Monday, November 05, 2007

Signs of the Economic Apocalypse, 11-5-07

From Signs of the Times:

Gold closed at 808.50 dollars an ounce Friday, up 2.7% from $787.50 at the close of the previous week. The dollar closed at 0.6894 euros Friday, down 0.8% from 0.6948 at the close of the previous Friday. That put the euro at 1.4504 dollars compared to 1.4393 the Friday before. Gold in euros would be 557.43 euros an ounce, up 1.9% from 547.14 for the week. Oil closed at 95.93 dollars a barrel Friday, up 4.4% from $91.86 at the close of the week before. Oil in euros would be 66.14 euros a barrel, up 3.6% from 63.82 for the week. Thje gold/oil ratio closed at 8.43 Friday, down 1.7% from 8.57at the end of the week before. In U.S. stocks, the Dow Jones Industrial Average closed at 13,595.10 Friday, down 1.6% from 13,806.70 for the week. The NASDAQ closed at 2,810.38 Friday, up 0.2% from 2,804.19 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.31%, down nine basis poinst from 4.40 for the week.

Oil and gold continued their shocking rise last week. Oil has gone up 30% against the dollar since September 1 and gold has gone up 19%. During that same period the dollar has fallen 6.5% against the euro, so gold and oil are going up against both currencies. Oil is going up in absolute terms, measured against gold. Things seem to be reaching a crisis point.

Paul Craig Roberts summed it up this way:
…The "Cakewalk War" in Iraq was supposed to be over in a few weeks and to pay for itself out of Iraqi oil revenues. The war is now five years old and has cost American taxpayers, and those left dependent on government programs by decades of a welfare state, $1 trillion in out-of-pocket and already incurred future costs.

As large and troublesome as this cost is, it pales in comparison to the damage the war has done to the value of the dollar and its role as reserve currency. Since 2001, the Euro has risen 60 percent against the dollar.

This means much more to Americans than the higher cost of a European vacation and status symbol German cars. The US dollar is losing its reserve currency role when the Euro, the currency of a nonexistent country--Europe--becomes so much more desirable than the dollar that it rises 60 percent in value.

The Euro is a monetary unit that has run far ahead of the political entity whose currency it is. Europe still consists of separate sovereign states, and many of them are unhappy with the Euro. Yet, since 2001 people throughout the world have been shifting from dollars to Euros.

It is not normal for people to flee from the reserve currency. It only happens when people believe it cannot continue to fill that role.

The US dollar is under double assault. One assault is from the offshoring of American jobs, which turns US GDP into foreign GDP and worsens the US trade deficit. It is not possible to achieve a trade balance when the production of goods and services for the US market is being moved offshore by US corporations.

The other assault is from the US budget deficit. Americans have become so hard pressed that their savings rate is negligible. The US government has to rely on foreigners to lend it money for its annual expenditures. Washington's two biggest bankers are China and Japan, the countries with the largest trade surpluses with the US.

The transformation of the Iraq "cakewalk" into an interminable war has run up a one trillion dollar price tag, and an even larger war with Iran is looming. US generals and neoconservative ideologues predict a decade or multi-decade long war in the Middle East. Washington's bankers are waking up to the reality that they will not be repaid.

The only reason the dollar has not already lost its reserve currency role is that the only alternative is the currency of a non-existent political entity. Yet, even the Euro, a virtual currency, may have taken the dollar's role by the end of 2008.

Full of hegemonic hubris, the US government does not understand that US power and hegemony have always depended, not on missiles and military force, but on the financial power conveyed by the dollar's role as reserve currency.

The reserve currency is world money, good in any country to pay any bill. The reserve currency country is not a debtor in the usual sense. As the reserve currency can be used to settle international accounts, the reserve currency country can borrow at will until lenders lose confidence in the currency.

There is abundant evidence that the loss of confidence in the dollar is underway. When it is complete, the US will no longer be a superpower.

The decline in American power and influence could be dramatic. Part of America's power results from European countries going along with Washington. However, the sharp rise in the Euro's value has hurt European exports, squeezing profit margins, wages, and encouraging offshore production. Fights over monetary policy between European capitals could doom both the EU and the Euro, leaving the world with no reserve currency and America with embittered former allies.

By going to war for hegemony, the Bush Regime has brought about American decline. While the neocons have spent two administrations trying to deracinate Islam, real threats to America's power have been neglected. Offshoring, which turns US GDP into imports and larger trade deficits, together with war debts, has eroded the dollar's status as reserve currency, undermining the foundation of American power.

The collapse of a hegemonic empire and its reserve currency is much bigger than a “business cycle” recession. All we can say a this point is things will soon be much different than they have been for the last two decades. We can look at where people live, for example. Alan Farago points to the central role played by suburban sprawl in the era that is coming to an end. The sprawl was driven by massive infusion of cheap credit gained from the export of productivity away from the United States that Roberts referred to. The sprawl had more than economic consequences, it also propelled a political, psychological and spiritual crisis:
The Housing Crash, Suburban Sprawl and the Crisis of the American Middle Class

Alan Farago

November 3 / 4, 2007

Congress and the White House, state governments, local legislatures and lobbyists are vested to the hilt in denial: that the downgrade by Moody's of at least $50 billion in collateralized debt from AAA to junk is a verdict on an economic model-suburban sprawl-that is torpedoing America's middle class.

At the heart of sprawl is securitization: that is to say, the packaging of mortgages by Wall Street indifferent to locale so long as the shape, size, and purpose of its components is more or less the same.

The catalogue of horrors is not exclusive to the middle class, of course. In places like Miami, the housing bubble had the collateral effect of diverting attention from the needs of the poor. While local legislatures did the bidding of the growth machine, the county housing agency was looted to a fare-thee-well.

But it is suburbia is where the financial avalanche in debt markets started-in states like Florida where a sophisticated economic elite, tied to the interests of production homebuilders, primed the pump of the growth machine.

Today, the stock market remains near historic highs but it is increasingly irrelevant to the middle class. The Wall Street press is filled with hope for another interest rate cut by the Federal Reserve. There is James Cramer (who even appeared on NBC Nightly News! as a reporter from the trenches) hyperventilating over the Fed "doing something", but when it can turn its TV set off long enough to pay attention, the middle class is like a boxer looking at its face in the mirror for the first time.

Round after round of promises: low inflation, steady job growth, health care, bridges, highways, the promise of public education, social security, the environment: what stares back at the middle class is an almost unrecognizable result.

The phenomenon was noted in the Sunday New York Times Magazine, "End Times for Evangelicals?" The report explored the profound change as Christian conservatives abandon the Republican party.

Some evangelical leaders are apparently concerned how closely tied the religious right has become to corporate America.

Another aspect, scarcely noted by the Times, is how the religious right organized in megachurches located in suburbia and rose exactly in proportion to the false prosperity of a housing bubble.

The constituents of suburban sprawl need constant spiritual renourishment even as discomfort spreads of its strip mall culture. The megachurches are a welcome relief for wage-earners pinned by long commutes from home to work and especially for latch-key children otherwise languishing in homes without mom or dad.

The bursting housing bubble is fragmenting the religious right. It's not a matter of evangelical convictions faltering. It's a matter of home economics ruining families as lines of credit and home equity make fools of believers. It's not just about church on Sunday. It's about the middle class coming to a boil over manifest inflation despite government assurances, good news papering over rampant fraud, it's about vanishing home equity, and it's about the middle class realizing that it has been left behind by arks of privilege.

It's in this context to consider two pieces of news: first, that Stanley O'Neal-the CEO of Merrill Lynch-has been held accountable for the worst loss in Mother Merrill's history, some $8.4 billion and yet will retire, according to press reports, with a payday that could reach $200 million.

The second piece of news is from the New York Times (Saturday, October 27, 2007), "As Housing in Florida Plummets, the Top Tier of the Market Just Dips."
"Despite a record number of foreclosures and a raft of public auctions of unwanted houses, the upper tier of the real estate market in Florida remains relatively immune to the spreading disaster As in other once-booming regions, in Florida the housing market seems to be not one market, but two. The lower end is littered with vacant houses and unfinished developments, and homeowners are struggling to meet their monthly payments as rates adjust upward. The luxury end has its unsold new condos and mansions lingering on the market, too, but as in New York, where the demand in pricey Manhattan is still strong, sales have fallen less. And Miami and other parts of Florida are continuing to attract interest among the wealthy."

At the same time, the stratification of housing markets in places like Manhattan or tony vacation retreats in Florida appear to the middle class to be supported by the kinds of financial fraud that turned dreams of wealth into bankruptcy on Main Street and turned AAA rated paper to junk on Wall Street.

But it does not pass unnoticed by Main Street that Wall Street can walk away from its failures with hundreds of millions, all taken down as fees and commissions and salaries in the creation of financial derivatives-or how speculators and bankers and developers in places like suburban Miami have squirreled away profits from developments at the edge of the Everglades foisted off as a public good-or, how the deal worked out by Wall Street banks whose off-book transactions shielded nearly $100 billion in losses will result in a further rain of commissions-as much as $1 billion worth according to recent financial reports.

These are the arks of privilege insulating the highest strata of society from the disintegration of the US dollar.

Today, homeowners in the millions-middle class Americans-are absorbed with the anxiety of foreclosure, of a home that can't be sold except at a loss, or, of personal debt tied to vanished gains of an unrealized asset. But there is more.

How much more remains to be seen. The total damage to financial institutions, measured in the hundreds of billions, may be absorbed by the wealth of nations, but the damage is so large, so global, no wonder most middle class Americans have no idea what hit them.

Here is what hit the middle class: wealth drained from the US economy by the forces of globalization-owned as equity now in low-cost labor or oil-producing nations-returned to the United States in the form of US government debt but also ownership of mortgage backed securities and other higher yielding financial derivatives. That they should be less than eager for a repeat performance should surprise no one.

And American voters think the biggest problem is tax dollars financing both sides of the "war on terror"? No. There's more.

If securitization defines suburban sprawl as a matter of scale (ie. more Targets, more Lowes, more McDonalds: can you really fit a hundred million people into Florida?), scale itself makes accountability vanish.

As accountability vanishes, uncertainty rises exponentially. There is a domestic analogue to the uncertainty plaguing world credit markets: for the American middle class, as accountability vanished in the financial sphere, so did the ideals of a civil society and representative democracy.

The middle class was promised the "ownership society", and while it was passively satiated by "American Idol" and "Dancing with the Stars" promising that anything is possible, its pockets were picked.

The middle class was robbed by liar loans and mortgage fraud, from toxic consumer debt to the wholesale conversion of local government to the purposes of the growth machine.

The biggest risk-one that the mainstream press and Wall Street, both, should take into account-is that the coming recession will trigger a backlash against the bankers and financiers whose engineering related to housing markets and mortgages did not, in fact, diversify risk (as securitization of mortgages was advertised to do,) but concentrated risk by raising the unquantifiable to exalted status.

America's political and economic elites have been perfectly happy with the arrangement, but in 2008, watch the "values voters". This time, the middle class, evangelical or not, will be pegged to the value of the dollar more than the morals so many candidates for political office wear on their lapel like laquered pins of the American flag.

The psychological costs of all this can be seen in the results of a survey done by the American Psychological Association.
One-third of Americans live with “extreme stress”

Naomi Spencer
29 October 2007

One in three adults in the US regularly contend with extremely high levels of stress, resulting in problems with their health, relationships, and work, according to a new national survey. Economic troubles are the driving force of stress for ordinary Americans, who reported money, workload, and housing expenses among their most stressful concerns.

The survey, Stress in America 2007, released October 24 by the American Psychological Association, was conducted online last month by polling agency Harris Interactive. It was based on a sample of 1,848 adults. Responses indicated that nearly half of all Americans are living with more stress than in the past few years.

It is no surprise that the rising cost of living, stagnating wages, and poor job market figure heavily into the worries of working families. Three-quarters of respondents reported money and work as the leading causes of stress, a significant jump from 2006, when 59 percent cited those factors.

Because the survey was undertaken on the Internet, media outlets have cautioned that the findings do not carry the same scientific weight as other research. However, if anything, the survey results probably underestimate the stress borne by lower income workers, who are less likely to use the internet.

Nearly half of all respondents reported that stress negatively impacted both their personal and professional lives, leading to difficulties in managing work and family responsibilities. More than half said stress led to fighting, and many attributed stress to the ostracism of family members, family separation, and divorce.

Interpreting the findings, Dr. Bankole Johnson, chair of the Department of Psychiatry and Neurobehavioral Sciences at the University of Virginia, told ABC News that the economy was alienating to individuals, leading to mass uncertainty. “A lot of people are faced with a sense of an uncertain situation, and for most people that’s a big stressor,” he said.

The political climate has also contributed to stress. Johnson remarked, “There is the constant stress of the war on terrorism...I would say that in the last ten years, there is more stress in general in the world. There is more uncertainty and a feeling that the world is somehow less safe than it ever has been.”

This stress has been deliberately grafted onto American life over the past seven years, as the government and media have subjected the population to a constant barrage of color-coded terror alerts and fear-mongering. To the extent possible, the political establishment has promoted fear in order to justify militarism abroad and the attack on democratic rights at home.

Immense social inequality assumes a definite place among the burdens shouldered by ordinary Americans. For example, the APA report notes in passing that 40 percent of respondents said they do not use all their allotted vacation time annually. Among employed respondents, the leading sources of stress reported were low pay (44 percent), heavy workload (40 percent), and long hours (39 percent).

A September report from the International Labor Organization found that Americans are the world’s most productive workers, largely because of the sheer number of hours worked. As one company after another in every economic sector carries out layoffs, workers are required to take on greater workloads and increase their output. Meanwhile, these wages have declined relative to inflation, and the cost of basic needs such as gasoline, food, and home energy contributes to the stress of working families.

Across industries, a third of workers reported experiencing extreme levels of stress during the month prior to being surveyed. Workers in the education and health services industries reported higher stress levels, with four in ten reporting “extreme stress.” These workers were among those who most frequently citied work as a cause of stress. Half of education and health workers reported low salaries, high workloads, and unrealistic job expectations.

The APA reported that adults with less than $50,000 in annual household income were more likely than those with higher incomes to report both physical (80 percent versus 74 percent) and psychological (77 percent versus 68 percent) symptoms of stress. Physical symptoms included fatigue, headaches, tightness in the chest, faintness and dizziness, upset stomach and other digestive problems. Common psychological symptoms included anger, anxiety, and “feeling as though you could cry.” On average, the survey found that Americans lost 21 hours of sleep per month due to stress, with half of respondents reporting insomnia at night during the last month.

Lower income adults managed their stress poorly, according to the APA, relying more heavily on smoking and drinking, skipping meals and missing sleep. Poor management of stress contributes to serious health problems such as obesity and heart disease. Chronic stress, which results in an elevated heart rate over long periods, is strongly associated with increased risk of heart attack.

The APA noted, “While 69 percent recognize that a mental health professional could aid in stress management, only 7 percent have sought professional support to help manage their stress during the past year.”

The ongoing collapse of the housing market presents a particular strain for individuals. More than half of the APA’s respondents cited rent or mortgage costs as sources of “extreme stress.” Dr. Beverly Thorn, president of the APA health psychology division, told ABC News that the respondents cited housing costs even when they were not necessarily prompted to specify the source of their stress.

On the West Coast, where median housing prices and foreclosure rates are among the highest in the country, 61 percent of respondents reported housing costs as a significant stressor.

According to statistics from housing sector tracker DataQuick Information Systems, mortgage companies sent over 72,500 pre-foreclosure default notices to California borrowers in the third quarter, substantially surpassing the previous record of 61,500 set in 1996. DataQuick also reported last week that California home sales for September were the slowest since the company began keeping records in 1988.

The decline of the housing market has very real consequences for the economy at large and the living conditions of working class households. As interest rates reset on millions of adjustable rate mortgages, borrowers in default are confronted with a market saturated with devalued houses. Unable to sell for what is due on the mortgage, homebuyers are pressed into foreclosure.

A number of new reports project more than a million foreclosures in the next year, wiping out an estimated $71 billion in housing wealth. Another $32 billion is expected to be lost indirectly as a result of neighborhood home devaluation in areas where foreclosures occur.
Recent books by Martha Stout (The Paranoia Switch, see also this review) and Naomi Klein (The Shock Doctrine: The Rise of Disaster Capitalism, see also this video) show that the stress and the fear is no accidental by-product of a fast paced economy nor merely a justification for wars but something much more sinister.

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