US trapped in depression

The US workforce shrank by 652,000 in June, one of the sharpest contractions ever. The rate of hourly earnings fell 0.1pc. Wages are flirting with deflation. 

by Ambrose Evans-Pritchard
From The Telegraph UK
July 04, 2010

“The economy is still in the gravitational pull of the Great Recession,” said Robert Reich, former US labour secretary. “All the booster rockets for getting us beyond it are failing.”

“Home sales are down. Retail sales are down. Factory orders in May suffered their biggest tumble since March of last year. So what are we doing about it? Less than nothing,” he said.

California is tightening faster than Greece. State workers have seen a 14pc fall in earnings this year due to forced furloughs. Governor Arnold Schwarzenegger is cutting pay for 200,000 state workers to the minimum wage of $7.25 an hour to cover his $19bn (£15bn) deficit.

Can Illinois be far behind? The state has a deficit of $12bn and is $5bn in arrears to schools, nursing homes, child care centres, and prisons. “It is getting worse every single day,” said state comptroller Daniel Hynes. “We are not paying bills for absolutely essential services. That is obscene.”

Roughly a million Americans have dropped out of the jobs market altogether over the past two months. That is the only reason why the headline unemployment rate is not exploding to a post-war high.

Let us be honest. The US is still trapped in depression a full 18 months into zero interest rates, quantitative easing (QE), and fiscal stimulus that has pushed the budget deficit above 10pc of GDP.

The share of the US working-age population with jobs in June actually fell from 58.7pc to 58.5pc. This is the real stress indicator. The ratio was 63pc three years ago. Eight million jobs have been lost.

The average time needed to find a job has risen to a record 35.2 weeks. Nothing like this has been seen before in the post-war era. Jeff Weninger, of Harris Private Bank, said this compares with a peak of 21.2 weeks in the Volcker recession of the early 1980s.

“Legions of individuals have been left with stale skills, and little prospect of finding meaningful work, and benefits that are being exhausted. By our math the crop of people who are unemployed but not receiving a check amounts to 9.2m.”

Republicans on Capitol Hill are filibustering a bill to extend the dole for up to 1.2m jobless facing an imminent cut-off. Dean Heller from Vermont called them “hobos”. This really is starting to feel like 1932.

Washington’s fiscal stimulus is draining away. It peaked in the first quarter, yet even then the economy eked out a growth rate of just 2.7pc. This compares with 5.1pc, 9.3pc, 8.1pc and 8.5pc in the four quarters coming off recession in the early 1980s.

The housing market is already crumbling as government props are pulled away. The expiry of homebuyers’ tax credit led to a 30pc fall in the number of buyers signing contracts in May. “It is cataclysmic,” said David Bloom from HSBC.

Federal tax rises are automatically baked into the pie. The Congressional Budget Office said fiscal policy will swing from
a net +2pc of GDP to -2pc by late 2011. The states and counties may have to cut as much as $180bn.

Investors are starting to chew over the awful possibility that America’s recovery will stall just as Asia hits the buffers. China’s manufacturing index has been falling since January, with a downward lurch in June to 50.4, just above the break-even line of 50. Momentum seems to be flagging everywhere, whether in Australian building permits, Turkish exports, or Japanese industrial output.

On Friday, Jacques Cailloux from RBS put out a “double-dip alert” for Europe. “The risk is rising fast. Absent an effective policy intervention to tackle the debt crisis on the periphery over coming months, the European economy will double dip in 2011,” he said.

It is obvious what that policy should be for Europe, America, and Japan. If budgets are to shrink in an orderly fashion over several years – as they must, to avoid sovereign debt spirals – then central banks will have to cushion the blow keeping monetary policy ultra-loose for as long it takes.

The Fed is already eyeing the printing press again. “It’s appropriate to think about what we would do under a deflationary scenario,” said Dennis Lockhart for the Atlanta Fed. His colleague Kevin Warsh said the pros and cons of purchasing more bonds should be subject to “strict scrutiny”, a comment I took as confirmation that the Fed Board is arguing internally about QE2.

Perhaps naively, I still think central banks have the tools to head off disaster. The question is whether they will do so fast enough, or even whether they wish to resist the chorus of 1930s liquidation taking charge of the debate. Last week the Bank for International Settlements called for combined fiscal and monetary tightening, lending its great authority to the forces of debt-deflation and mass unemployment. If even the BIS has lost the plot, God help us.

Read this! Excellent analysis of the global financial crisis

For an understanding of the global financial crisis and US imperialism Raymond Lotta's article provides plenty of insight. It's long, but very well written. The system is indeed mad, as Lotta convincingly shows us. And it's clear that the corporate imperialists will only "save" the system by destroying the rest of us. While Lotta's analysis focuses on the barbarism of capitalism, it's the mass grassroots struggles around the world which offer hope. The Venezuelan Revolution is one such beacon. There are lessons to be learnt from the revolutionary process in Venezuela that can help us here in Aotearoa. On the UNITYblog sidebar are a number of good articles looking at the exciting things happening in Venezuela. SW-NZ has argued that the Venezuelan Revolution, in the context of global economic, ecological and political crisis and intensifying inter-imperialist rivalry, can play a hugely important role in inspiring people around the world, but can also bring people and movements together. (See Organising to build a global broad left movement, 17.11.07). Nothing less than a global movement of the world's grassroots majority will be capable of bringing justice and sanity to the world. Financial Meltdown & the Madness of Imperialism by Raymond Lotta from Countercurrents.org 16 April, 2008 “The past 10 days will be remembered as the time the U.S. government discarded a half-century of rules to save American financial capitalism from collapse.” - David Wessel, economics editor, Wall Street Journal, March 27, 2008. “Be greedy when others are fearful.” - Warren Buffet, leading investment capitalist, quoted by The Economist, April 5, 2008 “[To the possessor of money capital] the process of production appears merely as an unavoidable intermediate link, as a necessary evil for the sake of money-making. All nations with a capitalist mode of production are therefore seized periodically by a feverish attempt to make money without the intervention of the process of production.” - Karl Marx, Capital, Volume II, ‘The Circuit of Money Capital’ The U.S. economy is experiencing the most wrenching financial turmoil since the Great Depression of the 1930s. Global markets have been reeling – as massive loans have turned bad, speculative bubbles have popped, and giant financial institutions have tottered. Financial turbulence originating in the U.S. has slowly expanded and worsened. There is now a global credit crisis. Banks and financial institutions are weighed down by huge losses caused by “non-performing loans.” Lending channels are choked up, as lenders are being called to pay back their loans, to clean up their balance sheets, and fearful that they are “throwing good money after bad” and won’t be paid back. There is real danger of a breakdown of the financial system. The new president of the International Monetary Fund has stated that the current turmoil poses the greatest financial crisis since the 1930s.1 The U.S. has been at the center of what is now a global financial storm. Bear Stearns, one of the largest and oldest investment banks in the U.S., collapsed in mid-March. The Federal Reserve Bank – which regulates and lubricates the U.S. banking system, and which also plays a special role in the world capitalist economy – has stepped in on an unprecedented scale. Continue

Economic crisis - urgent need for mass broad left alternative

In the article below James Cumes likens the current global economic crisis to the Great Depression of the 1930s. But he says this financial collapse is going to be worse!  

If so, it will be ordinary grassroots people in this country who'll be made to bear the horrendous fallout. But that's if we accept the political status quo. That's if we accept that the NZ Labour Party is the best we can hope for.  

The capitalists will fight to preserve their system by all the means they employed last century. The leadership of the Labour Party does not have the political will, or standing amongst grassroots people, to lead any resistance. We need to build a new mass-based broad left party that strives to give leadership to hundreds of thousands of New Zealanders. 

We must set out today to break the stranglehold of the Labour-National duopoly. This is an urgent task. Many grassroots activists, including Socialist Worker-New Zealand, are throwing their energy into building RAM into a truly mass-based party. A party that aims to win the respect of grassroots people by standing firmly with them on every issue. (For more info on RAM see articles on the sidebar under the heading 'Building a broad left party')  

Such a broad left party can hope to provide the leadership that mobilises people in the struggle against the corporate elites. Who, spurred by the seriousness of the looming economic crisis, will be hatching plans for preserving their domination of society.  

These are challenging times requiring major breaks from the past. To help build a mass-based alternative in Aotearoa join RAM today. Contact Grant Morgan, RAM chair. Email grantmorgan@paradise.net.nz  

The Black Death of financial collapse  

by James Cumes Asia Times 11 April 2008

The financial and economic crisis now upon us is by far the most menacing of the past century - even more so than the Great Depression of the 1930s. It is not just a "subprime" crisis; it is systemic - affecting the entire financial system.

It is also global, affecting various countries in various ways but affecting them all. In achieving a certain "globalization", we have been uniquely successful in globalizing collapse, chaos and misery. It is a globalization which, in our short-sighted negligence, we never envisaged.

In this crisis, even a country such as Australia is no more than a subordinate, neo-colonial, financial and economic dependency. In essence, we have reverted to what we were before and during the Great Depression of the 1930s, when Whitehall, Westminster and the Bank of England played the tune to which we jigged.

Then, from 1945 to 1969, for the first time, we played our own tune of full employment and stable economic growth. Wild radicals such as minister Eddie Ward in the governments of John Curtin (1941-45) and Ben Chifley (1945-49) warned us to be wary of Wall Street.

Continue

US general's glum message to Senate links into crisis times for late capitalism

by Grant Morgan
Chair of RAM - Residents Action Movement


With practical military precision, retired US general William Odom told the Senate foreign relations committee on 2 April that Washington's Iraq strategy is doomed to fail.

Rather than creating a centralised political stability in Iraq suitable for US corporates to exploit Iraqi oil and for the US state to expand control over the Middle East, the general explained why that Washington's strategy was spreading political instability, bolstering the strength of regional militias and their political allies, and pushing Iran into the role of a regional power-broker utterly hostile to America.

The general is, of course, speaking for what he sees as being in the best interests of the US state - not in the interests of grassroots people. However, as an experienced military leader he knows what works and what doesn't.

Odom's Senate testimony exposes the huge divisions within America's elite circles over how to preserve US economic, political and military mastery over the world at a time of growing crisis for the US state.


GLOBAL TSUNAMIS

Washington is facing not only the unravelling of its Iraq strategy, but also:
• The rise of the European Union and, especially, China as economic super-rivals to America.
• The return of Russia as a nuclear-armed energy giant linking up with Beijing in a contra-US alliance.
• The threat of international financial meltdown on the back of a credit crunch, weakening stock market values and a faltering US dollar.
• Venezuela's "socialism of the 21st century", a political challenge to corporate imperialism which is infecting much of Latin America.
• The global uncertainties of an accelerating climate crisis that threatens human extinction unless there is an emergency mobilisation detrimental to market forces.
• The de-legitimisation of neo-liberalism as both an ideology and a political strategy which is spreading like a virus around the world.

In short, global tsunamis of a size that could swamp even the "unsinkable" USS Imperial are being whipped up by the storms of late capitalism. That forecast, given the central role of Washington in the way the world is run, has huge implications for the global system itself, not just the US state.

Naturally, ruling circles everywhere will try to escape the consequences of their own crises by trying to do what they've always done - shove the crisis burdens onto the backs of the world's majority: the workers, small farmers, professionals, homemakers and other grassroots people who do society's useful work for very little pay and even less say in how society is governed.


BROAD LEFT ALTERNATIVE

But it's not all doom and gloom for the grassroots. In many places in many countries, broad left parties are starting to arise which look likely to mobilise the mass forces needed to put humans at the centre of society, not the dollar.

Important successes are being won by broad left parties like the 5-million strong United Socialist Party of Venezuela, The Left in Germany and the Coalition of the Radical Left in Greece.

And important moves towards the creation of broad left parties are happening in countries like Indonesia, France and Malaysia, led by groups of socialists.

A similar process is underway even in New Zealand, sparked by the decision of RAM (Residents Action Movement) to spread nationwide from its Greater Auckland base and to contest parliamentary as well as council elections. (For more on RAM, email grantmorgan@paradise.net.nz or go to UNITYblog sidebar feature "Do we need a broad left party?" - www.UNITYblogNZ.com)

It is a global contest between the oppressive anarchy of system crisis, on the one hand, and the humanistic plan of broad left unity, on the other. Who will win this global contest? That is not pre-determined. Late capitalism's institutional insanity can be overcome through grassroots people uniting for a co-operative, democratic and ecological world.

Our progressive vision stands in stark contrast to the growing crises plaguing even late capitalism's heartland - the US state.

Below is a full reprint of general Odom's testimony to the US Senate. As well as exposing the US state's strategic incoherence, it reeks of a systemic decay that refuses any political quick-fix. Read it and get a better understanding of the system's crises so that people like us are in a better position to mobilise for a grassroots alternative.


US general William Odom tells Senate:
Rapid Withdrawal is Only Solution

TESTIMONY BEFORE THE SENATE FOREIGN RELATIONS COMMITTEE ON IRAQ


By William E. Odom, LT General, USA, Ret.

2 April 2008

Good morning Mr. Chairman and members of the committee. It is an honor to appear before you again. The last occasion was in January 2007, when the topic was the troop surge. Today you are asking if it has worked. Last year I rejected the claim that it was a new strategy. Rather, I said, it is a new tactic used to achieve the same old strategic aim, political stability. And I foresaw no serious prospects for success.

I see no reason to change my judgment now. The surge is prolonging instability, not creating the conditions for unity as the president claims.

Last year, General Petraeus wisely declined to promise a military solution to this political problem, saying that he could lower the level of violence, allowing a limited time for the Iraqi leaders to strike a political deal. Violence has been temporarily reduced but today there is credible evidence that the political situation is far more fragmented. And currently we see violence surge in Baghdad and Basra. In fact, it has also remained sporadic and significant inseveral other parts of Iraq over the past year, notwithstanding the notable drop in Baghdad and Anbar Province.

More disturbing, Prime Minister Maliki has initiated military action and then dragged in US forces to help his own troops destroy his Shiite competitors. This is a political setback, not a political solution. Such is the result of the surge tactic.

No less disturbing has been the steady violence in the Mosul area, and the tensions in Kirkuk between Kurds, Arabs, and Turkomen. A showdown over control of the oil fields there surely awaits us. And the idea that some kind of a federal solution can cut this Gordian knot strikes me as a wild fantasy, wholly out of touch with Kurdish realities.

Also disturbing is Turkey¹s military incursion to destroy Kurdish PKK groups in the border region. That confronted the US government with a choice: either to support its NATO ally, or to make good on its commitment to Kurdish leaders to insure their security. It chose the former, and that makes it clear to the Kurds that the United States will sacrifice their security to its larger interests in Turkey.

Turning to the apparent success in Anbar province and a few other Sunni areas, this is not the positive situation it is purported to be. Certainly violence has declined as local Sunni shieks have begun to cooperate with US forces. But the surge tactic cannot be given full credit. The decline started earlier on Sunni initiative. What are their motives? First, anger at al Qaeda operatives and second, their financial plight.

Their break with al Qaeda should give us little comfort. The Sunnis welcomed anyone who would help them kill Americans, including al Qaeda. The concern we hear the president and his aides express about a residual base left for al Qaeda if we withdraw is utter nonsense. The Sunnis will soon destroy al Qaeda if we leave Iraq. The Kurds do not allow them in their region, and the Shiites, like the Iranians, detest al Qaeda. To understand why, one need only take note of the al Qaeda public diplomacy campaign over the past year or so on internet blogs. They implore the United States to bomb and invade Iran and destroy this apostate Shiite regime. As an aside, it gives me pause to learn that our vice president and some members of the Senate are aligned with al Qaeda on spreading the war to Iran.

Let me emphasize that our new Sunni friends insist on being paid for their loyalty. I have heard, for example, a rough estimate that the cost in one area of about 100 square kilometers is $250,000 per day. And periodically they threaten to defect unless their fees are increased. You might want to find out the total costs for these deals forecasted for the next several years, because they are not small and they do not promise to end. Remember, we do not own these people. We merely rent them. And they can break the lease at any moment. At the same time, this deal protects them to some degree from the government¹s troops and police, hardly a sign of political reconciliation.

Now let us consider the implications of the proliferating deals with the Sunni strongmen. They are far from unified among themselves. Some remain with al Qaeda. Many who break and join our forces are beholden to no one. Thus the decline in violence reflects a dispersion of power to dozens of local strong men who distrust the government and occasionally fight among themselves. Thus the basic military situation is far worse because of the proliferation of armed groups under local military chiefs who follow a proliferating number of political bosses.

This can hardly be called greater military stability, much less progress toward political consolidation, and to call it fragility that needs more time to become success is to ignore its implications. At the same time, Prime Minister Maliki¹s military actions in Basra and Baghdad indicate even wider political and military fragmentation. What we are witnessing is more accurately described as the road to the Balkanization of Iraq, that is, political fragmentation. We are being asked by the president to believe that this shift of so much power and finance to so many local chieftains is the road to political centralization. He describes the process as building the state from the bottom up.

I challenge you to press the administration¹s witnesses this week to explain this absurdity. Ask them to name a single historical case where power has been aggregated successfully from local strong men to a central government except through bloody violence leading to a single winner, most often a dictator. That is the history of feudal Europe¹s transformation to the age of absolute monarchy. It is the story of the American colonization of the west and our Civil War. It took England 800 years to subdue clan rule on what is now the English-Scottish border. And it is the source of violence in Bosnia and Kosovo.

How can our leaders celebrate this diffusion of power as effective state building? More accurately described, it has placed the United States astride several civil wars. And it allows all sides to consolidate, rearm, and refill their financial coffers at the US expense.

To sum up, we face a deteriorating political situation with an over-extended army. When the administration¹s witnesses appear before you, you should make them clarify how long the army and marines can sustain this band-aid strategy.

The only sensible strategy is to withdraw rapidly but in good order. Only that step can break the paralysis now gripping US strategy in the region. The next step is to choose a new aim, regional stability, not a meaningless victory in Iraq. And progress toward that goal requires revising our policy toward Iran. If the president merely renounced his threat of regime change by force, that could prompt Iran to lessen its support to Taliban groups in Afghanistan. Iran detests the Taliban and supports them only because they will kill more Americans in Afghanistan as retaliation in event of a US attack on Iran. Iran¹s policy toward Iraq would also have to change radically as we withdraw. It cannot want instability there. Iraqi Shiites are Arabs, and they know that Persians look down on them. Cooperation between them has its limits.

No quick reconciliation between the US and Iran is likely, but US steps to make Iran feel more secure make it far more conceivable than a policy calculated to increase its insecurity. The president¹s policy has reinforced Iran¹s determination to acquire nuclear weapons, the very thing he purports to be trying to prevent.

Withdrawal from Iraq does not mean withdrawal from the region. It must include a realignment and reassertion of US forces and diplomacy that give us a better chance to achieve our aim.


A number of reasons are given for not withdrawing soon and completely. I have refuted them repeatedly before but they have more lives than a cat. Let try again me explain why they don¹t make sense.

First, it is insisted that we must leave behind a military training element with no combat forces to secure them. This makes no sense at all. The idea that US military trainers left alone in Iraq can be safe and effective is flatly rejected by several NCOs and junior officers I have heard describe their personal experiences. Moreover, training foreign forces before they have a consolidated political authority to command their loyalty is a windmill tilt. Finally, Iraq is not short on military skills.

Second, it is insisted that chaos will follow our withdrawal. We heard that argument as the ³domino theory² in Vietnam. Even so, the path to political stability will be bloody regardless of whether we withdraw or not. The idea that the United States has a moral responsibility to prevent this ignores that reality. We are certainly to blame for it, but we do not have the physical means to prevent it. American leaders who insist that it is in our power to do so are misleading both the public and themselves if they believe it. The real moral question is whether to risk the lives of more Americans. Unlike preventing chaos, we have the physical means to stop sending more troops where many will be killed or wounded. That is the moral responsibility to our country which no American leaders seems willing to assume.

Third, nay sayers insist that our withdrawal will create regional instability. This confuses cause with effect. Our forces in Iraq and our threat to change Iran¹s regime are making the region unstable. Those who link instability with a US withdrawal have it exactly backwards. Our ostrich strategy of keeping our heads buried in the sands of Iraq has done nothing but advance our enemies¹ interest.


I implore you to reject these fallacious excuses for prolonging the commitment of US forces to war in Iraq.

Thanks for this opportunity to testify today.

The 2008 banking crisis

The 2008 banking crisis: Why the housing bubble? Why the crash? by Peter de Waal Over the last three decades the economies of the western world have been driven by an expansion of credit rather than wage growth. And suddenly access to credit is now being switched off overnight as fear grips the rich over the US sub-prime mortgage losses. The house price boom was a global phenomenon coinciding with the low interest rate policies of the central banks of big economies, particularly the US, after the dotcom bust and 11 September 2001. However, a report published by the OECD in 2006 warned that the boom was out of step with economic fundamentals. (See http://www.olis.oecd.org/olis/2006doc.nsf/linkto/ECO-WKP(2006)3 Figure 4 shows how the price to income and price to rent ratios have shot past the trend line since 2001.) As with most other countries you can see that the NZ rents and income curves follow each other closely. So if house prices are rising it does not follow that rents will increase if incomes are static or falling (a fact apparently lost to many amateur property investors).

Typically though, falling rental yields have been masked by asset appreciation. Many landlords who have moved into “property investment” in the last five years have only been breaking even, many have been losing money from day one on the basis that capital appreciation will see them right. However, once the asset class price starts stagnating or falling (e.g. studio apartments in Auckland) the illusion of capital gain can no longer mask the cash drain. Yesterday’s cheery “can’t go wrong with property” speculator is today’s stressed seller, buying food for his family on his credit card because all his income is sucked up by an empty property he can’t let at a rate that covers the mortgage on it...

Continue

The global slump of 2008-09 has begun as poison spreads

by Ambrose Evans-Pritchard  
from www.telegraph.co.uk
12 May 2008

The avalanche of bankruptcies has begun. Six US companies of substance have defaulted on bonds over the past fortnight, against 17 for the whole of last year.
As a "non-believer" in the instant rebound story, I am not easily shocked by gloomy reports. But the latest note by Standard & Poor's - The Bust After The Boom - gave me a fright.

The sick list is varied, though most for now are victims of the housing crash: Linens 'n Things, ($650m), Kimball Hill ($703m), Home Interiors ($310m), French Lick Resorts ($142m), Recycled Paper Greetings ($187m), and Tropicana Entertainment ($2.49bn).

As the Fed's latest loan survey makes clear, lenders have dropped the guillotine. With the usual delay, the poison is spreading from banks to the real world. Diane Vazza, S&P's credit chief, says defaults are rising at almost twice the rate of past downturns.

"Companies are heading into this recession with a much more toxic mix. Their margin for error is razor-thin," she said. Two-thirds have a "speculative" rating, compared to 50pc before the dotcom bust, and 40pc in the early 1990s. The culprit is debt.

"They ramped it up in the last 18 months of the credit boom. A lot of deals were funded that should not have been funded," she said. Some 174 US companies are trading at "distress levels". Spreads on their bonds have rocketed above 1,000 basis points.

This does not cover the carnage among smaller firms outside the rating universe. The California city of Vallejo (117,000 inhabitants) has just made history by opting for Chapter 9 bankruptcy, the result of tax erosion from a 26pc fall in local house prices. Half Moon Bay may be next.

"This is the tip of the iceberg: everybody is going to line up for Chapter 9 in California," said John Moorlach, Orange County board chief.

US consumers are juggling plastic to put off their day of reckoning. The Fed survey said credit card debt had jumped 6.7pc in the first quarter to $957bn, or $6,000 per working American, despite usury rates near 20pc.

"My guess is that many Americans continue to run up massive credit card debt because they have little intention of paying it off," said Peter Schiff at Euro Pacific Capital. Quite.

Thankfully, the Fed's monetary blitz has averted a depression. Emergency lending under the "unusual and exigent circumstances" clause of the Fed Act - the nuclear Article 13 (3), unused since the 1930s - has put a floor under the banking system. There will be no "reset Armaggedon" as rates vault on honey-trap mortgages. Drastic Fed cuts - to 2pc from 5.25pc in September - have conjured away that disaster, at least.

One dreads to think what would have happened if Fed liquidationists (Plosser, Hoenig, Fisher) had prevailed, as they did in 1930 - and still do in Euroland, where Germany's Axel Weber holds sway, and nobody of sense dares lead a mutiny. Despite the rescue, US house prices are likely to fall 25pc from peak to trough (Lehman Brothers, Goldman Sachs). We are barely half done, yet 10m-12m households are in negative equity already.

The bears at Société Générale are going into Siberian hibernation, issuing an "Ice Age" alert. They have slashed exposure to global equities to a minimum 30pc for the first time ever. Their weighting of super-safe "AAA" government bonds has been raised to a maximum 50pc.

This is a bet on gruelling "Japanese" deflation. The bank expects equities to fall by 50pc to 75pc.

"Nowhere and nothing will be immune. We are on the cusp of an equity meltdown that will slash and shred portfolios," said Albert Edward, SG's global strategist.

"We see a global recession unfolding. Liquidity will drain away and crush the twin emerging market and commodity bubbles. The recent hope that 'the worst might be over' is truly staggering. Profits are disintegrating," he said.

Today's "bear rally" may live on into June. Don't count on it. Global bourses are no longer rising hand-in-hand with oil in exuberant celebration of liquidity relief (US, UK, and Canadian rate cuts). Crude ceased to be a friend of equities when it reached around $110 a barrel. At last week's close of $126, it became an outright threat.

The Bush rescue package - $800 in rebate cheques per household - has been rendered null and void by the latest spike. The average US home is now spending over 8pc of income on energy or fuel.

OPEC is playing with fire by refusing to pump more oil to offset rebel attacks in Nigeria. The cartel's output drop of 350,000 barrels a day in April is a hostile act at this point.

But there again, why should Middle Eastern states help America as long as the White House keeps filling the US petroleum reserve to prepare for war with Iran?

Bush is playing with fire, too. The oil spike will burn itself out.

China has hit the buffers. With inflation at 8.5pc, it risks political turmoil. Moreover, it has repeated Japan's mistakes in the 1980s, building too many factories shipping too many goods at slender margins into a crumbling export market. Lehman Brothers' Sun Mingchun says China will tip over in the second half of this year.

"With so much latent overcapacity, an export-led slowdown could trigger a chain reaction which, in the worst case, could threaten the stability of [its] financial and economic system," he said.

Britain, Europe, Japan, and China will go down before America comes back up. This is turning into a synchronised bust, after all.

The Global Slump of 2008-09 is under way.

Financial Meltdown & the Madness of Imperialism

by Raymond Lotta from Countercurrents.org 16 April, 2008 “The past 10 days will be remembered as the time the U.S. government discarded a half-century of rules to save American financial capitalism from collapse.” - David Wessel, economics editor, Wall Street Journal, March 27, 2008. “Be greedy when others are fearful.” - Warren Buffet, leading investment capitalist, quoted by The Economist, April 5, 2008 “[To the possessor of money capital] the process of production appears merely as an unavoidable intermediate link, as a necessary evil for the sake of money-making. All nations with a capitalist mode of production are therefore seized periodically by a feverish attempt to make money without the intervention of the process of production.” - Karl Marx, Capital, Volume II, ‘The Circuit of Money Capital’ The U.S. economy is experiencing the most wrenching financial turmoil since the Great Depression of the 1930s. Global markets have been reeling – as massive loans have turned bad, speculative bubbles have popped, and giant financial institutions have tottered. Financial turbulence originating in the U.S. has slowly expanded and worsened. There is now a global credit crisis. Banks and financial institutions are weighed down by huge losses caused by “non-performing loans.” Lending channels are choked up, as lenders are being called to pay back their loans, to clean up their balance sheets, and fearful that they are “throwing good money after bad” and won’t be paid back. There is real danger of a breakdown of the financial system. The new president of the International Monetary Fund has stated that the current turmoil poses the greatest financial crisis since the 1930s.1 The U.S. has been at the center of what is now a global financial storm. Bear Stearns, one of the largest and oldest investment banks in the U.S., collapsed in mid-March. The Federal Reserve Bank – which regulates and lubricates the U.S. banking system, and which also plays a special role in the world capitalist economy – has stepped in on an unprecedented scale. The Federal Reserve took responsibility for $30 billion of basically worthless assets held by Bear Stearns. This paved the way for another financial titan, JP Morgan Chase, to take over the firm. In addition, the Federal Reserve has injected huge amounts of funds into the financial system to ward off additional bank failures and to restore international confidence in the U.S. economy – and to prevent the financial crisis from becoming a total financial breakdown. Fortune magazine in its April 14 issue analyzes the stakes this way: “The fear – a justifiable one – is that if one big financial firm fails, it will lead to cascading failures throughout the world. Big firms are so interlinked with one another and with other market players that the failure of one large counterparty, as they’re called, can drag down counterparties all over the globe. And if the counterparties fail, it could down the counterparties’ counterparties, and so on.”2 PART I. A FIRST CUT: UNFOLDING OF THE CRISIS The financial tornado gathered force in the spring of 2007, starting in the housing sector. The housing boom of the last few years was a boom in mortgage finance. Lenders, and these were not neighborhood finance companies or street-corner usurers but big corporate financial giants, were seeking to make big profits from their ability to tap into foreign capital flooding into the U.S. over the last decade. The Federal Reserve accommodated and encouraged this by keeping interest rates low. A. Subprime Lending Enter the world of subprime lending. Subprime loans are loans made to borrowers who would not qualify for a prime mortgage – because they might have “bad credit histories,” etc. And these loans were aggressively marketed, pushed on people through all kinds of deceitful means, with Black and Latino households disproportionately targeted and victimized (see Revolution, ‘Subprime Mortgage Crisis,’ April 13, 2008). The originators of these subprime loans, along with various financial middle-men, then “securitized” these loans. This means they combined these loans into larger groups of loans, turned them into complex financial products, and then sold them on financial markets. They sought to maximize fees and to “transfer risk” by quickly selling off these loans to other banks and institutional investors (like mutual and pension funds, university endowments, etc.). But as housing prices turned down and as interest rates went up, homeowners (or those who thought they were homeowners) found themselves strapped with adjustable mortgages requiring larger payments. And many could not afford payments. This triggered a wave of defaults. Investors and institutions that had purchased these mortgage securities (loans that had been grouped into bonds returning interest) found themselves with billions of dollars of near worthless assets. The financial insurers of these loans, yet another layer of “financial middle-men,” could not cover the risks and damage. B. Global Financial Shocks In the summer of 2007, fears of big financial losses caused stock market indexes around the world to plummet, including those in the rapidly growing regions of the Third World. A financial contagion was taking hold. Over a trillion dollars of funds from around the globe – with much of this from Asia and oil-exporting countries – were invested in the U.S. subprime market. The collapse in the value of mortgage and credit instruments originating in the U.S. weakened the financial balance sheets of banks and other overseas holders of these investments and set off tremors. For instance, in Great Britain, there was a run on the Northern Rock bank; a German bank required a bailout; and a leading French bank was hit hard. At the same time, financial institutions in the U.S. and elsewhere holding securities of crumbling or dubious value sought to strengthen their overall financial positions. They not only had to “write down,” that is, greatly reduce the value of the bad (“nonperforming”) loans they held. They also had to sell off “healthier” holdings in other parts of the world (investments unrelated to the subprime activities) in order to meet immediate financial commitments. And these sell-offs have had their own destabilizing global repercussions. This was especially the case last year in the stock markets of the Third World. C. New Dangers and New Risks By March 2008, the prices of stock of the big Wall Street players involved in this investment activity, firms like Goldman Sachs and Merrill Lynch, had fallen by some 40 percent. And since the onset of the credit crisis, financial institutions in the U.S. have “written down” more than $230 billion in mortgage loans and other assets.3 The Federal Reserve has moved to head off financial panic and to stimulate growth. But these moves have aroused new fears in the still unsettled world financial markets. Why? There are concerns about the Federal Reserve’s and U.S. Treasury’s ability to absorb what might amount to be hundreds of billions of dollars in bad investments. There are concerns about the ability of the Federal Reserve to pump huge amounts of funds into the U.S. financial system to keep it afloat. There are concerns that short-term and ad hoc efforts to slash interest rates and bail out financial firms may stoke inflation and further weaken the dollar. This dimension of the crisis, the fragility of the dollar, looms large. It has everything to do with empire. The international role of the dollar – as the world’s leading currency for settling transactions, clearing debts, and holding foreign exchange reserves – is a linchpin of U.S. global supremacy. It is also a linchpin of the whole current global economic order. But the dollar has been battered in international currency markets. In the last few months, it has sunk to new lows against the euro (the currency used in most of Western Europe), against the Japanese yen, and against the Swiss franc. Now the dollar has declined considerably in value relative to other major currencies since 2000. But this has been cushioned, managed, and kept functional by the ability of the U.S. economy to attract huge amounts of foreign exchange and foreign capital into financial markets, especially to finance U.S. Treasury debt. And one of the “disaster scenarios” most worrisome to U.S. imperialist policy makers is the danger of a global run on the dollar: private investors and central banks of other countries unloading their dollar holdings for stronger currencies. D. A Reflection: Transparency and Anarchy In early April, on the eve of a gathering of the world’s finance ministers and treasury officials, the International Monetary Fund issued a report on the financial damage caused by the collapse of the housing and credit markets. It warned that financial institutions worldwide might face losses approaching $1 trillion over the next two years.4 This calculation is far above what had been previously estimated. And according to some financial analysts, even this is a gross understatement. The free market is extolled by bourgeois ideologues for its “transparency.” This is the idea that markets, prices, and interest rates convey all necessary information: about supply, efficiency, choice, and reward. But one of the distinguishing features of this crisis is the incredible and pervasive lack of knowledge among lenders, borrowers, traders, and insurers about the quality and backing of what they borrow from others – and even of what they lend to others! Things are obscured, covered up, and very opaque. * There is the anarchy of capitalism, as giant agglomerations of capital battle others for market share and profits, and pursue competitive strategies that have unforeseen effects on the larger system. * There is the emergence of a newer banking system operating parallel to the older commercial banks. These are the so-called hedge funds, private equity firms, and investment banks. They move huge amounts of capital in and out of financial markets to take advantage of momentary and slight changes in bond prices, interest rates, and currency exchange rates. They borrow against assets that have a shadow existence, far removed from the actual production of value. They have led in creating new financial instruments, in which all kinds of loans of varying risk are bundled together into interest-yielding bonds and the like. And this newer banking system operates in a more unregulated environment than do the commercial banks. * This is a highly competitive, turbo-charged financial world, where huge blocks of capital seek quick gains at the expense of others. In this setting, speculation, fraud, and deception become part of survival strategies. One example of this in the unfolding of the financial crisis: financial agencies that rate the risk of things like mortgage-backed securities earn higher fees for providing favorable ratings on these new “financial products.” So they lied and deceived investors about real risk. This led to mis-pricing and to baseless expectations of return on investments. E. A Reflection: A House, Is Not Always a House As we descend from the skyscrapers of finance to ground level, the human toll comes into clearer view. At the start of 2008, nearly 1.3 million homes in the U.S were in some phase of foreclosure. That works out to more than one in every 100 U.S. households. According to Moody’s Economy.com: “not since the Depression has a larger share of Americans owed more on their homes than they are worth.”5 Think about it. Something as basic and essential as shelter is commodified. A house becomes an investment; its purchase underwritten by tradable financial instruments; and the lure of homeownership then engulfed by the devastating trade winds of the market. And what happens? People’s savings are wiped out. Their creditworthiness is damaged if not destroyed. And many face the prospect of homelessness. The problem is not that people don’t need houses. Nor is it that society doesn’t have the resources or knowledge to build houses. The problem is that capital stands as a barrier to meeting human need. PART II A SECOND CUT: DEEPER CAUSES AND IMPLICATIONS Where all this financial turmoil might lead cannot be predicted. A gigantic, speculative credit bubble has burst. Problems in U.S. lending markets and the U.S. banking system have brought on an economic slowdown in the U.S. This in turn is triggering a global slowdown. Consumer goods exporters of Asia that have relied heavily on trade with the U.S. are especially vulnerable. And so too are countries in Eastern Europe that have borrowed heavily to finance growth. Here is one tiny snapshot of the fallout and pain from the financial crisis. The U.S. housing slump has led to the loss of some 100,000 construction jobs, many that had been filled by undocumented immigrants. That has dramatically slowed the growth of money sent back home by these workers. After nearly quadrupling to $24 billion in 2006 from $6.6 billion in 2000, these earnings sent home grew only 3 percent in 2007, the slowest rate of growth in 20 years.6 Families in Mexico have come to depend on these remittances for food and clothing and other basic essentials. The buildup and collapse of this latest speculative bubble, and intensifying financial fragility that could lead to massive breakdown, are in fact outward expressions of deeper processes and transformations at work in the world capitalist economy. We need to take a step back. A. Globalization and Financialization For the last 15 years, world capitalist expansion has pivoted on a particular international dynamic and structure. This has involved heightened financialization and parasitism in the advanced capitalist countries – with the United States at the epicenter of this process; and the fuller integration of low-cost, export-producing countries of the Third World into the world capitalist market – with China at the epicenter of this process. The turning point in this process was the collapse of the social-imperialist Soviet Union in 1990-91. With the implosion of the Soviet bloc, the main geopolitical obstacle to U.S. imperialist freedom of action was removed. At the same time, and very much in connection with this, imperialist globalization accelerated. (This is analyzed in considerable depth in Notes on Political Economy: Our Analysis of the 1980s, Issues of Methodology, and the Current World Situation, 2000, RCP Publications.) Over the last 15 years, a globally integrated cheap-labor manufacturing economy, with huge labor reserves from China, India, and other parts of the Third World, along with labor from the former Soviet bloc, has been forged. The globalization of production has had enormous effects on world accumulation: raising profitability for imperialist capital, acting to compress wages, and lowering inflationary pressures. The integration of cheap-labor manufacturing into world production is now so deep that in the U.S., fully half of imports (mostly consumer goods) come from the Third World. A revealing statistic: a University of California study looked into who gains when an iPod manufactured by national firms in China is sold in America for $299. Only $4 stays in China with the firms that assemble the devices, while $160 goes to American companies that design, transport, and retail iPods.7 When we speak of capitalist accumulation, we are referring to the competitive production of surplus value (the source of profit) based on the exploitation of wage labor; and the investment and reinvestment of profit on an expanding, cost-cheapening, and technologically more productive basis. When we speak of “financialization,” we are referring to three particular features of the larger structure of capitalist accumulation in this period of imperialist globalization: a) the growing political and economic power of the financial layers of the capitalist class; b) the vast expansion of financial activities and of financial services, like organizing and financing corporate takeovers, insuring investments against risk, creating new financial instruments, etc. – activities in which profit-making involves the siphoning, centralization, and reinvestment of surplus value through financial channels; and c) the increasing separation of finance from production. This process of financialization has gone the furthest in the United States, and it is a major factor in U.S. imperialism’s ability to preserve and extend its dominance in international financial markets.8 Financialization is also a means through which wealth, and effective control over productive forces, is centralized by the imperialist countries – even as production has grown more geographically dispersed and increasingly carried out within subcontractural networks in the Third World. Financialization involves efforts to squeeze out more “value” from already created value. One measure of this is that in 2006, the daily volume of trading in foreign exchange markets and in derivatives (financial instruments) added up to $11.4 trillion – which almost equals the annual value of global merchandise exports that year. In terms of the shifts in the structure of the U.S. economy, the financial sector’s share of total corporate profits has risen from 8 percent in 1950 to 31 percent last year.9 B. Financialization and Production As far removed as finance may be from processes of production, and as elaborate and multi-layered as its operations have become, finance cannot break free of the sphere of production. Even as it objectively seeks to do so – and even as the disjuncture between the two spheres (production and finance) grows – it is the underlying conditions and profitability of production that set the overall conditions for the accumulation of capital. Imperialism is a worldwide system of production and exchange. It is the structure of social production – it is the global production of surplus value based on exploitation of people – that is at the foundation of this whole system. And in relation to the production of surplus value, “financialization” is both parasitic and functional. It is parasitic in the sense that financialization drains value from production. But financialization is functional to the workings of global capitalism in the sense that it facilitates the gathering of money capital into ever-larger agglomerations of capital and finds new profit-yielding channels in which to rapidly invest it – and just as quickly to withdraw it! Global capital faces all kinds of financial uncertainties and risks on its competitive global playing field as it moves through different channels, or circuits, of production. And the “risk-management” techniques provided by the global financial system are actually vital to the accumulation of capital, to the success of “risk-taking,” in the turbo-charged globalized economy.10 That’s why, for example, money jumps into Thai real estate markets one day, and pulls out and goes into ethanol production in Brazil the next – and then back to mortgage securities. And there is something else: the inflows and outflows of short-term and speculative capital also act as a perverse means of imposing discipline on and restructuring capitals – major manufacturing firm can be starved of credit or threatened with a leveraged buyout. And this kind of “financial discipline” has been imposed on whole countries in the Third World – aided, abetted, and orchestrated by the U.S.-dominated International Monetary Fund. All this is part of the reason that financial instability is a constant feature of capitalism in its more globalized and financialized forms of existence. Financialization and the globalization of production have been tightly bound up with each other. It can be put this way: there is a relationship between sweatshop labor in Guangdong province in China, the recycling of China’s export earnings into the U.S. Treasury and U.S. financial markets, and the credit-financed expansion in the U.S. of the last decade. Or, to put it more graphically, there is a link between the agony of superexploited labor in the bowels of the new industrial zones of the Third World, the feverish search for high and quick returns at the top of the financial pyramids, and the chaos of the housing markets with people losing their homes in the U.S. This is an extreme concentration of the nature of world capitalism. This world is highly bound together by production, trade, and finance. The requirements of life (consumer goods) and the requirements of production (machines and raw materials, etc.) are socially produced, that is, they involve the collective and interconnected efforts of wage-laborers in factories, warehouses, and so forth. But this wealth, the technology and means of producing it, and knowledge itself – all this is privately controlled and deployed by a small capitalist class. C. Barriers, Contradictions, and Shifting Tectonic Plates What we are witnessing now is that a particular dynamic of growth, marked by intensified financialization, is generating new contradictions and new barriers to sustained accumulation. The level of debt to economic output in the U.S. is at an all-time high. The financing of the trade and government deficits of U.S. imperialism (that is, providing credit for purchases of imports and having investors buy Treasury debt) depends on a steady and growing inflow of capital from abroad. But the weakening of the dollar and the emergence of competitor currencies, like the euro, increasingly threatens these mechanisms. And very crucial to this has been the process where dollars earned by countries like China through trade with the U.S., are then recycled back into the U.S. economy through purchase of Treasury bonds and other investments. In the U.S., the financial sector is seriously strained and is a flashpoint of heightened global financial instability, if not breakdown, leading to a major economic slump. Here we come to a basic point of this analysis: A financial crisis has broken out because of the severe imbalances built up between the financial system – and its expectations of future profits – and the accumulation of capital, that is, the structures and actual production of profit based on exploitation of wage-labor. The imperialist state is intervening to head off further damage and to discipline and restructure the financial system. But the very complexity of the “financial packages” created during the speculative boom – with their bundled-up loans and long strings of finance – are producing new challenges for policy-makers. As one Yale economist put it, perhaps unintentionally echoing a phrase from Marx: ‘like the sorcerer’s apprentice, we have created things we do not understand and cannot easily control.”11 This explosive uncertainty is developing against a larger international canvas. Major shifts are taking place in the world capitalist economy. The European market recently eclipsed the U.S. market in size. China’s growing demand for raw materials to fuel its export economy is making it a new player in the scramble for resources and control over them. And China’s increasing importance as a supplier of capital to the U.S. is giving it new leverage. Russia is reemerging as a world imperialist player, owing in part to its vast energy reserves and rising oil and gas prices. At the same time, and at this very moment of financial crisis, U.S. imperialism’s freedom of maneuver is severely hobbled – and this includes its ability to stimulate the economy through fiscal and monetary policy. The United States has never run such large current account deficits and no single country’s deficit has ever bulked as large relative to the global economy. D. The Military Fix Which brings us to one of the “dirty little secrets” of the financial crisis: the military needs and the military costs of empire – and “greater empire.” There is a brute fact of imperialist accumulation. The whole imperialist system rests on the domination of vast swaths of the globe through savage force, with the U.S. military colossus playing a special role. The U.S. military helps “create the conditions” for U.S. domination, pro-U.S. client regimes in the Third World, and conditions for investment by U.S. corporations. In the Bush era, U.S. imperialism has been attempting to parlay its military might into a new world order. This involves a restructuring of global political and production relations that will enable it to resolve or mitigate some of the problems and tensions it faces – and to lock in its global supremacy over rivals and potential rivals for decades to come. The U.S. share of world production has declined to about 20 percent, down from 30 percent forty years ago. But U.S. imperialism is compensating for this by pressing its military advantage as sole imperialist “superpower” (since the collapse of the Soviet Union). In a recent study, Chalmers Johnson has calculated that defense-related spending for fiscal 2008 will exceed $1 trillion for the first time in history. Leaving out the wars in Iraq and Afghanistan, defense spending has doubled since the mid-1990s.12 Militarization is also embedded in the U.S. economy. It is a key structural component of growth, scientific research, and technological prowess of U.S. imperialism. And because of its sheer size, it also plays a role in the attempts of the U.S. imperialist state to “manage” and stimulate the economy. But the recent wave of militarization has put enormous financial strains on U.S. imperialism. It has produced huge deficits that cannot be sustained without the inflow of capital into the U.S. And the wars for “greater empire” are incurring astronomically greater costs than military and government planners had anticipated. Not least because of the setbacks and difficulties U.S. imperialism has encountered in Iraq and Afghanistan. This is a sharp contradiction for U.S. imperialism – because in many ways it is staking the future of empire on these wars; but these wars have become more costly to wage. And it is the height of hypocrisy for Democrats to now blame the Iraq war for financial crisis – as they consistently voted for war-spending authorizations, to the tune of $500 billion. PART III: CONCLUSION This is a financial crisis of historic proportions. And like many other events in the world, this crisis points to the fundamental irrationality and cruelty of the system. It also shows the vulnerability of imperialism to sharp turns that could open up new possibilities for revolutionary advance. But things unfold in complex, unpredictable, and historically conditioned ways. And as serious and potentially destabilizing as this crisis may become, it is also possible that U.S. imperialism could turn this crisis to its advantage. We live in an age of “endless war” and environmental devastation. We live in an ever-more globalized capitalist system that thrives on the toil and agony of the great bulk of humanity but that cannot escape the anarchy that lies at its very foundations. There is necessity and freedom for the imperialists. And so too for the people. Footnotes 1. Quoted in Steven R. Weisman, ‘Financial Regulators Suggest Tighter Controls,’ The New York Times, April 12, 2008. 2. Allan Sloan, ‘On the Brink of Disaster,’ Fortune, April 14, 2008, p. 82. A useful discussion of derivatives, hedge funds, and the like is found in ‘The Predators’ Ball Resumes: Financial Mania and Systemic Risk,’ Interview with Damon Silvers, Multinational Monitor, May-June 2007. 3. S. Tully, ‘What’s Wrong With Wall St. and How to Fix It,’ Fortune, April 14, 2008, p. 72; Reed Abelson and Louise Story, ‘G.E. Earnings Drop, Raising Broader Fears,’ The New York Times, April 12, 2008. 4. Sean Farrell, ‘Financial turmoil could cost $1trn, warns IMF as global growth comes under threat,’ Independent.co.uk, 9 April 2008. 5. Data from RealityTrac.com, January 29, 2008; Moody’s Economy.com, February 21, 2008. 6. The New York Times, January 24, 2008. 7. Cited in Charlemagne, ‘Winners and losers,’ The Economist, March 1, 2008, p. 56. 8. Among informative studies of financialization, neoliberalism, and dollar hegemony are David Harvey, A Brief History of Neoliberalism (London: Oxford, 2005); Andrew Glyn, Capitalism Unleashed (London: Oxford, 2006); Kevin Phillips, American Theocracy (New York: Viking, 2006); Ramaa Vasudevan, ‘Finance, Imperialism, and the Hegemony of the Dollar,’ Monthly Review, April 2008; and C.P. Chandrasekhar, ‘Continuity or Change? Finance Capital in Developing Countries a Decade after the Asian Crisis,’ Economic and Political Weekly, December 15, 2007. 9. See Chandrasekhar, ‘Continuity or Change,’ pp. 37-38; The New York Times, December 11, 2007. 10. On financialization as a means to contain financial disorder and to impose neoliberal discipline, see Christopher Rude, ‘The Role of Financial Discipline in Imperial Strategy,’ in Leo Panitch and Colin Leys, eds., Socialist Register 2005: The Empire Reloaded (London: Merlin Press, 2004). 11. David Dapice, ‘Bad Spell on Wall Street,’ Policyinnovations.org, January 24, 2008. 12. Chalmers Johnson, ‘Why the US has really gone broke,’ mondediplo.com (English edition), February 5, 2008. Raymond Lotta is author of the books, America in Decline and Maoist Economics and the Road to Revolutionary Communism, a member of URPE and contributor to Revolution Newspaper

The Great Oil Swindle: How much did the Fed really know?

by Mike Whitney 30 May 2008 
from Information Clearing House

The Commodity Futures and Trading Commission (CFTC) is investigating trading in oil futures to determine whether the surge in prices to record levels is the result of manipulation or fraud. They might want to take a look at wheat, rice and corn futures while they're at it. The whole thing is a hoax cooked up by the investment banks and hedge funds who are trying to dig their way out of the trillion dollar mortgage-backed securities (MBS) mess that they created by turning garbage loans into securities. That scam blew up in their face last August and left them scrounging for handouts from the Federal Reserve. Now the billions of dollars they're getting from the Fed is being diverted into commodities which is destabilizing the world economy; driving gas prices to the moon and triggering food riots across the planet. For months we've been told that the soaring price of oil has been the result of Peak Oil, fighting in Iraq, attacks on oil facilities in Nigeria, labor problems in Norway, and (the all-time favorite)growth in China. It's all baloney. Just like Goldman Sachs prediction of $200 per barrel oil is baloney. If oil is about to skyrocket then why has G-Sax kept a neutral rating on some of its oil holdings like Exxon Mobile? Could it be that they know that oil is just another mega-inflated equity bubble‹like housing, corporate bonds and dot.com stocks‹that is about to crash to earth as soon as the big players grab a parachute? There are three things that are driving up the price of oil: the falling dollar, speculation and buying on margin. The dollar is tanking because the Federal Reserve's low interest monetary policies have kept interest rates below the rate of inflation for most of the last decade. Add that to the $700 billion current account deficit and a National Debt that has increased from $5.8 trillion when Bush first took office to over $9 trillion today and it's a wonder the dollar hasn't gone “Poof” already. According to a January 4 editorial in the Wall Street Journal: “If the dollar had remained 'as good as gold' since 2001, oil today would be selling at about $30 per barrel, not $99 [today $126 per barrel]. The decline of the dollar against gold and oil suggests a US monetary policy that is supplying too many dollars.” (Wall Street Journal 4.1.08.) The price of oil has more than quadrupled since 2001, from roughly $30 per barrel to $126, WITHOUT ANY DISRUPTIONS TO SUPPLY. There's no shortage; it's just gibberish. As to “buying on margin”, consider this summary from author William Engdahl: “A conservative calculation is that at least 60% of today’s $128 per barrel price of crude oil comes from unregulated futures speculation by hedge funds, banks and financial groups using the London ICE Futures and New York NYMEX futures exchanges and uncontrolled inter-bank or Over-The-Counter trading to avoid scrutiny. US margin rules of the government’s Commodity Futures Trading Commission allow speculators to buy a crude oil futures contract on the Nymex, by having to pay only 6% of the value of the contract. At today's price of $128 per barrel, that means a futures trader only has to put up about $8 for every barrel. He borrows the other $120. This extreme “leverage” of 16 to 1 helps drive prices to wildly unrealistic levels and offset bank losses in sub-prime and other disasters at the expense of the overall population.” So the investment banks and their trading partners at the hedge funds can game the system for a mere 8 bucks per barrel or 16 to 1 leverage. Not bad, eh? Is it possible that gambling on oil futures might be a temptation for banks that are already underwater from a trillion dollars worth of mortgage-related deals that have “gone south” leaving the banking system essentially bankrupt? And if the banks and hedgies are not playing this game, then where is the money coming from? I have compiled charts and graphs that show that nearly two-thirds of the big investment banks' revenue came from the securitization of commercial and residential real estate loans. That market is frozen. Besides, this is not just a matter of “loan delinquencies” or MBS that have to be written off. The banks are "revenue starved". How are they filling the coffers? They're either neck-deep in interest rate swaps, derivatives trading, or gaming the futures market. Which is it? Of course, there is one other possibility, but if that possibility turned out to be right than it would cast doubt on the legitimacy of the entire financial system. In fact, it would prove that the system is being rigged from the top-down by our friends at the Banking Politburo, the Federal Reserve. Here goes: What if the investment banks are trading their worthless MBS and CDOs at the Fed's auction facilities and using the money ($400 billion) to drive up the price of raw materials like rice, corn, wheat, and oil? Could it be? Could the Fed really be looking the other way so it can bail out its banking buddies while they drive prices skyward? If it is true (and I suspect it is) it hasn't done much good. As the Associated Press reported yesterday: “The Federal Reserve announced Thursday that it will make a fresh batch of short-term cash loans available to squeezed banks as part of an ongoing effort to ease stressed credit markets. The Fed said it will conduct three auctions in June, with each one making $75 billion available in short-term cash loans. Banks can bid for a slice of the available funds. It would mark the latest round in a program that the Fed launched in December to help banks overcome credit problems so they will keep lending to customers.” Another $225 billion for the bankers and not a dime for the struggling homeowner! The Fed is bankrupting the country with their permanent rotating loans to keep reckless speculators from going under. So much for moral hazard. As far as speculation, there is ample evidence that the system is being manipulated. According to MarketWatch: “Speculative activity in commodity markets has grown 'enormously' over the past several years, the Homeland Security and Governmental Affairs Committee said in a news release. It pointed out that in five years, from 2003 to 2008, investment in the index funds tied to commodities has grown by 20-fold -- to $260 billion from $13 billion.” And here's a revealing clip from the testimony of Michael W. Masters of Masters Capital Management, LLC, who addressed the issue of “Commodities Speculation” before the Committee on Homeland Security and Governmental Affairs this week: “Today, Index Speculators are pouring billions of dollars into the commodities futures markets, speculating that commodity prices will increase... In the popular press the explanation given most often for rising oil prices is the increased demand for oil from China. According to the DOE, annual Chinese demand for petroleum has increased over the last five years from 1.88 billion barrels to 2.8 billion barrels, an increase of 920 million barrels. Over the same five-year period, Index Speculators¹ demand for petroleum futures has increased by 848 million barrels. THE INCREASE IN DEMAND FROM INDEX SPECULATORS IS ALMOST EQUAL TO THE INCREASE IN DEMAND FROM CHINA.” "Index Speculators have now stockpiled, via the futures market, the equivalent of 1.1 billion barrels of petroleum, effectively adding eight times as much oil to their own stockpile as the United States has added to the Strategic Petroleum Reserve over the last five years. "Today, in many commodities futures markets, they are the single largest force. The huge growth in their demand has gone virtually undetected by classically-trained economists who almost never analyze demand in futures markets. "As money pours into the markets, two things happen concurrently: the markets expand and prices rise. One particularly troubling aspect of Index Speculator demand is that it actually increases the more prices increase. This explains the accelerating rate at which commodity futures prices (and actual commodity prices) are increasing. The CFTC has taken deliberate steps to allow CERTAIN SPECULATORS VIRTUALLY UNLIMITED ACCESS TO THE COMMODITIES FUTURES MARKETS. The CFTC has granted Wall Street banks an exemption from speculative position limits when these banks hedge over-the-counter swaps transactions. This has effectively opened a loophole for unlimited speculation. When Index Speculators enter into commodity index swaps, which 85-90% of them do, they face no speculative position limits.... The result is a gross distortion in data that effectively hides the full impact of Index Speculation.” (Thanks to Mish's Global Economic Trend Analysis, the one “indispensable” financial blog on the Internet) Masters adds that the CFTC is pressing to make “Index Speculators exempt from all position limits” so they can make “unlimited” bets on the futures which are wreaking havoc on the global economy and pushing millions towards starvation. Of course, these things pale in comparison to the higher priority of fatting the bottom line of the parasitic investor class. Brimming oil tankers are presently sitting off the coasts of Iran and Louisiana. The Strategic Petroleum Reserve has been filled. Demand is flat. The world's biggest consumer of energy (guess who?) is cutting back . As CNN reports: “At a time when gas prices are at an all-time high, Americans have curtailed their driving at a historic rate. The Department of Transportation said figures from March show the steepest decrease in driving ever recorded. Compared with March a year earlier, Americans drove an estimated 4.3 percent less - that's 11 billion fewer miles, the DOT's Federal Highway Administration said Monday, calling it 'the sharpest yearly drop for any month in FHWA history'." The great oil crunch is another fabricated crisis, another "smoke and mirrors" fiasco, another Enron-type shell-game engineered by banksters and hedge fund managers. Once again, the bloody footprints can be traced right back to the front door of the Federal Reserve. Don't expect help from the regulators either ­ they've all been replaced with business reps like Harvey Pitt or Hank Paulson. The only time anyone in the Bush administration finds their conscience is when they're offered a multi-million dollar “tell all” book deal.

The 2008 banking crisis: Why the housing bubble? Why the crash?

by Peter de Waal Over the last three decades the economies of the western world have been driven by an expansion of credit rather than wage growth. And suddenly access to credit is now being switched off overnight as fear grips the rich over the US sub-prime mortgage losses. The house price boom was a global phenomenon coinciding with the low interest rate policies of the central banks of big economies, particularly the US, after the dotcom bust and 11 September 2001. However, a report published by the OECD in 2006 warned that the boom was out of step with economic fundamentals. (See http://www.olis.oecd.org/olis/2006doc.nsf/linkto/ECO-WKP(2006)3) Figure 4 shows how the price to income and price to rent ratios have shot past the trend line since 2001.) As with most other countries you can see that the NZ rents and income curves follow each other closely. So if house prices are rising it does not follow that rents will increase if incomes are static or falling (a fact apparently lost to many amateur property investors). Typically though, falling rental yields have been masked by asset appreciation. Many landlords who have moved into “property investment” in the last five years have only been breaking even, many have been losing money from day one on the basis that capital appreciation will see them right. However, once the asset class price starts stagnating or falling (e.g. studio apartments in Auckland) the illusion of capital gain can no longer mask the cash drain. Yesterday’s cheery “can’t go wrong with property” speculator is today’s stressed seller, buying food for his family on his credit card because all his income is sucked up by an empty property he can’t let at a rate that covers the mortgage on it. NZ Housing Severely Over-Valued The New Zealand economy has been sustained by two things: farming income from primary produce sales and attracting successive waves of cashed-up migrants to hold up the inflated values of the local housing stock. Why should a house in Auckland be worth as much as a house in London or Sydney when the local economy is many times smaller? Global warming is bringing increased instability to the farming sector, as this years’ exceptional drought has shown, and migration is tending to zero as the world economy slows. Historically the long term value of housing in New Zealand (and UK, USA, Canada) is around 3-4 times the average wage. This would make the average New Zealand house worth $120,000 to $160,000. Now that so many home owners have been hooked into “betting the farm” on speculative investment in unliveable apartment space in central Auckland, it must flow on to the assets securing these loans: the suburban 3-4 bedroom house market. (See ‘Mortgagee auctions put valuations in spotlight’, Sunday Star Times, 24 February 2008, http://www.stuff.co.nz/4413930a13.html) A few months ago NZ economists were talking of a two year correction in the housing market. A recent article gives five years as a likely correction period. (See ‘Snapshot of a slump, Auctions fail to fire, 10% drop predicted’, Sunday Star Times, 2 March 2008, http://www.stuff.co.nz/sundaystartimes/4422356a6005.html). So will the housing market come down with a thump, or will it remain stagnant for 5-10 years as wages catch up with inflated values? Given that wages would have to at least triple to restore the long-term price to income and price to rent ratios, which is unlikely, I suggest that a grinding collapse will happen in stages. NZ Home Values A nasty correction is looming. A fall from an average value of $400,000 to $160,000 could see many people thrown out of their homes as they move into negative equity. This situation is no accident. According to local investment expert Brian Gaynor: Aggressive lending by the trading banks has played a major role in the housing boom. Between January 2002 and this January bank mortgage lending surged by 115.2 per cent, from $68.6 billion to $147.6 billion. This has been encouraged by bank capital adequacy rules that allow banks to lend twice as much on residential property for any given amount of capital compared with most other types of loans. For example, banks have been able to lend $200 million on residential mortgages for every $8 million of capital but only $100 million to businesses for the same amount of capital. This has encouraged the Australian-owned banks to focus on housing loans in NZ because it minimizes the amount of capital they have had to commit to this country. The housing market has a huge impact on the New Zealand economy because in terms of the total housing values/share market capitalisation ratio and total housing values/GDP ratio we are far more dependent on residential property than any other western country. There has been a great deal of comment and analysis about the wealth effect of sharemarket falls on the United States economy but we should be much more concerned about the wealth impact of a decline in house prices on retail spending and the New Zealand economy. (‘Falling house prices start ripple effect’, NZ Herald, 15 March, 2008, http://www.nzherald.co.nz/section/3/story.cfm?c_id=3&objectid=10498271&pnum) The government’s capital-adequacy rules were a cornerstone of this particular south seas housing bubble – a state-sponsored housing Ponzi-scam! (See http://en.wikipedia.org/wiki/Ponzi_scam) What a gift to the banks! NZ Savings + Re-Financing Loans New Zealand has an abysmal savings record, mainly brought about by the pitiful wages paid here and the very high real cost of living. So NZ bankers have turned to the lucrative Japanese Yen-NZ Dollar carry trade to provide funds to inflate house prices (and their profits) to their current astronomical levels. However this convenient trade is collapsing: The yen “carry trade” - borrowing cheap in Tokyo to chase yields from New Zealand, to Brazil, Iceland, and above all Britain - has juiced the global asset boom this decade by $1,000bn. It is perhaps the biggest liquidity pump of them all, yet it stopped pumping in August. Indeed, it is sucking the money back out again. The yen is soaring. (‘Japan is the next sub-prime flashpoint’, Telegraph, 13 February 2008, http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=&xml=/money/2008/02/10/ccjapan110.xml) And, The currency has appreciated by 19pc against the (US) dollar to yen103 since July as Japanese investors retreat from global markets. Foreign hedge funds that borrowed at near zero-rates in Tokyo to chase higher yields abroad are scrambling to unwind ‘carry trade’ positions, estimated at $1.4 trillion in its varied forms. Fukoku Life, the giant life assurance company, said it planned to ‘pull out’ of US bonds in preference for Japanese debt, a move underway across the Japanese corporate sector as the US yield advantage vanishes. ‘People are reconsidering the risks (in the US), and see the subprime problems as not being solved at all,’ said Yuuki Sakurai, the group’s finance chief. (‘Japan may cap yen to stave off slump’, Telegraph, 5 March 2008, http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=&xml=/money/2008/03/04/ccjapan104.xml) The question for all those New Zealand mortgage holders, many of whom will be refinancing this year, is where will the money come from? Now that the capital is being drawn back to the “saving” economies (Japan, Russia, the Middle East oil states and China) following the huge losses on US sub-prime loans, the Australian and local banks are going to have a hard time finding money to lend to NZ homeowners. So brace yourself for painful rises in interest rates as money becomes much harder to borrow. Although it will be a world-wide deflationary crisis, interest rates will rise sharply in New Zealand. NZ Landlords Response: Fleece the poor The NZ Herald describes the reaction of one landlord to the fall in house prices and rising interest rates: Withers, who has been investing in property since his university days, said rental property owners should look at improving their properties and reviewing their rents. He estimates some properties in Auckland have rents that are up to 15 years out of date. All the landlord is doing is subsidising someone else’s living costs. (‘Expert advice: Hold on tight for the housing crisis sales’, NZ Herald, 9 March 2008, http://www.nzherald.co.nz/section/1/story.cfm?c_id=1&objectid=10497016&pnum) Perhaps Mr. Withers should also note that most workers’ wages in NZ are 24 years out of date! House prices rose into the stratosphere while real wages are a fraction of what they were. That’s why there is a ‘correction’ taking place! Negative Equity The problem for the average worker will be if the value of the house they “own” falls below the amount the bank has mortgaged over the property. Banks are then entitled to ask for cash to restore their equity in the mortgage. In past slumps (UK early 1990s) they typically gave 30 days for such money to be produced before resorting to mortgagee sales. In the UK in the early 1990s there were 3000 such sales every week. Whether the banks resort to such practices again depends on how panicked they become. Much of banking practice seems to be a matter of whim, for example widespread lending with no reference to borrowers’ ability to pay, mortgages for 95%, 100% or more of the value of the property. Last year, another Sunday Star Times article stated that such essentially unsecured lending accounted for over 40% of the New Zealand mortgage market: Wellington-based Mike Pero broker Tony Sule estimates that about 40% of first-time homebuyers are opting for 100% loans as they are desperate to get into the market in case it becomes even less affordable. Adam Parore, founder of Adam Parore Mortgages, agreed saying buyers with cash deposits were becoming rarer. “I suspect another 50% are at 5% deposit, 10% at 10% deposit and almost none with a bigger deposit than that. The number of first home buyers with the standard 20% is basically zero you get one every now and then, but they are like hen's teeth.” The rise of the 100% mortgage, now available from all major banks, began in late 2005. They have become increasingly popular as house affordability drops a recent Massey University report found it had declined 70% in the past five years. New Zealand’s mortgage market is worth about $148 billion, of which about 40% matures each year and must be re-fixed. It is not known how much of that is 100% mortgages. (‘100% loans new norm for buyers’, Sunday Star Times, 7 October 2007, http://www.stuff.co.nz/stuff/sundaystartimes/4228640a6442.html) The availability of such mortgages allows the cheapest houses to be “bided up” by buyers who previously would not have been able to enter the market. Low or no deposit mortgages further raise the profits of the estate agents and the banks. Liquidity Crisis The sub-prime housing crisis has been characterised as a glut of mortgage lending to people who couldn't afford it. The US housing market has fallen 9.1% on a year-to-year basis, and 18% in the last quarter. (See ‘Ninja loans explode on sub-prime frontline’, Telegraph, 4 March 2008, http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/03/ccsubprime103.xml) In the UK building societies and banks are raising the minimum deposit for a new mortgages to at least 10% and as high as 25%. This will further collapse the market. (See ‘Buyers who do not have 10% deposits are left out in the cold’, The Times Online, 29 February 2008, http://business.timesonline.co.uk/tol/business/money/property_and_mortgages/article3456174.ece) Many other people in NZ with substantial amounts paid off their mortgages are also at risk, should the banks decide that with a collapsed lending market and falling house prices the banks’ equity is under threat. If negative equity becomes widespread expect a letter asking for the difference between what you bought the house for and what it is now worth, payable in 30 days! Failure of the Stock Market & the Flight to Commodities The failure of stocks, bonds and housing as investment vehicles has caused a speculative flight to commodities: It is taken for granted that China will continue gobbling up the world's resources with a limitless appetite, the world faces an inflationary fire and that the dollar will slide further. However, these assumptions are less certain than they look. “The strength of base metals is absolutely bewildering given that the US is falling into recession,” said Stephen Briggs, a metals analyst at Société Générale. “America matters. There is economic contagion in Europe and it is spreading to emerging markets as well, yet people don’t seem to care. They are taking no notice of the economic fundamentals, or they’re betting that supply will continue to fall short even if demand slows. This is dangerous. Base metals are highly cyclical. Sentiment can change overnight,” he said. Is China really big enough to offset construction slumps now engulfing the US, UK, Japan and much of the Eurozone? One cannot ignore 60pc of the world's economy. (‘Fears of a commodity crash grow’, Telegraph, 4 March 2008, http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=A1YourView&xml=/money/2008/03/04/cccomms104.xml) Will today’s high commodity prices be transformed into tomorrow’s collapse as demand slumps? It appears that the deflationary crisis is gathering speed. Calls to slash Federal Reserve interest rates to 1% as a massive decline in demand across the whole US economy driven by the sub-prime housing crunch is eerily similar to what happened in Japan 20 years ago. Land/house prices have not recovered in Japan to this day. What started as a crisis in one particular sphere of the market has extended to all others. A general crisis of capitalism is in the offing. For example the entire US mortgage market has entered a negative-equity crisis: The Fed is becoming increasingly concerned about the “wealth effective” as plummeting house prices and losses on the stock market combine to crimp spending. Its “Flow of Funds” report this week showed that household assets had dropped 1pc to $57.72 trillion in the final quarter of 2007, the first fall in six years. Mortgage debt is now greater than home equity for first time since records began. (‘US Fed pins economic hopes on $200bn liquidity boost’, Telegraph, 9 March, 2008 http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/08/cnusfed108.xml This is spinning off into the larger US economy with devastating results. Workers are being hit hard as the US ruling class attempt to avoid ruin: Grim jobs data released by the Labour Department showed that employers had cut the workforce by 63,000 in February, the sharpest drop since the dotcom bust. (‘US Fed pins economic hopes on $200bn liquidity boost’, Telegraph, 9 March, 2008 http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/08/cnusfed108.xml Decoupling Theory Some economists have been pushing the idea that the economies of the emerging “third world” countries have become self-sustaining: the so-called “decoupling theory”. They asserted that they would be able to ride out the financial storm in the West. OECD reports of declines in India and China show this is not true: Japan’s machine orders dropped 2.8 per cent in November and a further 3.2 per cent in December. January housing starts fell to the lowest in 40 years, down 18 per cent on the year. Tokyo property was off 22 per cent. Can this still be blamed purely on a change in building rules? “Recession is a clear and present danger in Japan,” said Tetsufumi Yamakawa, chief Japan economist for Goldman Sachs. “The leading indicators are deteriorating very sharply. Inventory is piling up at a rapid pace. There are clear signs of deceleration in exports of steel and semi-conductors to China,” he said. Yes, China. It turns out that the intra-Asia trade that was supposed to immunise the region against a slump is a disguised supply-chain ending up in the US market. American shoppers still make 30 per cent of global demand, just as it did a decade ago. Nothing has really changed. (Telegraph, 13 February 2008, http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=&xml=/money/2008/02/10/ccjapan110.xml A Generalised Crisis The UK banks are struggling to borrow money, despite having a strong well diversified economy: Bear Stearns is perhaps the most severely exposed American bank to the sub-prime mortgage crisis sweeping the world's biggest economy. Peter Spencer, economic adviser to the Ernst & Young Item Club said: “I'm afraid this is now tending towards the apocalyptic scale. This is really the second stage in the credit crisis. This will have a definite impact on British households. The point is that mortgage lenders here were until recently raising around a quarter of their funds from international markets. These are now frozen, as we can see from what happened to Bear Stearns. And if the international banks aren’t lending to anybody that money’s not coming back. I'm afraid this is now tending towards the apocalyptic scale.” (‘Bear Stearns crisis sparks UK recession fears’, Telegraph, 14 March 2008, http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/14/nbearsplash114.xml) This does not bode well for the safety of the New Zealand banking system. In a remarkably candid comment the Herald noted: Arguably, the prospect of further bank failures overseas and by extension here in New Zealand - where more than 90 per cent of the banking system is owned by foreigners - is more likely than it has been for years. New Zealand and Australia remain the only two OECD countries that do not have some form of insurance to protect depositors' cash should their bank go belly up. (Adam Bennett, ‘Are our banks safe?’, NZ Herald, 15 March 2008, http://www.nzherald.co.nz/section/3/story.cfm?c_id=3&objectid=10498295&pnum=0) Given all of the above you would have to say that no bank is safe in this environment, particularly not a New Zealand one, relying heavily on the goodwill of foreign lenders. What to Do Although capitalism achieved a massive reduction in real wages in the 1980s and '90s, that victory now poses a grave danger to the system. In the previous crash of 1987 residual levels of savings and mass home ownership meant that the working class had both the means to survive the crisis and could also be tapped for more money to prop the system up. This was done by the ruthless imposition of “user pays” schemes and the reduction of the social wage, such as the ending of free education, attacks on the right to public housing, the rationing of medical care, attacks on unemployed and the harassment and punitive case management of the injured by the Accident Compensation Corporation. Today most families survive on two, three or more jobs and credit cards. Earlier this year we saw the collapse of many finance companies. These organisations are in effect private banks with draconian terms and usurious rates of interest. Like the money that flowed to third world investments internationally, these companies were a local means of recycling the surplus cash piling up in the bank accounts of the rich. It should have been obvious to any economist that paying people less than they need to survive and then forcing them to borrow those stolen wages back at high interest had to be an unstable situation. The necessity of this “compensatory borrowing” of consumer credit had a useful spin-off for the system: it sustained mass consumption in the face of stagnant or falling wages. But there is also a political bonus – it reduces pressure for higher wages by allowing workers to buy goods they couldn’t otherwise afford. Having a large monthly credit card or finance company bill is a great conservatising force, making strikes and other forms of rebellion less attractive. The sub-prime housing crisis is tearing the world economy apart and will hit New Zealand very shortly. It is more than likely that many of thousands of homeowners could face eviction when massive interest rate rises and falling property values force them into negative equity. There must be a political response to this crisis from the left, calling for a moratorium on mass foreclosures. Ordinary people who worked hard and played by the rules imposed on them should not be made to pay for the criminal greed of the slick conmen and finance sharks, or their apologists in government.