The world crisis as it develops

David Seaton's News Links

The other day we went shopping at a huge hypermarket of the French, "Carrefour" chain on the outskirts of Madrid. We hadn't been there for about a year and we were struck by how the quality of the store-brand, discount merchandise had deteriorated in that time. Not that long ago it was possible to buy quite nice things at discount: bluejeans, appliances, etc, for very little money. The prices have held, but what is for sale is shoddy junk. This is a trend that I am noticing in all over the discount stores: hypermarkets, supermarkets, etc.

Obviously to avoid raising prices in the middle of a recession, the merchants are looking for ever more cut rate suppliers...  this appears to be the last "firewall" against inflation and when it is broken it will be difficult  for the great majority to continue to consume, especially since credit has tightened and jobs continue to be offshored; again, an attempt to buck the inflationary trend.

If the consumers in the wealthy countries can no longer afford to consume, many factories in the third world will be closed and their workers laid off, which will lead to turbulence in those countries, where workers and their families are much more exposed to the rising cost of basic food items... and so it goes.

There follow a series of quotes to fill in a possible profile of what awaits us in the coming months:

“The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit.” [Marx - Capital, Volume III, Chapter 30]

(...) High inflation endangers China’s status as the low-cost workshop for the world.(...) Food prices are soaring, and the government said on Friday that the consumer price index in March had risen 5.4 percent, its sharpest increase in nearly three years.(...) Beijing and many municipal governments have required employers to raise wages. The government has raised minimum wages in the hope of reducing the big income gap between the rich and the poor, and the urban and rural.(...)  “China is moving into a new era, a new norm,” said Dong Tao, an economist at Credit Suisse in Hong Kong. (...)  In some cases, retailers are bidding for goods at prices the exporters consider too low.“I hear that many Chinese exporters are rejecting orders from Wal-Mart and other Western retailers,” Mr. Tao said. “I’ve been covering the Chinese economy for a long time, and I’ve never heard that before.”(emphasis mine) New York Times

"The hedge funds are now active in commodities and are playing the futures contracts, where upwards of 30 million tons of soybeans for future delivery are contracted for every day. They are also buying the companies that stock grains.(...) Futures purchases of agricultural commodities classically have been the means by which a limited number of traders stabilized future commodity prices and enabled farmers to finance themselves through future sales. Speculative purchases have no other purpose than to make money for the speculators, who hold their contracts to drive up current prices with the intention not of selling the commodities on the real future market, but of unloading their holdings onto an artificially inflated market, at the expense of the ultimate consumer. Even the general public can now play the speculative game; most banks offer investment funds specializing in metals, oil, and more recently, food products. It is astonishing in the present situation that the international financial institutions and government regulators have done little to control or banish this parasitical and anti-social practice. The myth of the benevolent and ultimately impartial market prevails against all contrary evidence." William Pfaff

"The social theories of Karl Marx were long ago discarded as of little value, even to revolutionaries. But he did warn that capitalism had a tendency to generate its own crises. Indeed, the spread of capitalism, and its accelerated industrialization and wealth-creation, may have fomented the food-inflation crisis — by dramatically accelerating competition for scarce resources." Tony Karon - Time

It has always seemed to me that Marx's predictions were foiled by availability of ever cheaper and more abundant consumer goods and ever cheaper and more abundant credit with which to buy them, despite stagnant or falling wages. This formula seems to be in crisis now. It will be interesting to see how we wiggle out of this one. DS

We all live in Ponzi land

David Seaton's News Links

I was talking to a very shrewd and well informed friend of mine, a now sedate notary who was once a sort of Spanish Gordon Gekko in the 1980s. He gave me a very intelligent analysis of the crisis.

At the bottom of it, he said, was the enormous increase in productivity brought on by information technologies. We simply produce much more than we can possibly consume: we need lots of consumers and much fewer workers.

How are underemployed people supposed to buy anything? On credit. Something has to give, has given. I think he's right.

A very good example might be how much supermarkets have changed in the last 20 years. Remember (if you can) the days before bar code cash registers existed. Totaling up the merchandise, taking payment and making change was much slower work than today. Check-out girls needed a much bigger skill set in that environment: to add and subtract accurately in their heads to begin with.

Now, passing the product over the laser reader, passing the banker or credit card through the card reader and getting the customer's signature is only the work of seconds and if the customer pays in cash, the cash register tells the check-out girl the exact change to give. A person of average or better than average intelligence, who has successfully completed high school is wasted in such a job.

At the same time that the products are being checked out, the system is seamlessly keeping track of the inventory and calculating the buying needed to keep the shelves full and may even send the orders directly to the head office, several states away, where the orders are also processed electronically and trucks are filled and dispatched with a fraction of the human input needed only a few years ago. Now, project this technological productivity explosion onto almost any human activity. More work done with a shrinking work force.

It is easy to see that with this system it is possible to have much bigger stores with a much wider variety of products, employing many fewer and much less skilled, therefore lower paid, workers than ever before.

With lower costs and more technology, profits rise and much of this gain is reinvested in more productivity-raising technology, which makes more skills and the people who have them redundant. This means, perversely, that more profits usually lead to less jobs or much poorer jobs. This paradigm, which until recently only held true for the poorly educated, is now reaching the ranks of university graduates. Now, with digital technology, even high intellectual output tasks can be outsourced to where people with postgraduate degrees can be hired for the same cost per hour as high school graduates in a developed country.

Result: As more money is invested in raising productivity, fewer and fewer people can produce more and more for a market glutted with products that fewer and fewer people can afford to buy without going into debt.

Salaries don't rise because most workers are not really needed that badly and are easy to replace if they go on strike, complain or even report in sick.. and thus they have no bargaining power. Any shortages such as one resulting from low birthrate in developed countries can be solved by outsourcing the jobs to poorer countries with high birthrates.

All people are really required to do is to buy many things that they don't really need, which they can do, even with a McJob, by using a credit card... hereby kicking the can into the future: a future with poorer paying jobs, less horizon, more need of credit to participate, with less chance of ever paying back the debts incurred.

To make underpaid workers buy things that objectively they don't need, an entire industry (marketing) exists to make them dissatisfied with what they already have. Perversely, unhappiness becomes a social good in such an economic arrangement. A thrifty person, content with his lot, who for thousands of years was seen, in all traditions, as a wise and sensible man; in this contemporary situation is seen as a public enemy to be "stimulated".

In a sense our entire "civilization" is sort of a universal "Ponzi scheme". If the wheel stops even for a moment it all comes tumbling down.

It's amazing that a structure this artificial, that fills so few truly human needs, has taken so long to nearly collapse. DS

Change... you mean spare change?

David Seaton's News Links
The USA has gone broke.

From personal experience, I know that one of the hardest realizations that people who have always had quite a lot of money can have, is to discover that they are flat broke.

I don't say "wake up" to discover, because waking up is instantaneous and the discovery that one's world no longer exists is a slow one. Sometimes it never fully sinks in.

Denial is a wide river that floods the valleys of the nouveau pauvre.

Martin Wolf, the chief economist of the Financial Times outlines the situation:

"The risks are indeed high and the ability of the authorities to deal with them more limited than most people hope. This is not to suggest that there are no ways out. Unfortunately, they are poisonous ones. In the last resort, governments resolve financial crises. This is an iron law. Rescues can occur via overt government assumption of bad debt, inflation, or both. Japan chose the first, much to the distaste of its ministry of finance. But Japan is a creditor country whose savers have complete confidence in the solvency of their government. The US, however, is a debtor. It must keep the trust of foreigners. Should it fail to do so, the inflationary solution becomes probable. This is quite enough to explain why gold costs $920 an ounce."

David Ignatius elaborates in the Washington Post

"The public, fortunately, doesn't understand how bad the situation is. If it did, we might have a real panic on our hands.(...) Do you want to know who is bailing out America's biggest banks and financial institutions from the consequences of their folly -- by acting as the lender of last resort and controller of the system? Why, it's the sovereign wealth funds, owned by such nations as China and the Persian Gulf oil producers. The new titans are coming to the rescue, if that's the right word for their mortgage on America's future."

I disagree with David Ignatius when he says, "The public, fortunately, doesn't understand how bad the situation is." I think that deep down, the public does understand only too well and a great many of them are in denial.

I believe this explains the Barack Obama phenomenon, where a hysterical, nationwide personality cult has grown up mushroom style around a person who has never really done anything: Jerzy Kosinski's fantasy made flesh, a blank sheet, who creates rhythmic ecstasy in his followers with words like "hope" and "change".

Nobody has much of an idea what he might stand for. When Obama supporter Susan Sarandon was asked about this she replied, “I can’t wait to see”.

We are speaking of denial: lets review the steps of the classic, Kübler-Ross "grief cycle".

1. Shock stage: Initial paralysis at hearing the bad news.
2. Denial stage: Trying to avoid the inevitable.
3. Anger stage: Frustrated outpouring of bottled-up emotion.
4. Bargaining stage: Seeking in vain for a way out.
5. Depression stage: Final realization of the inevitable.
6. Testing stage: Seeking realistic solutions.
7. Acceptance stage: Finally finding the way forward.

I think it is obvious that the eight long years of the Bush Restoration have been pure Kübler-Ross. Different parts of the American electorate are at different places on the cycle.

Some of us went directly from "shock" to "anger". Others, the Obamites, are stuck at step two with maybe a foot in four; those disposed to vote for either Hillary or McCain are either at step five or are dabbling in six or seven.

I think these months are going to go down in history as one of the most bizarre chapters of our amazing and original national experiment. DS

When backing Barack feels like joining a cult - Boston Herald
Abstract: I’m nervous because too many Obama-philes sound like Moonies, or Hare Krishnas, or the Hale-Bopp-Is-Coming-To-Get-Me nuts. These true believers “Obama-ize” everything. They speak Obama-ese. Knit for Obama. Run for Obama. Gamble - Hold ’Em Barack! - for Obama. They make Obama cakes, underwear, jewelry. They send Valentine cards reading, “I want to Barack your world!” At campaign rallies people scream, cry, even faint as Obama calmly calls for the EMTs. When supporters pant en masse, “I love you!” (like The Beatles, circa 1964), Barack says, “I love you back” with that deliciously charming, almost cocky smile. Oh - I’m nervous because it’s all gone to his head and he hasn’t even won yet. I’m nervous because it’s gone to a lot of other people’s heads as well. Maryland Congressman Elijah Cummings introduced Obama last week in Baltimore and said, “This is not a campaign for president of the United States, this is a movement to change the world.” “He walks into a room and you want to follow him somewhere, anywhere,” says George Clooney. “I’ll do whatever he says to do,” says actress Halle Berry. “I’ll collect paper cups off the ground to make his pathway clear.” I’m nervous because nobody’s quite sure what Obama stands for, even his supporters. (“I can’t wait to see,” said actress/activist Susan Sarandon, declaring full support nonetheless). I’m nervous because even his biggest fans can’t name Obama’s accomplishments, including Texas state Sen. Kirk Watson, an Obama-man who humiliated himself when MSNBC’s Chris Matthews asked him about five times to name something, anything, Obama’s done. Watson hemmed. Watson hawed. Watson gave up. I’m nervous because John McCain says Obama’s is “an eloquent but empty call for change” and in the wee, wee hours, a nagging voice whispers, suppose McCain’s right, too? Then what? READ IT ALL

Poof!

David Seaton's News Links
There is a wonderful saying in Spanish, "eramos pocos y parió la abuela", which translates literally as, "there were only a few of us and grandmother gave birth" and means, "it was the last straw". Obviously the English version gives none of the surreal exasperation of the Spanish original.

This saying comes to my mind constantly when I put the economic news alongside the geopolitical stuff. So many calamities taken all together become a thing to itself, the quantity turns into a quality, something called a "tipping point".

Tipping into what? That is the question. DS

Nouriel Roubini says:
I now see the risk of a severe and worsening liquidity and credit crunch leading to a generalized meltdown of the financial system of a severity and magnitude like we have never observed before. In this extreme scenario whose likelihood is increasing we could see a generalized run on some banks; and runs on a couple of weaker (non-bank) broker dealers that may go bankrupt with severe and systemic ripple effects on a mass of highly leveraged derivative instruments that will lead to a seizure of the derivatives markets (think of LTCM to the power of three); a collapse of the ABCP market and a disorderly collapse of the SIVs and conduits; massive losses on money market funds with a run on both those sponsored by banks and those not sponsored by banks (with the latter at even more severe risk as the recent effective bailout of the formers’ losses by theirs sponsoring banks is not available to those not being backed by banks); ever growing defaults and losses ($500 billion plus) in subprime, near prime and prime mortgages with severe known-on effect on the RMBS and CDOs market; massive losses in consumer credit (auto loans, credit cards); severe problems and losses in commercial real estate and related CMBS; the drying up of liquidity and credit in a variety of asset backed securities putting the entire model of securitization at risk; runs on hedge funds and other financial institutions that do not have access to the Fed’s lender of last resort support; a sharp increase in corporate defaults and credit spreads; and a massive process of re-intermediation into the banking system of activities that were until now altogether securitized. READ IT ALL