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Signs of the Times for Mon, 01 May 2006


Signs Editorial:
Signs Economic Commentary
Donald Hunt
Signs of the Times
May 1, 2006
Gold closed at 651.60 dollars an ounce on Friday, up 2.1% from $638.50 the Friday before. The dollar closed at 0.7915 euros, down 2.4% from 0.8103 at the end of the previous week. That put the euro at $1.2634, compared to $1.2341 a week earlier. Gold in euros would be 525.75 euros an ounce, up 1.6% from 517.38 for the week. Oil closed at 71.88 dollars a barrel, down 4.5% from $75.12. Oil in euros would be 56.89 a barrel, down 7.0% from 60.87 at the end of the previous week. The gold/oil ratio closed at 9.07, up 6.7% from 8.50 the week before. In the U.S. stock market, the Dow Jones Industrial Average closed at 11,367.14, up 0.2% from 11,347.45 at the previous Friday's close. The NASDAQ closed at 2,322.57, down 0.9% from 2,342.86. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 5.05%, up four basis points from 5.01 the week before.

The currency and commodity markets, driven by fears of cataclysmic war and criminally insane leadership, seem to be increasing the pressure on the Bush administration. The open squabbling at the highest levels over blame for the Iraq fiasco, the plummeting of Bush's approval ratings and the looming indictment of Karl Rove, taken together with the sharp rise of gold and oil and the drop in the dollar suggest a coming crisis point. One gets the sense that the political and economic tectonic plates are shifting beneath us and that a sort of earthquake in the world power structure is imminent. More and more people are realizing, even in the United States, that the U.S. can no longer be considered a "superpower:"

Wars, Debt and Outsourcing
The World is Uniting Against the Bush Imperium

By Paul Craig Roberts
April 25, 2006

Is the United States a superpower? I think not. Consider these facts:

The financial position of the US has declined dramatically. The US is heavily indebted, both government and consumers. The US trade deficit both in absolute size and as a percentage of GDP is unprecedented, reaching more than $800 billion in 2005 and accumulating to $4.5 trillion since 1990. With US job growth falling behind population growth and with no growth in consumer real incomes, the US economy is driven by expanding consumer debt. Saving rates are low or negative.

The federal budget is deep in the red, adding to America's dependency on debt. The US cannot even go to war unless foreigners are willing to finance it.
Our biggest bankers are China and Japan, both of whom could cause the US serious financial problems if they wished. A country whose financial affairs are in the hands of foreigners is not a superpower.

The US is heavily dependent on imports for manufactured goods, including advanced technology products. In 2005 US dependency (in dollar amounts) on imported manufactured goods was twice as large as US dependency on imported oil. In the 21st century the US has experienced a rapid increase in dependency on imports of advanced technology products. A country dependent on foreigners for manufactures and advanced technology products is not a superpower.

Because of jobs offshoring and illegal immigration, US consumers create jobs for foreigners, not for Americans. Bureau of Labor Statistics jobs reports document the loss of manufacturing jobs and the inability of the US economy to create jobs in categories other than domestic "hands on" services. According to a March 2006 report from the Center for Immigration Studies, most of these jobs are going to immigrants: "Between March 2000 and March 2005 only 9 percent of the net increase in jobs for adults (18 to 64) went to natives. This is striking because natives accounted for 61 percent of the net increase in the overall size of the 18 to 64 year old population."

A country that cannot create jobs for its native born population is not a superpower.

In an interview in the April 17 Manufacturing & Technology News, former TCI and Global Crossing CEO Leo Hindery said that the incentives of globalization have disconnected US corporations from US interests. "No economy," Hindery said, "can survive the offshoring of both manufacturing and services concurrently. In fact, no society can even take excessive offshoring of manufacturing alone." According to Hindery, offshoring serves the short-term interests of shareholders and executive pay at the long-term expense of US economic strength.

Hindery notes that in 1981 the Business Roundtable defined its constituency as employees, shareholders, community, customers, and the nation." Today the constituency is quarterly earnings. A country whose business class has no sense of the nation is not a superpower.

By launching a war of aggression on the basis of lies and fabricated "intelligence," the Bush regime violated the Nuremberg standard established by the US and international law. Extensive civilian casualties and infrastructure destruction in Iraq, along with the torture of detainees in concentration camps and an ever-changing excuse for the war have destroyed the soft power and moral leadership that provided the diplomatic foundation for America's superpower status. A country that is no longer respected or trusted and which promises yet more war isolates itself from cooperation from the rest of the world. An isolated country is not a superpower.

A country that fears small, distant countries to such an extent that it utilizes military in place of diplomatic means is not a superpower. The entire world knows that the US is not a superpower when its entire available military force is tied down by a small lightly armed insurgency drawn from a Sunni population of a mere 5 million people.

Neoconservatives think the US is a superpower because of its military weapons and nuclear missiles. However, as the Iraqi resistance has demonstrated, America's superior military firepower is not enough to prevail in fourth generation warfare. The Bush regime has reached this conclusion itself, which is why it increasing speaks of attacking Iran with nuclear weapons.

The US is the only country to have used nuclear weapons against an opponent. If six decades after nuking Japan the US again resorts to the use of nuclear weapons, it will establish itself as a pariah, war criminal state under the control of insane people. Any sympathy that might still exist for the US would immediately disappear, and the world would unite against America.

A country against which the world is united is not a superpower.

The disconnect between corporate leadership and society that Roberts noted is also reflected in market data. In all this mess, stocks are holding steady (at least in dollar terms), consumer spending remains strong, the economic growth rate and employment numbers (propped up, no doubt, by massive deficit military spending) are high enough to give the illusion of economic normalcy in the United States, at least among the elites. Among the general public, though, polls clearly show that people don't believe the happy talk about the economy, no matter how much they are spending and working at the moment. According to the blogger Billmon, reasons for this are easy to find:

Why People Think the Economy Sucks

Many conservatives profess to be puzzled by the fact that many Americans don't appreciate the wonderful economic boom we're enjoying, now that the Cheney administration has led us into the supply side utopia.

And it's true, they don't:

Four in 10 - 40 percent - say Bush is doing a good job with the economy, down eight percentage points in a month.

The latest spike in sour feelings can probably be traced to the return, in many parts of the country, of $3-a-gallon gas. But economic sentiment has been unusually negative throughout this recovery - at least when compared to past relationships between consumer confidence and GDP growth, or confidence and the unemployment rate. Even now, with the unemployment rate below 5%, consumer confidence is still about where it was when the last recession officially ended. Why?

My explanation for our current era of bad feelings is pretty straightforward:




This is what used to be known as the class struggle. It was quite popular back in the day. It could even make a comeback if something isn't done to bring the trends shown above back into better balance. I have no quarrel with corporate profits, particularly if I get to keep some of them, but a situation in which all the benefits of productivity growth flow to capital, and none to labor, not only defies the standard economic textbooks, but probably isn't politically sustainable for long - at least, not without some help from guys like General Pinochet.

Why is this happening? New technologies, skill shortages, outsourcing, downsizing, the decline and fall of the union movement, changing social norms and expectations - or as John Snow might put it, learning to "trust the marketplace." Any of the above, all of the above.

It's sobering to think that what we've seen so far may be just the beginning of our journey back to the good old days of the Robber Barons. The economic effects of integrating China and India into the global labor market - what Laura Tyson describes as the mother of all supply-side shocks - could take decades to play out. And by the time they're done, there's likely to be a host of other low-wage countries lined up outside the factory gates. What Marx called the reserve army of the unemployed has never looked so huge.

Given the current power structure and the elite consensus that globalization can't be stopped, or even slowed, the solution isn't obvious, at least not to me. The New Deal is dead; the New New Deal hasn't been invented yet. But the political effects are easy enough to see. The immigration debate has been saturated by them.

Nativists and racists we will have with us always, but you have to wonder whether the issue would be half as hot right now if middle America was getting a bigger slice of the pie - maybe even with a little whipped cream on top. The millions of undocumented workers who are the current focus of our national angst (and in Michele Malkin's case, our national hysteria) are, at least in part, proxies for the billions of workers back where they came from - the invisible people who tuck the little inspection slips in the box with our Chinese-made DVD players, who sit in call centers in Bangalore and take our hotel reservations, or who debug our software code in Singapore.

...This isn't going to end well, but like I said, I don't know of any viable solutions - other than to encourage the creation of price bubbles in the assets most widely held by the American middle class. It may be a quick fix, but it works. The popular mood no doubt would be even less enthusiastic about the current "boom" if it weren't for this:


But bubbles by their nature are self-limiting, and this one may not last much longer, as even some supply siders are beginning to admit. When it deflates, the corporate conservatives are going to have a job on their hands staving off the kind of populist revolt that would make the rest of the world begin to doubt America's commitment to the global economic order America has created. And if that happens . . . well, even John Snow - the $112 million dollar man - may start to have his doubts about trusting the marketplace.

The ruling elite in the United States is clearly beginning to feel pressure from below and from abroad. The rest of the world, increasingly, may not mourn the end of the "global economic order America has created" as much as Billmon, especially if that economic order requires frequent unprovoked attacks on other countries. If a critical point is reached where the elite in the rest of the world completely lose confidence in the United States, they can do what investors and central banks have always done when a less-developed country's currency starts to look weak: head for the exits. The following article suggests that it is happening already:

The threat to a fistful of petrodollars

By Liam Halligan
23/04/2006

From Russia, you might say, with love. This weekend, Alexei Kudrin, Russia's finance minister, dropped a bombshell in Washington.

Attending the annual meetings of the World Bank and International Monetary Fund, Kudrin caused his American hosts discomfort by openly questioning the dollar's pre-eminence as the world's "absolute" reserve currency.

The greenback's recent volatility and the yawning US trade deficit, "are definitely causing concern with regard to its reserve currency status," he said. "The international community can hardly be satisfied with this instability."

Kudrin's intervention coincided with another meeting, also in Washington, of finance ministers and central bankers from the Group of Seven - which doesn't include Russia.

Top of the agenda: the effect of ever-rising oil prices on inflation and interest rates.

G7 countries are worried the spiraling price of crude - which closed at $72.79 a barrel on Friday and which has now trebled in three years - could inflict real economic damage. The US Federal Reserve, in particular, has been forced to take drastic action - raising interest rates 15 times since June 2004 to keep inflation in check.

Given that fragility, it is significant that Kudrin is now wondering aloud if the long-standing dollar hegemony can last. For him to do so is to highlight that America is vulnerable should that status be lost. That's because Russia, with its awesome oil and gas reserves, could kick-start a challenge to the dollar's supremacy.

Most nations stockpile their foreign exchange holdings in dollars. The US currency accounts for more than two thirds of all central bank reserves worldwide.

This reserve status means that the dollar is constantly in demand, whatever the underlying strength of the US economy.

And now, with massive trade and budget deficits to finance, America is increasingly reliant on that status. The unprecedented weight of US liabilities means a threat to the dollar's dominance could result in a currency collapse, plunging the world's largest economy into recession.

That won't happen immediately. The dollar has sat astride the globe for some time now - in fact, for most of the last century. But this statement from Russia - a country of growing financial and strategic significance - still caused the dollar to slide. It also fueled speculation that central banks could increasingly diversify their holdings away from dollars.

Kudrin's statement followed news that Sweden has cut its dollar holdings, from 37 per cent of central bank reserves to 20 per cent, with the euro's share rising to 50 per cent. Central banks in some Gulf states have also lately mooted a shift into the euro. Such sentiments helped push the dollar to a seven-month low against the single currency last week.

But Russia's intervention will have raised eyebrows in Washington because the backbone of the dollar's reserve currency status - the main guarantee that status continues -is the fact that oil is traded in dollars. And that is something the likes of Kudrin can directly affect.

For historic reasons, the dollar remains the world's "petrocurrency" - the only currency for the settlement of oil contracts on world markets. That makes the EU and Russia dependent on it. But with central banks switching to euros, the logical next step would be for fuel-exporting countries to start quoting oil prices in euros too.

The EU is Russia's main trading partner. More than two thirds of Russia's oil and gas is exported to the EU. That makes Russia a strong candidate to become the first major oil exporter to start trading in euros. Such a scenario, in recent years, has become theoretically possible. But now, with these latest comments, Kudrin has thrust that possibility into the open.

The G7 meeting was dominated, of course, by concern over Iran's nuclear programme. The threat of military action against Iran, itself a major crude exporter, is one reason oil prices are now testing record highs.

It is worth noting that Tehran has ongoing plans to set up an oil trading exchange to compete with New York's NYMEX and with London's International Petroleum Exchange. In the light of Kudrin's comments, it is significant that the Iranians want to run their oil bourse in euros, not dollars.

Were the Iranians to establish a Middle-East based euro-only oil exchange, the dollar's unique petrocurrency status could unravel. That, in turn, would threaten its broader dominance - which, given America's groaning twin deficit, could seriously hurt the US economy.

Some cite this as the real reason the US wants to attack Iran: to protect the dollar's unique position. I wouldn't go that far, but the prospect of a non-dollar oil exchange in Tehran is certainly an aggravating factor.

The opening of Iran's new oil exchange has recently been delayed. But, having spoken with numerous officials in Tehran, and western consultants who've been working with the Iranians for several years, I think it will go ahead. The exchange entity has already been legally incorporated in Iran and a site purchased to house administrative and regulatory staff.

The reality is that as long as most of Opec's oil - read Saudi Arabia - is priced in dollars, the US currency will retain its hegemony. But the opening of an oil bourse in Tehran, which now looks likely, will signal at least tacit Saudi consent for euro-based oil trading. The US knows this, which is why it is nervous about the dollar's status being questioned.

From the G7's fringe, Kudrin has now touched this raw nerve. This weekend's meetings have been dominated by questions of global financial imbalance - in particular, America's huge deficits.

Kudrin's missive comes as central bankers, and currency dealers, start to conclude the only way to resolve the massive US external deficit is a somewhat weaker US currency. As the IMF itself warned yesterday, a "substantial" dollar decline may be needed.

One way to bring that about would be for the euro to enter the global oil trading system. This is unlikely to happen soon. It might not happen at all. But the idea is now not only realistic but firmly on the table in Washington. Perhaps not with love, but it was placed there by the Russians.

Is there any hope for the United States and for the world, where both rich and poor suffer, in completely different ways, from capitalism, a system of pure rationality of means and irrationality of ends? Can there be a rebalancing, a new view of work and labor based on empathy, not on an exploitative, means-to-an-end view of workers? Perhaps it was a mistake, early on in capitalism, to separate economics from moral philosophy. Can there be a political economics balanced by an open emotional center? It may be that John Kenneth Galbraith chose a good time to pass away, since the moment appears ripe for such a reappraisal, one which would have made sense to him, and his passing may stimulate such a discussion. And, today is May Day, not only a celebration of spring in the northern hemisphere but also Workers Day and Socialism Day, except in the United States, which moved its workers' holiday to September, at harvest time. Labor became a crop to be harvested, not a source of growth and creativity.