Signs of the Economic Apocalypse, 9-15-08

From SOTT.net:

Gold closed at 768.70 dollars an ounce Friday, down 4.4% from $802.80 for the week. The dollar closed at 0.7032 euros Friday, up 0.3% from 0.7009 at the close of the previous week. That put the euro at 1.4221 dollars compared to 1.4267 the week before. Gold in euros would be 540.54 euros an ounce, down 4.1% from 562.70 at the close of the previous Friday. Oil closed at 100.69 dollars a barrel Friday, down 5.5% from 106.23 at the end of the week before. Oil in euros would be 70.80 euros a barrel, down 5.2% from 74.46 for the week. The gold/oil ratio closed at 7.63 Friday, up 0.9% from 7.56 at the end of the week before. In U.S. stocks, the Dow Jones Industrial Average closed at 11,421.99 Friday, up 1.8% from 11,220.96 at the close of the previous Friday. The NASDAQ closed at 2,261.27 Friday, up 0.2% from 2,255.88 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.72%, up 2 basis points from 3.70 for the week.

One week after the takeover of Fannie Mae and Freddie Mac by the Fed, the financial giants on the verge of collapse are Lehman Brothers, Merrill Lynch and Washington Mutual. No one seems to know where the bottom is. Even the New York Times is nervous:

In Frantic Day, Wall Street Banks Teeter

Andrew Ross Sorkin

September 15, 2008

In one of the most dramatic days in Wall Street’s history, Merrill Lynch agreed to sell itself to Bank of America for roughly $50 billion to avert a deepening financial crisis, while another prominent securities firm, Lehman Brothers, hurtled toward liquidation after it failed to find a buyer, people briefed on the deals said.

The humbling moves, which reshape the landscape of American finance, mark the latest chapter in a tumultuous year in which once-proud financial institutions have been brought to their knees as a result of tens of billions of dollars in losses because of bad mortgage finance and real estate investments.

They culminated a weekend of frantic around-the-clock negotiations, as Wall Street bankers huddled in meetings at the behest of Bush administration officials to try to avoid a downward spiral in the markets stemming from a crisis of confidence.

“My goodness. I’ve been in the business 35 years, and these are the most extraordinary events I‘ve ever seen,” said Peter G. Peterson, co-founder of the private equity firm the Blackstone Group, who was head of Lehman in the 1970s and a secretary of commerce in the Nixon administration.

It remains to be seen whether the sale of Merrill, which was worth more than $100 billion during the last year, and the controlled demise of Lehman will be enough to finally turn the tide in the yearlong financial crisis that has crippled Wall Street. Questions remain about how the market will react Monday, particularly to Lehman’s plan to wind down its trading operations, and whether other companies may still falter, like the American International Group, the large insurer, and Washington Mutual, the nation’s largest savings and loan. Both companies’ stocks fell precipitously last week.

Though the government took control of the troubled mortgage finance companies Fannie Mae and Freddie Mac only a week ago, investors have become increasingly nervous about the difficulties of major financial institutions to recover from their losses.

How things play out could affect the broader economy, which has been weakening steadily as the financial crisis has deepened over the last year, with unemployment increasing as the nation’s growth rate has slowed.

What will happen to Merrill’s 60,000 employees or Lehman’s 25,000 employees remains unclear. Worried about the unfolding crisis and its potential impact on New York City’s economy, Mayor Michael R. Bloomberg canceled a trip to California to meet with Gov. Arnold Schwarzenegger. Instead, aides said, Mr. Bloomberg spent much of the weekend working the phones, talking to federal officials and bank executives in an effort to gauge the severity of the crisis.

The weekend that humbled Lehman and Merrill Lynch and rewarded Bank of America, based in Charlotte, N.C., began at 6 p.m. Friday in the first of a series of emergency meetings at the Federal Reserve building in Downtown Manhattan.

The meeting was called by Fed officials, with Treasury Secretary Henry M. Paulson Jr. in attendance, and it included top bankers. The Treasury and Federal Reserve had already stepped in on several occasions to rescue the financial system, forcing a shotgun marriage between Bear Stearns and JPMorgan Chase this year and backstopping $29 billion worth of troubled assets — and then agreeing to bail out Fannie Mae and Freddie Mac.

The bankers were told that the government would not bail out Lehman and that it was up to Wall Street to solve its problems. Lehman’s stock tumbled sharply last week as concerns about its financial condition grew and other firms started to pull back from doing business with it, threatening its viability.

Without government backing, Lehman began trying to find a buyer, focusing on Barclays, the big British bank, and Bank of America. At the same time, other Wall Street executives grew more concerned about their own precarious situation.

The fates of Merrill Lynch and Lehman Brothers would not seem to be linked; Merrill has the nation’s largest brokerage force and its name is known in towns across America, while Lehman’s main customers are big institutions. But during the credit boom both firms piled into risky real estate and ended up severely weakened, with inadequate capital and toxic assets.

…The weekend’s events indicate that top officials at the Federal Reserve and the Treasury will take a harder line on providing government support of troubled financial institutions.

While offering to help Wall Street organize a shotgun marriage for Lehman, both the Fed chairman, Ben S. Bernanke, and Mr. Paulson had warned that they would not put taxpayer money at risk simply to prevent a Lehman collapse.

The tough-love message was a major change in strategy, but it remained unclear until at least Friday whether the approach was real or just posturing. If the Fed was faced with the genuine risk of another market meltdown, analysts said, it would be almost duty-bound to ride to a rescue of one kind or another.

What few people anticipated was that the Treasury and Fed officials might reach for an even broader strategy.

“They were faced after Bear Stearns with the problem of where to draw the line,” said Laurence H. Meyer, a former Fed governor who is now vice chairman of Macroeconomic Advisors, a forecasting firm. “It became clear that this piecemeal, patchwork, case-by-case approach might not get the job done.”

At first glance, the new strategy by Mr. Paulson and Mr. Bernanke represents a much purer and tougher insistence that Wall Street work out its own problems without government help.

But that is only the first glance. If Bank of America acquired Merrill Lynch, its capital reserves would immediately fall below the minimum requirements for bank holding companies. Federal regulators, including the Federal Reserve, would have to show lenience for as long as it took the capital markets to regain their confidence — which could be quite a while.

And Merrill Lynch is hardly the only troubled financial institution on the horizon. Administration officials acknowledged this week that more bank failures were inevitable, and the main protection for depositors — the Federal Deposit Insurance Corporation — is likely to exhaust the reserves it has built over the years from bank insurance premiums.

“What we need now is a systemic solution and to admit that this is an extraordinary situation,” Mr. Meyer said. He said the government should go to the heart of the crisis — the mortgage market — and start buying mortgage-backed securities in a broad rescue.

That is similar to an approach urged by Alan Greenspan, Mr. Bernanke’s predecessor as chairman of the Federal Reserve. Mr. Greenspan, who has long been a staunch opponent of government intervention in the economy, said Sunday that the federal government might have to shore up some financial institutions.

“This is a once-in-a-half-century, probably once-in-a-century type of event,” Mr. Greenspan said in an interview on ABC. “I think the argument has got to be that there are certain types of institutions which are so fundamental to the functioning of the movement of savings into real investment in an economy that on very rare occasions — and this is one of them — it’s desirable to prevent them from liquidating in a sharply disruptive manner.”

Most economists say that bailouts are often bad economic policy because each rescue tends to encourage “moral hazard” — the tendency of institutions and investors to take even bigger risks because they assume the government will rescue them, too.

Both Mr. Paulson and Mr. Bernanke worried that they had already gone much further than they had ever wanted, first by underwriting the takeover of Bear Stearns in March and by the far bigger bailout of Fannie Mae and Freddie Mac.

Officials noted that Lehman’s downfall posed a lower systemic threat because it had been a very visible and growing risk for months, which meant that its customers and trading partners had had months to prepare themselves.

Outside the public eye, Fed officials had acquired much more information since March about the interconnections and cross-exposure to risk among Wall Street investment banks, hedge funds and traders in the vast market for credit-default swaps and other derivatives.

But James Leach, a former Republican congressman from Iowa and chairman of the House Banking committee, said the Fed and Treasury might not be able to avoid a broader rescue.

“The Fed’s historic position is to object philosophically to a rescue role but in the end to do everything in its power to avoid anything that poses systemic risk,” said Mr. Leach, now a lecturer at Harvard.

“My sense is that the systemic question will be the only question on the table if Lehman falters,” he continued. “If systemic risk is considered grave, the Fed, perhaps with Treasury playing at least an advisory role, will intervene.”

Andrew Leonard reminds us that earlier this year failing firms got bailed out by “sovereign wealth funds” controlled by sheikdoms. Now no one but the Federal Reserve is willing to step in:

Rest of world to Wall Street: Not this time

Andrew Leonard

Friday, Sept. 12, 2008

Not so long ago, when Wall Street's best and brightest investment banks first started reeling from the credit crunch, sovereign wealth funds from around the world came riding to the rescue. Need to shore up your bottom line after a few billion dollars worth of write-downs? The Abu Dhabi Investment Authority or Singapore's Temasek Holdings were here to help.

In January, in "How Wall Street Broke The Free Market," I wrote about how both the left and right in the United States were wringing their hands at the prospect of foreign governments buying such big stakes in elite American financial institutions.

Not too worry! Eight months later, reports the Wall Street Journal in a big page one story (warning, ominously, that the credit crisis "could be entering a critical stage,") foreign governments aren't so eager to spring to the aid of beleaguered Americans.

Stung by mammoth losses on those investments, many investors are now balking. Sovereign-wealth funds, many of them facing criticism at home over the investments, have stayed on the sideline as Lehman and other firms have struggled to raise capital.

So what's worse -- getting bailed out by authoritarian petro-states, or being deemed too shaky an investment to be worth the trouble?

Raising adequate capital to weather the credit crunch storm is getting tougher and tougher for everybody, including commercial banks such as Washington Mutual, reports the Journal. Not only are foreign investors getting skittish, but some potential local white knights are running into problems. Private equity firms, for example, are limited to ownership of no more than 25 percent of a deposit-taking financial institution before they must be considered a bank-holding company subject to federal regulation.

Executives from such firms as Carlyle Group and Blackstone Group have been using the credit crunch to lobby the Office of Thrift Supervision and the Federal Reserve to allow them to own bigger stakes of financial firms without having to face regulation.

That's a good one. Because clearly the answer to Wall Street's problems over the last year is less regulation.

Since wealthy sheikdoms won’t bail out failing U.S. financial firms, and since the past weekend’s events have signalled that the U.S. Federal Reserve can’t keep doing this, banks are going to have to start bailing each other out, either by a healthier one buying up an unhealthy one, or by creating a bailout pool:

Banks roll out $70 billion loan program

Joe Bel Bruno, AP Business Writer

September 14, 2008

NEW YORK - A group of global banks and securities firms announced late Sunday a $70 billion loan program that financial companies can tap to help ease a credit shortage that threatens global financial markets.

The ten banks, which include JPMorgan Chase & Co. and Goldman Sachs Group Inc., said they were committing $7 billion each for the pool. The pool would act as a signal to the marketplace that banks, brokerages, and other financial companies can lean on the fund to take care of borrowing needs.

The banks said the program will be available to participating banks which can get a cash infusion up to a maximum of one-third of the total size of the pool. The size of the loan program might increase as "other banks are permitted to join."

All participating banks intend to use this facility beginning this week, the statement said.

The banks also include Bank of America Corp., Barclays PLC, Citigroup Inc., Credit Suisse Group, Deutsche Bank AG, Merrill Lynch & Co., Morgan Stanley and UBS.

The banks made the announcement to try to head off market disruptions after the possible failure of investment bank Lehman Brothers Holdings Inc. Lehman was expected to file for bankruptcy by Monday after succumbing to dwindling investor confidence due to losses from its real estate holdings.

What are we to make of all this? For one thing, an era is ending. The era of neoliberal “financial innovation” or new, complex ways of parasitically funelling wealth up the pyramid is coming to an end. So, too, is the era of U.S. hegemony.

US bailout of mortgage giants sets stage for wider financial crisis

Barry Grey

12 September 2008

Since the Bush administration announced on Sunday the US government takeover of mortgage finance giants Fannie Mae and Freddie Mac, in the largest corporate bailout in American history, developments have underscored the profound and systemic nature of the crisis that precipitated the action.

A week of wild gyrations on US stock markets, fueled by fears of an impending collapse of the Wall Street investment bank Lehman Brothers and the country’s largest savings and loan bank, Washington Mutual, demonstrates that the rescue of the government-sponsored mortgage companies is a stop-gap measure that does not begin to resolve the underlying crisis of American capitalism.

On the contrary, the bailout of Fannie Mae and Freddie Mac sets the stage for an intensification of the crisis in the coming months. At heart, the demise of the mortgage firms, which account for 80 percent of new home mortgages in the US and have a combined liability of $5.3 trillion in mortgage-backed securities which they own or guarantee, is a result of the collapse of the colossal credit bubble which sustained the super-profits of US banks and investment firms and the seven- and eight-figure salaries of their top executives.

It is the product of an economic system that has increasingly based itself on speculation and various forms of economic parasitism, while gutting the productive base of the country—at the cost of millions of jobs and the living standards of the American working class.

The decay of American capitalism has produced an economy that is drowning in debt and is dependent on massive inflows of capital from abroad for its survival. Now, the assumption by the government of the debt of the mortgage companies, carried out to protect the financial interests of banks and big investors, has placed a question mark over the solvency of the US government itself.

This threatens a curtailment of the inflow of international capital, a further erosion in the status of the US dollar and a drastic increase in the interest paid by the government to borrow money from its creditors. The US is already by far the world’s biggest debtor nation, with a balance of payments deficit of $800 billion and an economy that is sustained by a yearly inflow of $1 trillion in overseas capital.

The quantum leap in the national debt and government budget deficits resulting from the bailout of Fannie Mae and Freddie Mac—and the further corporate bailouts that are all but certain to follow—must inevitably lead to a realignment of social conditions within the US in accordance with the actual, deeply eroded, position of the United States in the world economy. This means an even more drastic lowering of the living standards of the American people.

On Tuesday, the Congressional Budget Office (CBO) declared that as a result of the government bailout, the finances of Fannie Mae and Freddie Mac had to be “directly incorporated into the federal budget,” and its liabilities added to the US national debt. This means, in effect, a near doubling of the US sovereign debt to a figure equivalent to the country’s gross domestic product (GDP).

The Financial Times reported Wednesday that the bailout had already resulted in a sharp rise in the price of credit default swaps on five-year US government debt. Credit default swaps are private contracts to buy insurance against the default of various forms of debt.

As the Financial Times wrote, “... the price suggests the market believes the US government is more likely to default on its obligations than some other industrialised countries.” It went on to cite a credit research strategist as saying, “The USA is now ‘riskier’ than Norway, Germany, Netherlands, Sweden, Finland, Austria, France, Denmark, Quebec and Japan.”

The CBO statement on Fannie Mae and Freddie Mac accompanied its report on the US government budget deficit for the current fiscal year, which ends September 31, and its projections for fiscal 2009 and beyond. The CBO put the current deficit at $407 billion, more than double the $161 billion deficit for fiscal 2007.

It projected, on the basis of current tax laws, that the budget gap would rise to a record $438 billion in the 2009 fiscal year that begins October 1. However, as CBO Director Peter Orszag noted, that figure could easily climb to $540 billion if Congress acts in the coming months, as expected, to curtail the growth in the alternative minimum tax and extend a variety of expiring business tax breaks.

Orszag further noted that these figures did not take into account the full scale of government expenditures related to the bailout of Fannie Mae and Freddie Mac. Treasury Secretary Henry Paulson said on Sunday the government would commit up to $200 billion to prop up the companies. Given the continuing decline in home prices and rise in foreclosures, that figure is virtually certain to rise by tens, if not hundreds, of billions.

Orszag said that the deficit would remain at between 3 and 4 percent of the GDP for the next decade, resulting in a $7 trillion rise in the national debt. Even these dire projections assume that Bush’s massive tax cuts for the rich will not be extended beyond their scheduled expiration in 2010.

Significantly, Orszag pointed to government health care spending—not the cost of corporate bailouts or the wars in Iraq and Afghanistan (which have to date consumed a combined sum of $850 billion)—as the main source of exploding deficits going forward. The CBO warned that Medicare and Medicaid spending, which currently account for an estimated 4.6 percent of GDP, could account for up to 12 percent of GDP by 2050.

The mounting financial crisis of American capitalism was further underscored by the Commerce Department’s report Thursday on the US trade deficit, which surged in July by 5.2 percent to $62.2 billion, the highest level in 16 months.

The headlong rush of Lehman Brothers and Washington Mutual toward collapse—or new federal bailouts—within days of the government takeover of Fannie Mae and Freddie Mac has underscored the depth of the financial crisis.

The stock of the 158-year-old Wall Street investment bank collapsed this week after it was reported that Lehman’s efforts to secure a capital infusion from the state-owned Korea Development Bank had collapsed. At the close of the financial markets on Thursday, the value of Lehman’s stock—down by more than 90 percent since its peak last February—was about $2.9 billion. It stood at $37.2 billion at the start of 2008.

Once the biggest underwriter of mortgage-backed securities, the firm has seen its speculative investments collapse and would have already gone bankrupt were it not for the Federal Reserve’s decision, taken at the time of the government-subsidized sale of Bear Stearns to JP Morgan Chase last March, to extend low-cost loans to investment banks and accept virtually worthless mortgage-related securities in return for highly rated Treasury securities.

It was reported Thursday that the firm was in talks with potential buyers, including Bank of America, for a buyout that would avoid bankruptcy or a government bailout—at the cost of billions in losses to shareholders and the jobs of thousands of Lehman employees. On Wednesday, when it announced a third quarter loss of $3.9 billion and a plan to spin off much of its business and shrink its operations, the company said it was slashing 1,000 to 1,500 jobs, its fourth round of layoffs this year.

Over the past year, US banks and brokerages have cut more than 110,000 jobs.
The collapse of both Lehman and the two government-sponsored mortgage giants starkly illustrates the immense dependence of American capitalism on overseas capital. Lehman went to ground after its bid for funds from a South Korean bank failed, and the government bailout of Fannie Mae and Freddie Mac was precipitated by the dumping of the firms’ securities by central banks and major investors in Asia and Russia.

The stock of the giant savings and loan bank Washington Mutual, which has some $180 billion in mortgage-related loans, has fallen by 34 percent since Monday and 92 percent over the past year. This week it reported a $3.33 billion second quarter net loss and has said its mortgage losses could reach $19 billion through 2011.

Raising the possibility of another government bailout, Christopher Whalen, a managing partner at Institutional Risk Analytics, said of Washington Mutual, “If this goes on until the end of the year, the bank is either going to have to be sold or recapitalized by the government. Those are the only choices.”

The Financial Times on Wednesday worried that the massive US budget deficits were limiting the ability of the government to continue propping up Wall Street with injections of hundreds of billions in capital. It wrote:

“Yesterday’s new deficit projections by the Congressional Budget Office highlight the troubled state of US government finances as it embarks on a new stage of interventions to contain the chronic impact of the credit crisis....

“Some economists worry that as the Federal Reserve has spent much of its ammunition, and as fighting the credit crisis falls more to the government, weak public finances mean the government does not have unlimited ammunition either.”

Noting that the Federal Reserve was seeking to conserve its capital for further corporate bailouts, the newspaper wrote, “Many Fed officials share this view, which is why the Fed is lukewarm on further fiscal stimulus, preferring to see the limited government funds spent on shoring up the financial system.”

The response to mushrooming budget deficits and soaring national indebtedness, as well as the spreading crisis on Wall Street, by the next administration, whether headed by Republican John McCain or Democrat Barack Obama, will be a policy of brutal austerity directed against the working class.

One can safely predict that not long after the November election, the incoming president will announce that his transition advisers have shown him the country’s financial books, that the dire state of the nation’s economy makes inoperative any and all promises of health care reform or relief to distressed homeowners, and that a regime of discipline and “sacrifice” will have to be imposed in the “national interest.”

Senator Kent Conrad, the Democratic chairman of the Senate Budget Committee, sounded just such a note when he said, in response to the CBO report, that “the next president will be inheriting a budget and economic outlook that is far worse than most people realize.”

As the CBO report indicates, the next administration will be tasked with dismantling basic entitlement programs such as Medicare and Medicaid.

If the demise of the U.S. empire happens in an orderly fashion, it would be an unalloyed Good Thing. Such things hardly ever happen smoothly, however. There will be increasing temptation for the Empire’s leaders to place an all or nothing bet, to go “all in” in poker terminology. Especially now that the Empire’s opponents are openly thumbing their noses at the U.S. Look at what has happened just in the past month. The United States (and Israel) egged its ally in the Caucasus, Georgia, to attack Russian-controlled territory. Russia inflicted a crushing defeat on U.S. and Israeli military hardware, software and personnel (yes, even personnel). The United States then launched illegal attacks in Pakistani territory. In its so-called “backyard” (what an insulting term!) in Latin America, the U.S. Ambassador to Bolivia began to coordinate a coup against Evo Morales and Bolivia expelled the Ambassador. The U.S. threatened Bolivia, but who believes them anymore? Venezuela then also ordered the U.S. Ambassador to leave, after earlier in the week inviting Russia to deploy two strategic bombers (“strategic” means they can carry nuclear weapons).

What will the world be like in a month or two?

Signs of the Economic Apocalypse, 6-9-08

From SOTT.net:

Gold closed at 899.00 dollars an ounce Friday, up 0.8% from $891.50 for the week. The dollar closed at 0.6340 euros Friday, down 1.4% from 0.6430 at the close of the previous Friday. That put the euro at 1.5774 dollars compared to 1.5552 the week before. Gold in euros would be 569.93 euros an ounce, down 1.0% from 573.24 at the close of the previous week. Oil closed at 137.84 dollars a barrel Friday, up 8.0% from $127.59 for the week. Oil in euros would be 87.38 euros a barrel, up 6.5% from 82.04 at the close of the Friday before. The gold/oil ratio closed at 6.52 Friday, down 7.2% from 6.99 for the week. In U.S. stocks, the Dow closed at 12,209.81 Friday, down 3.5% from 12,638.32 at the close of the previous Friday. The NASDAQ closed at 2,474.56 Friday, down 1.9% from 2,522.66 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.91%, down 14 basis points from 4.05 for the week.

The ten-dollar rise in the price of oil on Friday combined with the almost 400 point drop in the Dow has everybody spooked. The U.S. jobs report for May came out showing an alarming drop in jobs. Rising energy and food prices have people frightened and the mainstream media is doing nothing to stop the panic.

Job Losses and Oil Surge Spread Economic Gloom

Peter S. Goodman

June 7, 2008

The unemployment rate surged to 5.5 percent in May from 5 percent — the sharpest monthly spike in 22 years — as the economy lost 49,000 jobs, registering a fifth consecutive month of decline, the Labor Department reported Friday.

The weak jobs report, coupled with a staggering rise in the price of oil — up a record $10.75 a barrel to more than $138 — unleashed a feverish sell-off on Wall Street, sending the Dow Jones industrial average down nearly 400 points. The dollar plunged against several major currencies.

Investors’ recent hopes that the United States might yet skirt a recession sank swiftly in the face of gloomy indications that the economy is gripped by a slowdown and pressured by record fuel prices.

For tens of millions of Americans struggling to pay bills, the jobs report added an official stamp of authority to a dispiriting reality they already know: A deteriorating labor market is eliminating paychecks just as they are needed to compensate for the soaring cost of food and fuel, and as the fall in house prices hacks away at household wealth and access to credit.

“It’s unambiguously ugly,” said Robert Barbera, chief economist at the research and trading firm ITG. “The average American already knows that gas prices are up a ton and it’s really hard to find a job. Sally and Sam on Main Street are already well aware of this, and that’s why sentiment surveys are lower than they were in each of the last two recessions.”

…The report fleshed out how economic troubles that began with falling home prices have rippled out to other areas of the economy — to shopping malls, grocery stores and home improvement outlets. As merchants cut payrolls in response to declining business, that takes purchasing power out of the economy, reinforcing a downward spiral of retrenchment.

Professional and business services — which include lawyers, accountants, architects and management consultants — led the way down in May, shedding 39,000 jobs, according to the report. Construction declined by 34,000.

Manufacturing lost 26,000 jobs. Retail payrolls shrank by 27,000 and transportation and warehousing by 10,500. Finance and insurance lost 3,700 jobs, amid continuing worries that more red ink lies in wait for banks.

Here is Newsweek which for years was telling us not to worry:

Why It’s Worse Than You Think

For months, economic Pollyannas have looked beyond the dismal headlines and promised a quick recovery in the second half. They're dead wrong.

Daniel Gross

Jun 7, 2008

The forgettable first half of 2008 is stumbling to a close. On Friday, the Labor Department reported that American employers axed 49,000 jobs in May, the fifth straight month of job losses—an event that signals a recession sure as the glittery ball dropping on Times Square augurs a New Year. The report, which inspired a 394-point decline in the Dow Jones Industrial Average Friday, was the latest in a run of bad news. Auto sales, the largest retailing sector in the U.S., were off 10.7 percent in May from the year before. And housing? Ugh. Nationwide, according to the Case-Shiller Index, home prices in the first quarter fell 14 percent.

Yet hope springs eternal that the second half will be better than the first. Economists polled by the Federal Reserve Bank of Philadelphia in May believe the economy will grow at an annual rate of 1.7 percent and 1.8 percent in the third and fourth quarters, respectively. Lawrence Yun, chief economist at the National Association of Realtors, tells NEWSWEEK that "home sales and prices in most of the country will improve during the second half of 2008." (Yun is the Little Orphan Annie of forecasters. He's always sure the sun will come out tomorrow.) Last month, Treasury Secretary Henry Paulson said, "We expect to see a faster pace of economic growth before the end of the year."

The cause for optimism: the U.S. has called in the economic cavalry, which has responded in textbook fashion. The Federal Reserve has aggressively cut interest rates, bringing the Federal Funds rate down from 5.25 percent last September to 2 percent. Earlier this spring, Congress and President Bush, in a rare moment of bipartisan accord, passed a stimulus package, which will shove nearly $100 billion into the pockets of American consumers by mid-July.

But this downturn is likely to last longer than the eight-month-long recession of 2001. While the U.S. financial system processes popped stock bubbles quickly, it has always taken longer to hack through the overhang of bad debt. The head winds that drove the economy into this dead calm— a housing and credit crisis, and rising energy and food prices—have strengthened rather than let up in recent months. To aggravate matters, the twin crises that dominate the financial news—a credit crunch and the global commodity boom—are blunting the stimulus efforts. As a result, the consumer-driven economy may not bounce back as rapidly as it did in the fraught months after 9/11.

As it seeks to regain its footing in the second half, the U.S. economy faces two significant obstacles, neither of which was evident in 2001. The first is entirely homegrown: the self-inflicted wounds of the promiscuous extension and abuse of credit in the housing and financial sectors. The second is a global phenomenon that has comparatively little to do with American behavior: rampant inflation in commodities such as oil, food, and steel. These trends have conspired to inflict genuine economic pain and deflate consumer confidence. The Conference Board's Consumer Confidence Index in May slumped to a 16-year low…

Last November, retired school principal Barbara McGeary, 75, of Camp Hill, Pa., switched from a Toyota Rav 4 SUV to a Prius. But the savings she realizes are eaten by a higher food bill. "When I go to the grocery store, I see prices have doubled on some of the things I'm purchasing," she says. Last year she paid $3.99 for a container of about two dozen brownies. Now that they're retailing for $8.49, she bakes her own. McGeary and her husband are also eating at home more than ever. "Restaurants, of course, have had to increase their prices," she says.

While the housing and credit crisis is homegrown, the higher prices for high-octane gasoline and corn chips are effectively imports. Historically, or at least since the end of World War II, if the U.S. sneezed, the world caught a cold. When we used more gas, oil prices rose, and when we used less gas, oil prices fell. As GM vice chairman Bob Lutz points out, "Usually petroleum prices were the first to react to a severe U.S. slowdown." In the past it would have been unthinkable for oil to spike if Americans were cutting back.

Many factors, from a weak dollar to rising speculation, are behind the higher commodity prices. But at root, $4-per-gallon gasoline and $20-per-pound steaks are largely a function of the changing economic geography, and the diminished stature of the U.S. Last January, the talk of the World Economic Forum in Davos (aside from the locale of the Google party) was the prospect of "decoupling"—the notion that India and China could maintain their breakneck economic growth rates even if the U.S. pooped out. Five months later, the global economy seems to have decoupled faster than Jessica Simpson and John Mayer. The world is growing without us. "My impression is that China and India both have sufficient domestic demand-led growth to continue to have vibrant growth even if the U.S. has a sustained period of difficulty," former Treasury secretary Robert Rubin tells NEWSWEEK. Producers of commodities are enjoying the fruits of higher prices. Sorry, Tom Friedman, the world is no longer flat. "It is upside down," says Mohamed El-Erian, co-CEO of bond mutual-fund giant PIMCO. "The growing robustness of the emerging economies enables them to step up to the global plate at a time when the U.S. has to take a breather in order to put its financial house in order." This rampant global economic growth—more people eating better, more people driving, more people using electricity—is translating into higher prices at the Stop & Shop…

Now whenever the mainstream media moves all at once in the same direction, it’s hard not to be suspicious. It may be that they are trying to channel the anger that U.S. citizens are beginning to feel away from Anglo-American capitalism that has left most people at the mercy of the economic elements and towards rivals to the Anglo-American sphere. As the media tries to explain to U.S. citizens why prices are going up in the midst of a bad recession, they are turning to the “decoupling” thesis. That other countries are growing so fast and are so much less dependent on U.S. demand that they can drive prices up even as U.S. consumers have less to spend.

Amid economic slowdown, signs of new world order

Mark Trumbull

Jun 2, 2008

The world economy is cooling this year thanks to a slowdown in the United States, but something new is playing out: This slowdown is serving to amplify a shift in financial power toward Asia and developing nations.

Countries such as China and India are now big enough to help guide the global economy. In the past, a sharp downshift in the US and Europe would decisively slow the rate of global growth.

This time, emerging markets appear poised to grow collectively by 6.7 percent this year, according to recent forecasts by the International Monetary Fund. As a result, the IMF sees world gross domestic product (GDP) growing 3.7 percent, even though the US might experience a recession.

The US economy remains the world's mightiest. But even for Americans, this new economic order has immediate implications:

•Policymakers at the Federal Reserve must worry about upward price pressures for food and fuel – driven largely by rising demand in developing nations. That problem calls for tighter monetary policy, while the domestic consumer slump calls for the opposite policy.

•Demand for US exports from these new markets is providing a helpful cushion for growth, yet trade tensions could be an issue in the US presidential election.

•Money from emerging markets is playing an increasingly important role in the US financial system.

"We have a new pecking order in the world economy in terms of influence on global growth and economic power," says Michael Cosgrove, an economist in Dallas. "[Historically] we would see oil prices fall with a slowdown in the US and Europe…. That no longer holds."

The dynamism of the "BRIC" bloc – Brazil, Russia, India, and China – is not new, but their stunningly rapid rise in this past decade is now being tested in the laboratory of tough times.

For consumers and workers worldwide, what's playing out is a tug of war between two opposing problems.

First is the weakness in the US and some other advanced nations as a housing slump and related credit squeeze hits households. That's dragging GDP growth down on all continents.

Second is inflation, a symptom of the strength of emerging nations. Their demand for commodities explains much of the surge in fuel and food prices worldwide. It's this problem that is, at present, taking center stage as a global worry.

"The good news here is that the standard of living for a lot of people is improving," says Mr. Cosgrove, publisher of the EconoClast newsletter. But for now, "the bad news is that it pushes up prices."

What's changed in the world economy is not just the rate of growth of countries labeled developing or emerging. It's also the size of their economic output.

"What's different this time is that the emerging market economies have been growing so rapidly that they've emerged," says Ed Yardeni, an economic forecaster at Yardeni Research in Great Neck, N.Y. "They've become very large."

Now, these nations are accounting for more than half the world's economic growth in a given year. And, when measured in terms of the domestic purchasing power of their incomes, these countries are also approaching half of global economic output, according to IMF figures.

This makes it a different world from just seven years ago, the last time the US was in a recession. Then, America's nosedive brought global GDP growth down to 2.2 percent in 2001. Considering the expectation that GDP should keep pace with population growth, that was in effect a worldwide recession.

Oil prices were not a concern then. But growth in developing nations fell sharply to 3.8 percent from 5.9 percent in 2000.

This year, by contrast, the IMF forecasts a recession in the US but growth well above 6 percent in developing countries – down just a percentage point from last year.

Recession or not, how the American economy fares depends partly on trends in emerging markets.

One issue is cash supply. Historically, emerging economies are importers of capital. Now, "sovereign wealth funds," investment funds controlled by developing nation governments are helping US banks survive mortgage-related losses. More broadly, nearly half of US capital inflows over the past year and a quarter came from China, Brazil, Mexico, and Russia, according to Bank of America.

Emerging economies are also influencing monetary policy. The Federal Reserve has been lowering interest rates to stave off a banking crisis. But rising commodity prices mean the Fed has to be ready to fight inflation with higher interest rates.

Economists at Merrill Lynch predict that the current global economic cycle hinges on when monetary authorities in creditor nations – many in the developing world – clamp down on inflation.

Other economists caution against viewing emerging economies as being in the driver's seat. "The US is still the biggest by far," says Jay Bryson of Wachovia Corp in Charlotte, N.C.

He predicts that inflation pressures will abate as the world feels the cooling effect of the slowdown in US and Europe.

Developing nations are also trading more than ever, offsetting the US slowdown. But these trade ties are also controversial, especially with China.

A backlash against trade with developing nations is possible in the aftermath of the US election this fall.

It's a thorny political question – how to deal with policies that may not help every worker or that help some nations more than others. "Before, say, 1985, the United States got the majority of the gains from trade" with other nations, says Cosgrove. Since then, he reckons, "the US has a smaller share of the gains from trade."

Trade remains helpful for America and the world, but the danger is that voter psychology is shifting, he says.

In that regard it is interesting that there was coverage of a speech by the president of Russia blaming the U.S. for the economic problems of the world. Are people in the U.S. being prepared for expanded war? Will economic issues replace the worn-out “war on terrorism” as an excuse?

Medvedev puts blame on US for financial crisis

Neil Buckley and Catherine Belton in St Petersburg

Jun 7 2008

Russian president Dmitry Medvedev on Saturday blamed the US and its banks in large part for provoking today's financial crisis - and pushed for a role for Russia in finding a way out of the turmoil.

Mr Medvedev warned that growing "economic egoism" had contributed to global problems including rising food prices, but singled out the US for particular criticism for its role in triggering a global economic slowdown.

"Failure to take proper account of the risks by the biggest financial companies in combination with an aggressive financial policy by the world's biggest economy led not only to corporate losses," Mr Medvedev told the St Petersburg Economic Forum, a showcase for Russia's growing economic clout.

"The majority of people on the planet, unfortunately, have become poorer. And that is noticeable not only in the economies of poorly-developed countries but in the economies of the most advanced states."

The new Russian president's comments echoed in milder form and in the economic sphere the criticisms by his predecessor, Vladimir Putin, of US attempts to dominate world affairs. They were made to thousands of delegates at an event Russia has aggressively promoted in recent years to the point where it rivals the World Economic Forum in Davos in size and its pulling power for senior global executives.

Mr Medvedev said the turmoil provoked by the subprime crisis had exposed the inadequacy of US-dominated international financial institutions to regulate properly today's complex financial markets.

"The inconsistency of the USA's formal role in the world economic system with its real capabilities was one of the central reasons for the current crisis," he said. "However large the American market is and however reliable the American financial system, it is not capable of substituting for global commodity and financial markets."

Mr Medvedev added that it was an "illusion that one country, even the most powerful, can act as a global government".

Carlos Gutierrez, the US commerce secretary who spoke at the forum, said the US had not engaged in "economic egoism" and was a strong believer in free trade.
"Globalisation is in the national interest," he added.

Mr Medvedev repeated calls made by Mr Putin at the same event last year for a reform of financial institutions so they properly reflected the weight of powerful emerging markets. And he said Russia could help resolve today's crisis, noting its recent economic history of decline in the 1990s followed by nine years of recovery meant it had largely avoided the problems of more developed economies.

He called for promotion of Moscow as a financial centre, development of the rouble as a reserve currency, and for acceptance of investment overseas by Russia's emerging corporate heavyweights. He said such investment was "neither speculative nor aggressive".

He proposed Russia should host an international conference of heads of financial companies and leading financial analysts to tackle problems in global markets, which he suggested might become an annual event.

"Russia today is a global player," Mr Medvedev said. "And understanding our responsibility for the fate of the world, we want to take part in the formation of new rules of the game, though not because of often-cited 'imperial ambitions' but because we have the appropriate capabilities and resources".

Some executives said the forum showed Russia was once again becoming a leading economic power.

"Every time you interact with President Medvedev, you can't help coming away with the feeling that Russia's going to play an increasingly important role as an economic and political force and as a leading nation of the world," said Muhtar Kent, president and chief operating officer of the Coca-Cola Company. Mr Kent was among about 90 chief executives who held an hour-long meeting with the Russian president on Saturday evening…

As this plays out it is important to remember that the rise in energy prices may be an artificially induced bubble. As Stef Zucconi puts it:

Peak Oil…

Hmmm

One of those subjects which has the potential to divide Conspiraloons straight down the middle.

There are many loons out there who believe that much of the apparently fascistic, aggressive behaviour of Western governments, especially the US and the UK, is driven by the impending shortfall in global energy supply and the need to find excuses to occupy other countries and to make preparation to clamp down on dissent at home when the lights start going out.

I’m not one of them.

I’m one of those loons who believes that, yes, finite energy resources are an issue but, no, that's not the reason why the price of oil, and food, have been going through the roof recently.

I once worked for a company which traded, amongst other things, cocoa. The firm was a real cocoa trader; buying cocoa from real suppliers, transporting it in real ships and selling it on to real customers. And every now and again, I and half a dozen other people who made a living counting stuff would fly around to take stock of our company’s prodigious physical holdings of the yummy brown stuff. Our firm held onto a ridiculous amount of cocoa – much more than it needed to meet its immediate or even medium term requirements. Some of the stocks were literally years old.

The reason why the firm held onto so much was because, thanks to the involvement of hedge funds and other speculators, the cocoa futures market had become an absolute f*****g joke. It was simply cheaper and less risky to sit on tens of thousands of tons of physical stock rather than expose the company to a market being mugged by characters who were using the futures exchanges as a (rigged) casino.

The futures pricing of cocoa had become, just like the price of oil or wheat today, no more a product of genuine supply/ demand issues than the price of Dutch tulips 400 years ago or Florida real estate every thirty years or so.

And it comes as no surprise that very few people given a mainstream voice are connecting the very close timing of the collapse in property speculation, central banks printing shed loads of lovely inflationary money and the sharp rise in commodities prices.

It shouldn’t be rocket science but the obvious conclusions seem to be beyond the grasp of people who make a living pretending to tell the rest of us what’s going on.

Honourable exceptions include…

· Some bloke writing in The Herald (as one commentator puts it ‘This is dangerously close to real journalism’)...

"What is particularly worrying about this speculative boom is that a number of the big Wall Street banks are up to their oxters in it. Goldman Sachs, for example, which recently forecast that oil would reach $200 a barrel, is heavily involved in the oil futures market. It stands to make a lot of money if its forecast comes true. So do other investment banks. These institutions control billions of dollars of oil contracts, and it takes only a few of the big banks to move in a given direction for the entire market to shift. The extraordinary financial power of the banks is one disturbing aspect of globalisation"

And whilst I do understand why some fellow loons are concerned about future shortages of oil and food I do suggest that they keep their minds open to the possibility that real structural issues are being manipulated and used as Trojan horses to facilitate some serious financial rape and pillage.

Or to quote the big boogeyman being used to scare Americans,

Ahmadinejad says market full of oil, prices artificial

Tue Jun 3, 2008

ROME (Reuters) - The global market is "full of oil" and rising crude prices are being artificially driven by forces trying to further their geopolitical aims, Iranian President Mahmoud Ahmadinejad said on Tuesday.

"While the growth of consumption is lower than that of production and the market is full of oil, prices continue to rise and this situation is completely manipulated," Ahmadinejad said in his address to a U.N. food summit in Rome.

Without naming countries, the Iranian leader said "hidden and unhidden hands are at work to control the prices mendaciously to pursue their political and economic aims."

He said the goal of "powerful and international capitalists" was to keep the price of oil and energy "artificially high" in part to justify new explorations in the North Pole and the deep seas.

In an apparent reference to the United States, he said the international community should have a mechanism to force "the bullying powers to resort to peace and amity instead of occupation and warmongering...."