Monday, June 02, 2008

Signs of the Economic Apocalypse, 6-2-08

Gold closed at 891.50 dollars an ounce Friday, down 3.8% from $925.80 for the week. The dollar closed at 0.6430 euros Friday, up 1.4% from 0.6342 at the close of the previous Friday. That put the euro at 1.5552 dollars compared to 1.5767 the week before. Gold in euros would be 573.24 euros an ounce, down 2.4% from 587.18 at the close of the previous week. Oil closed at 127.59 dollars a barrel Friday, down 3.4% from $131.87 for the week. Oil in euros would be 82.04 euros a barrel, down 2.0% from 83.64 at the close of the Friday before. The gold/oil ratio closed at 6.99 Friday, down 0.4% from 7.02 for the week. In U.S. stocks, the Dow closed at 12,638.32 Friday, up 1.3% from 12,479.63 at the close of the previous Friday. The NASDAQ closed at 2,522.66 Friday, up 3.2% from 2,444.67 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.05%, up 21 basis points from 3.84 for the week.

Oil and gold both dropped significantly last week and the dollar strengthened against the euro. These movements may be related. The biggest move last week was the yield on the ten-year T-Note which rose more than 21 basis points (hundredths of a percent). Now that the Federal Reserve Board has bailed out the financial system by pumping huge amounts of money into the system, it may have to shift tactics to deal with the inflationary consequences of those actions. All that liquidity helped drive commodity prices sky high (for details, see this important piece by Mike Whitney). So now the Fed is worried about inflation. The bad news for average people is that the only way they can tame inflation now is by creating a severe recession. That is what will happen when interest rates rise as they are beginning to do. So when we all lose our jobs, we can console ourselves with the thought that the big banks and brokerage houses were saved.

Here is the signal of the change of course:

Dallas Fed's Fisher warns of quick 'change of course' if inflation gets worse

May 28, 2008

WASHINGTON (Thomson Financial) - The Federal Reserve could execute a rapid about-face on monetary policy if the threat of inflation continues to get worse, Dallas Fed president Richard Fisher warned tonight.

'If inflationary developments and, more important, inflationary expectations, continue to worsen, I would expect a change of course to occur sooner rather than later, even in the face of an anaemic economic scenario,' he said in a speech prepared for the Commonwealth Club in San Francisco.

Fed officials generally have been raising the level of concern about inflation in their speeches recently, but Fisher is one of the two members of the Federal Open Market Committee (FOMC) to vote against the last rate cut because of their inflation fears. The other was Philadelphia Fed president Charles Plosser.

All of the Fed speakers have emphasized their particular concern about inflation expectations and the risk that if they begin to rise, they will set off a wage price spiral that could require drastic action by the Fed to stop.

'No central banker can countenance it,' Fisher said, 'not least the men and women of the Federal Reserve.'

Fisher said that would be the limit of what he had to say about monetary policy and he also refused to discuss what the Fed might have done to prevent the housing bubble and market turmoil from developing.

The financial markets now, are paying the price for 'complacency and recklessness' Fisher said. 'Few scanned the horizon for trouble brewing as we proceeded along a path of unparalleled prosperity fuelled by an unsustainable housing bubble and unbridled credit markets.'

For the present, 'the Bernanke FOMC's objective is to use a new set of tools to calm the tempest in the credit markets,' he said.

'We trust that the various term credit facilities we have recently introduced are helping to restore confidence while the credit markets undertake self-corrective initiatives and lawmakers consider new regulator schemes.'

Most of Fisher's speech was devoted to a warning considerably more dire than his inflation fears. 'I see a frightful storm brewing in the form of untethered government debt,' he said.

Taking his audience through the familiar territory of Medicare and Social Security's long-term financial insolvency, he said the long-term fiscal situation of the federal government 'could be unimaginably more devastating to our economic prosperity than the sub-prime debacle and the recent debauching of credit markets.'

Why do these financial types always point to Medicare and Social Security when talking about government debt? Why not the military and “homeland security” budget? Could it be that it is because there is more money to be made by corporations on out of control military spending? Or do they just prefer to kill people instead of heal and support them in their old age?
Aside from the straightforward fiscal damage, Fisher said the 'dark and dirty secret about deficits -- especially when they careen out of control -- is that they create political pressure on central bankers to adopt looser monetary policy down the road.'

And the greater the financial hole of the US deficit, the greater the pressure on the Fed will be to print money to get out of it.

Meanwhile inflationary pressures are spreading. Fertilizer costs jumped 65% over the past year. Chemical prices are rising, too:

Dow Chemical announces massive price increase

Alex Lantier
30 May 2008

Dow Chemical announced it would charge up to 20 percent more for its products on May 28, citing spiraling price increases for oil and other petrochemical inputs. This decision by Dow—a behemoth with $54 billion in 2007 sales spread throughout numerous consumer industries—is expected to substantially increase inflation, which is already increasing rapidly in the US and throughout the world, cutting into workers’ purchasing power.

Dow’s action will affect a huge array of basic materials and consumer items, including: plastics used in automobile components and shopping bags; propylene glycols used in antifreeze, coolants, solvents, cosmetics and pharmaceuticals; and acrylic acid-based products used in detergents, wastewater-treatment and disposable diapers.

The Wall Street Journal commented: “Over the past months, Dow and other chemical companies have been raising product prices to pass on higher raw-material costs to their customers, but the increases have been usually confined to one product or one region. The company’s decision to increase prices for all its products world-wide is nearly unprecedented.”

Dow’s price increase comes on the heels of announcements of planned price increases of 4-8 percent on a variety of consumer goods produced by companies such as Procter & Gamble and Kimberly-Clark, which are among Dow’s main clients. It appears that Dow is trying to position itself to claim a significant portion of the new revenue that will be generated by retailers and consumer goods makers as they jack up their prices.

Other major chemical firms announced that they would also increase prices. Dutch firm LyondellBasell’s CEO Volker Trautz said, “This kind of volatile environment is not sustainable. We absolutely have to pass along price increases.”
US firm DuPont also confirmed press inquiries that it would raise prices, but declined to make a more detailed comment.

The chemical industry relies on oil, natural gas, and various derivatives of petrochemicals as raw materials for the more complex chemical compounds it produces. It has had to substantially reorganize its operations as the price of a barrel of crude oil has risen from an average of approximately $24 in 2002 to $65 in mid-2007 and $130 per barrel this month.

Dow CEO Andrew Liveris issued a statement declaring, “Our first-quarter feedstock and energy bills leapt a staggering 42 percent year over year, and that trajectory has continued, with the cost of oil and natural gas climbing ever higher.” Dow paid $8 billion for hydrocarbon raw materials in 2002 and expects to pay $32 billion for these raw materials in 2008. According to figures provided by Dow to the Wall Street Journal, Dow’s hydrocarbon costs have jumped from under 30 percent of its total costs in 2002 to just under 50 percent in 2007.

Liveris continued with an attack on the Bush administration’s energy policy and a warning about the impact of the oil crisis on the slowing US economy: “For years, Washington has failed to address the issue of rising energy costs and, as a result, the country now faces a true energy crisis, one that is causing serious harm to America’s manufacturing sector and all consumers of energy. The government’s failure to develop a comprehensive energy policy is causing US industry to lose ground when it comes to global competitiveness, and our own domestic markets are now starting to see demand destruction throughout the US.”

The statement on “demand destruction” was widely interpreted in the financial press as referring to the fact that, as gas prices rise, consumers are cutting back on purchases of consumer goods produced by Dow’s clients. Dow’s profit margin has fallen from 9.8 percent in 2005 to 7.6 in 2006 and 5.4 percent last year.

Liveris’s press release is an indication of powerful forces building up inside the US bourgeoisie that view current US policy as a massive debacle. In this respect it is worth noting that Dow is hardly friendly to environmental or left-wing causes. It was a major manufacturer of Agent Orange and napalm for the US military during the Vietnam War. It also acquired Union Carbide, whose operations poisoned thousands in the 1984 Bhopal chemical disaster in India. Dow has since refused to accept any liability for the incident. Liveris has posted his criticisms of US policy on the far-right National Review web site.

Dow’s price increase comes on the heels of the company’s May 15 annual meeting with shareholders, at which Livernis read a prepared statement which was posted on Dow’s corporate web site. He discussed the pressures bearing down on US manufacturers, caught between surging input prices and cash-strapped consumers shopping at large, powerful discount retailers like Wal-Mart.

His comments underline the combination of attacks on the workforce and political muscle abroad upon which US manufacturers rely today, in order to continue to deliver high profits to investors.

Describing the situation at the beginning of the decade, Liveris said: “Misguided energy policy here in the US was making natural gas—one of our key raw materials—even more expensive by the month. At the same time, we witnessed the rising power of the US retailer. Big box stores like Home Depot and Wal-Mart set new, low prices for high-quality goods. With their size and buying power, they began dictating pricing levels to their suppliers, who passed those dictates on to their supplies: companies like us. Caught between these two powerful forces, we lost $9 billion in pricing power between 1995 and 2002.”

The response was to embark on a large-scale attack on Dow’s workforce and productive capacity. Livernis boasted: “Many of the cost-control measures implemented as part of our survival in 2003 and 2004 are now institutionalized in our company. Financial discipline is a key strength at Dow and will remain so far into the future.... Since 2003, we have announced 92 plant shutdowns, 42 site exits, and 38 business divestitures.”

Despite falling profits, earnings per share have risen because of a massive stock buy-back program, in which Dow bought up much of its stock in order to prop up its stock price and reduce the number of shares over which Dow’s profits had to be distributed. Livernis noted: “The last chemical industry trough was in 2002 and our earnings at that time were 34 cents a share. When we look to the next expected trough sometime around 2010 ... we expect that number to be close to $3.50 per share, a ten-fold increase!”

Livernis noted that Dow’s dividend payments to stockholders had increased by 25 percent since January 2006.

One of the major factors underlying Livernis’s optimism on future earnings is his confidence that Dow will be able to use US imperialism’s substantial influence in the Middle East to boost revenues. Dow recently signed a joint venture agreement with Petrochemical Industries Company of Kuwait. It expects to receive below-market oil costs and $9.5 billion in cash from the Kuwaiti company.

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