Signs of the Economic Apocalypse, 1-14-08

From sott.net (Signs of the Times):

Gold closed at 897.40 dollars an ounce Friday, up 3.7% from $865.70 for the week. The dollar closed at 0.6768 euros Friday, down 0.2% from 0.6783 at the close of the previous week. That put the euro at 1.4776 dollars compared to 1.4744 the Friday before. Gold in euros would be 607.34 euros an ounce Friday, up 3.4% from 587.15 at the close of the previous Friday. Oil closed at 92.73 dollars a barrel Friday, down 5.3% from $97.69 for the week. Oil in euros would be 62.75 euros a barrel, down 5.6% from 66.26 at the close of the Friday before. The gold/oil ratio closed at 9.68, up 9.3% from 8.86 at the close of the previous week. In U.S. stocks, the Dow Jones Industrial Average closed at 12,606.30 Friday, down 1.5% from 12,800.18 the week before. The NASDAQ closed at 2,439.94 Friday, down 2.7% from 2,504.65 for the week. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.78%, down nine basis points from 3.87 for the week.

Gold continued to shoot up in price last week, ending just below $900 an ounce. Oil, however, dropped sharply, due to concerns about economic recession (which lowers demand for energy). The evidence for recession in 2008 continued to mount this week with the release of bad holiday sales figures for the major U.S. retailers. The once strong Countrywide mortgage company was bought by Bank of America and Citigroup got another infusion of cash from a Saudi prince and China. Recession fears also pushed U.S. stocks sharply down at the end of the week.

Fears About Economy Increase
Debt Crisis Grows; Top Mortgage Firm Sold at a Bargain

Anthony Faiola and Tomoeh Murakami Tse, Washington Post Staff Writers

January 12, 2008

Major banks and mortgage companies yesterday sharply accelerated an industry consolidation that is set to change the landscape of American lending, while a convergence of events exposed fresh worries about the U.S. economy.

New indications emerged yesterday that the spiraling subprime mortgage crisis is spreading from home loans to credit cards, potentially engulfing a far broader segment of Americans. At the same time, the U.S. trade deficit soared to a 14-month high, fueled by soaring oil prices.

And rising concern that U.S. investment houses, particularly Merrill Lynch, may yet suffer far greater losses, helped set up a wide market sell-off.

Echoing the heightened concern, Treasury Secretary Henry M. Paulson Jr. said yesterday that the U.S. economy had slowed "rather materially" at the end of 2007 and that "time is of the essence" in launching an economic stimulus package to stave off a recession.

Meanwhile, a broad shake-up of the U.S. lending industry is speeding up. Bank of America agreed yesterday to buy the troubled Countrywide Financial for $4 billion, a bargain-basement price for the nation's largest mortgage lender, which, analysts said, could have even more substantial mortgage-related losses ahead.

"There are signs" that the economy "is slowing down fairly rapidly," Paulson told Bloomberg Television. Congressional Democrats have promised to work with the Bush administration to pass a series of economic measures meant to boost consumer confidence and fend off a sharp downturn, perhaps including tax rebates for low- and middle-income Americans and tax cuts and other fiscal measures to boost investment. "If something were to be done here, I think the focus would be on something that's temporary and that could get done and make a difference soon," Paulson said.

Some saw the rescuing of Countrywide from possible bankruptcy, as well as news that J.P. Morgan Chase is in "very early talks" with about a half-dozen regional banks, including Washington Mutual of Seattle, as evidence of a much-needed consolidation that in the long run could fortify the lending industry and eventually ease the nation's credit crunch.

At best, however, that dawn remains some ways off. Economists said the market drop yesterday signals that Wall Street is increasingly betting on a recession and failed to respond to vows by Federal Reserve Chairman Ben S. Bernanke that the central bank would act aggressively to prevent one.

The Dow Jones industrial average of 30 blue-chip stocks plunged 246.79, or 1.9 percent, to 12,606.30. The Standard & Poor's 500-stock index, a broader market measure, lost 19.31, or 1.4 percent, to 1401.02. The tech-heavy Nasdaq composite index declined 48.58, or 2 percent, to 2439.94.

"I almost feel like we're in the first innings of a bear market," said Jim Herrick, director of equity trading at Robert W. Baird. "It's really hard to see the light at the end of the tunnel."

Jitters were also stirred by a New York Times report that Merrill Lynch may take a $15 billion write-down when it reports earnings next week, exceeding the $12 billion that had been predicted. In addition, American Express shares shed 10.1 percent of their value after the company warned that it would take a charge of $440 million in the fourth quarter, in part to cover higher delinquencies.

As companies continue to be squeezed in the credit crunch, the landscape for financial institutions has increasingly become a matter of survival of the fittest. Wobbling mortgage lenders are searching for bailouts, and banks relatively unscathed by deteriorating mortgage assets are cautiously looking for discounted takeover targets.

Bank of America, at least on paper, is getting Countrywide on the cheap -- picking up the lender at a mere 31 percent of its book value. Yet even at that price, analysts fretted that Bank of America may still be taking on too much risk and exposing itself unnecessarily to what could be a far deeper cache of bad debt on Countrywide's books.

Other factors that will determine whether the United States is able to avoid a recession, or at least blunt its pain, are developments in the labor market, whether consumers continue to tighten their purse strings, and how much money financial institutions will be losing in the months to come as the shake-out continues.

Joe Brusuelas, chief economist at the research firm IdeaGlobal, said the magnitude of these losses may be staggering.

"We haven't even scratched the surface of what the losses will be," Brusuelas said. "I don't think we're anywhere near the end. Rather, we're still at the beginning of this."

On the plus side, some economists said, U.S. institutions are moving to deal with a bad situation far faster, for instance, than Japanese banks did after the collapse of that nation's real estate market in the early 1990s. Major U.S. financial institutions have written off $68 billion as they come to grips with the depths of their troubles.

"This all signals that we're moving in the right direction," said Art Hogan, chief market analyst for Jefferies & Co. "But we're going to have more bumps in the road ahead, especially next week, when many financial institutions will report their earnings and probably more write-offs."

Economic concerns deepened yesterday after the release of data showing an unexpectedly larger U.S. trade deficit in November, $63.1 billion. Analysts had hoped that the weaker dollar would help U.S. companies export America's way to a narrower trade gap. But while exports did stage a relatively robust uptick, they were more than offset by a 16.3 percent rise in the nation's bill for foreign oil.

The widening deficit has serious political ramifications, particularly in an election year in which globalization and free trade have become popular pi¿atas on the campaign trail as a blame for America's economic woes. Critics of free trade, as well as those who have pressed the Bush administration to get tougher on China in particular, have blamed those policies for zapping millions of jobs from the United States.

Protectionist fires are likely to be fanned by more revelations yesterday that major U.S. financial institutions are searching for cash infusions from sovereign wealth funds, the investment arms of foreign governments. Such funds in Asia and the Middle East are flush from the industrial revolution in China and soaring oil and gas exports in the Persian Gulf states.

To date, sovereign wealth funds have invested nearly $30 billion in Merrill Lynch, Citigroup, UBS, Morgan Stanley and Bear Stearns. Citigroup and Merrill are to get up to an additional $14 billion combined, the Wall Street Journal reported this week. Such deals are emerging as flashpoints for some critics, who insist that it is not in U.S. interests to have the nation's key financial institutions part-owned by foreign government entities.

In addition, Congress is considering bills that would clear the way for economic sanctions on China if it continues to prop up its currency, which some analysts say is being artificially undervalued by as much as 40 percent against the dollar to ensure that Chinese exports remain cheap.

In an interview yesterday, Commerce Secretary Carlos M. Gutierrez said the trade deficit with China had actually narrowed slightly in November and warned against slipping into a new era of protectionism.

"If the discussion were to translate into isolationist and protectionist policies, I think that would be bad for our economy and bad in terms of the message that we are sending to the world," Gutierrez said.

Last week we continued a look into the reasons why capitalism makes everyone, poor and rich, so miserable. We looked at the culture of pure capitalism as a narcissistic “family of families” in which the needs of the system takes precedence over the needs of its members. The end result being similar to symptoms found in victims of narcissistic families:

A chronic need to please; an inability to identify feelings, wants, and needs; and a need for constant validation. This group of patients felt that the bad things that happened to them were well deserved, while the good things that happened were probably mistakes or accidents. They had difficulty being assertive, privately feeling a pervasive sense of rage that they feared might surface. They felt like paper tigers-often very angry, but easily beaten down. Their interpersonal relationships were characterized by distrust and suspicion (bordering on paranoia), interspersed with often disastrous episodes of total and injudicious trusting and self-disclosure. They were chronically dissatisfied, but were fearful of being perceived as whiners or complainers if they expressed their true feelings. Many could hold their anger in for extremely long periods of time, then become explosive over relatively insignificant matters. They had a sense of emptiness and dissatisfaction with their achievements; this was found even among individuals who externally may have been viewed as very successful. The list of people included professionals who were obsessively involved in their enterprises, but were unable to achieve at a level at which they found satisfaction. In relationships, these individuals frequently found themselves in repeated dead-end situations. (Stephanie Donaldson-Pressman and Robert M. Pressman, The Narcissistic Family, p. 3)

Just what are those needs of the system?

The heart of capitalism or, as Karl Marx would put it, its inner logic, is the commodity form. In Capital, Marx proposed the distinction between two forms of exchange, one capitalistic, M-C-M, and the other pre-capitalistic, C-M-C. ‘M’ stands for money and ‘C’ stands for commodity. Tied up with this distinction is the distinction between use value and exchange value. In precapitalist exchange, a producer exchanges a commmodity for money and uses the money to buy another commodity in order to use that other commodity. In capitalist exchange you start with money, buy commodities (either materials or commoditized labor), and sell them for more money. The process then starts again by using that more money to make even more money, and so on. In both cases people are making things and selling them, but the consequences are fundamentally different.

In a recent book, Economics Transformed, Marxist economist Robert Albritton takes an interesting look at those consequences and why they make us so unhappy.

One of the points Albritton makes is that we don’t have pure capitalism, and never have. This has several consequences, including why neoclassical economics and its mathmatical models cannot accurately describe reality. These mathematical models can only accurately describe a world in which commoditization, the turning of all goods, labor, land and even money itself into commodities, is complete. To the same degree that specific historical situations fall short of that, so will the mathematical models.

[A] general economic theory can only use mathematics when commodification of economic variables is complete, because otherwise relatively autonomous and qualitatively distinct economic and non-economic structures will alter quantitative outcomes such that there can be no purely mathematical precision in them. And since at the level of history commodification is never complete, the study of economics at this level must always be multidisciplinary and include the study of different types of structures of power that are implicated in ‘economic’ outcomes. (pp. 11-12)

Now looking at it from the point of view of happiness or what Albritton calls “human flourishing” it becomes clear that profit-making, by ignoring use values will end up creating an environment where human flourishing is impossible.

With C-M-C a watchmaker produces watches that are sold for money used to buy the conveniences of life. Because the watchmaker produces a particular use-value, this use-value is invested with her life-energy and skill, such that even if her income should decline perilously, it would be difficult to shift to a more lucrative product, say shoes. Further, the purpose of watchmaking in this case is to get other use-values that are needed to live the life expected of watchmakers. Should the watchmaker make more than this, she would presumably buy more use-values resulting in a more commodious living… (p. 37)

In contrast with the petty commodity form C-M-C, which involves exchanging use-values not wanted with those wanted, M-C-M1 is the circulation form specific to capital, in which the aim is unlimited money-making. In order to achieve this, ideally capital would move easily from less profitable to more profitable production processes, and this is significantly advanced by factory production which deskills and commodifies labour-power. (p. 38)

What type of person is needed by a capitalistic system? It needs capitalists and de-skilled workers living at near subsistence levels, not happy craftspeople taking pride in making watches. To expand on this, Albritton discusses Hegel’s philosophy of the “subject.”

Hegel begins his Philosophy of Right with the legal subject understood as the externalization of the will into the creation of private property… [His] legal subject is followed by a moral subject, who, through a process of internalization, develops a soul and a conscience. Finally an ethical or political subject synthesizes the external and internal into institutions appropriate to the full development of both legal and moral subjects. The synthesis of the legal, moral and political subject can be called the ‘rational subject.’ (p. 48)

Strictly from the point of view of capital in a purely capitalist society, only the legal subject must be recognized… Capital’s indifference to use-value… implies a non-recognition of moral, political or rational subjectivity. In a purely capitalist society all that is required is subjects capable of owning commodities, selling or buying commodities, or making contracts involving exchange transactions or transfer of ownership… From the point of view of pure capitalism, the only kind of subjectivity that need exist is free legal subjectivity: there need be no moral subjects or political subjects, and rational subjectivity is limited to the rules of survival in capitalism. (p. 49)

Indeed, were we to imagine that a purely capitalist society actually came into historical existence, the result would be a general hollowing out of the soul and an extreme externalization of the self into a commodity world. Selves would be nothing but differently appearing bodies plus the commodity accoutrement that they possess. They would be only differentiated from commodities by their capacity for self-movement, by their capacity for exclusive property rights against one another, and by their particular commodity equipage and consumption patterns. (p. 50)

The legal subject of pure capitalism is radically decentred since such a subject is simply a collection of opportunistic profit-making capacities without any centre of inner connectedness. In this case the subject writ large is capital and individuals are only recognized as subjects insofar as they are useful to capital. (p. 50)

What type of person does the system produce? Degraded people for the most part, degraded in all kinds of ways.

Fully commodified labour-power implies complete lack of organization of labour in its contracting with capital, and it implies a steady supply of labour-power to be drawn from an industrial reserve army [of the unemployed]…Insofar as there is a good supply of workers, capitalists can focus purely on the use of labour-power to expand [exchange] value, while being totally indifferent to use-value consideration such as the living conditions, health and well-being of workers. In Capital, Marx uses the example of the difficulties in getting legislation in nineteenth century England to protect children from the brutal exploitation of capitalists to illustrate capital’s indifference to use-value and its willingness to sarcrifice even the most basic human decency on the altar of profit. (p. 42)

Albritton identifies a healthy ecological environment as a use-value that capitalism has no choice but to ignore but that is necessary for human flourishing.

Given capital’s indifference to use-value and strong orientation towards short-term profits, but for the constraints of landlords there is no reason why capital should not despoil and desertify the land if it is profitable to do so. (p. 43)

Reading Albritton’s definition of human flourishing is to see immediately what a degraded situation we were born into and how far away are we from a world that encourages such flourishing.

We know a lot about what humans need to flourish materially (diet, shelter, exercise, healthy natural environment, absence of threat of physical violence, and so forth) and are gradually becoming much more knowledgeable about what sorts of social, political and psychological conditions (love, care, friendship, generosity, respect, purpose, freedom, democracy, social justice, and so forth) promote the richest possibilities of human development. If our enourmous research capabilities were directed away from the means of violence and means of profit, we could certainly learn a great deal more about creating healthy and sustainable material and social environments. For example, we only know the carcinogenic properties of a small proportion of the total number of chemicals that we have spread about our environment. We seem to be failing our youth as more and more fall into poverty and all the social ills that accompany it. At the same time, we know a great deal about what sorts of food intake and what sorts of exercise will advance bodily health. Also we know something about the sorts of caring and loving social environments that will advance mental health and sociability. And while we should know that violence breeds violence, we are doing an extremely poor job of reducing the level of violence in the world.

I use the term “human flourishing” to refer to what we know about how to make our lives more fulfilling while improving the health of the earth for future generations. (p. 163)

So why can’t we make use of this knowledge?

Humans value many things other than profits, but in pure capitalism the value of these things will not register unless they are profitable. According to capitalistic rationality a beautiful factory will not be build unless it is profitable to do so, and since making workplaces beautiful would cut into profits, in a purely capitalistic society considerations of beauty would not enter their design. Indeed, industrial workplaces are often noisy, dirty, dangerous and ugly. If testing the carcinogenic properties of a chemical might reduce profits by increasing costs, no test will be performed. Indeed, social and environmental costs that do not register in the profit structure are clustered together as “externalities.” Because of capital’s indifference to use-value, it has no interest in costing “externalities”… (p. 167)

The term “externalities,” coined by corporate accountants, carries with it the same feeling of contempt with which psychopaths discuss human morals.

Laying off workers, paying low taxes, skirting health and safety regulations, moving production to low-wage areas, can all be justified by the unavoidable imperatives of profit. Shifting income and wealth from the public sector to the private sector can also be justified by the necessity to keep the profits of the private sector high enough to encourage investment, as can massive hand-outs of public money to the private sector. (p. 168)

What a victory for the psychopaths among us, those without conscience, to have implemented a strong, dynamic engine, the commodity form-driven inner logic of capitalism that throws up a culture that pushes normal people to be selfish, greedy, shortsighted and amoral! If it doesn’t always succeed in making normal people psychopathic, the culture creates an environment where selfish, greedy, shortsighted and amoral actions are accepted as inevitable and natural. The reason it seems natural, is that the coercion behind it is concealed by being axiomatic, by being a result of the operation of the inner logic rather than of outside force like most historical social systems.

Marx argues that historically class exploitation exists wherever property relations allow a particular group to control the surplus product defined as that product above and beyond what is required for the producers to reproduce themselves. Capitalism differs from other modes of production, because, in principle, the class relation can be reproduced without reliance on extra-economic force when commodification is complete. Ideologically this has enabled capitalism to hide economic domination behind what ideally should be free and equal market exchange. And it has placed the burden on each individual to be responsible for their own economic well-being. (p. 171)

Next week we will look at what might be needed to counteract the degrading inner logic of capitalism, taking into account Ponerology and its advances in identifying in societies the psychopathic and those easily corrupted and coopted by them.