Friday, August 29, 2003

And don't forget to include Brazil in the list of countries officially in recession.

And now Hong Kong is officially in recession as well as the eurozone, the city's third in six years.

The run-up to the WTO ministerial in Cancun is in a near crisis after a host of Southern countries revolted against the pharmaceutical deal worked out with the United States.
A deal to provide cut-price copies of life-saving drugs for the world's poorest people was on the brink of collapse yesterday in Geneva, after developing countries objected to a last-minute compromise worked out to pacify the US pharmaceuticals industry.

A marathon session of negotiations ended early yesterday morning with no deal amid bitter recriminations and accusations of sabotage.

Delegates failed to bridge their differences over relaxing global patent laws when they reconvened last night despite an impassioned warning from the World Trade Organisation director general, Supachai Panitchpakdi, that the stalemate could jeopardise the Cancun summit of trade ministers which begins in less than two weeks.
It looks like the Southern back benchers, led by the Philippines, came out strongly against the tentative deal with the US (which torpedoed a previous agreement in December) and implicitly against the leadership of Brazil and India who, together with South Africa and Kenya, worked out the compromise with the US.

Interestingly, The Guardian reports that "Kenya . . . held up talks for six hours until its Geneva representative was overruled by Nairobi." Clearly there was a lot of pressure on the Southern countries to accept the deal, a settlement which was to ensure that Southern countries didn't 'take advantage' of the magnanimity of the US to allow countries which didn't produce drugs themselves to import generics produced in countries like Brazil and India under compulsory licenses. According to the BBC, Southern countries were to be held responsible for "ensur[ing] cheap versions of drugs do not make their way onto markets in rich countries." Does this mean Mexican border guards need to inspect the handbags of every old lady crossing back into Arizona from a day trip to Nogales?

The Guardian also reports that the sub-Saharan countries, clearly the most desperate for any deal at all, are pressing everyone they can to accept the compromise. It looks like I jumped the gun a bit on proclaiming the unity of the South behind the leadership of Brazil and India. But this time, disunity plays to the South rather than to the North. No compromise on drugs means the Cancun ministerial will likely collapse, and the North isn't about to let that happen.

The new reality for the American worker.

The General blogged lots of comparative details on this subject back on August 3. My comments back then make a nice companion text to this graphic.

I guess this is what you call "political purple prose".
Mark Morford, a columnist for the San Francisco Chronicle's website, wrote yesterday: "It's true. It's real. The Bush action figure is a genuine serious item and not, as you would fully expect, a joke, not a parody ...

"There he is, all faux manly and squinty and artificially buffed up, his gull-wing ears toned down and the thin-lipped brow-furrowed monkey confusion so common to his scrunched little face apparently erased by expert doll craftsmen and/or a drunken 50-cents-an-hour sweatshop employee somewhere in China."

Gosh, the one on the right is almost life-like . . .

Does anybody else see a bit of a problem with these trends?
The Commerce Department said consumer spending, which comprises about two-thirds of U.S. economic activity, grew 0.8 percent in the month, in line with expectations of analysts polled by Reuters. June personal spending was revised up to 0.6 percent from 0.3 percent.

Personal income grew 0.2 percent in July, less than the 0.3 percent growth rate expected by economists.
Remarkably, wage and salary disbursements actually fell $500 million as workers in all but the service industries took a hit. Personal consumption has been rising faster than disposable personal income for some time now; in five of the seven months this year, consumption rose faster than income. The big 1.5% rise (in current dollars) in disposable personal income was bought in July with Bush's one-off tax rebate. The underlying trends for consumption, however, don't look good -- unless we get annual tax rebate checks in perpetuity.

Thursday, August 28, 2003

The Big Picture cuts right to the chase -- as one would expect.
Zero % financing amounted to channel stuffing; After nearly a year of those aggressive sales tactics, the auto sellers have exhausted all demand at the margins. There is now zero pent up demand for autos, and we are approaching zero pent up demand for homes . . .
Maybe the gluttonous American consumer really has reached his limits? At least on big ticket items?

Initial unemployment insurance claims seem to have leveled off recently, and the bulls are interpreting this as another sign of the "recovery".
"The jobless claims were a fairly positive number," said Phil Flynn, head financial analyst for Alaron Trading Corp. "It is not the type of number that will knock your socks off, but it was pretty much in range of what was expected."

. . . It marked the fourth consecutive week in which the moving average was below the key 400,000 mark viewed as a sign of an improving job market.

"It's encouraging that we've been at or below that psychologically important 400,000 jobless claims level for several weeks now," said Patrick Fearon, an economist for AG Edwards and Sons. "There's no question that there's been a modest improvement in the labor market recently."
As the below chart shows, jobless claims in July and August have indeed come down off of particularly high figures in the spring. That being said, we've seen this fluctuation under Bush before, including a rather sustained period last summer below the magic number of 400,000.

The black line is the four month moving average. For a larger picture, click here.

The left turn throughout much of Latin America is having salutary effects on the region's international clout as well.
The presidents of Venezuela and Brazil called for creating a powerful South American trade bloc this year before continuing talks on a U.S.-backed hemispheric free trade zone.

Brazil's Luiz Inacio Lula da Silva and Venezuela's Hugo Chavez said Tuesday that integrating South America's two largest trading blocs, Mercosur and the Andean Community, comes before any hemispheric deal. They set a Dec. 31 deadline for a regional trade union.

Silva and Chavez argue the Free Trade Area of the Americas � a proposal to create the world's largest trading zone � will deepen Latin poverty by forcing local industry to compete against developed nations.

"We're not saying that we don't want to negotiate with the United States, because it is very important for Brazil. But we must integrate first to negotiate with that country," Silva said at a news conference.

South American nations can create "a power bloc" to confront the FTAA, Chavez said. "Only united can we break the chains that oppress us.

. . . Brazil has warned it won't continue with FTAA negotiations unless Washington relaxes trade barriers on Latin American exports such as oranges and sugar. Chavez claims the FTAA is the latest incarnation of economic "colonialism" and vows to put any deal to a popular vote.
The possible unification -- at least politically -- of Mercosur and the Andean Community is big news. Once the WTO ministerial in Cancun is behind Bush, he will start pushing the FTAA hard again. Latin American looks ready for the fight.

Proof positive that the Global South is more united than it has been since the 1970s and playing hardball at the WTO.
The United States said today that it was close to accepting an agreement, which it had rejected last December, to help poor nations buy generic medicines through exemptions from trade rules.

The reversal by Washington � meant to improve the access of millions of people in those countries to expensive patented medicines for AIDS and other diseases � could enhance the Bush administration's international standing and prevent the collapse of global trade talks to be held in Mexico next month.

. . . Faizel Ismail, the permanent representative of South Africa to the World Trade Organization, who was part of the private negotiations, said the United States accepted the deal because of new assurances that it would not be abused by the countries in need of generic drugs to fight diseases like AIDS, malaria and tuberculosis.
It remains to be seen what "abused" actually means in the text of the agreement. But suffice to say that the South isn't lying down any more.

Remember when considering the revised GDP figures today that the two biggest contributors by far were consumer durables and military spending. These two sources of economic growth probably won't do a repeat performance in 2003:III. Spending on consumer durables was driven largely by the refi boom. The spending splurge made possible by homeowners refinancing their mortgages and spending the 'savings' on furniture, refrigerators and toys for the garage may have spilled over into July, but don't count on a quarter-wide contribution.

Military spending will continue to be very large and is the real wildcard. In 2003:II it went up by $47.5bn, and in light of the comments of Paul Bremer and the Republicans in Congress, the spending could continue to rise and rise. Defense spending could keep this economy chugging all summer long. And who cares -- the day of reckoning is far off -- unless, of course, you're a federal worker.

One final note. GDP revised upwards thanks to smaller than expected trade deficits. With the rising dollar since June, these deficits should return to all-time record territory in no time.

The revised GDP figures for 2003:II came out today, and on the face of it, the US economy was clipping along quite nicely this spring.
Gross domestic product, or GDP, grew a revised 3.1 percent in the second three months of the year, the Commerce Department said -- a figure broadly in line with Wall Street expectations for a 3.0 percent gain. That was up from the 2.4 percent rise estimated a month ago and followed anemic 1.4 percent growth in each of the two prior quarters.

It was the fastest expansion since the third quarter of last year and is likely to bolster hopes for strong growth in the current quarter.
As many regular readers know, the General blogged on July 31,
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!!
I revised my number crunching in light of the likelihood that some of these billions would have entered into the economy anyway, and thus on August 6 the General said
While probably not all the $45.6bn was generated out of 'thin air' (through foreign borrowing or printing money), a goodly proportion certainly was. If just half of it came into GDP this way -- say, $23bn -- that would mean GDP growth in 2003:II without the occupation would have been a mere 1.5%. Surely this is a conservative estimate as well.
With the revised numbers out today, things still look unbalanced.

In current dollars, US GDP rose $105.5bn in 2003:II. Of that, $47.5bn was in national defense. As a first (simplistic) cut, US GDP in the second quarter without the Iraq war/occupation would have risen not 3.1% but 1.38%. As a second (more sophisticated) cut, assuming only half of the defense contribution to GDP came from foreign borrowing and growth in the money supply -- a conservative estimate in the General's opinion -- second quarter GDP would have risen just 2.23%

Now I grant you, 2.2% is better than the 1.4% of 2002:IV and 2003:I. That being said, it's still a pretty anemic level of growth.

Wednesday, August 27, 2003

The refinancing share of total mortgage loan activity in the US fell last week below 50% for the first time since mid-June 2002.

More evidence that the US current account deficit will be skyrocketing in the near future -- and that the country's economic debate in the 2000s will increasingly look like that of the 1980s.
By spending trillions of yen to buy dollars in the foreign exchange market, Japan has limited the yen's rise against the dollar this year to no more than 2.3 percent, while the euro has jumped as much as 13.5 percent. The yen is now up just 1.3 percent against the dollar while the euro is up 3.8 percent, almost three times as much.

Japan's success in keeping the yen from gaining significant strength against the dollar � and other currencies � is helping the country's economy rebound by keeping its exports more competitive abroad. But, at the same time, it is a drag on American economic growth and is making it more difficult for the United States to reduce its troublesome current account deficit, which is now over $500 billion.
Apart from the US, East Asia is the only growth spot in the global economy today. But much of this growth is premised, as we see in the cases of both Japan and China (the two largest economies in East Asia), on selling to the United States. East Asia has trillions of dollars in reserves and has shown no reluctance to use them. Watch for the dollar to rise even further in the near future, and global balancing to fall right off the table.

The costs of empire just keep going up.
Iraq will need "several tens of billions" of dollars from abroad in the next year to rebuild its rickety infrastructure and revive its moribund economy, and American taxpayers and foreign governments will be asked to contribute substantial sums, U.S. occupation coordinator L. Paul Bremer said yesterday.

Bremer said Iraqi revenue will not nearly cover the bill for economic needs "almost impossible to exaggerate."

. . . A State Department official said the Bush administration is preparing to seek a "huge" supplemental spending bill from Congress. Administration sources also said the U.S.-controlled Coalition Provisional Authority is running so low on funds that the White House is considering seeking an emergency infusion next month to cover the organization's bills.
Unlike the troop costs, which are variable from providing country to providing country, rebuilding Iraq's electricity system will cost $13bn regardless of who pays. Considering the lackluster follow-through on the big promises in Tokyo of $4.5bn in aid to Afghanistan in January 2002, I wouldn't expect to see donors scrambling to line up behind Viceroy Bremer's request. If "several tens of billions" of dollars can't be squeezed out of Iraq any time soon, the US will pay the bulk of the costs -- on credit, of course.

Or perhaps the US Congress can pass a special "Iraq tax" or run a special "multistate Iraq lottery game"?

Tuesday, August 26, 2003

So, how many Eastern Europeans exactly will it take to stabilize Iraq? James Dobbins, who helped to manage the reconstruction of Bosnia and Kosovo, and also served as a special envoy for George W. Bush in Afghanistan, tallied the numbers.
Using the Bosnian model, he concluded that to be effective in Iraq the US would need 258,000 troops on the ground. Using the Kosovo model, that figure rose to 526,000. The current deployment in Iraq of some 170,000 troops, of which 148,000 are US forces, suggests a serious shortfall.
So we're looking at least at another 80,000 Poles, Ukrainians and Bulgarians needed on the ground, because we know these boots won't be filled by American soldiers.
Although neo-conservative dogma favours the all-American option, the US does not have troops to spare, and training more would take time and money. Seeking to expand the army for a war that was supposedly won four months ago also would be far too hazardous politically as a presidential election approaches.
It's too bad Brian Whitaker reviews all the troop options for Bush without analyzing the VVV (very valuable vassals) route. This can be done without a UN resolution or a UN authority over the entire operation. NATO has taken over filling many of the foreign boots in Afghanistan, so why not VVVs -- lots more VVVs -- in Iraq?

India and Brazil seem to be teaming up on more issues than just pharmaceuticals for the upcoming WTO ministerial in Cancun.
Developing countries yesterday expressed dissatisfaction with the latest proposed outline for a trade agreement to be considered at the upcoming meeting of World Trade Organization ministers in Mexico, saying the document failed to fully reaffirm the group's commitment to eliminating farm subsidies.

The countries, led by Brazil and India, pledged to present their own proposal at the meeting next month in Cancun of the 146-member Geneva-based organization
There are three somewhat distinct issues wrapped up in the negotiations over agriculture: market access, domestic support and export subsidies. While most liberal free-trade bloggers focus on the first two, the third is the most destructive to agricultural production in the Global South. Don't cry too many tears for the Brazils and Chiles and Argentinas of the world who use more or less the same massive capital-intensive methods as do the Europeans and Americans. Cry for the small farmers of the Philippines or Kenya or Mexico instead who are swamped by Northern grain overproduced and dumped on the world market.

Aside from the moral aspects of the trade negotiations, the politics of the ministerial are especially volatile. India and Brazil seem to have really taken up the mantle of leadership for the Global South as a whole. In the past, Brazil (under Cardoso) had been happy to play US lap dog and India had largely abandoned its leading role won under Nehru in favor of isolationist Hindu nationalism. These more docile days seem to be behind us now.

The General blogged on this topic a week ago. Now it's made the Washington Post.
Homeowners who rushed this summer to refinance their mortgages at super-low interest rates are finding that the volume of applications is choking the financing system. This means that the rate locks they counted on to protect them against rising expenses are expiring before their loans can close.

The result: Costlier loans, angry borrowers and climbing numbers of complaints to regulators.

In the land of life-time employment, now part-time or temporary employees make up roughly a quarter of the Japanese work force.

In the 1980s Japan was strong-armed into reducing its trade deficit with the US by starting Honda, Toyota and Nissan auto manufacturing plants in the US rather than keeping producting in Japan and shipping the cars across the Pacific. In 1982 Honda became the first, opening a plant in Ohio, and thus today all those Honda Accords zipping down US freeways are built in Marysville, OH and the Civics in East Liberty, OH.

Of course, auto production had the (then) powerful auto workers union going for it, and even Republicans back in the 1980s cared about union votes. Will Bush listen to the voice of UNITE today? International labor standards are an eminently worthy goal and a non-protectionist means to advance the interests of workers both in the US and in China. Will Bush advance their cause at the WTO?

You know, it's already permissable per the WTO to block the import of goods made with prison labor (see the General Agreement on Tariffs and Trade, Article XX, para. e). Thus international labor standards of a sort are already on the books. Yet the American public, addicted to cheap goods made with exploited labor and helped along by liberal economists providing ideological cover for their habit, will most likely be happy to sell their brothers and sisters for twenty pieces of silver.

The renminbi rumble is really starting the heat up now. Much as Japan was the target for American industrial ire in the 1980s, China is the target in the 2000s.
In South Carolina, the Republican governor, Mark Sanford, cites the currency, the yuan, as posing a major threat to his state's struggling textile industry by making Chinese exports unreasonably cheap.

In Erie, Pa., executives and workers at scores of industrial companies are planning a loud protest on Labor Day over "unfair competition" � and one of the biggest targets will be the seemingly obscure matter of the yuan.

And in Washington, the Bush administration is gearing up to put direct political pressure on China next week when Treasury Secretary John W. Snow makes a highly publicized trip through Asia. The subject was near the top of the agenda when President Bush met with his economic team two weeks ago in Crawford, Tex. . . .

In a blunt letter to President Bush last month, 16 Republican and Democratic senators and representatives complained that China was undercutting American factories by intentionally keeping its currency undervalued.

The lawmakers, from Democrats like Senator Charles E. Schumer of New York to Republicans like Mr. English and Senator Elizabeth Dole of North Carolina, demanded that Mr. Bush press China to adopt a free-floating currency and to let the yuan rise in value.
There certainly is cause for concern in the manufacturing sector. Imports from China in current dollars doubled in just five years, from $62.6bn in 1997 to $125.2bn in 2002. In 2002 the goods and services balance with China weighed in at -$103.1bn, also doubling since 1997.

The sectors hit hardest by this imbalance are apparel and footwear, computer accessories and household goods. Tens of thousands of people in the US depend on textile, electronics and furniture manufacturing for their livelihoods, particularly in the American South. Already hard hit by decades of (from their perspective) an overvalued currency and a government policy to undermine manufacturing, it looks like many of these folks aren't going to take it anymore.
"In the Textile Belt, there are a number of governors who are acutely aware of the problem," [South Carolina Governor] Sanford said in an interview. "But our ability to impact currency rates halfway across the globe is frankly nonexistent."
Free traders usually step in to offer the fig leaf of "trade adjustment assistance" to smooth over the rough patches, but these policies are little more than salves for their troubled consciences. If you want the truth about adjustment, read the series "No end in sight to N.C. job losses" in the Raleigh News & Observer, 18-20 August 2002.

As the head of the Gaston County (NC) Economic Development Commission said in that series, "On a macro-level, we understand the need to have open and free trade for the overall economic health of the United States . . . but a lot of that will come on the backs of workers in North Carolina. I think we're going to have a whole generation of workers that is lost."

Oh well, I'm sure there's a nice chicken processing plant they can work in for $7/hr.

Monday, August 25, 2003

Treasury bond prices fell sharply today, and that means
Analysts suspect that much of the rest of the week's economic data will surprise on the upside and see 10-year yields testing recent highs above 4.60 percent.
Remember, we here at the Globblog are watching for the 10-year to cross the 5.0% line -- the point at which interest rates may very well begin pulling back on the US "recovery".

There are some interesting stats in the latest issue of Time magazine on the increasingly loudly asked question "Is the army stretched too thin?".
America's military has been shrinking for the past 35 years. Since the height of the Vietnam War in 1968, the number of American men and women in the Army, Navy, Air Force and Marine Corps has fallen, from 3.5 million to 1.4 million today. The active-duty Army, the service most needed for labor-intensive peacekeeping missions, has fallen from 1.6 million troops in 1968 to 480,000 today. All four services have been cut in strength, and leaders of both parties have overseen this decline. President Bush's father reduced the number of Army divisions from 18 to 14; Bill Clinton cut it further, to 10.
One might think that in light of the US "mission" in Afghanistan, Iraq and elsewhere, an increase in the number of US troops -- possibly via a renewed military draft (although this is still unacceptable talk in polite company) -- would be the answer, as many senators such as Kay Bailey Hutchinson, Dick Lugar and Joe Biden have indicated.

And yet the colonial logic is unerring -- "boots on the ground" wearing the American flag are far more costly than boots wearing the flag of somebody else.
But with the price of the Iraqi occupation running $1 billion a week, the Administration is reluctant to do anything that would boost that bill. And adding soldiers of any kind is not cheap. While young G.I.s earn about $16,000 annually in base pay, fringe benefits and bonuses can drive the actual cost as high as about $60,000.
Compare this to the rough cost of $40,000 to maintain a Polish peacekeeper in Iraq for a year (and that includes deployment costs), or roughly $10,000 for a Ukrainian one. I've got to believe the cost of a Pakistani peacekeeper would be much less still.

One way or another the US will be paying for the boots on the ground in Iraq. But like any responsible businessman, Rumsfeld wants value for his money. When the European powers ran out of cheap home-grown troops to fight in Europe during the world wars, they imported the necessary forces from the colonies. The US is keeping up the same fine tradition.

Remember back to 1996 when Boutros Boutros Ghali was not-so-subtly nudged out of his post as Secretary General of the United Nations (technically, ineligible for another term due to a US veto) and replaced at the behest of Bill Clinton by the much more amenable Kofi Annan? Looks like the US really knew what it was doing.
Mr Boutros Ghali, speaking on BBC Radio 4's Broadcasting House yesterday, said the UN was perceived as an extension of the US state department.

"Many countries of the third world see a basic discrimination adopted by the United Nation system," he said. "The resolutions which are not respected by the Iraqis deserve the bombing of Baghdad. The same resolutions which are not respected by the Israelis deserve nothing.

"So the perception in a great part of the third world is that the United Nations, because of the American influence or because of any other reason, is a system which discriminates [against] many countries of the third world." . . .

Mr Halliday [Fred Halliday, former UN assistant secretary-general], meanwhile, said the UN security council had been taken over and corrupted by America and the UK.

"The UN has been drawn into being an arm of the US - a division of the state department," he said. "Kofi Annan was appointed by the US and that has corrupted the independence of the UN. The UN must move quickly to reform itself and improve the security council. It must make clear that the US and the UN are not one and the same."

I really despise most advertising, but the ones which truly stir disgust are those which appropriate spiritual symbols in the service of commercialism and material avarice. You know the ones. Corporations using pristine natural settings to peddle their gas-guzzling SUVs. Or using primitive peoples to endorse high-tech products, as in the credit card commercial (VISA, I think) which showed Masai herders in their traditional dress exchanging the hilarious joke about how to stop an elephant from charging. Or an especially obnoxious one from IBM which ran about three years ago before the dot com bubble burst which showed a hip twenty-something businessman wearing his ultra-cool mobile computer headset with voice recognition software and screaming "Buy!" and "Sell!" over and over, oblivious to the disturbances he was causing to a flock of nearby pigeons (nature).

But the worst of all are those which use religious symbols to hustle products. Monks, it seems, are now turning up everywhere in commericials.
The men in hoods and robes are marketers' darlings, having starred lately in campaigns for America Online's broadband service, General Mills' Oatmeal Crisp Fruit 'n Cereal Bars and PepsiCo's Pepsi Blue brand. These followed appearances in commercials for companies like I.B.M., Nintendo and Sony.

"They're lovable," said Len Short, executive vice president for brand marketing at America Online in Dulles, Va., part of AOL Time Warner. In the pantheon of widely appealing stock figures, "you have dogs, babies and monks." he said. "Who hates monks?"

. . . Many times the monks' role in advertisements is . . . to show that the product is fabulous enough to entice even an ascetic, said James Twitchell, professor of English and advertising at the University of Florida in Gainesville.

"Here's a group that owns contemplation," Professor Twitchell said. "So anything that gets them to throw it over must be a miracle."
Great. Men and women who have devoted their lives to the service of God and the Church have achieved the status of "lovable" right up there with dogs and babies, and become so through the act of abandoning their life of simplicity and embracing the worldly pleasures which only consumption can deliver. It reminds me of something a friend said to me over the summer -- Americans are unable to figure out Islam because they simply cannot comprehend why anyone would turn down the opportunity to consume alcohol and engage in promiscuous sex.

Capitalism is stunningly skilled at making every sacred thing it touches profane.

More evidence of the very valuable vassalage (VVV) of Eastern Europe for the US occupation of Iraq.
Eager to have more Iraqis take responsibility for their country's security, American officials here are planning to ferry as many as 28,000 Iraqis to Eastern Europe for an intensive police training course.

Bernard B. Kerik, a former New York City Police commissioner in charge of the Iraqi Interior Ministry, said in an interview that American officials had secured permission from the government of Hungary to set up a large police academy inside an old Soviet military base there.

Mr. Kerik said the extraordinary measures were necessary because the existing police academies in Iraq were not large enough to train that many officers in the next several months.

His plan is part of a larger effort by senior American officials here to press the Iraqis to take a greater share in running the country. The Bush administration is also under growing political pressure at home to lighten the load on the American forces here.
This importance of this small agreement goes far beyond Iraq. It points up the continuing struggle between the US and UK (with Spain and for the moment, Italy) on one side, Germany, France and Belgium on the other, over the future of Europe. The former groups wants Europe to remain a vassal to the United States as it was throughout the Cold War, while the latter group seeks both a more autonomous role globally and a domestic path independent from Texas-style capitalism. Eastern Europe is proving the battleground between these opposing visions and forces, and so far the US-UK side seems to be winning.

More Poles, coming right up!

Saturday, August 23, 2003

Here are a few recent tidbits of interest from the world of bankruptcy.
  • June's credit card delinquency rate, which reflects the percentage of credit card accounts with a monthly payment that is more than 30 days past due, rose to 5.12 percent from 4.93 percent a year ago, Moody's said. Moody's credit card delinquency index has risen from year-earlier levels in 10 of the last 11 months, it said. . . . For the second quarter, the charge-off rate was 6.97 percent, matching the record high set in the second quarter of 1997.
  • The total number of bankruptcies and the total number of non-business (personal) bankruptcy cases filed in the 12-month period ending June 30, 2003, once again broke records, according to data released today by the Administrative Office of the U.S. Courts. Filings increased 9.6 percent from 1,505,306 bankruptcy cases filed in the 12-month period ending June 30, 2002, to 1,650,279 filed in the same period ending on June 30, 2003, the largest number of cases ever filed in any 12-month period.
  • At its current growth rate, the total number of personal bankruptcies filed in the U.S. will eclipse 1 million petitions around mid-August, the earliest that milestone has been achieved in a calendar year.
  • Research by the Federal Reserve indicates that household debt is at a record high relative to disposable income. Some analysts are concerned that this unprecedented level of debt might pose a risk to the financial health of American households.

Since the "do more with less" approach has worked so well with the North American power grid, Don Rumsfeld thought he'd make it the Pentagon's motto, too.
A senior Defense Department official said Mr. Rumsfeld would order the Pentagon's senior leadership, both civilian and military, to rethink ways to reduce stress on the armed forces, fulfill recruitment and retention goals and operate the Pentagon more efficiently.

In essence, Mr. Rumsfeld will ask the service secretaries and chiefs and his under secretaries to address how the Pentagon can more efficiently use its troops at a time when the armed forces are spread thin by global deployments.
"More efficiently" is mostly a euphemism for "privatization" and "outsourcing", something Republicans have been doing for a long time. Rather than have uniformed soldiers doing lots of jobs, Rumsfeld figures the private sector and foreign militaries can do lots of the scut work instead. But the funny thing about private corporations and foreign militaries is that if they don't want to show up to support the latest imperial adventure, they won't.
U.S. troops in Iraq suffered through months of unnecessarily poor living conditions because some civilian contractors hired by the Army for logistics support failed to show up, Army officers said. . . .

One thing became clear in Iraq. "You cannot order civilians into a war zone," said Linda K. Theis, an official at the Army's Field Support Command, which oversees some civilian logistics contracts. "People can sign up to that -- but they can also back out." . . .

For almost a decade, the military has been shifting its supply and support personnel into combat jobs and hiring defense contractors to do the rest. This shift has accelerated under relentless pressure from Defense Secretary Donald Rumsfeld to make the force lighter and more agile.

"It's a profound change in the way the military operates," said Peter W. Singer, author of a new book, "Corporate Warriors," a detailed study of civilian contractors. He estimates that over the past decade, there has been a ten-fold increase in the number of contract civilians performing work the military used to do itself.

"When you turn these services over to the private market, you lose a measure of control over them," said Singer, a foreign policy researcher at the Brookings Institution, a think tank in Washington.
Go figure. You can't count on patriotism to motivate capital or mercenaries (and in the end, what's the difference between the two?). Who woulda thunk it!

International intellectual property rights are one of the two Big Issues for the Global South at the upcoming WTO ministerial meeting in Canc�n. Everyone thought the North and South had reached a compromise on the question of global drug access back in Doha in 2001, but the US lobbying group PhRMA (Pharmaceutical Research and Manufacturers of America) made sure that didn't happen. Now, just two-and-a-half weeks away, the word on the street is that a draft deal between the US and several key Southern countries is in the works.
Trade diplomats and industry executives said negotiators from the US and several developing countries were in sight of a compromise to end a deadlock that has divided the WTO for almost two years. A draft deal must still be approved by governments of the developing countries involved.

If they all accept the plan in time, it will be submitted to a meeting of the WTO's ruling general council next week, where broader support will be sought.

"We are optimistic of finding a solution," said Fazil Ismail, chief WTO representative of South Africa, which has played a pivotal role in the talks.

The WTO ambassadors of Brazil and India, also crucial figures, declined to predict whether a final agreement would be reached.
The chattiness of South Africa versus the stoicism of Brazil and India is notable. South Africa is a country which does not have its own drug industry and therefore must import its pharmaceuticals from abroad -- preferably generic drugs from other Southern countries which are much cheaper than from the North. Brazil and India, on the other hand, are successful producers of generic drugs and often use compulsory licensing to force pharmaceutical corporations to work their patents locally rather than force these poor countries to import from the US or Europe. With the US on one side and Brazil and India on the other, importers like South Africa are the fence-sitters. Which way they go will heavily influence the politics of this entire issue.

Back when the United States was a developing country, folks like Thomas Jefferson simply stole intellectual property valuable to the advancement of the country. Of course, the US Founding Fathers didn't have the WTO to worry about back then. As recently as the 1970s most countries did not recognize product patents on pharmaceuticals. India, for example, recognized only process patents until forced by the WTO in 1998 to recognize product patents. Back then, only processes could be patented, so if some innovative firm could produce an existing drug in a novel way, they were rewarded rather than crushed by monopolists.

Unfortunately, the prospect of simply eliminating pharmaceutical patent regulations for the poorest countries in the world is not on the table -- but it should be. Patents, after all, are government enforced monopoly rights which must be balanced against the interests of the public. The poorest countries in the world should not have to pay anything at all to monopolists for the "privilege" to purchase drugs. If Brazilians can do it cheaper than Americans, I say let the Brazilians do it. Or is this fight really about the US government and PhRMA trying to stop the growth and development of the pharmaceutical industry in the Global South except on their own terms -- in short, about keeping the South continually dependent on the North?

Friday, August 22, 2003

The General is not one to frequent the Washington Times, but this recent op-ed by Senator Kay Bailey Hutchison (R-TX), chair of the Senate Appropriations Subcommittee on Military Construction, caught the General's eye.
Our recent operations in Afghanistan and Iraq reinforce those very lessons. We prosecuted a very successful war, but if we are going to bring freedom and democracy to the Iraqi and Afghan people while preserving the peace elsewhere, we will need young men and women with their boots on the ground. I am increasingly concerned we don't have enough soldiers and Marines to do all the jobs that must be done.

. . . the Army's active strength [is now at] 491,000 � too low for our current requirements. Today, in addition to the 491,000 active-duty Army soldiers, there are 550,000 members of the Reserve and National Guard. In order to keep 370,000 of our soldiers deployed to more than 100 countries, we have called to active duty an unprecedented 136,000 members of the Reserve and National Guard. . . .

Our guard members and reservists signed up to defend our nation in times of national emergency and stand ready to do just that. They never expected to augment the day-to-day missions of active-duty forces. . . .

We need more troops or fewer missions. Before we lose too many trained and qualified reservists, I hope we address the critical issue: Do we have enough Army and Marine active- duty members for the post-September 11 era of national security? My view is: We do not.
This is a heavy-hitting piece by a person with real power in the Senate. Has there ever been an empire than operated without a military draft? I don't think so (but I'm happy to be corrected). "More troops or fewer missions" indeed.

Abu Aardvark has offered the General a kind word of instruction on liberal Islam. If you recall, last week the General opined,
Kristof is typical of those liberal atheists who want to imagine religion in a way which [1] makes it completely consonant to their own world view and [2] subsequently drains it of all meaning and power. In this article, Kristof does to Christianity what Tom Friedmann does every day to Islam. Friedmann want desperately to find the elusive "liberal Muslims." He routinely scours the Islamic world for them, champions the two or three he runs across and prescribes their amazingly unpopular and insincere religion for the millions who actually hold to the tenets of Islam -- all while Freidmann himself is not Muslim.
Now, the General knows a lot about Christianity, and not much at all about Islam. Here is what Abu says.
While the Good General is right about Friedman, I think he is on shakier ground with his dismissal of liberal Islam. There really is a strong intellectual trend of liberal Islam, and a strong popular trend of Islamists who hold views far, far from the rigid Salafi extremities of an Osama bin Laden. For a start, the General might check out the work of Yusuf al-Qaradawi, who is probably the single most popular and influential Islamist public intellectual today, in part due to his regular appearances on al-Jazeera. Al-Qaradawi is an Islamist who came out of the Muslim Brotherhood milieu, but has written and preached extensively for the values of tolerance and against extremism. Where Friedman goes wrong - and GG is right about this - is to assume that these liberal Islamists share the same beliefs and preferences as Western liberals. They don't. Many of the goals of a Qaradawi, or a Tariq al-Bishri, or an Abdelkarim Soroush, or many other luminaries I could name, are firmly grounded in a religious worldview and absolutely aim to propagate the faith and to improve the religious practice of Muslims. But they are also sympathetic to democratic political forms and have fought vigorously for a range of civil and political freedoms, preach tolerance and co-existence, and represent a centrist, moderate, and popular stream within societies otherwise trapped between intolerant Islamist radicals and repressive, authoritarian secular states.
I am happy to accept all these comments, although I think the Aardvark has a rather different definition of "liberal" than does the General. I was using the term theologically while Abu seems to be using it in a political sense -- linking it to "tolerance and against extremism" for example. I don't know if there are any "liberal Muslims" who deny that Gabriel delivered the Koran to Muhammed, deny the resurrection of the body, or claim that Muhammed did not in fact ascend into heaven. But there are lots of "liberal Christian" clergy even who deny similiar aspects of Christianity.

The Conference Board reports today that everything is still coming up roses for the US economy.
A widely followed measure of U.S. economic activity rose in July for the fourth consecutive month, providing another sign that the pace of the recovery is picking up.

The Conference Board, an independent New York business research group, said its gauge of leading economic indicators rose 0.4 percent last month, to 112.5 percent, compared with a 0.3 percent increase in June. . . .

Goldstein and other economists attributed the improved business conditions primarily to tax rebate checks, an increase in military spending and low interest rates that have been a catalyst to the home-buying boom.
Of the ten components of the leading indicators index, five were in a positive direction. However, the two that really matter, making up together over 60% of the total index, are interest rates and the money supply.

After running negative or turning in miniscule positive contributions all year, the interest rate spread (10-year minus federal funds) jumped remarkably in July. Clearly the Conference Board assumes that rising interest rates mean a growing economy in the future, but as the General has argued, rising long-term interest rates are clearly a mixed bag, at least as negative as positive. In particular, the rise in the ten-year has been driven as much by the collapse of the refinancing boom as by expectations that the economy will turn around.

The other big contributor is the money supply; the Conference Board uses M2. This has been a big contributor all year as M2 has been swelling well beyond the pace of economci growth. In fact, M2 is up over 8% since July 2002 and up over 12% annualized since April. Is this a sign of good times to come or a credit bubble? As Doug Noland at the Prudent Bear said recently,
We face these days a fundamental problem: our Credit system is already extremely unstable, owing to unprecedented mortgage debt growth. Destabilizing consequences include the explosion in mortgage-related securities, financial leveraging and (trend-reinforcing) derivative hedging. Furthermore, housing inflation has been excessive for years, with boom-time conditions only sustained by massive Credit growth. And, finally, it is simply difficult to envision how manic buyers� enthusiasm can be sustained for too long in this post-bond Bubble rate environment.
Apart from these two numbers, there really isn't much good news to report from the Conference Board. The other Big Number, average weekly manufacturing hours (which together with interest rates and the money supply make up a full 81% of the leading indicators index), fell again in July.

So interest rates are rising and the Fed is churning out money like there's no tomorrow. Celebrate!

Some interesting comments on the concomitant decline of manufacturing and rise in inequality in London.
The transformation in the occupational structure of London (and other major cities) has been paralleled by changes in its earnings structure. The past 25 years have seen a major growth in high paid jobs, particularly in finance. As a result, the distribution of earnings has shifted sharply upwards. According to the New Earnings Survey, in 2002 average gross annual earnings for full time workers on adult rates in the UK as a whole was �24,500. In Greater London it was �34,760 and in the City of London it was a remarkable �59,000.

Averages are just that, however, and in London in 2002 10 per cent of full-time workers earned less than �260 a week whereas 10 per cent earned more than �1,070 a week. In the City, the top 10 per cent earned more than �1,670 per week, or almost �87,000 a year. One consequence of the gains at the top end has been a sharp increase in inequality. The ratio of the top 10 per cent of earnings to the bottom 10 per cent has risen sharply since the 1970s. The rich are now much richer and London is a much more unequal city than 25 years ago. Dick Whittington was part right: the streets of London are paved with gold, but only for some.
Earlier this month Angry Bear was on a tear over housing prices in the "red states" (voting for Bush in 2000) versus in the "blue states" (voting for Gore in 2000), making the argument that liberal politics makes for higher housing prices, which for some reason is inherently good. The experience of London sheds a different light on the phenomenon.
Not surprisingly, the growth of the well paid professional and managerial middle class has had an impact on the housing market. The size of the owner occupied sector has grown rapidly in recent decades, and prices have risen dramatically. Land Registry data show average prices in London in the second quarter of 2003 were �246,000 but they varied between �642,000 in Kensington to �142,000 in Barking.

Perhaps the biggest impact, however, has been on the growth of gentrification. Forty years ago most of inner London was white working class. Today, middle class home ownership has pushed steadily outwards into Islington, Hackney and the East End. What remains of the traditional working class has either moved out to the suburbs or become more concentrated in the council and social housing sector where unemployment and economic inactivity is high.
So, sure, new middle class professionals voted Gore in 2000, as they voted Labour in 2001. Yet the story of the rise of this liberal class is hardly good news. It is contributing handsomely to the dramatic rise in inequality across all the industrialized countries, reflected in home ownership trends where this class dominates. This class is the one which keeps the Republican lock on the governor's office in Massachusetts despite it being a virtual one-party state (not a single Republican serves in Congress from MA), the same class which has nearly destroyed social democratic politics in its old bastion of Minnesota. As the new middle class has risen, the Twin Cities metropolitan region (Minneapolis--St. Paul) has grown richer, more suburban and more Republican. Neither MA nor MN -- signature "liberal" states if there is such a thing -- have had Democratic governors since the 1980s, even though both voted Gore in 2000.

Let's not sing the praises of the latt� set too loudly.

Thursday, August 21, 2003

If it walks like a duck and quacks like a duck, it's a duck. If it floats like a bubble and swells like a bubble . . .

Wow, they're even cutting interest rates in Brazil.
Brazil's central bank made a larger-than-expected cut in the country's key interest rate Wednesday, hoping to keep South America's largest economy from sliding in recession. . . .

The bank lowered its benchmark short-term rate to 22% from 24.5%. It was the third rate cut in as many months and the deepest in four years.
Loose money seems to be everywhere these days. But if Brazil -- the second largest economy in Latin America -- were to fall into recession, that would be clear evidence that the global economy is really on the ropes -- it's not just a European thing.

It's funny how the business media make such a big deal about the supposedly magic number of 400,000 when speaking of new jobless claims in the US.
The number of Americans filing first-time claims for jobless benefits fell last week, a government report said on Thursday, with the power blackout having a ``minimal effect'' on the data.

Initial claims fell to 386,000 in the week ended Aug. 16, down 17,000 from an upwardly revised 403,000 in the prior week and below analysts' expectations for 395,000 claims. . . .

The running four-week average, which is viewed as a better gauge of the labor market because it smoothes volatility, was below the key 400,000 mark for the third week in a row.

The moving average dropped 1,250 claims for the four-week period ending Saturday to 394,250, pointing to a strengthening job market.
Hmm, 400,000 is bad but 394,000 is a sign of growing strength??

You may recall that the "magic number" lurked under 400,000 for most of the early winter of 2002-03, and the summer of 2002, and late winter 2002, and summer 2001. Since the magic threshhold was first breached under Bush in April 2001, the lowest it's been was 368,000 new claimants the week ending January 11, 2003. Wake me up when we get to this figure again.

What's the solution? Order more Poles.
But the diplomatic maneuvering today suggested that some officials in the administration, particularly in the State Department, believe that the bombing demonstrates that military reinforcements are needed. There are now 139,000 American troops in Iraq and 21,700 troops from other countries, half from Britain.

Some experts say it is unrealistic to think that Iraq can be secured with troops at the current level. A debate over this subject flared in May, when Gen. Eric K. Shinseki, then the Army chief of staff, said hundreds of thousands would be needed to secure Iraq after the war.

James F. Dobbins, an expert in peacekeeping operations who was the Bush administration's special envoy to Afghanistan, said in an interview today that the United States might need 300,000 to 500,000 troops to maintain stability in the country.

"Whatever the right number is, it's significantly larger than what we have," said Mr. Dobbins, director of international security and defense policy at the Rand Corporation. "But, let's face it, we're going to be driven by what can be deployed rather than what the situation calls for."
When US Congressman Charles Rangel tried to broach the subject last winter of reintroducing the military draft in the United States, he didn't get far, but this possibility just can't go away so long as the US is committed to empire.

Just as the French had hundreds of thousands of soldiers from West Africa, the West Indies and Indochina fighting for it in Flanders during World War One, so, too, does the US have Poles, Danes, Bulgarians and Hondurans serving in Iraq today. But how many colonial subjects can the Bush administration really force to the front of this war?

Matthew Yglesias likes the new piece by Jacob Levy (a Volokh Conspiracy blogger) in The New Republic on agricultural subsidies. But is there really much to like there?

Levy is way off-base on much of his commentary. In short, he really doesn't know what the hell he's talking about.
Agricultural protectionism--the combination of quotas, tariffs, and subsidies for farm products--may be the purest example of destructive special-interest politics ever created. Rich countries--with a few exceptions, such as Australia--burden their own populations three times over. The policies cost taxpayers directly--the atrocious 2002 U.S. farm bill is slated to cost $180 billion over ten years. (Worse, annual unbudgeted "emergency" farm spending during the late 1990s accounted for a great deal of the spending boom that squandered much of the predicted budget surplus long before the first Bush tax cut took effect.) In return for their largesse, taxpayers get the privilege of paying higher prices as consumers (and, of course, inflated prices for basic foodstuffs hit the poorest proportionately hardest). And, by locking up an excess of labor and capital in an agribusiness sector that couldn't turn an honest profit on its own, agricultural protectionism inhibits productivity growth, preventing shifts in employment and investment to more productive parts of the economy.
First, let's ask why farm subsidies exist in the first place. In the US, these things took off after the 1996 "Freedom to Farm" bill was passed which scheduled the elimination of all production controls on US agriculture. Without production controls, overproduction occurred and prices went through the floor. Farm subsidies then came in to compensate for these ultra-low prices -- prices farmers had not seen since the Great Depression. Sure, the General agrees, these massive farm subsidies are bad policy and bad economics. But they don't come out of nowhere. They are the direct result of the rule of the market in agriculture.

What next from Levy? Higher food prices? Please! The US is the master of malbouffe -- "junk food" in the sense of mass-produced crap with low nutritional value, even less cultural value, standarized, laced with pesticides, additives, fillers, preservatives, artificial flavors and colors. The intensive agriculture system which the US has mastered has produced the cheapest food on the face of the planet -- cheap malbouffe. Adam Drewnowski of the University of Washington has done an interesting study that suggests Americans are so obese precisely because our food is too cheap, not too expensive. What costs less, a malbouffe box of Twinkies or a head of lettuce? Calorie for calorie, Drewnowski found, in the words of the Seattle Times,
the less-convenient foods recommended by most experts for all-around good health and weight control particularly fresh vegetables, fruits, fish and lean meat tend to cost more than packaged convenience foods when measured on a cents-per-calorie basis, even when including the costs of processing and packaging convenience foods.
What next from Levy? Subsidies keep too many Americans in agriculture? Now he's moved straight from the sublime into the ridiculous. In 1990, just 3.9 million Americans lived on farms -- a mere 1.6% of the country's population. And this is too many for Levy?? Give me a break.

Levy continues:
By shutting off access to developed countries' markets for the goods that developing countries are most likely to produce competitively, agricultural protectionism forecloses the most likely route to development and poverty alleviation. Moreover, the artificially high prices in the rich countries encourage overproduction there; the surplus gets exported at cut-rate prices, which not only makes it hard for developing countries to compete in export markets, it typically makes poor farmers uncompetitive in their home markets as well.
Not exactly. The US produces no coffee at all, must import every bean, and yet coffee farmers around the world are in desperate poverty and the ones in Ethiopia are dying. Did the colonies in Africa or Latin America get rich off of sugar, palm oil or tobacco? No. Farmers in the global south need most of all for the US and the EU to stop dumping, much less do they need access to US and EU markets.

At least Levy recognizes that many in the Global South overproduce, too. Brazil, Argentina and most of the rest of the Cairns Group are no saints in this story. They are as desperate to dump their overproduction as are the US and the EU. In fact, they are using many of the same methods as the rich countries use. The Cairns Group is no story of peasant agriculture on the ropes. They're as much a part of the problem as anybody.

Levy's argument is so weak because he hasn't the slightest idea why overproduction occurs. It doesn't occur because of subsidies. Subsidies are an effect, not a cause, of overproduction.

The causes are several. First, technology is the biggest culprit. The US, the EU and many other governments as well as corporations now such as Monsanto pour billions of dollars into research to produce crops, animals and techniques which boost production with no thought as to whether we need to boost production in the first place. In fact, there is rampant overproduction in the US and yet agriculture research institutes continue to fund research to produce more and more.

Second, the nature of agribusiness today is not far behind as a chief culprit. The Cargills, ADMs and Tysons of the world make their money off of volume. They have driven farmgate prices so low through overproduction that the profit margin is extremely thin. In order to make profits, therefore, they need volume, volume, volume! Then the game becomes one of trying to stick "the other guy" with the costs of overproduction. Currently this largely means US agribusiness trying to stick it to the EU, and vice versa. As long as we have a policy of ultra-cheap food, we will have rampant overproduction.

Third, consumers in the Global North themselves are party to this madness, and especially Americans. US consumers want cheap food. They pay the least amount relative to their incomes in the world, they like it that way, and they demand it persist. And whether they realize it or not, the path to cheap food is overproduction. Eric Schlosser's fantastic book Fast Food Nation demonstrates very clearly the wide ramifications of the American food culture on society at large. As this culture moves not just to Japan and Europe but to the cities of Mexico, Brazil and even Vietnam, obesity and all its health problems follow. Did you know that there are more overweight people worldwide today than underweight people?

The piddling libertarian move of Levy will get the world nowhere. History shows that crop acreage changes very little in relation to price. Prices can tank and production will fall just a little. Daryll Ray of the University of Tennessee shows that since 1985, "a one percent change in the index of prices received by farmers results in a 0.15 percent change in total harvested cropland acreage". So much for the market solving our problems.

Yes, help the world's poor, but don't do it by 'unleashing the market'. Do it through promoting food security and food sovereignty, and get over the libertarian whining.

Wednesday, August 20, 2003

For those visitors looking for some comments on Christianity, try my recent commentary here.

A little currency update to hold you over.

On Tuesday the 19th, the broad dollar index closed at 120.68, the highest level for the dollar since April 29.

First Germany, then Italy. Now it looks as if France, too, may be slipping into recession.
The French economy shrank by 0.3% during the April to June period, official figures revealed. France's economy, the second largest in the eurozone, steadily weakened during 2002.

However, marginally more upbeat figures in the first three months of 2003 had raised hopes of an improvement. But the latest contraction will dash hopes of a turnaround
The GDP figures for France are abysmal. The country's best quarter over 2002-03 was 2002:I when GDP growth totalled a mere 0.7%. France is only avoiding a recession call on a technicality, anyway, since GDP contracted both in 2002:IV and 2003:II while eeking out a meagre 0.2% growth in 2003:I.

Thus for all practical purposes, Germany, France and Italy are all in recession. If Japan stays in the doldrums, prepare for the US current account deficit to skyrocket later in the year.

The US balance of payments numbers for 2003:II don't come out for another month, but a close estimate is -$136.3bn -- i.e. 111% of the 2003:I goods and services deficit (in 2003:I the figure was -$136.1bn -- 112% of the goods and services deficit). If so, the US would have a current account deficit again at 5.1% of GDP, and this in a quarter in which GDP was growing and the trade deficit moderating. In the second half of 2003 GDP will probably grow, but the current account deficit will surely grow more as the US becomes the global growth engine yet again.

In case you just weren't sure about the impact of Wal-Mart on the retailing world, here's what a Merrill Lynch analyst has to say.
Wal-Mart's impact has been "like the Black Death," said Mark Husson, a retail analyst for Merrill Lynch. "The plague comes to your village, and everybody gets sick, but not everybody dies."
Well, when you look at the big picture, that is comforting, isn't it? The Black Death only killed about 40% of Europe, after all. So Wal-Mart won't wipe out everybody with delirium, blood infections and swelling, puss-filled buboes! Take heart!

The refinancing boom continues to bust.
U.S. mortgage applications last week fell 10.7 percent to their lowest level in more than a year, an industry survey said on Wednesday, as rising rates cut into demand for buying a home or refinancing a loan. . . .

With rising rates, the number of mortgage applications filed in the week ended August 15 was more than 60 percent lower than in the last week of May, when mortgage applications peaked, according to the group.

That decrease has come mainly from a decline in refinancing. Refinancing applications last week were over 70 percent lower than in the last week of May.
According to the Mortgage Bankers Association of America, the refinance share of mortgage activity fell to 53.4% of total applications, down from 77.3% in mid-June. Considering the MBAA's chief economist suggests the bottom of this decline is around 20-25%, we've got quite a long ways yet to fall.

While some economists who will remain nameless are constantly crowing about the big productivity numbers the US economy has been putting up recently, an interesting op-ed in today's Financial Times puts a valuable new spin on the data.
But starting in 1995 something extraordinary happened. America's productivity growth speeded up while Europe's slowed. A host of research studies attributed most, if not all, of the US's surge to its dominance in making computers and developing software. Intel and Microsoft are familiar names that symbolise US dominance in the information and communications technology (ICT) sector. . . .

Two weeks ago the productivity puzzle suddenly deepened when the US government revised upwards its productivity numbers for the past two years and provided its first release for the second quarter of 2003, which came in at an unbelievable 5.7 per cent. The underlying long-run trend of productivity growth is currently running at about 2.8 per cent a year, fully double the pre-1995 growth rate.

So we face a new paradox. Those research studies that attributed the 1995-2000 revival of US productivity growth to the ICT investment boom of the late 1990s have some explaining to do. After 2000, the ICT investment boom collapsed along with the stock market but productivity growth accelerated. If ICT growth collapsed but productivity growth increased ever faster, something else besides ICT investment must have been behind the American miracle.

The General crunched some numbers and the results are quite fascinating. The below chart shows quarterly growth rates in private non-residential fixed investment (blue line) and worker productivity (red line) since 1992. The growth rates are seven quarter centered moving averages, and the productivity line is lagged nine quarters.

[If you can't see the image, clicking here should work]

Throughout the roaring '90s, investment and productivity gains are shadow one another in an amazingly tight way. The nine quarter lag sort of surprises me, but there the data is.

As we approach 2000, investment growth starts to fade, and by 2000:IV (remember, these are 7-quarter centered moving averages) investment begins to actually fall. What is stunning, of course, is how productivity begins to take off like a rocket just as investment begins to wane. These post-2000 gains -- that is, the really big productivity gains -- are not built on technology.

What then are they built on? The FT piece today suggests it's
"intangible" productivity-yielding activities. These comprise such things as reorganising and reinventing business practices, and both formal and informal training of computer and software users. . . . especially [in] retail trade, which just happens to be where the US's productivity showing is strongest. America's retail productivity performance has all been achieved in stores newly built since 1990, not in existing stores.

The new stores are the "big boxes" such as Wal-Mart, Home Depot and Best Buy, large new buildings set up on greenfield sites at interstate highway junctions, in suburbs and, increasingly, in inner cities. As these new stores reap the rewards of their size, openness and accessibility and drive smaller stores out of business, they bolster the average productivity of the US retail sector as a whole.
Yes, ladies and gentlemen, "modern retailing" is the answer.

If true, this analysis fits nicely into the exploitation argument the General has been pushing all along. After all, Wal-Mart is synonymous with "exploitation," both of its workers and its suppliers. "Modern retailing" gives corporations big profits and gives consumers cheap goods. It also supplies low wages and low benefits, battles union activity, acts as a huge accelerator on the US current account deficit, destroys smaller businesses (which notably funnel much more of their revenue into local communities), undermines democracy and aggravates deflation.

"How beauteous mankind is! O brave new world, that has such people in it!"

Tuesday, August 19, 2003

Yesterday this ridiculous report put out by the World Markets Research Center was all the rage. It claimed that the United States was the fourth most likely target of terrorists in the next year, behind only Colombia, Israel and Pakistan. All the nightly news programs ran with it.

Um, did these jokers just forget the obvious -- or did they intentionally "overlook" -- you know, like, IRAQ!!

How is it that mortgage rates are rising rapidly -- up over 100 basis points since June -- and yet the Homebuilders Association's housing index rose for its fourth straight month, hitting its highest level since December 1999? Justin Lahart at CNN/Money has some ideas.
First off, if the slowdown in mortgage activity is going to hit housing (or consumer spending, for that matter), it's going to happen with a lag . . .

Second, its important separate out mortgage refinancing, where people who already own a home get a more favorable rate on their mortgage, from mortgage purchases aimed at buying a home. According to the Mortgage Bankers Association new mortgage application has moderated only slightly since June and is still above where it was through April.
Good points. Let me offer a third.

The General's brother was in the market for a new home a few months ago, precisely to take advantage of the ultra-low mortgage rates. The General's banker kept delaying and delaying, slowing down the application process, asking for more information, ignoring phone calls, and the like so much that weeks went by before my brother finally gave up and went to find another banker. With rates rising since June, bankers have every incentive to draw out the application process as much as possible. The General heard a story on Marketplace (on NPR) a few weeks back on how lots of people who thought they had locked in the ultra-low rates found out later to their dismay that they hadn't locked in a thing. The banker gave them a quote, but one without guarantees -- of course, that was only stated in the fine print. The longer it takes to actually lock in the rate, the higher the rates go, the more money the banker makes.

Brad DeLong has what appears to be a nice little discussion of the US current account deficit. Unfortunately it falls painfully short precisely because the Good Doctor is a liberal economist and thus has no real appreciation for either structure or history.

The analysis starts off badly, trying to imagine away most of three decades worth of large and engorging current account deficits:
Some of these large trade deficits are the result of domestic economic mismanagement (the very large trade deficits of the mid to late 1980s were, in large part, consequences of the disastrously-botched fiscal policy that was the Reagan deficit). Some of these large trade deficits are the result of foreign economic mismanagement (the very, very large trade deficits of the late 1990s and early 2000s are in large part the result of insufficient demand and high unemployment in many of our major trading partners). Some of these large trade deficits are simply not there: the result of errors and omissions in the data that fail to capture a substantial amount of U.S. service and other exports
It gets better when DeLong begins to take the data seriously and inquire why it is that the US alone seems immune to the laws of international financial gravity.
there is a portion of the persistent U.S. trade deficit that is not due to domestic macroeconomic mismanagement, not due to foreign macroeconomic mismanagement, and not the result of errors and omissions in the data, but instead reflects three exorbitant privileges that the U.S. has as a result of its key role in the world economy.

The first exorbitant privilege is that foreign central banks prefer to hold their reserves in dollar-denominated assets--and as the world economy expands, they want to hold more and more of such dollar-denominated assets.
Excellent point that central banks prefer to hold dollars. This is not so much because "the world economy expands" as it is because of the structural position of the United States in the global economy -- namely, as the world's consumer market of last, and increasingly first, resort. Countries like Japan and China need to hold dollars to keep their currencies stable so as to maintain their price advantages exporting to the US market. One need look no further than early 2003 to see the heavy management of the East Asian currencies compared to the real economic costs incurred by the Europeans who have allowed theirs to float.
The second exorbitant privilege is that rich people in many foreign countries think that dollar-denominated assets--large sums of money in the Vanguard funds or somewhere in Citigroup--are an important part of their political risk insurance portfolio.
Very good again. Especially elites from the Global South use the US as a nice safe haven for their ill-gotten gains. Economists James K. Boyce and L�once Ndikumana wrote a very interesting article last year documenting the amount of capital flight from Africa -- much of it winding up in the US.
In a study of 30 SSA countries, we estimate total capital flight for the period 1970-1996 to have been about $187 billion in 1996 dollars. Including interest earnings, the stock of capital flight for the sample stood $274 billion, equivalent to 145% of the total debt owed by the same group of countries in 1996. In other words, we find that SSA is a net creditor to the rest of the world in the sense that external assets, as measured by the stock of capital flight, exceed external liabilities, as measured by the stock of external debt. The difference is that while the assets are in private hands, the liabilities are the public debts of African governments.
So crooked Latin Americans and Africans park their money in Miami and Los Angeles and New York, helping prop up the US current and enabling the enormous current account deficit. True, but nothing to be proud of.
The third exorbitant privilege is that even if the rich abroad are confident about the political stability and economic prospects of your native land, the United States is still a very, very nice place to live in many, many ways. Lots of people living elsewhere know this, and think that even if they don't want to live in America, the odds are very good that some at least of their children or grandchildren will.
This one is just silly, and more a subset of privilege #2 than something that can stand on its own. Why not park the money in Europe, then? In fact, many Southern elites do park their money in Europe, and with the US war on terrorism seeking to crack down on the finanical network of al-Qaeda and similiar groups, more of this money is likely to go to Europe in the future. It's contribution to the ability of the US to maintain its deficit is negligible and not worth mentioning.

What does DeLong miss, however?

First, the growing negative net investment position of the United States. This is the most important point and DeLong completely ignores it.

Second, the ballooning US federal deficit.

Third, the growing current account deficit as a percentage of GDP: 5.1% of GDP in 2003:I.

Fourth, the existence of the euro as a real global challenger to the privileges of the dollar.

Yes, de Gaulle was right. The US does enjoy "exorbitant privilege" which no other country on earth can have. Yet even the US economy does not walk on water. In the cartoons, some characters hover in mid-air after they run off the cliff longer than others. The US is amazingly adept at hovering, but even this cartoon character needs to face up to the laws of gravity.

Waiting for petro.
The three months since full-blown hostilities ended have been a hard lesson for markets which had hoped to see oil exports from Iraq climb swiftly towards the 2m barrels a day the US promised to deliver by the end of the year. Southern refineries have been plagued by power cuts, the north-south "strategic pipeline" had already been sabotaged, and the weekend's attacks brought exports from the north of the country to a complete standstill. . . .

With anti-coalition guerrillas having discovered economic terrorism, few now believe the 2m barrel objective is achievable. "There are a lot of factors out there supporting the oil price right now, but the overriding question is when Iraqi production comes back," said Razia Khan, of Standard Chartered bank. A prolonged period of $30-a-barrel prices is not the prescription central bankers and finance ministers would have written for the world economy right now.
Here is the General's favorite part:
Hawks in the Bush administration had hoped before the war that oil revenues of up to $15bn a year would offset the $4bn a month cost of keeping troops in Iraq. But far from profiting from the war by seizing a cheap source of energy, Washington is having to throw money at securing Iraq's oil sector, at a time when its finances are already showing a record deficit.
As Mick Jaggar so ably crooned, "You can't always get what you want, but if you try sometimes you might find you get what you need." The neocons particularly, but also the country as a whole, needs this collective reality-inducing slap upside the head. Brent crude is at $28.80/barrel today and moving higher.

In the last week the General has seen more than a few articles discussing the steady but sure erosion of manufacturing in both the US and the UK by China. In the UK,
a report published yesterday by the Institute for Public Policy Research (IPPR) has such a depressingly resigned view of the outlook for British manufacturing industry, suggesting as it does that manufacturing might shrink to as little as 10 per cent of GDP and 5 per cent of employment by 2050. Interestingly for a left-leaning think-tank, the IPPR thinks there is little the Government can or should do about this phenomenon, which it thinks is both global and inevitable.
And in the US,
The proportion of the work force employed in manufacturing has fallen to 11 percent from 30 percent in the mid-1960's. Two of the 19 percentage points disappeared in just the last 28 months. On another level, manufacturing's share of real gross domestic product � representing all the goods and services produced in the United States � has edged down, even including in the count the output of foreign manufacturers operating here. The share of real G.D.P. has dropped to between 16 and 17 percent, from 18 to 19 percent in the 1950's.

Given manufacturing's importance in maintaining our status as a world power, the downward trends are alarming.
Alarming? Technocrats and new middle class types like Robert Reich will celebrate the rise of the "symbolic analyst" and insist the US and UK can get along just fine selling legal services and insurance and haircuts to one another while the Chinese make all our toys and the Mexicans make all our clothes. Isn't that how the Western countries got to rich, anyway, by casting off lowly manufacturing onto the Global South and turning to the "new economy"?

Maybe not.

Both the UK and the US article mention the social and especially cultural importantance of manufacturing.
it would be wrong to abandon manufacturing entirely to its fate. There are key strategic and social reasons for maintaining at least some kind of a multi-layered manufacturing base. Societies that forget how to make and grow things will eventually lose touch with the very basics of human existence. There has always been a big and vibrant market in individually customised products, but it has tended to be confined to the relatively wealthy. Technology is likely to transform it into a mass market phenomenon, but to work local production is essential. That's why it is so important that Britain continues to maintain a modern skills base in manufacturing.
Over at the NYTimes,
the essence of a great world power is its edge in producing not services but manufactured products that other people want � Boeing's airliners, for example, Intel's semiconductors and Caterpillar's earth-moving equipment. To the extent this output passes to foreign manufacturers, or even to Americans operating abroad, we lose the means to buy what we, in turn, want from others.

More than half of the manufactured goods that Americans buy are made abroad, up from 31 percent in 1987. If we continue on our path of ceasing to make merchandise that others want to buy from us, the danger is that these imports will be unaffordable for our descendants.
What both articles ignore is the role of manufacturing in promoting a more equal democratic society in both the UK and the US. Manufacturing produced the middle class we know today. As manufacturing dies in both countries, so does the middle class. Gaps of inequality are gaping in both countries now as the new middle class takes up law and business consulting and graphic design while the working class slips into jobs as janitors, security guards, retail clerks and telemarketers.

History suggests that democracy depends upon manufacturing.

Cancun will surely not be a full repeat of Seattle. Yet we do know that history always repeats itself, first as tragedy, second as farce.
Hope is fading fast that this latest World Trade Organisation jamboree will lead to a deal to unlock billions of pounds for both the rich and poor nations.

It is a staggering 21 months since the talks were launched in Doha, Qatar, amid scenes of jubilation. That optimism has all but evaporated and there is scant sign of progress. . . .

most NGOs believe there is a real danger the talks will simply rubber stamp a deal under which rich countries exploit the wealth of the developing world but give little in return. Adriano Campolina Soares, head of the rights campaign at ActionAid, said globalisation has "completely failed" poor people and the WTO's trade rules have made things yet worse.

He said: "If Cancun fails to deliver genuine changes on key issues such as agriculture and access to essential drugs, developing countries may well start questioning the existence of an organisation that seems constantly to work against us."
Believe it or not, the US is still trying to prevent the override of drug patents in the Global South despite the apparent victory for the South at Doha in 2001. Back on November 14, 2001, the WTO declared by consensus
We agree that the TRIPS Agreement does not and should not prevent Members from taking measures to protect public health. Accordingly, while reiterating our commitment to the TRIPS Agreement, we affirm that the Agreement can and should be interpreted and implemented in a manner supportive of WTO Members' right to protect public health and, in particular, to promote access to medicines for all.
Things looked good for the rights of countries like Brazil, South Africa and India in particular to grant compulsory licenses to local manufacturers of pharmaceuticals and to decide for themselves what constitutes a "national emergency" in public health. It even looked good for smaller, much poorer countries in the South to import generics from countries like Brazil or India since they couldn't produce the drugs themselves.

Even since then, however, the Bush administration has used every gambit in the book to block the flow of generic drugs across international boundaries. In particular, the US uses its "Special 301" trade powers to bully any country failing to live up to the patent standards which US pharmaceuticals -- represented by the Pharmaceutical Research and Manufacturers of America (PhRMA) -- deem necessary. The use of bilateral trade agreements is also prevalent. Just as the US has won exemption from the jurisdiction of the International Criminal Court via so-called "Article 98 agreements," so too is it winning "TRIPS-plus" patent protections via the same kind of bilateral strongarm tactics.

Monday, August 18, 2003

The majority of 'global rebalancing' scenarios require the US dollar to fall significantly -- if slowly -- so as the begin to dig away at the stunningly enormous US current account deficit (at 5.1% of GDP in 2003:I) and direct capital away from the US and into other economies. With the US economy appearing to return to some respectable if not vigorous level of GDP growth, toss the rebalancing scenarios out the window.
The dollar neared a 3-1/2-month high against the euro and rallied broadly against all major currencies on Monday as technical patterns accelerated a dollar uptrend fueled by recent solid U.S. economic data. . . .

According to dealers, relatively weak economic reports from the euro zone have given U.S. data additional significance, as traders see reason for optimism that the economy is poised for sustained growth.

"Right now, the focus is just shifting a little bit to the U.S. economic picture being a bit stronger than the European picture," said Cyrus Whitney, head dealer with Commerzbank in New York. "Now that the euro has broken (below) $1.1215/1.1220 support ... the euro could ultimately try $1.10 over the next couple of days."
Get this. The euro is down from its all-time high of $1.1870 on June 5 to $1.1135 this afternoon -- a big 6.2% drop in just over two months. That of course means a big 6.2% rise in the dollar. Per the broad dollar index, the US dollar is up 2.5% since its recent low on June 16.

A stronger dollar is likely to keep capital flowing into the country, keeping interest rates low and the "recovery" on track. It is also likely to exacerbate disinflation, continue to crush the US manufacturing sector, and will surely blow the current account deficit up like a balloon. Global recovery seems premised, as always, on US growth. Yet in the early 1990s when the world did the same thing, the US current account deficit nearly balanced in the face of US recession. This time around the world continued to loan and loan and loan to the US, and must continue to loan and loan and loan continually.

Good for the US perhaps (too bad if you're hoping to get recalled to the factory after that layoff). Bad for the home countries having their capital sucked out of them. Global rebalancing without somebody's real economy paying the price looks to be impossible -- and that's where the politics will play themselves out.

Saturday, August 16, 2003

And you thought Arnold was California's biggest problem.
Growing fiscal problems in U.S. states are becoming more difficult to resolve quickly, and California's crisis might require painful remedies, the International Monetary Fund's top economist said Thursday.

In an interview with Reuters, Kenneth Rogoff said California's massive $38 billion deficit was going to prove especially hard to turn around without tough budget cuts.

If California were a country, the size of its primary deficit, not counting interest payments, would rank in the top five in the world, he said. . . .

"It is going to be very hard to turn this around quickly," Rogoff said. "Looking at the California situation it's hard to recall any region that's terminated a deficit of that size without a lot of pain and growth steroids."
This comment of Rogoff's really stunned me, however.
Turning to another deficit that is a worry for the IMF, Rogoff said the growing gap in the U.S. current account, the broadest measure of trade, thus far has been gradual, letting steam out of "what was an overvalued" U.S. dollar.
Huh?? The gap has been growing all year and six of the seven largest monthly deficits ever have been in 2003. The US current account deficit is so far 25% larger than this time last year. How exactly is this letting off steam?? Particularly since the dollar has been rising the past two months??