Thursday, July 31, 2003

On a personal note, the General heartily thanks those who have written in this week with encouragement. Sometimes the blogosphere can get lonely!

On the principle of "one good turn deserves another", why not check out these blogs today?
Magpie at http://magpieblog.blogspot.com

Sadly, No! at http://www.sadlyno.com

blogorrhoea at http://blogorrhoea.blogspot.com

Just in case you thought massive consumer debt was only an American way of life, its heartening to know the Yanks are in good company with the Brits.
Fears that Britain is heading for a repeat of the 1990s housing crash were ratcheted up a gear yesterday as the head of the mortgage industry warned there was a "risk of complacency" over the surge in debt levels.

The Council of Mortgage Lenders, which represents the vast majority of the industry, urged government regulators to warn new buyers they could lose their home if they were made redundant or fall ill.

The comments � which came as Prime Minister Tony Blair said he was not worried about the burgeoning debt mountain � followed news that households are borrowing at the fastest rate on record. . . .

there were already warning signs flashing, including: the number of homeowners who have made no provision for meeting their mortgage payments if they lost their income; early signs of a rise in personal insolvencies; a fall in the amount of state support; a rise in the volume of write-offs of unsecured loans, and high levels of overall consumer borrowing.
The really interesting part of this article is how the number of home reposessions in Britain has halved in just two years -- from 23,000 in 2000 to 12,000 in 2002. It seems highly unlikely that most homeowners achieved rock-hard balance sheets in just 24 months; more likely that banks are willing -- for now -- to write off non-performing loans.

Looks like the Great Debtor Mountain Range crosses the Atlantic with nary a puddle between the peaks to dampen your toes.

Borrow-ho!

One place deflation seems to have been temporarily licked is in industrial commodities. The Journal of Commerce and the Economic Cycle Research Institute report that their price index of 18 commodities (stuff like copper, textiles, rubber, plywood, oil -- you get the idea) is now growing at an annualized rate of 13.7%, up from a low in mid-May of -0.3%.

Jonathan Fuerbringer of the NYTimes then puts his finger on an amazingly important aspect to this data.
Anirvan Banerji, director of research at the Economic Cycle Research Institute, said, "This is suggesting there is real strength in the industrial economy." He added, "The ambiguity here is which industrial economy it is." Recent economic data indicate that the manufacturing pickup is outside the United States, especially in China.
So world commodity prices are going up, reflecting higher demand on the part of producers -- in China. This probably means more imports for the middle class rather than more jobs for the US working class.

The GDP numbers are just too rich to ignore this morning!

By the way, did you hear that US GDP rose in 2003:II by 2.3492%? No, you probably heard 2.4%. Now I grant you, rounding is fine for the big picture, but when you look at the actual numbers, this is closer to 2.3% than to 2.4%. Keep that in mind.

Also, did somebody say "military Keynesianism"? The General reported today that the #1 contributor to the US GDP rise in 2003:II was federal defense spending. Let's pretend that the US had had no war in Iraq and defense spending had stayed steady. In 2003:I it was $409.7bn (in chained 1996 dollars), so let's plug in a nice round figure of $410bn of imaginary defense spending for 2003:II (for those of you keeping score at home, the real number was $448.9bn).

Lop off the $40bn difference and what do you get? A 0.67% growth rate in 2003:II!!

Now that would have been one hell of a headline!

More tidbits from today's GDP report from the US Department of Commerce.
The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 0.3 percent in the second quarter, compared with an increase of 3.4 percent in the first. Excluding food and energy prices, the price index for gross domestic purchases increased 0.7 percent in the second quarter, compared with an increase of 1.8 percent in the first.
This is the smallest price index rise since 2001:III when the overall economy caught a whiff of deflation, with the price index falling 0.2%.

Factoring out volatile food and energy prices, the price index for 2003:II (+0.7%) was just a tick above its recession low in 2001:III (+0.6%). Now the US economy overall is running at half the core inflation rate of 2002, which was itself extremely low.

Recall also that core consumer price inflation for the first half of 2003 is running at a mere 1.7%, a full half a percentage point below where it was in the second half of 2002 -- and it is trending downward every month.

This is still an economy flirting with deflation, moreso than ever before.

The advance GDP figures for 2003:II are now in! Drum roll, please . . .
The U.S. economy, lifted by consumer and business spending, broke out of the doldrums and grew at an annual rate of 2.4 percent in the second quarter of 2003, the strongest showing in nearly a year.
Now, before you all get caught up in the Wall Street festivities this morning off such numbers, let the General take you on a stroll down GDP lane.

First, the US economy finally got a little zig after two straight quarters of zags. Recall that in both 2002:IV and 2003:I GDP rose a paltry 1.4%; in comparison, 2.4% looks pretty good. But in comparison to the zigs of 2002, things don't look nearly so rosy. In 2002:I GDP rose 5%; in 2002:III, 4%. These latest figures are a far cry from those real zigs.

Second, let's disassemble the numbers and find out exactly where this GDP jump came from. The two primary contributors to the rise were consumer expenditures on durable goods (+1.68%) and spending on national defense (+1.69%). No other dimension of the US economy grew by even 1.0% in 2003:II. The growth in consumer spending on non-durable goods was less than half that of durable goods spending, and non-defense federal spending actually dropped 0.1%.

Now let's take those durable goods numbers apart. 53% of the durable goods increase was in the automotive sector, 32% in furniture and household goods. Readers of the General know that the refi boom is over, so those furniture and household goods numbers are clearly unsustainable. The recovery in auto sales for 2003:II pulled the industry out of its two quarter tailspin, but as USA Today reported earlier this month,
Wall Street analysts say auto sales now are so heavily driven by incentives that sales aren't a meaningful signpost.
So what Wall Street is really celebrating today is an unsustainable blip in auto sales and refi-driven spending, and the war in Iraq. Bizarre!

Wednesday, July 30, 2003

Further evidence of the demise of neoliberalism in Latin America. Now even the Right is rhetorically attacking it!
"Starting now our absolute priority is the strengthening of internal markets, the generation of employees, self-employment and family income ...," [Mexican President Vincente] Fox told radio listeners. "We have left aside the idea of a neoliberal economy that had shown little success in the past."
Well, better late than never, eh?

The General just can't help but see real trouble ahead for the FTAA as long as neoliberals like Robert Zoellick are in charge of US trade policy. Of course, any Democrat likely to win in 2004 -- excepting only Dick Gephardt -- won't do anything substantially different.

Big trade fights between not just the EU and the US, but between the US and a Latin American bloc led by Brazil, are in our future.

Here's an excerpt from a pretty provocative piece in the Financial Times over the weekend by Philip Coggan. Sorry about not blogging it until now.
Those who believe that US, UK and other European efforts to reflate their economies will prove equally ineffective tend to draw their arguments from the so-called "Austrian school" of economics. They believe that the current recession is caused by the over-investment and excessive debt levels that occurred in the 1990s. This slashed the return on capital.

Growth can be restored, on this view, only if the excess capacity is destroyed, so that the surviving businesses can become profitable again.

The actions of the central banks have thus been a mistake. By slashing interest rates, they have simply allowed fundamentally unprofitable businesses to survive for longer than they should have done, prolonging the period of low returns. Likewise, Japan's refusal to allow a clear-out of its corporate and financial sectors has been a primary cause of its economic doldrums over the past decade.

Indeed, the central banks may have made matters worse. Low rates have simply allowed other bubbles to develop in the housing market, and have persuaded consumers to take on even more debt. The eventual crash will accordingly be all the greater.
Now, Coggan doesn't quite believe this story, but it isn't clear why. He admits the falling dollar is dicey at best in that what is good for the US here is bad for Europe, already struggling under an excessively high euro. Only if the dollar falls against East Asian currencies will this turn out to be a boon for the global economy, and thus far there are no real reasons to be optimistic on that score.

Savings rates, debts levels and the US current account deficit are all enormous and growing. Interest rates have been rising rapidly for six weeks. Productivity gains in the 1990s are now fueling disinflation more than economic growth.

The US economic gurus all predictly recovery for the 2nd half of 2003 therefore, in Coggan's estimation, absolutely must be right. If not, the "Austrian School" bears (how is their analysis here any different from Marx, again?) will have their day.

For those who doubt the General's logic on the teetering pillar that was consumer spending, I offer you some relevant tidbits from Monday's CNN Money:
  • "the debt-service burden before the past two consumer spending booms was closer to 12 percent -- its current level of 14 percent may be too high to spark much of a rush to the malls."
  • "the household savings rate was 7.7 percent in the last month of the 1990-91 recession, compared with just 3.5 percent now."
  • "in every recession since World War II the ratio of household debt to assets has fallen. In the most recent recession, however, the debt/asset ratio skyrocketed, setting a record high of more than 18 percent in the first quarter of this year."
  • "even as homes have gotten more valuable, homeowners are giving more and more of the pie to mortgage lenders -- the ratio of homeowners' equity to total home value dropped in the first quarter to its lowest level since World War II, according to the latest Fed data."
  • " In most recessions, the rate of household bankruptcy filings actually fall, since most people stop spending and tighten their belts. In the most recent recession, however, bankruptcy filings continued to surge, according to the American Bankruptcy Institute, setting new records in 2001 and 2002."
As a Merrill Lynch economist says in this piece, the US economy is "addicted to credit". When the price of crack starts going up, addicts begin to do strange and dangerous things. The General is not predicting that middle-class suburban soccer moms will turn into bag brides anytime soon. At the same time, when the days of double upping are over, you either desperately scrounge up the money or go through some nasty withdrawal symptoms.

'Why is the drop in consumer confidence a big deal?' one might ask. After all, the General puts little stock of any kind in surveys about peoples' feelings, especially when it comes to the economy. The importance comes primarily in refracting these July figures through the prism of real earnings.

Since December 2002 real hourly earnings have stagnated. In 1982 dollars, average hourly earnings stood at:
  • $8.30 for December
  • $8.28 for January
  • $8.26 for February
  • $8.22 for March
  • $8.27 for April
  • $8.31 for May
  • $8.30 for June
Thus for the past six months US workers' earnings have been spinning their wheels. As the production side of the economy begins to exhibit a pulse, the consumption side is going nowhere and more importantly with little capacity to go anywhere, either. If American workers' wages aren't going up, only debt, tax cuts or transfer payments can buoy the Amazing American Consumption Machine. In light of current record levels of consumer debt, state and local government tax increases and budget cuts, and the ever-expanding federal US budget deficit, where exactly are these compensatory dollars coming to come from?

The Bush administration's mantra has always been "I will gladly pay you Tuesday for a hamburger today." Maybe Tuesday is coming closer than George is willing to admit.

Perhaps the housing bubble chickens are finally coming home to roost.
The year's highest interest rates pushed down demand for mortgage refinancings in the United States to lows not seen since last December, an industry survey reported on Wednesday. . . .

Rates for 30-year loans, the most commonly used home mortgage, rose to 5.87 percent in the latest week from 5.72 percent in the previous week, according to the Mortgage Bankers Association of America.

"The 30-year contract rate is at highs not seen since December 13 of 2002 when it was at 5.91 percent," said Douglas Duncan, the trade group's chief economist, adding "there is no question we're past the peak (in refinancings)."
To the degree that the refi market was shoving piles of cash into the hands of consumers who then gleefully spent them at Home Depot, Lowe's, etc. and thus boosting consumer spending, this pillar of growth in the US is bearing no more weight. In fact, if consumer spending cannot at least tread water, this pillar may in fact begin to totter the economy overall as consumers concentrate on keeping up with their mortgage payments rather than buying that new car.

Just three weeks ago the MBAA refi index stood at 6768.3. Now its at 4145.8, plummeting to earth faster than Skylab. Tie this all in with the big unexpected drop in consumer confidence for July, and suddenly the two mainstays of the US economy over the last two years -- consumer spending and housing -- may be evaporating like the morning mist.

Monday, July 28, 2003

From today's FT:
From Mr Steven Morris.

Sir, Avinash Persaud suggests that Federal Reserve chairman Alan Greenspan's "deflation mongering ... was merely a ruse to hide (a) switch to an inflation policy" that he sees as a necessary condition for the strong economic rebound he is so desperately attempting to create ("The Fed takes a dangerous stance", July 23).

This is interesting to ponder, but the point is moot. Whether intended or not, the liquidity the Fed has pumped into the economy has already created inflation, in the form of an inflated property market, as unsustainable as the dotcom mania.

Mr Greenspan's hope has been that extracting wealth from home equity would help Americans compensate for egregious stock market losses and a (continuing) recession while record low interest rates would buy time for the rest of the economy to recover. Three years into Mr Greenspan's scheme, we find homeowners and consumers alike awash in record levels of debt and everyone still waiting for "the recovery".

In the past few months the Fed has been playing fast and loose with either its fear of deflation or a denial of its presence. This has led to almost unprecedented chaos in the fixed income markets and a significantly higher, market-driven interest rate environment.

Rates are still historically low, we are told. That is true; but do professionals honestly believe that a roughly 30 per cent increase in long-term rates in merely four weeks will have no consequences for the economy?

Just look at the prices of housing equities. Since mid-June, the parabolic rise in the share prices of home-builder companies has ended and the shares are now down about 20 per cent across the board. The housing sector of the stock market has topped out. The housing market has also topped out; but this has not yet been reflected in the economic data.

Mr Greenspan's policies have succeeded in creating a housing bubble, widespread indebtedness and another frothy stock market.

If the Fed chairman's call on the economy is wrong again, you will be hearing a lot more about deflation than inflation in the coming months.

The General has been silent these last three days pondering the future of General Glut's Globblog. Sitemeter tells him that less than 20 people out there in the blogosphere are reading the General every day. Pretty low numbers indeed!

This threw the General back into his thinking chair. There are thousands of blogs out there blogging current events, especially the war against Iraq, the guerilla war, the uranium scandal, the future of various Bush cabinet members, the casualty count, the existence of Iraqi WMDs, etc. etc. etc. Does the blogosphere really need the General's comments when you can get more or less the same thing pretty much everywhere?

The Globblog needs a clear identity, and this is it: deflation.

While the politics of the Iraq war and its aftermath is easy to follow (or at least easy to rant about) and everybody and their brother's dog has a view to air, there are few voices out there with something substantial to say about deflation and overproduction. So this will be the General's focus.

Maybe there are only 20 people out there who care about deflation? Perhaps. But I guarantee you that deflation, whether in the North America, East Asia, or Europe, will affect your real every-day life 100 times more than Condi Rice, Paul Bremer and the Hussein brothers ever will.

Thursday, July 24, 2003

Now Seoul has entered the Chinese peg fracas. Unlike China, Hong Kong and Malaysia, Korea does not peg to the dollar, and unlike Japan and Taiwan, does not intervene nearly as dramatically to halt the gradual rise of its currency, the won, as the dollar as dropped.
Kwon Tae-shin, deputy finance minister, said in an interview with the Financial Times that South Korean exports were being priced out of the market by those from countries that were keeping their currencies artificially cheap.

He said Seoul had allowed its currency to appreciate more than other Asian countries as the dollar has weakened over the past few months.

"Korea is always arguing, whenever we talk to other Asian countries, that the market should set the value of currencies," he said. "If every country intervenes to depreciate their currency against the dollar, it creates a beggar-my-neighbour situation. Korea is keeping up with the market more than other currencies in Asia."
A critical mass may be building for at least a revaluation of the renminbi, a move which could have huge consequences for global rebalancing.

Well, how 'bout that! It turns out Republicans aren't all bad after all!

Crony finance capital seems to have taken it on the chin from moderate Republicans in the House of Representatives (I didn't know this kind of creature still existed).
A bill to limit the role of states in investigating brokers and investment bankers appears to be rapidly losing support, according to several industry and congressional sources.

Republican Rep. Peter T. King of New York has come out against the proposal, and other moderate Republicans are likely to join him, leaving supporters without enough votes to approve the measure in the House Financial Services Committee, sources said.

As a result, Rep. Richard H. Baker (R-La.) and the bill's other backers are considering asking the committee to adjourn today without taking up the proposal, the sources said.
Crony media capital has also taken a direct hit from the same moderate Republicans.
The House voted yesterday to block the Federal Communications Commission from imposing rules that would allow the nation's biggest broadcasting companies to buy more television stations, setting up a potential showdown with the White House.

A bipartisan coalition pushed through the measure by attaching it to an appropriations bill to fund the Commerce, State and Justice departments and several agencies, including the FCC. The spending bill was approved by a vote of 400 to 21, despite a veto threat from the Bush administration and objections from the Republican House leadership.
It's heartening to see Republican Representatives finally refuse to function as nothing more than back-benchers for Tom Delay and Karl Rove and exercise their constitutional duties. A 400-21 vote -- that's incredible!

Has the US unemployment rate peaked?
The number of Americans lodging new jobless claims dropped to the lowest level since February, the government said on Thursday in a report showing surprising strength in the long-depressed U.S. job market.

The level of new claims, which gives an early reading on the resilience of the job market, plunged by 29,000 to 386,000 in the July 19 week, down from a revised 415,000 in the prior week, the Labor Department (news - web sites) said.

New claims were far below Wall Street expectations for 413,000 applications, and the lowest since the week of Feb. 8. It was also the first time since then that initial claims were below the critical 400,000 mark, a level viewed by economists as the sign of a soft jobs market. Claims had been above 400,000 for 22 straight weeks.

Still, a Labor spokesman urged caution in reading too much into one week's figure, saying "it is not uncommon for the series to exhibit volatility during July because of traditional temporary layoffs in industries such as automobiles, textiles and apparel."
The geographic dispersal of these numbers is interesting. The South continues to get hammered by layoffs; the five states with the biggest rise in initial jobless claims were North Carolina, South Carolina, Georgia, Tennessee and Alabama. Manufacturing continues to be very weak in this region. Wisconsin and Massachusetts led the pack of states experiencing the biggest fall in claims this week.

While there was a big drop in the number of initial claims, the number of Americans drawing unemployment insurance for the week only dropped 0.67%. Over 3.6 million Americans are still on the dole.

Nonetheless, cautious optimism seems to be seeping throughout the business punditocracy. 2003:II GDP figures come out one week from today. It will be very interesting to get this backwards glance at the overall economy.

Wednesday, July 23, 2003

Washington Post foreign correspondent Karl Vick recently returned from Liberia and answered online questions this morning. His opening response sums up the relationship between the West and West Africa amazingly clearly and powerfully.
Just to the north of Liberia is Sierra Leone. When the atrocities in Sierra Leone reached a point of gothic horror that the world could no longer quite ignore, it was Britain that sent in the troops that kept the warring parties apart long enough for order to be restored. The country had been a British colony, and naturally looked to its former master for help.

Just to the south of Liberia is Ivory Coast. When that former French colony found its way to civil war after decades as the relatively prosperous, famously stable anchor of Francophone Africa, the nation that sent the troops that are still there keeping the warring parties apart was � France.

The United States never was much on colonies. But Liberia is a lot closer to being a former colony than any other African country can ever hope to claim. The organization that founded the country went by the name the American Colonization Society, shipping freed American slaves to settle the coastal areas of what became Liberia. It was Washington that fended off attempts by France and other European powers to nibble away at the interior territory marked "Liberia" on the map.

And when the call went out for an "international stabilization force" to stand between the three warring parties in the present conflict there, eyes naturally turned to Washington. "It's their turn," said one of the ambassadors to the Security Council. And the Bush administration seemed to step up to the challenge.

But that was a month ago, and it's still all talk.
The United States is setting up a real colony in Iraq. In Liberia, there is not a Democrat's chance in Tom Delay's Texas that a new colony will be constructed. This is the core reason (but clearly not the only one) why the case for US military intervention is so much better than in Iraq.

Moreover, Liberia is already under the neo-colonial thumb of the US, so US troops as part of a coalition including West African states is no step backwards. Indeed, in light of the bloodshed and warfare since 2000, it will be downright positive.

The Bushies now have seen the light on Iraq. It wasn't at all about WMDs, they say. It was all about the mass graves, the domestic terror, the authoritarian regime. We've got all this on a Liberian scale today, and yet the Right somehow can't seem to exercise its moral outrage for Africans as it can for A-rabs who sit on "our" oil and defy "our" will.

Today The Guardian reports the civilian death toll has reached 600 in the last week and at least 200,000 refugees are holed up in soccer stadiums and Masonic Lodges. On Monday, during the heaviest fighting in Liberia in two months and amidst the deaths of nearly 100 civilians, someone in the crowd in Monrovia carried a sign which read: "Today G. Bush kill Liberia people".

If the Right wants to be even remotely believable in its claims of moral interest, Liberia is the place to prove it.

Good ol' Chris Farrell wades into the deep end in this week's issue of Business Week and comes out spluttering.
The economy's Achilles' heel is abroad. America's monetary and fiscal authorities have been far more aggressive in trying to stimulate growth than the governments in either Europe or Japan. Weakness overseas is a limit on U.S. growth.
There is a shred of truth in this statement, but just a shred. Yes, weak global demand is a limit on US growth. If measuring growth as GDP, however, "weakness overseas" will likely never end.

Since the US is a structural importer, exports will never be able to make more than a slight contribution to the country's economic growth. Moreover, real US exports have been stagnant for about 5 years now, i.e. during real economic growth in Europe and long before the latest Bush recession. In fact, real US exports peaked just when the overall US economy peaked, in 2000:III.

In GDP calculations, net exports are what count. Since the US is a structural importer and has been since the 1970s, "overseas" will always reduce US GDP. The gap between the US and the rest of the world (especially Europe and East Asia) has been a function of US overconsumption as much as overseas underconsumption. Moreover, underconsumption in places like China is part and parcel of the entire global system. An imbalanced global economy is capitalism's norm, after all. The uncoordinated Keynesian interventionism of today is a far cry from the managed capitalism of the Bretton Woods era, the only period in which global capitalism even marginally overcame its tendencies of uneven development.

Remember that the flip side of underconsumption (or as polite economists prefer, "lack of demand") is overproduction. Perhaps Farrell might turn his attention in that direction for more profitable insights.

Higher mortgage rates are beginning to bear their bitter economic fruit.
Fewer Americans applied for mortgages last week, an industry group said on Wednesday, as the highest borrowing rates in more than three months cut demand for refinancing.

Applications for home loans fell 5.4 percent last week to the lowest level since early May, the Mortgage Bankers Association of America said on Wednesday.

The housing and mortgage sectors have been crucial props for the economy for over two years. By some estimates, about half the growth in the economy for the last year has come from housing and home loans.

But with rates rising, housing will likely slow, economists said.
The MBA Market Composite Index now stands at 1284.3, down from its high of 1856.7 the week ending May 30. That makes a remarkable 31% drop in the index over the past six weeks. Refinancing as a percentage of total mortgage applications dropped for the fifth week in a row, and the average contract interest rate for 30-year fixed-rate mortgages is now up to 5.72%, the highest since early April.

Pollyannaish economists are already trotting out the lyrics from "Sunshine Day": "Business spending is likely to increase" and "On the consumer side, with tax refunds coming to Americans, spending should hold steady".

The main pillar of the US economy for the past two years is done bearing its undue share of the weight.

Tuesday, July 22, 2003

For a very intelligent political response to Stephen Roach's constant worrying over global capitalism's imbalances, check out "Asia�s Mercantilism Today Is Blowback From 1997" over at The Prudent Bear.
a move away from US-centric growth is absolutely essential if debt-laden American households are to rebuild their balance sheets and the country as a whole begins the process of alleviating extreme external imbalances. But however much we sympathise with the thrust of Wood�s criticism, we believe that Asia�s proclivity to buy dollars virtually on auto-pilot and thereby perpetuate the region�s mounting current account surpluses can readily be understood as blowback to the American response to the region�s grave economic crisis in 1997/98.
In short, East Asia knows the dramatic risks of speculative attacks on their currencies and have vowed never the let that happen again. In the current context, the only way to do that is peg to the US dollar and stock up on greenbacks.

Neo-liberal frenzy for global capital mobility is at the heart of this problem. Global rebalancing could use a healthy dose of 'sand in the wheels' if you know what I mean.

Stephen Roach wrings his hands again this week over the global economy to more interesting results.
My concerns hinge mainly on recent developments in foreign exchange markets and on the response of politicians and policy makers to those developments. From the start, I felt that a significant shift in the world�s most important relative price -- the US dollar -- would be the central lever of global rebalancing. A weaker dollar puts pressure on a saving-short US economy to restrain domestic consumption and rebuild national saving. The related outcomes of a stronger euro and a stronger yen put comparable pressures on Japan and Europe to do the opposite -- to transform externally driven growth into support from domestic demand. As is often the case, what seems so logical in theory turns out to be much tougher in practice. For years, the Japans and Europes of the world have been either unwilling or unable to accept the heavy lifting of structural reforms that is so essential to unshackle domestic demand. My biggest fear has been that such politically and socially induced resistance could derail global rebalancing (see my May 27, 2003 Forum dispatch, �The Heavy Lifting of Global Rebalancing�). Those counter-forces now seem to be coming into play.
This is an excellent example of why Roach's analysis is simultaneously excellent and frightening. Roach is clearly no brainless cheerleader for global capitalism. His structuralist approach to studying the global economy makes him particularly sensitive to aspects which usually only Marxists see. At the same time, Roach is a liberal (in the European sense) through and through. As is clear from Monday's comments, only "structural reforms" within Europe and Japan will solve the global demand imbalance. That is, social democracy (or what's left of it) must go.

Roach's logic is that only "structural reform" will allow the US dollar to fall and the yen and euro to consequently rise. Without "structural reform" both the Japanese and the European will continue to intervene in forex markets and keep their currencies low.

Unfortunately, this story doesn't have a lot going for it. We can see this best in Europe. First, the Europeans have not intervened to keep the euro low. In fact, it is the Europeans more than anyone else who have a right to complain about global policies which have sent the euro soaring in the midst of a flagging economy. Second, until the mid-1990s US-EU trade was more or less balanced. Only with the boom in the US economy (fueled primarily by stock market speculation as well as IT investment) of the late 1990s did the present imbalance arise. "Structures" don't dramatically change over the course of five years, and blaming the European "structure" for the imbalance is completely unfair.

The United States clearly overconsumes, and the world is addicted to it. The real solution is not "structural reform" and the end of social democracy so much as it is a global economy which moves off its dollar foundations and away from US imperialism. If Roach could see the world as a nascent American empire, these "problems" would no longer be interpreted confusedly as a story of parts. It would be a story of the whole. If the whole is to be fixed, the whole must be changed.

The General just loves headlines like these, from the wire services today:

Dollar Gains on Saddam Sons Report (Rueters)

Stocks Up After Report on Saddam's Sons (Reuters)

Remember, when economists start trotting out their incantations like homo economicus and rational expectations, just remember they're voodoo priests trying to scare you. Markets really are irrational -- to the hilt!

The supporters of Octavian are plotting to murder the Republic and declare the Empire before our eyes.
Still, [Douglas Feith, #3 at the Pentagon] and other Pentagon officials said, they are studying the lessons of Iraq closely � to ensure that the next U.S. takeover of a foreign country goes more smoothly.

"We're going to get better over time," promised Lawrence Di Rita, a special assistant to Rumsfeld. "We've always thought of post-hostilities as a phase" distinct from combat, he said. "The future of war is that these things are going to be much more of a continuum

"This is the future for the world we're in at the moment," he said. "We'll get better as we do it more often."
Will the People really wake up and see the 'war on terror' for what it really is -- a gambit for Empire? Or will we be satisfied with bread and circuses forever?

Perhaps a re-release of Gladiator would help.

Monday, July 21, 2003

Positive economic news from The Conference Board today?
A key U.S. economic forecasting gauge rose in June for the third consecutive month, suggesting the economy should pick up in the second half of 2003, a private research firm said on Monday.

The Conference Board said the index of leading indicators rose 0.1 percent in June, slightly below expectations of Wall Street economists, who had forecast it to rise 0.2 percent.

"After a weak first half, the leading economic indicators are suggesting a better economic performance in the second half of 2003," Conference Board chief economist Ken Goldstein said in a statement.
You know it's a slow news day when this is the leading wire story on the economy. A 0.1% rise isn't exactly news of much of anything but stagnation, after all. Is this really cause for (muted) celebration??

Compared to the May figures of +1.1%, the June report is nothing. Moreover, of the ten leading indicators which make up the overall index, only four rose in June and these four don't exactly speak well of the US economy.

The main reason for the overall rise in the index is a 0.17% increase in stock prices and the money supply! Initial weekly unemployment claims fell slightly (thus the index rose 0.4%) and building permits rose even more slightly (the index rose 0.2%). With rising mortgage rates, building permits are sure to level off or fall for July, and unemployment is certainly not going to be falling significantly any time soon. All the other six indicators were either flat or negative.

So we should feel good about another stock market bubble and Greenspan's loose monetary policy in isolation?? All it takes is a little digging to reveal the sad truth behind the numbers.

Damn the deficits! Full steam ahead!
The strains on American ground forces as the Bush administration extends their global missions are prompting new debates on Capitol Hill and within the Pentagon over the question of whether the military needs more troops worldwide.

Defense Secretary Donald H. Rumsfeld and senior military officers spent time over the weekend considering how to assign enough soldiers to fill the long-term mission of stabilizing Iraq while simultaneously fulfilling other overseas commitments and providing security against terrorism at home and abroad. . . .

On Capitol Hill, two members of the Senate Armed Services Committee � one a Republican, and one a Democrat � have been driving the debate, and both predicted in interviews last week that Congress would support a request to expand the military's personnel roster, even with the growing budget deficit.
Real national defense consumption expenditures and gross investment has risen every quarter but one under President Bush, from $359bn (1996 dollars) in 2001:I to a peak of $413bn in 2002:IV. As of 2003:I, real quarterly defense spending has risen 14.1% over 2001:I. Over the same comparison, real quarterly non-defense spending has risen 11.5%.

The gap is much more stark when considering defense spending in relation to discretionary non-defense spending, however (even Bush can't get out of all those Medicare and Social Security payments). According to OMB tables, defense spending in current dollars rose from 2000 to 2002 by 18.4%. Domestic non-defense discretionary spending (i.e. all non-defense federal outlays minus Social Security, SSI and Medicare) over the same period rose by just 4.5%!

Empires can be expensive, and after a short period of digestion, imperial powers have always sought to make them pay their own way. In light of US budget woes and the prospect of even more spending on even more active duty National Guard and Reserve troops (and in the medium term, even more troops?), Iraq is going to made to pay its own way sooner than is probably wise from a political standpoint. You really didn't think George W. would get the Japanese to subsidize the whole thing the way his old man did, did you?

Sunday, July 20, 2003

Come on aboard, I promise you it won't hurt the horse -- there's lots of room for you on the Bush/Snow bandwagon!

It seems that the President is doing such a bang up job convincing Americans that the war in Iraq is going swimmingly, he's decided to convince us all the US economy is going gangbusters as well. The Washington Post describes it as a "month-long economic sales tour". After this Bush will really need that traditional month-log vacation at his ranch in Crawford.

The apparent meme for this trip has been set out by the President already:
"There are hopeful signs that our actions are contributing to economic growth," Bush, who is spending the weekend at his ranch, said in his radio address today. "Now that Americans can keep more of what they earn, we can expect to see rising demand for goods and services. And as demand increases, companies will need more workers to meet it."
Let's see here. The Bush economic logic says low pay makes for low consumer spending makes for low employment and low economic growth. Stunning in its simplicity -- and like most of what comes out of Bush's mouth these days, stunningly wrong. Or should that be "exaggerated"?

The usual pattern for consumer spending is to fall during recessions and then explode during recoveries, reflecting the impact of unemployment and lower earnings during recessions and pent-up demand during recoveries. This is just the pattern in the early 1980s, when consumer spending actually fell in 1980 and rose barely above 1% annually in both 1981 and 1982. In the next three years, consumer spending rose over 5% each year. We see the pattern in the Poppy Bush recession, too, although with the delayed consumer spending recovery due to the now-familiar "jobless" US recoveries. Growth in consumer spending was under 2% in 1990 and actually fell in 1991. From 1998-2000, however, consumer expenditures rose over 4% each year.

What has made this most recent recession so strange is that consumer spending never really took a serious hit. In 2001 real personal consumption expenditures rose 2.5% and in 2002 rose 3.1%. Thus there is no real pent-up consumer demand to drive a recovery from this largest chunk of the economy. Americans have been spending their tails off, recession or not.

So when Bush starts to look for a demand-led recovery, the man is fooling himself. We all know the Bush tax cut package will put very little money into the pockets of average folks, and the rise in taxes at the state and local level has more or less cancelled out any stimulus the federal tax cut offered. Besides, this voodoo economics didn't work under Reagan and it won't work now.

Consumer spending is not going to drag this economy out of its rut short of handing out bags of money at Wal-Mart. The housing boom is already cooling considerably in the face of rising interest rates. Exports won't do the trick, either. It's up to either capital investment or government spending. Capital investment looks pretty unpromising in light of the continuing dramatic underutilization rates of US industrial capacity. Maybe we'll spend our way to prosperity by rebuilding Iraq and Afghanistan?

As you can see, the options don't look good. Public works and a real tax cut package designed to benefit the working class is the only real shot, but with this administration in power, don't hold your breath for recovery.

Saturday, July 19, 2003

Thanks to CalPundit for linking to the General's speculation that Israel may be Tony Blair's 'secret source' for the Iraq-African uranium link.

Two interesting points came up in the comments following the CalPundit blog:

[1] It turns out that Israel has a 'parallel intelligence agency' just like Don Rumsfeld's Office of Special Plans (OSP) which circumvents the CIA to provide the most alarmist spins on raw intelligence possible. As The Guardian reports,
The OSP was an open and largely unfiltered conduit to the White House not only for the Iraqi opposition. It also forged close ties to a parallel, ad hoc intelligence operation inside Ariel Sharon's office in Israel specifically to bypass Mossad and provide the Bush administration with more alarmist reports on Saddam's Iraq than Mossad was prepared to authorise. . . .

The exchange of information continued a long-standing relationship Mr Feith and other Washington neo-conservatives had with Israel's Likud party.
Could Sharon's special intelligence office be the source for Bush fingering "Somalia and possibly DR Congo" in the National Intelligence Estimate?

[2] The right is trying to pin France as Tony Blair's secret "foreign intelligence service" source, relying mostly on the Iraq-Niger link and Niger's status as a former French colony. The General thinks the African uranium quest has moved beyond Niger, but let's still entertain the possibility that France is the source.

The reason Jack Straw has given for not revealing The Source is because it is 'against the rules'. Any foreign intelligence service requesting anonymity is ensured anonymity (is this even remotely believable?). A rumor circulated earlier this week and was reported in The Scotsman that Blair was going to name France publicly. Of course, that never happened.

If France is The Source, why desire to preserve anonymity this long? The right thinks it's a gambit by Chirac to save face; he knew Saddam was a dangerous madman hell-bent on acquiring nuclear weapons, but valued their oil contracts more than the future of humanity. Yes, people actually get paid for writing such crap.

A French connection is certainly plausible in light of France's colonial ties to much of uranium producing Africa, but the continuing refusal to go public makes no sense. This is all the more so since this evidence cannot be air tight by any means. If it was, damn the rules -- Blair needs saving! Plus, France has formally denied passing any intelligence along to London regarding the Iraqi Uranium Quest ("Contrary to the insinuations which appeared in the British press, France is not behind the intelligence published in the British dossier dated September 24, 2002 and relative to the nuclear program of Iraq"), whether in Niger or anywhere else. This outright French denial must surely void the oh-so-important 'rules' and release the Brits to reveal the fact that France is lying. Unfortunately for the right, London never took the opportunity to deny the French denial. Finally, the fall-out of such a revelation for Chirac would surely be minimal at most. It's a safe assumption that this supposed intelligence is shaky at best -- like most of the intelligence cooked up by both London and Washington in the run-up to war. Chirac could freely state that the information was worth passing on but, "Mon Dieu! We wouldn't have gone to war over it!"

The Israel guess is no worse on the evidence than France and far better on the plausibility scale -- even moreso in light of the fact that Mossad is no more in control of Israeli intelligence than is the CIA over American intelligence. It could even be the case that Israel passed along the same intelligence to both the US and the UK independently but with opposite evaluations of its worth. Stranger things have happened. Has anybody actually asked Israel yet? Sharon? Mossad? Anybody?

The headlines should read: John Snow to Europe: "Drop Dead".

Yesterday the esteemed US Secretary of the Treasury John Snow was in Germany and responded to questions regarding the continuing refusal of the Japanese to let the yen float upwards to reflect the country's massive current account surplus, especially vis-a-vis the United States. While Alan Greenspan sits in Washington berating the Chinese to not only change their peg with the dollar but break it completely and float the currency, John Snow has sympathy for Tokyo.
Brushing aside the concerns of many Europeans, the United States Treasury secretary, John W. Snow, said today that the Bush administration would not pressure Japan to stop intervening in the currency market to depress the value of the yen.

"Japan is going through a tough set of things," Mr. Snow said to reporters here at the end of a four-day trip to Britain and Germany. "As they deal with those things, we're not going to be critical of them at all for their actions."

Mr. Snow said that he understood Japan's desire to stanch the rise of its currency to keep its goods competitive in overseas markets. "They need a strong export sector to be able to get their reforms done," he said.

Such words are cold comfort to Europeans, who say their exports are being hurt in those same markets by the powerful rise of the euro. Mr. Snow helped fuel that rally during a previous visit to Europe, when he appeared to abandon Washington's longtime commitment to a strong dollar.

Today, Mr. Snow insisted the United States wanted a strong dollar. But he added, "We're committed to this regime of floating exchange rates."

And he implied that the euro was trading at a proper level. "Where is it relative to where it started?" he asked. "About the same."
The General has already discussed the results of East Asia either pegging or heavily managing their 'floating' currencies in the face of massive current account surpluses and relatedly massive US current accout deficits. The dollar feels pressure to fall (and East Asian currencies to rise) but Tokyo, Beijing, Hong Kong, Seoul and the rest refuse to allow this to happen. So instead the euro soars in the face of a flagging economy, even in the face of recession and possibly deflation at the heart of Europe.

Apparently the US understands the unique plight of the Japanese. For the Europeans, however, it's more or less the message Gerald Ford gave to New York City in 1975: "drop dead".

Friday, July 18, 2003

That Ol' Time Mission Creep just keeps getting creepier.

Recall that less than two weeks ago, Gen. Tommy Franks told the House Armed Services Committee that US forces will be in Iraq from two to four years. Now a Pentagon study group led by CSIS head John Hamre says two to five years.

Not only that,
It also recommended a �supercharged� effort to get other countries to provide people, money and other aid. �Relying on the war coalition will not produce sufficient resources or capacity,� it said.
In light of India's recent refusal to accept Don Rumsfeld's $300 million bribe to join the 'coalition of the willing,' a "supercharged" effort indeed will be necessary! Of course, the Indian example suggests the US Congress will still likely be the ultimate financier of any new troops in Iraq. Note that even the much ballyhooed "Polish led" peacekeeping force for Iraq -- a motley collection of Poles, Ukranians, Bulgarians, Spaniards, Filipinos, Hondurans and Salvadorans among others -- is heavily supported by NATO.

And these guys aren't heading to Iraq out of the goodness of their hearts. Oh, no! The Poles have admitted officially that they're there for one reason: to gain direct access to Iraqi oil supplies! You've got to give Polish Foreign Minister Wlodzimierz Cimoszewicz kudos for honesty if nothing else.

Maybe we should start talking about the 'coalition of the willing to get paid'?

Well, imagine this.
Iraq needs up to $90bn (�57bn) in investment to restore its economy to health, according to the latest assessment by experts. The investment, which would focus on re-building infrastructure, will take a decade, said Achmed al-Shahrabani, who is leading a special Iraq initiative by management consultants McKinsey. Speaking at a conference on Iraq reconstruction in London, he said that oil revenues would not be enough to cover Iraq's economic rehabilitation.
According to McKinsey, the Iraqi colony cannot pay it's own way. In light of the Bush administration's projected $455bn budget deficit for 2003 and $475bn in 2004 (and if you believe it's only going to be this big, I've got a bridge in Brooklyn you might be interested in), the US Congress is unlikely to be too keen to subsidize an Iraqi recovery much longer.

The oil question is a tricky one, because the primary economic benefit to the US from the colonization of Iraq is lower world oil prices. However, higher world oil prices are necessary if Iraq is to pay it's own way toward reconstruction.

So the question becomes "Excepting oil, how can capital make money off of Iraq?".

Agriculture is likely to be a special target of US efforts.

In May the US announced that Dan Amstutz will lead the Bush administration's agriculture strategy in Iraq. Amstutz served Ronald Reagan as a Department of Agriculture Undersecretary and then as ambassador and chief negotiator for agriculture during the Uruguay Round talks which gave birth to the disastrous Agreement on Agriculture and the World Trade Organization. As you might have guessed, he is a former Cargill executive, too.

Amstutz comes to his new job hoping to do to Iraq what he did to small farmers in the US and around the world in the 1980s: namely, run them out of business by supporting, via regulation and by subsidy, enormous transnational agribusiness firms which will spur overproduction, drive down commodity prices, control seed technology through global intellectual property law, and cast the global food supply into the hands of the world food cartel.

As Jeffrey St. Clair at Counterpunch describes,
The contours of Amstutz's plan for Iraq are familiar: a combination of free-market shock therapy and predation by multinational corporations. Gliding over a decade of UN sanctions that have starved the nation and a war that ravaged the nation's infrastructure, Amstutz announced that the real problem facing Iraqi agriculture is, naturally, government subsidies. "Iraqi farmers have had little incentive to increase production because of price controls that have kept food very inexpensive," Amstutz announced. "With a transition to a market economy, we can see health returning to agriculture and incentives to employ good farming practices and modern techniques."

The more likely scenario is that Amstutz will use destitute condition of Iraq's farmlands as a lucrative opportunity to dump cheap grain from American companies like Cargill, all of it paid for by Iraqi oil. If this scenario plays out, it will spell disaster for Iraq's struggling farmers.
Kevin Watkins of Oxfam put it far more bluntly.
"Putting Dan Amstutz in charge of agricultural reconstruction in Iraq is like putting Saddam Hussein in the chair of a human rights commission," Mr Watkins said.
St. Clair's conclusion, in the General's opinion, is misplaced. Back in the 1970s Iraq was actually a net food exporter and there is no environmental reason the country cannot become one again. More importantly, Cargill, ADM, Monsanto and the like don't care if Iraqis eat their own food or US exported food. What they do care about is that Iraqi food passes through their hands first and foremost. Dan Amstutz is the perfect guy to ensure this happens, and in light of the increasing need for Iraq to pay its own way as a US colony over the next few years and oil inability to carry the entire load, agriculture is the place to look.

Still no giving ground by Tony Blair on the secret "foreign intelligence service" which gave the UK its independent information on Iraqi attempts to procure uranium from Africa. Now in its defense, the Bush administration has just today declassified excerpts from the October 2002 National Intelligence Estimate. The relevant bit is as follows:
"reports indicate Iraq also has sought uranium ore from Somalia and possibly the Democratic Republic of the Congo."
Of course, all this showed up in the Washington Post over a week ago, so no real news there beyond confirmation of what we've already heard through a leak.

This intelligence report followed by just one month Tony Blair's dossier on Saddam Hussein which also pointed to Iraq's quest for African uranium. Did the Bush administration rely on its own intelligence to come up with Somalia and "possibly" the DR Congo, or just lift it from Tony? One can't say at this point.

So back to the original question: what is Tony Blair's secret source for the uranium charge against Iraq? If it's not Niger, then where was Saddam snooping for isotopes?

Here's something interesting the General culled from an article in The Telegraph from September 2002 just after the UK dossier was released:
The Democratic Republic of Congo has emerged as the likeliest target of Iraq's attempts to secure uranium for its nuclear weapons programme, after Britain gave warning that Saddam Hussein has sought "significant quantities" of the radioactive metal somewhere in Africa. . . .

Last November Kenyan authorities arrested five Iraqi men, attempting to travel to the Congo on fake passports, on suspicion of being terrorists. Officials were unable to say last week whether the men had been deported or were still in custody.
Something similar showed up in The Guardian:
A delegation of five Iraqis was arrested in Nairobi by the Kenyan secret service last November while travelling to eastern Congo on fake Indian passports, a western intelligence officer said. Documents seen by the Guardian show that leaders of the Mayi-Mayi, a brutal militia embroiled in the country's civil war, visited Baghdad twice and offered diamonds and gold to the Iraqis. Uranium was not mentioned in the documents but the intelligence officer said the Mayi-Mayi would be able to obtain the material in areas it controlled. Initial contact between Baghdad and the militia was said to have been brokered by a Sudanese general who offered Sudan as a conduit for Iraqi oil and arms.
And this from WorldNetDaily.com in October 2002:
Democratic Republic of the Congo's most notorious criminal gang is hoping to acquire uranium it can peddle to Iraq's Saddam Hussein for use in building a nuclear weapon, according to members of the gang interviewed by WorldNetDaily. . . . leaders of the Mayi-Mayi have traveled to Iraq, selling diamonds, gold and other products from the Congo, which is rich in natural resources.
If this is the best lead going, who is the "foreign intelligence service" which [1] has operatives in the DRC and Kenya; [2] is likely to pass on such information to London; and [3] wants to jealously guard it's anonymity?

The General's guess is Israel.

Why? For starters, Israel clearly has security interests in Kenya and business interests in DR Congo. First, Kenya has long been a popular tourist destination for Israelis. The terrorist attacks on the Israeli hotel and the Israeli charter airliner in Kenya in November 2002 only points up Israel's interests in the country. Second, from August 2000 to April 2001 the Israeli company IDI Diamonds held a multi-million dollar monopoly on the export of all Congolese diamonds and Israeli corporations continue to dominate the DR Congo diamond trade. Rumors circulated that the firm agreed to help train government troops in partial exchange for the monopoly.

Might Israeli security agents or businessmen have run across information of Iraqi officials snooping around DR Congo? Recall that even the intelligence gathered by The Telegraph, The Guardian and WorldNetDaily.com does not include concrete agreements to transfer -- much less the transfer itself -- uranium to Iraq. Might these agents or businessmen have been exaggerating their tales?

Certainly we can all understand why Israel would want to stay as far out of the fray as possible. Clearly wanting a US invasion of Iraq, news that Israel was the source would immedately tag Israel as the tail that wagged the US dog into war and rain fire and brimstone down upon the heads of not only Bush and Blair but probably Sharon as well. This would be even more the case if the intelligence is not, shall we say, 'rock solid'.

Keep your eye on Israel as this story unfolds over the coming weeks. Blair is so up against the wall that he may well be forced to reveal his 'secret source'.

Thursday, July 17, 2003

While the blogosphere continues to argue over the identity of Tony Blair's 'secret source' for the intelligence linking Iraq and African uranium, nobody has seemed to have picked up the strong rebuttal in the Italian daily La Repubblica to the Italian government's denial that it is the source.

The General doesn't read Italian but does read French, so this comes through Le Monde (excuse my translation):
An anonymous source from SISMI [the Italian Military Secret Service -- ed.] confirms with the newspaper [La Repubblica -- ed.] that a diplomat came into contact with Italian intelligence services and offered documents concerning correspondence regarding a supply contract to transfer uranium to Iraq. SISMI believed it to be authentic. The salesman [i.e. the diplomat -- he sold the documents to SISMI for several thousand dollars] used a little trick. Knowing that the Nigerien embassy was under the surveillance of the secret service, he conspicuously placed a telex to Rome on February 1, 1999 in the dossier. It announced an official visit, in the name of Saddam Hussein, to Niger of the Iraqi ambassador at the Vatican. The telex had already been intercepted at the time by the Italians. The trip had actually taken place, thus the remainder of the dossier was regarded as legitimate. . . .

The Italians transmitted the file to the UK's MI6. The anonymous SISMI source explains this as normal collaboration between allies. This is at the end of 2001 and the beginning of 2002. It reaches the Americans. The CIA sent an ambassador on a mission to Niger [Joe Wilson -- ed.] who returned convinced the dossier was a fake. It isn't spoken about again until September 24, the day when Tony Blair announced that Iraq had sought to purchase uranium from an African country.

La Repubblica's story turns mischevious. According to certain members of SISMI, the newspaper writes, it was Silvio Berlusconi himself who revived the false dossier during a telephone conversation with George Bush, three days before it was mentioned in the State of the Union address, when Bush spoke the words on uranium which has today landed him in the hot seat.
Adam from "The Likely Story" has blogged this story as well after a tip from the General. Check out his analysis.

Believe it or not, there are actually some Republicans out there besides Pat Buchanan who think that maybe an American empire isn't such a good idea.
An unusual manifesto is circulating through the e-mail boxes of prominent Washingtonians from an ad hoc group calling itself the "Committee for the Republic." Its five sponsors include conservative C. Boyden Gray, a White House lawyer in the first Bush administration; Chas. W. Freeman, a former ambassador to Saudi Arabia; and Stephen Cohen, a senior fellow at the Brookings Institution. The manifesto is a work in progress, its authors say. But the goal is clear: to educate Americans about the dangers of empire. . . .

"The American Revolution was a nationalist revolt against the British Empire," the draft manifesto argues. "Our country was born as a defiant rejection of the legitimacy of imperialism." Citing the lessons of the classics, it argues that the "inevitable cost of empire" is a loss of political and economic freedom at home. "Domestic liberty is the first casualty of adventurist foreign policy."

While the draft was written before the latest flap over bad intelligence used in the State of the Union address, it also argues: "To justify the high cost of maintaining rule over foreign territories and peoples, leaders are left with no choice but to deceive the people."
Just when you think the Republican Party is irreformable, it turns out there are a few populists in it after all.

The General likes to to keep track of the American crony capitalist class. Need we more evidence that the Republican Party is its political body?
Republican state attorneys general in at least six states telephoned corporations or trade groups subject to lawsuits or regulations by their state governments to solicit hundreds of thousands of dollars in political contributions, according to internal fundraising documents obtained by The Washington Post.
The crony capital claim is not a one-way street by any means. Sometimes crony capital manipulates the state, sometimes the state manipulates crony capital. It's a symbiotic relationship destined to end in sorrow. Just ask Indonesia.

Put these two bits of information together and you get a not-so-rosy story after all.

First,
The Commerce Department reported Thursday that housing construction rose 3.7 percent from May to a seasonally adjusted annual rate of 1.80 million units, the highest level since January. June's performance, stronger than the 1.75 million pace that economists were predicting, offered a fresh sign that the housing and residential construction markets continue to serve as one of the national economy's few pillars of support.
Second,
Mortgage rates rose for the fourth consecutive week after reaching a record low in mid-June, stoking fears that the resilient housing market could begin to slow, Freddie Mac said on Thursday. Thirty-year mortgage rates averaged 5.67 percent in the week, compared with 5.52 percent the previous week. It marked the fourth consecutive weekly increase since the 30-year mortgages hit 5.21 percent for two weeks in June, its lowest on record.
So what do we have here? New housing starts hit their second-highest level of the year in June just as mortgage rates ended their long decline. Recall that for two weeks in mid-June, the 30-year mortgage hit its trough of 5.21%. Clearly Americans saw the writing on the wall and jumped into the housing market before it was too late to benefit from mortgage rates they might never see again in their lifetimes.

The upshot? The June housing figures are a fluke, a product of the end of the fall in mortgage rates, not of a rebounding US economy. Look for very meager numbers for July.

So the Associated Press can spin the numbers all they want. This "pillar of support" for the American economy has taken all the weight it can bear and will take no more.

Wednesday, July 16, 2003

The chorus against the Chinese peg is joined by Alan Greenspan, who actually suggested Beijing should float its currency and revealed today that US Treasury Secretary John Snow has told the Chinese as much in person. This is some pretty reckless talk from a man known for his skill at understatement and caution.

It looks like the Brits have finally realized the obvious: the UK under Tony Blair is a US client state. As vassals have always done, they travel to the imperial metropole to be praised and medaled. Just as members of the British cabinet fawned over Mohawk Chief Joseph Brant in 1776 and received gifts and rewards from the hand of King George III himself, so, too, will Tony Blair play the dutiful role of vassal and receive his Congressional Medal of Honor.

Mark these words for future reference:
U.S. Treasury Secretary John Snow predicted Wednesday that the American economy will regain momentum and grow by more than 3 percent by the end of the year.
Considering Snow's rather limp record of crystal ball reading to date as well as his designated role as Bush Administration economic cheerleader, one shouldn't take such talk too seriously. But who knows, perhaps the zags are ready to give was to a zig or two this year after all? We'll be returning to this prediction often in the future.

The economic data released today tells the continuing saga of economic stagnation and threats of deflation.

First, industrial production ticked up slightly in June by 0.1%. Manufacturing rose 0.4% but was offset by a sharp -3.5% change in utilities output. Total industrial capacity remained stuck at 74.3%, again the product of a slight improvement in manufacturing (from 72.6% to 72.8%) and a sharp decline in utilities (from 83.4% to 80.2%). On a quarterly basis, industrial capacity in 2003:II was down notably from 2003:I. At 74.3%, industrial capacity continues to decline by quarters and is at its lowest point since 1983:II. Despite the small rise in June, the same goes for manufacturing, which also continues to decline by quarters and in 2003:II is also at its lowest capacity utilization rate since 1983:II.

This is clearly not an economy which can profitably utilize more capital investment.

Second, consumer prices in June rose 0.2%, but the more important story is in core CPI which remained flat. This was the third month this year that core consumer prices did not rise at all, and for the first half of 2003, core inflation stands at 0.8%, even lower than the last six months of 2002. Over the past 12 months, core inflation in the US is running at a mere 1.5%.

Thus it was entirely appropriate that Greenspan today said, in his usual obscurantism, that deflation would "continue to engage our attention". Yet despite the Fed's commitment to ultra-low interest rates into the foreseeable future, the 10-year treasury yield continued its recent ascent, at 3.95% from its mid-June trough. That makes a nasty potential combination of rising interest rates and falling prices -- a witches' brew for capitalism.

It continues to stun the General how all this news can be seen as downright rosy by particularly dimwitted economists like Mark Vitner of Wachovia Securities or pundits like Alan Webber.

Monday, July 14, 2003

Today is Bastille Day, and per tradition, President Jacques Chirac issued a general 2.5 month reprieve on all sentences of convicted criminals across France save for those convicted of terrorism and similar crimes. Earlier in the week, Chirac also announced a special 2-month pardon for Jos� Bov�, lowering his recent sentence for two instances of destroying genetically-modified crops in France from 10 months to 5.5 months. Notably, Chirac purposefully did not grant Bov� a full pardon as Bov� had demanded, stating uneqivocally
Les militants syndicaux sont des Fran�ais comme les autres et ne doivent pas s'imaginer que cette vocation leur donne le droit d'enfreindre la loi.
More than 200 visitors a day come to Bov�'s prison to sign a petition on his behalf, and demonstrations occur every day in France supporting a full pardon of Bov�. Until then, of course, this hero sits in prison, something law-breaking "terrorists" Sam Adams and John Hancock never did for their roles in the Boston Tea Party.

Take a few minutes today to write to Bov� and send him your personal support. His address is:
Jos� Bov�
No d�crou 22377 Y
Bloc A 07
34753 Villeneuve-les-Maguelone
France
While you're at it, buy a copy of his book, The World is Not For Sale: Farmers Against Junk Food. Read it and take action.

From today's New York Times. Funny how when right-wing parties come into power they become even more dogmatic, whereas when left-wing parties come into power they start heading rightwards faster than an Indy car taking Turn One.
As a firebrand labor leader 25 years ago, Luiz Inacio Lula da Silva proved adept at using strikes to persuade politicians and bosses. Now, as the president of Brazil, he finds himself on the receiving end of a walkout by government employees, who accuse him of being a turncoat because of his plan to slash their generous pension benefits.

The strike, which started last week, is the first by federal workers in Brazil, Latin America's largest country, since Mr. da Silva and the left-wing Workers' Party took power in January.

Union groups say that while Mr. da Silva has consulted businessmen and elected officials about the pension legislation, he has refused to meet with "the public workers who are the main target of the reform" and were among his most ardent supporters.

Mr. da Silva, a former leader of the metalworkers union in Sao Paulo, recently sent a pension reform package to Congress that was similar to one that the Workers' Party strenuously opposed for nearly a decade when it was in the opposition.

The costs of empire just keep going up.
Defense Secretary Donald H. Rumsfeld said today that the United States might need to send additional troops to Iraq to quell an increasingly well-organized guerrilla resistance, and warned that more American soldiers would die in attacks this summer. . . . "It seems to me that the numbers of U.S. forces are unlikely to go up," he said on the NBC News program "Meet the Press." "Now, could they? You bet. If they're needed, they will be there." . . . if the strains of American deployments of ground troops around the world forced the Pentagon to seek to increase the size of the Army and the Marines, "clearly, we will come to Congress and ask for an increase."
The operative question in light of globalization cannot be any other than: "How long until the US starts making its Iraqi colony 'pay its own way'?"

The diversity of opinions concerning China's role in globalization's current impasse find interesting expression in a pair of commentaries by Stephen Roach of Morgan Stanley and the latest issue of The Economist.

The Chinese economy is booming. Industrial production is soaring, exports are into the stratosphere, and as a result China is running an increasingly large current account surplus with the center of the world economy, the United States. Because the Chinese currency, the yuan, is tied to the US dollar, the dollar's tumble over 2002 are early 2003 has made this powerhouse even more powerful, undercutting not only other industrialized countries but more importantly other Southern countries in East Asia and Latin America. If the dollar continues to fall, this advantage will become even more acute.

Roach's thoughts on China are summed up in his title: "The Scapegoating of China". According to Roach, China's export success is due mainly to Western TNCs, not domestic Chinese firms. An appreciation of the yuan vis-a-vis the dollar will "destabilize the very supply chain that has become so integral to new globalized production models." That is, a rising yuan will interrupt the flow of ultra-cheap goods from China to the West that the West has created to serve itself. Roach also thinks China is not ready to float; it is "entirely premature and risky". A revaluation would provoke deflation in the country, blow up a property bubble, and encourage global speculation against the currency.

Roach shrugs off the corrosive effects of China's near-slave labor force on labor markets in the Global North, basically appealing to the palliative 'Wal-Mart effect' (loathsome low-paying jobs compensated by access to low-cost plastic crap equals happiness) and demanding structural reform in Japan and Europe first and foremost (i.e. the 'Texasification' of the rest of the industrialized world).

Over at The Economist, the pernicious effects of the peg of not only the yuan but also the Hong Kong dollar, as well as active management of the South Korean won and the Taiwan dollar (and the yen), on the global economy are discussed. As a result of this pegging and dirty floating,
Asia's foreign-exchange reserves have swollen from less than $800 billion at the start of 1999 to over $1.5 trillion now, almost two-thirds of the global total. Japan bought over $30 billion-worth in May alone; it now has almost $550 billion in its coffers. The world's seven biggest holders of foreign-exchange reserves are all in Asia.
The Economist comes out boldly to state that in their view the Chinese yuan is "the most undervalued currency in the world," estimating an undervalue of nearly 20% against the US dollar; China's massive increase in foreign currency reserves, massive current account surpluses, and huge FDI inflows are presented as evidence.

So why doesn't China revalue (floating is right out and thus Roach's plea against it is a red herring)? Because the illnesses of globalization are hitting China as well: unemployment and deflation. As Charles Kindleberger points out in his excellent book The World in Depression, relative currency appreciation in a world poised on the edge of deflation is deflationary for the country appreciating. Plus, a rising yuan would cut into China's export engine and thus shake the most profitable sector of the economy at a time when unemployment, particulary in rural areas, is accute.

What makes the US complaint against the value of the yuan ironic is that Asians stuffing US dollars under their central bank mattresses helps finance the US current account deficit. If the Chinese, Taiwanese and Koreans didn't sit on all these dollars, they would send them out into circulation, drive the dollar down very sharply, and shake the US economy up like it hasn't been shaken since the late 1970s. If Asia dumps dollars, get ready for the end of Greenspan & Co.'s deflation strategy, too; interest rates will suddenly and unpleasantly shoot up. Thus the US needs Asians to hold dollars, but it also needs them to not hold dollars (i.e. let their currencies appreciate).

The euro zone countries are particularly hard hit by this predicament. Pressure on the US dollar to sink cannot be dissipated in East Asia due to these policies, so the full force of dollar devaluation gets felt in Europe, and the euro zooms upward. For a region poised on the brink of recession, an appreciating currency is not only unwelcome, but more importantly a sign of an amazingly disfunctional global economy.

Friday, July 11, 2003

More insanity from the Bush administration. In the midst of a rising unemployment, credit defaults and now rising mortgage rates, an overall economy in which you can't tell the difference between recession and recovery, Bush wants to eliminate overtime pay for some 8 million workers, particularly in the service sector. Regardless of the ideology of the move, the practicality is imbecilic at best. Just when working class folks need more income to trigger more consumption and thus re-start the capital spending cycle in the US, the Republicans think it would be a good idea to cut the incomes of working class folks.

If you thought the 2003 tax cut was both evil and downright reckless, you aint seen nothin' yet. Crony capitalism is what Republican rule is all about.

Stephen Roach's take on the insanity that is the US stock market:
As measured by the S&P 500, the US stock market had risen some 26% from its March 11 lows before slipping about two percentage points over the past couple of weeks; at its 17 June high, that run-up went about six percentage points further that the four previous post-bubble rallies, which averaged about 20%. I am beginning to worry that since the current rally has now distinguished itself from the previous false starts, market spin is starting to take over in driving perceptions of underlying economic activity. That�s exactly what happened in the late 1990s, when the bubble gave rise to a constant stream of �new wave� interpretations of the New Economy. And it may well be happening again today, as the sharp recent rebound in the stock market appears to have shifted the emphasis from hard to soft data. This time, it�s policy stimulus that is presumed to make a difference. But 550 bp of monetary easing and nearly five percentage points of fiscal stimulus later, the consensus call for a vigorous recovery remains nothing more than an unsubstantiated forecast. In my view, the issue of policy traction remains as contentious as ever. Yet try telling that to a stock market on the mend. To me, this is all starting to have an eerie sense of d�j� vu.
Note especially the shift of emphasis from hard to soft data. "Hard" data is that useless backward looking stuff like unemployment rates, jobless claims, GDP growth and the like. "Soft" data is the crystal ball that reliably forecasts the future like surveys (of purchasing managers, consumers, even economists!). Remember, when material facts fail to please, just ask people about their feelings.

Good Lord, and you can actually win a Nobel Prize in this discipline!!

In May 2003 the US dollar fell 4.6% against other major currencies and oil prices dropped to their lowest levels since July 2002. Nonetheless, the US trade deficit shot up to its third highest tally ever: -$41.84bn. 38% of the trade deficit is accounted for by the deflation-struck countries of East Asia (Japan, China and the four East Asian NICs), forming a convenient vector for the export of deflation to the US. If Germany falls into deflation this year, the massive trade deficit with the euro area (which constitutes another 13% of the overall deficit) will only aggravate the situation.

So far the January-May 2003 trade balance stands at -$205bn. Amazingly this is 29% above the same period last year. And don't forget, 2002 set an all-time US current account deficit record, which the US is on track to utterly shatter this year. It's safe to say that the US current account deficit for 2003 could easily reach -$575bn, and 6% of US GDP is not out of the question.

The global economy is weak and only getting weaker, particularly with word out that Japan is still a wreck (as if anyone really believed the recovery stories last week!) and Germany is pressing for currency depreciation to rescue it from recession. There is simply nothing short of a major recession in the US which can pare back this dangerous current account deficit spiral. The distinct possibility is that the spiral will itself provoke the recession, tanking the dollar and spreading deflation throughout Europe.

Hidden within today's news that US producer prices rose 0.5% in June after falling in both April and May is the more important datum of another fall in core producer prices by 0.1%. Over the past year core producer prices have fallen seven of twelve months. For the year so far, core producer prices have risen just 0.5%.

The downward pressure on prices continues.

It's about time the so-called 'Third Way' of Clinton, Blair and the rest has finally been unmasked by its own creators as the political project of the yuppie new middle class, the working class be damned! (Oh, by the way, we do need your votes in the upcoming election. Thanks.)

Thursday, July 10, 2003

The retail sales reports out today put CPI deflation in a new light. Recall that except for The Gap, Wal-Mart was the only major retailer doing markedly better in the first half of 2003 than the first half of 2002. Now consider this in light of Wal-Mart's contributions to American deflation. Wal-Mart's corporate profit strategy is, to put it succinctly, squeeze the producer. As the #1 retailer in the US and the world, Wal-Mart has amazing oligopsony powers to extort ultra-low prices from producers and passing a portion of them on to Joe and Jane American. By virtue of its very existence, Wal-Mart is a deflationary force in the world economy.

Combine that with Wal-Mart's cozy relationship with Beijing:
Wal-Mart is the biggest purchaser of China's goods, buying so much that if the Bentonville, Ark., retailer were a country, its $12 billion in imports would have made it China's eighth-largest trading partner last year, ahead of Russia and Great Britain. . . . Wal-Mart's trade with China is a one-way street, making the retailer responsible for about 10 percent of the U.S. deficit with China.
Now combine that with the fact that East Asia is the primary source of import deflation in the US and you get the amazing magical Wal-Mart deflating machine, coming to a crashing economy near you?

It is surprising how some myths simply refuse to die. That the Republican Party is the Party of "small government" and "fiscal conservatism" is a particularly egregious one that lives on despite all evidence. Another is that the Republican Party is the party of devolution and "state's rights". This one, too, is based on nothing but hot air as
a bill that would sharply limit the power of state securities regulators to police and penalize wrongdoing by brokerage firms and their employees was approved by a subcommittee of the House Financial Services Committee yesterday. . . . If passed, the bill would prevent states from imposing rules on the disclosures that brokerage firms make about the investments they sell. The measure would also prohibit state regulators from instituting conflict of interest requirements on brokerage firms, like those relating to stock analysts that 10 large securities firms agreed to last December when they settled with regulators and paid $1.4 billion in penalties and fines.
Regulation of financial services has always been in the hands of the states in the US, but now "conservatives" want to run roughshod over these traditional practices. If these myths just won't die, what are the chances that the American public will believe George W. is a liar?

Evidence is superfluous when there is dogma to defend!

Looks like the General spoke too soon about mortgage rates. Last week the 30-year mortgage rate stood at 5.37%. This week it stands at 5.52%. That's makes a rise of 53 basis points in just one month.

For all of 2002 the 30-year rate averaged 6.54%. At the pace rates are rising today, we should be back to that spot around Labor Day. As Bananarama so poetically said, this could be a "Cruel, Cruel Summer" for the US economy.

You've already read the stories about US unemployment claims rising yet again to their highest absolute level in 20 years. What you may not have seen is the retail sales reports out today as well, a key marker of the US consumers ability to buy all the crap s/he can amass and thus keep the overproduction engine in high gear.

Same store sales 22-week results as of July 4/5:
  • The Gap: +11%
  • Wal-Mart: +2.5%
  • Limited Brands, Inc.: +1.0%
  • Target: +0.3%
  • TJX: no change
  • JCPenny: -2.5%
  • Saks: -2.7%
  • Federated Department Stores: -3.6%
  • Sears: -4.7%
  • Dillard's: -5.0%
  • May Co.: -7.2%

Now consumer spending is beginning to look a bit dicy. Sure ultra-cheap Wal-Mart continues to chug along, but even giants like Target are at a standstill (a combination of low growth at Target and big drops at Mervyns) and the department stores are looking downright ill.

Or perhaps the US economy will be saved by Middle Americans in the near future all looking like this?

Another bit of news from Iraq that reinforces the General's new slogan, "From quagmire to colony is but a step":
American troops may still be in Iraq four years from now, Gen. Tommy Franks told Congress on Thursday. The wartime commander told the House Armed Services Committee: "I anticipate we'll be involved in Iraq in the future. Whether that means two years or four years, I don't know.''
Maybe four years? Does anyone really believe this?

Franks nicely soft-pedaled the time frame of US occupation, pitching "four years" as the outside estimate. Come on! It will most likely take at least two full years just to pacify Iraq, and that with the number of troops at 150,000. The full job of conquering the country could be done more quickly with more troops, but Bush won't touch that option with a ten-foot pole -- at least not until 2005, if you know what I mean. Considering the very low morale of many US soldiers in Iraq ("pawns in a game that we have no voice [in]" -- that from a US soldier himself!), we might see the absolute numbers of troops at a moment in time fall but the overall number flowing through the country over time rise dramatically.

Then the nation-building operation should take another 5-10 years. Certainly US troops need not stay at a level of 150,000 for ten years, but I would wager there will be thousands of them in the country even into 2010s. And anybody thinking of joining the National Guard in the next decade had better stock up on desert gear.

Wednesday, July 09, 2003

The price tag for Mr. Bush's empire is officially estimated: $57.6bn per year.

That's $3.9bn per month for Iraq and $0.9bn per month for Afghanistan, according to Don Rumsfeld in his testimony before the Senate Armed Services Committee.

In comparison, the Republicans are planning on spending $40bn annually for a prescription drug benefit in Medicare.

Not that Republicans care much about deficits, seeing as how they have long been the party of borrow-and-spend, but this revelation is certain to prod the Bush administration toward recruiting more willing participation from the coalition of the willing. The problem is, of course, that most of the willing are only willing when they get paid to serve. For example, Bangladesh and Pakistan both have considered sending a few thousand peacekeepers to Iraq to replace US soldiers. However, they have the funny notion of wanting the US to pay for the privilege.

When you're forced to buy your friends, you can't get along in the world on the cheap. The US Congress will surely have to face up to this reality, and the sooner the better.

The refi business continues to slow down. According to the Mortgage Bankers Association of America, 30-year rates now stand at 5.37% up from 4.99% just three weeks ago. In turn,
its measure of demand for refinancings, the refinancing index, fell 21.3 percent to 6,768.3, while its gauge of demand for loans to buy a home, the purchase index, fell 5.5 percent to 414.1.
It looks like the housing boom is coming to a certain end, with uncertain implications for the overall economy.

It seems a safe assumption that the refi business will cool considerably. With unemployment high and going higher and consumer bankruptcies growing as well (see previous posting), lenders have to keep lending to stay ahead of the defaults. But the housing lending market is saturated now, and demand for housing loans has dropped off precipitously. This is especially true for refi loans which have fueled the US consumption binge since 2000 in the face of falling interest income, falling stock prices and a sharp slowdown in wage growth.

Without refi, how will the American consumer continue to consume?