Monday, July 07, 2008

Signs of the Economic Apocalypse, 7-7-08


Gold closed at 935.50 dollars an ounce Friday, up 0.5% from $931.30 for the week. The dollar closed at 0.6367 euros Friday, up 0.6% from 0.6332 at the close of the previous week. That put the euro at 1.5706 dollars compared to 1.5793 the week before. Gold in euros would be 595.63 euros an ounce, up 1.0% from 589.69 at the close of the previous week. Oil closed at 144.18 dollars a barrel Friday, up 2.8% from $140.21 for the week. Oil in euros would be 91.80 euros a barrel, up 3.4% from 88.78 at the close of the Friday before. The gold/oil ratio closed at 6.49 Friday, down 2.3% from 6.64 for the week. In U.S. stocks, the Dow closed at 11,288.54 Thursday (Friday was a holiday), down 0.5% from 11,346.51 at the close of the previous Friday. The NASDAQ closed at 2,245.38 Thursday, down 3.1% from 2,315.63 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.98% up one basis point from 3.97 for the week.

Recent trends continued last week with gold up, oil up much more, stocks down and, in the U.S., jobs down.

Job losses mount as US economy heads into virtual freefall

Jerry White

3 July 2008

Job losses in the US are mounting as inflation, the credit crunch, plunging home values and tighter family budgets are combining to produce a perfect storm of economic malaise, which is threatening the livelihoods of tens of millions of working people.

The private sector eliminated 79,000 jobs from May to June, according to a survey of nearly 400,000 US businesses released Wednesday by Automatic Data Processing, Inc. The ADP National Employment Report said the decline was “broad based across industrial sectors and suggests continued weakness in employment.”

The goods-producing sector slashed 76,000 jobs last month, ADP reported, with manufacturing employment falling by 44,000, marking their nineteenth and twenty-second consecutive monthly declines, respectively. Service jobs also declined by 3,000, the first fall-off since November 2002.

Construction and financial services related to home sales and lending are the two sectors of the economy hardest hit by the housing and mortgage crises. In June, ADP reported, construction employment dropped by an additional 34,000 jobs, marking the nineteenth straight monthly decline. A staggering 349,000 construction jobs have been lost since the peak of August 2006. Three thousand jobs in financial services were also lost in June.

“It’s clear that the housing downturn and credit crunch are still very much under way,” Andrew Tilton, an economist with Goldman Sachs told the New York Times. Clearly, there are more jobs to be lost in housing, finance and construction—hundreds of thousands of more jobs to be lost collectively.”

The US Bureau of Labor Statistics will release its monthly jobs report on Thursday, with economists predicting a loss of as many as 60,000 jobs in June. This would be the sixth consecutive month of employment declines.

Meanwhile, the Chicago-based job placement firm Challenger, Gray & Christmas Inc., which tracks job cutting announcements by employers, said planned layoffs rose to 81,755 last month, up 47 percent from June 2007.

“Downsizing in the financial sector has remained heavy, but now we’re seeing increased job cuts in other non-housing-related industries, mostly due to the added burden of skyrocketing oil prices,” chief executive officer John A. Challenger said in a statement released Wednesday. “The overall economy could continue to experience net losses for several months to come.”

The massive loss of jobs in the US is part of an international trend fueled by the worldwide credit crisis, economic slowdown and spiking commodity prices. On Wednesday, the Paris-based Organization of Economic Co-operation and Development (OECD)—which includes 23 European states as well as the US, Australia, Turkey, New Zealand, Canada, Mexico, Japan and South Korea—warned that joblessness in industrialized countries would rise by 9 percent to 34.8 million, reversing the downward trend of recent years.

In the face of spreading unemployment, the OECD noted, “the growth in real compensation per employee should slow down in 2008 in the majority of the 30 OECD countries and be broadly in line or below productivity gains.”

From the standpoint of the world’s corporate and financial elite, this is the positive side of the growing economic insecurity felt by masses of working people. Citing the OECD figures on slowing job growth the Financial Times of London noted, “Rising unemployment, however, should dampen fears of inflationary pay rises as workers worry more about retaining their job than using their bargaining power to increase real pay.”

Meltdown of the US auto industry

Job cuts, higher prices and crushing levels of debt all threaten to slow US consumer spending, which accounts for 70 percent of the country’s economic activity. In a sign of the impact this is having on retailers, Starbucks, the world’s largest coffee chain, said Tuesday it would close 600 stores in the US—in addition to 100 already announced—laying off more than 12,000 employees.

American Airlines—which, like several other carriers, has cut back routes in the face of the high cost of fuel and fewer air travelers—announced Wednesday it would furlough 900 flight attendants.

UnitedHealth, the largest US health insurer, also announced it would lay off 4,000 workers, due to falling profits and rising health care costs.

The auto industry has been particularly devastated, with vehicle sales hitting a 10-year low, down 18 percent in June. Detroit automakers continued to see sharply declining sales, with Chrysler’s June sales down 36 percent compared to a year ago, Ford down 28 percent and General Motors falling 18 percent. Japanese automaker Toyota was also hit hard, with US sales down 21 percent.

Analysts predict automakers will sell well below 15 million new vehicles in the US this year, far fewer than the 16 million typical sold throughout the decade.
The decline—driven by high gas prices and falling demand, including from contractors and construction workers, for SUVs and pickups, upon whose high profit margins the US automakers depend —has now raised the prospect of the financial failure of one or more of Detroit’s famed “Big Three.”

GM, which is reportedly burning up $1 billion in cash reserves each month, could face bankruptcy, according to Merrill Lynch analyst John Murphy, who lowered his outlook for GM stock to $7 a share in a note to investors Wednesday. “The key change in our outlook is a much lower forecast for US auto sales that is driving higher cash burn necessitating a much larger raise than the market is currently anticipating,” Murphy wrote in reference to GM’s need to quickly borrow money.

Other analysts say GM must raise as much as a $10 billion as early as this quarter to keep operating. The company says it has liquidity and flexibility to meet its financial requirements. However, it could find raising additional cash difficult, if not impossible, because of the unfavorable rates in the tight credit market.

The threatened collapse of the once mighty icon of US industrial supremacy underscores the historic decline in the world position of American capitalism and the virtual takeover of the US economy by various forms of financial parasitism. Wall Street has carried out a deliberate policy of deindustrialization, in order to free up capital from unprofitable industries and invest it in more lucrative and speculative ventures, including the dot-com boom, the housing bubble and the new frenzy in oil, corn and other commodity future markets.

GM stock has fallen to a 50-year low, plummeting from $43 last November to close at $9.98 Wednesday. The total value of GM stock is the least of all companies traded on the Dow Jones Industrial Average. By contrast, the Internet company Google is selling at $527 per share and has a market capitalization 28 times the size of GM.

“What’s GM worth now—$7 billion?”, Bruce Birger, managing director of Birger Capital Management asked the Detroit News. “People can write checks for that amount.”

Ford, which has borrowed heavily against its assets, is not much better off, with shares of its stock selling at $4.36, roughly equivalent, the newspaper noted, to the price of gas in some major American cities.

Both companies are reportedly scrambling to sell off assets or use overseas divisions as collateral for new loans, which could mean selling them off to raise cash.

Another candidate for bankruptcy is privately-held Chrysler, which was bought by the private equity firm Cerberus. “They’re a limited liability company—when they run out of money, they’ve run out of money,” Steven Davidoff, a law professor at Wayne State University told the Detroit News. “Cerberus may push for the nuclear option and go into bankruptcy to restructure the organization,” he added, suggesting that the company could follow the lead of auto parts maker Delphi, which used the bankruptcy court to tear up its labor agreements and impose 50 percent wage cuts on its workers.

The News reported that there was “talk” of the automakers reopening union contracts, less than a year after the four-year agreement signed by the United Auto Workers bureaucracy, which handed over massive wage and benefit concessions in return for what have proven to be worthless “job guarantees.” All three of the companies have since carried out mass layoffs.

The burgeoning economic crisis is taking place in the middle of an election campaign that is remarkable for the lack of any serious proposals to meet what is increasingly becoming a catastrophe for tens of millions of working people in the US. The economic stimulus checks Washington sent out to the public have long since been eaten up by rising gas and food prices, and neither party nor their respective presidential candidates—Democrat Barack Obama and Republican John McCain—has any proposal to provide relief to workers facing the loss of their jobs and their homes.

These are the economic effects of a crumbling empire: loss of jobs, falling currency.

The buck doesn't stop here; it just keeps falling

Tom Raum

July 6, 2008

Dollar woes cramp economy, US consumers, but the government's options are limited

WASHINGTON (AP) -- Things in the U.S. sure are tough. Brother, can you spare a euro? Signs saying "We accept euros" are cropping up in the windows of some Manhattan retailers. A Belgium company is trying to gobble up St. Louis-based Anheuser-Busch, the nation's largest brewer and iconic Super Bowl advertiser.

The almighty dollar is mighty no more. It has been declining steadily for six years against other major currencies, undercutting its role as the leading international banking currency. The long slide is fanning inflation at home and playing a major role in the run-up of oil and gasoline prices everywhere.

Vacationing Europeans are finding bargains in the U.S., while Americans in Paris and other world capitals are being clobbered by sky-high tabs for hotels, travel and even sidewalk cafes. Northern border-city Americans who once flocked into Canada for shopping deals are staying home; it's the Canadians flocking here now.

Everything made in America -- from goods to entire companies -- is near dirt cheap to many foreigners. Meanwhile, American consumers, both those who travel and those who stay at home, are seeing big price increases in energy, food and imported goods. The dollar has lost roughly a quarter of its purchasing power against the currencies of major U.S. trading partners from its peak in 2002.

Since oil is bought and sold in dollars worldwide, the devalued dollar has made the recent surge in energy prices even worse for Americans, leading to $4 gasoline in the United States. Analysts suggest that of the $140 a barrel that oil fetches globally, some $25 may be due to the devalued dollar.

Further declines in the dollar will add to oil's appeal as a commodity to be traded.

Oil, suggests influential energy consultant Daniel Yergin, is "the new gold."

The limp greenback has had one big benefit to the U.S. economy: Since it makes American goods cheaper overseas, it has helped manufacturers who export and other U.S. based companies with international reach. Exports have been one of the few bright spots in an otherwise darkening U.S. economy…

Mark Zandi, chief economist at Moody's, said expanding exports due to a weak dollar are "an important source of growth, but it doesn't add a lot to jobs, it doesn't mean very much for the average American household. For the average American, for the average consumer, these are pretty tough times."

The loss of the dollar's purchasing power and international respect has some experts worrying that the euro might one day replace the dollar as the so-called primary reserve currency. And that could trigger a dollar rout as foreign governments and international investors flee from U.S. Treasury bonds and other dollar-denominated investments.

Making matters worse: The gaping U.S. current-account deficit -- the amount by which the value of goods, services and investments bought in the U.S. from overseas exceeds the amount the U.S. sells abroad -- and the low levels of domestic savings means that foreigners must purchase more than $3 billion every business day to fund the imbalance.

Since roughly half of the nation's nearly $10 trillion national debt is held by foreigners, mostly in Treasury bills and bonds, such a withdrawal could have enormous consequences.

Yet Washington finds its options limited.

President Bush asserts longtime support for a "strong" dollar, and made that point again Sunday in a news conference in Japan with Prime Minister Yasuo Fukuda. "In terms of the dollar, the United States strongly believes -- believes in a strong dollar policy and believes that the strength of our economy will be reflected in the dollar."

But not once in his presidency has the U.S bought dollars on foreign exchange markets -- called intervention -- to help prop up the greenback. There's no telling where the buck will stop these days, although for the past few weeks it seems to be in a holding pattern. Even as three Bush Treasury secretaries in a row spouted the strong-dollar mantra, the dollar kept tumbling against the euro, the pound, the yen, the Canadian dollar and most other major currencies.

The Federal Reserve could prop up the dollar by increasing interest rates under its control. Increased yields would make dollar-denominated investments more attractive to foreigners. But that could undercut the already anemic economic growth in a frail U.S. economy rocked by soaring fuel costs, falling home prices and rising unemployment -- and the lowest reading of consumer confidence in 16 years.

The Fed must do a balancing act between keeping the domestic economy from going into recession and keeping inflation at bay.

Furthermore, no Fed likes to raise rates aggressively in a presidential election year. It seems more inclined to hold interest rates low for now to give financial markets time to recover from the housing meltdown and credit crunch. It did just that in its meeting on June 25, leaving a key short-term rate at 2 percent. The rate reached that level in April after a series of aggressive cuts that brought it down 3.25 percentage points since September. Those cuts helped ease the housing and credit crises -- but drove the dollar further down.

In early June, Bush declared before his trip to Europe: "A strong dollar is in our nation's interests. It is in the interests of the global economy." That, plus a warning by Fed Chairman Ben Bernanke that the dollar's weakness was contributing to U.S. inflation, seemed to temporarily break the dollar's tumble. Presidents and Fed chairmen don't usually talk directly about the dollar and exchange rates -- leaving that up to the Treasury secretary -- and international bankers and investors took note of the high-level attention.

Over the past few weeks, the dollar has remained relatively stable, although it took a dip after the Fed decided to leave rates unchanged. The long slide may not be over.

Still, if the Fed moves to lift rates later this year, as some traders and investors anticipate, it could buttress the dollar and spur an exodus of speculators from the oil market -- helping to both prop up the dollar and drive down oil prices. But few economists are sanguine that the economy will improve any time soon.

The other main tool to move the dollar -- intervention in currency markets by buying dollars and selling other currencies -- is risky.

It would take great sums of money to make any difference. The foreign exchange market is the largest in the world, with over $1 trillion traded each day. Seeing the U.S. trying to prop up the greenback by buying dollars could be taken as a sign of desperation and possibly trigger a renewed round of selling.

Furthermore, there has been little encouragement for such a strategy from finance ministers from the Group of Eight wealthy democracies -- Japan, Britain, Germany, France, Italy, Canada and Russia plus the U.S.

Leaders of the eight countries were to meet in Japan beginning Monday, but the falling dollar was not even on the formal agenda. It's too touchy an issue, and the dollar's relative stability over the past few weeks makes it easier for world leaders to steer clear. "People will be talking about it in the corridors," said Reginald Dale, a senior fellow with the Center for Strategic and International Studies.

Treasury Secretary Henry Paulson has suggested that nothing is "off the table" including intervention. But Bush has made statements suggesting he intends to let market forces set exchange rates.

The dollar has fallen so far, it will be difficult to halt or reverse its slide.

U.S. efforts to persuade Saudi Arabia and other major oil-producing nations to increase their production -- and help ease pressure on both oil prices and the dollar -- have brought scant results.

"There's no magic wand," said White House press secretary Dana Perino. "It's not going to be a problem that we solve overnight."

The impact of the falling dollar is not always visible to the average consumer. Not like the big numbers on gas pumps that give stark evidence of price levels.

But imported goods, from fuel to cars from Japanese automakers and toys from China -- are getting more expensive just as U.S. wages are either stagnant or falling.

American companies suddenly look cheap to acquisition-minded foreigners, particularly those based in Europe.

Belgian-based InBev's hostile bid for Anheuser-Busch is a recent example. It has bid $46 billion to acquire the company -- a 30 percent premium above where Anheuser's shares traded before the June 11 proposal.

A successful acquisition by InBev would put the last remaining mass-market American brewer in foreign hands. InBev is based in Belgium but run by Brazilians. Anheuser-Busch, which brews both Budweiser and Bud light, holds a 48.5 percent share of U.S. beer sales. Anheuser-Busch rejected InBev's bid, but the Belgian brewer forged ahead, seeking to unseat Anheuser's 13-member board and take its offer directly to shareholders.

If the takeover goes through, it might open the floodgates to other foreign takeovers of American companies.

Some of the dollar's decline depends on hard-to-measure factors, like the psychology of foreign investors.

When the U.S. economy is weakening, many investors stay away. The slide of the dollar has coincided with a long period of relatively low interest rates.

And some of the decline in the dollar's global role "is due to the foreign policy failures of the Bush administration, not just to recent economic developments and policies," suggests Adam S. Posen, deputy director of the Peterson Institute for International Economics and a former economist at the Federal Reserve Bank of New York. In other words, some international investors unhappy with Bush's policy on Iraq or toward other parts of the world might not wish to invest in American companies or buy U.S. bonds…

No, not because investors are “unhappy” with the policies. It’s because the policies have failed and have wasted over a trillion dollars. These policies have enriched a few insiders feeding at the trough while bankrupting the U.S. government. If there is one think we can thank George Bush for it is for destroying the U.S. empire and making the United States just another country. And as a U.S. citizen, I mean that sincerely, not ironically. Let’s let Joseph Heller explain, in Catch-22, in the scene where Lieutenant Nately encounters a disrespecful old man in an Italian whorehouse:
“America,” he said, “will lose the war. And Italy will win it.”

“America is the strongest and most prosperous nation on earth,” Nately informed him with lofty fervor and dignity. “And the American fighting man is second to none.”

“Exactly,” agreed the old man pleasantly, with a hint of taunting amusement. “Italy, on the other hand, is one of the least prosperous nations on earth. And the Italian fighting man is probably second to all. And that is exactly why my country is doing so will in this war while your country is doing so poorly.”

Nately guffawed with surprise, then blushed apologetically for his impoliteness. “I’m sorry I laughed at you,” he said sincerely, and he continued in a tone of respectful condescension. “But Italy was occupied by the Germans and is now being occupied by us. You don’t call that doing very well, do you?”

“But of course I do,” exclaimed the old man cheerfully. “The Germans are being driven out, and we are still here. In a few years you will be gone, too, and we will still be here. You see, Italy is a weak country, and that’s what makes us so strong. Italian soldiers are not dying any more. But American and German soldiers are. I call that doing extremely well. Yes, I am quite certain that Italy will survive this war and still be in existence long after your own country has been destroyed.”

Nately could scarcely believe his ears. He had never heard such shocking blasphemies before, and he wondered with instictive logic why G-men did not appear to lock the traitorous old man up. “America is not going to be destroyed!” he shouted passionately.

“Never?” prodded the old man softly.

“Well…” Nately faltered.

The old man laughed indulgently, holding in check a deeper, more explosive delight. His goading remained gentle. “Rome was destroyed, Greece was destroyed, Persia was destroyed, Spain was destroyed. All great countries are destroyed. Why not yours? How much longer do you really think your own country will last? Forever? Keep in mind that the earth itself is destined to be destroyed by the sun in twenty-five million years or so.” (Joseph Heller, Catch-22, ch. 23)

But the downfall will be hard on those who grew up in affluence. Who knows how it will play out, but Ran Prieur wrote an essay two years ago imagining six different collapse scenarios. He concluded by imagining how it plays out for one person:

In 2006 there's a war that doesn't seem to affect you directly. But you really start to notice prices going up. You can't sacrifice on fuel, and you couldn't stand to live with other people, so you slash your food budget -- no more organics, and more white sugar and white flour. Your health deteriorates, you get depressed, and when the first serious crisis hits, you find yourself on a bus to an "evacuee facility" where you get sick and die... Back up.

You decide to share an apartment and cut your rent in half. It's no fun having to compromise with other people, but it builds your skills in working out conflicts and tolerating annoyances, and makes you generally more adaptable. You spend the extra money paying higher prices to maintain the lifestyle you're accustomed to. Then you lose your job. For a few months you live on credit cards, but they run out, and the company hassles you to collect your debt which now grows exponentially even though you're not spending anything. You live in fear of eviction and stand in line all day to get really bad food. Your health deteriorates, you have to sell your car, you get desperate, and one day you get caught stealing something, and you're sent to a prison where everyone is left to die in the next disaster... Back up.

Seeing that you might lose your job, you decide to build up savings. You stop spending on entertainment, learn to cook meals from bulk foods, get all your clothing from thrift stores, and turn the heat off. When you lose your job, you immediately sell your car, pay off your credit cards, and move to someplace even cheaper and more crowded. Here you're able to squeak by year after year, doing odd jobs, scavenging metal... Wait -- this isn't good enough. Back up.

When you lose your job, you drive your car to stay with a friend who lives on remote land. But it's only a little cheaper, since you still have to pay car expenses, and the land is nowhere near self-sufficient in food. Pine bark and larvae taste awful, and the social isolation is driving you nuts. Back up.

In the crowded cheap place, you spend a year reducing your possessions and learning skills to drop down another notch. Also, you start talking to people about your plans and building a group of allies. Together you pick out an abandoned house and openly move in and fix it up. At the same time, you find a backup abandoned house in case you're thrown out of this one. But you're able to stay for several years, with almost no expenses beyond food. You get an old wood-burning stove and scavenge wood from wrecked buildings, and one of you learns basic medical and dental skills. You catch and store rainwater from the roof -- even with the asphalt shingles it's better than city water, and later you scavenge sheets of metal to catch it. You meet someone with a farm just outside the city, and arrange to trade work at harvest time for a share of the food. This is survivable, but the food is still tight. It could be better. Back up.

Even before you find the squat, you scout some places in the near suburbs, out of the way and with good sunlight, and spend your spare cash on seedlings -- blueberry, apple, walnut, juneberry, goumi. As other food sources decrease, these increase, and you learn propagation and set up hundreds more trees and bushes around the city. You gather lamb's quarters seeds in late summer and scatter them on disturbed ground in the spring, and plant hundreds of wild onions. Most of this food is discovered by other people but there's still plenty for you and your friends. After a few more years you occupy a small area where a lot of the trees are, and set up a second homestead, but keep a presence in the city.

All this time you're working with other groups to help people get food and water and medical care, to transform the infrastructure, and to deter violent crime, or clean up after it. There are drug gangs, right wing death squads, and the occasional marauding horde of government troops and/or bandits. There are giant storms and hard summers and winters. But the vast majority of your friends are not killed, and people go about their lives less fearful than they did at the peak of the Empire.

If you don't have kids, you help raise other people's kids. They don't go to school, but jump right in doing what adults do, and spend a few weeks learning to read and write when they're ready. By 2030, the city is full of gardens and orchards. You don't know anyone with a car, but a few techies are still using old computers and surviving satellites and fiber optic lines to connect to a patchy internet. You hear strange stories of distant lands, and wonder where it's all heading. At the end of a long and very interesting life, like all your ancestors (except the most recent), you die at home surrounded by people you love.

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