Signs of the Economic Apocalypse, 5-19-08

From SOTT.net:

Gold closed at 899.90 dollars an ounce Friday, up 1.6% from $885.80 for the week. The dollar closed at 0.6419 euros Friday, down 0.6% from 0.6459 at the close of the previous Friday. That put the euro at 1.5578 dollars compared to 1.5482 the week before. Gold in euros would be 577.67 euros an ounce, up 1.0% from 572.15 at the close of the previous week. Oil closed at 126.62 dollars a barrel Friday, up 0.5% from $125.96 for the week. Oil in euros would be 81.28 euros a barrel down 0.1% from 81.36 at the close of the Friday before. The gold/oil ratio closed at 7.11 Friday, up 1.1% from 7.03 for the week. In U.S. stocks, the Dow Jones Industrial Average closed at 12,986.80 Friday, up 1.9% from 12,745.88 at the close of the previous Friday. The NASDAQ closed at 2,528.85 Friday, up 3.4% from 2,445.52 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.84%, up seven basis points from 3.77 for the week.

There was no correction in oil prices last week, but the rise did slow. Oil rose a half percent in dollars and fell slightly in euros. Some political maneuverings around the oil issue did uncover interesting indications about future events, thought. Last week the U.S. Congress was successful in forcing Bush to stop adding oil to the Strategic Reserve. Why, in times of rapidly rising oil prices, with all the political pressure that entails, would Bush not want to ease prices by a moratorium on filling up the Strategic Oil Reserve? Could it be that he is expecting to need a lot of that oil if he or Israel is able to attack Iran, with all the supply disruptions that would result? It can’t just be a desire to enrich the oil companies, they already have more money than they know what to do with. Then there was the embarrassing public rebuff that the Saudis gave Bush by refusing to increase oil production. Is that tied to their possible opposition to an attack on Iran?

In any event, the bubble in energy prices is cause for a sick feeling of fear in populations around the world. Now that it’s clear that the financial powers that be intend to inflate their out of the mess they’re in, it will be the average person who will pay the price. Unlike the high-tech stock bubble of the 1990s or or the housing boom of this decade that benefitted a fairly wide spectrum of the population, the commodities bubble we are seeing now is causing widespread pain.

US workers paying the price for Wall Street’s debacle

Barry Grey
16 May 2008

The Federal Reserve Board, with the full backing of the Bush administration, Congress and both political parties, has carried out a massive and unprecedented intervention to avert an imminent collapse of the US banking system and bolster the major Wall Street finance houses.

The Fed’s decision in March to underwrite with $29 billion of its own funds the takeover of investment bank Bear Stearns by JPMorgan Chase, in order to prevent the collapse of Bear Stearns, and its even more extraordinary move to allow major investment banks to avoid a similar fate by borrowing directly from its coffers, was a signal that the US government would marshal whatever resources were necessary to rescue the banking system from the consequences of the speculative binge that had generated billions in salaries and bonuses for the Wall Street elite.

While the government bailout, ultimately to be financed from public funds, has seemingly averted an immediate banking collapse, it has done nothing to address the underlying crisis. Rather, the Fed and the US corporate-financial establishment hope that it has created the conditions for a more orderly “deleveraging” of the financial system, i.e., a liquidation of trillions in vastly inflated and unmarketable assets, in which the social and economic pain is borne overwhelmingly by working class and middle class families.

The Fed’s actions have restored a measure of confidence to the financial markets, reflected in a stock market rally that has driven the Dow Jones Industrial Average back toward the 13,000 level. At the same time, the Fed and most financial analysts are acknowledging that the US housing collapse and credit crunch have precipitated an economic slowdown that will likely be protracted.

Addressing a conference of the Federal Reserve Bank of Atlanta on Tuesday, Federal Reserve Board Chairman Ben Bernanke said that financial markets were improving but “remain far from normal.” He said the decision in March to allow investment firms to obtain emergency loans from the Fed “seems to have bolstered confidence.”

But, he cautioned, the crisis would not be resolved quickly. “Ultimately,” he said, “market participants themselves must address the fundamental sources of financial strains through deleveraging, raising new capital and improving risk management, and this process is likely to take some time.”

Whatever the technical indices of the slump—not a few experts have taken to denying that the US is in a recession or heading for one—ordinary working people in the United States are suffering a major cut in their living standards. Job losses are mounting, wages are declining, work hours are being reduced and prices for essentials such as food and gasoline are soaring.

In a word, the underlying historical and economic processes that produced the crisis on Wall Street are making the vast majority of Americans poorer. And we are only at the beginning of this process.

The impact of the economic crisis on the general population was reflected in a Washington Post-ABC News poll released Tuesday, which reported that 68 percent of people surveyed said they were concerned about their ability to maintain their standard of living. The biggest factor cited by respondents was the sharp rise in consumer prices.

A separate poll released by ABC showed economic anxiety to be at its highest point on record since 1981.

In the Post-ABC poll, the nearly 70 percent who said they were worried about maintaining their lifestyles represented a 17 percent jump since December of last year. The growing anxiety reported by respondents cut across party and income lines, “spreading rapidly among Republicans, people from rural areas and those from middle- and upper-income households,” according to the Post.

The newspaper said that nearly six in ten people from households with an annual income of $100,000 or higher said they were worried, up from a third in December. Of those who identified themselves as Republicans, 56 percent expressed concern, up from 32 percent.

Twenty percent cited higher gasoline prices as the single most important economic issue, and about a third pointed more generally to rising prices as the primary cause of their apprehension. Two-thirds called rising gasoline prices a financial hardship, including a third who said higher fuel prices were a severe burden.

There is, of course, a very real basis for these concerns. Just on the question of gasoline, the Energy Department reported that the average cost of gas rose 11 cents in the past week alone, and has gone up 33 cents over the past month on its way to over $4 a gallon.

According to a report issued Wednesday by the Labor Department, food prices shot up 5.1 percent in April over a year earlier, and 0.9 percent from the previous month. Both of these gains are the biggest since 1990. The spike in food prices was propelled by increases in the price of bread, fruit, coffee and other consumer staples.

Health care costs have risen 4.3 percent in the past 12 months.

Prices for imported goods—a direct reflection of the precipitous decline of the US dollar—rose 1.8 percent in April from March. They have soared 15.4 percent from last year, the biggest year-to-year increase since such records began to be kept in 1982.

Meanwhile, real weekly wages have fallen compared to a year earlier in every month since October.

A major component of the “deleveraging” process is an assault on jobs by means of downsizing, restructuring and corporate bankruptcies. The last three months have seen, according to the Labor Department, a net loss of 180,000 jobs in the US. Aside from construction and manufacturing, where job cuts continue to escalate, the financial sector is bearing the brunt of the job-cutting.

It is estimated that so far this year 50,000 financial jobs have been slashed. More than 23,000 financial-related US job cuts were announced in April, according to the outplacement firm Challenger, Gray & Christmas. That increased the total to 49,825 in the first four months of this year—nearly as many job cuts as were announced in all of 2007.

This, however, is only the first stage of what promises to be a far larger job-slashing process. Last week, the Swiss bank UBS announced it will lay off 5,500 employees in the US and Britain. Lehman Brothers is expected to announce that it is eliminating 5 percent of its employees, or about 1,425 positions, on top of a previously announced 5 percent cutback in its work force.

By the end of June, Morgan Stanley plans 1,500 more job cuts. This puts total layoffs at Morgan Stanley at about 4,500, or 10 percent.

Citigroup on May 9 announced a plan to shed up to $500 billion of assets and slash some $15 billion off its cost base. The bank did not say how many jobs would be eliminated, but the figure will likely be in the tens of thousands. The bank has already announced 13,000 job cuts.

The crushing impact of job losses and price rises continues to undermine retail sales. The Commerce Department reported Tuesday that retail sales fell another 0.2 percent in April from the previous month. This smaller-than-expected drop obscures the dramatic slump in consumer spending in key manufacturing sectors. Auto sales fell 2.8 percent in April, after a 0.5 percent drop in March.

The Federal Reserve issued a report on US manufacturing Thursday which showed that the slump in that critical sector is deepening. Industrial production declined 0.7 percent in April, more than twice the drop forecast by economists.

The financial crisis is taking a growing toll in the form of corporate bankruptcies. Corporate bankruptcy filings rose in the US last month more than 50 percent over the previous year’s figure.

In the financial sector itself, losses from failed mortgage-related assets and bad debts continue to mount, reflecting the underlying insolvency of major sections of the financial system. Last week, American International Group, the world’s largest insurance firm, announced a record $7.8 billion loss in the first quarter of 2008. This brought the company’s loss to $13.1 billion over the past two quarters. AIG has written down $20 billion in credit derivative contracts since December.
The deepening financial crisis of Fannie Mae and Freddie Mac, the two major mortgage companies that are sponsored by the US government, is indicative of the way in which the crisis on Wall Street is being offloaded onto the government. Freddie Mac on Wednesday reported a loss of $151 million in the first quarter of 2008. The market responded to this lower-than-expected loss by driving the company’s stock up by 9 percent.

However, the reported figure was achieved by means of accounting gimmicks that concealed an actual loss of $2 billion. The previous week, Fannie Mae reported a first quarter loss of $2.2 billion. Its stock also shot up.

The two companies suffered more than $9 billion in mortgage-related losses last year, and are sitting on as much as $19 billion in additional losses that they have not yet fully acknowledged, analysts say. Their combined cushion of $83 billion underpins a colossal $5 trillion in debt and financial commitments—a level of leverage that is unsustainable.

But in the aftermath of the bursting of the housing bubble, the government has allowed them to expand their loans while lowering their capital cushions. This is because the two government-backed firms are essentially taking over the mortgage financing business that has been dumped by the banks and investment firms.

As the New York Times reported last week, “As Wall Street all but abandons the mortgage business, Fannie Mae and Freddie Mac now overwhelmingly dominate it, handling more than 80 percent of all mortgages bought by investors in the first quarter of this year. That is more than double their market share in 2006.”

In a separate article on Thursday, the Times explained the reason for the stock market’s enthusiasm for the shares of the two companies. “‘Both these companies are clearly going to be insolvent by the end of the year, but everyone knows that Congress will do anything to keep them afloat, because if Fannie and Freddie go under, the entire global financial system will melt down,’ said Christopher Whalen, a founder of Institutional Risk Analytics, an independent research firm. ‘These companies’ earnings don’t matter. Their accounting hardly matters. People buy the stock because they believe the federal government will bail them both out if things get really bad.’”

No such bailout is in the works for the millions of families that are losing their homes as a result of the mortgage crisis.

Foreclosure filings surged 65 percent in April from April 2007, according to a report issued Wednesday by RealtyTrac. One in every 519 households received a foreclosure filing—the highest such figure since the real estate tracking company began issuing foreclosure reports in January 2005. Nationally, 243,353 homes were facing foreclosure last month. That amounts to 2 percent of all homes.

Foreclosure filings rose in all but eight states. The hardest hit states included Arizona, California, Florida and Nevada. Analysts expect the foreclosure rate to continue to rise, spiking in the third and fourth quarters of this year.

Not surprisingly, consumer confidence has hit a low point not seen since 1980.

Consumers' mood as grim as early-80s

Burton Frierson

May 16, 2008

NEW YORK (Reuters) - U.S. consumer confidence tumbled to a 28-year low this month as rising prices strained household finances, while another drop in single-family housing starts underscored problems still plaguing the economy.

Friday's reports highlighted worries that the United States could be entering the early days of a period of stagflation like the late 1970s and early 1980s, characterized by a sluggish economy and accelerated price growth.

The data showed consumers' short-term inflation expectations hit a 26-year high, heightening the dilemma facing the Federal Reserve, which has bet that a slow economy will tame prices.

"The Fed has continuously said they want to contain inflation expectations -- and they are not contained," said Tom Sowanick, chief investment officer at Clearbrook Financial LLC in Princeton, New Jersey.

"The Fed is going to have to address inflation expectations in some manner, whether they talk it down or they force it down, possibly by taking away the aggressive rate cuts over the last year."

Stocks ended little changed another record high in oil prices helped energy shares, though it reminded investors of inflation worries. The bond market, which abhors inflation, ended lower.

The Fed has slashed its target for the benchmark overnight federal funds rate by 3.25 percentage points since crises in the housing and credit markets last year pushed the economy toward recession. The rate cuts are a textbook response to the threat of recession, but the opposite strategy used to fight inflation.

GRIM MOOD

The Reuters/University of Michigan index of consumer confidence certainly highlighted the threat to economic growth, dropping to 59.5 in May -- the lowest level since June 1980.

This is bad news for the United States, where consumers fuel two-thirds of national economic activity through their purchases of goods and services.

"Consumer confidence continued to slip in early May due to surging food and fuel prices," the Surveys of Consumers statement said. "Record numbers of consumers viewed the economy in recession and saw little hope of recovery anytime soon."

This took the shine off news from the Commerce Department that starts on new U.S. homes rose by a surprisingly strong 8.2 percent in April, the biggest monthly increase in more than two years. The bounce, however, came entirely from multiple-unit dwellings such as apartments and condominiums.

Applications for new building permits also turned up for the first time in five months, presenting another rare bit of good news for the beleaguered U.S. housing market, the original source of the economy's current troubles.

In a sign that housing's woes were not yet over, groundbreaking on single-family homes in the United States dropped to the slowest pace since 1991.

Meanwhile, the Michigan report's gauge of one-year inflation expectations surged to 5.2 percent -- the highest since February 1982 -- from 4.8 percent in April.

Also worrying for policy-makers at the Federal Reserve, five-year inflation expectations were the highest since August 1996, edging up to 3.3 percent from April's 3.2 percent.

The inflation measures challenge the Fed's view that soaring commodity prices have not yet led to an increase in long-term expectations for price growth.

None of this should come as a surprise to people. Yet it probably is surprising, since we were fed a steady diet of lies for the past thirty years about the economy. For example, we have been told since the 1980s that making rich people richer will benefit everyone. That pritatizing government services will create efficiencies and improve services. That lowering taxes will increase government revenue. That social democracy will impoverish people and take away freedom. It was all a con job designed to implement predatory capitalism and to concentrate wealth in the hands of a few psychopathic elite.

If we weren’t so stupid in the United States, we could have this, according to David Seaton:

What I would like for the USA is first: a federal, universal, obligatory, public health system that would be so good that the private system would be reduced to preforming silicon breast implants on precocious 12 year old Valley girls. This would mean that a little black girl in Tupelo Mississippi would have the same medical care as a rich little white boy in Lake Forest Illinois.

Next I would like a free, federal, universal, public education system, from cradle through post graduate, that would be so good that only people belonging to strange sects, would think it worth the money to send their kids to a private school. Like the French Lycée system: the same all over the country, same courses, same exams, same standards for all students, so that the little black girl in Tupelo Mississippi would get exactly the same, quality education, as the rich little white boy in Lake Forest Illinois. All of this with a free public university system, so good that Harvard, Yale and Princeton would be reduced to diploma mills for rich kids that didn't want to study hard.

And a good pension system, of course. This what I consider the minimum a "progressive" should demand from the state. You might have a few questions.

Does this mean big government?

You bet. It would mean a huge, unionized, bureaucracy.

Wouldn't that be very expensive?

Horribly expensive.

How would you pay for it?

To start with I would reduce US military spending to make it only more powerful than the combination of China and Russia and not more powerful than the next 19 countries on the list all together. I would be grateful to see the numbers, but I imagine that setting up my version of America would cost a lot less than the war in Iraq.

Now it is easy to understand that from my viewpoint the Democratic Party of the USA is the greatest bunch of wankers since Tommy Chong's definitive, "Harry Palms". I am not sure that the Democrats are a path to the kind of America I would like, in fact they might be the greatest obstacle standing in the way. So while generally feeling more comfortable traveling in the company of Democrats, I am not rooting for them.

Having read and understood this, you may understand why I am often crueler to Democrats than to Republicans. With them, what you see is what you get, while with the Democrats we may be looking at nothing more than a Judas goat to neutralize the appearance of any social movement in America that might bring about social justice.

I think that all of this is something that the politicians really cannot be expected to do. The civil rights movement came from the African-American community's political agitation, the politicians bowed to that pressure. I think it will require mass movements, even a classic general strike to get my agenda taken care of. Barack Obama is not going to do any of this... people are fooling themselves if they think he ever will.

Or this, according to the blogger “Badtux the Snarky Penguin” who reminds us that energy deregulation was one of the biggest con jobs of all time:

Government is the problem?

Third day in a row of record heat here in Santa Clara. My air conditioning has been making my electric meter spin madly. I pity those of you who don't have cheap reliable government-provided electricity but instead must purchase that expensive unreliable private enterprise provided electricity for twice the price (or for those who can't purchase private enterprise provided electricity for any price and must rely on expensive diesel generated electricity). I might go walking down the street and take a few photos of that shiny glistening Santa Clara Muncipal Utilities power substation just so I can play them back as a slideshow on the background of my Macbook while smiling at the people who say "government is the problem, not the solution!" while I pay half as much for my power as they do thanks to the people of the City of Santa Clara gathering together and building their own power plants and power substations for themselves (that whole WE THE PEOPLE thingy).

When folks elsewhere are having blackouts, we have reliable electricity flowing to our wall outlets. When folks elsewhere are being reamed by private utilities, we pay half the price. AND THAT IS TRUE EVERYWHERE THAT MUNCIPAL UTILITIES PROVIDE ELECTRICITY! And it's not because Santa Clara Municipal Utilities is subsidized by taxes. Indeed, the City of Santa Clara has lower taxes than all the surrounding cities because of "in lieu of taxes" revenues from the electrical utility. It's simply that for necessities that we cannot easily live without such as electrical utilities, government is more responsive to the people than private enterprises are. Once a private enterprise has obtained monopoly status, it has no incentive to economize, reduce headcount, and increase its reliability. But for the City of Santa Clara, if the electrical utility becomes unreliable, we would start clogging our city councilors' phone lines with complaints -- and WE KNOW WHERE THEY LIVE. They aren't anonymous unelected people in some giant corporate tower thousands of miles away. They live HERE, and we voted them into office, and if they don't serve us, we can kick them out and elect city councilors who will, and if worse came to worse and dozens of people were dying from the heat because of their incompetence, we could get together with our baseball bats and pitchforks and run them out of town with their homes burning behind them.

Now, folks say that private enterprise always works better than government, and that's why we should not allow government to provide health insurance. To them all I have to say is this: Muncipal power companies, bitches. When you idiot ideologues were sweltering in the dark during the rolling blackouts in 2000, we few cities in California who own our own power companies were nice and cool. If Medicare For All operates with even HALF of the efficiency of Santa Clara Muncipal Utilities, it would still be TWICE as efficient as private insurance companies are at providing health care funding. And there's no reason to believe that Medicare For All would be any less efficient than Santa Clara Municipal Utilities.

So you guys who say private enterprise is always better than government can just go take out a third mortgage on your homes to pay for your electrical bills during this heat wave. I, on the other hand, shall pay for it with the contents of my change jar. Hasta la vista, baybee! And may someday we get government-provided health insurance as reliable as government-provided power. Government of the people, by the people, for the people. We The People, f*** yeah!