Friday, June 27, 2003

In times like these, it's tough to remember that the real economy and the financial economy are almost always at loggerheads. Lest we forget, look at what is happening in Brazil today. Despite his left-wing credentials, Lula bows to whatever the financial markets demand:
the central bank has raised its pivotal interest rate to a dizzying 26.5 percent, and the government has committed itself to raise its budget surplus to 4.25 percent of gross domestic product
So Brazil is "rewarded" with exceptionally low inflation and an 800 basis point spread over US Treasury bonds.

Trouble is, by making finance capital happy the real economy gets strangled.
Industrial production in April was down 4 percent from a year earlier. The economy contracted 0.1 percent in the first quarter, and most economists predict that it will have shrunk in the second quarter as well, theoretically pushing Brazil into recession. Retail sales have slumped, and unemployment rose to 12.8 percent in May � its highest level in 14 months. Here in S?o Paulo, Brazil's economic powerhouse, the jobless rate has topped 20 percent, further fueling the already alarming upward spiral of crime and violence. Even for those with work, the news is bad, as average wages in May fell to 841 reais ($290), 15 percent lower than a year earlier.
This is the same old sorry tale told throughout the world. How does the United States resist it? How is it that finance capital in the US is seemingly taking it on the chin, with interest rates now at near-50 year lows?

First, finance capital needs to make profits now by volume and the refi market suits that need well. Also, the US alone needs to worry very little about the value of its currency. Ultra-low interest rates just can't knock the dollar down, whereas it will crush any other currency. Finally, deep financial markets in the US attract the world's capital, keeping Wall Street well lubricated.

This is an unusual set of conditions, however, particularly since the return of finance capital to power in the early 1980s. If the amazing volume of lending driven by the housing market begins to slacken, look for finance capital to grow restless indeed.

This one is just too rich to pass up.

"Based on the Department's analysis, we concur with the conclusion advanced in your letter that over the next 12 to 18 months there are only limited opportunities to increase [natural gas] supply; and that, therefore, the emphasis must be on conservation, energy efficiency and fuel switching."

-- Spencer Abraham, Secretary of Energy, letter to Sen. Tom Daschle, 6 June 2003

"Conservation may be a sign of personal virtue, but it is not a sufficient basis for a sound, comprehensive energy policy."

-- Dick Cheney, Vice President, 1 May 2001

Is the turnaround here?
American's incomes, including wages, interest and government benefits, rose by a modest 0.3 percent in May, up from a 0.2 percent advance in April, encouraging news because income growth is a main force behind future spending by consumers, economists say. The income and spending figures are not adjusted for price changes.
Let's take apart the data. Wage and salary disbursements rose just 0.2% for the month, "other labor income" 0.3%. The real winners were proprietor's income (i.e. profits of "closely held businesses") up 1.0%, transfer payments up 0.8% and dividend income up 0.6%.

Remember that wages and salaries actually fell in April, so a modest upturn is more a recovery than an upturn. So who was actually doing well in May? Old folks on Social Security, capitalists receiving dividends and corporate chiefs of privately held firms.

It turns out capital isn't quite so keen on colonizing Iraq as the Bush administration is.
The risks for companies have been highlighted by apparent sabotage attacks on oil pipelines. Intelligence gathered by Kroll, the corporate security group, advises clients that political transition is unlikely to go smoothly. "It is pretty unlikely that the kind of liberal capitalist democracy that has been talked about is going to emerge any time soon," said the consultancy. The Kroll report, which is being sold for $5,800 to corporate clients and agencies, outlines four potential short-term scenarios but says two - a stable "soft landing" or complete fragmentation - are extremely unlikely. Instead, it concentrates on the even chances of a "wobbly landing" or an "Iraqi revolt". Its findings are based on field visits and the advice of security experts.
Two notable points. The first is that corporate intelligence types -- folks with real money on the line and not just idiots like Tom Friedmann who wager their supposed prestige -- think outright military revolt in Iraq has a 50-50 shot. That's pretty scary. With news like this, capital is likely to stay well away from the hard work in Iraq and prefer instead to cherry pick where US forces provide huge amounts of security for their projects. This further means that the US military presence will be significant well into the foreseeable future. That is, we can't begin to imagine when US forces will be out of the country.

Second point is that Kroll is charging $5800 for this report. That's serious money just for security information, even for corporate CEOs living off the fat of the Pentagon's land. If Kroll can actually get that kind of money, it means firms are seriously concerned about their security situation in Iraq. In the medium-term, capital's opinion and not the neocon's views matter most.

But remember, capital will brave any hell-hole if there are profits to be made. Look for lots of US taxpayer-funded "incentives" for Corporate America to commit to Iraq.

Thursday, June 26, 2003

The General doesn't generally blog US electoral politics, but this comment in The American Prospect really caught my eye:
Howard Dean has been well-served by the rusty ritual of presidential contenders pausing from their campaign travels to go home and formally declare their candidacies. Subtly but effectively, in yesterday's "announcement speech," Dean recast his candidacy from a protest campaign targeting his fellow Democrats at least as much as President Bush to a populist movement "to take our country back." . . . Within little more than a year, Dean evolved from another Paul Tsongas, fiscally conservative but socially liberal, to the new Paul Wellstone
Being the dyed-in-the-wool lefty Minnesotan that he is, the General really sat up upon reading this.

Is Dean really the guy to carry the populist message? Dean with the record as a "socially progressive but fiscally conservative" governor?

The General may be a Marxist when it comes to academic analysis, but politically he's a populist through and through. I'm not holding my breath for Dean, however. Let's wait and see. Al Gore tried this line once before, after all.

Here's something to chew on.
Average interest rates on U.S. 30-year mortgages inched up this week, after dipping to historic lows, Freddie Mac said on Thursday. Thirty-year mortgage rates averaged 5.24 percent after 5.21 percent last week, the lowest on Freddie Mac records dating back to 1971.
Now clearly a week a trend does not make, but the slight turn upwards could have enormous consequences and not for the reasons the Powers-That-Be have in mind. There is little reason to think the increase is due to actual economic recovery. It may be caused by expected recovery and it may be caused by the US federal government sucking every spare dollar in the wind for miles around as debt. Regardless of the causes, any real rise in mortgage rates will choke off the housing boom which relies on ultra-cheap lending rates. Rising defaults and bankruptcies (remember that U.S. mortgages in foreclosure climbed to a record high in the first three months of 2003) can easily follow in its wake, and the house of cards teeters.

Now none of this is a foregone conclusion, but this unusual rise in mortgage rates is definitely something to keep an eye on.

Mission accomplished, huh?
Bomb and grenade ambushes Thursday signaled increasing anti-American resistance in Iraq, despite U.S. claims of mopping up opposition. One American soldier and two Iraqi civilians were killed, and two American soldiers were missing.

Now we hear that the sluggish 1.9% growth rate in 2003:I GDP was actually a languid 1.4%. This means the US economy didn't even register a mini-zag in 2003:I. As the General said at the end of May,
it looks like the yo-yo swings which provided at least some growth in 2002 are now over. Come, gentle reader, and step back in time with me to the recession of 2001, in which GDP fell three consecutive quarters (2001:I to 2001:III). Since then, GDP growth has zigged into significantly positive territory (e.g. 2002:I, 2002:III) and zagged into sluggish growth (e.g. 2002:II, 2002:IV). Now the US economy is coming off a significant zag (2002:IV) during which GDP grew just 1.37% annualized, but got no zig the following quarter as it had throughout 2002. And 1.88% is good news?
In fact, GDP has now zagged two quarters in a row. Amazingly, 2002 is looking downright robust in comparison to the last 6 months.

Some good analysis from Aileen Kwa at Focus on the Global South on the subsidies-overproduction link -- or lack thereof (from the globalfarmcrisis list-serv):
Farmers are supposed to produce less, or even not produce at all, since they will receive payments in any case. Has it worked in the past? No. Since the 1990s, the EC has been decoupling part of its subsidies in cereals. EC intervened at prices much closer to the world price, and 50 per cent lower than the previous intervention price, whilst channeling payments to farmers directly. If the theory was right, cereals production should have fallen, since farmers could have produced less (and distorted world prices less) yet received their payments. The CTA (Technical Centre for Agricultural and Rural cooperation ACP-EU) instead found that EU cereals production increased by 25 per cent instead of contracting because overall subsidy levels had in fact increased. The direct payments given were calculated to more than adequately make up for losses experienced from a lower intervention price.

Why dont EU farmers follow the economic, price and subsidy signals which the decoupling theory presumes they do? Probably because the theory is just too simplistic. There are too many other factors involved. Farming is not just a job, but a part of ones family history possibly for hundreds of years. Producing drastically less, or eventually moving out of the farm altogether is also likely to entail moving to the city and accepting a very different culture and way of life. In reality therefore, most European farmers stick to farming as long as they possibly can. It matters little to the farmer then what labels the government supports come with.
While it's too simplistic to focus only on the sociological aspects here and ignore the much more powerful political-economic dimensions of overproduction, Kwa nonetheless has a point.

Imagine this: Africans actually think they can speak for themselves better than George Bush can. The audacity!

The word out of Europe today is a "radical" reform of the Common Agricultural Policy. By cutting subsidies dramatically, the logic goes, trade "distortions" will be lessened as well, farmers in the Global South will gain new access to European markets, and all will be right with the world.

But are subsidies the real cause of agricultural overproduction and subsequent dumping on the world market? University of Tennessee ag economist Daryll Ray doesn't think so. According to Ray, "The subsidies did not cause the low prices, the low prices caused the subsidies."

The structure of agriculture in the US and EU today gives farmers and agribusiness every incentive in the world to overproduce regardless of subsidies. When there are no price floors, when you have minimal control over your conditions of production, when profit margins are miniscule and thus high volume is required to turn any profit at all, when public research money is plowed into new technological means to overproduce, you have a situation in which overproduction is written into the script.

This is true in major ag exporting countries of the Global South as well. As Ray says,
Brazil and Argentina have long-term development agendas and using their economic competitive advantage in agricultural production appears to be one of the strategies they are using to achieve their goals. U.S. policies and prices, exchange rates, and a host of other influences may marginally affect the rate of growth of soybean acreage and production in Brazil and Argentina, but basically it's a train that has left the station and it has considerable momentum.
The political consensus forged in the US in particular is built on cheap food, and low prices in agriculture are necessary for that political foundation to be maintained. Americans will protest a loss of their Doritos long before a loss of their democracy! The bottom line:
But is important to remember the direction of causation: the low prices caused the increase in subsidies, subsidies were not large and then prices fell. Another important point: just as farmers in other countries who do not have subsidy programs have not reduced production materially, neither would farmers in this country reduce production substantially if subsides were lower. Land prices would plummet and some land would change hands but production would continue unabated.

Wednesday, June 25, 2003

So eager to go to Iraq, yet so reluctant to go to Liberia. I wonder why? The former colonial powers are strapping on their boots and taking a bit of responsibility for the messes they helped create in West Africa. France has had troops in Cote d'Ivoire for months, the British worked for peace in Sierra Leone, and now Britain's U.N. Ambassador Jeremy Greenstock is bold enough to suggest that the United States is the "natural candidate" to end the bloody reign of Charles Taylor in Liberia. For God's sake, the Liberian rebels are bombing annexes to the US embassy compound and all we get out of the State Department is how everybody should really just get along??

If the Iraq war was all about human rights, where is the Bush administration's outrage and bravado for Liberia? Things are so bad there that any kind of Western intervention would help, even George Bush's (I don't think we're in danger of seeing a US colony in West Africa anytime soon -- Iraq is already turning into one). But what are the chances Bush will follow the lead of the French? Any bets?

Somos Todos Jos� Bov�!

This just in! Supply-side economics is wrong!

But seriously folks, does anybody really believe that folks will work more and spend more (and thus boost GDP) because their taxes have been cut? These idiotic voodoo economists (Poppy Bush at least got this much right about the supply-siders) have been romanced by their own abstractions and ideology. Homo economicus is the pathetic two-dimensional silhouette of an actual human being who animates liberal economic models. He has perfect information, complete free will and always wants more and more and more (if the price is right). Some economists remember that this little fellow doesn't actually exist, but somehow those devoted to voodoo apparently forgot this point in moving from models to the real world.

It turns out that, low and behold, most workers don't actually control the hours they work. Who woulda thunk it? So cutting taxes doesn't mean John Q. Public puts in another 5 hours a week at the office instead of throwing back cold ones in his Lay-Z-Boy because the boss decides when John works, not John. It's all well and good for economists to study cab drivers and major-league baseball game vendors and bicycle messengers to figure out whether people do or do not respond to incentives the way the voodoo economists think they will, this is at the margins. Middle class workers on salary don't get more money for more work, and working class folks on the time clock rarely get to decide when to work and when not to. They might work more, but working less is not an option.

Let's see voodoo economics for what is really is -- a lie designed to hide the truth that the rich get richer, they stick the middle class with the bill, and squeeze the poor for every dime they're worth.

The New York Times reports today that "The 400 wealthiest taxpayers accounted for more than 1 percent of all the income in the United States in the year 2000, more than double their share just eight years earlier, according to new data from the Internal Revenue Service. But their tax burden plummeted over the period."

And this little tidbit is even more outrageous: "The number of Americans with high incomes who pay no taxes anywhere in the world has reached a record. In 2000, there were 2,022 Americans with incomes of more than $200,000 who paid no income tax anywhere in the world, up from just 37 in 1977, when the report was first issued."

My only comment is that the US had a Democratic President from 1993-2000. I guess Jesse Jackson was right: DLC does stand for "Democrats for the Leisure Class".

You see, even lefties can disagree with each other. Yesterday George Monbiot penned a stinker. His mea culpa, "I was wrong about trade," is basically an attack on Colin Hines and the entire Green 'localization' camp coupled with a lot of wishful thinking on reforming the WTO. The problems with Monbiot's newfound faith are many.

The guts of Monbiot's mistake is his early observation that "The only thing worse than a world with the wrong international trade rules is a world with no trade rules at all." Of course, there is simply no such thing as a world with rules, for trade or anything else. If there were no rules there would be no regularized activity of any kind. Monbiot laments US unilateralism and pressuring small countries to tow the US political line or suffering the economic consequences. But when has it been any different? The WTO is certainly about rules, but rules selectively enforced. After all, a country calling for a panel to formally accuse another member country of violation of the WTO agreements makes first and foremost a political decision. There is no Attorney General for the WTO bringing charges against the ne'er-do-wells, after all. The US enthusiasm for bilateral and regional trade agreements goes to show how getting around the WTO is easy as pie, and thus it is hardly as if the WTO rules are restraining the powerful in any meaningful way.

Monbiot then procedes to pillory the localization movement which in his view is "as coercive, destructive and unjust as any of the schemes George Bush is cooking up." Why? Because trade (a euphemism for "exporting to the Global North") is the only way folks in the Global South can improve their lot. And how is this different from anything coming out of Washington?

Monbiot's alternative to localization is "fair trade," and there is great merit in making global trade more fair. But Monbiot's ideas are hopelessly outdated. His first is a global system of preferential trading arrangments which would allow Southern countries relatively closed borders while requiring Northern countries to keep theirs open. While this may have had a chance in the 1970s, we're way beyond any political hope of this coming to pass now. Monbiot's second idea is to license transnational corporations. That is, only those following fair trade rules on labor standards, environmental standards, and the like, will get a license. Who will distribute these licenses? A kinder gentler WTO apparently.

All in all, Monbiot misses the entire point of the localization movement, which emphasizes many values completely eclipsed in the neoliberal system: self-reliance, self-government, security, community, fairness, solidarity, care, environmental justice. There will always be trade even in a 'localized' world, and surely there is room in for a global organization to oversee its rules. But trade in the real world is primarily a means to extract labor and resources cheaply from other places, whether across the state or across the world. The more trade can be embedded in community, the more trade will be fair, and community cannot consist of 6 billion people.

Focusing not only on trade but on technology transfer, multinational corporations, labor organizing, global property rights and a host of other global economic issues is essential to create a new kind of global economic order. The best place to start is in fact not with a new compassionate WTO but with a more muscular International Labour Organisation. The solution is to empower the powerless, not for some liberal well-meaning technocrats to tweak the rules for them.

Well, it seems the markets were expecting a kiss today and all they got was a handshake. The Fed dropped the Federal Funds rate by 25 basis points today, bringing the mark down to 1.0% -- "lowest since Eisenhower" as we're hearing ad naseum. Upon the news the Dow promptly tanked 100 points and the S&P fell 12 points, although both recovered slightly by the end of trading. Clearly the markets thought the date had been going pretty well and fully expected 50 basis points as a result. The claim that recovery is just around the corner also dampened expectations of future rate cuts although the August meeting could very well deliver that kiss down to 0.75% the markets had wanted now. Nonetheless, the commitment to ultra-low rates for the long haul continues to buoy everyone's spirits.

There are some dissenters, of course. Peter Cardillo, chief strategist at Global Partner Securities, said the "mixed signals" coming out of The Great Greenspan Show was confusing Wall Street. "It could potentially begin a market correction, with the market losing about 5 per cent in the next couple of months." In addition, business investment data continued to disappoint -- but who really thought it is on the verge of an upturn??

All the loose money seems to continue getting plowed into housing as sales of new single-family homes climbed 12.5 percent in May to a record annual rate of 1.157 million units and sales of pre-owned homes jumped 1.2 percent in May to 5.92 million. As Teddy at "It's Still the Economy, Stupid" points out, any tick up in interests rates is likely to kill the housing market and maybe even burst a few bubbles in California and on the East Coast. This is an economy running faster and faster just to stay in the same place.

Tuesday, June 24, 2003

George Bush continues to beat the drum linking the European ban on importing genetically modified foods and famine in Africa. The logic of Bush's argument, however, is difficult if not impossible to follow. Yesterday at the Bio 2003 Convention Center and Exhibition in Washington, the President said laid out the latest iteration of this argument.

First, the President says "we must help troubled nations to avert famine by sharing with them the most advance methods of crop production" which of course means biotech crops. In order to feed themselves, Bush says, Africa needs biotech.

In the very next paragraph, Bush states
Acting on unfounded, unscientific fears, many European governments have blocked the import of all new biotech crops. Because of these artificial obstacles many African nations avoid investing in biotechnology, worried that their products will be shut out of important European markets. For the sake of a continent threatened by famine I urge the European governments to end their opposition to biotechnology.
While the remark won the expected round of applause, the connection between African famine and European GM food policies is unexplained. How exactly is it that African famine will be averted by exporting GM food to Europe?

Let's look at the famine-threatened areas of Africa today.

In Ethiopia, the overwhelmingly dominant crop export is coffee. There is no such thing as GM coffee, Ethiopians can't eat coffee, and thus Bush's comments are irrelevant. The country's response to Bush's comments, in the words of the BBC, has been "lukewarm". If Bush cared about famine in Africa he would seek to revive the International Coffee Organization and boost world coffee prices rather than blab on about something he knows nothing about.

Eritrea is another country facing famine, whose top agricultural exports are sesame seeds, of which there are no GM varieties, and fish. The country is highly dependent on food imports (man cannot live on sesame seeds alone) and has no ability to export food to anywhere, much less to Europe. Again, Bush's comments are irrelevant.

In West Africa, Mauritania faces famine. It exports fish and live animals and to the best of my knowledge there is no GM cattle or camel on the horizon. Mauritanian live animal exports are not fed grain but pasture. Corn costs money after all and pasture is (virtually) free.

In Southern Africa famine stalks four countries in particular: Zambia, Zimbabwe, Mozambique and Malawi. If Bush's comments have any relevance it is here, where maize is a primary food crop and there has been controversy over genetically modified US food aid.

But let's not get carried away. Malawi's primary agricultural exports by value are tobacco leaf, tea, raw sugar, coffee and cotton seed cakes. Mozambique's are fish, cotton, cashews, sugar and copra. Zambia's are sugar, cotton lint, tobacco leaves, and Zimbabwe primarily exports the same. Of these four countries, only Zimbabwe is a major exporter of a food crop -- maize -- and none have notable export-dependent meat industries which might be kept out of the EU because the animals were fed GM maize.

Famine threatens these four countries due primarily to the fall in maize harvests caused by drought, price spikes, and politics. Planting BT or herbicide resistant corn would not have prevented this shortfall. When the US offered to dump its surplus GM corn on Southern Africa as an act of humanitarian relief, three of the countries agreed to accept the offer if the maize came in milled form. This was to prevent farmers from taking GM maize seeds and planting them in Southern Africa. Why did these governments want to prevent such a thing? Certainly not because of fears of being shut out of European markets as a result! They wanted to do so in order to prevent their future dependence on Western biotech corporations which own the seeds they would be planting.

Clearly Bush's complaint is rooted in a single incident: the refusal of Zimbabwe to import US produced GM corn in any form. Remember that Zimbabwe, Malawi and Mozambique all accepted milled GM maize. Why did Zambia refuse? The President of the country claims the grain is "poison". While the President is not only excessively cautious but downright reckless with the lives of the millions in Zambia who face famine, he has not refused the grain out of trade concerns. What is more important in Zambia's refusal is the role of local politics and the prestige of the President who came out very strongly against GM food imports and cannot backtrack for political reasons.

Again Africa exists for Bush only as a bully club with which to beat the Europeans. Bush doesn't care about famine. He cares about the millions of tons of overproduced GM grain in the United States desperate for an outlet and a future market. This is not about Africans feeding themselves; it is about US grain exports to Africa.

The US House Agriculture Committee issued a report last summer titled "The Facts on US Farm Policy". On the cover is emblazoned a quote from President Bush:
We're a blessed Nation because we can grow our own food and, therefore, we're secure. A nation that can feed its people is a nation more secure.
How sadly ironic that Bush cannot apply to Africa the same values that he applies to his own country.

Easy money promises to just get easier tomorrow as the Fed is roundly expected to cut the US Federal Funds rate to 1.0%, and perhaps as low as 0.75%. Yet this is among the bluntest of tools to try to fine-tune a wildly imbalanced national and global economy, and the more likely consequences are surely not going to be to the liking of Greenspan & Company.

Thus another representative of finance capital comes out today in the FT to critique the Fed's "increasingly desperate attempts to steer the US economy away from deflation". Since the Fed must keep long-term interest rates ultra-low in order to keep the US housing and thus consumption bubbles from bursting and the massive US federal budget deficit financed, it is in the process encouraging a bond market bubble and moreover commiting itself to stop any possible bubble burst at all costs. As Barnes observes,
This is extremely powerful stuff. Essentially, the Fed is telling the markets to have a party because the punch bowl will stay in place for a long time. Moreover, if the party starts to get too dull, the Fed will add another bottle of booze to the bowl.
Now that's great writing.

More bubbles seem to be inevitable in the current environment. Attacking one only feeds another. And in case we haven't noticed, bubble management hasn't been Greenspan's strong suit -- viz. the 1994 bond market and the 2000-02 stock market.

In Barnes' view,
The Fed's aggressive efforts to steer the economy away from deflation will be conducive to mini-bubbles in a range of asset markets. The Fed does not necessarily want more bubbles to grow but they are seen as an acceptable price to pay.
The matter at hand is of course whether the new bubbles created by the Fed's loose monetary policy will generate only "mini" bubbles or whether, as Barnes himself notes,
You may know that it makes no sense to buy Treasuries at current yields but the game is worth playing if you can get out before the mass of investors. The fact that many investors undoubtedly take the same attitude sets the scene for dramatic marke reversals down the road.

Monday, June 23, 2003

This should rain on the parade of anyone having lots of faith in the ability of the Fed to manage future expectations and thus wield power to fight deflation through "unorthodox" policies. The Motley Fool reports that "apparently not many listen to [Alan Greenspan] when he talks about stock valuations". Apparently investors listen to what The Maestro says about bond prices, but when it comes to stocks they throw caution to the wind!
According to a study released by the Fed, of the 10 times since 1989 that Mr. Greenspan commented about the level of the markets, only twice was there a significant reaction: In July 1998, the S&P 500 dropped 1.6% when he spoke of "unrealistic forecasts" for corporate earnings, and there was a 2.8% fall in October 1999 when he warned that the market had a history of sharp reversals. Even those drops are relatively minor, and the markets recovered from them rather quickly.
When there are tulip bulbs to be had, aint nobody gonna stand in the way!

If Greenspan & Co. cut rates 50 basis points this week, I think we can all start calling this market the "Greenspan bubble," step aside and wait for the Big Crash.

The big political news on the globalization front today is of course the commando-style arrest of Jos� Bov� on Sunday. There's not a great deal about it in the American press but as you might expect, the French press is chock full of stories. I'll try to sort through them and give a report tomorrow.

Stephen Roach pens an incredibly sobering commentary today. You just can't read today's missive and not get a creepy 1930s feeling about you.
I take this debate over non-traditional policies very seriously. It is emblematic of how desperate matters have now become. It reflects a mindset in policy circles that hasn�t been seen since the 1930s. And it reflects perils in the global economy that haven�t been seen in the modern era.
Not only does the global economy have to fight off the US current account deficit (flip-side, the rest of the world's current account surplus now at 2% of global GDP), deflation and massive budget deficits. It has to fight them all off simultaneously.

As Roach observes, the surplus-deficit gap between the US and the rest of the world (primarily East Asia) "has never been larger"; the US, the engine of the dysfunctional global economy, "is currently closer to deflation than at any point in over 40 years and will probably get even closer in the months ahead" (amazingly enough, there is even CPI deflation in parts of Latin America!); and the "traditional options of monetary and fiscal stimulus have all but been exhausted." The intersection of these problems is such that fixing one will only aggravate another. For example, a boost in US demand pushing the US economy up into mild inflation would only exacerbate the current account deficit.

If for no other reason than monetary authorities' public willingness to try "unorthodox" policies to fight deflation, the current era has more than a whiff of the 1930s about it. The post-WWII social contract in both Japan and Western Europe is under the sword of Damocles, according to Roach, for the only solution to this impasse is "painful . . . structural reform". This is the only solution from the point of view of capital. Remember, Roach is a pessimist on capitalism, but only in the short term. The guy works for Morgan Stanley after all! He is more like the technocrats heading up the New Deal rather than the populist farmers in the Midwest and the socialist labor unions in the East and California working to create a wholly new economic order.

Roach at least has one thing right: "we�re in uncharted waters, both in diagnosing the world�s problems as well as in prescribing the remedies." If the Left has any spark of life left in it, it will seize this moment.

Here's an interesting dust-up between national and transnational capital. It seems three US titanium producers -- RTI International Metals Inc., TIMEC Co. and Allegheny Technologies Inc. -- want to maintain the Pentagon's long-standing policy, enshrined in law, of purchasing only American-made titanium. Boeing and Lockheed Martin, titanium consumers and the "private sector" wing of the Pentagon, prefer the luxury of shopping the global titanium market instead of having to "Buy American". What makes this especially interesting is the clash pits the domestic capital wing of the Republican Party, in this case represented by House Armed Services Committee Chairman Duncan Hunter, with the transnational capital wing of the Party, in this case represented by the Bush Administration. It looks as if the House Republicans are mostly behind Hunter, and the Senate Republicans are the constituency each side is trying to woo.

On the GMO front, Saskatchewan canola farmer Percy Schmeiser tells his story of being sued by Monsanto to the tune of almost $200,000 for "stealing" the mega-corporation's GM technology, even though Schmeiser has never planted Monsanto seeds. How did the stuff get in Schmeiser's fields then?
I have learned the hard way that one of the main problems with GE (genetically engineered) crops is that it is impossible to keep their seeds and pollen from spreading to fields with non-GE crops. The seeds get blown by wind or passing trucks, or they get mixed with non-GE crops by accident or any number of other means of cross-contamination. In other words, there is no guarantee of containment of GE crops; ultimately they will spread throughout a given area. This is what happened to me. And, sooner or later, it will happen everywhere else.
Think Schmeiser is the exception? Not only is he one of five hundred and fifty people being sued by Monsanto for theft of their seed technology, take a look at last week's news that nearly 20% of US farmers planting BT corn are failing to comply with government regulations to prevent unwanted spread of the modified seeds' genetic information. Not only have these farmers failed to plant at least 20% of their acres with non-GM corn which would give pests room to munch on corn without BT and thus not build up quick resistance to the chemical; 13% of them (i.e. 2/3 of the violators) plant no non-GM corn at all!

Obviously there is simply too much money to be made in the short-term for Monsanto or the federal government to be worried about people like Percy Schmeiser. Instead the Bush administration has adopted a 'take-no-prisoners' approach to agricultural export policy -- with the EU, with Mexico, with anybody who tries to stand in the way of the global wrecking ball.

As if we all couldn't see this one coming:
The dispute over genetically modified crops will intensify today with news of the evolution of "superweeds", which are resistant to the powerful weedkillers that GM crops were engineered to tolerate. . . . It means that bigger quantities of weedkillers - not less, as the biotechnology companies have claimed - will be needed in GM-crop fields, adding to the already intensive agriculture that has wiped out much of Britain's farmland wildlife in the past four decades.
Perhaps stories like this will begin to expose the true logic of industrial agriculture, which has nothing to do with long-term concerns such as eradicating hunger or battling poverty and everything to do with short-term profits. Good Lord, even a concern for long-term profits would be downright refreshing from the biotech lobby. Anybody with a high-school lesson in biology could have foreseen the short-term success of pouring huge amounts of Roundup on Roundup-resistant crops followed inevitably by its longer-term failure as good old fashioned natural evolution worked its magic. Superweeds have appeared in Australia, Chile, Malaysia and California among other places. Just think if they turned up in Africa -- what a human and natural disaster that would be! But don't expect Monsanto to be worrying about these minor details.

Saturday, June 21, 2003

From Reuters:
"The director general (World Trade Organization chief Supachai Panitchpakdi) explained to ministers that he was very worried about the state of play. He made it very clear that time was running out," spokesman Keith Rockwell told reporters, adding the WTO chief had been "blunt and direct."
These are fairly ominous words coming fom Supachai, the new WTO chief who took over from Michael Moore (not the funny one) last year. "Grave concerns" were expressed over the state of agriculture negotiations. As the Australian trade minister said, "It has been 18 months, we have missed every deadline so far and we are within 50 days of Cancun."

Are the WTO members going to pull another rabbit out of the hat as they did in December 1993? The General's suspicion is that the brinkmanship practiced today is much less likely to wind up in a sudden agreement out of the blue, not the least of which being because the Global South is much more strongly positioned today than ten years ago and the US is much more unilateralist than ten years ago. Countries such as Brazil, South Africa and India are far less likely today to simply roll over for the North, especially on intellectual property rights. Differences over agriculture between the US and EU were more or less papered over in 1993, with little stopping either from massive dumping activities or massive financial supports for overproduction. Agreeing to disagree while making it look like agreement is not going to be so easy this time. Finally, in 1993 the world was coming out of a mild recession. In 2003 the situation is much uglier. Surely we won't have a repeat of the 1930s, but as Marx said, history always repeats itself, first as tragedy, then as farce.

Prepare for the farce of Cancun.

This says a mouthful: the Masters of the Universe, also known as the members of the World Economic Forum, said in Jordan that 75% of them had no plans of any kind to increase capital investment; 24% said they would increase investment in the "medium term"; a scant 1% said they would boost capital spending "immediately".

If the "recovery is around the corner" hype in the United States is true, then it is only capital in the US which intends to begin plowing profits back into productive capacity. This would clearly aggravate the problems of a US-centric global economy even more, sending the current account deficit into the stratosphere. If you thought 5.7% of GDP was big, you aint seen nothin' yet!

Of course, the hype is probably just that -- hype. With comments like these from the mouth of transnational capital itself, there's little reason to think anything but that the doldrums, the 'jobless recovery,' the 'era of low growth' or whatever you want to call it will be with us for quite some time. We won't be able to tell the difference between recession and recovery.

Friday, June 20, 2003

Canada, one of the hottest economies in the Western world (believe it or not!), has an inflation rate even lower than that of the US. For May 2003 Statistics Canada reported a rise in the core inflation rate (using the US definition of CPI minus food and energy) of just 0.2%. In the US the increase for May was 0.3%.

Alan Greenspan: The Maestro or the Sorcerer's Apprentice??
According to Merrill Lynch economist David Rosenberg, U.S. mortgages have grown at 13 per cent in the past year, and now make up a record 30 per cent of non-financial debt. Household debt levels rose faster in the past six months than at any time since 1986, while household debt relative to income hit a new high: 111 per cent. "This is what Fed policy is accomplishing -- akin to giving another drink to the inebriated sailor," Mr. Rosenberg said. "One characteristic of a 'bubble' is excessive leverage. That definition seems applicable in this case."

It's official: US troops will occupy Iraq for at least ten years. That's from Marine General Peter Pace, vice chairman of the Joint Chiefs of Staff, and Wolfowitz of Arabia. While this is surely a shock to some, it's no surprise to anyone who knows anything about the history of US imperialism. The US took the Philippines as a colony from Spain in 1898, fought a three-year guerilla war against Filipino independence fighters, clashed with remants for another decade, and only granted the country full sovereignty in 1946. With the rise in the pace of everyday life in the 21st century, compressing 50 years down to 10 seems about right -- although the General wouldn't be a bit surprised if ten years in Afghanistan and more like 20 in Iraq is closer to the truth.

From "quagmire" to "colony" is but a step.

Reuters reports today that
U.S. mortgages in foreclosure climbed to a record high in the first three months of 2003 as job losses and personal bankruptcies forced more people out of their homes, a mortgage industry group said on Friday.
So now we begin to hear that more and more Americans are unable to service even their ultra-low rate mortgates.

On Wednesday, Teddy at "It's Still the Economy, Stupid" had a good discussion about the housing bubble in the US, in short saying that the housing market can bubble along indefinitely with low and continually falling interest rates. It all hits the fan when interest rates can no longer fall; zero after all the nominal interest rate floor, and if the US economy catches a touch of deflation, real interest rates will actually start rising.

But the sluggish economy and the worst jobs picture since the 1930s may be far more consequential than any possibilities of bottomed out interest rates or deflation. As Teddy notes,
As soon as lenders change their view on the profitability of making low interest rate loans on homes rising faster than the incomes of increasingly unemployed and financially strapped homeowners, their perceptions will change too. Then we will find out how much of housing demand is fundamental and sustainable.

Let's count up the strike-wave country tally: Austria, France, Israel, Peru and now Germany.

Apparently Paul Krugman has been channeling The General's thoughts. On Wednesday I said
the equity market mini-boom since March is not really based on future expectations. It is based on future wishes but driven by massive amounts of liquidity shot into the system by the Fed and by foreign investors returning those still rather high-value dollars to the US in search of some kind of positive return.
Today Krugman says:
it's hard to find any real news to justify the market's leap. Instead, investors seem to be buying stocks because they are rising � which is pretty much the definition of a bubble.
One might think it stunning that investors learned no lessons from the 2000-03 stock market debacle, but as Ronald Reagan famously said, "there you go again". I think Krugman is being a bit unfair, however, tagging the cause of this latest bubble in investor fears of being left behind. The General points to massive amounts of liquidity in the system instead. Capital has to go somewhere, after all.

One helpful comment at the end of Krugman's piece today concerns the implications of an economic recovery and the record US budget deficit for the stock market:
If and when businesses start borrowing again, they'll have to compete for funds with the federal government, which will be running $400-billion-plus deficits as far as the eye can see. Meanwhile, foreigners won't keep lending us $500 billion each year; in fact, private investment inflows into the United States have already dried up. Oh, and the banana-republic policies now being followed in Washington won't just drive up interest rates; they'll probably generate a full-blown fiscal crisis one of these years. That can't be good for equity prices.
Interest rates can stay ultra-low not only because of Fed policy, but also because there isn't much competition for borrowing. Business just doesn't want to borrow no matter what the rates (unless to buy back their own stocks or speculate on those of others). But when the recovery does come and business does want to borrow, the 800-lb. gorilla called the United States Treasury will be there sucking up every spare dollar in sight and two or three hidden under rocks as well. These budget deficits will have to demand some blood sooner rather than later.

And while it certainly isn't fashionable these days to call the US a "banana republic," considering the financial status of the country, isn't the label apt? When the US was exercising global hegemony in the 1940s-1970s, the US was the world's creditor. Great power comes from being the fellow to whom everybody has to come to get the loans everybody needs. Today it's precisely the other way around. Now the US is the globe's capital vacuum, but can still threaten the world -- not with positive power but with negative power, i.e. the power to fail. This is essentially the power that workers in the former Soviet Union had. There were few rewards in fulfilling the five-year plan, but there were concessions made to those threatening to fail to fulfill it. This "power of the weak" is a dangerous one, however, more like Sampson threatening to pull down the temple upon everyone than any kind of rational quality of leadership or even blatant domination.

Two interesting articles on the politics of GM foods today. Both concern the increasing importance the US government is putting on ensuring the advance of genetically modified food around the world.

The first is the completely expected news that the "consultations" mandated by WTO rules between the US and the EU over the EU's ban on genetically modified foods have broken down and that the US is moving to formally request a panel to prosecute the issue. As one trade lawyer cited in the New York Times said, "There have never been more of these litigations than there are right now." Yet more evidence of the rising tensions in the trans-Atlantic bloc.

The second is the effort the US government has gone to to woo Brazil over to the GM side. Twenty Brazilian "politicians, scientists and environmentalists" are in the US on the American taxpayers dollar to "study" GM crops and, hopes the White House and Monsanto, reverse the Brazilian position on keeping GM seeds out of their country.

US capital has invested an incredible amount into GM technology and GM crops and now demands the US government help it crack markets around the world. Currently only the US, Canada and Argentina grow GM crops at any significant level, with nearly all other countries trying to keep the stuff out. Part of the issue is the science; part is simply old-fashioned smash-mouth intra-capitalist competition.

Thursday, June 19, 2003

More evidence that the European social model itself is what is really at stake in the debate over deflation in Germany today:
Germany's economics and labour minister has provoked anger by arguing that Germans take too many holidays. "In terms of vacation time, public holidays, and working hours, we have without doubt reached the limit," Wolfgang Clement said in an interview with Stern magazine. Mr Clement said the economy - currently hovering on the brink of recession - was being damaged because workers were having too much time off.
And this from a social democrat! Just imagine what a liberal (in the European sense) would say!

Just as the siesta is dying in Latin countries, traditional religious festivals are in jeopardy in Germany. But by giving up the European model, the Germans and the rest of "old Europe" can copy George W.'s and Tom DeLay's Texan model instead -- with great records on democracy, justice, the environment and human rights.

Seattle Times editorial columnist Bruce Ramsey makes a very perceptive observation today: the rock-bottom interest rates of today mean Americans have even less incentive to save than ordinarily.
I have been a customer of a certain money-market fund since 1979. I remember when the fund paid 14 percent. Perhaps that was excessive, though it didn't seem so at the time. But 0.96 percent? Give me a break! After taxes and inflation, it is less than nothing. My saved wages dribble away like antifreeze from a rusty radiator.

Millions of Americans are now presenting their savings to American industry as a gift. The likes of Ford Motor Credit and General Motors Acceptance Corp. offer car buyers great deals on financing, squeezed from the owners of money-market funds. Banks, posting a prime rate of 4.25 percent, haul off our saved dollars like bales of old newsprint.
This is an interesting side-effect of the Fed's monetary policy since 2001. Americans save less and spend more to "boost the economy," and yet the massive and ever-increasing current account deficit means foreigners, not Americans, must finance a larger and larger proportion of economy activity in the US, which puts pressure on the US net investment position and ultimately on the dollar.
The bond bulls point to Japan, whose savers suffer under a 10-year yield of 0.4 percent. "At that rate, you double your money in about 180 years," Grant said. "Before taxes."
All this money with nowhere to go but speculating on the stock market and inflating the housing bubble. In fact, these have become the sites of "saving" in the US. Too big to fail? Or a hard rain's gonna fall?

Truly amazing. The 2003:I current account deficit rose to an all-time high of $136.1bn, a 5.8% jump over 2002:IV. Goods imports rose over $6bn while goods exports rose just $2.5bn, and the services surplus actually fell as US services exports dropped $0.7bn and services imports rose $1bn. And this in the midst of a falling dollar. US exports (including goods and services) are up from the pits of late 2001, but still have not recovered to early 2001 levels.

A completely foolish exchange in the New York Times today sums up the level of thinking in "free trade" circles:
The Bush administration believes the way to deal with swelling trade deficits is for other countries to remove trade barriers, rather than raising barriers to imports coming into the United States. That would allow U.S. companies to more freely do business in overseas markets, thus boosting America's global competitiveness, the administration says.

But critics say growing deficits are proof that the administration's free-trade policies aren't working. U.S. companies have moved operations overseas, while imports flood into the United States, a combination that has cost millions of lost American manufacturing jobs.
This ridiculousness of this 'debate' is tempered only by the frightening seriousness of the consequences of failing to have a meaningful discussion on the position of the US in the global economy. The United States cannot improve its external position through free trade agreements because trade barriers are not the cause of this trouble. The US has since the early 1980s been a structural importer and no amount of tweaking trade agreements or twisting arms in the WTO is going to change that. Both Republicans and Democrats have since the 1980s actively sought to destroy the US manufacturing base, and these current account deficits are proof of their success.

The flip side is that "fair trade" a la Dick Gephardt is not going to change things either, because again the diagnosis of the cause of these imbalances is completely wrong. While Gephardt and some few others actually care about manufacturing jobs, the vast majority of the power elite whether in the Republican or the Democratic camp simply do not.

The result is that in 2003:I, the US current account deficit as a percentage of GDP hit 5.7%! Back in 2000, the IMF boldly stated:
the United States cannot live beyond its long-term means forever, nor will U.S. assets always be so favored by global investors. At current exchange rates and assuming a resumption of sustained growth in the world economy, by 2005 the current account deficit will be about $600 billion�more than 5 percent of GDP. This is both a large volume of assets, in dollar terms, that the United States is offering to international investors, as well as an unprecedented (for the United States) share of GDP. To avoid a sustainability episode in the future, it is critical that structural reforms start now.
Truly stunning how sanguine that outlook appears now in hindsight. The US didn't take 5 years but only three to push the $600bn threshhold, and less than that to jump the 5% GDP hurdle. How long until the day of reckoning? How long?

The Financial Times has an extended commentary (again, pay-only -- sorry) today about Greenspan and the opening of "a new chapter in the history of central banking" in which the focus is no longer inflation but formally and officially deflation.

The trigger for this "new chapter" is next week's much-anticipated 25 basis point drop in the federal funds rate, which will bring the Fed's interest rates down to 1.0%. The possibility of a dramatic 50 basis point cut is unlikely but not out of the question either, which would lower interest rates to 0.75%.

What makes this all particularly interesting is, in the words of the FT, "Recent intense internal debate has led the Fed to question its earlier confidence that deflation could always be prevented." In other words, it not just about the money supply.
as the debate has evolved, concerns have emerged at the Fed about this blithe assurance that central banks can always create inflation if they choose. Fed officials used briskly to reject comparisons with Japan, which has struggled with deflation for a decade despite cutting interest rates to near-zero and pumping huge amounts of money into its economy. Now, they are less certain. The spectre of a 1930s-style "liquidity trap" - where efforts to create money have no effect on the economy - has loomed larger.
What is amazing to the General is how in the 1990s economics has become more and more a branch of psychology, except one populated almost completely by amateurs, dabblers and pop psychologist cranks. To avoid the liquidity trap, the Fed is now fully in for "managing expectations"; what you do is far less important than how the markets think about what you do. Of course, this has always been The Maestro's forte, but the task is now far larger and failure more ominous. And since 2000 we've learned that Greenspan isn't exactly Midas despite his continued lionization.

There is still little appreciateion for the consequences of flooding the country with cheap money on another stock market bubble or the existing housing bubble. The Fed also seems to neglect the important historical context of previous post-WWII interventions to prevent deflation in the 1940s. Today not only the US but the world is in structural deflation much like the late 19th century. Our lessons won't be coming from the era of Keynes but rather the era of the Robber Barons -- in more ways than one.

Wednesday, June 18, 2003

George W. said today that "we will not tolerate construction of a nuclear weapon" in Iran. While the Bush record on nuclear proliferation isn't terribly reassuring, focusing all on sticks and almost nothing on carrots, we might all be hopeful that Iran will not go nuclear. A popular view in the West seems to be that the Iranian nuclear program is fueled by the mullahs and radical Islam. Thus stirs the neocon fantasy -- regime change in Tehran equals enhanced US security and a non-nuclear Iran.

Two flies in this ointment.
  • as an old op-ed from December by an Iranian student leader points out (blogged today by Abu Aardvark),
    What is it that the protesters are saying? The original ideals of the 1979 Iranian Revolution were democracy and social justice, coupled with a respect for the nation's distinct cultural identity. . . . The proud traditions and norms of Iran are what the students seek to revitalize. Theirs is not a counterrevolution but a completion of the present one.
    This is hardly some kind of fall-in-your-lap I-love-George-W. kind of movement. While certainly reformist, Khatami and his supporters aren�t likely to roll over for American Empire.

  • Nuclear weapons expert George Perkovich notes the �nationalistic attraction of nuclear weapons in a society like Iran�. Similarly to Pakistan, a change in regime and a change in ideology did nothing to change the long-term state goal of joining the nuclear club. In light of both US and Israeli possession of huge numbers of nuclear weapons combined with their long-standing hostility to the Iranian Revolution in any form, it makes sense for Tehran under any realistic regime to want nukes.
When the countries most interested in stopping the birth of a nuclear Iran (US, UK, France, Russia) are the same ones showing absolutely no interest in Article VI of the Nuclear Non-Proliferation Treaty (signed in 1968), namely that
Each of the Parties to the Treaty undertakes to pursue negotiations in good faith on effective measures relating to cessation of the nuclear arms race at an early date and to nuclear disarmament, and on a treaty on general and complete disarmament under strict and effective international control.
the use of force at the end of the day seems likely.

More news on silly stuff like price-to-earnings ratios and other stuff that doesn't matter now that the "new economy" is back again on Wall Street:
For certain, the Dow is much less expensive than when it peaked out in early 2000. Back then, its price-to-earnings ratio was around 27. Now, it's around 18. What's more, with the intense focus on company bookkeeping that's developed over the past year, the quality of Dow company earnings is much higher than during the bubble years.

That doesn't mean it's cheap, however. Through much of the 1990s, the Dow 30 carried a lower P/E than now and before the 1990s the Dow's valuation tended to be much lower. A decade ago the Dow carried a dividend yield of around 3 percent -- low by historic standards. Now its dividend yield is 2.1 percent.

Moreover, looking beyond the Dow, stock valuations overall are rich. The S&P 500's PE is back over 20. And the tech-filled Nasdaq 100's PE is pushing 50. When investors see the Dow approach the 10,000 mark, they may take a hard look at the market and decide that it's become too expensive again. And take it as an opportunity to get down off the mountain.

Resource wars are an all-too-real phenomenon in the Global South. Despite Samuel Huntington's popular 'clash of civilizations' thesis which claims most civil wars in the world today are fought over identity issues, the facts are that most reach their horrifying levels of violence and duration due to the valualble natural resources which lie within the borders of the country which can be sold on the world market to fuel the war effort. The infamous 'blood diamonds' of Sierra Leone are an excellent example.

The General says this to put in context news that "War and lawlessness have helped make Afghanistan the world's largest opium producer and a government ban is unlikely to make a significant dent in last year's poppy production". It turns out that after the stunning success of Operation Infinite Justice (better known by its later more Muslim-friendly moniker "Operation Enduring Freedom") hasn't been all that successful: one-third of the country is so dangerous it is inaccessible to the United Nations; UN Undersecretary-General for Peacekeeping Jean-Marie Guehenno sees "an apparent marked increase" in infiltration by Taliban remnants in the south and southeast of the country; 3,400 tons of poppy were produced in just five Afghan provinces last year, a 15-fold increase over 1979; and the opium money, earned by selling drugs primarily in Asia and Europe, fuels the entire cycle.

More interesting news keeps coming out of Argentina since the election of N�stor Kirchner. Rather than cuddle up to the United States, Kirchner wants to revive MERCOSUR and the country's relationship with Brazil. A very interesting idea of creating a MERCOSUR parliament with elected representatives came out of a joint press release from Kirchner and Lula, and MERCOSUR also plans to extend membership to Peru and Venezuela soon.

If South America can enter into FTAA negotiations as a bloc, this will put significant roadblocks in way of the plans of US corporations to simply run roughshod over the continent and stick the rest of Latin America with an �ber-NAFTA.

The FT rains on the bulls' parade a bit this morning (pay-only article; thanks LexisNexis!):
Should we all rejoice at all this happiness? Unfortunately, no. Bond and equity market rallies have been built on contradictory foundations. Bond market strength relies on the assumption of future economic weakness; equity market strength rests on a robust economic recovery. In the end, both cannot be right.
Hmm, the markets are forecasting two opposite and incompatible outcomes for the future of the US economy. Hmm. Did someone say "irrational exuberance"?

The General says the equity market mini-boom since March is not really based on future expectations. It is based on future wishes but driven by massive amounts of liquidity shot into the system by the Fed and by foreign investors returning those still rather high-value dollars to the US in search of some kind of positive return. Plus it doesn't hurt to keep the US consumer beast fed.

The FT's final word:
Investors should be careful. Equity market optimism is infectious, but economic fortunes have repeatedly failed to meet the predictions of imminent recovery over the past three years. There can no longer be any doubt that the 1990s boom and bubble left behind long-lasting imbalances that will not disappear quickly. Rumours of the definitive end of the bear market are greatly exaggerated.

Tuesday, June 17, 2003

There's no telling how far wacky ideology will obstruct the Republicans long-term goal of economic growth. The Bush policy seems designed to boost the stock market first and foremost, then boost investment secondarily, which is supposed to thus boost economic growth and eventually someday down the road boost employment. It utterly fails, of course, to take note of the overaccumulation of capital in the late 1990s. A policy focused on tax cuts for the little guy (e.g. cutting payroll taxes) designed to boost consumer spending -- which would also boost inflation -- seems to make a lot more sense.

To the General's mind, manipulating interest rates seems an awfully blunt tool. What will happen when the Fed lowers rates another 25 basis points next week? More money flowing into housing and the stock market, most likely, both of which are already bubbling if you know what I mean. Capital has shown for three years now that it isn't keen on investing to produce more capacity. Just today the Fed reported that industry is operating at 74.3% of capacity, same as April and down from March. Industrial production of consumer goods continued to fall in May (-0.1%) and production of business equipment remained unchanged. We haven't seen rates of underutilization this low since 1983. And Dubya and his cronies think we need more investment??

Is the deflation dragon slayed? It seems Wall Street thinks so, what with the 0.0% change in CPI in May and the +0.3% change in core CPI. Housing and medical care seem to be leading the inflation train this month, with deflation in transportation, apparel, and education & communication. As a result, as the FT explains
The dollar firmed to its best levels of the day on Tuesday after an surprise bounce in inflation eased deflation fears and lowered expectations the Fed would cut rates by a half point next week.
But the US stock markets have already priced in a 25 basis point decline. If the Wall Street analysts are correct, we should see the stock market rally screech to a halt next week if the Fed does not lower rates. All the more reason to expect a rate cut? To see clear evidence of irrational exuberance if the cut doesn't come but the market continues to soar anyway?

What is really saving the US from deflation is the country's service-based economy. In the seasonally-adjusted CPI for March-May 2003, commodities turned in a stunning -5.2% rate; services, +3.8%. The US is clearly not out of the deflation woods yet, however. Core CPI for March-May 2003 was +1.0%; Dec. 2002-May 2003, +1.3%; June-Nov. 2002, +1.9%. The closer we come to the present, the lower the inflation rate.

Interestingly, the eurozone countries exclude housing prices from their favored inflation measure, the harmonised index of consumer price inflation (HICP). Considering housing is the key sector of growth and inflation in the States, it would interesting to see what an HICP value for the US would be.

This time it's personal. That's not only the tag-line from "Jaws: The Revenge", truly one of the worst movies of all time. It also describes the continuing deterioration of the ties that bind the trans-Atlantic business class together. The verbal war has now expanded from governments and defense industry executives to the leaders of the class itself. Case in point -- Thomas Donohue, President and CEO of the US Chamber of Commerce:
I am very concerned about Europe . . . We're worried about the over-regulation; the demographic situation; economic growth rates; European trade rules; employment rules and environmental costs. It hurts us all.
Donohue characterizes EU regulatory policy in chemicals as nothing more than "trade blockage" and complained that "[w]hat most Europeans seem to be interested in is whether the US economy will grow so they can sell us more products". The final point at least is true enough, and demonstrates the ugly truth lying at the foundation of the contemporary global economy: rampant American overconsumption and inordinate US absorbtion of global capital investment.

On a political note, a rather interesting excerpt from the FT story:
He also criticised the interest taken by Europeans in the handing out of contracts for rebuilding Iraq. "The US and Britain didn't go to war for the contracts," he said. But he added: "The president of the United States knows how this thing got done, and it will all be taken care of. . . George Bush is a very simple guy: he helps his friends."
Is this a threat? A gloat? A Monty Pythonesque "nudge, nudge, wink, wink, say no more"?

Suffice to say that the trans-Atlantic struggle over parsing out the costs from the impasse of globalization has now entered the verbal jockeying phase. The battle has been engaged.

Monday, June 16, 2003

More evidence of the amazing stupidity of mainstream economists comes in the form of an op-ed by former Clinton administration functionary Everett Ehrlich in today's Los Angeles Times:
Every so often some economists decide that everything they ever learned was wrong and, from that moment on, everything is going to be completely different.

Twenty years ago it was the idea that cutting taxes radically would pay for itself. Predictably, the nation's largest peacetime deficits resulted. Five years ago it was the idea that the Internet made companies valuable even if they produced no profit and very little product. Unsurprisingly, the stock market nose-dived soon thereafter.

Now, the idea is deflation � that prices are going to fall steadily just as they've risen steadily for all of our lives.
Never mind that the first two were fantasies with no historical data to back them up, while deflation is not simply an historical but a present reality. What a bonehead! It gets worse, though:
if higher productivity led to deflation, prices would have fallen for all of human history. Productivity growth isn't a problem � it's a miracle. If it weren't for productivity growth, we'd all have the standard of living of mule drivers and wood cutters.

A more productive worker earns more in the marketplace and in turn spends more. And spending more keeps prices stable, if not rising.
Wrong! A more production worker does not necessarily earn more in the marketplace, and even if s/he does earn more, the important measure is rise in earnings relative to productivity. Surprising an economist can't figure this out. If productivity rises much faster than real wages, you get trouble. This is exactly what has been happening in the US since the early 1970s, although the gap has gotten truly enormous only since the early 1990s.
the best argument against deflation is that the U.S. economy is about to grow, and, ironically, the deflationists have all but assured that growth.
Yes, the monetarist argument again. But since we know deflation is not primarily a monetary phenomenon, good ol' muddle-headed Mr. Ehrlich is wrong again. Where is mention of the housing bubble, the Japanese experience, the imminent deflation threat in Central Europe, the monster US budget deficit? Apparently when you live in Fantasy Land, you whirl around and around and around inside the Mad Hatter's giant teacups so much that your brain becomes soft. An irony even an economist could love.

Apparently economic war between the US and Europe has already broken out. At least, that's what French Defense Minister Mich�le Alliot-Marie says:
Enfin, les industriels am�ricains sont, eux, dans une logique de guerre �conomique. Cette attitude n'est pas li�e � l'�pisode irakien. Face � eux, les industriels europ�ens doivent se regrouper pour �tre en mesure de leur r�sister.
The interview appeared in Saturday's Le Monde. A review in English can be read from the Associated Press.

Rummy came back on Sunday, speaking through a DoD spokesman:
The French defense minister is entitled to her own opinion. However, her opinion does not accurately characterize the policy or position of the secretary of defense, or the position of the US government.
The trans-Atlantic split is about far more than Iraq, and it reaches far beyond government-to-government relations, as Alliot-Marie indicates. Stay tuned.

As if we didn't already know the US financial markets weren't completely wacked out:
The more bonds rally, the more you hear about how much better off investors would be in stocks.

It's true that bonds aren't offering much of a return these days. The 10-year Treasury's yield of just 3.1 percent is downright meager. Think of it: at the end of 10 years, investors' total return on the 10-year will be just about 35 percent. Even if you bought shares three years after the Great Crash in 1929, you got a better return on stocks than that.

The bond market, in fact, seems to be predicting the United States is going to have a Japan-like experience over the next several years as it works off the excesses of the bubble. That's an incredibly pessimistic outlook, given the scope of Japan's policy failures over the past decade.

But Merrill Lynch strategist Kari Pinkernell points out that even though bond yields are at their lowest level since the 1950s, the stock market's dividend yield is even lower. At 1.9 percent, the S&P 500's yield is at less than half its historic level of 4 percent.

Even stranger, investors have been flocking to stocks that don't pay dividends. This year, non-dividend paying stocks in the S&P 500 have outperformed the 100 stocks that have the highest dividend yield. By the same token, stocks with dividend yields lower than the 10-year Treasury's yield have performed better than stocks that yield more than the 10-year.

The good news for investors is that all this means there are still plenty of opportunities in high-dividend paying stocks. When excluding companies whose dividends appear to be at risk, Merrill has found 82 stocks in the S&P that yield more than the 10-year.

The problem? It seems strange that dividend-paying stocks have performed so poorly, especially given the recent cut in the dividend tax. That investors are opting instead for non-dividend paying stocks -- like techs and biotechs -- suggests that the market may have become overly speculative.
Can you say "irrational exuberance" all over again??

Stephen Roach sees the politics behind deflation!! Sadly his politics are what you would expect from a Wall Street financial guru, but still, give the man props for seeing the world as it really is.
Today�s America is more trusting of markets to allocate scarce resources -- namely, labor and capital. Europe is not. That�s where the social contract comes in. America has dramatically re-written its social contract with labor, whereas Europe has not.
This is what the current impasse of globalization is all about. The US crushed its labor movement in the early 1980s, partly through the White House and Reagan's busting of PATCO, partly through the Reagan recession which destroyed the ability of labor to hold onto wage gains, partly through the stratospheric rise of the dollar in the early-mid 1980s which killed the ability of US manufacturing and agriculture to export. So now the US grows, and Roach preaches the capitalist sermon of "flexible" labor markets (read temp work and no job security) without mentioning the stunning rise in economic inequality in the US since the early 1980s, which of course translates rather easily into political inequality and the slow death of democratic self-rule (but that's for another blog).

Now Europe is facing its own Reagan moment, and as Roach ably observes, "nothing less than its deeply entrenched social contract is now at risk." Now Fordism is not the be-all and end-all of economic arrangements, of course. Perhaps something better than the European social model could arise. If globalization survives, however, it is all but assured that the Europeans will look a lot more like Texas. If globalization enters into a deflationary crisis, the real prospect of fundamental change exists. Whether than change is toward more equality (socialism) or less (fascism) is the dangerous gambit.

We may be back to the 1930s -- in more ways than one -- before we know it.

Saturday, June 14, 2003

A clash of trade principles was set into motion Friday with little Palau's ratification of the Cartagena Protocol on Biosafety. On September 11, 2003, the Caragena Protocol will go into effect and become international law alongside the multitude of treaties administered by the World Trade Organization. Get ready for the wrestling match.

On the side of biosafety is Article 10 paragraph 6 of the Cartagena Protocol:
Lack of scientific certainty due to insufficient relevant scientific information and knowledge regarding the extent of the potential adverse effects of a living modified organism on the conservation and sustainable use of biological diversity in the Party of import, taking also into account risks to human health, shall not prevent that Party from taking a decision, as appropriate, with regard to the import of the living modified organism . . . in order to avoid or minimize such potential adverse effects.
This wording is more or less repeated in Article 11 paragraph 8. The quick witted will recognize this language as reflective of the "precautionary principle" -- i.e. don't f*** with something unless you're sure what you're doing.

On the side of "free trade" is Article 2 paragraph 2 of the Agreement on Sanitary and Phytosanitary Measures:
Members shall ensure that any sanitary or phytosanitary measure is applied only to the extent necessary to protect human, animal or plant life or health, is based on scientific principles and is not maintained without sufficient scientific evidence
and Article 5 paragraph 4:
Members should, when determining the appropriate level of sanitary or phytosanitary protection, take into account the objective of minimizing negative trade effects.
This is language reflective of the "right to trade" -- i.e. I don't give a damn what you're afraid of or what kind of crazy tests you want, you will eat my frankenguava!

This is only a microcosm of what the WTO faces in the future. Up to now, the WTO agreements have been seen as preeminent in the arena of international economic law. However, a host of treaties on labor and environmental standards exists which clash at least in principle and often in letter with the WTO agreements. How to ajudicate between competing laws? There is no global Supreme Court to sort this stuff out. It will be decided instead in the ring of political combat. Put on your gloves, blue-green coalition! Teamsters and turtles need to start training together again.

Although it's a slow blogging day, this little piece of news caught my eye: "Paris Air Show Opens; US Execs Stay Home". It turns out that US defense contractors have decided that the ever-popular 'must go' annual Paris Air Show -- a key opportunity for networking, showing off the latest models and announcing big deals -- is a not-so-must event this year. While certainly the slump in the airline industry is a factor, the fact that not a single top US executive is going shows it's all about politics, not business. To clinch this fact, Lockheed Martin CEO Vance Coffman had planned on attending but pulled out at the last minute due to "scheduling conflicts". He might as well have said he had to stay home and wash his hair.

The General is of two minds about this. On the one hand, it highlights the ongoing dangers of a trans-Atlantic split. Not only are top-level corporate big-wigs not showing up. Overall, US exhibitors are down from 350 two years ago to 183 this year -- a whopping 52% drop. Overall participation is estimated to be down just 5%. US contractors are probably responding less from patriotism than from fear of Don Rumsfeld who has "put pressure on U.S. companies not to attend" according to Reuters. Defense contractors in particular know which side of their bread is buttered, and the Bush administration shows it has no interest in patching things up with Europe, demanding loyalty from US corporations as well.

While this speaks danger in one sense, it suggests more positively that the trans-Atlantic capitalist class isn't as united as it was in the 1990s, and thus not nearly as powerful. That being said, defense contractors are among the least transnationalized firms in the world. Still, the continuing ability of the state to make capital jump is worth noting.

Friday, June 13, 2003

Another highlight from Stephen Roach's commentary today:
The problem, as I put it in response, is that a saving-short US economy is now asking the rest of the world to divert an increasingly larger portion of its surplus saving to fund America�s ever-rising twin deficits. In other words, if a non-US global investor currently has 60% of his/her assets in dollar-denominated assets, America is saying that�s no longer enough -- we want you to increase your overweight to at least 70%. When I put it that way, even the bulls flinch. �There�s no way I would do that,� said one, �without being compensated for taking the added risk.� Those are code words for demanding price concessions on bonds and/or stocks. Even in a US-centric world, there�s a saturation point for foreign willingness to hold ever larger amounts of dollar-denominated assets without receiving some compensation for the added risk that entails. That�s what current-account pressures are all about.

The situation in Europe is getting dicy. As Stephen Roach points out today,
Germany is clearly the weakest link in the chain, yet Europe�s policies are ill-equipped to deal with this serious asymmetrical shock. Although the ECB has now slashed its policy rate to 2.0%, Germany�s 0.8% core inflation rate implies that real short-term rates in Euroland�s biggest economy are still a positive 1.2%. By contrast, with core inflation an estimated 2.4% elsewhere in Euroland, that means real short rates are a negative 0.4% in the non-German portion of the region. That underscores the ultimate inconsistency of Euroland�s monetary policy: Policy is most restrictive in the country that is most vulnerable (Germany) and most stimulative in nations that are in the best relative shape. Such are the pitfalls of an increasingly dysfunctional United States of Europe.
Roach sees deflation now spreading to Switzerland, and "with the rest of Europe in trouble, an extremely open Swiss economy has nowhere to hide."

In another extremely open economy -- the United States vis-a-vis its regions -- the inflation story is also interesting. For example, in the first four months of this year core inflation (CPI minus food and energy) has been running about +3.2% in the Boston area, +2.5% in Los Angeles, +2.3% in the New York metro area, +1.1% in Chicago, +0.9% in Atlanta. For US regions, the core inflation rates vary from a high of +1.8% in the urban Northeast and South to a low of +1.1% in the urban Midwest. The ugly recession-deflation-positive interest rates story in parts of Europe seems most applicable to the US 'rust belt'. Chicago's core CPI was a mere +0.6% in April; Cleveland's was -1.1%. The just-released Fed Beige Book describes the Chicago district's economy as "sluggish," and "manufacturing activity was again weak with few signs of strengthening." For the Cleveland district the picture is "mixed".

That deflation train just keeps chugging along. Producer prices in the US fell 0.3% in May, the second montly decline in a row. The core producer price index (total finished goods minus food and energy) ticked up slightly, by 0.1%, demonstrating that falling energy prices are a big part of the story, but clearly not the whole enchilada. The April and May figures suggest the US economy is returning to its 2002 form when producer price deflation was the norm, rather than ealry 2003 when producer price inflation looked to be returning.

In other news, the US trade deficit narrowed by nearly 2% in April, climbing down from an all-time monthly high in March (-$42.9bn) to the third highest monthly total ever in April (-$42.0bn). This was achieved almost solely on the back of a decline in the import of oil and natural gas (exports of both goods and services declined in April). Not to say that Americans imported less oil and natural gas -- only that prices on these items fell. US imports by volume of crude petroleum went up 4.6% in April, and total energy-related petroleum products imports rose 0.2%.

Only global price deflation is narrowing the US trade gap.

Jeff Frankel has an interesting idea about what to do with the new Iraqi currency:
define the value of the dinar as one-third of a dollar plus one-third of a euro, plus one-hundredth of a barrel of oil.
Hopefully this kind of sensible thinking will carry the day and we won't hear any more calls for dollarizing the country ("Experts from Treasury are deciding how best to scrap the Iraqi currency -- featuring likenesses of Hussein -- and replace it, at least temporarily, with the U.S. dollar," Washington Post, 2 April 2003)!

Thursday, June 12, 2003

Over at "It's the Economy Stupid," there's a good blog today by Angry Bear:
Seriously, if regressive tax cuts come at the expense of growth (either directly or because they foreclose some alternative and more stimulative policy) then they don't even help they rich. Or, more precisely, they improve the relative (to everyone else) wealth of the rich, but come at the expense of absolute wealth.

Another way of seeing this is to ask your rich friend which they would prefer: (1) Paying a marginal tax rate of 39.6% and having the economic growth of the Clinton Years, or (2) Paying a marginal tax rate of 35% and having the economic growth of the Bush Years (I or II)?
The problem with Bear's analysis is that he thinks the Republican Party is the party looking out for the best interests of capital. This is only partially true. The Republican Party is the party of crony capital first and foremost, and crony capital doesn't give a damn about the larger economy. What does Bechtel and Halliburton care about US GDP growth when there's free feeding at the government's "reconstruction of Iraq" trough?? Or USX when there are steel tariffs to be won?? Moreover, the Republican Party is the party of capital in the narrowest sense. Capital cannot see the forest for the trees; this has always been the case. So when capital takes the reigns without any effective opposition (and after all, the Republicans now control every branch of the US government, for the first time since the 1920s *hint* *hint*), it will pursue a very narrow view of its interests, focused on short-term gains at the cost of the long-term health of the system itself.

This is why the Democratic Party (or at least the Republican wing of the Democratic Party -- you know, the DLC types) is capital's best friend although always to be spurned. The Democrats look to the health of capitalism much more than do the Republicans. The former know capitalism is inherently crisis-prone while the latter continue to believe their mythology about self-regulating markets. After all, when the Republicans could only think to pour gasoline on the fire of the Great Depression, Franklin Roosevelt had to sweep in to save capital from itself. He was capital's best friend and was never even thanked for it.

So it's no surprise that the Republicans are willing to drive the real economy into the ground. They might even be successful in forcing 'the other guy' (whether in Africa or the Middle East or Europe) to pay for the disaster (see the General's comment below re the politics of deflation). If we understand that capital can't see beyond the end of its own nose without help from those with an eye for the Big Picture, and also understand that the Republican Party is completely captivated by ideology and has no ability today to be self-reflective (power breeds hubris, after all), the current convergence of a bad economy and bad policy is really no surprise.

Just in case you doubted the fact that mainstream economics hasn't a clue about development, Jeff Madrik of the New York Times inadvertently proves it again.

In the article titled "Looking Beyond Free Trade," Madrik boldly states " In the last decade, economists have discovered how much more difficult development is than just promoting trade and free markets." And the comments grow more inanane as the article goes on.
Although it certainly looks as if Mr. Bush is moving in the right direction, questions arise over his tenacity and whether his commitment to development will essentially be only about free trade. "Free trade agreements are at best only part of the solution," said Robert Z. Lawrence, a Harvard economist. "They must be complemented with other reforms."
First of all, "free trade" is now a euphemism for neoliberalism. The "free trade" agreements constituting the WTO are only tangentially about trade and even less so about "free" trade. They are mostly about managing the political tensions between states which arise from economic integration, whether trade in goods, trade in services, intellectual property rights, investment, food safety, government procurement, government regulation, etc. etc. etc.

"Free trade" is hardly doing the Global South a favor, either. Any country in the South with the power to do so has fought against what the North labels "free trade". One look at South America today will prove the point.

The article seems to believe that the Washington Consensus is behind us and that "development is now clearly about elbow grease, not canned ideas. It is about tenacity and pragmatism, not political values or the export of ways of doing business that are congenial to our own companies." While it may be personally pleasing to be naive, it is not helpful to anyone. The "Monterrey Consensus" of 2002 is merely the "Washington Consensus in a sombrero", and it will take a lot more than announcing an AIDS fund to change the exploitative foundations of the global economy, a key aspect of that foundation being "free trade".