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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