Signs of the Economic Apocalypse, 12-10-07

From Signs of the Times:



Gold closed at 800.20 dollars an ounce Friday, up 1.4% from $789.10 at the close of the previous week. The dollar closed at 0.6822 euros Friday, down 0.2% from 0.6834 at the close of the previous Friday. That put the euro at 1.4658 dollars compared to 1.4633 the Friday before. Gold in euros would be 545.91 euros an ounce, up 1.2% from 539.26 for the week. Oil closed at 88.28 dollars a barrel Friday, down 0.5% from $88.71 at the close of the week before. Oil in euros would be 60.23 euros a barrel, down 0.6% from 60.62 for the week. The gold/oil ratio closed at 9.06 Friday, up 1.8% from 8.90 at the end of the week before. In U.S. stocks, the Dow closed at 13,625.58 Friday, up 1.9% from 13,371.72 for the week. The NASDAQ closed at 2,706.16 Friday, up 1.7% from 2,660.96 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.11%, up 17 basis points from 3.94 for the week.

No big movements in the markets last week. The unveiling of Bush’s plan to prevent housing foreclosures in the United States helped to counteract downward pressures on stocks. The surprise leak early last Monday of the National Intelligence Estimate (NIE) which stated that Iran’s nuclear weapons programs were disbanded in 2003 gave hope that the United States will resist pressure from Israel to attack Iran. That helped keep oil prices below their recent highs

U.S. Stocks Rise for 2nd Week on Bush Plan to Avert Recession

Elizabeth Stanton

Dec. 8 (Bloomberg) -- U.S. stocks posted their steepest two- week advance since September after President George W. Bush announced a plan to freeze some mortgage rates to prevent foreclosures from causing a recession.

Centex Corp. and D.R. Horton Inc. led homebuilders as they climbed the most in seven years. Intel Corp., Micron Technology Inc. and other semiconductor companies in the Standard & Poor's 500 Index rose the most since June following analyst predictions that demand for computers will increase. All 10 industries in the S&P 500 gained.

Stocks have rebounded after losing their 2007 gain at the end of last month, spurred by speculation the Federal Reserve will reduce interest rates to prop up the world's largest economy. The S&P 500 declined yesterday after a Labor Department report showed U.S. employers added more jobs than estimated in November, diminishing the odds that central bankers will cut their rate benchmark by half a point on Dec. 11.

“The economy is slowing, but it’s not falling off a cliff,” Jeremy Siegel, an economics professor at the University of Pennsylvania’s Wharton School of Business, said during an interview in New York. “That’s important for investors.”

The S&P 500 added 1.6 percent to 1,504.66, bringing its two- week gain to 4.4 percent and its advance this year to 6.1 percent. The Dow Jones Industrial Average rose 1.9 percent to 13,625.58. The Nasdaq Composite Index climbed 1.7 percent to 2,706.16.

Quarter-Point Cut

Ten-year Treasury yields had the first weekly gain since October, rising to 4.11 percent, as traders pared bets that the Fed will reduce its rate benchmark by more than a quarter point. Two-year yields rose to 3.10 percent.

Homebuilders in the S&P 500, which fell as much as 78 percent from their July 2005 peak through Nov. 27, added 17 percent for the steepest weekly advance since August 2000. Centex gained the most, climbing 24 percent to $25.81. D.R. Horton rose 16 percent to $13.86.

Bush announced on Dec. 6 an agreement between the government and the lending industry that would freeze rates for five years on some variable rate mortgages and provide assistance to as many as 1.2 million homeowners.

The government’s plan may help end the recession in the U.S. housing market, which is entering its third year. The number of Americans behind on their mortgage payments in the third quarter was the highest in 20 years, the Mortgage Bankers Association said Dec. 6.

‘Muddle Through’

“The economy will muddle through without tipping into recession,” said Joshua Feinman, chief economist in New York at Deutsche Asset Management, which oversees $798 billion. Growth will accelerate during the second half of next year, he said.

Intel gained the most in the Dow average, climbing 6.3 percent to $27.73. Thomas Weisel Partners LLC analyst Kevin Cassidy raised his rating on the world’s largest chipmaker to “overweight” and increased his 2008 profit estimate in part because of growing demand for computers from Brazil, Russia, India and China…

Payrolls rose by 94,000 in November, the Labor Department said yesterday. The jobless rate remained at 4.7 percent for the third month in a row. Economists predicted a gain of 80,000 jobs and an unemployment rate of 4.8 percent, according to the median estimates in a Bloomberg survey.

Sales at U.S. retailers probably rose in November as discounts and wage gains helped Americans cope with near-record fuel costs, economists said before reports this week.

“The economy from a numbers standpoint is stronger than what people’s perceptions are,” said Scott Fullman, director of investment strategy at Israel A. Englander & Co. in New York, a derivatives brokerage firm for institutional clients with combined assets under management of more than $100 billion…

Is the economy really stronger than people’s perceptions? Will the United States economy really avoid recession in 2008? Probably not. A recession is probably the best that can be expected. No doubt statistics, such as the recently released “better than forecast” employment numbers in the United States, have been massaged to make us feel better. But perception management can only go so far in masking reality.

The economy's last hurrah before that big sucking sound

Richard Benson

December 7, 2007

As 2007 wounds down, it’s time to reflect on how bogus government statistics along with Wall Street media hype have impacted the psychology and perception in the financial markets. Sheer disappointment is one way to describe what the financial markets will experience as the existing belief in a Goldilocks economy is challenged by sobering facts and a hard landing, yet to come.

Christmas is meant to be a festive and happy time of year spent with family and friends, but there is a dark side to this year’s holiday. The picture of the father, mother, son, or daughter pulling out the only credit card left that’s not maxed out in order to buy that special gift for a loved one, is not the face you’ll see portrayed in the media. The TV and newspapers show only affluent-looking preppy-faced Americans wearing pricey Italian shoes and sunglasses, shopping the malls and luxury stores for 50-inch flat screen TV’s, cashmere sweaters, Tiffany diamond rings and fancy chocolates. The media will avoid at all costs the large percentage of Americans on the brink of bankruptcy and foreclosure, living paycheck to paycheck, because there’s nothing Christmassy about that picture.

I have to wonder, though, if Americans are really shopping (i.e., spending money), or just looking for bargains at the major department stores that began running fire sales as early as October. Foreigners will undoubtedly be the luckiest group this season as they take full advantage of the declining dollar. Contrary to what you may have read in the American financial press about the declining dollar being good for America, you’ll read a different viewpoint in the foreign press, as many people overseas think America is getting what it deserves: a real comeuppance, as the dollar and our empire literally go down the tubes.

The US Economy is in terrible shape! Our government has been psychologically manipulating the American people every time they publish blatantly false data on employment and income that makes our economy look stronger than it really is. If the average American realized how bad things were, they might try to save more. But spending would collapse if they did, so the goal of the Bush Administration seems to be to hide any signs of a recession as long as possible.

If you don’t see it, it must not be there

For those familiar with the government releases, the Bureau of Labor Statistics ("BLS") just posted a benchmark data revision that showed the total number of workers employed on the payroll survey was 300,000 less than originally estimated for March 2007 (900,000 versus the 1,200,000 that was reported). By the time the dust settles, and later benchmark revisions come in for the whole year, it is likely that all of the jobs added by the BLS Birth/Death Model in 2007 will be fictitious. This could mean there hasn’t been any job growth at all! Without the fiction of job growth, you can imagine how much worse it will be for consumer income, spending, and sentiment not to mention business investment plans.

The reason employment is weak is because at least 40 percent of all job growth was tied directly or indirectly to housing. With housing in free fall, the solid job growth reported by the BLS Payroll Survey simply does not make sense.

The Department of Commerce keeps statistical estimates such as Personal Income, which is based on the estimated number of workers in the BLS Payroll Survey. So now, based on the revisions to the BLS Payroll Survey for March (and other data), revised Personal Income (wages, salaries, interest income, etc.) grew at an annual rate of only 1.6 percent in the second quarter of 2007, not the 4.5 percent originally reported. That’s three percent less in Personal Income. These imaginary workers with no Personal Income will not be shopping this December or anytime soon, so we can expect to see lower retail sales and corporate profits. Income never made, can't be spent.

As these pretend workers turn out to be a myth, they will eventually show up in the government statistics. When that happens, corporate sales will suffer and the financial markets will take notice. This is also a reminder that for statistics, the government's game is to report the false glowing numbers to the financial markets in the full light of day, and then report the corrections and horrible truth in the dead of night, and hope no one notices.

The big reason the economy is going over the cliff is not the direct result of the sub-prime mortgage debacle and the hundreds of billions in investor dollars that have been lost, although this is a major contributing factor. The reason, we focus on, is that the economy is already in recession as a direct result of homeowners having had that ATM ripped out of their house. Stories like the homeowner who purchased a home for $100,000 years ago but got carried away in the frenzy of the last decade by doing 4 cash out REFI’s, running their mortgage balance up to $625,000 while living large, are last year’s stories. That $800 billion a year in Mortgage Equity Withdrawal ("MEW") has come to a sudden end and with the average homeowner no longer living large off the house, the economy is left with that "big sucking sound".

With home prices falling, there frequently is no equity to take out! Potential borrowers don't have verifiable income to actually pay back a loan unless home prices are rising rapidly, so they can no longer buy or refinance. Meanwhile, with lenders asking for down payments, housing prices will just keep heading down for another year.

The US economy is continuing to weaken in many areas: The US Treasury has received lower income tax receipts forcing state and local governments to cut back because they’re coming up short; capital gains on home sales are falling as home prices fall; property tax receipts are also declining as assessed values go down; weak retail sales mean lower sales tax receipts; corporate profits are down, along with corporate taxes paid; and, many self-employed workers may be employed, but they’re not making anything or only half of what they used to.

Moreover, America is not the only country with an economic problem. The housing bubble is turning out to be worldwide, with a major impact on England and much of Europe. The biggest economic losers include the emerging markets, especially China. Don't believe for one second those Wall Street touts selling the notion that the emerging markets have "decoupled" from the US economy and their growth will lead the world forward without the American consumer. That’s hogwash. Where do you think their trade surpluses and big sales gains (driving investment in plants and equipment) came from anyway? From the American consumer and MEW! Take $800 billion of easy spending away from the American consumer and you're going to see a lot of blow back in lost sales by the emerging market countries, including China.

As the recession takes hold, I see this holiday shopping hype as the Economy’s Last Hurrah, but it’s not just the American economy that’s going to hear that "big sucking sound" in the New Year!

As Benson wrote above, it’s hard to imagine that a sharp downturn in the U.S. economy wouldn’t send the rest of the world into a recession as well. That has been made clear in the past few months when the world got a glimpse of how many non-U.S. banks were infected with U.S. subprime loans. But that effect will pale before what happens when the U.S. consumer runs out of money (credit).

‘Decoupling’ Debunked as U.S. Collapse Infects World

Simon Kennedy

Dec. 7 (Bloomberg) -- It turns out the U.S. economy matters after all.

The credit collapse and dollar decline that followed a surge in U.S. home foreclosures jeopardize expansions in the U.K., Canada and Germany, economists said. They also debunk “decoupling,” an argument advanced by analysts at Goldman Sachs Group Inc. and Morgan Stanley that the world wouldn’t suffer as it did during U.S. slowdowns in previous decades.

The Bank of England and Bank of Canada this week followed the Federal Reserve in cutting interest rates, and the European Central Bank lowered its growth forecast for next year. British policy makers reduced their benchmark rate yesterday, even after Governor Mervyn King expressed concern about inflation just two weeks earlier.

“Two thousand and eight will be the year of ‘recoupling’,” said Peter Berezin, an economist at Goldman in New York, explaining his firm’s about-face. “What began as a U.S.-specific shock is morphing into a global shock.”

Of the 38 countries they monitor, Goldman economists expect growth to slacken in 26 and strengthen in a dozen. That will cause global growth to slow to 4 percent next year from 4.7 percent this year, with Europe and Japan fading faster than the U.S., they say.

“There are a lot of risks out there,” Goldman Chief Economist Jim O’Neill said in an interview today.

Market lending rates have risen worldwide in the last three weeks as $70 billion of writedowns linked to defaults on U.S. subprime mortgages fanned international concern about the strength of financial institutions.

Roach Skeptical

Decoupling is “a good story, but it’s not going to work going forward,” Stephen Roach, chairman of Morgan Stanley in Asia, said in an interview in New Delhi on Dec. 2. His colleague, Stephen Jen, said in a report the previous week that because the possibility of a U.S. recession has increased, so has the chance that the rest of the world will falter.

Higher market rates pushed up the cost of lending everywhere, making it costlier for companies and consumers to fund new spending or investment. The cost of borrowing euros for three months, for example, this week rose to a seven-year high.

“Initially the impact of the subprime crisis was on the U.S. directly, but what we’re seeing now is a more insidious paralysis of credit conditions moving across different markets and economies,” said Brian Hilliard, director of economic research at Societe Generale SA in London.

Threat to Airbus

The dollar’s decline in sympathy with its economy is also exacting a price overseas. Airbus SAS may cut its 2 billion-euro ($3 billion) research budget to trim costs as the dollar’s dive becomes “life threatening” for the world’s largest planemaker, Chief Executive Officer Tom Enders said Nov. 23.

At the same time, U.S. consumers are starting to retrench in the face of declining home values and rising energy bills as oil prices near $100 a barrel. The Conference Board’s index of consumer confidence decreased last month to the lowest since the aftermath of Hurricane Katrina in 2005.

Wolseley Plc of the U.K., the world’s biggest distributor of plumbing and heating equipment, said Nov. 28 that first- quarter pretax profit through October fell almost 15 percent after U.S. revenue declined 10 percent.

“The American consumer is the big gorilla on the demand side of the global economy,” Roach said. “As the slowdown goes from housing to consumption, we’ll find the world is not as decoupled as it thinks.”

U.K. Cut

U.K. monetary policy makers yesterday cut their key rate for the first time in two years to 5.5 percent, pointing to deteriorating financial markets. In August, King said he was optimistic the turmoil wouldn’t hobble his economy.
The Bank of Canada identified “global financial market difficulties” as it lowered its main rate by a quarter point to 4.25 percent on Dec. 5.

While the European Central Bank is signaling no intention of cutting interest rates soon, Bank of France Governor Christian Noyer said Dec. 4 that there is now a “question mark” over his view of September that Europe would remain unscathed from the market rout.

Tai Hui, head of Southeast Asian economic research at Standard Chartered Bank Plc in Singapore, also doubts Asia’s economies can weather a collapse in U.S. consumer demand, with Hong Kong, Taiwan, Malaysia and Singapore at particular risk from reduced exports.

‘Need to See’

Bank of Japan Governor Toshihiko Fukui said this week that “we need to see how the U.S. consumer is affected” as he holds his key rate at 0.5 percent, the lowest among industrialized nations. Waning U.S. demand meant the Japanese economy grew an annualized 1.5 percent in the third quarter, almost half the preliminary estimate, the Cabinet Office said in Tokyo today.

On the other hand, Alex Patelis, head of international economics at Merrill Lynch & Co., is confident “the time has not yet come to call the end of this global upturn,” citing demand in emerging markets such as China and Russia.

Patelis predicts the world economy will grow 4.7 percent next year and 5.6 percent if the U.S. is excluded.

John Llewellyn, a senior economic policy adviser at Lehman Brothers Holdings Inc. in London, is unconvinced, arguing that if U.S. consumers buckle, so will growth elsewhere.

“Decoupling is a lovely idea, but I’ll only believe it when I see it,” he said.

China has the most at stake in whether or not the world economy can “decouple” from the U.S. But China itself is itself hiding huge amounts of bad debt.

The coming China crash

Martin Hutchinson

December 3, 2007

While the Chinese stock market, as measured by the China Securities Index 300, is down 18% since October 16, that follows a period of almost two years during which the CSI 300 had soared 535% since January 1, 2006. Chinese economic growth is currently running at over 11% and the big money is convinced that it will continue, while the country’s foreign exchange reserves are $1.4 trillion, the largest in the world.

A crash would appear to be imminent!

Bears on China have been common for the last decade, and their track record has not been good. To take just one unfair example, Henry Blodget, the former Internet genius, wrote in Slate in April 2005 “You’ve probably been daydreaming about the fortune to be made in Chinese stocks. Well, keep dreaming….you’ll eventually conclude that you could have done better selling insurance in Toledo.” That was about six months before the Chinese market took off, and if anybody has made 500% on their investment by selling insurance in Toledo during that period, I haven’t met him.

To see why a crash may be coming, it is worth examining the behavior of the China Investment Corporation, the $200 billion sovereign wealth fund set up by the Chinese government in September. Now $200 billion is a fair chunk of cash; you could almost buy all but three US corporations with that (at today’s prices, ExxonMobil, General Electric, Microsoft – there are 4-5 others including Google that barely top the bar.) Six weeks ago, the power of sovereign wealth funds was celebrated and China Investment’s moves into the market were awaited with bated breath.

Well, so much for that. A third of China Investment’s portfolio is to be invested in Central Huijin Investment Company, a purchaser of bad loans from the Chinese banks, and another third will recapitalize China Agricultural Bank and China Development Bank, to shape them up for privatization. $3 billion of the fund was invested in the private equity manager Blackstone in May – that may have bought China useful political contacts, but it is now worth $2 billion. And the remainder is being invested very carefully, primarily in US Treasury securities – which are also losing money steadily in yuan terms.

The lackluster investment strategy of China Investment exposes a central flaw in the Chinese economy, its lack of a rational system of capital allocation. For more than a decade, Chinese state-owned companies have made losses, and have been propped up by the banking system. Since 2004, loss-making state owned companies have been joined by overbuilding municipalities, erecting white-elephant office blocks in attempts to turn themselves into the next Shanghai. None of these losses have resulted in bankruptcy; instead the cash flow deficits have been covered by the Chinese banks. As a result, the Chinese banks have an enormous volume of bad loans -- $911 billion at May 2006, according to a later-withdrawn estimate by Ernst and Young, which must surely have ballooned to $1.2-1.3 trillion now.

That explains why China Investment is somewhat un-aggressive in its international investment strategy. China’s $1.4 trillion of reserves are in fact almost all required to prop up the banking system, when the inevitable liquidity crisis occurs. If the banks are to survive, China Investment will have to be followed by six more sovereign wealth funds of equal size, each of which will have to abandon its attempts to take over Exxon or Google and pour its money down domestic rat-holes.

A $1 trillion problem in subprime mortgages has caused even the US money market to seize up and has required frequent applications of sal volatile by the Fed. Since China’s economy is around one fifth the size of the United States’ the Chinese banking system’s bad debt problem is in real terms about five times that of the United States, about 40% of its Gross Domestic Product.

We have seen this movie before; the Japanese banking system’s bad debts after 1990 totaled around $1 trillion, about 30% of Japan’s GDP. The result was the bursting of the 1980s bubble and a period of little or no economic growth that lasted well over a decade. Admittedly the Japanese authorities made matters worse, by refusing to face up to their bad debt problem and issuing more government bonds to fund witless Keynesian public spending schemes.

Nevertheless, we can have very little confidence that the Chinese authorities, once the same problem stares them in the face, would do any better. After all, at least one of the alternative policy mixes, that tried by Herbert Hoover and the Federal Reserve in 1930-32, proved very much worse. Per Capita US Gross Domestic Product was no higher in 1940 than it had been in 1929, as in the Japanese case, but in the interval it had declined by a horrifying 28% and had recovered very slowly. If China faces the choice between a decade of stagnation, as in Japan from 1990-2003 and a decade of economic collapse, as in the United States from 1929-1940, it will rightly prefer the Japanese alternative.

It may not however have the choice. One of the factors that kept Japan out of real trouble in the 1990s was continued strong growth in the US and world economies; thus its magnificent export industries were able to continue growing, albeit at a slow rate, and provide a certain amount of traction for the economy as a whole. However, China will find it difficult to do the same, since the next decade does not seem likely to be a period of robust world growth, far from it. The United States seems fated to endure at least a few years of very sluggish growth due to its housing market crash, and Britain appears to be in a similar mess, so even relatively robust growth in the resurgent economies of Germany and Japan may not be sufficient to keep Chinese exports growing.

At that point, China will have two alternatives. It can allow the banks to work their way out of their bad loans, condemning the domestic economy to probably a decade of little growth and extremely tight credit (high Chinese savings would alleviate this problem, but they will be trapped in the Chinese banks because the authorities foolishly do not allow Chinese citizens to invest abroad.) Alternatively, it can inject more or less its entire foreign exchange reserves into the domestic banking system in order to recover its bad debts, which would allow the Chinese economy to continue expanding, but at a cost of devastatingly high inflation from the additional money pumped into the system (the $100 billion plus of Chinese bank initial public offerings carried out in 2006-07, pumped into the domestic economy, already appears to be worsening Chinese inflation and China Investment’s $130 billion will doubtless worsen the problem.)

We have seen societies with low economic growth, very high inequality (as China has now) and persistently high inflation; they are collectively known as Latin America. Since China also has much of the corruption that bedevils Latin America and its government lacks any genuine understanding of the free market and is increasingly dominated by special interests, it may indeed be fated to follow a Latin American growth path for the next few decades, with a tiny entrenched elite enriching itself at the expense of the disfranchised masses. That would be the worst possible outcome for the Chinese people, but it is not by any means impossible.

Many observers of the current US financial market downturn comfort themselves with the thought that the world now has more than one growth engine, and that China, with four times the US population, can because of its very high growth pull the world economy along sufficiently even when the US stalls. However, if China is about to incur the inevitable backlash from its recent debt and equity bubbles, during which practices have flourished that have no place in a well functioning free market, then we may be entering a world in which the two main growth engines of the last decade are both broken. Growth in such a world will be truly sluggish and inflation high, as the world struggles to cope with the effects of an excess of cheap money now grown toxic…

Those who say that the economy is better than perceptions of it are responding mostly to numbers showing how things are now. The pessimists are looking at what may be in the near future. The fundamentals haven’t changed much over the past several years, but general perceptions of the future, economic or otherwise, have gotten much more pessimistic. This is finding its way into the mainstream media. Articles like the following in the Washington Post would be hard to find a couple of years ago:

It's Not 1929, but It's the Biggest Mess Since

Steven Pearlstein

December 5, 2007

It was Charles Mackay, the 19th-century Scottish journalist, who observed that men go mad in herds but only come to their senses one by one.

We are only at the beginning of the financial world coming to its senses after the bursting of the biggest credit bubble the world has seen. Everyone seems to acknowledge now that there will be lots of mortgage foreclosures and that house prices will fall nationally for the first time since the Great Depression. Some lenders and hedge funds have failed, while some banks have taken painful write-offs and fired executives. There's even a growing recognition that a recession is over the horizon.

But let me assure you, you ain't seen nothing, yet.

What's important to understand is that, contrary to what you heard from President Bush yesterday, this isn't just a mortgage or housing crisis. The financial giants that originated, packaged, rated and insured all those subprime mortgages were the same ones, run by the same executives, with the same fee incentives, using the same financial technologies and risk-management systems, who originated, packaged, rated and insured home-equity loans, commercial real estate loans, credit card loans and loans to finance corporate buyouts.

It is highly unlikely that these organizations did a significantly better job with those other lines of business than they did with mortgages. But the extent of those misjudgments will be revealed only once the economy has slowed, as it surely will.

At the center of this still-unfolding disaster is the Collateralized Debt Obligation, or CDO. CDOs are not new -- they were at the center of a boom and bust in manufacturing housing loans in the early 2000s. But in the past several years, the CDO market has exploded, fueling not only a mortgage boom but expansion of all manner of credit. By one estimate, the face value of outstanding CDOs is nearly $2 trillion.

But let's begin with the mortgage-backed CDO.

By now, almost everyone knows that most mortgages are no longer held by banks until they are paid off: They are packaged with other mortgages and sold to investors much like a bond.

In the simple version, each investor owned a small percentage of the entire package and got the same yield as all the other investors. Then someone figured out that you could do a bigger business by selling them off in tranches corresponding to different levels of credit risk. Under this arrangement, if any of the mortgages in the pool defaulted, the riskiest tranche would absorb all the losses until its entire investment was wiped out, followed by the next riskiest and the next.

With these tranches, mortgage debt could be divided among classes of investors. The riskiest tranches -- those with the lowest credit ratings -- were sold to hedge funds and junk bond funds whose investors wanted the higher yields that went with the higher risk. The safest ones, offering lower yields and Treasury-like AAA ratings, were snapped up by risk-averse pension funds and money market funds. The least sought-after tranches were those in the middle, the "mezzanine" tranches, which offered middling yields for supposedly moderate risks.

Stick with me now, because this is where it gets interesting. For it is at this point that the banks got the bright idea of buying up a bunch of mezzanine tranches from various pools. Then, using fancy computer models, they convinced themselves and the rating agencies that by repeating the same "tranching" process, they could use these mezzanine-rated assets to create a new set of securities -- some of them junk, some mezzanine, but the bulk of them with the AAA ratings more investors desired.

It was a marvelous piece of financial alchemy, one that made Wall Street banks and the ratings agencies billions of dollars in fees. And because so much borrowed money was used -- in buying the original mortgages, buying the tranches for the CDOs and then in buying the tranches of the CDOs -- the whole thing was so highly leveraged that the returns, at least on paper, were very attractive. No wonder they were snatched up by British hedge funds, German savings banks, oil-rich Norwegian villages and Florida pension funds.

What we know now, of course, is that the investment banks and ratings agencies underestimated the risk that mortgage defaults would rise so dramatically that even AAA investments could lose their value.

One analysis, by Eidesis Capital, a fund specializing in CDOs, estimates that, of the CDOs issued during the peak years of 2006 and 2007, investors in all but the AAA tranches will lose all their money, and even those will suffer losses of 6 to 31 percent.

And looking across the sector, J.P. Morgan's CDO analysts estimate that there will be at least $300 billion in eventual credit losses, the bulk of which is still hidden from public view. That includes at least $30 billion in additional write-downs at major banks and investment houses, and much more at hedge funds that, for the most part, remain in a state of denial.

As part of the unwinding process, the rating agencies are in the midst of a massive and embarrassing downgrading process that will force many banks, pension funds and money market funds to sell their CDO holdings into a market so bereft of buyers that, in one recent transaction, a desperate E-Trade was able to get only 27 cents on the dollar for its highly rated portfolio.

Meanwhile, banks that are forced to hold on to their CDO assets will be required to set aside much more of their own capital as a financial cushion. That will sharply reduce the money they have available for making new loans.

And it doesn't stop there. CDO losses now threaten the AAA ratings of a number of insurance companies that bought CDO paper or insured against CDO losses. And because some of those insurers also have provided insurance to investors in tax-exempt bonds, states and municipalities have decided to pull back on new bond offerings because investors have become skittish.

If all this sounds like a financial house of cards, that's because it is. And it is about to come crashing down, with serious consequences not only for banks and investors but for the economy as a whole.

That's not just my opinion. It's why banks are husbanding their cash and why the outstanding stock of bank loans and commercial paper is shrinking dramatically.

It is why Treasury officials are working overtime on schemes to stem the tide of mortgage foreclosures and provide a new vehicle to buy up CDO assets.

It's why state and federal budget officials are anticipating sharp decreases in tax revenue next year.

And it is why the Federal Reserve is now willing to toss aside concerns about inflation, the dollar and bailing out Wall Street, and move aggressively to cut interest rates and pump additional funds directly into the banking system.

This may not be 1929. But it's a good bet that it's way more serious than the junk bond crisis of 1987, the S&L crisis of 1990 or the bursting of the tech bubble in 2001.

The fact that pessimistic talk is featured in the leading news outlets in the United States may be the best evidence that the plug is being pulled.

Signs of the Economic Apocalypse, 5-28-07

From Signs of the Times

Gold closed at 661.40 dollars an ounce Friday, down less than 0.1% from $662.00 at the close of the previous Friday. The dollar closed at 0.7439 euros Friday, up 0.5% from 0.7403 at the previous week’s close. That put the euro at 1.3442 dollars compared to 1.3508 the Friday before. Gold in euros would be 492.04, up 0.5% from 490.08 for the week. Oil closed at 65.20 dollars a barrel Friday, up 0.4% from $64.94 at the close of the week before. Oil in euros would be 48.50 euros a barrel, up 0.9% from 48.08 for the week. The gold/oil ratio closed at 10.14, down 0.5% from 10.19 at the close of the previous Friday. In U.S. stocks, the Dow closed at 13,507.28, down 0.4% from 13,556.53 for the week. The NASDAQ closed at 2,557.19 Friday, virtually unchanged from 2,558.45 at the end of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.86%, up six basis points from 4.80 for the week.

We are seeing a clear trend of rising U.S. interest rates with the ten-year Treasury note rising 22 basis points over the last four weeks. This has helped boost the dollar against the euro, but is one blade of the scissors cutting the U.S. consumer, the other blade being the rise in energy and food prices. The official inflation numbers don’t look too bad but they exempt food and energy prices (the two most necessary items) and include housing prices, which have dropped. If you don’t own a house yet, that’s good news, but about 70% of U.S. citizens do own a house and it is their most valuable asset, so dropping housing prices are bad news for most folks.

U.S. Existing Home Sales Drop to Lowest in Four Years

Shobhana Chandra

May 25 (Bloomberg) -- Sales of previously owned homes in the U.S. unexpectedly fell in April to the lowest level in almost four years, dimming prospects for a quick recovery in the housing industry.

Purchases fell 2.6 percent to an annual rate of 5.99 million last month from 6.15 million in March, the National Association of Realtors said today in Washington. A measure of the supply of homes for sale rose to the highest since August 1992.

The decline comes a day after a government report showed sales of new homes surged as buyers took advantage of a slide in prices. Today's figures suggest that owners of existing homes may have to cut prices further during the prime spring selling season. The drop also reflects the impact of banks making it tougher to get subprime loans, a response to rising defaults.

“The housing market correction won't be resolved quickly,” said Kevin Logan, senior market economist at Dresdner Kleinwort in New York. “Downward pressure on prices will persist and sales will be sluggish for some time.”

Resales were expected to be at a 6.12 million annual rate, unchanged from the originally reported March figure, according to the median of 70 forecasts in a Bloomberg News survey. Estimates ranged from 5.9 million to 6.4 million. Logan forecast a 6 million pace.

Inventory Grows

The number of previously owned unsold homes on the market at the end of April represented 8.4 months' worth at the current sales pace. The supply of homes for sale increased 10.4 percent to 4.2 million last month.

Purchases fell in all four regions. They declined 8.8 percent in the Northeast and 0.7 percent in the Midwest. They slid 1.2 percent in the South and 1.7 percent in the West.

The median price of an existing home fell 0.8 percent last month from a year earlier to $220,900.

Resales of single-family homes declined 2.4 percent in April to an annual rate of 5.22 million, the report said. Sales of condos and co-ops dropped 3.8 percent to a 770,000 annual rate.

“There is just no way that the housing slump is over,” said Roger Kubarych, chief U.S. economist at UniCredit HVB in New York.

Sales of new homes jumped 16 percent in April, the Commerce Department reported yesterday, as buyers took advantage of the biggest decline in median prices since 1970. New homes make up about 15 percent of the market.

Timely Barometer

Economists consider sales of new homes a more timely barometer because they are recorded when a contract is signed. Figures on home resales are compiled from contract closings and may reflect agreements reached a month or two earlier.

The housing slump helped reduce the pace of economic growth last quarter to an annual 1.3 percent, the slowest in more than four years. Federal Reserve policy makers say housing remains a risk to their forecast that growth will pick up later this year.

The Realtors group forecasts resales will fall 2.9 percent this year, after an 8.5 percent drop in 2006, and the median price of an existing home will drop 1 percent.

A recovery in housing is being held back by a wave of subprime mortgage defaults, which is throwing homes back onto the market and prompting banks to tighten lending standards for borrowers with poor or limited credit histories.

‘Spillovers’

Curbs on subprime lending “are expected to be a source of some restraint on home purchases and residential investment in coming quarters,” Fed Chairman Ben S. Bernanke said May 17. Even so, Bernanke said he doesn't foresee “significant spillovers” from the subprime market to the rest of the economy.

At least 50 subprime lenders have halted operations, gone bankrupt or sought buyers since the start of 2006, according to Bloomberg data, leading to a smaller supply of money for lending.

Builders are still struggling. Toll Brothers Inc., the largest U.S. luxury home builder, yesterday reported a 79 percent plunge in profit in the quarter ended April 30.

The Horsham, Pennsylvania-based company didn't provide an earnings forecast for the rest of the year because of “uncertainty” about the pace of sales and the direction of the market.

“We continue to operate conservatively in the current difficult market,” Chief Executive Officer Robert Toll said in a statement. Still, he said he was “a little more confident” than he was on a May 9 call.

Affordability

Lower prices and higher incomes may make homes more affordable, drawing buyers back into the market. Affordability has improved since the second quarter of last year, when it slipped to the lowest since at least 1992.

Robert Niblock, chief executive of home-improvement retailer Lowe's Cos., said on a May 21 conference call that the housing market is “at or near the bottom.” Lowe's, based in Mooresville, North Carolina, lowered its annual earnings forecast after fewer home sales hurt demand for cabinets and appliances last quarter.

Housing accounts for about 23 percent of the U.S. economy, when taking into account purchases of furniture, appliances and items for new homes, according to the Joint Center for Housing Studies at Harvard University in Cambridge, Massachusetts.

The wave of large public corporations taken private by private equity firms gathered steam last week with EMI and Alltel joining Chrysler as private companies. For the short term the buyouts and mergers (81 billion dollars worth of deals in May alone, a record amount) have propped up stock markets in the U.S. Record high stock prices help to keep economic confidence up and mask the structural defects of the economy.

For the long term, the private equity boom marks a new stage in depriving people of economic power. Changes to labor laws over the past 30 years have given workers much less control over their lives and now the private-equity boom is taking power away from public shareholders. And now, Wall Street is taking the private equity trend a step further, creating a private trading system for “stocks” of such privately held companies:

Goldman Takes 'Private' Equity To a New Level
Firm's Trading System Lets Unregistered Stock Reach Exclusive Market

Randall Smith

Goldman Sachs Group Inc. ranks as the most profitable securities firm on Wall Street -- reflecting its mastery of trading on the world's public markets.

Now Goldman is turning that franchise on its head, creating its own private system to trade the stocks of companies that don't want the scrutiny and regulatory burdens of going public.

The new system, GS TRuE -- short for Goldman Sachs Tradable Unregistered Equity -- was announced two weeks ago and made its debut on Monday with an $880 million sale of a 15% stake in Oaktree Capital Management LLC, an alternative-investment manager.

It is the first of several new, private exchanges like these being considered by Wall Street firms and others. Nasdaq is also planning its own new market for smaller, unregistered securities.

These markets will generally be closed to individual investors. For instance, Goldman's market is open only to large institutional investors with assets of more than $100 million. That is because the stocks traded on GS TRuE aren't registered with the Securities and Exchange Commission and issuers aren't subject to SEC regulations designed to protect individual investors.

It represents the latest step in the creeping exclusion of individual investors from a growing proportion of financial-market activity. For instance, giant private-equity firms are busy buying public companies and delisting them from stock exchanges. The growing importance of hedge funds -- which are generally limited to wealthy investors, institutions and endowments -- also excludes individuals.

The new system is "a manifestation of the growth of private-equity relative to public equity," said Jay Ritter, a finance professor at the University of Florida in Gainesville, pointing to the record-setting pace of private-equity buyouts of public companies recently.

Traditional mutual funds -- one of the main investment tools at the disposal of individual investors -- are also limited in the amount of unregistered securities they can buy or sell. Hedge funds, by contrast, have more freedom to buy unregistered stocks and bonds.

Indeed, bankers and capital-markets executives at rival firms say that, at GS TRuE's debut, hedge funds were prominent among buyers for the issue by Los Angeles-based Oaktree.

Some investor advocates criticized the trend of selling more securities faster with less disclosure. "It becomes much more of a buyer-beware marketplace with little regulatory oversight or protection," said Steven B. Caruso, a New York lawyer who represents investors in disputes with Wall Street.

Business Backlash

Goldman's move partly reflects a business-community backlash against increased regulation of public-company accounting practices -- a favorite theme, as it happens, of Treasury Secretary Henry M. Paulson Jr., who is also a former Goldman chief executive.

Wall Street executives said the market offers an alternative to companies that don't want to wait for regulators to approve their financial disclosures needed for an initial public offering, which can take 90 days or more.

They also said it offers a haven for firms that don't want to be subject to what Oaktree described as "the full panoply of regulations applicable to publicly traded companies in the United States." In a memorandum describing the stock sale, Oaktree added that staying private would avoid "pressure to describe the company as one capable of steady growth, whereas our underlying business is actually quite variable."

Although the Oaktree offering was sold to only about 50 buyers, it traded at roughly the same multiple of expected 2008 earnings as Fortress Investment Group LLC, a comparable alternative-investment manager that recently sold stock in a conventional initial public offering, according to Wall Street traders.

In other words, the Oaktree stock traded without a price discount that would reflect the lack of a public market with multiple dealers. In that respect, the new market passed an important first test. If stocks traded at too much of a discount, that might dissuade other companies from listing there.

What History Says

Bankers at rival firms -- many of which are developing similar systems -- predict that there will be consolidation among the different platforms.

"History in other markets would indicate that this will converge into a single platform," said Daniel Simkowitz, a managing director in capital markets at Morgan Stanley, which advised Oaktree on the issue.

Indeed, Nasdaq Stock Market Inc. is in the home stretch of getting approval for a similar unregistered trading facility for smaller companies called Portal. Another securities firm, Friedman, Billings, Ramsey Group Inc., has sold unregistered stock for numerous companies in real estate, energy and lodging.

Goldman executives said one reason they launched their own system solo, without asking other rival securities firms to participate, was to insure control over the number of investors in any particular security. That is crucial, they said, because any company that goes over 499 investors must register as a public company.

That 499-investor limit, said one executive of a top private-equity firm, is one reason why such buyout firms aren't likely to rush pell-mell into this type of new issue for their portfolio companies. The buyout firms want to attract far more investors to make sure they get the best prices for their stock, he explained.

'New Tool' in the Kit

Rob Pace, a senior capital-markets executive who played a lead role in developing the Goldman system, called such issues "a new tool in the tool kit" for investors, filling out a spot between harder-to-trade traditional private placements and public offerings.

Mr. Pace noted that Goldman still believes "the U.S. public capital markets are the deepest and most liquid," and will continue to represent "a more prevalent way to raise equity capital."

Goldman also said companies that issue stock on its system must promise to issue quarterly, annual and event-related financial reports comparable to those of public companies. However, they don't have the same obligation for widespread dissemination of detailed business information that can be of use to competitors.

Gregg Weinstein, a Goldman trading executive who also worked on the system, said Goldman doesn't "have any expectation that we're going to be able to stand alone in this product forever." But, he said, working with other dealers on the first issue would have risked delays.

China was in the news last week for a variety of reasons. The second U.S. – China Strategic Economic Dialogue took place last week between U.S. Treasury Secretary Paulson and Chinese Vice Premier Wu Yi. The Chinese pushed back at U.S. pressure to let Chinese currency increase in value, so Alan Greenspan sparked a sharp drop in the Chinese stock market by mentioning how overvalued it is and the Washinton Post expanded the poison food additive from China scandal moved from pet food to human food. China then announced $36 billion in U.S. business deals.

First the Strategic Economic Dialogue:

Dancing with the Drago
Paulson in China

Mike Whitney

May 24, 2007

Treasury Secretary Henry Paulson wrapped up 2 days of high level talks with the Chinese delegation on Wednesday without any progress on the two issues of central importance to the American people"the massive $230 billion trade deficit and the ongoing manipulation of the Chinese currency, the yuan. As expected, China agreed to allow "more passenger flights between the two countries" and they also approved a plan "to remove a ban on the entry of new foreign brokerages and to allow financial services firms to expand their operations in China". (Marketwatch)

But that was basically it. China will not to allow its currency to float freely on the open market. They want to maintain the advantage they have on their American competitors by continuing to "fix" the yuan in a way that best serves their national interests. That's the way nations are supposed to work. The Chinese aren't taken in by the hogwash about "free trade" or "deregulation". They're playing to "win""and that's what counts.

It's different in America, where the currency has been deregulated to serve the interests of a small group of bankers and investors. Every one else loses. Factories are boarded-up and workers are thrown out of their jobs because they cannot compete with foreign manufacturers who "underbid" them on every item. This doesn't matter to Paulson and his buddies in the financial service industry. Their business thrives on ever-increasing flows of cheap capital to American markets. Whatever happens to the American worker is not his concern.

Oh sure, Paulson may wave his finger reproachfully at his Chinese counterparts for rigging their currency, but he's certainly not going to do anything that would disrupt the flow of $230 billion into US bonds and securities. America's massive $800 billion current account deficit is what keeps interest rates low and the stock market humming-along at full throttle. Why would he mess with that?

After all, what's more important: American workers or the wealth and prosperity of Wall Street moguls and banking giants?

According to Marketwatch, Paulson succeeded in persuading his Chinese counterparts to allow foreign brokerages and financial services firms "to expand their operations in China." Big surprise, eh? As former chief of Goldman Sachs, it's clear that this was high on Paulson's list of priorities. After all, Chinese workers set aside an estimated 50% of their earnings and have saved a whopping $2 trillion in the last decade. The financial service industry must be salivating at the thought of opening shop in Beijing and tapping into that mushrooming market.

There's a misconception in the US (particularly among "protectionist" Democrats) that trade with China is a "one way street" that only benefits the Chinese. That is not the case. In fact, the real beneficiaries of the present arrangement are the US business elites who set out to destroy the American work-force by moving factories to a country with no labor or environmental laws. The Bush administration has assisted the exodus of US corporations by creating tax incentives for "off-shoring" and by promoting a free trade ideology which is ruinous to America's future.

But that's not China's fault. China can't be blamed for our job losses or "unsustainable "trade deficit---that's the result of the neoliberal policies which have enriched a few wealthy American industrialists and bankers at the expense of everyone else. As China expert Henry C K Liu says in his article "A Dialogue of the Mute"

"China has actually been a powerless respondent to the dysfunctional terms of trade set by US economic policies, aggressively exploited by US transnational corporations and financial institutions for unfair profit." (More than 60% of China's trade surpluses are traded by foreign companies, many of which are US firms)

Liu adds: "China cannot expand domestic consumption because Chinese wages and benefits are too low. Yet Chinese cannot raise wages faster because real wealth has been leaving the country through export trade while the yuan money supply is expanding through the central bank buying dollar inflows with yuan. The result is a liquidity bubble, with too much currency chasing a dwindling supply of real wealth that has been exported."

The Strategic Economic Dialogue (SED) between the Chinese and US delegations was a complete failure. The yuan will continue to be manipulated and America will continue to bleed jobs and wealth. We'll probably never know what really went on behind closed doors, but one thing is certain; the US is not giving the orders anymore. With $1.3 trillion in dollar-backed securities and US Treasuries, the Dragon is in the driver's seat. Now that Japan has slowed down its purchases of US debt; China represents the last bit of scaffolding holding up the feeble greenback. That means that the Fed will have to consult with their "loan-officers" in Beijing before raising or lowering interest rates.

Sounds crazy, but its true.

And, while everyone is predicting that Fed-master Bernanke will probably lower interest rates to save the struggling real estate market; it may be that our Chinese friends will demand a rate-hike to preserve their investment. That'll just speed up the sub-prime meltdown and send tremors through world stock markets.

Our favorite economic guru, Elaine Supkis, provides a bit of historical background to our current economic predicament. In Yesterday's post she says:

"Anyone with half a brain can see that on 9/11, we reset our economy on its present irresponsible course. Bush and the American people declared a war on terror and began spending like fiends and cut taxes and Bush famously said we should all go shopping so we went on the world's biggest, stupidest shopping binge.

To hide the inflation this new policy brought and thanks to the Federal Reserve simultaneously dropping interest rates to an amazing and irresponsible 1%, hiding inflation became the #1 job and to do this, we had to shift as much labor as possible to China! China's surplus in trade with us was fairly insignificant before 9/11 but it shot through the roof. After 9/11, China passed Japan and has been the #1 source of cheap labor for the US which must use China in this fashion or find some other nation to do this for us.

What I am saying is, we cannot simply force China to raise their prices to us, we will simply rush to India or some other cheap labor nation to do the work for us!

The US RULERS know China's intentions. Bush's family works for the Communist Chinese, they have had business deals with them for years and years. The Chinese have cultivated corrupting the Bush clan since they first met Mr. Bush Sr. when he jumped from the CIA to ambassador to China. These people then ran off to China to make money off of the differential between Chinese labor's wages and American consumer buying abilities. The Chinese exploited this treason as they should, after all, we are in competition with them for ruling the world and if our rulers are so banged stupid that they think they will dominate the Chinese and not vice-versa then...we get what we are getting today.

Namely, our necks in a Chinese noose. But do not forget, the American ruling class put our necks there, not the Chinese. They simply cooperated! (See the whole post here.)

The economic war against the American people started on the same day as the war on terror"9-11. Interest rates plummeted, the money supply was put on steroids, and the US began auctioning off its national wealth at a rate of $800,000 billion a year. The current account deficit and the loss of 3.2 million manufacturing jobs has been used to conceal inflation which is only now beginning to rear its head in the form of recycled dollars in an over-leveraged stock market. (Why else would the Dow hit new highs every day when GDP is an anemic 1.3%?)

We can see now, (from the coordination of policy) that it wasn't just Big Oil and the neocons who led us to war with Iraq. The Federal Reserve played an equally important part in that deception. It lulled the people to sleep with low interest rates (which kept the economy humming-along) while the nation's wealth was shifted from the middle class to the mega-rich. The Fed's policies have created enormous equity bubbles and a massive "unsustainable" trade deficit. When the bubbles burst, the America people will be forced to "privatize" whatever public assets are left.

Wasn't that the goal from the very beginning?

Now, we're stuck and there's no way out. If China allows its currency to rise; then the US economy will plunge into recession or worse. And, if we stay on the same course, the country's wealth will be sold piecemeal to foreign investors while the dollar continues to weaken and unemployment soars.

Our options are limited and we appear to be headed for a hard landing. But--Elaine Supkis is right--you can't blame the Chinese for that. It may be their noose, but it was Bush and Co. who put our necks there.

Poison food is one result of the collusion between greedy, plutocratic Chinese and greedy plutocratic U.S. elites. The following investigative report was published by the Washington Post:

Tainted Chinese Imports Common

In Four Months, FDA Refused 298 Shipments

Rick Weiss
May 20, 2007

Dried apples preserved with a cancer-causing chemical.

Frozen catfish laden with banned antibiotics.

Scallops and sardines coated with putrefying bacteria.

Mushrooms laced with illegal pesticides.

These were among the 107 food imports from China that the Food and Drug Administration detained at U.S. ports just last month, agency documents reveal, along with more than 1,000 shipments of tainted Chinese dietary supplements, toxic Chinese cosmetics and counterfeit Chinese medicines.

For years, U.S. inspection records show, China has flooded the United States with foods unfit for human consumption. And for years, FDA inspectors have simply returned to Chinese importers the small portion of those products they caught -- many of which turned up at U.S. borders again, making a second or third attempt at entry.

Now the confluence of two events -- the highly publicized contamination of U.S. chicken, pork and fish with tainted Chinese pet food ingredients and this week's resumption of high-level economic and trade talks with China -- has activists and members of Congress demanding that the United States tell China it is fed up.

Dead pets and melamine-tainted food notwithstanding, change will prove difficult, policy experts say, in large part because U.S. companies have become so dependent on the Chinese economy that tighter rules on imports stand to harm the U.S. economy, too.

"So many U.S. companies are directly or indirectly involved in China now, the commercial interest of the United States these days has become to allow imports to come in as quickly and smoothly as possible," said Robert B. Cassidy, a former assistant U.S. trade representative for China and now director of international trade and services for Kelley Drye Collier Shannon, a Washington law firm.

As a result, the United States finds itself "kowtowing to China," Cassidy said, even as that country keeps sending American consumers adulterated and mislabeled foods.

It's not just about cheap imports, added Carol Tucker Foreman, a former assistant secretary of agriculture now at the Consumer Federation of America.

"Our farmers and food processors have drooled for years to be able to sell their food to that massive market," Foreman said. "The Chinese counterfeit. They have a serious piracy problem. But we put up with it because we want to sell to them."

U.S. agricultural exports to China have grown to more than $5 billion a year-- a fraction of last year's $232 billion U.S. trade deficit with China but a number that has enormous growth potential, given the Chinese economy's 10 percent growth rate and its billion-plus consumers.

Trading with the largely unregulated Chinese marketplace has its risks, of course, as evidenced by the many lawsuits that U.S. pet food companies now face from angry consumers who say their pets were poisoned by tainted Chinese ingredients. Until recently, however, many companies and even the federal government reckoned that, on average, those risks were worth taking. And for some products they have had little choice, as China has driven competitors out of business with its rock-bottom prices.

But after the pet food scandal, some are recalculating.

"This isn't the first time we've had an incident from a Chinese supplier," said Pat Verduin, a senior vice president at the Grocery Manufacturers Association, a trade group in Washington. "Food safety is integral to brands and to companies. This is not an issue the industry is taking lightly."

New Focus on the Problem

China's less-than-stellar behavior as a food exporter is revealed in stomach-turning detail in FDA "refusal reports" filed by U.S. inspectors: Juices and fruits rejected as "filthy." Prunes tinted with chemical dyes not approved for human consumption. Frozen breaded shrimp preserved with nitrofuran, an antibacterial that can cause cancer. Swordfish rejected as "poisonous."

In the first four months of 2007, FDA inspectors -- who are able to check out less than 1 percent of regulated imports -- refused 298 food shipments from China. By contrast, 56 shipments from Canada were rejected, even though Canada exports about $10 billion in FDA-regulated food and agricultural products to the United States -- compared to about $2 billion from China.

Although China is subject to more inspections because of its poor record, those figures mean that the rejection rate for foods imported from China, on a dollar-for-dollar basis, is more than 25 times that for Canada.

Miao Changxia, of the Chinese Embassy in Washington, said China "attaches great importance" to the pet food debacle. "Investigations were immediately carried out . . . and a host of emergency measures have been taken to ensure the hygiene and safety of exported plant-origin protein products," she said in an e-mail…

An Official Response

The Cabinet-level "strategic economic dialogue" with China, which began in September and is scheduled to resume on Wednesday, was described early on as a chance for the United States and China to break a long-standing stalemate on trade issues. When it comes to the safety of imported foods, though, they may highlight the limited leverage that the United States has.

It is not just that food from China is cheap, said William Hubbard, a former associate director of the FDA. For a growing number of important food products, China has become virtually the only source in the world.

China controls 80 percent of the world's production of ascorbic acid, for example, a valuable preservative that is ubiquitous in processed and other foods. Only one producer remains in the United States, Hubbard said.

"That's true of a lot of ingredients," he said, including the wheat gluten that was initially thought to be the cause of the pet deaths. Virtually none of it is made in the United States, because the Chinese sell it for less than it would cost U.S. manufacturers to make it.

So pervasive is the U.S. hunger for cheap imports, experts said, that the executive branch itself has repeatedly rebuffed proposals by agency scientists to impose even modest new safety rules for foreign foods.

"Sometimes guidances can get through, but not regulations," said Caroline Smith DeWaal, food safety director at the Center for Science in the Public Interest, an advocacy group. Guidances, which the FDA defines as "current thinking on a particular subject," are not binding.

Under the Bush administration in particular, DeWaal said, if a proposed regulation does get past agency or department heads, it hits the wall at the White House Office of Management and Budget.

Andrea Wuebker, an OMB spokeswoman, said that the office reviewed 600 proposed rules last year and that it is up to agencies to finalize rules after they are reviewed. She did not tally how many reviews sent agencies' rule-writers back to the drawing board. She noted that some food safety rules have been finalized, including some related to mad cow disease and bioterrorism. Critics point out that the bioterrorism-related regulations were required by an act of Congress.

John C. Bailar III, a University of Chicago professor emeritus who chaired a 2003 National Academies committee that recommended major changes in the U.S. food safety system -- which have gone largely unheeded -- said he has become increasingly concerned that corporations and the federal government seem willing to put the interests of business "above the public welfare."

"This nation has -- and has had for decades -- a pressing need for a wholly dedicated food safety agency, one that is independent and not concerned with other matters . . . to bring together and extend the bits of food safety activities now scattered over more than a dozen agencies," he said in an e-mail.

Legislation to create such an agency was recently introduced, though many suspect that is too big a challenge politically.

But in the aftermath of the recent food scandals, a growing number of companies and trade groups, including Grocery Manufacturers of America, are speaking in favor of at least a little more protection, starting with a doubling of the FDA's food safety budget...

Paul Krugman points out the absurdity of the Bush administration’s refusal to enforce regulations while the industries themselves are literally asking for it:

…Without question, America's food safety system has degenerated over the past six years. We don't know how many times concerns raised by F.D.A. employees were ignored or soft-pedaled by their superiors. What we do know is that since 2001 the F.D.A. has introduced no significant new food safety regulations except those mandated by Congress.

This isn't simply a matter of caving in to industry pressure. The Bush administration won't issue food safety regulations even when the private sector wants them. The president of the United Fresh Produce Association says that the industry's problems "can't be solved without strong mandatory federal regulations": without such regulations, scrupulous growers and processors risk being undercut by competitors more willing to cut corners on food safety. Yet the administration refuses to do more than issue nonbinding guidelines.

Why would the administration refuse to regulate an industry that actually wants to be regulated? Officials may fear that they would create a precedent for public-interest regulation of other industries. But they are also influenced by an ideology that says business should never be regulated, no matter what.

The economic case for having the government enforce rules on food safety seems overwhelming. Consumers have no way of knowing whether the food they eat is contaminated, and in this case what you don't know can hurt or even kill you. But there are some people who refuse to accept that case, because it's ideologically inconvenient.

That's why I blame the food safety crisis on Milton Friedman, who called for the abolition of both the food and the drug sides of the F.D.A. What would protect the public from dangerous or ineffective drugs? "It's in the self-interest of pharmaceutical companies not to have these bad things," he insisted in a 1999 interview. He would presumably have applied the same logic to food safety (as he did to airline safety): regardless of circumstances, you can always trust the private sector to police itself.

O.K., I'm not saying that Mr. Friedman directly caused tainted spinach and poisonous peanut butter. But he did help to make our food less safe, by legitimizing what the historian Rick Perlstein calls "E. coli conservatives": ideologues who won't accept even the most compelling case for government regulation.

Earlier this month the administration named, you guessed it, a "food safety czar." But the food safety crisis isn't caused by the arrangement of the boxes on the organization chart. It's caused by the dominance within our government of a literally sickening ideology.

Signs of the Economic Apocalypse, 2-26-07

From Signs of the Times

Gold closed at 685.70 dollars an ounce Friday, up 1.9% from $673.00 at the close of the previous Friday. The dollar closed at 0.7595 euros Friday, down 0.2% from 0.7611 at the previous week’s close. That put the euro at 1.3167 dollars compared to 1.3140 at the end of the week before. Gold in euros would be 520.77 euros an ounce, up 1.7% from 512.18 for the week. Oil closed at 61.14 dollars a barrel Friday, up 3.1% from $59.28 at the close of the previous Friday. Oil in euros would be 46.43 euros a barrel, up 2.9% from 45.11 euros at the end of the week before. The gold/oil ratio closed at 11.22, down 1.2% from 11.35 for the week. In U.S. stocks, the Dow Jones Industrial Average closed at 12,647.48 Friday, down 0.9% from 12,767.57 at the close of the previous Friday. The NASDAQ closed at 2,515.10 Friday, up 0.8% from 2,496.31 at the close of the Friday before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.67%, down two basis points from 4.69 for the week.

The sharp and steady rise in the price of gold in recent weeks, up more than 7% in 2007, feels ominous coming at a time of building pressure, a time when we are days, weeks or months away from finding out whether the neocons will induce the U.S. empire to commit suicide by attacking Iran.

The ongoing dispute between factions in the U.S. elite, between those that are desperate enough to roll the dice on a last-ditch, all-or-nothing bet and those who feel that the situation can be managed by means of a strategic retreat remains unresolved. One one side the neocons, comprised of both Israel-first likudniks and the U.S. militarist/ nationalists argue that to prevent the loss of the Iraq War and to prevent the replacement of the United States as the “sole superpower” by China, a bold attempt to take over the world must be made now before China and Russia get any stronger. The realists argue that the Iraq War is already lost and steps must be taken to mitigate the damage to U.S. power from that loss, including negotiations with Iran and Syria and between Israel and Palestine (unthinkable steps for neocons).

While the realist faction enjoys overwhelming popular and elite support, the neocons have already captured the crucial levers of power and can make use of information gained in extensive surveillance programs to blackmail and control any opponents. Only an arrest and impeachment of Cheney could stop an attack on Iran, it seems, so the final arguments in the Lewis Libby trial add to the building tension. In response to Libby’s defense attorney, Theodore Wells’s statement that the prosecution was really going after Cheney, Special Prosecutor Patrick Fitzgerald came close to admitting just that in his closing arguments:

"You know what? [Wells] said something here that we're trying to put a cloud on the vice president. We'll talk straight. There is a cloud over the vice president. He sent Libby off to [meet with former New York Times reporter] Judith Miller at the St. Regis Hotel. At that meeting, the two hour meeting, the defendant talked about the wife [Plame]. We didn't put that cloud there. That cloud remains because the defendant obstructed justice and lied about what happened."

So a U.S. Special Prosecutor is accusing the Vice President of a criminal conspiracy to blow the cover of a CIA agent who was working on counter-proliferation, on nuclear weapon material smuggling to Iran of all places. Seems impeachable, but the Israel lobby seems to have complete control of both sides of the aisle in Congress, so it’s hard to imagine any action taken against Cheney until after the attack on Iran has taken place.

While we wait for the big boys to fight it out, the recent two-part series in the World Socialist Web Site on what the rise of China means for world capitalism (part 1, part 2) by John Chan is worth reading. Chang begins by outlining the recent history of large scale strategic competition between the great powers:

Russia’s move on January 8 to shut down one of its major pipelines carrying oil from Siberia to the refineries in Europe via Belarus, demonstrates the potentially explosive character of conflicts over energy. Germany relies on Russia for one-third of its oil imports, mostly through this pipeline, which also provides 96 percent of Poland’s oil imports. Europe as a whole depends on Russia for more than 30 percent of its oil. Last winter Russia threatened to cut off gas supplies to the Ukraine. It was a shock not just to Kiev, but other European capitals. This strategy allows Russia to divide the European Union and counter political pressures on Moscow.

Central Asian challenge

The US ambition to control the huge energy resources of the Middle East and Central Asia would allow Washington to do to its rivals what Moscow is already doing. The US strategy is, however, under challenge, particularly with the American military bogged down in Iraq. China and Russia are forming their own bloc to undermine US influence in Central Asia.

The Shanghai Cooperation Organisation (SCO), which includes Russia, China and the Central Asian republics, brings together Moscow’s vast reserves of oil and gas and Beijing’s rapidly growing economic clout. Neither China nor Russia wants an open confrontation with the US over Central Asia, but both countries have a shared interest in preventing American dominance in a region that is economically and strategically important.

In the 1990s, Moscow did not take a great deal of interest in the SCO, which it regarded as more of a Chinese initiative. But Russian President Vladimir Putin, facing the pressure of pro-Western “colour revolutions” on Russia’s borders, has discovered shared interests with China. Both countries want the US military out of Central Asia, while Russia is a supplier for China’s huge appetite for oil and gas. In turn, China, which is seeking to rapidly modernise its military, has been the main source of income for Russia’s decaying defence industries.

In 2005, as the US debacle in Iraq became transparent, China and Russia started to work closely to counter the US position in Central Asia. After Washington criticised Uzbekistan’s President Islam Karimov over his brutal suppression of anti-government protestors in Andijan, Beijing gave Karimov the red carpet treatment. As a result, the Uzbek president opened two dozen oilfields to Chinese companies and eventually shut down the US air base in Uzbekistan.

The SCO cuts directly across US plans for energy transport routes in the Middle East, the Caspian and Central Asia. Putin’s strategy is to use Russia’s state energy monopolies and its political influence in Central Asia and the Caspian region to establish a network of pipelines not only directed to Moscow’s traditional Western clients, but also to the dynamic economies of the Far East. Putin plans that a third of Russian oil and gas exports will go to the Far East by 2020, with China and Japan the biggest beneficiaries.

With Moscow building oil and gas pipelines to the Far East, and Beijing making huge investments in oilfields and pipelines across Central Asia, the prospect of an SCO regional “energy club,” which would act as a counterweight to US influence, has attracted India, Pakistan and Iran as observers.

Beijing and Moscow have also increased military cooperation. After their first large-scale joint military exercise in 2005, the two countries are planning another later this year, to include SCO member states and other former Soviet republics. Although Russia and China are still far from forming a formal military alliance, their close ties pose a potential challenge to US dominance and will provoke a reaction from Washington.

With Russian assistance, China is acquiring advanced military technology. It surprised the US on January 11 by launching a missile to destroy one of its own satellites. Beijing used the test to demonstrate to Washington that China has the capacity to destroy satellites, on which the US military is heavily dependent for navigation, intelligence and weapons guidance.

Despite Chinese President Hu Jintao’s slogan of the country’s “peaceful rise”, Beijing’s economic dynamism has an objective logic of its own. In order to secure the raw materials and energy supplies needed for the country’s booming industry, China is busy building its presence in Africa, Latin America and the Middle East. It was estimated that last year nearly half the world’s heads of state visited Beijing, while top Chinese leaders visited two-thirds of the members of the United Nations.

With more than $1 trillion in foreign currency reserves, China is very much behind the “Hugo Chavez” phenomenon not just in Latin America, but Africa, Asia and the Pacific. Unlike the US and other Western governments that posture about promoting democracy, Beijing sticks to a policy of “non-interference” in the internal affairs of other nations. It has offered billions of dollars in loans and aid to various countries, as long as they agree to protect China’s economic and strategic interests.

As a result, China has become a new, alternative source of funds for many developing countries. In October, Beijing hosted a summit for the government heads of the 10 South East Asian nations. In November, China invited the leaders of 48 African nations to a lavish gathering, signalling Beijing’s entry into the new scramble for Africa. These leaders came to China not only for money, but also political support.

China is promoting itself as a new role model for developing countries, in which dictatorship rather than “democracy” is viewed as a crucial component of economic success. This is particularly favoured by various corrupt Third World regimes, which are under pressure from the Western powers, for their own reasons, to carry out limited political reforms.

Beijing’s support for, including in some cases the provision of arms, Sudan, Zimbabwe, Myanmar and Venezuela—i.e., to regimes to which Washington is openly hostile—has provoked opposition from the Bush administration. Over a year ago, former US deputy secretary of state, Robert Zoellick, commented: “China’s involvement with troublesome states indicates at best a blindness to consequences and at worst something more ominous.” He warned that if Beijing wanted to “push the US out, they will get a counter-reaction” from Washington.

This “counter-reaction” is already evident in the US push for the strategic encirclement of China. Last year, Bush signed an accord with India on nuclear cooperation and encouraged New Delhi to act as a counterweight to Beijing. Washington has also backed Australia’s escalating intervention in the South Pacific to topple regimes that were inclining towards China and other rivals.

In addition, the Bush administration has actively encouraged Japan to play a more aggressive role in North East Asia, against North Korea and China. The crisis over North Korea’s missile and nuclear tests has been provoked by the Bush administration’s bellicose policy to precipitate a “regime change” in Pyongyang. The long-term consequence of this standoff could well be the re-armament of Japan, including with nuclear weapons.

According to Chan, the increasing power of China comes from China’s rapidly increasing wealth which derives from China’s position as a low-wage industrial zone for the world-economy. The low-cost production of goods in China allowed multinational corporations to postpone the crisis of capitalism for three decades or more.

The danger of imperialist war is compounded by the deepening economic crisis of world capitalism. After three decades of globalised production, the advanced capitalist countries, the US in particular, have discovered that the economic crisis that they sought to avoid by diverting manufacturing to cheap labour countries has returned home on a much larger scale.

China’s foreign currency reserves surpassed the $1 trillion mark last year, while the US trade deficit with China reached a new record of $230 billion. The American and Chinese ruling elites have no progressive means for resolving these massive economic imbalances. Beijing needs to keep foreign capital flowing in and exports expanding, in order to create 24 million jobs a year to maintain social stability. The US economy requires the supply of $2 billion a day from the rest of the world, especially from Asian central banks, to finance its massive trade deficits.

If this process continues indefinitely, the financial system must collapse at some point with incalculable consequences for the world economy. The solution offered by the Democrats in the US Congress to “correct” these imbalances is to promote protectionist legislation against China, which will only heighten political tensions and threaten financial stability.

A new book China Shakes the World: The Rise of A Hungry Nation by James Kynge, a veteran China correspondent for the British-based Financial Times, provides some insights into the global impact of China’s enormous economic contradictions. His study found that China resembles, to some extent, the US in the late nineteenth century, in terms of its infrastructure development.

In the 1990s, after discovering that the US interstate highway system had saved American companies $1 trillion over the past four decades, Beijing bureaucratic planners copied the US system across China. When this plan is finished by 2030, China will have 830,000 kilometres of expressways—a little longer than the existing the US system. China is also building railways that duplicate much of the American railroad boom at the turn of twentieth century, including a rail line to Tibet—the “roof of the world”. The scale of China’s electricity power construction is also unprecedented. Every year since 2004, China has been building enough power plants to supply a major European country such as Italy or Spain.

On the other hand, Kynge pointed out, the wages of Chinese workers are far worse when compared to English workers during the Industrial Revolution or an American worker in nineteenth century. Some 200 years ago, a British Weavers Minimum Wage Bill proposed to pay eight shillings a week. After adjusting for time and converting into Chinese currency, Kynge estimated this was double the average wage of a semi-skilled rural migrant worker in China today. A Chicago worker in a lumber yard in the 1850s would have earned between one and half to three times more than a modern Chinese worker doing a similar job today.

The marriage between modern infrastructure and the country’s vast pool of cheap labour is the key to China becoming the new manufacturing centre for global capital. But China is no longer just a cheap labour platform. It is also rapidly developing as a more sophisticated industrial power. According to the Organisation of Economic Cooperation and Development (OECD), mainly due to growing international investment, China last year surpassed Japan to become the world’s second largest spender on research and development. China has also overtaken Germany as the fifth most prolific nation in filing patents for new processes and technologies.

Although its overall capacity for technological innovation still lags far behind industrially developed countries, these figures demonstrate that China is rapidly catching up. Coupled with rampant violations by Chinese companies of intellectual property rights—ranging from DVDs to cars—China’s economy is growing not just at the expense of jobs in South East Asia and Latin America, but increasingly replacing skilled labour in the advanced capitalist countries.

China now exports not only shoes and clothes, but also car components and machine tools that still form the manufacturing basis of Western economies. It is not coincidental that after China’s entry into the WTO in 2001, there has been a continuing drop in wages and a loss of jobs in both advanced and developing countries. In the US, some three million manufacturing workers have lost their jobs. In Europe, China’s impact on small and medium-sized firms, which employ the bulk of workforce, contributed to the continent’s 9 percent unemployment rate.

The process of China moving up the technological ladder, Kynge’s study found, is driven by the necessities of the market. Boeing, the US aircraft manufacturer, for example, initially had to send some production to China and other low-wage countries to maximise the returns to its shareholders. “But in doing so,” Kynge wrote, “it threatened to put out of business many of its small, long-term suppliers [in the US]... The process was self-reinforcing. The more Boeing outsourced, the quicker the machine tool companies that supplied it went bust, providing opportunities for Chinese competitors to buy the technology they needed, better to supply companies like Boeing. Boeing makes money, but ultimately at the expense of the industries and jobs that sustain Middle America.”

The impact of Chinese and Indian cheap labour is having an impact on more than just semi-skilled factory jobs or basic call centre services. IT companies now can outsource even the most skilled professional jobs to any geographical location. According to McKinsey Global Institute, some 9.6 million jobs in the US service sector could theoretically be outsourced overseas. If that happened, it would double the US unemployment rate from around 5 percent to more than 11 percent.

Every year, China produces more university graduates than the US and 60 percent of them cannot find a job. National language no longer offers protection to US workers from global competition. There is already a large pool of English-speaking, educated Indian workers. In China, an estimated 200 million people are learning English. The mere existence of these vast reserve armies of labour has created a huge downward pressure on wages and conditions, even for middle-class professionals in Western countries. In the final analysis, the integration of a new labour force of more than two billion low-cost workers in the global capitalist economy is a major factor behind the eruption of social unrest in France and other countries in 2006.

Kynge wrote in his book that the existing European welfare states are incompatible with competition from China. “Intellectually, many in Europe may find it distasteful that the EU runs a subsidy under which cows get more than $2 a day—more than the average daily income of 700 million Chinese...

“China was able in the five years from the onset of the Asian financial crisis in 1997 to lay off more than 25 million workers from its inefficient and heavily subsidised state-owned enterprises. The fruits of that stern therapy are now evident in the competitive shock that is hitting Europe and America. But China is not a democracy... When workers rioted, protested, petitioned or dissented, it answered with well-honed authoritarian tactics. The result has been that state-financed social welfare has in the space of less than a decade ceased to be a millstone for the corporate sector. The housing, schooling, healthcare and pension obligations that over 300,000 state companies used to meet on behalf of their workers have now been eliminated, reduced or privatised. China today is a great deal less socialist than any country in Europe; the 120 million or so migrant workers, for instance, receive no welfare at all.”

It may well be that the rise of China to superpower status will allow the Powers that Be to implement Chinese-style prison labor camp industrialization world-wide.

The “rise of China” does not signal a new golden age for capitalism. Long before China becomes a mature capitalist power, it will confront violent struggles with other powers for raw materials and geopolitical influence. The US and Japan have already expressed their open hostility toward a more assertive China. Last year Indian Prime Minister Manmohan Singh told Chinese President Hu Jintao that Asia was big enough for the two countries. In fact, the economic dynamism of the two rivals is placing them on a collision course for regional dominance.

China’s socially destructive industrialisation is not based on a historic upward expansion of world capitalism, but is the product of its decay. China’s economic growth will deepen class tensions around the world by intensifying the downward global pressure on wages and working conditions…

If you are part of the global super-elite, “intensifying the downward global pressure on wages and working conditions” doesn’t sound so bad. Paul Craig Roberts published an article summarizing his views on the so-called benefits to developed countries of off-shoring to low-cost countries like China (the article in its entirety with charts can be found here). Not surprisingly, all the benefits that the United States derives from offshoring go to the super-rich. But the economics profession is both intellectually and financially compelled to try to convince the rest of us that that type of globalization is a good thing:

Blind to the Consequences of Offshoring
Economists in Denial

By Paul Craig Roberts

February 19, 2007

At a Washington, D.C., press conference last November, Harvard University professor Michael Porter claimed that globalism was bringing benefits to Americans (Manufacturing & Technology News, Nov. 30, 2006). Porter was introducing the latest report, "Competitiveness Index: Where America Stands" of which he is a principal author, from the Council on Competitiveness.

I recognized a number of Porter's claims to be inconsistent with empirical data. After examining the report, I can confidently state that the report provides scant evidence that America is benefiting from globalism.

This is not to say that the statements in the report and the information in the numerous charts are untrue. It is to say that the data do not support the claim that America is benefiting from globalism.

…The greatest failure in the competitiveness report is the absence of mention of the labor arbitrage and its consequences when U.S. firms offshore their production for U.S. markets. This practice translates into direct job loss and direct tax base loss, and it transforms domestic output into imports. This is capital and technology chasing absolute advantage abroad. This cannot be considered trade based on resources finding their comparative advantage in the domestic economy.

It is this replacement of U.S. workforces by foreign workers that explains the extraordinary rise in CEO compensation and the flow of most of the income and wealth gains to the few people at the top. By offshoring their workforces, CEOs cut their costs and make or exceed their earnings forecasts, thus receiving bonuses that are many multiples of their salaries. Shareholders also benefit. When plants are closed and jobs are offshored, American employees lose their livelihoods, but managements and shareholders prosper. Offshoring is causing an extraordinary increase in American income inequality.

The report acknowledges that "for the first time in history, emerging economies, such as China, are loaning enormous amounts of money to the world's richest country." Historically, it was rich countries that lent to underdeveloped countries. The truth of the matter is that China's loans to the United States are a form of forced lending. China is flooded with dollars from America's dependency on imports of Chinese manufactures and advanced technology products. There is nothing that China can do with the dollars except to purchase existing U.S. equity assets or lend the dollars back to the United States by purchasing Treasury debt. With China's currency pegged to the dollar, China cannot dump the dollars into foreign exchange markets without initiating a run on the dollar and complaints that China is increasing its competitive advantage over the rest of the world.

When I was Assistant Secretary of the U.S. Treasury in the early 1980s, U.S. foreign assets exceeded foreign-owned assets in the United States. By 2005 this had changed dramatically, with foreigners owning $2.7 trillion more of the U.S. than the U.S. owns abroad. For the first time since the United States was a developing country 90 years ago, the country is paying more to foreign creditors than it is receiving from its investments abroad.

The report downplays the extraordinary trade and current account deficits on the grounds that "foreign affiliate sales" do not count against the trade deficit and "intra-firm trade" is a significant proportion of the trade deficit and "is due to trade within American companies."

This argument shows that the report is written from the standpoint of what is good for global firms, not what is good for America.

It made some sense when General Motors claimed that what is good for General Motors is good for America, because when the claim was made General Motors produced in America with American labor. It makes no sense to make this claim today when what is good for a company is achieved at the expense of the American work force.

… A country whose workforce is employed in domestic non-tradable services is a Third World country with nothing to export. How will the United States pay for its heavy dependence on imports of manufactured goods and energy?

As long as the dollar retains its reserve currency role, Americans can continue to hand over paper for real goods and services. But how long can the United States retain the reserve currency role when its economy does not make things to export; when its work force is employed in domestic services; and when its foreign creditors own its assets?

… For developed economies, offshoring is a reversal of the development process. As offshoring progresses, the domestic economy will become less developed and have less demand for university education.

… In the July 2006 issue of CounterPunch, I wrote that jobs offshoring was the new form of class warfare and that it was bringing political instability and social strife to the United States. There is nothing in the Council on Competitiveness' latest report to cause me to alter my view.

So it seems that even if one faction of the U.S. imperial elite can prevent an attack on Iran, U.S. citizens will still fall into third world poverty and economic subordination. On that, the elite seem to be united. There are so many ways this could happen that the process appears over-determined. Offshoring of jobs, massive debt followed by bankruptcies, defaults and foreclosures, and, as the example of Katrina showed, “natural” disasters. Last week we discussed how large scale bird flu outbreaks could, by people working from home overloading the system, lead to a collapse of the internet. The internet would, in effect, be taken over by the authorities and access limited to economically critical a activity, according to an article in Computerworld. This week, the Associated Press reported on the effects such a pandemic would have on the food distribution system in the U.S.

Grocery industry prepares for bird flu

By Timberly Ross, Associated Press Writer
Mon Feb 19, 12:07 AM ET

Stocking up on food is as simple as a trip to the grocery store, a veritable land of plenty for Americans. But will fresh fruits and vegetables, meat, bread, milk and other household staples still be available if the U.S. is hit with an anticipated bird flu pandemic? If state and federal officials urge people to stay away from public places, like restaurants and fast-food establishments, will they be able to get the groceries they need to prepare food in their homes?

For Becky Jones of Omaha, who stocks up once a week for her family of three, the prospect of not having access to food is frightening. She said most people, herself included, only have food on hand for three or four days.

Unlike other critical infrastructure sectors like water, energy and health care, the food industry isn't getting much help from state and federal governments when it comes to disaster planning. That puts the burden on individual supermarket chains and wholesalers to deal with a potentially large number of sick workers that could affect store operations and disrupt the food supply.

"The industry is actively thinking through contingency plans, so if it should happen, our members would be well prepared to deal with it," said Tim Hammonds, president of the Food Marketing Institute, an advocate for grocery wholesalers and retail supermarkets nationwide.

The U.S. Department of Health and Human Services estimates a third of the population could fall ill if the H5N1 strain of the bird flu mutates into a form that spreads easily from person to person. It's not clear if that will ever happen and no human cases of bird flu have ever been traced to eating properly cooked poultry or eggs.

But if a pandemic emerges, the Department of Homeland Security projects worker absenteeism to reach 40 percent or more over a prolonged period. Hammonds said retail food stores would have to contend with worker shortages and disruptions in the supply chain.

The food and agriculture industry is listed among 13 critical-infrastructure sectors that the Department of Homeland Security says must remain functional during a pandemic.

"Having those critical facilities open — like power, water, food — becomes very important" during a national disaster such as a pandemic, said Keith Hanson, an outreach coordinator for Nebraska's Center for Biopreparedness Education.

Hanson works with local businesses, helping test their preparedness plans. He will speak about the importance of that testing at the Public Health Preparedness Summit in Washington, an annual conference designed to help public health workers prepare for emergencies. This year's meeting started Friday and ends Feb. 23.

Hanson said continued operations of power and water utilities are of the utmost importance, but grocery stores rank highly too. That's because people today keep less food on hand, opting instead to make weekly trips to the grocery store.

Americans are also dining out more than they have in the past. Money spent on food prepared outside the home rose from 34 percent of total food costs in 1974 to about 50 percent in 2004, according to a report by the U.S. Department of Agriculture.

The Food Marketing Institute's Hammonds said a widespread pandemic will likely cause food consumption to shift away from restaurants and fast-food establishments and toward in-home eating, causing a greater demand for groceries.

"That means stores would need to be prepared for an increase in volume," he said.

Hy-Vee, a West Des Moines, Iowa-based supermarket chain that operates more than 200 stores in the Midwest, does not have a disaster plan developed in the event of avian flu. But company spokeswoman Chris Friesleben said the company keeps abreast of the illness through the Food Marketing Institute.

"The food supply is essential to the well-being of the community," said Hammonds. "We've been through a lot about what we need to do as a supermarket."

That includes urging wholesalers and retailers to talk with their suppliers about alternative sources for their products and to anticipate what products will be in high demand in a pandemic situation, such as medicines and food staples.

Stephanie Childs, a spokeswoman for Omaha-based ConAgra Foods Inc., said a company task force was formed more than a year ago to develop an operating plan in the event of a national disaster. The plan specifically addresses bird flu, examines areas that could be affected and how the company could respond, she said.

ConAgra is one of the nation's largest food companies, with brand names that include ACT II popcorn, Banquet, Chef Boyardee, Marie Callender's, Egg Beaters and Orville Redenbacher's.

The company employs about 27,000 people, but Homeland Security projections indicate that number could fall to 16,200 during a pandemic.

Childs said such worker shortages and difficulties with suppliers getting their products to ConAgra plants were among the potential problems the company identified. She did not disclose how the company would address those issues.

The federal government and public health agencies are urging people to stock up on nonperishable food, like canned goods and dried fruit, to ensure they have to food to eat during a pandemic.

Jones, the Omaha woman, said that's a proactive approach, but was worried that people with limited incomes may not be able to afford a large stockpile of food.

She stopped short of calling for the government to oversee the food industry's pandemic planning, but said, "If they see a crisis that is on the horizon, they do have to give us some type of warning."

It certainly feels like we are being prepared for something big coming down the pike. Not only that, but we are also being prepared to get no help at all from government or the lords of capitalism. More than a year after Katrina, the full depth of the abandonment of the citizens of New Orleans and the gulf coast is becoming clear. The insurance companies have paid only a fraction of what they were contractually bound to pay. I once sat next to a couple of claims adjustors returning from New Orleans a few months after the hurricane and one of them told me what he most liked about his job was helping people get back on their feet. It seemed just like the advertisements for the insurance agencies. He described the devastation and I asked him how the insurance companies could absorb such massive exposure and he replied, “Easy. We deny claims.” What a disconnect! The following excerpts from a transcript of the Open Source radio show on the topic show how that has worked out:

‘My wife called my insurance company . . . and they said, “Oh no, this isn’t covered, at all! You don’t get anything!” Now, I went to law school, so I said, “let’s talk to her supervisor.” But think of all the people in New Orleans, all the working class folks who maybe just took that and said, “Oh, I just don’t have a claim.” . . . The rationale was, “it’s just a flood story. It’s a flood story, so we don’t have to pay, we’re the wind carrier.” And actually, our roof was blown off. And they knew this, and they just tried to drive people away.’ -- Allen Kanner

‘It was like being in a place where a neutron bomb had been activated, or some kind of a science fiction movie. Nobody around, incredibly silent, no colors, everything was in sepia tones, and no birds – it was just really creepy. We called Allstate every day, and we waited and waited and waited, and we kept being told that clearly the wind made our house lean, but they needed a report from the engineers. So finally, in February, two individuals from a group called Haag Engineering visited our house, and they left after fifteen minutes without asking us any questions. They just told us that they didn’t need our input. Finally, at about eight months after our house was damaged, I received a letter in the mail, a letter from Allstate, claiming that they were going to deny our claim because of the report from Haag Engineering, which said, among other things, that it wasn’t windy enough during Katrina to make a house lean.’ – Michael Homan

‘About a month ago we filed a complaint against Allstate with the Insurance Commissioner in Louisiana….They get fools like me to pay them money every month for several years thinking I am insuring my house against wind and flood damage, and then after the largest natural disaster in this nation’s history, they don’t pay us. Instead, they pay some hack engineers to say it wasn’t windy enough during Katrina to make a house lean. And when it goes to court, Allstate will be able to claim they were simply relying on the opinion of “experts” and won’t be directly liable. And now Allstate has threatened to pull out of Louisiana if they are not able to drop coverage for 30,000 homeowners who they feel are too much risk. That would leave 220,000 homes without insurance. I had hoped that Katrina would have woken us up, and we would finally realize that our society needs more of a measure than just profit alone.’-- Michael Homan