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Red Lights Flashing
Doug Noland of Prudent Bear started his weekly Credit Bubble Bulletin on Friday with the words “It has the feel of an unfolding bear market.” Martin Goldberg, author at Financial Sense, titled his Thursday market wrap-up “Something big is about to happen.”
For years the US has over consumed and under saved. Foreigners have financed the difference between consumption and savings so far, confident in US politics and the US economy. This is changing.
The US war adventure in Iraq has helped to push oil prices up 100% in only one year. This is an oil shock for the global economy. Take a look at this chart and predict where the oil price may go. 
The Saudis say they are pumping whatever they can. Seeing these prices and imaginating the “love” the Saudis have for a Bush administration let me doubt that they are telling the truth.
According to Morgan Stanley the US needs to attract $2.6 billion per business day to stay liquid. Foreign buying of US equities slowed to an average of just $0.6 billion of US equities in the first seven months of 2004 – only 10% of the $5.7 billion monthly average in 2000-2003.
With less demand for US$ assets the Dollar will sink relative to other currencies. When the US$ did sink to $1.30 per Euro in February, the Euro Central Bank did threaten to intervene. This stopped the slide at that time. Last week the Euro finance ministers agreed to favour a stronger Euro. Finance Minister Nicolas Sarkozy of France said, “A strong currency is better when commodity prices are high.” With the Euro higher, oil will be cheaper for Euro countries. This will offset losses in exports.
The Japanese and Chinese Central Banks have not yet arrived at this conclusion. The current exchange rate is around 107 yen per US$. At 105 the Japanese Central bank will threaten to intervene, at 100 yen/US$ it will intervene. But what happens if oil goes to $70/barrel? Japan is importing all its oil and at a certain price point it will come to the same conclusion as Mr. Sarkozy. Better to buy cheaper oil than to waste money to keep the US$ up. At that point the US$ will go down some 25%.
With the US$ going lower who will buy US treasuries? Currently treasuries only give some 4% in interest. This is not enough to compensate for the risk of a sinking US$. Therefore treasuries will sink in value and their interest rate will go up. This may not happen immediately (see Japanese intervention), but the long term trend is obvious.
Rising interest rates are bad for the bond markets. There are trillions in bonds in the market. Fannie Mae alone has a book of business of $2.282 Trillion. It has sold Mortgage Backed Securities (MBS) of about this value and lent the money to US homeowners. Many of these loans are with Adjustable Rate Mortgages (ARM). When interest rates go up, this bubble will burst. Fannie Mae being under SEC investigation and in de-facto receivership does not help to keep ones confidence.
The stock markets show divergences. Since January the DOW is in a downtrend. But for the last two weeks the DOW did fall while the NASDAQ did rise. What is the rational of Google being evaluated at $46 billion when the company makes a profit of only $105 million? If you buy a Google share you will get an interest rate of 0.2% plus a serious downside risk. This is the sentiment of early 2000 and the result will be similar.
Often there are external events that trigger the fall of nervous markets. The US election is right at the door. If the election is contested, as it is likely, what will happen with confidence in the US democracy, in the US debt position, in the US markets?
Markets anticipate it is said. If this is true and the markets do anticipate problems after the election what will they do this week?
I think the cringe I personally admit to feeling when I first read Dan’s provocative comment was a cringe of recognition as well as sorrow. We — people who have the means and leisure time to sit at computers chatting in a literary way about the issues that trouble us — are clearly “winners” in a global game of very high stakes. I admit to a natural, but ethically troubling, sense of good fortune in having been born pale rather than brown, inside rather than outside the AngloAmerican power bloc, etc. — clearly it is better not to be bombed than to be bombed. It is better not to go hungry than to starve.
However, the triumph of brute power is not necessarily a given. Thought experiments are several: in the triumph of Gandhi’s non violent resistance movement in the face of heavily armed and funded State repression; in the interesting period in Japanese history when the culture managed to refuse the new technology of fire-arms; in any solidarity movement whose members accept risk, suffering, even death rather than betray their friends and comrades; in the eventually successful prosecution of the worst of the crime bosses who once ran Chicago and other major US cities. Brute power does not always win in the sense of getting its own way and bashing down all opposition; and it does not always win in the larger sense of actually achieving something worth having.
In all the rhetoric about the “inevitability” of “winners and losers,” of thieving and bullying, selfishness and brutality, there is an implicit riddle of scale. Let’s say we accept, for argument’s sake, the truism that selfishness and power will always carry the day, that human nature is rotten to the core, the strong will always smash and possibly eat the weak — and that we would sensibly and selfishly rather be on the winning side: therefore, imperial expansion is a winning strategy, and much though we might tut-tut over it and wish that things were otherwise, that’s just reality. Now, what happens if we scale that argument back down from international to intranational?
That would mean that, say, California should not negotiate or dicker with Oregon or Washington over water rights — it should just exercise its massive economic power and population power, and either starve them of trade or invade them outright, to secure total control over water from the NW. After all, that would be a winning strategy: we want the resource, it is essential to us, we must control it at any cost. And we could scale it down even further: if my neighbour has a 60 inch TV screen and I rather covet it, why should I not simply march over there, bash him over the head, and take it? After all, if I’m capable of bashing him over the head and thus “winning,” then it’s a winning strategy for me to take his stuff and improve my own standard of living. I mean, he’s not a relative or anything.
In fact, why should I exempt relatives from this reasoning? If my brother has a nicer house than I have, or I visit him and notice that he has a good stock of canned chicken soup of which my own larder is a bit short, why not just steal his soup, or kill him and inhabit his house? There’s a reason for the OT stricture about not coveting thy neighbour’s ox (or whatever else).
In other words, if it is pragmatic and correct in international terms to believe that “what’s right is what’s right for Me,” or that morality/ethics aka neighbourly/familial relations are just a wishful fantasy and have no real-world application, then where do we draw the line of scale, that delimits the scale on which such relationships are appropriate and necessary? Is criminal behaviour magically legitimate if only it is done on a grand enough scale?
One way to look at this is that at some point in human evolution we applied “rules” and standards of ethical conduct and reciprocity only to our own kin group. (“Me and my brothers against the world.”) People outside our kin group were fair game, people inside had to be treated according to certain conventions and had “rights”. Then we agglomerated into larger and more abstract groupings: tribes, castes, nation-states, language groupings, “races”. People outside our Whatever were fair game, but people inside had to be treated according to some kind of rules of fair play or ritual and had “rights”.
Some of us still think, consciously or un, that people outside our nation-state (or, I suspect, more persuasively outside our skin colour and language family, or outside our religion) are fair game: it is no sin to cheat or kill the Unbeliever. Some of us think that this way of thought is too deeply wired ever to change, that we can never agglomerate as human beings on any level higher than the nation-state or the religious cult/church/faith. Some would say we’re not even too good at that — we’re not too good at agglomerating in any size much larger than the village.
What does remain clear is that the behaviour of the US in Iraq would be flagrantly antisocial and illegal if it were mimicked by one neighbour on my block against another; it would be illegal and barbaric and flagrant if it were mimicked by my institution against another rival institution — UC bombs and invades Cal Tech to steal compute power! — it would be illegal and barbaric if it were mimicked by the State of California against the State of Washington; it would be illegal and barbaric if it were mimicked by France against Germany. And anyone who said, in any of those cases, “Well power will out, the strong will trample the weak, and there is not much we can do about it,” would be considered quite a strange person — because we have a long tradition of laws, restrictions, conventions, and so forth that have defined such abuses of power as illegitimate.
What’s at stake here in many ways is the fragile attempt at extending the conventions of civilised life upward to a larger scale: the scale of international relations. The Bush Regime categorically denies any such supranational legal structure. They are, geopolitically speaking, like a fanatical tribesman who believes that it isn’t murder if you kill one of that other tribe, only if you kill one of your own (or if one of those other people dares to kill one of your own).
This highly solipsistic morality — exceptionalism, failure to generalise — might be called the root of barbarism. There was a time when its smaller-scale forms were accepted — when it would have been laughable to suggest a future in which relations between France and Germany might be regulated by international law or the constraints of a federation-like body such as the EU. Imagine explaining the EU to a European living in the rather volatile 1700’s!
There was a time fairly late in the game when, e.g. Germans (under the Kaiser or that other nasty man) or the French (under Napoleon) thought that “power will out,” might maketh right, and there was nothing very much wrong with making a strong imperial bid for domination of the other guy’s territory and resources. I sincerely hope that we are not going to revert to such a state of affairs.
And I sincerely hope that there will be a time, may it come soon, when behaviour like invading someone else’s country to control the oil — even if their skin and hair is on average darker than yours and their GDP doesn’t put them in the Big League — is considered just as shocking and uncivilised and illegal as it would for me to bash my neighbour over the head and steal his TV. It is rational to pursue self-interest, but it is barbaric to pursue self-interest to the point of committing crimes, killing people, stealing things. Whether next door or across an ocean.
I have often said that Americans (all AngloAmericans and to some extent all G8 denizens) are trapped in the role of Mama Corleone. We are kept in style, living a life of luxury or at least security and ease, by criminal means — let us not quibble, the numbers are quite plain: the rest of the world hungers so that we may overeat, the rest of the world cannot afford kerosene to cook with because our SUVs and airplanes drive up the cost of fossil fuel. Whole forests fall and tribes are decimated so that we may build crappy furniture out of chipboard, or import cheap meat for vile McBurgers. Whole oceans are fished to extinction, condemning coastal populations to hunger, so that we can gorge on cheap fish. And I haven’t even got to the impacts of mineral and fossil extraction. Our advanced mercantile economies were founded on the massive infusion of stolen bullion, slaves, and other resources from the “New World” — a world some of whose cultures were actually far older than our own. Large numbers of us live on land very recently plundered — within living memory, almost — from its original inhabitants. The role of theft and murder in our pre-eminence is no more deniable than it is for the Corleone Famiglia, so let’s not mince words.
So, the question before us is, do we remain a pack of Mama Corleones — nice, kind, sweet, virtuous within our immediate purview — and resolutely blind and deaf to any clue about the Don’s business? Do we continue to believe that whatever benefits our Famiglia is OK, or at least inevitable, and that whatever the Don does to “protect his family” is justified regardless of who has to lose so that we may “win”? Or do we, like Michael’s young wife Kay, risk the Don’s wrath by “asking him about his business”? Do we reject the Don’s patronage in favour of a life possibly less luxurious, possibly less “safe” even, but one not based (or less based) on criminal proceedings? Do we try to “make the Family legitimate”? To make our business affairs conform to some conventional code of law and due process, rather than considering every rival an enemy and every conflict of interest a mortal struggle best resolved by swift and decisive murder?
It may “make strategic sense” to invade other countries, but it also makes strategic sense to knock over gas stations, deal hard drugs to kids, steal other people’s TVs, and sell our kids to whorehouses for a profit rather than accept the expense of raising and educating ’em. We have an ethical sense that prevents us from seeing those kinds of strategies as acceptable or desirable. When are we going to scale that ethical sense up to a radius of more than a few hundred miles? Now seems like as good a time as any.
Posted by: Anonymous | Oct 26 2004 22:16 utc | 37
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