fields this year. The Broad Institute, a research body supported by the Massachusetts Institute of Technology, Harvard and affiliated hospitals warns that head blight “is becoming a threat to the world’s food supply.”

The Food and Agriculture Organization of the United Nations reported earlier this year that a new and virulent fungus of wheat-stem rust had spread from East Africa to Yemen. Some 80 per cent of wheat varieties in Africa and Asia are susceptible to the disease…

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Monday, October 15, 2007

Signs of the Economic Apocalypse, 10-15-07

From Signs of the Times:

Gold closed at 753.80 dollars an ounce Friday, up 1.7% from $741.30 at the close of the previous week. The dollar closed at 0.7053 euros Friday, down 0.3% from 0.7074 at the close of the previous Friday. That put the euro at 1.4178 dollars compared to 1.4136 the Friday before. Gold in euros would be 531.67 euros an ounce, up 1.4% from 524.41 for the week. Oil closed at 83.69 dollars a barrel Friday, up 3.0% from $81.22 at the close of the week before. Oil in euros would be 59.03 euros a barrel, up 2.7% from 57.46 for the week. The gold/oil ratio closed at 9.01, down 1.3% from 9.13 at the end of the week before. In U.S. stocks, the Dow closed at 14,093.08 Friday, up 0.2% from 14,066.01 for the week. The NASDAQ closed at 2,805.68 Friday, up 0.9% from 2,780.32 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.68%, up four basis points from 4.64 for the week.

Gold continues to rise and the dollar continues its fall. I am no longer surprised that stock prices keep rising. Those prices are not adjusted for the fall in the value of the dollar. They also reflect the ability of corporations to exploit people (profits) and that is increasing. There is little reason to use the stock market as an economic indicator. Ran Prieur puts it this way:

Last night I realized something: The stock market has passed from reality into myth: that is, it is no longer an indicator of how well off we are, but a symbol of how well off we are, exactly the same way Bush is not a strong leader but a symbol of a strong leader. When we ask, "are we in a depression yet?" we look to the stock market, because the Myth says "depression = stock market crash."

So I'm going to go out on a limb and say the stock market will never crash. More precisely, the Dow Jones number will never be seen to take a big fall. They won't let it! Because "they" understand the propaganda value of the Dow, they will find a way to keep it rising forever, or until no one cares. One way they'll do it is by companies buying back their stocks, which the oil companies are already doing, thus raising the price by reducing supply. Another way is through hyperinflation, which the Federal Reserve has been working on for years by printing mountains of new money.

So in five or ten more years, when a gallon of milk costs $400, and we're squatting in abandoned suburbs and eating dogs, Fox News and NPR will still recite the hourly magic spell: "Today the Dow Jones hit an all time high of 156,000..." And those who are caught in the spell will think, "The economy is doing better than ever -- if I work even harder I can get a piece of it."

The New York Times seems to think the stock market will crash, though. The 20-year anniversary of the 1987 crash provides the occasion for uneasy feelings:
The Man Who Won as Others Lost

Landon Thomas Jr.

October 13, 2007

Paul Tudor Jones II leans back in his chair and grins. The stock market is going to crash, and he knows it. “There will be some type of a decline, without a question, in the next 10, 20 months,” he says in his rich Memphis drawl. “And it will be earth-shaking; it will be saber-rattling.”

Coming from a financial speculator as prominent as Mr. Jones, a man with about $19 billion of short-term trading capital at his disposal, the words might be enough to send ripples through a stock market that, apparently defying logic, has been hitting new highs each day.

Except that the crash to which Mr. Jones refers occurred Oct. 19, 1987. His prognostication — brazen, and as impudent as the man himself — was made in a documentary called “Trader,” which was filmed in the year preceding that day.

Now, 20 years after the 508-point decline, several strategists are anticipating that the earth will shake again. Valuations are stretched beyond historical comparisons. The market, ever more volatile, is reaching new highs, ignoring a buildup of bad news. Most crucially, the strategists say, the sentiment that the market’s rise is infinite seems to have taken permanent hold.

“The overvaluation of stocks is more extreme than the 1929 high,” said Robert R. Prechter Jr., an independent market forecaster in Gainesville, Ga., and a well-known follower of Elliott Wave theory, which examines the extent to which investor psychology creates stock market patterns. “Which tells me the next bear market will be the biggest in many years, probably since 1929-32.”

At the end of the day Oct. 19, 1987, stocks were down 22 percent — precisely the “Acapulco cliff dive” predicted by Mr. Jones in the video. The day ruined the careers of many, but it made the reputations of Mr. Jones and Mr. Prechter, whose professional relationship dates to the mid-1980s.

In the video, Mr. Jones can be seen huddled over a graph, comparing the market’s peak in 1987 with a previous high in 1929.

As Elliott Wave theory would have it, the two market tops may have been 60 years apart but the herdlike exuberance of investors pushing stocks ever upward was the same. On Oct. 5, 1987, Mr. Prechter, then and now the best-known proponent of the theory, told his subscribers to sell.

While the rest of Wall Street counted its losses, Mr. Jones, at age 32, returned 200 percent for his investors that year and drew a payday of an estimated $100 million for the year, an almost unheard-of sum at the time.

No one, including Mr. Prechter himself, claims that Mr. Jones relied solely on Mr. Prechter’s call. Indeed, in the video Mr. Jones can be seen as early as 1986 making a case that the market would fall. But the crash did not last long. Prices rebounded the next day, and within two years, the market had regained all that it had lost that day.

Now, Mr. Prechter is suggesting that the country is facing not just a market crash, but also a depression. On every measure, he says, the market is more overvalued than it was in 1987 before the reversal. The price-to-book ratio of the S.&. P 500-stock index today is 4.04, compared with 1.73 in 1987. And measures of the bullishness of Wall Street traders confirm Mr. Prechter’s assessment of the overvaluation…

The Times published the following piece by Robert Schiller the next day:
Sniffles That Precede a Recession

Robert J. Shiller

October 14, 2007

A recession has much the same pattern as the flu — starting with vague feelings of malaise and quickly building in misery until a patient’s activities are drastically curtailed. Then, all too gradually, comes an extended period of recovery, accompanied by lingering symptoms of discomfort.

With the unemployment rate up to 4.7 percent in September from 4.4 percent in March, the economy is feeling a chill. Is it descending into recession?

Most economists seem to be concluding that the current unpleasantness is a false alarm. They point to some good vital signs: the stock market is up, the dollar is cheap, the rest of the world is strong and the Fed is ready to respond.

But there are worrisome symptoms, and they bear close watching. The most important is a creeping sense of malaise that could turn into a general loss of confidence. The downturn in the housing market and the repercussions in financial markets are critical factors.

There have been only two domestic recessions in the last quarter-century — both of them also global recessions. According to the National Bureau of Economic Research dating committee, the first began in July 1990, the second in March 2001.

There were familiar warning signs for both of them — an initial sharp rise in unemployment, followed by slower increases that continued for a couple of years. In each case, as often happens with recessions, there was no agreement that a recession was under way until months after it started.

Diagnosis of a recession is hard because no single virus causes it. Instead, a recession seems to be a result of a confluence of many hard-to-measure factors. A decline in investment spending is typically one of them, and a recession is generally one of those rare events when residential and nonresidential investment both happen to decline together.

In some respects, the current situation looks a lot like the period leading up to the 1990 recession. We were coming out of a housing boom then, and the economy was emerging from an associated lending crisis — the savings-and-loan debacle. Now we are dealing with the subprime mortgage “crisis,” but so far, we have not seen the decline in nonresidential investment that occurred in 1990.

There are also some similarities to the 2001 recession, which likewise followed a huge speculative boom. The bursting of the Internet bubble brought a huge decline in corporate investment, and the 2001 recession helped to cleanse investors of their exaggerated hopes for the stock market, particularly for technology and the dot-coms. A similar cleansing of thinking appears under way regarding the housing market. But residential investment is not as big a component of gross domestic product as nonresidential investment; the decline in the housing market has apparently not yet been enough to push us into recession territory.

Consumer confidence indexes have not yet fallen as they did at the onset of the last two recessions. But confidence is a delicate psychological state, not easily quantified. It is related to the stories that people are talking about at the moment, narratives that put emotional color into otherwise dry economic statistics.

In August 1990, for example, a series of events in the Persian Gulf severely damaged business confidence, and that sequence seems to explain the timing of the 1990 recession. Saddam Hussein started his surprise invasion of Kuwait on Aug. 2, 1990, and the United States began sending jet planes to Saudi Arabia shortly thereafter; the Gulf War abruptly became a virtual certainty. Mr. Hussein asked Muslims around the world to join in a jihad against the forces opposing him. In the United States, people started canceling business trips. August was also the month when intense public conversation began about the economy’s weakness. In a sense, that was when the recession started, not the July date given by the bureau committee.

It is clear that salient, emotion-arousing narratives — those that capture the popular imagination and damage public confidence — are central to the etiology of recessions. As these stories gain currency, they impel people to curtail their spending, both in business and their personal lives.

Is this happening now? A disturbing narrative began to unfold in the last couple of months. People began talking of failed institutions — of the possibility that savings socked away in a money market account might actually be invested in subprime loans and so be lost. There has been fear of locked credit markets, of possible bank failures and runs on banks.

Some of these tales have faded — bank runs no longer seem a risk. But confidence in the economy remains fragile. More shocks are likely as an era of huge real estate speculation apparently ends, with the possibility of further surges in foreclosures and failures of financial institutions.

The narrative is still unfolding, and the extent of its virulence is not yet known.

Robert J. Shiller is professor of economics and finance at Yale and co-founder and chief economist of MacroMarkets LLC.

Speaking of 1987, the following (satirical) piece from The Onion proves that supply-side economics works!
Reaganomics Finally Trickles Down To Area Man

HAZELWOOD, MO—Twenty-six years after Ronald Reagan first set his controversial fiscal policies into motion, the deceased president's massive tax cuts for the ultrarich at last trickled all the way down to deliver their bounty, in the form of a $10 bonus, to Hazelwood, MO car-wash attendant Frank Kellener.

"Back when Reagan was in charge, I didn't think much of him," Kellener, 57, said, holding up two five-dollar bills nearly three decades in the making. "But who would have thought that in 2007 I'd have this extra $10 in my pocket? He may not have lived to see it, but I'm sure President Reagan is up in heaven smiling down on me right now."

Leading economists say Kellener's unexpected windfall provides the first irrefutable proof of the effectiveness of Reagan's so-called supply-side economics, and shows that the former president had "incredible, far-reaching foresight."

"When the tax burden on the upper income brackets is lifted, the rich and not-rich alike all benefit," said Arthur Laffer, who was a former member of Reagan's Economic Policy Advisory Board. "Eventually."

The $10 began its long journey into Kellener's wallet in 1983, when a beefed-up national defense budget of $210 billion enabled the military to purchase advanced warhead-delivery systems from aerospace manufacturer Lockheed. Buoyed by a multimillion-dollar bonus, then-CEO Martin Lawler bought a house on a 5,000-acre plot in Montana. When a forest fire destroyed his home in 1986, Lawler took the federal relief check and invested it in a savings and loan run by a Virginia man named Michael Webber. After Webber's firm collapsed in 1989, and he was indicted on fraud and conspiracy charges, he retained the services of high- powered law firm Rabin & Levy for his defense. After six years and $7 million in legal fees, Webber received only a $250,000 fine, and the defense team went out to celebrate at a Washington, D.C.-area restaurant called Di Forenza. During dinner, lawyer Peter Smith overheard several investment bankers at an adjoining table discussing a hot Internet start-up that was about to go public. Smith took a portion of his earnings from the Webber case and bought several hundred shares in, quadrupling his investment before selling them four months later.'s two founders used the sudden influx of investment capital to outfit their office with modern Danish furniture, in a sale brokered by the New York gallery Modern Now! in 1998. After the ensuing dot-com bust, Modern Now! was forced out of business, and Sotheby's auction house was put in charge of liquidating its inventory. The commission from that auction enabled auctioneer Mary Schafer to retire to the Ozark region of Missouri in 2006. Last month, while passing through Hazelwood, she took her Audi to Marlin Car Wash, where Kellener was one of the employees who tended to her car. She was so satisfied with the job that she left a $50 tip, which the manager divided among the people working that day.

"This money didn't just affect one life," Laffer said. "It affected five."

Prior to joining Marlin Car Wash in 2005, Kellener worked for nearly two decades at a local Ford assembly plant that is now defunct. Before that, he was employed by the FAA as an air traffic controller until his union went on strike and Reagan fired him, along with nearly 13,000 others. This is the largest tip he has received in his professional life.

"I thought Reaganomics was nothing more than a mirage that allowed President Reagan to reward his wealthy support base," Sen. Edward Kennedy (D-MA) said. "But two generations later I am seeing Reaganomics in action, and I like what I see. It just took a little longer than I thought it was supposed to."

The tip has not gone unnoticed by the economic team in the current administration.

"Had Mr. Kellener received that money in 1981, like the Democrats wanted, it would only be worth $4.24 today because of inflation," Treasury Secretary Henry M. Paulson, Jr. said during an official announcement of the economic policy's success at a press conference Monday. "Instead, Kellener has a solid $10 to spend right here and now. The system works, and our current president intends to keep making it work."

Kellener, who has cared for his schizophrenic sister ever since her federally funded mental institution was closed in 1984, said that he plans to donate the full $10 to the Republican presidential candidate who best embodies Reagan's legacy.

Monday, October 01, 2007

Signs of the Economic Apocalypse, 10-1-07

From Signs of the Times:

Gold closed at 750.00 dollars an ounce Friday, up 1.5% from $738.90 at the close of the previous week. The dollar closed at 0.7009 euros Friday, down 1.3% from 0.7097 at the close of the previous Friday. That put the euro at 1.4268 dollars compared to 1.4091 the Friday before. Gold in euros would be 525.65 euros an ounce, up 0.2% from 524.38 for the week. Oil closed at 81.66 dollars a barrel Friday, virtually unchanged from $81.62 at the close of the week before. Oil in euros would be 57.23 euros a barrel, down 1.2% from 57.92 for the week. The gold/oil ratio closed at 9.18, up 1.4% from 9.05 at the end of the week before. In U.S. stocks, the Dow Jones Industrial Average closed at 13,895.63 Friday, up 0.5% from 13,820.19 for the week. The NASDAQ closed at 2,701.50 Friday, up 1.1% from 2,671.22 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.58%, down five basis points from 4.63 for the week.

Last week was the end of the third quarter of 2007, so let’s look at the quarterly and annual numbers. Gold in dollars rose 15.2% from $650.90 to $750.00 for the quarter and rose 17.4% from $638.80 for the year to date. The dollar fell 5.4% from 0.7384 euros to 0.7009 for the quarter and fell 4.7% from 0.7338 for the year. Gold in euros rose 9.4% from 480.65 to 525.65 euros an ounce for the quarter and rose 8.6% from 483.98 for the year. Oil in dollars rose 15.5% from $70.68 to $81.66 for the quarter and rose 33.8% from $61.05 for the year. Oil in euros rose 9.7% from € 52.19 to € 57.23 for the past quarter and rose 23.7% from € 46.25 for the year to date. The gold/oil ratio fell 0.3% from 9.21 to 9.18 for the quarter and fell 13.9% from 10.46 for the year. The Dow rose 3.6% from 13,408.62 to 13,895.63 for the quarter and rose 11.5% from 12,463.15 for 2007. The NASDAQ rose 3.8% from 2,603.23 to 2,701.50 for the third quarter and rose 11.8% from 2,415.29 for the year. The yield on the ten-year U.S. Treasury note fell 45 basis points from 5.03 to 4.58 for the quarter and fell 12 basis points from 4.70 for the year.

Here are some charts going back to the end of 2004:

The story of the third quarter of 2007 was the fall of the dollar to record lows and the rise in the price of gold and oil, not only in dollars but also in euros. Gold went up 15% in dollars (nearly $100 an ounce) and more than 9% in euros. Oil also went up over 15% in dollars and 9% in euros during the third quarter of 2007. In essence ALL currencies went down, the dollar just fell more than the others. Much of this can be attributed to the sub-prime meltdown in the United States and to the threat of expanded war in Western Asia.

Events in the third quarter have spooked even the institutional investors and the mainstream media who, until now, viewed the world economy through rose colored glasses. I would like to welcome our friends in the mainstream financial media to reality! Those of us who have been warning people for years about the danger of a dollar currency collapse about the unsustainable levels of debt in the United States and about the housing bubble now have a lot more company. The fact that fewer people are completely deluded about the situation in the world economy may offer some cause for hope, but the awakening may be too late to avoid the consequences.

The subprime meltdown was only the beginning of the process of sweating out bad debt and re-pricing downward housing and other markets. Unfortunately the process has just begun:

Defaults on Insured Mortgages Increase 30 Percent

By Hugh Son and Josh P. Hamilton

Sept. 28 (Bloomberg) -- More American homeowners are missing mortgage payments, pushing defaults on privately insured home loans up 30 percent last month from year-earlier levels, according to a trade group.

Borrowers more than 60 days behind rose to 58,441 in August, Washington-based Mortgage Insurance Companies of America said today on its Web site.

The report bolsters data that show the worst U.S. housing slump in 16 years may be getting deeper. Foreclosures set a record in the second quarter, according to the Mortgage Bankers Association, and last month lenders sent a record 108,716 notices of default, auction or repossession, RealtyTrac Inc. reported. Fannie Mae Chief Executive Officer Daniel Mudd said yesterday the weakness will last beyond 2008, increasing credit losses.

“These defaults are a lagging indicator, so they're probably going to get worse from here,” said Michael Darda, economist at Greenwich, Connecticut-based equity trading firm MKM Partners LP.

Mortgage insurers, which reimburse home lenders when borrowers don't pay, have stumbled in stock market trading as the record defaults increased claims. MGIC Investment Corp., the largest U.S. mortgage insurer, lost about half its value this year. PMI Group Inc., the second-largest, lost more than 30 percent. Third-ranked Radian Group Inc., the insurer whose acquisition by MGIC was scuttled, has fallen almost 60 percent.

MGIC fell 36 cents to $32.31 today in 4:05 p.m. New York Stock Exchange composite trading. PMI declined 18 cents to $32.70 and Radian climbed 24 cents to $23.28.

Risk and Reward

Lenders often require homeowners to buy private mortgage insurance if they contribute less than 20 percent in cash for a home purchase. The report said 197,169 U.S. borrowers used the coverage in August, 15 percent more than in July.

Insurers are selling more coverage as lenders seek to lower their risk and make loans attractive to investors. Policies sold to homeowners surged 66 percent to $23.8 billion last month over the year-earlier period, the mortgage insurance trade group said.

Delinquent policyholders who resumed paying on time rose by 11 percent from July to 33,811, results that “appear encouraging” to Michael Grasher, analyst at Piper Jaffray & Co. in Chicago.

“While we expect investors remain guarded on the group, numbers out this morning do not reflect a level of risk commensurate with existing valuations” of some mortgage insurers, Grasher said today in a research note.

The trade group's report draws data from six of the seven U.S. mortgage insurers, excluding Radian, which isn't an association member.
Unsold houses are piling up, reaching more than five million according to a recent estimate, driving prices down.
U.S. Homes Post Steepest Price Drop in 16 Years

Vinnee Tong

NEW YORK (AP) -- The decline in U.S. home prices accelerated nationwide in July, posting the steepest drop in 16 years, according to the S&P/Case-Shiller home price index released Tuesday.

Home prices have fallen by more every month since the beginning of the year.

An index of 10 U.S. cities fell 4.5 percent in July from a year ago. That was the biggest drop since July 1991.

S&P Index Committee Chairman David Blitzer said the severe declines may be done by the end of the year.

"Maybe the first stage is steep declines, and we're just about done with those," he said. "The second stage is not much gain, not much loss.

"The rest of the economy has to catch up to home prices."

Yale economist Robert Shiller, who helped create the indices, said in a statement, "The further deceleration in prices is still apparent across the majority of regions." Shiller is also MacroMarkets LLC's chief economist and perhaps is best known for predicting the dot-com bust.

A broader index of 20 cities fell 3.9 percent in July over last year, with 15 of 20 cities reporting that prices fell.

The five cities where prices are still rising -- Atlanta, Charlotte, N.C., Dallas, Portland and Seattle -- have reported growth is slowing in the past year. Atlanta and Dallas are close to moving into negative territory, S&P said.

Shiller, an economist at Yale University, told lawmakers in written comments last week that the loss of a boom mentality among consumers poses a "significant risk" of a recession within the next year.

His comments came a day after home buyers and other borrowers got some welcome news when the Federal Reserve cut a key interest rate by half a point to 4.75 percent. It was the Fed's first cut in four years.

The housing slowdown and decline in credit availability have triggered worries that the economy could go into a recession, spurring the Fed to act. Economists differ on whether the Fed will again cut rates during two meetings before year's end.
The only thing policy makers can do about it now is lower interest rates. Doing that, however, may destroy the value of the dollar. In the old days, before the collapse of the U.S. Empire, inflation could be exported to other countries, since the dollar was the world’s reserve currency. The thought was that the dollar was ultimately backed by the stability of the U.S. political and economic system and also by the U.S. military. Now the U.S. military is in shambles, and the political system is looking more and more like that of a banana republic. The only thing now keeping the dollar up at all is the fear by the rest of the world of what would happen if it collapses. At some point, not very far from where we are now, there may be a rush for the exits by those holding dollars.