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Topic: It’s Official: The Crash of the U.S. Economy has begun. (Read 10759 times) |
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Blunderov
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It’s Official: The Crash of the U.S. Economy has begun.
« on: 2007-06-15 09:47:00 » |
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[Blunderov] I don't know very much more about economics than Mr Micawber's principle: "Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."
Dr Richard C. Cook however is a very considerable expert in these matters and what he has to say is disquieting.
(The other thing I know about economics is that it is good to have gold when everything else is going belly up. Why that is I don't know, I admit. Gold makes wonderful jewelry and is very good for filling and decorating teeth as well as being very useful in electronics. But it isn't really all that useful. A mystery.)
globalresearch
It’s Official: The Crash of the U.S. Economy has begun
by Richard C. Cook
Global Research, June 14, 2007
It’s official. Mark your calendars. The crash of the U.S. economy has begun. It was announced the morning of Wednesday, June 13, 2007, by economic writers Steven Pearlstein and Robert Samuelson in the pages of the Washington Post, one of the foremost house organs of the U.S. monetary elite.
Pearlstein’s column was titled, “The Takeover Boom, About to Go Bust” and concerned the extraordinary amount of debt vs. operating profits of companies currently subject to leveraged buyouts.
In language remarkably alarmist for the usually ultra-bland pages of the Post, Pearlstein wrote, “It is impossible to predict when the magic moment will be reached and everyone finally realizes that the prices being paid for these companies, and the debt taken on to support the acquisitions, are unsustainable. When that happens, it won't be pretty. Across the board, stock prices and company valuations will fall. Banks will announce painful write-offs, some hedge funds will close their doors, and private-equity funds will report disappointing returns. Some companies will be forced into bankruptcy or restructuring.”
Further, “Falling stock prices will cause companies to reduce their hiring and capital spending while governments will be forced to raise taxes or reduce services, as revenue from capital gains taxes declines. And the combination of reduced wealth and higher interest rates will finally cause consumers to pull back on their debt-financed consumption. It happened after the junk-bond and savings-and-loan collapses of the late 1980s. It happened after the tech and telecom bust of the late '90s. And it will happen this time.”
Samuelson’s column, “The End of Cheap Credit,” left the door slightly ajar in case the collapse is not quite so severe. He wrote of rising interest rates, “As the price of money increases, borrowing and the economy might weaken. The deep slump in housing could worsen. We could also discover that the long period of cheap credit has left a nasty residue.”
Other writers with less prestigious platforms than the Post have been talking about an approaching financial bust for a couple of years. Among them has been economist Michael Hudson, author of an article on the housing bubble titled, “The New Road to Serdom” in the May 2006 issue of Harper’s. Hudson has been speaking in interviews of a “break in the chain” of debt payments leading to a “long, slow economic crash,” with “asset deflation,” “mass defaults on mortgages,” and a “huge asset grab” by the rich who are able to protect their cash through money laundering and hedging with foreign currency bonds.
Among those poised to profit from the crash is the Carlyle Group, the equity fund that includes the Bush family and other high-profile investors with insider government connections. A January 2007 memorandum to company managers from founding partner William E. Conway, Jr., recently appeared which stated that, when the current “liquidity environment”—i.e., cheap credit—ends, “the buying opportunity will be a once in a lifetime chance.”
The fact that the crash is now being announced by the Post shows that it is a done deal. The Bilderbergers, or whomever it is that the Post reports to, have decided. It lets everyone know loud and clear that it’s time to batten down the hatches, run for cover, lay in two years of canned food, shield your assets, whatever.
Those left holding the bag will be the ordinary people whose assets are loaded with debt, such as tens of millions of mortgagees, millions of young people with student loans that can never be written off due to the “reformed” 2005 bankruptcy law, or vast numbers of workers with 401(k)s or other pension plans that are locked into the stock market.
In other words, it sounds eerily like 2000-2002 except maybe on a much larger scale. Then it was “only” the tenth worse bear market in history, but over a trillion dollars in wealth simply vanished. What makes today’s instance seem particularly unfair is that the preceding recovery that is now ending—the “jobless” one—was so anemic.
Neither Perlstein nor Samuelson gets to the bottom of the crisis, though they, like Conway of the Carlyle Group, point to the end of cheap credit. But interest rates are set by people who run central banks and financial institutions. They may be influenced by “the market,” but the market is controlled by people with money who want to maximize their profits.
Key to what is going on is that the Federal Reserve is refusing to follow the pattern set during the long reign of Fed Chairman Alan Greenspan in responding to shaky economic trends with lengthy infusions of credit as he did during the dot.com bubble of the 1990s and the housing bubble of 2001-2005.
This time around, Greenspan’s successor, Ben Bernanke, is sitting tight. With the economy teetering on the brink, the Fed is allowing rates to remain steady. The Fed claims their policy is due to the danger of rising “core inflation.” But this cannot be true. The biggest consumer item, houses and real estate, is tanking. Officially, unemployment is low, but mainly due to low-paying service jobs. Commodities have edged up, including food and gasoline, but that’s no reason to allow the entire national economy to be submerged.
So what is really happening? Actually, it’s simple. The difference today is that China and other large investors from abroad, including Middle Eastern oil magnates, are telling the U.S. that if interest rates come down, thereby devaluing their already-sliding dollar portfolios further, they will no longer support with their investments the bloated U.S. trade and fiscal deficits.
Of course we got ourselves into this quandary by shipping our manufacturing to China and other cheap-labor markets over the last generation. “Dollar hegemony” is backfiring. In fact China is using its American dollars to replace the International Monetary Fund as a lender to developing nations in Africa and elsewhere. As an additional insult, China now may be dictating a new generation of economic decline for the American people who are forced to buy their products at Wal-Mart by maxing out what is left of our available credit card debt.
About a year ago, a former Reagan Treasury official, now a well-known cable TV commentator, said that China had become “America’s bank” and commented approvingly that “it’s cheaper to print money than make cars anymore.” Ha ha.
It is truly staggering that none of the “mainstream” political candidates from either party has attacked this subject on the campaign trail. All are heavily funded by the financier elite who will profit no matter how bad the U.S. economy suffers. Every candidate except Ron Paul and Dennis Kucinich treats the Federal Reserve like the fifth graven image on Mount Rushmore. And even the so-called progressives are silent. The weekend before the Perlstein/ Samuelson articles came out, there was a huge progressive conference in Washington, D.C., called “Taming the Corporate Giant.” Not a single session was devoted to financial issues.
What is likely to happen? I’d suggest four possible scenarios:
Acceptance by the U.S. population of diminished prosperity and a declining role in the world. Grin and bear it. Live with your parents into your 40s instead of your 30s. Work two or three part-time jobs on the side, if you can find them. Die young if you lose your health care. Declare bankruptcy if you can, or just walk away from your debts until they bring back debtor’s prison like they’ve done in Dubai. Meanwhile, China buys more and more U.S. properties, homes, and businesses, as economists close to the Federal Reserve have suggested. If you’re an enterprising illegal immigrant, have fun continuing to jack up the underground economy, avoid business licenses and taxes, and rent out group houses to your friends.
Times of economic crisis produce international tension and politicians tend to go to war rather than face the economic music. The classic example is the worldwide depression of the 1930s leading to World War II. Conditions in the coming years could be as bad as they were then. We could have a really big war if the U.S. decides once and for all to haul off and let China, or whomever, have it in the chops. If they don’t want our dollars or our debt any more, how about a few nukes?
Maybe we’ll finally have a revolution either from the right or the center involving martial law, suspension of the Bill of Rights, etc., combined with some kind of military or forced-labor dictatorship. We’re halfway there anyway. Forget about a revolution from the left. They wouldn’t want to make anyone mad at them for being too radical.
Could there ever be a real try at reform, maybe even an attempt just to get back to the New Deal? Since the causes of the crisis are monetary, so would be the solutions. The first step would be for the Federal Reserve System to be abolished as a bank of issue and a transformation of the nation’s credit system into a genuine public utility by the federal government. This way we could rebuild our manufacturing and public infrastructure and develop an income assurance policy that would benefit everyone.
The latter is the only sensible solution. There are monetary reformers who know how to do it if anyone gave them half a chance.
Richard C. Cook is the author of “Challenger Revealed: An Insider’s Account of How the Reagan Administration Caused the Greatest Tragedy of the Space Age.” A retired federal analyst, his career included work with the U.S. Civil Service Commission, the Food and Drug Administration, the Carter White House, and NASA, followed by twenty-one years with the U.S. Treasury Department. He is now a Washington, D.C.-based writer and consultant. His book “We Hold These Truths: The Hope of Monetary Reform,” will be published later this year. His website is at www.richardccook.com.
Richard C. Cook is a frequent contributor to Global Research. Global Research Articles by Richard C. Cook
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Blunderov
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Re:It’s Official: The Crash of the U.S. Economy has begun.
« Reply #1 on: 2007-06-20 14:20:42 » |
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[Blunderov] Bellaciao has fixed it's attention on matters economic and "it ain't that pretty at all".
http://bellaciao.org/en/article.php3?id_article=15099
FED looses control on US interest rates and crisis reaches China and EU
20 June 2007, 00:04:49
FED looses control on US interest rates and crisis reaches China and EU
GEAB N°16 is available! Global systemic crisis / Summer 2007 : Fed looses control on US interest rates and crisis reaches China and EU Public announcement GEAB N°16 (Special Summer 2007 issue - 23 pages!)
This second quarter's fundamental event about to shove most players' anticipations over the coming months, is certainly the final and simultaneous failure of the two key-strategies defined by US leaders, i.e.:
. in the economic, financial and monetary fields, the Fed' policy initiated a year ago when M3 publishing was abandoned and aimed at substituting a financial and stock bubble to the bursting housing bubble in order to maintain US growth (and capital attractiveness) has now patently failed, thus entailing a historical loss of the Fed's control on US interest rates (for the first time since 1918, except in times of war or social/economic depression)
. in the military, strategic and diplomatic fields, the stability plan for Iraq is a complete failure taking place in the framework of Washington's growing political paralysis (which LEAP/E2020 plans to describe in GEAB N°17 - on subscription).
Spring 2007 indeed appears as the tipping point of the global systemic crisis: the US economy went into recession, US interest rates were restored, the bond market is in crisis, the subprime crisis begins to hit large US financial institutions such as Bear Stearns (1), Goldman Sachs (2) and Freddie Mac (3), the US housing crisis is speeding up (4), the paralysis of Washington's political power grows (5), the isolation of the US on the international arena increases, the security plan for Iraq proves to be a complete failure, the US is powerless against Iran, the relaunch of the Israelo-Arab peace process aborts, trade tensions between China and the US rise, a growing number of countries (Kuwait, Syria,…) flee from the US dollar, etc…
However, according to LEAP/E2020 researchers, it is undeniably this Fed's and White House's (Pentagon's) double simultaneous failure which affects most the unfolding of the global systemic crisis for the months to come, as it precipitates China and the EU into the « vacuum » thus created and thrusts the US into « recessflation ».
Continue to read: http://www.leap2020.eu/GEAB-N-16-is-available!-Global-systemic-crisis-Summer-2007-Fed-looses-control-on-US-interest-rates-and-crisis-reaches_a713.html
Wall Street, Iraq and the declining dollar
19 June 2007, 23:50:09
Wall Street, Iraq and the declining dollar
19/06/2007 10:30:00 AM GMT
The Bush Administration's response to 9/11 has weakened the position of the dollar in the world.
A mismanaged war, the oil crisis and a flood of U.S. currency are setting the stage for economic disaster.
A mismanaged war, the oil crisis and a flood of U.S. currency are setting the stage for economic disaster, investment banker Ken Miller reports. The disastrous impact on the economy of George W. Bush's response to the attacks of September 2001 is still being measured. On Friday of last week, the Bush Administration announced that it would not re-nominate Gen. Peter Pace as chairman of the Joint Chiefs of Staff. The Administration's decision to throw a loyal supporter overboard avoids a messy confirmation hearing that would have further focused a war-weary nation's attention on the past. But sometimes looking backward can help us anticipate the future.
In February of this year, Rep. Henry Waxman's Committee on Oversight and Government Reform revealed fresh details of how the Coalition Provisional Authority dumped $12 billion in cash — in $100 bills — into Iraq in 2004. Multiple flights of huge C-130 transport planes were required to deliver 363 tons of greenbacks — a modest portion of the $510 billion we have spent so far in Iraq and Afghanistan. By certain measures, this may not be America's most expensive war. But the worst economic effects are yet to come.
No matter how the Iraq War ends, it is clear that the United States is incapable of militarily securing territory against the wishes of a hostile population. And the Iraq War is at the heart of two alarming trends that are likely to have a negative impact on America's position in the world: The demand for oil is rising while the supply is declining, and the demand for the U.S. dollar is declining while the supply of dollars is rising.
In the four years since the toppling of Saddam Hussein, the Iraqi oilfields and associated infrastructure have sustained 400 attacks. And because of the situation on the ground, Iraqi oil production, at 1.95 barrels per day during the first quarter of 2007, was far short of the government's goal of 2.5 million barrels per day and the previous peak of 3.7 million under Saddam. In this asymmetrical war, our enemies are spending a fraction of our costs on improvised explosive devices, chlorine gas and human bombers, while we invest heavily in noneffective weapons systems and force structures.
U.S. oil and gas production peaked in the early '70s, and we are now by far the world's largest energy importer. The largest oilfields in Saudi Arabia, Kuwait, Iran, Syria, Yemen and Oman are in decline, as are most oilfields in the former Soviet Union, Canada, Central and South America, and on-shore Africa. New fields will be discovered and new technologies brought to bear, but costs of production will be higher than in the past and will require more expensive investments in equipment and technology.
Even as existing fields age, the new economies of India and China require more and more oil to fuel their impressive growth. Although a worldwide depression might result in a temporary drop in the price of oil and other commodities, the long-term imbalance between growing demand and declining supply will eventually reassert itself, creating price increases over time.
Contemporaneously with the supply/demand imbalance in oil and other hard commodities, the Bush Administration's response to 9/11 has weakened the position of the dollar in the world. The president's request that Americans continue to spend has struck an all-too-sympathetic chord with the American people. The trade deficits caused by that spending have created a current account deficit equal to 6.2 percent of GDp, sending trillions of dollars into the hands of foreigners.
While we continue to import goods of much greater value than those we export, thus flooding the world with dollars, Bush has pursued a policy of what some have dubbed "military Keynesianism" — that is, the combination of low taxes and high military expenditures. This dynamic forces the Federal Reserve to print money and foster easy credit policies, which will eventually result in higher interest rates, inflation or both.
So the printing presses are spewing out more dollars, which are being collected by China, Japan and others. And those countries are showing signs of concern that they have too much of their foreign exchange reserves tied up in our currency. Likewise, certain other nations are evidencing a declining interest in accepting the dollar as a medium of exchange. It was in October 2000 that Saddam insisted that Iraq's oil be paid for in euros. But now Russia wants payment for the energy it exports in rubles. Venezuela and Iran insist on euros. Kuwait has recently unpegged its dinar from the dollar in favor of a basket of currencies.
The dollar has indeed shown symptoms of its decline in popularity during the Bush years. The dollar has weakened against the euro, gold, copper and other hard assets and currencies. When Bush came in office, for example, you could get .987 euros for every dollar. Now you can only get 75. You could say that at $65 per barrel, oil is getting more valuable... or you could say the value of the dollar has declined as measured by oil.
Mainstream economists seem to agree that best-case, the dollar will continue a stately decline, but in a world where the United States has lost so much respect, where we continue to flood the world with dollars and borrow to finance our consumer habit, we could find that one of those sharp, depression-inducing discontinuities occurs—like, say, a run on the dollar.
We are continuing to import 60 percent of the 20.6 million barrels of oil we use daily. And though the size and stability of our economy is likely to insure a demand for the dollar at some level, oil that anyone can buy for hard currency may be getting scarcer. Governments have begun to do deals aimed at taking oil off the market for their own account — deals like the ones China has done with Angola, Brazil, Iran, Nigeria, Venezuela and Sudan. South Korea has just announced it will follow suit.
If our military cannot secure oil by force, and if oil is destined to cost us more and more of a declining currency to buy what is available, then "brand USA" is in trouble. When Bush leaves office, this country will have to begin the difficult task of reversing some very bad trends in the military, fiscal, monetary and energy areas. The pollution of his legacy transcends mere politics.
— Ken Miller is chairman and CEO of Ken Miller Capital LLC in New York.
http://www.aljazeera.com/news/newsfull.php?newid=12007
U.S. Is ‘Really in Trouble,' Says Bloomberg
19 June 2007, 23:24:41
U.S. Is ‘Really in Trouble,' Says Bloomberg
By DIANE CARDWELL Published: June 19, 2007
MOUNTAIN VIEW, Calif., June 18 — Mayor Michael R. Bloomberg, sounding every inch the presidential candidate he insists he is not, brought his message of pragmatic, nonpartisan leadership to California on Monday, telling a crowd of Google employees that the nation was “really in trouble.”
In unusually stark terms, Mr. Bloomberg expressed his frustration with the state of the nation, touching on campaign-style issues like the war in Iraq, immigration, education, health care and crime before a crowd of more than 1,000 employees at the Google campus here.
“Whoever out of those 20 becomes president I think has to do something about a country that I think is really in trouble,” Mr. Bloomberg said, referring to the current crop of candidates. “There's the war, there is our relationships around the world.”
“Our reputation has been hurt very badly in the last few years,” he continued, criticizing what he called a “go-it-alone mentality” in an increasingly interconnected world.
The trip west comes as speculation about Mr. Bloomberg's presidential ambitions has intensified, with his increasing travels around the country to speak about national issues, and with aides promoting the idea behind the scenes.
Mr. Bloomberg made his comments as a guest speaker at Google, technically as part of their series of authors, ostensibly because of his autobiography, “Bloomberg by Bloomberg,” which was published in 1997. But the notion of his making a third-party run at the White House was never far from the surface.
Indeed, in introducing Mr. Bloomberg, Alan Davidson, Google's senior policy counsel, said, to laughter, that the hourlong discussion was not part of the candidates' series, which has already brought former Senator John Edwards, Gov. Bill Richardson and Senators Hillary Rodham Clinton and John McCain to the campus.
Asked about the subject, Mr. Bloomberg said that he was not a candidate for president and intended to finish out his term, which lasts through 2009, and then become a full-time philanthropist. Nonetheless, he declined to say definitively that he would not run, calling a question from a reporter asking him if he would rule out a candidacy too “Shermanesque” to answer.
In his remarks, he sounded much like a candidate for national office. He returned to a pet theme, criticizing the federal government for its immigration policies and what he sees as insufficient attention to rising costs of Social Security and health care.
Mr. Bloomberg also took a swipe at the presidential candidates of both parties, saying they were not offering serious ideas about improving public education or lowering street crime.
Arguing that people have a much greater chance of being killed by street crime than by a terror attack, he said: “Yet every press conference, they all beat their chests and say, ‘I can protect this country better from terrorism.' Well, what about protecting them out in the streets every day?”
Mr. Bloomberg began his day in San Francisco. urging members of the Commonwealth Club, a public affairs group, to exert pressure on Congress to drop an amendment from its spending bill this year that limits the way the Bureau of Alcohol, Tobacco, Firearms and Explosives releases information about the source of illegal guns.
He ended the day in Los Angeles, where he assailed what he called the “swamp of dysfunction” in Washington. His remarks came in a speech opening a two-day conference for which Mr. Bloomberg is a co-host with the mayor of Los Angeles, Antonio Villaraigosa.
http://www.nytimes.com/2007/06/19/nyregion/19mayor.html?_r=1&ref=politics&oref=slogin
Ron Paul Introduces bill H.R. 2755 to Abolish the Federal Reserve
19 June 2007, 22:41:47
Ron Paul Introduces bill H.R. 2755 to Abolish the Federal Reserve
H.R. 2755 to Abolish the Federal Reserve http://www.picassodreams.com/picasso_dreams/2007/06/hr_2755_to_abol.html ^ | June 17, 2007
http://www.youtube.com/watch?v=A4kxTkhwR_Q
Posted on 06/18/2007
H.R. 2755 to Abolish the Federal Reserve
If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good, makes the bill good, also. The difference between the bond and the bill is the bond lets money brokers collect twice the amount of the bond and an additional 20%, where as the currency pays nobody but those who contribute directly in some useful way. Is it absurd to say that our country can issue $30 million in bonds and not $30 million in currency? Both are promises to pay, but one promise fattens the usurers and the other helps the people.” - Thomas Edison
“Banking was conceived in iniquity and born in sin. Bankers own the earth; take it away from them but leave them with the power to create credit, and, with a flick of the pen, they will create enough money to buy it all back again. Take this power away from them and all great fortunes like mine will disappear, and they ought to disappear, for then this world would be a happier and better world to live in. But if you want to be slaves of bankers and pay the cost of your own slavery, then let the bankers control money and control credit.” - Lord Stamp, Director of the Bank of England, 1940
“I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is now controlled by its system of credit.
We are no longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and duress of a small group of dominant men.” - Woodrow Wilson, 1919 (Referring to the Federal Reserve and the transition to a debt-based economy)
“The stock of money, prices and output was decidedly more unstable after the establishment of the Reserve System than before. The most dramatic period of instability in output was, of course, the period between the two wars, which includes the severe (monetary) contractions of 1920-21, 1929-33 and 1937-38. No other period in American history contains as many as three such severe contractions. This evidence persuades me that at least a third of the price rise during and just after World War 1 is attributable to the establishment of the Federal Reserve System… and that the severity of each of the major contractions - 1920-21, 1929-33, and 1937-38 - is directly attributable to acts of commission and omission by the Reserve Authorities… Any system which gives so much power and so much discretion to a few men, (so) that mistakes - excusable or not - can have such far reaching effects, is a bad system. It is a bad system to believers in freedom just because it gives a few men such power without any effective check by the body politic - this is the key political argument against an independent central bank… To paraphrase Clemenceau, money is much too serious a matter to be left to the central bankers.” - Milton Friedman, Nobel Prize winning economist.
Presidential candidate and Congressman Ron Paul (R-TX) introduced H.R. 2755 “To abolish the Board of Governors of the Federal Reserve System and the Federal reserve banks, to repeal the Federal Reserve Act, and for other purposes.” This legislation would help to restore the U.S. Constitution, which mandates that only Congress can coin money (Article I, Section 8, Clause 5), and that US debts be settled in silver and gold Article I, Section 10, Clause 1).
This is the second time he has introduced legislation.
Given that one out of six Americans works for government (local, state and federal) or an organization/corporation that receives the majority of its revenues from government, it is easy to see why this news isn't considered newsworthy for the mainstream press. Government workers are dependent upon the printing presses. Politicians certainly don't want the dissolution of the Fed. They borrow money from the bankers and make your great grandchildren pay interest on the debt so they can “bring home the pork”. You did not participate in these loans, you receive no financial benefit from these loans, nor did you sign any contracts making you responsible for the debt, but you and future generations will be forced to pay until Congress dissolves the Fed or there is revolution. There is no other choice.
http://www.govtrack.us/congress/bill.xpd?bill=h110-2755
http://www.freerepublic.com/focus/f-chat/1851968/posts
Stephen King: A crisis of faith among central bankers
19 June 2007, 19:16:37
Stephen King: A crisis of faith among central bankers
Published: 18 June 2007 http://news.independent.co.uk/business/comment/article2670015.ece
I'll begin with a statement of the bleeding obvious. There are lots of things we simply don't know. Those, in turn, can be split into the known unknowns and the unknown unknowns, to use the terminology famously employed by Donald Rumsfeld. Although he was ridiculed for his apparently unusual take on epistemology, his comments were, philosophically, perfectly sensible. Perhaps, though, the context was wrong. He seemed to be using a general point about epistemological uncertainties to provide a specific excuse about policy failure in Iraq.
This raises a more practical issue. To what extent should our leaders admit to their all-too-human frailties? Should they show humility or be resolute in their actions? Should they wear their doubts on their sleeves or, instead, stride confidently forward, heroically brushing aside the countless objections about a given course of action while reading the collected works of Friedrich Nietzsche?
Those who admit to their uncertainties are all too often given a bit of a hard time. You may recall the furore in the 1980s over the then Bishop of Durham's doubts about the virgin birth and his - so it seems - misquoted comments about the resurrection being not much more than a conjuring trick with bones. I'm sure there are plenty of ecclesiastically minded people who, like the Right Rev David Jenkins, doubt the literal truth of the Gospels, but whether they're wise to air their doubts in public is another thing altogether. People in power have a job to do. They have to lead by example, dispelling the manifest uncertainties that infect all walks of life.
So it is with central bankers. Central bankers have to meet the objectives given to them by their political leaders and, these days, those objectives typically amount to the deliverance of price stability. What happens, though, if central bankers start to have doubts? What if they question the wisdom of their inflation-targeting objective? What if they are no longer sure of how to hit their objective? Should they, like the Bishop of Durham, tell the wider world or, instead, should they keep their doubts under wraps, to be discussed with only their closest and most trusted colleagues?
I raise these questions because, within the central banking community, there appears to be some sort of crisis of faith, a crisis that has been reflected in financial market developments in recent weeks. Of course, knowing that bond yields have spiked up says little about the underlying causes. Among the explanations doing the rounds have been Chinese foreign exchange reserve diversification and the greater-than-expected buoyancy of the global economy. The really big worry, though, is the possibility that inflation has returned. If so, either we're about to see bigger price increases or, instead, we're going to have to tolerate higher interest rates to prevent those price increases from coming through. Either way, central banks have got their work cut out.
Why, though, should a suspected build-up of inflationary pressures lead to a crisis of faith? The crisis reflects three separate sources of central bank tension: disagreement, dilution and doubt.
Imagine a world with a single central bank. There would be one objective - global price stability - and one instrument - the global short-term interest rate. Now switch back to the real world: lots of central banks, all of whom have their own separate concerns and views of how the world behaves. Disagreements become the norm.
At the end of last week, markets breathed a sign of relief because the monthly increase in the US consumer price index, excluding the volatile food and energy components, was only 0.1 per cent, pulling the annual rate down towards 2 per cent. From the Federal Reserve's point of view, that's good news because Ben Bernanke and his colleagues like to focus on this "core" measure of inflation. Imagine, though, that the Bank of England was in charge of US monetary policy. The Monetary Policy Committee would focus on the 0.7 per cent monthly increase in the headline consumer price index, which pushed the annual inflation rate up towards 3 per cent, and conclude that inflation was a bit too high. Who's right? A lot depends on the degree to which central banks should take into account "global" inflationary pressures that lie outside their direct control.
Alternatively, think about money supply. The Federal Reserve argues that money supply these days is unimportant because it's so heavily distorted through offshore holdings and the shift away from bank lending towards securitisation. For the European Central Bank and the Bank of England, however, money supply growth is a potential early warning sign of inflationary dangers ahead. Again, who's right? I think the Europeans have got a point, but the dispute reveals a schism in central bank thinking. There may be no nailing of 95 Theses on the Wittenberg church door, but the differences of view threaten disagreements on action.
Dilution comes from the breakdown in linkages between monetary policy and monetary conditions. This, if you like, is an issue of control. Economists often give the impression that a given change in policy rates will have a precise impact on the economy - a bit like shifting the thermostat on your central heating system. Suppose, though, you then discover that only some of the radiators in your house are connected to the boiler and that some malevolent force - perhaps one of your children - keeps opening the doors and windows. Under those circumstances, your chances of reaching the desired ambient temperature are rather low. The same applies to central banks. Their efforts are diluted because other central banks are pulling in different directions.
And, then, finally, there's doubt. Mervyn King, the Governor of the Bank of England, is in danger of becoming a monetary equivalent of the Bishop of Durham. Last week, Mr King gave a speech to the Welsh CBI in which he admitted "our job ... is rather like taking part in a spot-the-ball competition". For the Bank of England, the missing ball is the outlook for inflation and the message seems to be that, like any spot-the-ball competition, the whereabouts of the missing inflationary ball is anybody's guess. Admittedly, some may be more skilled than others in assessing the outlook for inflation but the comparison does not inspire confidence.
In truth, the Governor's comments were made with tongue firmly lodged in cheek, and no doubt he was trying to make inflation targeting sound a bit more interesting than it really is, but his expression of doubt serves to emphasise that central bankers will, from time to time, get things wrong.
But do we want our central bankers to admit this? Of course they'll get things wrong. Of course they'll face challenging times. But it sometimes helps to preserve an aura of invincibility. Why, for example, was the Bundesbank so successful over so many years? How did Messrs Pöhl, Schlesinger and Tietmeyer pull off the German price stability trick from one year to the next? Was it control of the money supply, or independence from government interference, or success with the inflation equivalent of spot the ball? I suspect it was none of these. Instead, their pseudo-religious tones encouraged the German public to keep their faith in price stability. A delusion perhaps, but a jolly useful one nonetheless. Without it, disagreement, dilution and doubt threaten to upset the economic stability we've come to expect over the last few years.
Stephen King is managing director of economics at HSBC stephen.king@ hsbcib.com
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teh
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Re:It’s Official: The Crash of the U.S. Economy has begun.
« Reply #2 on: 2007-06-23 23:37:51 » |
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hmm, maybe now I can afford to buy a house in the UK.
Assuming I still have a job. :-)
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Re:It’s Official: The Crash of the U.S. Economy has begun.
« Reply #3 on: 2007-07-10 02:03:57 » |
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Mortgage resets: Record bill coming due
Billions in subprime ARMs will be subject to higher payments.
Source: CNN Money
Authors: es Christie (CNNMoney.com staff writer)
Dated: 2007-07-09
More than two million subprime adjustable rate mortgages (ARMs) are poised to reset at much higher rates in coming months, worsening an already suffering housing market.
Borrowers who took out hybrid ARMs in 2004 and 2005 to secure low "teaser" rates for the first two or three years of the loan may see their monthly mortgage payments climb by 35 percent or more.
Consumer groups and politicians worry that hundreds of thousands of subprime ARM borrowers will be unable to keep up with their mortgage payments and will lose their homes.
"In October alone more than $50 billion in ARMs will reset," according to Mark Zandi, chief economist and co-founder of Moody's Economy.com. That's a record, according to Zandi.
A buyer in 2005 with poor credit and limited means might have signed on for a $200,000 2/28 hybrid ARM, locking in a fixed rate of 4 percent for two years. After paying $955 a month, his bill would now be set to spike to $1,331, a 39 percent increase.
Until recently, rising home prices bailed out many ARM borrowers in trouble. They could raise cash with cash-out refinancings or home equity lines of credit. If worse came to worse, they could sell the house and get some money back.
But prices have stabilized or slipped in many markets. (Latest home prices.)
As a result, Doug Duncan, chief economist for the Mortgage Bankers Association (MBA), is expecting as many as 600,000 home owners will get into trouble with perhaps half of them actually losing their homes.
One of the reasons for the worsening situation, according to Zandi, is that just as the number of subprime ARMs being underwritten was reaching a high, the quality of loans was hitting new lows.
"There were increasingly poor quality loans made starting in the spring of 2005," he said, "with the poorest of all made during the fall of 2006."
Lenders approved many borrowers who had little chance of being able to afford the payments two and three years out. They approved applications without any proof of income or assets ("liar loans") and others that barely could make the low teaser-rate payments. Some borrowers chose interest-only ARMs, which left the principal of the loan untouched. (Regulators are urging tighter standards.)
"Lenders wanted to keep the pipeline flowing," said Zandi, "and were hopeful that prices would grow again."
The hardest hit areas will fall into two categories, according to Duncan. The regions battered by basic economic storms - think Detroit, Cleveland, St. Louis and other old industrial centers - and high-growth areas where home markets went crazy earlier in the 2000s and where home prices are now falling
Subprime ARM lending was most common in some of those once red-hot areas. According to Zandi, three quarters of all those loans were made in the California, Nevada, Arizona, Florida and Massachusetts markets.
"Prices there are falling quickly, particularly in Florida and Las Vegas," he said. (Florida foreclosures are set to spike.)
There will be more downward pressure on prices as delinquencies, foreclosures and short sales add inventory to markets.
Another factor is that regulators and lenders are attempting to tighten loan underwriting standards, meaning fewer credit-damaged applicants will get approved, lowering demand for homes.
The tightening mortgage-loan standards could also result in short-term foreclosure spikes. Home owners with resetting ARMs, for example, may not qualify for refinancing under the stricter oversight. That could lock borrowers into unaffordable loans and they could lose their homes.
Another increase in supply, according to Josh Rosner, managing director at financial research firm Graham Fisher & Co, will be from investment properties coming back on the market. There was a precipitous burst of buying homes for investment purposes earlier in the decade. In 2005, about 40 percent of all purchases were of second homes and the majority of these were for investment purposes.
As returns on these investment properties decline, owners will bail out, increasing the listing backlog and depressing prices further. The effect of a foreclosure rise and home price slide on the nation's economy may be hard to predict but it will have an impact.
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Re:It’s Official: The Crash of the U.S. Economy has begun.
« Reply #4 on: 2007-07-10 13:06:48 » |
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[Blunderov] Markets rise and fall, it might be argued. Recession follows growth, growth recession. The business cycle, well, it cycles. But the prospects for an economic recovery with oil at $300 seem slim. The International Energy Agency issues a stark warning.
Source:blacksunjournal
World will face oil crunch in five years
10 July 2007, 05:28:18 | BlackSun
The world is facing an oil supply “crunch” within five years that will force up prices to record levels and increase the west’s dependence on oil cartel Opec, the industrialised countries’ energy watchdog has warned. In its starkest warning yet on the world’s fuel outlook, the International Energy Agency said “oil looks extremely tight in five years time” and there are “prospects of even tighter natural gas markets at the turn of the decade”. The IEA said that supply was falling faster than expected in mature areas, such as the North Sea or Mexico, while projects in new provinces such as the Russian Far East, faced long delays. Meanwhile consumption is accelerating on strong economic growth in emerging countries. The problem is exacerbated by the fact that supply from non-members of the Organisation of the Petroleum Exporting Countries will increase at an annual pace of 1 per cent, or less than half the rate of the demand rise.
For those of us who’ve been SHOUTING about this for the past five years and more, it’s about time there was some mainstream acknowledgement. Don’t wait until gas hits $10.00 a gallon or more (and it will) to sell your SUV and buy a more efficient car. If you do, you won’t be able to buy that hybrid or electric at any reasonable price, demand for them will be so high.
As James Howard Kunstler is so fond of saying, you’ll be “stuck up a cul-de-sac in a cement SUV without a fillup.” Oil’s already close to $80/barrel, and the fun hasn’t even started. Matthew Simmons sees a strong possibility of oil prices up to the $300 a barrel range within 5 years. If you’re driving a Denial, a Youcon, an Escalation, a Negativator, or anything of that sort, DUMP THE SUV ALREADY!!!!!!!
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Re:It’s Official: The Crash of the U.S. Economy has begun.
« Reply #5 on: 2007-07-13 03:55:33 » |
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[Blunderov] It seems that the economic meltdown in Zimbabwe may be an intimation of things to come on a global scale.
I found this interesting background information on "stagflation" atWikipedia
<snip>
Historical stagflation
[edit] Stagflation in the late Classical Keynesian Period (1968-1982)
Stagflation occurred in the economies of the United Kingdom in the 1960s and 1970s and the United States during the 1970s, most famously during the Carter Administration. The difficulty in fitting its existence within a Keynesian framework led to a greater acceptance of monetarist theories in the 1970s and 1980s. The pendulum has, to some extent, swung back in the other direction as monetarism has seemed to encounter increasing difficulty predicting the demand for money and the long period of low inflation and high employment during the Y2K/Dot-Com Bubble of the late 1990s and again during the 2004-2006 period, which temporarily drove oil prices high enough to measureably increase inflation during the first three quarters of 2006.
The monetarists would respond that inflation was remarkably stable during the dotcom boom and recession and that the oil price driven inflation was nothing more than the natural increase in price of one commodity rather than true inflation. The rise in oil prices was just that, a rise in oil prices. It had nothing to do with the value of the overall currency even if consumers lost effective currency as a result. The elimination of oil as a commodity would eliminate this "inflation".
[edit] Stagflation worries in the present
During 2006, certain economists believed that global stagflation might return when the price of oil was close to $80 a barrel, and the US Federal Reserve was increasing interest rates. Blogs promoting fears of stagflation began getting attention even before statements by Stephen Roach and Paul Krugman. They cite a cooling housing market combined with a failure to adjust monetary policy as potentially leading to higher than "comfort zone" inflation and slower growth.
The worries multiplied in 2007 . On February 28th China's reaction to its complex domestic policy binds triggered a shock to financial markets (DJIA down 5%)as well as a reminder of the danger China had raised in February 2005 when Chinese economist Fan Gang, director of the state-owned National Economic Research Institute in Beijing, recommended publicly [World Economic Forum, January, 2005] that China sell its hoard of U.S. Treasury debt into the world market because interest rates were too low. China is the second-largest holder of U.S. Treasury debt in the world (after Japan). Such an action would send U.S. interest rates soaring, according to most generally-accepted models of the global economy, since such a massive sale would immediately drive down bond values, thereby raising not only the effective interest rate on existing bonds but also the market into which new bonds were sold. These models show that U.S. interest rates would soar. The polico-economic indication from these models was that the U.S. Federal Reserve was already in the policy bind that would contribute to Stagflation.
Two days earlier (2-26-2007) U.S. Federal Reserve Chairman Alan Greenspan predicted a possible recession in the U.S. before the year 2007 was over, speaking via satellite link to a Hong Kong business group. Some took this to be an indication that his model also recognized that China's policy binds had created a U.S. policy bind which prevented anti-recessionary action by the U.S. Federal Reserve. Others postulated that the higher interest rates prevailing in the U.S. in 2007 were known by him to be the U.S. response that was implemented to forestall the possibility of China's massive bond sale. Still others voiced the conclusion reached after the Nixon-era price controls that high interest rates were in and of themselves inflationary, since the cost of money was factored into models for the unit cost of everything from the price of wheat to the cost of making a high-budget film in Hollywood, a microeconomic measure prevailing in some modern economic models.
At its May 2007 meeting the U.S. Federal Reserve (FOMC Minutes, May 9, 2007, U.S. Treasury Dept.) made the following policy statement: "In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information." The across-the-board reaction was that the widely anticipated July 2007 lowering of U.S. interest rates was no longer feasible, and the Fed's response confirmed to many who maintain a polico-economic models that U.S. economic policy was unfolding in a manner that confirmed that the policy bind which accompanies Stagflation was becoming more visibly present.
On May 11th former U.S. Federal Reserve Chairman Alan Greenspan redefined the odds on a U.S. recession during 2007 from "possible" to "1-in-3".
May ended with the widely publicized report that foreign holdings of U. S. Treasury debt maturing in the three-to-ten year range had reached the 80% level, sparking comparisons to 19th Century America when European lenders provided financing for building U.S. infrastructure projects such as railroads and canals. Today's worries leave U.S. domestic economic policy hostage to international economic factors flowing from spiraling U.S. trade deficits and government deficits.
The first two weeks of June 2007 brought reports that China's trade surplus for the previous month had exceeded $22 billion, which moved the United States Congress, the OECD and the IMF to forcefully describe China's trade and exchange rate policies as "unfair". Also in June China began to show a reluctance to increase its hoard of U.S. Treasury debt and is thought to be the Asian seller with daily offerings of 10-year Treasury notes in the overnight market. This action drove down values and thereby increased the interest yield from its long-established rate below 5.0% to the 5.1-5.2% range with peaks at 5.3%. One result is that the U.S. housing market went into the biggest slump in 15 years. Furthermore, this higher prevailing interest rate triggered a mini-collapse in the already sagging subprime home mortgage market, which leaves a number of New York investment houses in peril of defamation and legal liabilities.
Despite all these adverse signals and an oil price approaching $70 per barrel, the insatiable demand of the U.S. consumer created sufficient optimism for investors to trigger the stock market to its largest three-day advance in 18 months on the occasion of the June 15th triple witching Friday. Ergo, markets were happy.
Ultimately, the current worry reaches epic proportions -- the prospect of global stagflation, a phenomena never before encountered.</url>
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Re:It’s Official: The Crash of the U.S. Economy has begun.
« Reply #6 on: 2007-07-13 07:52:54 » |
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And all the above while the dollar (deservedly) achieves its lowest value ever against the Euro or, if you prefer it, against a barrel (of Brent light). Interestingly, viewed in this way, the stock-market "gains" magically transform into ever deepening losses camouflaged only through increasingly desperate blinding actions, taken at the executive level, yet still of precisely the same nature as gave Enron's management its post-collapse reputation for honesty and transparency.
Unfortunately for traders, the more naive of whom imagine that they are operating in an unfettered market, and even the more cynical having little realization of exactly to what an extent the US economy has been "managed" by the stabilization fund, the US markets are anything but laissez faire. In my opinion, the visible anomalies are simply a reflection of the stabilization group's increasingly desperate activities, injecting ever larger amounts of freshly printed virtual dollars into an ever more unstable economy and ever more precariously balanced financial markets - often in contradiction to their actions of the day before. The last time a national economy was so badly mismanaged, the USSR collapsed. And it should be said, they apparently had more competent managers, more consistent policies and a much more transparent system than we do at this stage. Not that any of this helped them. And of course, as we see today, the USSR actually had the oil resources (even if at the time the USA succeeded in blocking its ability to borrow) to effect an economic turn-around despite having attempted - for a while - to follow the advice of the same American and International "Robber Barons" who appear to be currently engaged in carving up the bones of the USA.
The interventions to prop up the existing major players; at the cost of increasingly meaningless financial data (e.g. the Bush administrations CPI, PPI, M1 and M2 are decidedly untrustworthy given that they no longer reflect energy, property, medical, infrastructure or food costs, and given that most primary processing is no longer accomplished in the USA (meaning that input costs are more a function of arbitrary fiscal policy than they are any concrete costs). Given the mechanisms of the M3, had it continued, it would have given away the unprecedented situation which is why it is no more.) and where their actions, when finally and inevitably disclosed in the ensuing fall-out, will dramatically reduce confidence in US markets and institutions, meaning that the crash, when it comes, is likely to be worse than anything financially triggered seen before, more like the after effects of a rather brutal war (which is indeed the case in Zimbabwe, where an unacknowledged 30 year long, 3 way tribal war has left the country in unrehabilitatable ruins*) than a "market correction" (which given that it will have been triggered by what might charitably be viewed as a presidentially mandated (as opposed to merely sanctioned) fraud, it won't be).
Apropos of something, do you still recall the amazing anti-consumer (and thus constituent) changes in bankruptcy law, given by the Bush administration to the credit and service suppliers? They will likely become ever more relevant in the near future. But hey, in the zero-accountability, Whitehouse-speak of the day, that's in the past. We need to move on now (to the next disaster).
Kind Regards
Hermit
*It used to be possible to visit Rhodesia to visit the Zimbabwe Ruins. Now we (at at least the very brave or foolhardy) visit Zimbabwe to view the Rhodesian Ruins. Difficult to remember today that this was the most productive farming community and greatest agricultural product exporter in Africa. Apropos of something, it can be argued, credibly I think, that the monumental income disparity between the haves and have-nots lead, if only indirectly (The UK advised and guaranteed the transition), to the collapse of the Rhodesian economy. Unfortunately, as a general historical rule which Zimbabwe could not avoid, in effect if not intent, equalizing actions imposed under duress tend not to raise the poor but to lower the rich, resulting in a much smaller pot to share.
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Re:It’s Official: The Crash of the U.S. Economy has begun.
« Reply #7 on: 2007-07-13 12:47:11 » |
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[Blunderov] Thank you Hermit for that last post. It5 was most informative and interesting. As Always.
Here is a link to todays' economic data. Those who know about these things were looking to the retail data for signs of the true state of the US economy and this was, as had been suspected for some while, disappointing.
Seriously of concern is the steady decrease in the value of the dollar and the simultaneously steady increase in the cost of oil for the USA. The brute fact is that supplies of oil are becoming scarcer and harder to exploit. The dreaded double whammy.
Oddly, TMM, the markets seem unfazed. Go figure, as they say.
tradingmarkets
<snip>
Markets May See Weakness On Disappointing Economic Data And Higher Oil Prices - RTTNews Daily Market Analysis
Friday, July 13, 2007; Posted: 09:32 AM
(RTTNews) - The major U.S. index futures are pointing to a slightly higher opening on Friday. Given the buying momentum witnessed yesterday, one cannot rule out some degree of profit taking. The markets may also see some nervousness due to a rise in crude oil prices, specifically following the International Energy Agency's forecast for higher oil product demand. The tidings on the economic front are disturbing, as the Commerce Department reported a decline in retail sales for June, which marked the steepest drop in nearly two years. Import prices also climbed sharply, which may aggravate inflation concerns. Nonetheless, some of the weakness may be mitigated by fairly upbeat results from Dow component General Electric (GE | charts | news | PowerRating) and optimistic expectations regarding the forthcoming second quarter reporting season.</snip>
forbes
Forex - Euro at all-time high against dollar following strong GDP data
07.12.07, 8:49 AM ET
LONDON (Thomson Financial) - The euro continued to post fresh all-time highs against the dollar, supported by an unexpected upward revision to first quarter GDP growth and robust industrial production figures.
First quarter euro zone GDP was revised up to show a 0.7 pct quarter-on-quarter increase from the previous estimate of 0.6 pct, while industrial output in May posted a 0.9 pct monthly rise, reversing's April's 0.9 pct decline.
Much of the euro's gains in recent days have been interpreted as dollar weakness due to concern about the troubled US sub-prime credit market. However Stuart Bennett at Calyon said a key driver has also been the continued strength of the euro zone economy and rising expectations as to where interest rates for the 13-nation currency zone will peak.
'The upward revision to GDP, although somewhat backward looking, does support the upbeat outlook for euro zone growth and reaffirms the likelihood that the European Central Bank (other-otc: CHPA.PK - news - people ) will hike rates to 4.50 pct by January 2008,' he said.
Earlier comments from the ECB that it is monitoring inflation risks closely and remains ready to raise interest rates further if necessary also boosted the euro.
theaustralian
Aussie dollar tipped to break US87c
July 13, 2007
THE Australian dollar closed stronger today at yet another fresh 18-year high after equity markets bounced back.
Better than expected retail sales data in New Zealand also helped the local currency during morning trade.
The domestic currency is tipped to push through the US87c mark tonight for the first time since February 1989 if American economic data is weaker than expected and casts a black Friday spell over the US dollar.
At 5pm (AEST), the Australian dollar was trading at US86.74c up more than half a US cent from yesterday's close of US86.15c.
It traded between a low of US86.22c and a fresh 18-year high of US86.78c during the day.
Overnight, the currency overtook the US86.46c high set on February 16, 1989 and now has the challenge of breaking the next high of US87.95c, which was reached on February 15, 1989.
RBC Capital Markets senior economist Su-Lin Ong said the Australian dollar was likely to break through the US87c barrier tonight if US retail sales data for May was weak.
"If they do print on the soft side as expected, the US dollar comes under pressure and the Aussie gets a leg up," she said.
The Australian dollar rose to its daily high this morning after Statistics New Zealand reported that retail sales rose by a stronger than expected seasonally adjusted 1.2 per cent in May.
That was well above median market predictions of a 0.4 per cent climb.
The New Zealand dollar rose a quarter of a US cent to a high of US78.69c after the data was released, which in turn helped the Australian dollar.
Ms Ong said the Australian dollar rose after the New Zealand data release before falling a little during afternoon trade.
"It hasn't had any local data today so it's taken its direction from the Kiwi," she said.
But a weakness in the US dollar, based on lacklustre economic data and worries about the sub-prime mortgage market, did more to help the Australian dollar during the day.
Woes on the sub-prime mortgage market, where loans are approved for people with a poor credit history, have helped risk-averse investments in recent days.
But today risk assets enjoyed a rebound, which helped the Australian dollar.
The Australian ASX 200 index closed 0.4 per cent higher, while the Dow Jones index was up by 2.1 per cent.
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Re:It’s Official: The Crash of the U.S. Economy has begun.
« Reply #8 on: 2007-07-13 16:44:44 » |
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I figure unless you are intimately involved and understand the medium term issues (which I am not, and I don't) especially in re: to your specific investments, then you should probably just ignore the stock market. It's not like I'm going to sell anything off, so I mostly pay attention to longer-term issues, which at this point makes me feel quite bearish. I suppose if you've got a well diversivied investment portfolio, including things like gold etc., you probably just ignore everything except how much you can figure out to save in taxes. I'm sure if you are Warren Buffett, you've probably got your ass covered, but if you aren't you are probably in for a big butt screwing in the near future. Unfortunately many investors have an irrationally optimistic view of their understanding of the markets and the tax laws which apply thereof. There has been way too much political tweaking of US economy both in terms of fiscal and monetary policy in the last 6+ years, without much regard to the underlying realities of deficit spending and energy costs. The house of cards is due for a catastrophic fall, whether it is next month, or next year. If there was a reliably profitible way to bet significantly beyond that, I might consider it, but too many political realities may postpone many of those for one more year as it likely may. If there is any humanly possible way to postpone catastrophe after Nov 2008, I'm sure the Republican administration will quickly sell their individual and collective souls to do so, even if it sends everyone to economic hell in '09.
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Re:It’s Official: The Crash of the U.S. Economy has begun.
« Reply #9 on: 2007-07-15 04:13:26 » |
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[Blunderov] It is surprising to me that this gathering of omens has not been taken a lot more seriously than the experts seem to be doing. This all looks really bad to me but I suppose the experts must have seen this sort of thing come and go before. Or so they seem to think. Faith in god. Faith in the markets. Seems the faith-based economy is a fact. Why else would the degree of public hysteria, or the lack thereof, be considered an important economic indicator? What, I have to wonder, does "consumer confidence" really have to do with the price of eggs? Retail is down, people; those are the numbers that are meaningful or so it seems to me.
Returning to brass tacks, the following bears out what some of us here have been predicting for a while. I suppose there must be a soupcon of satisfaction in that but not a lot. The world needs the USA economy to function properly.
The lesson for the day is, as Robert Mugabe has discovered, that you can only print so much currency before the punters go elsewhere for value.
[/url=http://www.globalresearch.ca/index.php?context=viewArticle&code=20070714&articleId=6322]globalresearch[/url]
Iran demands Japan's oil payments in yen, not US dollars
The dollar has sharply plummeted against the yen this afternoon on reports Iran has asked Japan to stop paying for its oil in dollars.
The dollar was driven down against the Japanese yen this afternoon, hit by the news that Iran had asked Japan to pay for its oil purchases in the Japanese currency and not in dollars.
Iran has sent a letter to Japanese refiners, signed by Ali A Arshi, the general manager of crude marketing and exports for Iran's national Iranian Oil Company, according to a report by Bloomberg.
The letter asks for yen payments "for any/all of your forthcoming Iranian crude oil liftings."
The request is for all shipments "effective immediately".
Japan's oil payments to Iran rose 12 per cent last year to 1.24 trillion yen (£5 billion).
The yen dropped against the dollar initially coming down to below 120 from 122.40 but later recovered somewhat on strong consumer confidence data from the US.
Three big oil producing nations - Iran, Venezuela and Russia - have all been moving much of their foreign currency reserves from dollars to euros in recent months.
The latest move can only add to the long-term pressure on the dollar, already hit by worries about the US economy based on the crisis in the sub-prime mortgage market.
It was also under pressure against the euro and sterling as US retail sales for June showed their sharpest drop for two years. This was later countered by consumer sentiment data showing consumers had high confidence in July.
By mid session Wall Street was trading up on its record rise from yesterday with the Dow Jones index up 29 points at 13890.
Against the euro, the dollar was still close to all-time highs this afternoon at $1.378 and against sterling it was $2.033.
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Re:It’s Official: The Crash of the U.S. Economy has begun.
« Reply #10 on: 2007-07-26 20:22:32 » |
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Of course one day on the stock market doesn't mean anything by itself, but in the context of this thread, I suppose it could count as the first real signs of queasiness before the big collapse. I noted that other stock markets got hit even harder with the exception of China and Japan which seemed to have already done some major corrections much earlier this year.
Wall St indexes plunge on housing, credit fears
excerpt from http://edition.cnn.com/2007/BUSINESS/07/26/wallst.plunge.reut/?iref=mpstoryview
NEW YORK (Reuters) -- U.S. stocks plummeted on Thursday, with the Dow industrials tumbling more than 300 points, on signs of further weakness in the housing market and deteriorating conditions for corporate buyouts.
The S&P shed about $300 billion in market value in the worst single session since the February 27 global market sell-off, with surprisingly weak earnings reports also weighing on stocks. Even with the sharp decline, the Dow and S&P 500 are within 5 percent of their respective record highs.
[see link for full text]
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Re:It’s Official: The Crash of the U.S. Economy has begun.
« Reply #11 on: 2007-07-26 23:31:22 » |
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The reason for the drop is that the Fed's worries about inflation have been thrown to the wind in the face of a housing and sub-prime induced banking and investment house collapse, and is pumping money into the economy faster than it can be printed (and that isn't a misprint, it is being done by making credit available) to make up for the lack of foreign interest in T-bills at any rate. We may be setting up to compete with Zimbabwe in making the Weimar Republic's (US instigated) inflation rate look moderate. The estimate is that the banking sectoir is goint to lose $100 billion in investment value this year (to put this into perspective, think of it as being another Katrina sized economic debacle - but without offshore reinsurance to carry 80% of the brunt of it). Hell, if Cheney and Co get their prayers answered, for a successful major attack on a US city this summer (in August during the Congressional Recession?), with a declaration of martial law and an attack on Iran (One for Israel!) in close succession, then we may just end up making Mugabe look like a not too terrible a ruler and Zimbabwean Dollar appear to be a valuable instrument.
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Blunderov
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Re:It’s Official: The Crash of the U.S. Economy has begun.
« Reply #12 on: 2007-08-05 01:53:54 » |
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[Blunderov] The logic continues to unwind.
http://www.informationclearinghouse.info/article17214.htm
Tuesday's Market Meltdown; Greenspan's "invisible hand"
By Mike Whitney
02/28/07 "ICH" -- -- Yesterday’s stock market freefall has Greenspan’s bloody fingerprints all over it. And, no, I’m not talking about Sir Alan’s crystal ball predictions about the impending recession; that’s just more of his same circuitous blather. The real issue is the Fed’s suicidal policies of low interest rates and currency deregulation which have paved the way for economic Armageddon. Whether the Chinese stock market contagion persists or not is immaterial; the American economy is headed for the dumpster and it’s all because of the wizened former fed-chief, Alan “Great Depression” Greenspan.
So, what does the stumbling Chinese stock market have to do with Greenspan?
Greenspan was the driving force behind deregulation which keeps the greenback floating freely while the Chinese and Japanese manipulate their currencies. This gives their industries a competitive advantage by allowing them to consistently underbid their foreign rivals. Big business loves this idea, because it offers cheaper sources of labor and allows them to maximize their profits. It’s been a disaster for Americans though, who’ve seen their good paying jobs increasingly outsourced while US manufacturing plants are dismantled and air-mailed to the Far East.
Greenspan has been the biggest champion of deregulation; it’s another way he pays tribute to the Golden Calf of “free trade", the god of personal accumulation.
Yesterday, the Chinese got whacked with their own stick. By keeping the value of their currency down, they spawned a wave of speculation which inflated their stock market by 140% in one year. When the government threatened to tighten up interest rates the stock market went into a nosedive and the overall index got a 9% haircut in a matter of hours. If they had been playing by the “free market” rules, rather than pegging their currency to artificially cheap greenbacks they could have avoided inflating their stock market.
As it happens, the rumblings in the Chinese market sent tremors through the global system and triggered a 416 point loss on Wall Street; the biggest one day slide since 9-11. Now the world is watching nervously to see if the markets can recuperate or if this is just the beginning of America’s great economic unwinding.
Wednesday’s revised numbers of GDP are not encouraging. The Commerce Dept revised their original data from a robust 3.5% GDP to a paltry 2.2. The economy is shrinking faster than anyone had anticipated. Also, durable goods plummeted beyond expectations and the real estate market continues to swoon. Troubles in the sub-prime market are spreading to non traditional loans as more and more over-leveraged homeowners are unable to make their monthly mortgage payments. (By the end of December 24 sub-prime mortgage lenders had already gone belly-up) Greenspan’s empire of debt is bound to come under greater and greater pressure as volatility increases.
On Monday, the National Association of Realtors (NAR) reported a 3% jump in the sales of existing homes, but it was all hogwash. The housing industry has joined the media in trying to conceal what’s really going on by showering the public with cheery talk of a recovery. Don’t believe it. Go to their website and you’ll see that “year over year” January sales were down by a whopping 290,000 homes. Add that tidbit to “new home sales” (announced today) which “fell by 16.6%, the most since 1994” (Bloomberg) and you get bird’s-eye-view of an industry teetering on the brink of collapse.
Greenspan pumped the housing bubble so full of helium; we’ll be feeling the back-draft for a decade or more. Still, the gnomish ex Fed-master had the audacity to stand in front of the cameras and say, “We have not had any major, significant spillover effects on the American economy from the contraction in housing.”
Really?
Apparently, Greenspan hasn’t taken note of the skyrocketing rate of foreclosures or the growing number of people on public assistance. It’s doubtful that one notices the struggles of the working stiff from their manicured sanctuary in the Aspen foothills.
It’s not just the housing market that’s buckling from the expansion of debt, but the stock market as well. The Associated Press reported last week that, “Investors are borrowing at a record pace to sink into the stock market, and the trend is raising concerns on Wall Street about what might happen if a major correction occurs….The amount of margin debt, which is how brokers define this kind of borrowing, hit a record $285.6 billion in January on the New York Stock Exchange. Such a robust appetite, amid a backdrop of complacent market conditions, could leave investors badly exposed if major indexes are snagged by a market decline. Some could find themselves forced to sell stock or other assets to meet what’s known as a margin call, when a broker effectively calls in the loan".
That last time margin debt was this high was at the height of the dot.com bubble in March 2000. We all know how that turned out; the bubble burst taking with it $7 trillion in savings and retirement from working class Americans.
It all could have been avoided if there were prudent and enforceable regulations on margin debt. Of course, that would have been a violation of the central tenet of free market exploitation: “There shall be no law inhibiting the unscrupulous ripping-off of the American people”.
Margin debt is a red flag that the market is over-inflated by speculation. When the market hits a speed-bump like yesterday the fall is steeper than normal, because panicky, over-leveraged investors start scampering for the exits. This probably explains much of what happened on Wall Street after the sudden decline in the Chinese market.
The problems facing the stock market will soon play out whether or not we recover from this “dress rehearsal”for disaster. America’s huge account imbalances and the massive expansion of personal (mortgage) debt ensure that there’s more trouble ahead.
The real problem is deep, systemic and difficult to understand. It relates to basic monetary policy which has been tragically mishandled by the Federal Reserve. A healthy economy requires that money supply not exceed the growth of real GDP; otherwise inflation will ensue. The Fed has been cranking up the money supply at a rate of over 11% for the last 6 years ensuring that we will eventually face a cycle of agonizing hyper-inflation.
More worrisome is the fact that the world is about to face a global liquidity crisis for which there is no easy solution. See, the Fed loans money to the banks by buying government debt. Then, the banks, through the magic of “fractional banking”, are then able to multiply the amount of money they loan out to their customers. In other words, the loans exceed the amount of the reserves by a considerable margin.
Grasping the magnitude of this phenomenon is the only way to appreciate the storm that lies ahead. This excerpt may shed some light on the issue:
“In the 1970s the reserve requirements on deposits started to fall with the emergence of money market funds, which require no reserves. Then in the early 1990s, reserve requirements were dropped to zero on savings deposits, CDs, and Eurocurrency deposits. At present, reserve requirements apply only to "transactions deposits" - essentially checking accounts. THE VAST MAJORITY OF FUNDING SOURCES USED BT PRIVATE BANKS TO CREATE LOANS HAVE NOTHING TO DO WITH BANK RESERVES AND IN EFFECT CREATE WHAT IS KNOWN AS “MORAL HAZARD” AND SPECULATIVE BUBBLE ECONOMIES.
Consumer loans are made using savings deposits which are not subject to reserve requirements. These loans can be bunched into securities and sold to somebody else, taking them off of the bank's books.
THE POINT IS SIMPLE. COMMERCIAL, INDUSTRIAL AND CONSUMER LOANS NO LONGER HAVE ANY LINK TO BANK RESERVES. SINCE 1995, THE VOLUME OF SUCH LOANS HAS EXPLODED, WHILE BANK RESERVES HAVE DECLINED.” (Wickipedia)
That’s why we should not be surprised when we discover that, although there are currently $3.5 trillion in bank deposits in the USA, the actual reserves are about $40 billion.
This system works fairly well unless there’s a major market meltdown or a run on the banks, in which case people will quickly find that there are, in fact, no reserves. Even this would not be a concern if the Fed had not increased the money supply by leaps and bounds while, at the same time, fueling the housing bubble through obscenely low interest rates. Now, millions of homeowners will be facing default on their loans, the banks will be stretched to the max, and the stock market will begin to falter.
Something’s gotta give.
Last week, in Davos, Switzerland, German banker, Max Weber, warned the G-8 Summit, “If you misprice risk, don't come looking to us for liquidity assistance. The longer this goes on and the more risky positions are built up over time, the more luck you need… It is time for financial market to move back to more adequate risk pricing and maybe forego a deal even if it looks tempting… Global liquidity will dry up and when that point comes some of this underpricing of risk will normalize. If there is much less liquidity around, people will not go into such high risk.”
It is unlikely that Weber’s advice will be heeded. The United States has grown addicted to “cheap money” and ever-expanding debt. The Federal Reserve will keep greasing the printing presses and diddling the interest rates until someone takes away the punch bowl and the party comes to an end.
There’ve been plenty of warnings, but they’ve all been brushed aside with equal disdain. In a recent article on Counterpunch.org, (“Lame Duck”) Alexander Cockburn refers to a report published by the Financial Services Authority (FSA) “a body set up under the purview of the British Treasury to monitor financial markets and protect the public interest by raising the alarm about shady practices and any dangerous slides towards instability.”
The report “Private Equity: A Discussion of Risk and Regulatory Engagement” states clearly:
“Excessive leverage: The amount of credit that lenders are willing to extend on private equity transactions has risen substantially. This lending may not, in some circumstances, be entirely prudent. Given current levels and recent developments in the economic/credit cycle, the default of a large private equity backed company or a cluster of smaller private equity backed companies seems inevitable. This has negative implications for lenders, purchasers of the debt, orderly markets and conceivably, in extreme circumstances, financial stability and elements of the UK economy.”
The problem is even worse in the US where personal and mortgage debt has increased by over $7 trillion in the last 6 years! This is not an issue that can be resolved by a meager 10% correction in the stock market. The reaction on Wall Street to the sudden downturn in China demonstrates the fragility of the market and presages greater volatility and retrenchment.
We should expect to see bigger and more destructive market-fluctuations as investors get increasingly skittish over bad economic news and weakness in the dollar. Yesterday’s 400 point somersault is just the first sign that Greenspan’s Goldilocks’ economy is cracking at the seams.
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Blunderov
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Re:It’s Official: The Crash of the U.S. Economy has begun.
« Reply #13 on: 2007-08-06 18:36:11 » |
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[Blunderov] The carnage continues.
http://www.globalresearch.ca/index.php?context=viewArticle&code=20070806&articleId=6467
Stock Market Meltdown
by Mike Whitney
Global Research, August 6, 2007
Information Clearing House - 2007-08-04
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“Whatever is going to happen, will happen...just don’t let it happen to you.” Doug Casey, Casey Research
It’s a Bloodbath. That’s the only way to describe it.
On Friday the Dow Jones took a 280 point nosedive on fears that that losses in the subprime market will spill over into the broader economy and cut into GDP. Ever since the two Bears Sterns hedge funds folded a couple weeks ago the stock market has been writhing like a drug-addict in a detox-cell. Yesterday’s sell-off added to last week’s plunge that wiped out $2.1 trillion in value from global equity markets. New York investment guru, Jim Rogers said that the real market is “one of the biggest bubbles we’ve ever had in credit” and that the subprime rout “has a long way to go.”
We are now beginning to feel the first tremors from the massive credit expansion which began 6 years ago at the Federal Reserve. The trillions of dollars which were pumped into the global economy via low interest rates and increased money supply have raised the nominal value of equities, but at great cost. Now, stocks will fall sharply and businesses will fail as volatility increases and liquidity dries up. Stagnant wages and a declining dollar have thrust the country into a deflationary cycle which has---up to this point---been concealed by Greenspan’s “cheap money” policy. Those days are over. Economic fundamentals are taking hold. The market swings will get deeper and more violent as the Fed’s massive credit bubble continues to unwind. Trillions of dollars of market value will vanish overnight. The stock market will go into a long-term swoon.
Ludwig von Mises summed it up like this:
"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The question is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved." (Thanks to the Daily Reckoning)
It doesn’t matter if the “underlying economy is strong”. (as Henry Paulson likes to say) That’s nonsense. Trillions of dollars of over-leveraged bets are quickly unraveling which has the same effect as taking a wrecking ball down Wall Street.
This week a third Bear Stearns fund shuttered its doors and stopped investors from withdrawing their money. Bear’s CFO, Sam Molinaro, described the chaos in the credit market as the worst he'd seen in 22 years. At the same time, American Home Mortgage Investment Corp---the 10th-largest mortgage lender in the U.S. ---said that “it can't pay its creditors, potentially becoming the first big lender outside the subprime mortgage business to go bust”. (MarketWatch)
This is big news, mainly because AHM is the first major lender OUTSIDE THE SUBPRIME MORTGAGE BUSINESS to go belly-up. The contagion has now spread through the entire mortgage industry—Alt-A, piggyback, Interest Only, ARMs, Prime, 2-28, Jumbo,—the whole range of loans is now vulnerable. That means we should expect far more than the estimated 2 million foreclosures by year-end. This is bound to wreak havoc in the secondary market where $1.7 trillion in toxic CDOs have already become the scourge of Wall Street.
Some of the country’s biggest banks are going to take a beating when AHM goes under. Bank of America is on the hook for $1.3 billion, Bear Stearns $2 billion and Barclay’s $1 billion. All told, AHM’s mortgage underwriting amounted to a whopping $9.7 billion. (Apparently, AHM could not even come up with a measly $300 million to cover existing deals on mortgages! Where’d all the money go?) This shows the downstream effects of these massive mortgage-lending meltdowns. Everybody gets hurt.
AHM’s stock plunged 90% IN ONE DAY. Jittery investors are now bailing out at the first sign of a downturn. Wall Street has become a bundle of nerves and the problems in housing have only just begun. Inventory is still building, prices are falling and defaults are steadily rising; all the necessary components for a full-blown catastrophe.
AHM warned investors on Tuesday that it had stopped buying loans from a variety of originators. 2 other mortgage lenders announced they were going out of business just hours later. The lending climate has gotten worse by the day. Up to now, the banks have had no trouble bundling mortgages off to Wall Street through collateralized debt obligations (CDOs). Now everything has changed. The banks are buried under MORE THAN $300 BILLION worth of loans that no one wants. The mortgage CDO is going the way of the Dodo. Unfortunately, it has attached itself to many of the investment banks on its way to extinction.
And it’s not just the banks that are in for a drubbing. The insurance companies and pension funds are loaded with trillions of dollars in “toxic waste” CDOs. That shoe hasn’t even dropped yet. By the end of 2008, the economy will be on life-support and Wall Street will look like the Baghdad morgue. American biggest financials will be splayed out on a marble slab peering blankly into the ether.
Think I’m kidding?
Already the big investment banks are taking on water. Merrill Lynch has fallen 22% since the start of the year. Citigroup is down 16% and Lehman Bros Holdings has dropped 22%. According to Bloomberg News: “The highest level of defaults in 10 years on subprime mortgages and a $33 billion pileup of unsold bonds and loans for funding acquisitions are driving investors away from debt of the New York-based securities firms. Concerns about credit quality may get worse because banks promised to provide $300 billion in debt for leveraged buyouts announced this year……Bear Stearns Cos., Lehman Brothers Holdings Inc., Merrill Lynch & Co. and Goldman Sachs Group Inc., are as good as junk.”
That’s right---“junk”.
We’ve never seen an economic tsunami like this before. The dollar is falling, employment and manufacturing are weakening, new car sales are off for the seventh straight month, consumer spending is down to a paltry 1.3%, and oil is hitting new highs every day as it marches inexorably towards a $100 per barrel.
So, where’s the silver lining?
Apart from the 2 million-plus foreclosures, and the 80 or so mortgage lenders who have filed for bankruptcy; a growing number of investment firms are feeling the pinch from the turmoil in real estate. Bear Stearns; Basis Capital Funds Management, Absolute Capital, IKB Deutsche Industrial Bank AG, Commerzbank AG, Sowood Capital Management, C-Bass, UBS-AG, Caliber Global Investment and Nomura Holdings Inc.—are all either going under or have taken a major hit from the troubles in subprime. The list will only grow as the weeks go by. (Check out these graphs to understand what’s really going on in the housing market. http://www.recharts.com/reports/CSHB031207/CSHB031207.html?ref=patrick.net
The problems in real estate are not limited to residential housing either. The credit crunch is now affecting deals in commercial real estate, too. Low-cost, low-documentation, “covenant lite” loans are a thing of the past. Banks are finally stiffening their lending requirements even though the horse has already left the barn. Commercial mortgage-backed securities are now nearly as tainted as their evil-twin, residential mortgage-backed securities (RMBS). There’s no market for these turkeys. The banks are returning to traditional lending standards and simply don’t want to take the risk anymore.
Bataan Death March?
Leveraged Buy Outs (LBOs) have been a dependable source of market liquidity. But, not any more. In the last quarter, there was $57 billion in LBOs. In the first month of this quarter that amount dropped to less than $2 billion. That’s quite a tumble. The Wall Street Journal’s Dennis Berman summed it up like this: “the Street is scrambling to finance some $220 billion of leveraged buy out deals” (but) the “mood has gone from Nantucket holiday to Bataan Death March”.
Berman nailed it. The investment banks took great pleasure in their profligate lending; raking in the lavish fees for joining mega-corporations together in conjugal bliss. Then someone took the punch bowl. Now the banking giants are scratching their heads-- wondering how they can unload $220B of toxic-debt onto wary investors. It won’t be easy.
“The banks and brokers are in the bull’s eye,” said Kevin Murphy. “There’s article after article not only on subprime, but also banks sitting on leveraged buy out loans.” (WSJ) Credit protection on bank debt is soaring just as investor confidence is on the wane. In fact, the VIX index (The “fear gauge”) which measures market volatility--- has surged 60% in the last week alone. The increased volatility means that more and more investors will probably ditch the stock market altogether and head for the safety of US Treasuries.
But, that just presents a different set of problems. After all, what good are US Treasuries if the dollar continues to plummet? No one will put up with 5% or 6% return on their investment if the dollar keeps sliding 10% to 15% per year. It would be wiser to one’s move money into foreign investments where the currency is stable.
And, that is (presumably) why Treasury Secretary Paulson is in China today---to sweet talk our Communist bankers into buying more USTs to prop up the flaccid greenback. (Note: The Chinese are currently holding $103 billion in toxic US-CDOs---and are not at all happy about their decline in value.) If the Chinese don’t purchase more US debt, then panicky US investors will start moving their dollars into gold, foreign currencies and German state bonds as a hedge against inflation. This will further accelerate the flight of foreign capital from American markets and trigger a massive blow-off in the stock and bond markets. In fact, this process is already underway. (although it has been largely concealed in the business media) In truth, the big money has been fleeing the US for the last 3 years. What passes as “trading” on Wall Street today is just the endless expansion of credit via newer and more opaque debt-instruments. It’s all a sham. America ’s hard assets are being sold off to at an unprecedented pace.
Credit Crunch: Whose ox gets gored?
When money gets tight; anyone who is “over-extended” is apt to get hurt. That means that the maxed-out hedge fund industry will continue to get clobbered. At current debt-to-investment ratios, the stock market only has to fall about 10% for the average hedge fund to take a 50% scalping. That’s more than enough to put most funds underwater for good. The carnage in Hedgistan will likely persist into the foreseeable future.
That might not bother the robber-baron fund-managers who’ve already extracted their 2% “pound of flesh” on the front end. But it’s a rotten deal for the working stiff who could lose his entire retirement in a matter of hours. He didn’t realize that his investment portfolio was a crap-shoot. He probably thought there were laws to protect him from Wall Street scam-artists and flim-flam men.
It’ll be even worse for the banks than the hedge funds. In fact, the banks are more exposed than anytime in history. Consider this: the banks are presently holding a half trillion dollars in debt (LBOs and CDOs) FOR WHICH THERE IS NO MARKET. Most of this debt will be dramatically downgraded since the CDOs have no true “mark to market” value. It’s clear now that the rating agencies were in bed with the investment banks. In fact, Joshua Rosner admitted as much in a recent New York Times editorial:
“The original models used to rate collateralized debt obligations were created in close cooperation with the investment banks that designed the securities”….(The agencies) “actively advise issuers of these securities on how to achieve their desired ratings” (Joshua Rosner “Stopping the Subprime Crisis” NY Times)
Pretty cozy deal, eh? Just tell the agency the rating you want and they tell you how to get it.
Now we know why $1.7 trillion in CDOs are headed for the landfill.
The downgrading of CDOs has just begun and Wall Street is already in a frenzy over what the effects will be. Once the ratings fall, the banks will be required to increase their reserves to cover the additional risk. For example, “As a recent issue of Grant’s explains, global commercial banks are only required to set aside 56 cents ($0.56) for every $100 worth of triple-A rated securities they hold. That’s roughly 178 to 1 ratio. Drop that down to double-B minus, and the requirement skyrockets to $52 per $100 worth of securities held---a margin increase of more than 9,000%”.
“56 cents ($0.56) for every $100 worth of triple-A rated securities”?!? Are you kidding me?
As Mugambo Guru says, "That is 1/18th of the 10% stock margin equity required in 1929"!! (Mugambo Guru; kitco.com)
The high-risk game the banks have been playing---of “securitizing” the loans of applicants with shaky credit---is falling apart fast. There’s no market for chopped up loans from over-extended homeowners with bad credit. The banks don’t have the reserves to cover the loans they have on the books and the CDOs have no fixed market value. End of story. The music has stopped and the banks can’t find a chair.
The public doesn’t know anything about this looming disaster yet. How will people react when they drive up to their local bank and see plywood sheeting covering the windows?
This will happen. There will be bank failures.
The derivatives market is another area of concern. The notional value of these relatively untested instruments has risen to $286 trillion in 2006---up from a meager $63 trillion in 2000. No one has any idea of how these new “swaps and options” will hold up in a slumping market or under the stress of increased volatility. Could they bring down the whole market?
That depends on whether they’re backed-up by sufficient collateral to meet their obligations. But that seems unlikely. We’ve seen over and over again that nothing in this new deregulated market is “as it seems”. It’s all stardust mixed with snake oil. What the Wall Street hucksters call the “new financial architecture of investment” is really nothing more than one overleveraged debt-bomb stacked atop another. Ironically, many of these same swindles were used in the run-up to the Great Depression. Now they’ve resurfaced to do even more damage. When the crooks and con-men write the laws (deregulation) and run the system; the results are usually the same. The little guy always gets screwed. That much is certain.
At present, the stock market is running on fumes. Another 4 to 6 months of wild gyrations and it’ll be over. The NASDAQ plunged 75% after the dot.com bust. How low will it go this time?
Keep an eye on the yen. The ongoing troubles in subprime and hedge funds are pushing the yen upwards which will unwind trillions of dollars of low interest, short term loans which are fueling the rise in stock prices. If the yen strengthens, traders will be forced to sell their positions and the market will tank. It’s just that simple. The Dow Jones will be a Dead Duck.
So far, Japan ’s monetary manipulations have been a real boon for Wall Street--enriching the investment bankers, the big-time traders and the hedge fund managers. They’re the one’s who can take advantage of the interest rate spread and then maximize their leverage in the stock market. It works like a charm in an up-market, but things can unravel quickly when the market retreats or starts to zigzag erratically. The recent rumblings suggest that the volatility will continue which will push the yen upwards and cut off the flow of cheap credit to the stock market. When that happens, the end is nigh.
The American People: “We’re not a dumb as you think”
It’s always refreshing to find out that the majority of Americans seem to have a grasp of what is really going on behind the fake headlines. For example, The Wall Street Journal/NBC conducted a poll this week which shows that two-thirds of Americans believe that “the economy is either in a recession now or will be in the next year.” That matches up pretty well with the 71% of Americans who now feel the Iraq War “was a mistake”. Americans are clearly downbeat in their outlook on the economy and haven’t been taken in by the daily infusions of happy talk about “low inflation” and “sustained growth” from toothy TV pundits. In fact, the mood of the country regarding the economy is downright gloomy. “Only 19% of Americans say things in the nation are headed in the right direction, while 67% say the country is off on the wrong track”. Iraq , of course, is the number one reason for the pessimism, but the dissatisfaction runs much deeper than just that.
“Only 16% expressed substantial confidence in the financial industry”—“18% in the energy or pharmaceutical industries”—“17% in large corporations and 11% in health-insurance companies”. Only 18% of the people have confidence in the corporate media and only 16% in the federal government.
These are encouraging numbers. They show that the vast majority of people have lost confidence in the system and its institutions. They also illustrate the limits of propaganda. People are not as easily indoctrinated as many believe. Eventually the “bewildered herd” catches on and sees through the lies and deception.
The American people know intuitively that something is fundamentally wrong with the economy. They just don’t know the details or the extent of the damage. Decades of neoliberal policies have inflated the currency, broadened the wealth gap, and destroyed manufacturing. Workers can no longer buy the things they produce because wages have stagnated through a stealth campaign of inflation which originated at the Federal Reserve. When wages shrink, prices eventually fall from overcapacity and the economy slips into a deflationary cycle. This downward spiral ultimately ends in depression. So far, that's been avoided because of the Fed’s massive expansion of cheap credit. But that won’t last.
Economic policy is not “accidental”. The Fed’s policies were designed to create a crisis, and that crisis was intended to coincide with the activation of a nation-wide police-state. It is foolish to think that Greenspan or his fellows did not grasp the implications of the system they put in place. These are very smart men and very shrewd economists. They knew exactly what they were doing. They all understand the effects of low interest rates and expanded money supply. And, they’re also all familiar with Ludwig von Mises, who said:
"There is no means of avoiding the final collapse of a boom brought about by credit expansion.”
A crash is unavoidable because the policies were designed to create a crash. It’s that simple.
The Federal Reserve is a central player in a carefully considered plan to shift the nation’s wealth from one class to another. And they have succeeded. Nearly 4 million American jobs have been sent overseas, the country has increased the national debt by $3 trillion dollars, and foreign investors own $4.5 trillion in US dollar-backed assets. While the Fed has been carrying out its economic strategy; the Bush administration has deployed the military around the world to conduct a global resource war. These are two wheels on the same axel. The goal is to maintain control of the global economic system by seizing the remaining energy resources in Eurasia and the Middle East and by integrating potential rivals into the American-led economic model under the direction of the Central Bank. All of the leading candidates—Democrat and Republican---belong to secretive organizations which ascribe to the same basic principles of global rule (new world order) and permanent US hegemony. There’s no quantifiable difference between any of them.
The impending economic crisis is part of a much broader scheme to remake the political system from the ground-up so it better meets the needs of ruling elite. After the crash, public assets will be sold at firesale prices to the highest bidder. Public lands will be auctioned off. Basic services will be privatized. Democracy will be shelved.
The unsupervised expansion of credit through interest rate manipulation is the fast-track to tyranny. Thomas Jefferson fully understood this. He said:
“If the American people ever allow private banks to control the issue of our currency, first by inflation, then by deflation, the banks and the corporations that will grow up will deprive the people of all property until their children wake up homeless on the continent their fathers conquered.”
We are now in the first phase of Greenspan’s Depression. The stock market is headed for the doldrums and the economy will quickly follow. Many more mortgage lenders, hedge funds and investment banks will be carried out feet first.
As the disaster unfolds, we should try to focus on where the troubles began and keep in mind Jefferson ’s injunction:
“The issuing of power should be taken from the banks and restored to the people to whom it properly belongs.”
Rep. Ron Paul is the only presidential candidate who supports abolishing the Federal Reserve.
Global Research Articles by Mike Whitney
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Re:It’s Official: The Crash of the U.S. Economy has begun.
« Reply #14 on: 2007-08-09 10:41:36 » |
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In Richistan: Fantastic Wealth for a Few; Steady Decline for Many
The Return of the Robber Barons
[Hermit: As usual read skeptically and cross reference. Contra the author, study after study has shown that immigrants, including illegal immigrants, generate substantially more tax revenue than they cost, while the few thriving US businesses, including the financial services and information science sectors are massively dependent on foreign skill sets. I would suggest that three major factors combine to distort this. The abysmal US press, the near non-existence of retraining programs, the pathetic state of logical, mathematical and scientific capability in the ill educated US population (and it should be noted that this is how the US leadership appears to prefer it). The balance of the article seems reasonably sound.]
Sources: Counter Punch
Authors: Paul Craig Roberts
Dated: 2007-08-02
Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He was Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review. He is coauthor of The Tyranny of Good Intentions.
The US economy continues its 21st century decline, even as the Bush Regime outfits B-2 stealth bombers with 30,000 pound monster “bunker buster” bombs for its coming attack on Iran. While profits soar for the armaments industry, the American people continue to take it on the chin.
The latest report from the Bureau of Labor Statistics shows that the real wages and salaries of US civilian workers are below those of 5 years ago. It could not be otherwise with US corporations offshoring good jobs in order to reduce labor costs and, thereby, to convert wages once paid to Americans into multi-million dollar bonuses paid to CEOs and other top management.
Good jobs that still remain in the US are increasingly filled with foreign workers brought in on work visas. Corporate public relations departments have successfully spread the lie that there is a shortage of qualified US workers, necessitating the importation into the US of foreigners. The truth is that the US corporations force their American employees to train the lower paid foreigners who take their jobs. Otherwise, the discharged American gets no severance pay.
Law firms, such as Cohen & Grigsby, compete in marketing their services to US corporations on how to evade the law and to replace their American employees with lower paid foreigners. As Lawrence Lebowitz, vice president at Cohen & Grisby, explained in the law firm’s marketing video, “our goal is clearly, not to find a qualified and interested US worker.”
Meanwhile, US colleges and universities continue to graduate hundreds of thousands of qualified engineers, IT professionals, and other professionals who will never have the opportunity to work in the professions for which they have been trained. America today is like India of yesteryear, with engineers working as bartenders, taxi cab drivers, waitresses, and employed in menial work in dog kennels as the offshoring of US jobs dismantles the ladders of upward mobility for US citizens.
Over the last year (from June 2006 through June 2007) the US economy created 1.6 million net private sector jobs. As Charles McMillion of MBG Information Services reports each month, essentially all of the new jobs are in low-paid domestic services that do not require a college education.
The category, “Leisure and hospitality,” accounts for 30 per cent of the new jobs, of which 387,000 are bartenders and waitresses, 38,000 are workers in motels and hotels, and 50,000 are employed in entertainment and recreation.
The category, “Education and health services,” accounts for 35 per cent of the gain in employment, of which 100,000 are in educational services and 456,000 are in health care and social assistance, principally ambulatory health care services and hospitals.
“Professional and technical services” accounts for 268,000 of the new jobs. “Finance and insurance” added 93,000 new jobs, of which about one quarter are in real estate and about one half are in insurance. “Transportation and warehousing” added 65,000 jobs, and wholesale and retail trade added 185,000.
Over the entire year, the US economy created merely 51,000 jobs in architectural and engineering services, less than the 76,000 jobs created in management and technical consulting (essentially laid-off white collar professionals).
Except for a well-connected few graduates, who find their way into Wall Street investment banks, top law firms, and private medical practice, American universities today consist of detention centers to delay for four or five years the entry of American youth into unskilled domestic services.
Meanwhile the rich are getting much richer and luxuriating in the most fantastic conspicuous consumption since the Gilded Age. Robert Frank has dubbed the new American world of the super-rich “Richistan.”
In Richistan there is a two-year waiting list for $50 million 200-foot yachts. In Richistan Rolex watches are considered Wal-Mart junk. Richistanians sport $736,000 Franck Muller timepieces, sign their names with $700,000 Mont Blanc jewel-encrusted pens. Their valets, butlers (with $100,000 salaries), and bodyguards carry the $42,000 Louis Vuitton handbags of wives and mistresses.
Richistanians join clubs open only to those with $100 million, pay $650,000 for golf club memberships, eat $50 hamburgers and $1,000 omelettes, drink $90 a bottle Bling mineral water and down $10,000 “martinis on a rock” (gin or vodka poured over a diamond) at New York’s Algonquin Hotel.
Who are the Richistanians? They are CEOs who have moved their companies abroad and converted the wages they formerly paid Americans into $100 million compensation packages for themselves. They are investment bankers and hedge fund managers, who created the subprime mortgage derivatives that currently threaten to collapse the economy. One of them was paid $1.7 billion last year. The $575 million that each of 25 other top earners were paid is paltry by comparison, but unimaginable wealth to everyone else.
Some of the super rich, such as Warren Buffet and Bill Gates, have benefitted society along with themselves. Both Buffet and Gates are concerned about the rapidly rising income inequality in the US. They are aware that America is becoming a feudal society in which the super-rich compete in conspicuous consumption, while the serfs struggle merely to survive.
With the real wages and salaries of American civilian workers lower than 5 years ago, with their debts at all time highs, with the prices of their main asset--their homes--under pressure from overbuilding and fraudulent finance, and with scant opportunities to rise for the children they struggled to educate, Americans face a dim future.
Indeed, their plight is worse than the official statistics indicate. During the Clinton administration, the Boskin Commission rigged the inflation measures in order to hold down indexed Social Security payments to retirees.
Another deceit is the measure called “core inflation.” This measure of inflation excludes food and energy, two large components of the average family’s budget. Wall Street and corporations and, therefore, the media emphasize core inflation, because it holds down cost of living increases and interest rates. In the second quarter of this year, the Consumer Price Index (CPI), a more complete measure of inflation, increased at an annual rate of 5.2 per cent compared to 2.3 per cent for core inflation.
An examination of how inflation is measured quickly reveals the games played to deceive the American people. Housing prices are not in the index. Instead, the rental rate of housing is used as a proxy for housing prices.
More games are played with the goods and services whose prices comprise the weighted market basket used to estimate inflation. If beef prices rise, for example, the index shifts toward lower priced chicken. Inflation is thus held down by substituting lower priced products for those whose prices are rising faster. As the weights of the goods in the basket change, the inflation measure does not reflect a constant pattern of expenditures. Some economists compare the substitution used to minimize the measured rate of inflation to substituting sweaters for fuel oil.
Other deceptions, not all intentional, abound in official US statistics. Business Week’s June 18 cover story used the recent important work by Susan N. Houseman to explain that much of the hyped gains in US productivity and GDP are “phantom gains” that are not really there.
Other phantom productivity gains are produced by corporations that shift business costs to consumers by, for example, having callers listen to advertisements while they wait for a customer service representative, and by pricing items in the inflation basket according to the low prices of stores that offer customers no service. The longer callers can be made to wait, the fewer the customer representatives the company needs to employ. The loss of service is not considered in the inflation measure. It shows up instead as a gain in productivity.
In American today the greatest rewards go to investment bankers, who collect fees for creating financing packages for debt. These packages include the tottering subprime mortgage derivatives. Recently, a top official of the Bank of France acknowledged that the real values of repackaged debt instruments are unknown to both buyers and sellers. Many of the derivatives have never been priced by the market.
Think of derivatives as a mutual fund of debt, a combination of good mortgages, subprime mortgages, credit card debt, auto loans, and who knows what. Not even institutional buyers know what they are buying or how to evaluate it. Arcane pricing models are used to produce values, and pay incentives bias the assigned values upward.
Richistan wealth may prove artificial and crash, bringing an end to the new Gilded Age. But the plight of the rich in distress will never compare to the decimation of America’s middle class. The offshoring of American jobs has destroyed opportunities for generations of Americans.
Never before in our history has the elite had such control over the government. To run for national office requires many millions of dollars, the raising of which puts “our” elected representatives and “our” president himself at the beck and call of the few moneyed interests that financed the campaigns.
America as the land of opportunity has passed into history.
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With or without religion, you would have good people doing good things and evil people doing evil things. But for good people to do evil things, that takes religion. - Steven Weinberg, 1999
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