Signs of the Economic Apocalypse, 8-18-08

From SOTT.net:

Gold closed at 791.70 dollars an ounce Friday, down 9.2% from $864.80 for the week. The dollar closed at 0.6813 euros Friday, up 1.8% from 0.6691 at the close of the previous week. That put the euro at 1.4677 dollars compared to 1.4944 the week before. Gold in euros would be 539.42 euros an ounce, down 7.3% from 578.69 at the close of the previous week. Oil closed at 113.71 dollars a barrel Friday, down 1.3% from $115.20 at the close of the Friday before. Oil in euros would be 77.47 euros a barrel, up 0.5% from 77.09 for the week. The gold/oil ratio closed at 6.96 Friday, down 7.9% from 7.51 at the end of the week before. In U.S. stocks, the Dow Jones Industrial Average closed at 11,659.90 Friday, down 0.6% from 11,734.32 at the close of the previous Friday. The NASDAQ closed at 2,452.52, up 1.6% from 2,414.10 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.84%, down nine basis points from 3.93 for the week.

The fall of gold accelerated last week with gold falling 9% against the dollar last week and 16% over the past two week. Commodities in general have been falling. We seem to be seeing the bursting of the commodities bubble due to the view that the world economy has not yet “decoupled” from the United States.

Gold, Oil Slump, Leading Commodities Plunge to Four-Month Low

Feiwen Rong and Chanyaporn Chanjaroen

Aug. 15 (Bloomberg) -- Gold plunged below $800 an ounce, heading for the biggest weekly slide in more than 25 years, and oil, wheat and sugar slumped as the dollar's rebound reduced the appeal of commodities after a six-year boom.

The Reuters/Jefferies CRB Index of 19 commodities tumbled as much as 2.7 percent to 379.07, the lowest since March 20, as silver, soybeans and corn lead the drop. A rally this month in the U.S. currency has curbed the appeal of dollar-priced raw materials as a hedge against inflation, and demand for commodities may be hurt as an economic slowdown spreads.

Commodities, measured by the CRB, are down 20 percent from a record July 3, descending into a bear market. Declining raw- materials prices may help ease global inflationary pressures after consumer prices in the U.S. accelerated 5.6 percent during the year to July, the biggest jump in 17 years.

“There will be a precipitous slowdown in global growth and that means a lot less demand for things like energy and base metals,” said Michael Pento, a senior market strategist at Delta Global Advisors in Huntington Beach, California. “It would be insane to step in and buy oil or metals now. These markets will be vulnerable for the next four of five months.”

Sixteen of 19 commodities in the CRB declined this month, after the index plunged 10 percent in July, the biggest such drop in 28 years. Only wheat, cattle and nickel are up in August.

Commodity Peak

“Prices have made a peak,” said Marc Faber, who forecast in June that commodities would start to fall. “Whether that is a final peak or an intermediate peak followed by higher prices, we don't know yet. It could go lower,” he said by telephone today from Chiang Mai, Thailand.

Gold futures fell as much as 4.5 percent to $777.70 an ounce, the lowest since Nov. 20 on the Comex division of the New York Mercantile Exchange. Gold fetched $788.60 at 12:56 p.m. A close at that price would leave the precious metal down 8.8 percent, the biggest weekly decline since February 1983.

Silver lost as much as 14 percent, dropping to the lowest price since Sept. 5.
“There's a perception that demand for commodities might be weakening,” David Jollie, editor of Johnson Matthey Plc's publication on platinum-group metals, said today by telephone from Royston, England. “North America and Western Europe are struggling, but the emerging economies remain strong.”

Gasoline Demand

Crude oil for September delivery dropped as much as $3.67, or 3.2 percent, to $111.34 a barrel on the Nymex, and traded at $111.86 at 12:59 p.m. Gasoline demand was down 2.1 percent in the first seven months of the year as record prices and slower economic growth cut consumer spending, the American Petroleum Institute said Aug. 13.

Europe's economy contracted in the second quarter for the first time since the introduction of the euro almost a decade ago, a report showed yesterday. According to a UBS AG report published Aug. 6, the world is “precariously close” to a recession in 2009.

“It's not just a U.S. problem, it's a global problem, and it's taking its toll on commodities,” said Peter Luxton, an energy analyst at Informa Global Markets. “What's happening elsewhere is starting to take its toll.”

U.S. Output

There are signs of a pickup in the U.S., the world's largest economy. Industrial production unexpectedly rose in July, helped by gains in automobiles, metals and machinery, the Federal Reserve reported today.

Demand for autos increased for a third month, reflecting a continued rebound from a strike at an auto-parts supplier. Gains elsewhere signal demand from overseas continued to boost orders even as U.S. consumer and business spending weaken.

Crude oil will probably fall below $100 within weeks, nearing the $90 threshold that would trigger a production cut by the Organization of Petroleum Exporting Countries, according to Alfa Bank. OPEC, the supplier of more than 40 percent of the world's oil, is scheduled to meet in Vienna on Sept. 9 to review production targets.

“OPEC will likely defend $90 a barrel or higher,” Alfa analysts led by Ronald Smith in Moscow wrote in an e-mailed report today. “OPEC will remain firmly in control of the oil market for at least the next decade.”

Investment Flows

Assets linked to commodity indexes have almost quadrupled to $297 billion as of June, from about $76.7 billion in January 2006, according to an estimate by Lehman Brothers Holdings Inc. Some investors buy commodities as a hedge against inflation and against declines in the dollar. The CRB index jumped to a record last month as the U.S. currency slumped to an all-time low against the euro.

A “buying orgy” in commodities was inflating prices and increasing the risk of a collapse, Paul Touradji, founder of Touradji Capital Management LLC, said in March.

Gold may rebound from the latest slump and rally through 2010 as fabrication demand rises and on expectations that the dollar will resume its slide against the euro, Citigroup Inc. said. It forecasts an average price of $950 next year and $1,000 in 2010.

“Longer term, we would not be surprised to see gold double,” the bank's analysts John Hill and Graham Wark wrote in a report. “We would be aggressive buyers at current levels expecting gold to work higher through 2009/10.”

It is interesting that Citigroup sees a stong rise in the price of gold in the future despite the sharp drop in recent weeks. George Ure agrees and explains the paradox by referencing hedge funds:

The Great De-Levering, Redux

As I explained on Tuesday, my friend who has written a book has explained in great detail how something called "The Great De-Levering" is taking hold in the world, so as you look at the price of gold which has crashed well under $800 an ounce this morning, it's neither a time for fear, or a time for panic. What's missed by the conspiracy minded is that there has been a tremendous build-up of excess financial leverage in the global economic system and it's in the process of all coming unraveled.

In the detailed explanation this week, the plot line simplifies to this:

· There are 9,000 hedge funds. Virtually all of them are over-leveraged to one extent, or another. They control something on the order of $500-trillion in synthetics, but some of that is double and quadruple-counted, so let's say only $250-trillion.
· So all it takes is one hugely run up asset class to suffer a short-term decline and two things happen:

o Those with over levered positions are forced out immediately.
o Those who try and hang onto positions find their balance sheets have been devalued. What might have been a $50 million position with gold at $1,000 an ounce today is down to a shade over $39-million.

· When the decline is asset values hits the top line of a hedge fund, their can quickly go from hugely profitable to horrible losses.
· These loses then trigger additional selling of assets in an attempt to stem the bleeding on the P&L
· Which then drives down other asset classes....and so forth.

As a result, with The Great De-Levering underway, if my serious money-managing friend is right, we should see the propagation of losses across almost all asset classes. Let's check the headlines and see how things are going as the week winds up, shall we?

· Gold falls more than 3 percent overnight. No surprise there.
· Silver, part of the same asset class dropped even more, down to $12.95 an ounce (update quotes at top of page).
· Oil is another asset class that could be expected to drop. Sure enough, we now read that "Oil seen dropping under $90 by Year End" in a headline. The headline in this morning's WSJ online report "Oil Falls on Economic Worries" while accurate, doesn't mention that the real driver is the Texas Hold-em Poker game being played as the 9,000 hedge funds play masters of the universe and try to hang on to be one of what my friend thinks will be only 3,000, or so, left by the end of the game.
· Headlineslike "Oil falls below $114 on slowing economies" only gets to part of the answer. Yes, a global recession/depression is bad, but remember energy is an asset class that's de-leveraging, too.
· Homes? Because of the mess in home financing, the sales of homes has fallen to a 10-year low. Well, oh duh. What were you expecting? This is a global (as in circularly referenced) economy. A sneeze here is a sinus headache there, and first thing you know, heart attacks are propagating. So much so that Mr., Bulbblator, former Fed Deity Alan Greenspan is saying now maybe the housing market won't bottom until next year. Now who woulda thought?

To be sure, there are a few asset classes which have done better than others. Wheat's outlook is mixed, so it has been in a rally for a few days, but it's not so much that wheat demand is up (it is) or that the world is running out of food (it is)( or that topsoil is disappearing (it is) and that Prince Charles is right about genetically modified foods posing a planetary health risk (they are).

Nope, the reason that grain has been in a short counter-trend rally here is what? The ultra-lemming behavior of the fund managers who play the game of financial pile-on even more tightly regimented that mindless 401(k) retail "investors".

…A colleague of mine called from Chicago yesterday to ask a simple enough question:

"George, we see the worst inflation numbers in 17-years, food is running on empty, there's a threat of global war which could go global, and all these other pressures -- so why isn't the price of gold going through the roof and making us rich?"

I then patiently explained that we live in a country which has been hijacked by a bad craps game involving hedge funds. Just for example, the big money boyz want Hillary so badly that she's now weaseled a her way into a nomination slot. Big money is throwing all kinds of dough her way because she'll socialize more losses and privatize more gains. What part of the picture is not clear? America has been hijacked by high rollers. How many times did Americans have to say "No Hillary!" and still we're being over-ruled by the hand-outs from the Fat Cats. What isn't clear?

The Fat Cats are also angling to get another War going as soon as they can because that will help their version of "the economy" by boosting defense spending. Which is why Condi Rice and a large naval armada are talking peace but really angling for regional conquest along Russia's southern border. Meantime, the Polish "defense shield" deal has been signed.

This puts a US/Western missile program about 300-miles from the Russian border and right next door to Belarus. How would you feel if the Russians angled to put a missile project in Edmonton, Alberta? That's how close we're talking. So no wonder Russia is pissed.
--
In this morning's email I received this:

"I’m a journalist for a Belgian business magazine. I read your comments on your discussion with your friend in the hedge fund business who is about to write a book

At one moment you say ‘Before Thanksgiving I might take a position long gold/commodities in the light of the discussion… because some serious money could enter this trade’ or something like that.

Before that the whole discussion was about the deleveraging of the hedge fund business acting in lock step (black boxes).

My question is, why wouldn’t the opposite happen ? May be they have too much leveraged positions in gold/commodities.

Can I quote you on the answer ?"

'K, point by point: My friends book is done - ready for print - he's just looking for an agent because he's too busy managing a fund with more zeros than I can count to mess with publishing it himself.

I guess my 'quotable answer" would be this: "Markets always go to extremes. At some point, the price of gold and silver will likely be oversold. The world is also a very dangerous place and we have the potential in Ossetia, Kashmir, and Bushir for direct conflict involving nuclear weapons. I expect one of these two thresholds will be passed before year's end, perhaps before November 1st. A flight to safety from war, or just the mechanics of being oversold might be playable, so I may try.

Once there, because hedge funds are so lemming-like, I a major short-term move up in the metals and that's when I might be in one last leveraged move which would precede a move to government bonds held directly because the middlemen (banks) have become shaky and untrustworthy as I read it. Having a 'split portfolio' of part gold/silver balanced against cash/government bonds held directly, seems to me a reasonable way for a small investor to cover both the possibility of hyperinflation on the one hand and massive deflation on the other.

The game is not about making a killing. It's about not getting killed.

We might add that it is not a game.

No doubt the easing of commodity inflation and the increase in industrial production in the U.S. is good news. The problem is that the root cause of the recent distress, the collapse of the housing market, shows no sign of letting up.

Bank seizures of US homes reach record high

Andre Damon

16 August 2008

Banks repossessed almost three times as many American homes last month as in July of 2007, while foreclosures jumped 55 percent over the same period, according to a report issued Thursday by RealtyTrac, a California-based seller of foreclosure data.

More than 272,000 properties, or one for every 464 US households, were in “some stage of foreclosure” last month, according to the report. The number of foreclosures in July jumped 8 percent to 272,171 from June, slightly lower than the record 273,001 foreclosures in May.

Even these staggering figures represent an “artificial depression” in foreclosures, Rick Sharga, a RealtyTrac vice president, told Bloomberg News, due to the fact that a number of states—including New York and California—implemented foreclosure moratoriums last month. Most of the affected properties will go into foreclosure in later months, Sharga said.

Bank repossessions grew significantly as a percentage of all foreclosure activity, “posting a 184 percent year-over-year increase, compared to a 53 percent year-over-year increase in default notices and an 11 percent year-over-year increase in auction notices,” according to James J. Saccacio, CEO of RealtyTrac.

When foreclosed properties fail to sell at county auctions, they are repossessed by banks pending their sale. Bank repossessions constituted only 16 percent of foreclosure activity a year ago, but they now make up some 28 percent, according to the report. While banks owned 224,000 foreclosed properties in 2006 and 445,000 in 2007, they owned 775,244 through July of this year.

The sheer mass of foreclosed homes is depressing real estate markets and steeply driving down prices, leading to more foreclosures. Foreclosed properties now represent approximately 17 percent of the inventory of existing homes for sale, according to the RealtyTrac report.

US Treasury Secretary Henry Paulson said two months ago that 1.5 million foreclosures started in 2007, and that as many as 2.5 million could begin in 2008. But, by all indications, even these figures constitute only a fraction of the homes yet to be foreclosed.

Some 6.5 million US properties are set to fall into foreclosure by the end of 2012, according to a report circulated last April by Credit Suisse. Some 12.7 percent of mortgage borrowers, or 8.4 percent of all US homeowners, stand to lose their properties in the next five years, according to the report.

Credit Suisse expects that housing prices will fall by ten percent in 2008 and five percent in 2009, precipitating what it refers to as “a wave of foreclosures.” It further predicts that some 63 percent of subprime borrowers will have negative equity by 2009, compared to only about 30 percent last year.

Nearly one third of Americans who bought homes since 2003 have negative equity—that is, they owe more on their homes than their current value—according to Zillow.com, a property valuation company. Zillow also found that 45 percent of those who bought at the peak of the housing market in 2006 are under water.

Home values have fallen 15.8 percent in the year to May, according to the S&P Case-Schiller index, which tracks home values in 20 major cities. Moreover, nearly one quarter of home sales in the past year were at a loss to the sellers. Such circumstances raise the incentives to foreclose, driving property values lower and precipitating a downward economic spiral.

Zillow also found staggering negative equity rates in cities most affected by the housing downturn. Four cities in California—Stockton, Modesto, Merced, and Vallejo-Fairfield—had more than 90 percent of homeowners underwater. Five more cities had negative equity percentages of more than 80 percent. Half of the sales in Stockton and Modesto were foreclosed properties, compared to 15 percent nationwide.

Figures released this week by the National Association of Realtors are similarly bleak. The association found that existing home sales fell to their lowest levels since 1998, falling six percent in the past year alone. The report also notes that the median price among single-family homes fell by almost eight percent in the past year, from $223,500 to $206,500.

California cities were among the worst hit. Home values in Sacramento, the state’s capital, fell by 36 percent in the past year, while those in Riverside/San Bernadino fell by 32.7 percent and in Los Angeles fell 30 percent.

These cities, consequently, had among the highest foreclosure rates, with more than one in every 90 homes in some stage of foreclosure during the month. All in all, one in every 182 California homeowners received a foreclosure notice in July.

Cape Coral-Fort Meyers, Florida had the highest metro foreclosure rate in the country, with one in every 64 households receiving a foreclosure filing in last month.

In addition to fueling a massive social crisis, the vicious cycle of falling home values and foreclosures will drag down economic growth and fuel unemployment, as the US ruling class seeks to purge the excesses out of its financial system by writing down billions of dollars in bad debt.

While throwing open the Federal Reserve Board and the US Treasury to Wall Street speculators, the government has done next to nothing to assist the millions of people having their lives uprooted. The housing bill recently passed by Congress assists at most 400,000 homeowners, representing only six percent of the 6.5 million people estimated to fall into foreclosure by 2012.

The time for payment of debts due and the restoration of stolen property has come.

The Fire This Time. The Republicans and the Economy

David Michael Green

August 9 / 10, 2008

Any American who’s been on the planet for more than a few years has lived through a series of economic ups and downs – what economists call the business cycle. These booms and busts seem to follow one another as inevitably as sunset does sunrise.

Phil Gramm hasn’t apparently noticed, but we’re now pretty deep into an economic downturn – whether or not it officially qualifies as a recession yet or is simply on the way to becoming one.

But two things are especially striking about this particular iteration of our economic malaise. One is that we never quite seem to have had the boom we were supposed to get in between this bust and the last one. Gross domestic product, the key single indicator of economic health used to measure the state of the economy, has done reasonably well since the downturn that began in 2000. So has the stock market, and so, especially, have the one percent or so of the richest Americans, who have lately transitioned from being ridiculously rich to obscenely rich.

Most of the rest of us, on the other hand, may be excused for wondering when the good times hit, ‘cause we somehow missed it. It’s funny (hah-hah, right?), but in the go-go late 1990s, some economists were wondering whether Alan “The Second Coming” Greenspan and Robert “Token Wall Street Pseudo-Democrat” Rubin hadn’t actually killed the business cycle forever, with only good times to come for generations on end. Ironically, the subsequent decade may be considered to have posed the same question, only with a very different meaning. Given the absence of any serious recovery content in the latest alleged recovery, maybe the business cycle is dead – only not with permanent boom, but permanent bust, instead.

In truth, though, we may come to look upon years like 2004 or 2005 as the good ol’ days. That’s because the second unique thing about the present downturn is the depth of down to which we may now be turning. I’m sure somebody was relieved when George Bush recently informed the country that the economic fundamentals are solid, but it sure wasn’t me. Hard as it is to imagine that this president could get something wrong or speak, uh, somewhat less than candidly, my fear is that conditions are quite the opposite of those the cheerleader-in-chief portrayed. I remember well the recessions of the 1970s, 1980s and 1990s. This one doesn’t feel anything like those. It seems a lot bigger. My fear is that the bottom may be falling out. My fear is that it’s the fire this time.

I’m not an economist (not that economists so very often know what the hell they’re talking about either), so I will readily admit that I don’t have a lot of expertise on this question. But I will say one thing with confidence, however, even as a economics dilettante (in political science we call those people ‘angry voters’). And that is that there are incredible signs of economic thin ice almost anywhere you turn today. The national debt has never been higher. Consumer debt has never been higher. Savings have never been lower. The trade deficit has never been higher. The dollar is spectacularly weak. Foreclosures are mushrooming. Quality jobs are disappearing in droves. People are working longer to maintain the same standard of living, or often less. Employers are economizing, among other ways, by cutting healthcare benefits. Real estate values are plummeting. Sure, it’s a great time to be a bankruptcy lawyer or a repo man, but probably most of us would agree that keeping people in those two fields well employed isn’t worth the trade-off of having an economy in the toilet.

…There’s no question that America has historically been an industrious, innovative and hard-working country. We still are today, though the hard-working part has gotten simultaneously more hard, less rewarding, and less driven by desire for advancement than need for survival. Perhaps the paradigmatic moment of our time was Clueless George on the campaign trail in 2004, gushing over a woman he met who said she worked three jobs to keep afloat. For Bush, it was an ‘only in America’ moment – completely oblivious, as he seemed to be, that this represents almost nobody’s vision of the good life. Well, almost nobody. One imagines that Dick Cheney was smiling in the wings of that event, thinking to himself: “Once we get all of them doing that, our work here will be done!”. Nowadays, no industrialized country in the world has workers who put in more hours per year than the US. None has such a glaring absence of economic support programs as America does, either.

But we’ve worked hard here, historically, like the good Protestants we are, and we’ve been technologically innovative and admirably determined in achieving our far-reaching aspirations. That’s all good stuff, but just the same, though, there’s been an undeniable dark side to the phenomenal success of the American economy. We’ve worked hard to produce a lot, true, but we’ve also – in a word – stolen a lot as well.

We stole from indentured servants from the beginning. We stole from Native Americans within minutes of landing here, and never stopped until we’d grabbed all the land and resources we wanted, leaving them casinos and poverty in return. We harnessed yokes around Africans and imported them as if they were agricultural beasts of burden, and continued to do so for centuries. We built our economic accomplishments on the backs of near-slave immigrant laborers, from Chinese coolies to Mexican wetbacks, along with Irish, Italian, German, Jewish and a whole lot of other nationalities in-between. We stole fully half of Mexico following a trumped-up war no less bogus than the current one in Iraq, then we did the same for Hawaii, Cuba, the Philippines and more. We broke the backs of labor movements in order to enrich a few owners while grinding ‘human resources’ into impoverishment and early death. We exploited the entire continent-and-a-half of Latin America, installing local dictators in country after country who got personally wealthy by doing the oppressive and murderous dirty work for American resource extraction corporations. We assigned to women endless domestic chores without the slightest compensation, nor political power, nor even ownership of family wealth.

These are the obvious thefts – and there is no more accurate word for it – by which we’ve massively enhanced our wealth over a period of centuries. But there are less obvious ones as well. We have raped the environment for precisely the same purposes. You can get a lot wealthier a lot faster by not concerning yourself (or even paying compensation for) the environmental destruction caused by manufacturing, mining, drilling and more, than you would by having to be responsible for those very real costs of your enterprise. Economists like to gently refer to such factors as ‘externalities’. That’s a polite way to describe a process by which the rich get even richer through offloading the costs of their business to you and me, and keeping the profits for themselves.

Not content with any of that, however, we’ve also lately been engaged in other, new and improved, more subtle forms of national wealth theft. Rampant consumerism based on little plastic cards is quite effective, leaving costs to others, like our children. So is – as exhausted consumerism now heads for the ditch – turning our houses into piggy banks to keep an economy artificially afloat, until that can no longer be sustained either. Or running incredible trade deficits, or radically deflating the value of our currency to keep sales of American goods abroad halfway viable. Another nice trick you can do is run up the national debt and leave that to your kids as well. You can also ignore your infrastructural repair and development needs so people can party on now, instead of paying the taxes necessary to keep the economy strong for the next generation. Talk about eating your young. One of the best of all these games over last decades has been the uninhibited agenda of economic globalization which has now managed to successfully export American white collar jobs to India, right behind the blue collar ones that previously went to China. That was supposed to make us all richer, remember? Some people indeed are. Those without jobs, or working for half what they used to make, aren’t in that small group however.

What all of these ploys have in common is that they are all methods allowing one to live larger than we’re rightfully entitled to. Slavery is the most obvious example. You wanna live the good life? The most basic formula ain’t that hard to figure out. Kidnap some dude from a less technologically developed part of the world, terrorize him with overwhelming force and psychological violence to go along with the real kind, then watch as he plows your field while you sit on the porch sipping Mint Juleps. Then, repeat. This is the most obvious example, yes, but really no different in principle from ripping off your own kids with tax ‘cuts’ unaccompanied by spending cuts, which drive up the national debt and hand the next generation the bill. Plus interest. Or stealing in the form of externalizing costs for remediating environmental destruction while the eco-evildoers go off scot-free with grossly inflated profits (indeed, in some cases, these would be non-existent profits, were the real costs to have been factored in). And so on, and so on.

…But the bigger point is simply this. Americans historically did well by working hard, educating themselves and bringing clever innovation to the table. But for just as long they got really rich by stealing the extra wealth, whether from someone else’s labor, from their neighbors, from the environment in which we live, or from the future.

What if there are no more piggy banks from which to steal? What happens if the US economy has finally hit the wall of remorseless reality, and can only produce what it can honestly produce? What happens to the American economy and American standards of living if all the gimmicks have been exhausted?

The fire this time?

Signs of the Economic Apocalypse, 5-19-08

From SOTT.net:

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

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

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

US workers paying the price for Wall Street’s debacle

Barry Grey
16 May 2008

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Consumers' mood as grim as early-80s

Burton Frierson

May 16, 2008

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

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

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

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

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

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

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

GRIM MOOD

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Does this mean big government?

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

Wouldn't that be very expensive?

Horribly expensive.

How would you pay for it?

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

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

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

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

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

Government is the problem?

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

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

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

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

Signs of the Economic Apocalypse, 5-5-08

From SOTT.net:

Gold closed at 858.00 dollars an ounce Friday, down 3.7% from $889.70 for the week. The dollar closed at 0.6480 euros Friday, up 1.3% from 0.6398 at the close of the previous Friday. That put the euro at 1.5432 dollars compared to 1.5630 the week before. Gold in euros would be 555.99 euros an ounce, down 2.4% from 569.23 at the close of the previous week. Oil closed at 116.32 dollars a barrel Friday, down 1.9% from $118.52 for the week. Oil in euros would be 75.38 euros a barrel, down 0.6% from 75.83 at the close of the Friday before. The gold/oil ratio closed at 7.38 down 1.8% from 7.51 for the week. In U.S. stocks the Dow Jones Industrial Average closed at 13,058.20 Friday, up 1.3% from 12,891.86 at the close of the previous Friday. The NASDAQ closed at 2,476.99 Friday, up 2.2% from 2,422.93 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.86% Friday, down one basis point from 3.87 for the week.

Gold is almost in a free-fall and I don’t know quite what to make of it. Do traders think the worst is past? How could they, given the signs of Israel ordering its client state, the U.S., to attack Iran? Whatever the reason, gold has dropped more than 16% from its peak, further than the 10% that defines a mere correction. What may be happening is that the commodity boom has made other commodities more attractive than gold. Gold is unique in that it is both a commodity and a currency. Gold is good for a flight to safety, but markets have been up lately and some complacency is setting in.

In the U.S., stocks are up, jobs are down, prices are rising. What we are seeing is a further decoupling of general well-being from corporate well-being. That shouldn’t come as a surprise, since profits can only be made to the extent that people are exploited (paid less than the value of their labor). And when the U.S. Federal Reserve steps in, it does so to preserve the financial industry and corporate profits, thus encouraging stagflation, defined as the loss of jobs, low growth with high inflation. Usually inflation accompanies periods of high growth. Not in the 1970s and not now.

US payrolls shrank by 20,000 jobs in April
Net job less in 2008 at 260,000

Barry Grey

3 May 2008

The Labor Department reported Friday that the US economy lost a net total of 20,000 jobs in April, marking the fourth consecutive month of overall job losses. The employment report, combined with other data on economic growth, retail sales, consumer spending and wages, provides a picture of an economy sinking deeper into recession and a population in increasingly desperate financial straits.

While the net job loss reported by the Labor Department was lower than most economists’ predictions, it nevertheless confirms that the crisis ignited by the collapse in the housing and credit markets is dramatically impacting production, sales and consumption, and driving down working class living standards.

April’s job losses followed upwardly revised losses of 81,000 in March and 83,000 in February. Payrolls also fell by 76,000 jobs in January.

The payroll decline would have been far worse except for a spurt of new jobs in the generally low-paying service sector. Service industries added 90,000 jobs, the most since last December. Most of them came in the health care and professional technical services sectors.

Massive job losses continued in construction and manufacturing. A net total of 61,000 construction jobs were lost in April, the largest number for that sector since 103,000 were cut in February 2007. Since peaking in September 2006, some 457,000 construction jobs have been lost.

Goods-producing businesses cut 110,000 jobs, the largest number of job reductions since January 2002. This followed a loss of 88,000 jobs in this sector in March.

Factory payrolls slumped by 46,000 workers. Retail payrolls declined by 26,000, after falling 19,300 a month earlier.

The report confirmed that wage growth has slowed dramatically and is trailing behind inflation. Workers’ average hourly earnings rose in April by 1 cent, or 0.1 percent, the least since October. In a separate report issued on Wednesday, the Labor Department revealed that wages and benefits, adjusted for inflation, were down 0.6 percent in the first three months quarter of 2008 compared with a year earlier.

Employers are reducing work hours and overtime, further slashing take-home pay. The average work week declined to 33.7 hours from 33.8 hours. Average weekly hours worked by factory workers deceased to 40.9 from 41.2, while overtime fell to 3.9 hours from 4.0 hours. That brought average weekly earnings down by $1.45 to $602.56 last month.

The official unemployment rate for April declined marginally to 5 percent from 5.1 percent in March. However, this reduction was the result of an increase in part-time jobs. The number of workers with full-time jobs actually declined.

An alternative Labor Department measure of the unemployment rate, which includes people who have stopped looking for work and those working part-time because they can’t find full-time work, rose a tenth of a percentage point to 9.2 percent. Moreover, the number of people remaining on jobless rolls—called continuing claims—rose 74,000 to 3.02 million, the first time in four years the number has exceeded three million.

Since midweek, a number of major companies have announced plans for layoffs.

* General Motors on Wednesday said it was slashing production of full-sized trucks and SUVs, eliminating 3,550 jobs.

* Home Depot announced a major retrenchment on Thursday, saying it was halting plans to open about 50 new US stores and closing 15 existing stores over the next seven weeks. As many as 1,300 employees could lose their jobs.

* Sun Microsystems posted a net loss of $34 million for its third quarter and announced plans to cut up to 2,500 jobs.

* Health care giant Johnson & Johnson announced Wednesday it was eliminating 400 sales jobs in the US by the year’s end.

These job cuts are in addition to ongoing layoffs in the financial sector. Wall Street banks and securities firms have slashed 48,000 jobs in the past ten months.

A raft of other data released over the past several days indicates that the economic slowdown is accelerating and points to even bigger job losses in the coming weeks.

The Commerce Department reported on Wednesday that the US economy had grown by an anemic 0.6 percent in the first quarter of 2008. But even this marginal growth was due entirely to a rise in exports, resulting from the sharp decline in the value of the dollar, and a buildup of inventories.

Excluding inventories, US gross domestic product shrank at a 0.2 percent pace, the first contraction in more than 16 years. Excluding both inventories and exports, the economy contracted at a 0.4 percent rate, the first such decline since the end of 1991.

The underlying data on consumer spending, business investment and construction all showed a sharp contraction. “You’re seeing a sharp slowdown in domestic demand,” Michael T. Darda, chief economist at MKM Partners, told the Wall Street Journal.

The buildup of inventories portends a major pullback in the coming months. As the New York Times noted on May 1, “If business does not swiftly improve, allowing factories to sell the products they have piled up, firms are likely to lay off workers at a more aggressive clip.

“Even if business picks up and orders materialize, averting broader layoffs, factories will probably not need to produce as many new things in coming months, prompting some to trim working hours and purchases of materials.”

The Institute for Supply Management (ISM) issued a report this week showing a continuing slowdown in manufacturing. Its index of factory activity for April was 48.6, the same as the month before. A number below 50 indicates contraction. The index, based on a survey of purchasing managers, showed a retrenchment in new orders and production, as well as a rise in prices paid to suppliers.

The impact of soaring food and gasoline prices on consumer demand has hit the auto industry particularly hard. Industry figures released Thursday showed that autos sold at a lower-than-forecast rate of 14.4 million units per year in April, the slowest since 1998. GM officials estimated that the industry’s seasonally adjusted annual selling rate in April was at its lowest since 1992.

A Commerce Department report released Thursday showed an accelerating decline in consumer spending, which accounts for more than two-thirds of GDP in the US. Consumer spending grew by only 0.1 percent in March, when adjusted for inflation, after remaining flat in February.

Sales of big-ticket items declined in March. In the first quarter, sales of those goods plummeted 6.1 percent.

“What you’ve got here is a very dramatic consumer slowdown,” said Ian Shepherdson, chief United States economist at High Frequency Economics. “It’s much more severe than anything we saw in 2001,” he added, referring to the last recession.

Slumping consumer spending is wreaking havoc among major retail firms, sparking a wave of bankruptcy filings, store closings and the cancellation of expansion plans. Besides Home Depot’s announcement of store closings and layoffs, homes goods retailer Linens ‘n Things on Friday said it had filed for Chapter 11 bankruptcy protection and disclosed plans to close 120 stores. The company employs 17,500 people.

This followed bankruptcy filing announcements by Sharper Image and Lillian Vernon in February.

Foot Locker plans to close 140 stores over the next year, Ann Taylor will close 117, and the jeweler Zales will close 100. Women’s clothing retailer Charming Shoppes, which owns Lane Bryant and Fashion Bug, is closing at least 150 stores. Wilsons the Leather Experts will close 158. Pacific Sunwear is shutting a 153-store chain called Demo. Starbucks will close 100 stores.

JC Penney recently announced it will open 36 stores this year, down from the 50 initially planned. Lowe’s said it was delaying the opening of 20 stores this year, mostly in California and Florida.

The International Council of Shopping Centers predicts 5,770 store closings in 2008, up 25 percent from 2007.

The store closings and delayed openings will have a ripple effect throughout the economy, depressing sales tax revenues and eliminating work for commercial construction firms.

While the deepening slump is having a devastating impact on working class families, Wall Street is celebrating a major stock market rally. The Dow Jones Industrial Average closed Friday at 13,058, its high point for the year.

The stock market is up almost 11 percent in the last few weeks, and high-yield, low-grade junk bonds are once again soaring, along with bank stocks and credit derivatives. As the New York Times put it on Friday, “Main Street may be struggling, but Wall Street is on a bit of a roll.”

“There has been a huge change of sentiment in all of the markets,” said William Knapp, investment strategist for MainStay Investments, a division of New York Life. “A lot of the fear has been gone.”

It is no mystery what has caused this remarkable shift in market sentiment. It began with the Federal Reserve’s rescue of Bear Stearns in March and its decision to directly lend money to the big Wall Street investment banks.

This was a signal that the US government would marshal all of its resources to prevent a collapse of a major Wall Street financial house and rescue the financial elite from the consequences of its own reckless pursuit of super-high investment returns by means of vastly inflated home values and the creation of a huge credit bubble.

The reverse side of this coin is a deepening assault on the jobs, wages and living standards of working people, in order to place the full burden of the financial crisis on their backs.

While hundreds of billions of dollars have been made available to Wall Street firms—indeed, only minutes before the jobs figures were published on Friday, the Fed said it would increase its auctions of cash to banks and expand the collateral it takes on from bond dealers—virtually nothing has been done either by the Bush administration or the Democratic Congress to provide relief to families facing the loss of their homes, crushing debts and soaring food and gasoline prices.

It is estimated that 10 million American home owners are “under water”—meaning they owe more on their mortgage loans than their homes are worth on the market. Foreclosure filings are soaring, having risen in the first quarter of this year more than 112 percent over the same period in 2007.

But the Bush administration’s housing relief program, FHA Secure, has so far aided only about 2,000 homeowners who were clearly behind in repaying their loans. The administration insists that only “deserving” home owners should be helped—a standard that clearly does not apply to bank CEOs, who have appropriated hundreds of millions in compensation while running their companies into the ground.

The Democrats, for their part, are promoting a bill that would help a mere fraction of distressed home owners refinance their mortgages, while providing no relief for the hundreds of thousands who have already lost their homes. To qualify, home owners would have to prove their ability to repay new, federally insured loans.

Democrats promoting the bill, such as Massachusetts Congressman Barney Frank, say it could help up to 1.5 million home owners. (In fact, they know the bill will not be enacted due to opposition from the Bush administration and Republican legislators).
But there were already 1.2 million loans in foreclosure as of January, and one analyst at Credit Suisse projects that falling home prices, tighter lending standards and job cuts could lead to an additional 2.8 million foreclosures in 2008 and 2009.

As for the rise in commodity prices, the Fed’s actions have fueled that too, thereby increasing the hardship on people around the world:

Ben's bind

The Economist

Disentangling the links between the Fed, the falling dollar and the soaring price of the world's commoditiesMay 1st 2008

Washington, DC - The spirit of St Augustine hovered over the Federal Reserve this week. “Oh Lord, let us stop cutting interest rates, but not yet,” is pretty much what America's central bankers decided on April 30th. The Fed's governors cut their policy rate by another quarter-point, to 2%. But the accompanying statement gave a small hint that they may now pause.

There are plenty of reasons to stop cutting. Real interest rates are now firmly negative. Although the housing market continues to contract—the latest figures show sales falling, prices tumbling and the number of vacant homes soaring—the economy is limping rather than slumping. According to initial GDP estimates released on April 30th, output grew at an annualised rate of 0.6% in the first three months of the year—the same pace as in the previous quarter and faster than most people expected. The mix of growth was not good. Final sales fell while firms built up their stocks, which bodes ill for future output. But with tax-rebate cheques arriving in the mail, a dose of fiscal stimulus is imminent.

A growing chorus worries that ever lower policy rates are adding to America's problems. Some prominent economists, including Martin Feldstein of Harvard University and Bill Gross of PIMCO, a big money-management firm, have urged the central bank to stop. Fed cuts, they argue, are doing little to reduce borrowing costs but have sent commodity prices soaring—fuelling inflation and hitting Americans' wallets hard.

Thanks to the credit crunch, Fed loosening plainly packs less punch than hitherto. Lending standards are tightening across the board. The cost of a 30-year mortgage has risen over the past six months, even as short-term rates have tumbled. But monetary policy has not been impotent. One route through which it has worked has been the weaker dollar. Although the greenback has been sliding for over five years, the pace of decline stepped up as the Fed slashed rates. Since August the dollar has fallen by 7% against a broad basket of currencies and 13% against the euro. Together with strong global growth, this weakness has cushioned and reoriented America's economy. Strong foreign earnings have boosted corporate profits. Strong exports have countered the weakness in construction. Exclude oil, and America's current-account deficit has shrunk to an eight-year low of 2.4% of GDP.

But oil—and other commodities—are the crux of the problem. In the past, economic weakness in America has usually pushed the price of oil and other commodities down. That relationship has weakened thanks to demand growth in big commodity-intensive emerging economies. But the recent surprise is that commodity prices have soared even as America's economy has stalled and forecasts for global growth have been trimmed as well. No one expects global growth to accelerate this year, yet the price of crude oil is up 20% since the beginning of the year, The Economist's overall commodity-price index is up 18%, the metals index is up 24%, and the food-price index is up 18%. Supply shocks—from drought in Australia to strikes at Nigerian oil wells—are clearly part of the problem. But the fact that prices have soared across so many commodities suggests a common cause.

Could the culprit be the Fed? Advocates of this idea point to two channels. First, by slashing real interest rates, the Fed has encouraged speculation in commodities by reducing the cost of holding inventories. Second, by pushing down the dollar, Fed looseness is pushing up the price of dollar-denominated commodities.

Jeff Frankel, a Harvard economist, has long argued that low real interest rates lead to higher commodity prices. When real rates fall, he points out, commodity producers have more incentive to keep their asset—whether crude oil, gold or grain—in the ground or in a silo, than to sell today. Speculators, in turn, have more incentive to shift into commodities. There is no doubt that commodities have become an increasingly popular investment category—in fact they bear many of the hallmarks of a speculative bubble. But inventories for many commodities, particularly grains, are unusually low.

What about the dollar link? Chakib Khelil, president of the Organisation of Petroleum-Exporting Countries, argued this week that oil could reach $200 a barrel largely because the market was being driven by the dollar's slide. Movements in the euro/dollar exchange rate and the price of oil have become extremely close (see chart). An analysis by Jens Nordvig and Jeffrey Currie of Goldman Sachs shows that the correlation between weekly changes in the oil price and the euro/dollar exchange rate has risen from 1% between 1999 and 2004 to 52% in the past six months.

That link is partly a matter of accounting. If the dollar falls, the dollar price of a commodity must rise for its overall price—in terms of a basket of global currencies—to remain stable. But commodity prices have risen even when priced in non-dollar currencies. And the correlation between changes in the price of oil and the euro/dollar exchange rate has risen even when oil is priced in a basket of currencies, such as the IMF's special drawing rights.

So is the weaker dollar driving oil prices up or are high oil prices driving the dollar down? The Goldman analysts argue the latter. Dearer oil is pushing the dollar down, they claim, because oil exporters import more from Europe than America and hold less of their oil revenues in dollars. A second factor lies with central banks. Because the Fed focuses on “core” inflation (which excludes food and fuel), whereas the ECB targets overall inflation, America's central bank runs a looser policy in response to higher oil prices, thus pushing the dollar down.

Another reason to suspect that the Fed is more than a bit player is that American interest-rate decisions have a disproportionate effect on global monetary conditions. Some emerging economies still peg their currencies to the dollar; many others have been reluctant to let their exchange rates rise enough to make up for the dollar's decline. As a result, monetary conditions in many emerging markets remain too loose. This fuels domestic demand, pushing up pressure on prices, particularly of commodities. All of which suggests that the Fed's decisions are propagated widely through the dollar.

The most recent circumstantial evidence also suggests that the Fed may bear some responsibility for the commodities boom. The dollar slipped after the Fed's rate-cut decision as investors reacted to its doveish tone, though at $1.56 per euro, it was still up 2.6% from its low of $1.60 on April 22nd. The price of oil, after hitting a record high of almost $120 a barrel on April 28th, had tumbled to $113 on April 30th. But the price of crude and other commodities rose afterwards. If those reactions persist, America's central bankers may have to reflect carefully

The rise in the price of energy and food (ignored in the Fed’s “core inflation” numbers) causes the most anxiety among the general public. Not only are food prices higher, but surpluses are disappearing. Since ancient times, one of the main fuction of urban republics was to stockpile food surpluses for use in times of famine. The scary thing now is that with sophisticated supply chain distribution systems, there is really very little extra food. There have been no famines in the developed world for many decades (not since the end of World War II in Europe, for example), so most people do not realize how dependent we are on far-flung, lean distribution networks. The local food movement is still an elite phenomenon.

Surplus U.S. food supplies dry up

Sue Kirchhoff, USA TODAY

WASHINGTON — As the farm economy collapsed in the 1980s, the U.S. Department of Agriculture was saddled with mountains of surplus cheese, corn and other foods that it socked away in warehouses and even caves.

As recently as 2003, the USDA had to buy so much powdered milk to support dairy prices that beleaguered officials shipped some to U.S. ranchers for cattle feed.

While the previous surpluses were costly and sharply criticized, much of the food found its way to the poor, here and abroad. Today, says USDA Undersecretary Mark Keenum, "Our cupboard is bare."

U.S. government food surpluses have evaporated because, with record high prices, farmers are selling their crops on the open market, not handing them over to the government through traditional price-support programs that make up for deficiencies in market price.

Worldwide, food prices have risen 45% in the past nine months, posing a crisis for millions, says the United Nations' Food and Agriculture Organization.

Because of the current economics of food, and changes in federal farm subsidy programs designed to make farmers rely more on the markets, large U.S. reserves may be gone for a long time.

The upshot: USDA has almost no extra food to supplement the billions in cash payments it spends to combat hunger at home and in developing nations.

A coalition of religious and farm groups, in an open letter to Congress this week, warned that low supplies increase the risk of hunger and higher prices, calling for creation of a strategic grain reserve.

"As a matter or national security, our government should recognize and act on its responsibility to provide a stable market for food in an era of unprecedented risk," says the letter from the National Family Farm Coalition and various groups.

Others experts say large government stockpiles are not only unnecessary, they are counterproductive. That includes John Block who, as President Reagan's Agriculture secretary during the 1980s, went to enormous lengths to get rid of extra food: giving commodities to farmers as payment for idling land, offering surplus grain as a subsidy to exporters and holding cheese giveaways for the poor.

"We shouldn't have large reserves stacked up. It was very costly for us," Block said, noting that for years he was accused by other nations of depressing their farm sectors by dumping extra U.S. food on world markets.

Still, even he terms the current world situation "shocking" in the sense that prices for so many types of food have risen at once.

The USDA's sole remaining sizable stockpile contains about 24 million bushels of wheat in a special government trust dedicated to international humanitarian aid. The special food program, which also holds $117 million in cash, has dwindled from its original 147-million-bushel level as Republican and Democratic administrations have used it but not fully replenished it.

That leaves the Bush administration with less flexibility to respond quickly to international food aid needs. President Bush in mid-April drew $200 million from the Emerson Humanitarian Trust, named after former congressman Bill Emerson, a Missouri Republican. Bush's action followed a desperate plea from the United Nations for food aid. Thursday, the president announced he would ask Congress for $770 million in separate, additional funding to meet international needs.

But Agriculture Secretary Ed Schafer, at a recent food aid conference, says his agency faces tough decisions about managing the rest of the reserve in times of widespread hunger. "How far do we draw down?" he asked. "Do we take it down to zero because we need it? Do we hold some in there, because who knows what's going to happen, for emergency purposes later?"

Nutrition programs in need

Domestic nutrition programs, supported by once-bountiful commodity supplies, also face increasing stress. In a sign of how tight the situation has become, Keenum last summer dug into little-used legal authority to barter the last remaining USDA raw cotton and other surplus for about $120 million of canned meat and other processed goods desperately needed by domestic food banks and international programs.

"Now that we've created the program, it would be great if we had more stocks we could convert," Keenum says. "We just don't."

The fact that USDA's larders are depleted doesn't mean the country is out of food. The vast majority of U.S. grain is in the hands of farmers and private firms. Overall, the USA is expected to have carryover supplies of 241.9 million bushels of wheat this year, for example. But the USDA situation is indicative of broader trends, with domestic and international grain supplies in decline.

Total U.S. wheat stocks are down from 777 million bushels in 2001, and are the lowest since World War II. The USDA says that's about a 35-day supply of wheat and notes that farmers in Texas are already starting to harvest a new crop. The American Bakers Association estimates the country has a 24-day supply of wheat compared with the previous three-month level on hand.

International grain supplies are the tightest in three decades, and prices of wheat, corn, rice and other food staples have doubled or tripled.

"The whole world has gotten fairly sanguine about food supplies," says Bruce Babcock, director of the Center for Agricultural and Rural Development at Iowa State University. "Advances in logistics and just-in-time production have allowed the world to get by on very low stock levels for a very long time. We kind of undershot it this year."

But Babcock says a strategic food trust like that proposed by farm and religious groups raises tough policy questions: How would it be managed? When would it be tapped? Whom would it benefit? And how would USDA keep it from acting as a disincentive to advances in productivity?

There is some basis for comparison. The nation for years has maintained a strategic petroleum reserve as a form of energy security. The White House, which now wants to increase supplies in the reserve, is in a struggle with members of Congress who say such a move is unwise at a time when oil prices are above $100 a barrel.

Congress, so far, has responded to the growing food crisis by proposing a major increase in nutrition funding in a five-year farm bill now under debate. Lawmakers and the White House are also prepared to spend more money for international programs. The U.S. in the last year provided more than $2 billion in foreign food aid.

"The commitment is there to deal with the international and domestic situation … in a formidable way," says Rep. Rosa DeLauro, D-Conn., chair of a House subcommittee that funds food aid.

But there has been no major re-examination of one of the major factors contributing to tight supply: recent federal laws mandating increased production of ethanol, which in the USA is generally made from corn.

Many farmers today are growing crops for fuel, not food, a development outside of USDA control and one that makes it harder for the government to manage crop production. As much as a third of the corn crop could be dedicated to ethanol production.

Commodity programs

The USDA accumulates stockpiles several ways. It buys dairy products when prices are low. Farmers who grow wheat, corn, soybeans and other grains can forfeit their crop to pay off loans. The USDA can buy crops, including fruits and vegetables, when surpluses develop.

The federal government spends more than $60 billion a year on food stamps, the school lunch program and other nutrition aid. Much of that is in cash, but the programs can also benefit from surplus commodities. The USDA on Thursday announced it would buy $50 million in pork products for feeding children and school lunch programs, as part of its effort to cope with rising food prices. The purchase also helps pork producers who have been hit by rising grain prices.

In general, higher prices mean federal spending is rising, and many school districts are being forced to raise lunch prices. High prices and low supplies have probably had the most immediate impact on food banks, which face rising caseloads and falling private-sector donations as the economy slows.

"USDA food truly is some of the most nutritional that we receive. We are located where there is no food industry other than retail groceries and small restaurants. … We could not feed the people we need to without the support of the USDA," says Rhonda Chafin, executive director of the Second Harvest Food Bank of Northeast Tennessee. America's Second Harvest, a network of 205 food banks serving 25 million, is seeing a 20% rise in its caseload.

Food banks and other programs receive $140 million in annual commodity donations, which could rise to $250 million in the five-year farm bill under debate. The USDA provides extra food via a bonus program, buying surplus goods as they become available.

The program is an add-on that varies from year to year, though food banks have come to rely on it. The bonus began to dry up several years ago as food prices rose, plummeting from about $250 million in 2003 to $58 million last year. The USDA barter program has partly picked up the slack.

The Emerson Trust, the reserve for humanitarian aid, was created when the government was swimming in supply. The trust isn't the main U.S. food aid program but is an important backstop that's been tapped seven times since 2002 to aid Africa and Iraq.

Sporadic replenishment

The trust has been sporadically replenished since the mid-1990s. In addition to wheat, it now holds $117 million in cash: enough to buy about 14.6 million bushels of wheat at the current price. Still, that would leave overall supply down about two-thirds from original levels. International feeding organizations, which have pushed for years to get the trust replenished, note that it is the only U.S. stockpile for emergency needs. Now, at a time when it is desperately needed, they say, the stocks are not there.

Food aid "is going to have to be significantly higher if we're going to continue to play the role we've played in the past; … $117 million is not much," says Lisa Kuennen-Asfaw of Catholic Relief Services.

As is the case with many food programs, use of the trust has been politically charged in the past. For example, wheat growers have protested that pulling wheat out of the trust when prices are low further depresses markets. Companies that have been paid for years to hold supplies of wheat for the trust don't want to lose their payments.

USDA's Keenum says the U.S. government has the will and the money to continue providing needed resources to hungry people.

"We're not seeing a shortage of food in this country," Keenum says. "The issue is having the resources to purchase food for international and domestic needs."

The problem is much bigger than just food for poor people, it could easily become a cut-throat scramble for short supplies among the well-off. In fact, we may be seeing the beginning of the predicted resource wars. China is working to nail down food supplies by leasing farm land around the world:

China 'may lease foreign fields'

China could lease overseas farming land to beat rising food prices, according to reports from Beijing.

Soaring grain prices have encouraged the ministry of agriculture to consider the scheme, according to the Beijing Morning newspaper.

Chinese enterprises would lease or even buy farmland in Latin America, Australia and the former Soviet Union.

The land in production could replace Chinese farmland lost to rapidly growing cities and industrial zones.

Pilot schemes

The BBC's China analyst, Shirong Chen, says the initiative builds on recent experience.

Ten years ago a Chinese company formed a joint venture with the Cuban government to set up two farms to grow rice in Cuba. A similar venture has been set up in Mexico.

High international grain prices and the pressure of domestic inflation are the main factors behind the drive.

Grain prices rose by 60 % on the global market in the first three months of the year, adding to inflationary forces in a country which needs to feed 1.3 billion people.

Meanwhile official records showed that the amount of available arable land fell sharply in 2007, getting closer to the minimum level Beijing has vowed to retain.

The great powers seem to be on the brink of making major moves that could result in a world war. Why else would the United States, Great Britain and Israel be crazy enough to think of attacking Iran and widening the wars in the Middle East?