2009 and the Economy : Not So Good

'It is getting awful damn hard to be optimistic about the US economy these days. If the problem can be fixed at all, it will probably really require an unprecedented degree of global cooperation.'
By Roger Baker / The Rag Blog / January 2, 2009

Here are two interesting, widely read, and intelligent viewpoints regarding where the US economy is headed in 2009. I would advise that they be read in full. Reading Kunstler is like drinking fine champagne. Bottom line: It is getting awful damn hard to be optimistic about the US economy these days. If the problem can be fixed at all, it will probably really require an unprecedented degree of global cooperation.

First we have James Howard Kunstler, a widely read blogger and writer, who wrote the book "The Long Emergency" on the long-range nature of the current economic crisis. It should be noted that Kunstler successfully predicted the beginnings of the current economic crisis as being centered on energy problems back in early 2005; note this link.

Kunstler's crystal ball may thus be regarded as being admirably clear as judged by his track record. Plus his thinking is complemented with a wealth of detail. Following are a few snips from Kunstler's 2009 forecast (well worth reading in full, IMO).

Forecast for 2009

. . .Without reviewing all the vertiginous particulars of the year now ending, suffice it to say that the US economy fell on its ass and that the "global economy" did a face-plant as well. The American banking sector imploded spectacularly to the degree that investment banking actually went extinct -- as if a meteor landed on the corner of Madison Avenue and 51st Street. The response by our government was to shovel "loans" onto the loading dock of every organization that pretended to be something like a bank, while "bailing out" an ever-longer line of corporate claimants with a pitiable song-and-dance. The oil markets went on a roller coaster ride. The housing bubble collapse grew to avalanche velocity (taking out whole colonies of realtors, mortgage brokers, and construction contractors in its path), the commercial real estate sector developed hemorrhagic fever, retail drove off a cliff on Christmas Eve, the stock market fell in the toilet, jobs and incomes went up in a vapor, and tens of millions of ordinary citizens addicted to revolving credit found themselves in a life-and-death struggle for the means of existence.

None of this is over yet. . .

[. . . .]

Apart from "cleaning up Dodge," so to speak, and from issues of collective character-and conscience-in-office, I worry that the avalanche of troubles already ongoing will overwhelm Mr. Obama and his people .It's also well worth worrying whether they will pursue policies similar in kind to the ones pursued by Bush, namely throwing money at everything and anything, and it sure looks like they are planning to do just that. I am especially concerned about an "infrastructure stimulus" project aimed at highway improvement at the expense of public transit. This would be the epitome of a campaign to sustain the unsustainable. We need to begin planning right away for a transition away from automobiles, not in order be good socialists but because Happy Motoring is at the core of our unsustainability trap. The car system is going to fail in manifold ways whether we like it or not, and it will fail due to circumstances already underway. For one thing, it will cease to be democratic as the remnants of the middle class find it impossible to get car loans, or pay for fuel, or insurance, and that will set in motion a very impressive politics-of-grievance setting apart those who are still able to enjoy motoring and those who have been foreclosed from it. Contrary to what you might make of the current situation in the oil markets, we are in for a heap of trouble with both the price and supply of petroleum (more on this below). And there is no chance in hell that any techno rescue remedy to keep all the cars running by other means will materialize. . .

[. . . .]

[Regarding inflation] This is the "other shoe" that a lot of people are waiting to drop. Right now we are caught up in a compressive debt deflation as mortgages stop "performing" and loans of all kinds are welshed on. Since money is loaned into existence, and a great many loans are not being repaid, then a lot of money is going out of existence. That's what I mean when I say that capital is leaving the system. At the same time, the Federal Reserve has made good on its promise to drop money from helicopters if necessary to prevent an implosion of the banking system (as all that older money goes out of existence), and so it's now a question as to when the amount of new money will exceed the disappeared old money. (Of course when I say money, I mean "money," because we are dealing here in a shadow realm of assumed value.) In any case, there is bound to be a lag period between the time that the Fed's money is dropped from the choppers and the time it actually filters through the banks and other recipients to the so-called "real economy" of people who buy and sell real things. The credible estimates I hear run between six and 18 months.

I'll only venture to guess that we could see the start of serious inflation sometime in 2009. To some extent, all currencies are now free-falling together, some at slightly faster rates than others, but the situation of the US dollar is so grotesquely dire, and our structural imbalances so monumental, that it is hard to imagine that our currency will not win the international race to the bottom. Gold resumed its movement upward against the dollar a week before Christmas, and that may be an early sign. The government -- and anyone badly in debt -- benefits much more from inflation than deflation, so every effort will be made to avert the latter. The trouble lies in the government's dumb incapacity to control dangerous things that it sets in motion, so that an inflationary campaign to avoid compressive deflation can so easily lead to a fiasco of super or hyper inflation -- the kind that kills governments and turns societies into murderous monsters. I'll forecast the that the US dollar is worth 40 percent of its current value by next Christmas. . .

As a second example of judging where the US economy is headed, we have the following snips extracted from an article by Peter S. Goodman in the New York Times. The article notes with some alarm that the US government is printing, permitting, and spreading around gargantuan amounts of freshly generated cash and credit as an emergency measure, since the hundreds of billions of dollars in bank bailouts didn't have much effect in stopping and reversing the current deflationary spiral.

The Treasury Dept, in cooperation with the Federal Reserve, and many other top US government officials, is generating trillions in new money and credit, including lowering the prime interest rate to zero (the interest rate that the biggest banks have to pay on their federal loans). The theory, in accord with classic Keynesian theory, is that sooner or later, when everyone including the banks are waist-deep in cash, they will be in a mood to start spending it more freely again. Flooding the economy with lots of cash will no doubt get folks spending again at some point.

The downside is that whenever the psychology finally does turn around, it is likely to turn around rather suddenly and unpredictably. Whenever this happens, average cash-strapped consumers who are already strapped by credit card debt are likely to focus their spending on those consumer necessities that are already in short supply. Things like heating oil, gasoline, and food. Such vital necessity prices are likely to get bid up pretty fast. Meanwhile those investors who have extra cash, and with a sense of history, are more likely to spend it on bars of gold, rather than as previously on second homes in Palm Beach or trips to Las Vegas. The New York Times piece lacks the vigor and predictive clarity of Kunstler's predictions, but a lot of the message is the same.

Debt Sweat: Printing Money – and Its Price

. . .The value of outstanding American Treasury bills now reaches $10.6 trillion, a number sure to increase as dollars are spent building bridges, saving auto jobs and preventing the collapse of government-backed mortgage giants. Worry centers on the possibility that foreigners could come to doubt the American wherewithal to pay back such an extraordinary sum, prompting them to stop — or at least slow — their deposits of savings into the United States.

That could send the dollar plummeting, making imported goods more expensive for American consumers and businesses. It would force the Treasury to pay higher returns to find takers for its debt, increasing interest rates for home- and auto-buyers, for businesses and credit-card holders.

"We got into this mess to a considerable extent by overborrowing," said Martin N. Baily, a chairman of the Council of Economic Advisers under President Clinton and now a fellow at the Brookings Institution. "Now, we're saying, 'Well, O.K., let's just borrow a bunch more, and that will help us get out of this mess.' It's like a drunk who says, 'Give me a bottle of Scotch, and then I'll be O.K. and I won't have to drink anymore.' Eventually, we have to get off this binge of borrowing."

Some argue that the moment for sobriety is long overdue, and postponing it further only increases the ultimate costs. "Our government doesn't have enough spare cash to bail out a lemonade stand," declared Peter Schiff president of Euro Pacific Capital, a Connecticut-based trading house. "Our standard of living must decline to reflect years of reckless consumption and the disintegration of our industrial base. Only by swallowing this tough medicine now will our sick economy ever recover."

But most economists cast such thinking as recklessly extreme, akin to putting an obese person on a painful diet in the name of long-term health just as they are fighting off a potentially lethal infection. In the dominant view, now is no time for austerity — not with paychecks disappearing from the economy and gyrating markets wiping out retirement savings. Not with the financial system in virtual lockdown, and much of the world in a similar state of retrenchment, shrinking demand for American goods and services. . .

[. . . .]

. . .The most frequently voiced worry about the bailouts is that the Fed, by sending so much money sloshing through the system, risks generating a bad case of rising prices later on. That puts the onus on the Fed to reverse course and crimp economic activity by lifting interest rates and selling assets back to banks once growth resumes.

But finding the appropriate point to act tends to be more art than science. The Fed might move too early and send the economy back into a tailspin. It might wait too long and let too much money generate inflation.

"It's a tricky business," says Allan H. Meltzer, an economist at Carnegie Mellon University, and a former economic adviser to President Reagan. "There's no math model that tells us when to do it or how.". . .

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College: American Dream Evaporates, Item by Item

Bye Bye College Education: The Path to Upward Economic Mobility is Fading Away
By Joel Hirschhorn / December 12, 2008

Try to imagine just how much the cost of a college education has increased over the past 25 years. Take your time. Think in terms of how various kinds of things have increased in cost over this period, such as common foods and movie tickets, for example. Odds are that no matter how awful you think inflation has been you will never correctly guess how much a college education has increased in cost.

Are you ready for the ugly truth? The National Center for Public Policy and Higher Education has found that college tuition and fees have increased an amazing and appalling 439 percent over the past 25 years. And forecasts are that those costs will continue to increase rapidly.

One reaction to this fact might be that, as bad as it sounds, perhaps the incomes of American families have increased enough to offset this huge increase in the cost of a college education. Not so. Over this same period, median family income increased by just 147 percent. In other words, college education costs increased nearly three times faster than family income increased.

This explains why borrowing by students and families to cover college education costs has skyrocketed in recent years. And now comes the current economic meltdown. Paying off debts already incurred will be very, very difficult for incredible numbers of Americans. But even worse, in many respects, is that younger people looking forward to a college education may not be able to borrow enough for a college education and, therefore, face a very bleak future. Without affordable college education the path for economic success in America will fade away.

Even attendance at public universities and community colleges will become extremely difficult during what is predicted to be a long and brutal economic recession. All this bad news is the worst for families in the lowest income brackets. This means that economic inequality that is already a problem will only get worse, as poorer American families become increasingly unable to send their children to college. The old idea that college students can work to help pay for their college education also starts to unravel, because in these recessionary times it will be very difficult for students to get those jobs.

Clearly, there is only one possible but unlikely solution. The government could provide more direct financial assistance, not just loans, to help families afford college education. But in these dire fiscal times will the federal government bail out ordinary Americans they way it has been bailing out banks and all kinds of companies? Time will tell.

Source / Associated Content

Thanks to Joel Hirschhorn / The Rag Blog

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Bleak News on Employment Front : Jobless Rate Soars

Theodore Harmon, left, helps Solomon Boyd with a job application as the two look for work at the New York State Department of Labor office in Harlem. Photo by David Goldman / NYT.
Economist Jared Bernstein: 'Working families are in trouble'
By Michael M. Grynbaum

The unemployment rate jumped to 6.1 percent in August, its highest level in five years, pushing the job troubles of American workers onto the political stage as the presidential campaign enters its final eight weeks.

So far, 605,000 jobs have disappeared since the start of the year, with employers slashing 84,000 jobs in August alone, the Labor Department reported on Friday. And even Americans who are still employed are facing tough times.

Raises have not kept up with the rising cost of living, putting more pressure on workers as high gasoline and food prices curtail their spending power.

The bleak data, which came as the two presidential candidates began a two-month sprint to Election Day, clearly raised the challenge facing Senator John McCain, the Republican candidate. Economic downturns are almost always bad for the incumbent party. In 1980, when unemployment rose more than a percentage point during the year, and several months showed year-over-year declines, the incumbent, Jimmy Carter, lost. In 1992, jobs were down, although the unemployment rate did not rise that much, and President Bush lost his bid for re-election.

In a statement Friday, Mr. McCain said that “Washington has failed to act” to improve the poor economy.

“Americans are hurting and we must act to create jobs,” he said. He vowed to enact a jobs program and help retrain workers for the changing market.

While Mr. McCain has tried to distance himself from President Bush, Senator Barack Obama, the Democratic candidate, tried again Friday to link the Republican candidate to the current administration. Mr. Obama argued that his opponent was “intent on continuing the economic policies that just this year have caused the American economy to lose 605,000 jobs.”

“Today’s jobs report is a reminder of what’s at stake in this election,” Mr. Obama said in a statement.

The Obama campaign called on Congress, which returns next week, to enact another stimulus package, using the senator’s $100 billion proposal as a starting point.

An economic adviser for Mr. McCain, Douglas J. Holtz-Eakin, speaking for the campaign, said Congress should consider another short-term stimulus, but did not specify whether that should be more rebate checks or come in some other form, like tax cuts.

The unemployment rate, which rose from 5.7 percent in July and from 5 percent in April, is at its highest level since September 2003. While teenagers accounted for most of the earlier increase, the job losers in August were mostly over 25 and college educated as well as high school graduates.

“These numbers just cry out to me that the job market is in a recession,” Stuart Hoffman, the chief economist of PNC Bank, said.

Stocks on Wall Street fell after the release of the report, but the Dow Jones industrials recovered and was up slightly in afternoon trading.

Production workers in the manufacturing industry were hit hardest in August, with 61,000 workers losing their jobs. Nearly 60,000 administrative workers, including secretaries and temp workers, were laid off.

Gains came in the education and health care industries, which added a total of 55,000 jobs. But those were offset by broad job cuts at restaurants, auto dealers and factories that make parts for cars and other transportation equipment.

It was the eighth consecutive month that the economy has shed jobs, which is, historically, a symptom of recession.

Layoffs have picked up speed in the last three months, contrary to earlier estimates that they had begun to plateau. The government now says that 100,000 jobs were lost in June, double its original estimate.

“Working families are in trouble,” Jared Bernstein, an economist at the Economics Policy Institute in Washington and an adviser to Senator Obama, said. “This spike in the unemployment rate occurred exclusively among adults who are 25 and older. These are not teens; many of these folks depend on their jobs and their paychecks, and in this climate that means they’re suffering.”

Most workers are effectively earning less than they were a year ago. Hourly wages for rank-and-file workers — those not in supervisory or managerial positions — grew 3.6 percent between last month and August 2007. That was a faster growth rate than July, but below the rate of inflation.

The clear signs of pain in the labor market come as the economy continues to grow; between April and July, the economy expanded at a relatively brisk pace of 3.3 percent, according to the Commerce Department.

Businesses have been benefiting from high foreign demand for American-made goods, which has kept production high. But little of that activity, analysts said, has translated into assistance for the average American worker.

“Whatever is growing the economy, it’s not showing up in the jobs market in any way at all,” Mr. Bernstein said.

Companies may be terminating workers to cut costs in anticipation of tougher times ahead. Many analysts believe the global economy has entered a broad slowdown, which could depress export sales and put a dent into American business activity. Officials at the Federal Reserve believe activity will slow sharply for the rest of the year before returning to a faster growth rate in 2009.

The Labor Department’s jobs report is considered the most reliable snapshot of the nation’s economy in any given month. The unemployment rate is estimated by surveying thousands of households, while the data on job cuts is compiled from reports from employers.

Also on Friday, a new report showed that the outlook for the housing market remained troubling, though there are some early signs of improvement. The number of home loans in foreclosure jumped in the second quarter to another record but the percentage of borrowers who are starting to fall behind declined, according to data from the Mortgage Bankers Association.

[Louis Uchitelle contributed reporting.]

Source / New York Times

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ECONOMY : Trickle Down from the Bailouts

'The federal government is drowning in a sea of red ink'
By Roger Baker / The Rag Blog / August 19, 2008

Bernanke and his crew at the fed bailed out Bear Stearns at taxpayer expense because they feared not doing so would have caused a financial meltdown. There are many tens of trillions in financial derivatives that could quickly cause a panic and domino effect if they don't keep throwing money at the banks to back up these tangles of derivatives which guarantee bonds and that the US financial system is sound.

The banks they need to bail out to prevent a spreading panic keep getting smaller and smaller. Bailing out Fannie and Freddie is only a matter of time now. The federal government is drowning in a sea of red ink.

But meanwhile all that bailout money is leaking into the broader economy and driving up "core inflation", which in turn underestimates true inflation. When that happens, you lose money by holding bank deposits and treasury bonds and you have to raise interest rates, which then makes the derivative credibility problem worse. Things are unstable and could deteriorate pretty fast if the Chinese and Arabs and everyone start cashing in and dumping their dollars internationally. Get ready for more inflation, as Fisher of the fed is warning of now:

Fed's Fisher Says U.S. May Face `Lingering Inflationary Fever' / Bloomberg / August 19, 2008

Note from this last link that everything hinges on energy prices driving cost-push inflation moderating. If peak oil is real (which it is) then there is no way out; no amount of bailouts can paper over the reality all the trillions in derivatives that guarantee that the big corporations can repay their debts are as worthless as all the subprime loans that were involved in the first stage of the widening crisis.

See the following stories:

Bernanke Tries to Define What Institutions Fed Could Let Fail / Bloomberg / August 18, 2008

Large U.S. Banks May Fail Amid Recession, Rogoff Says / Bloomberg / August 19, 2008

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'The Fed's Next Move is Down'

Thomas Hobbes. Laying out the Hobbsian choice.

See "The Fed's next move is down" by John Browne below.

'The odds thus favor inflation to keep the party going'
By Roger Baker / The Rag Blog / August 8, 2008

This guy lays out the facts of the Hobbsian choice pretty clearly. When the ruling oligarchy of banks get in trouble, they have their puppets at the fed print up more money. The odds thus favor inflation to keep the party going rather than facing (immediately) the hangover of a deep depression.

Of course the same result could be achieved much more directly and honestly if the government would simply raise taxes enough to raise the cash to bail out the banks in a similar way.

But the obviousness of this redistribution of wealth to favor the banks would cause the public to rebel, so the fed chooses the sneaky route of concealed taxation through inflation to buy time.

The Fed's next move is down
By John Browne / August 8, 2008

The US Federal Reserve this week surprised no one by leaving its key rates unchanged and gave no indication that the committee was preparing to raise or lower rates any time in the foreseeable future. As always, the market reactions were much more interesting and unpredictable. In this case, bond markets barely changed, the US stock market jumped, and euro futures strengthened slightly against the US dollar.

Although few monetary hawks felt that there was any reasonable chance for an inflation-fighting rate hike this week, there was hope that lone dissenter on the rate-setting Federal Open Market Committee, Richard Fisher, would be joined by other committee members in voting against the current round of liquidity injections. No such luck there.

For now at least, Mr Fisher is still a one-man band. The rest of the committee still shows no stomach to really take on inflation (despite this week's alarming consumer price index report) and plenty of willingness to push back on the gathering recession. As a result, my feeling is that the next rate move will be down.

Last summer, I predicted on CNBC's Kudlow Show, that the Fed would lower rates from 5.25 to near 1.00% and that the US dollar would continue in relative decline. I was scoffed at and ridiculed. Well, I believe that the Fed statement indicates that rates will soon head south, towards 1.00% or even lower.

On July 3 this summer, I predicted, again on Kudlow's show, that oil would soon drop in price, due to demand destruction. Again, I was ridiculed. On the very next business day, oil began to fall. Two days later it reached the peak, from which it has since fallen dramatically as the recession of which I have long warned has become clearer.

I say these things not to boast, but to lend weight to my arguments and warning of impending hyper-stagflation. Facing the prospect of both inflation and recessionary forces, the Fed is boxed in.

As a student of the Great Depression, Bernanke has correctly, in my view, sensed that whereas inflation does the greatest long-term economic damage, it is recession that his political masters most fear. He is also aware that it was the raising of interest rates that turned the 1930 recession into the Great Depression of 1933, which lasted until World War II.

Depression, especially in a highly leveraged world that is accustomed to prosperity, would likely result in serious civil strife. Politically, it must be avoided no matter what the economic or financial costs. Despite "spin-talk" to the effect that the Fed is pursuing a dual mandate to both fight inflation and promote growth, in reality they are simply trying to promote growth pure and simple. This is the reality that few market analysts or journalists dare to mention.

With 5 million American homes vacant, the Big 3 auto giants heading towards bankruptcy and some US$4 trillion already wiped off of American home values, things look bad for American consumer demand. With consumer spending accounting for 72% of GDP, this should ensure recession. To try to change this outcome, the Fed stands ready to implement the most inflationary monetary policy in its history.

Looking ahead, Nouriel Roubini, the former Clinton White House economist, forecasts credit losses will amount to some $2 trillion. So, while the Fed has applied Band-Aids to the financial crisis, the evidence is that internally, financial institutions are still bleeding fast.

The latest fall in commodity prices has given Bernanke the wiggle room that he has hoped for desperately these past months. The pullback in oil and other commodities will give him the golden opportunity to lower interest rates further to avoid the looming recession from morphing into depression.

Investors should expect falling worldwide interest rates. Short-term government bonds in inherently strong currencies, like Swiss francs, remain attractive. As hyper-stagflation and acute financial stress becomes manifest, gold will likely rise significantly.

[John Browne is senior market strategist, Euro Pacific Capital. Euro Pacific Capital commentary and market news is available at www.eurpac.net It has a free on-line investment newsletter.]

Copyright 2008 Euro Pacific Capital.

Source / Asia Times

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Economy : Nearing a Tipping Point

Those Greenspan bubbles a'bursting...
By Roger Baker / The Rag Blog / July 16, 2008

It looks like the US economy has gotten itself into a 'liquidity trap'; the blowback from Greenspan's bubbles and banking deregulation.

If we try to avoid a deepening depression, the fed would normally try to inject enough liquidity by lowering interest rates to reflate the economy and stimulate spending, according to classic Keynesian principles. The income tax rebates were supposed to do the same thing, but were too little too late. But once the psychology of cutting back on the non-essential spending sector of the economy gets started, it tends to be reduce business profits for a large part of the total GNP and to become a self-reinforcing recession, depression, whatever.

Since the financial panic is centered in the finance industry, "Helicopter Ben" is trying to avoid bank runs by bailing out the big guys, including Freddie Mac and Fannie Mae. The unregulated hedge funds who have borrowed from the giant investment banks like JP Morgan have to get bailed out too as part of the same process.

But all the new dollars and taxpayer IOUs that Ben Bernanke uses to bail out the banks and their wealthy investors has to go somewhere. This liquidity would be stupid to go into parts of the consumer economy that are doing poorly, so it will go into the parts of the economy that have a solid spending base like food and oil and commodities. So the bailout dollars get recycled into bidding against the Chinese for a limited world supply of oil and all the fruits thereof, which naturally increases their price, which shows up as the inflation we see now.

But we are nearing a tipping point where T-note holders worldwide see how stupid it is to hold dollars that are losing value, due to inflation not paying as much as their T-note value, and so dump massive amounts of dollar liquidity into the international economy to buy Euros, gold, etc. So the dollar plunges and the cost of oil in dollars leaps upwards, raising the cost of nearly all necessary commodities. If you think inflation is bad now wait until the whole world dumps their dollars.

Its a new version of the stagflation of the oil crisis of the early 1970s and 1980s. Then economic shock therapy by Paul Volker plus Arab oil led to recovery, but this time things look a lot more serious because the economy is so highly-leveraged so that a lot of banking debt on the books is worthless and also because there is no more cheap oil to hold down commodity prices that depend on an oil-addictive economy designed to benefit financial interests with the short range investment focus that flourished under Greenspan's watch

U.S. economy: Consumer prices up 5% to 17-year high
By Shobhana Chandra and Timothy R. Homa / July 16, 2008

U.S. consumer prices surged 5 percent in the past year, the biggest jump since 1991, just as households struggled with falling home values and the credit crunch.

Spiraling expenses for food and fuel spurred the increase in June, the Labor Department said today in Washington. The cost of living rose 1.1 percent from May, more than forecast and the second-largest rise since 1982. Separate figures showed industrial production rose more than estimated because of the end of a strike at American Axle & Manufacturing Holdings Inc. and increased electricity output.

Price gains accelerated last month even after stripping out energy and food, underscoring the challenge for Federal Reserve Chairman Ben S. Bernanke as he attempts to steer the economy through the slowdown and credit crisis. Treasuries fell.

"This is a problem for the economy; it's even worse for the Fed," said Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania.

"Inflation numbers are high enough that under different circumstances the Fed would be hiking rates."

Excluding food and energy, so-called core costs climbed 0.3 percent in June from the previous month and 2.4 percent from a year before.

Yields Jump

Benchmark 10-year note yields rose to 3.93 percent at 4:20 p.m. in New York, from 3.82 percent late yesterday. The Standard & Poor's 500 Stock Index advanced 2.5 percent to close at 1,245.36, after earnings from Wells Fargo & Co. topped analysts' estimates.

Consumer prices were forecast to rise 0.7 percent, according to the median estimate of 79 economists in a Bloomberg News survey. Projections ranged from gains of 0.2 percent to 1.1 percent. Costs excluding food and energy were forecast to rise 0.2 percent, the survey showed.

Bernanke told lawmakers in semiannual testimony on the economy yesterday and today that inflation risks have "intensified." At the same time, he dropped his June assessment that risks to the economic expansion had diminished, indicating policy makers aren't ready to raise interest rates to contain expenses.

"We don't think they're going to raise rates now -- until June next year now is our forecast -- until basically the economy starts to get some footing," Beth Ann Bovino, senior economist at Standard & Poor's in New York, said in an interview with Bloomberg Radio. "Right now the beast is what's going to happen with the economy."

Exceeding Forecasts

Prices were forecast to climb 4.5 percent in June from a year earlier, according to the survey median.

A separate report today said confidence among U.S. homebuilders dropped to 16 this month, a record low. Readings for current sales, expected sales and buyer traffic in the National Association of Homebuilders/Wells Fargo sentiment index also were at all-time lows.

``The magnitude of the housing bubble was unprecedented, and the corrective process promises to be a long and painful one,'' Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York, said in a note to clients.

The Fed said today that production at factories, mines and utilities increased 0.5 percent last month after dropping 0.2 percent in May. Capacity utilization, which measures the proportion of plants in use, rose to 79.9 percent from 79.6 percent.

Strike's Resolution

The resolution of a three-month strike by General Motors Corp.'s largest axle supplier, American Axle, probably helped lift auto output. Excluding autos, factory output fell 0.1 percent for a second month.

Wholesale costs rose 1.8 percent in June, the most in seven months, the Labor Department reported yesterday. From a year ago, prices climbed 9.2 percent, the biggest surge since 1981.

Companies, unable to fully recover ballooning raw-material costs by raising prices, have cut staff and reduced equipment purchases as profits shrink.

Kimberly-Clark Corp., the maker of Huggies diapers and Scott paper towels, said earnings for this year will trail its previous forecast as expenses rise more than twice as fast as predicted,

"Inflation has outpaced our ability to offset higher costs in the near term through price increases, cost reductions and other measures," Thomas Falk, the Dallas-based company's chief executive officer, said this week in a statement.

Price Increase

Procter & Gamble Co., the maker of Tide detergent and Head & Shoulders shampoo, last week said it'll raise prices as much as 16 percent due to higher costs for plastic, energy and paper. The increases start in September and are the Cincinnati-based company's steepest in at least 18 months.

Energy expenses jumped 6.6 percent, the biggest gain since November. Gasoline soared 10.1 percent and fuel oil jumped 10.4 percent.

The cost of fuel will continue stoking price pressures. Crude oil futures reached a record $147.27 a barrel on July 11 and have risen almost 90 percent in the past year. Regular gasoline, which topped $4 a gallon for the first time in June, kept rising this month, AAA figures show.

The consumer price index is Labor's broadest gauge of costs. Almost 60 percent of the CPI covers prices consumers pay for services ranging from medical visits to airline fares and movie tickets.

Food Expenses

Food prices, which account for about a fifth of the CPI, increased 0.8 percent, driven by the biggest gain in the cost of vegetables in almost four years.

The report showed that food and fuel weren't the only items on the rise. Costs for airline fares jumped 4.5 percent, the most since 2001.

Rents which, make up almost 40 percent of the core CPI, also accelerated. A category designed to track rental prices rose 0.3 percent after a 0.1 percent gain in May.

Today's figures also showed wages decreased 0.9 percent in June after adjusting for inflation, the biggest drop since September 2005, and were down 2.4 percent over the last 12 months. The decline in buying power is one reason economists forecast consumer spending will slow.

Americans trimmed purchases of automobiles, furniture and restaurant meals last month as the cost of gasoline soared, a Commerce Department report showed yesterday.
Retail sales rose 0.1 percent, less than forecast, a sign the boost from the tax rebate checks is already fading.

Source. / Bloomberg

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Brother, Can You Spare a Euro?

The U.S. dollar has been declining steadily for six years against other major currencies, undercutting its role as the leading international banking currency. (Photo by Michael Probst / AP.
The buck doesn't stop here; it just keeps falling
By Tom Raum / July 6, 2008

WASHINGTON — Things in the U.S. sure are tough. Brother, can you spare a euro?

Signs saying "We accept euros" are cropping up in the windows of some Manhattan retailers. A Belgium company is trying to gobble up St. Louis-based Anheuser-Busch, the nation's largest brewer and iconic Super Bowl advertiser.

The almighty dollar is mighty no more. It has been declining steadily for six years against other major currencies, undercutting its role as the leading international banking currency. The long slide is fanning inflation at home and playing a major role in the run-up of oil and gasoline prices everywhere.

Vacationing Europeans are finding bargains in the U.S., while Americans in Paris and other world capitals are being clobbered by sky-high tabs for hotels, travel and even sidewalk cafes. Northern border-city Americans who once flocked into Canada for shopping deals are staying home; it's the Canadians flocking here now.

Everything made in America — from goods to entire companies — is near dirt cheap to many foreigners. Meanwhile, American consumers, both those who travel and those who stay at home, are seeing big price increases in energy, food and imported goods. The dollar has lost roughly a quarter of its purchasing power against the currencies of major U.S. trading partners from its peak in 2002.

Since oil is bought and sold in dollars worldwide, the devalued dollar has made the recent surge in energy prices even worse for Americans, leading to $4 gasoline in the United States. Analysts suggest that of the $140 a barrel that oil fetches globally, some $25 may be due to the devalued dollar.

Further declines in the dollar will add to oil's appeal as a commodity to be traded.

Oil, suggests influential energy consultant Daniel Yergin, is "the new gold."

The limp greenback has had one big benefit to the U.S. economy: Since it makes American goods cheaper overseas, it has helped manufacturers who export and other U.S. based companies with international reach. Exports have been one of the few bright spots in an otherwise darkening U.S. economy.

Franklin Vargo, vice president of international economic affairs at the National Association of Manufacturers, welcomes the dollar slide, as do members of his organization.

"We can see that, when the dollar's not overpriced, that people around the world want American goods and our exports are going gangbusters now," he said.

He doesn't see the dollar as undervalued. He sees it as having being overpriced in the 1990s — and what's happened since as something along the lines of a correction.

Still, Vargo acknowledges the dollar's decline has brought a measure of pain to some consumers. "As the dollar has gone down in value, that has added to the dollar cost of oil. No question. So having the dollar decline is not unambiguously a plus. That's why we say there's got to be a balance there somewhere. What we want is a Goldilocks dollar. Not too strong, not too weak. But just right. And only the market can determine that," Vargo said.

Mark Zandi, chief economist at Moody's Economy.com, said expanding exports due to a weak dollar are "an important source of growth, but it doesn't add a lot to jobs, it doesn't mean very much for the average American household. For the average American, for the average consumer, these are pretty tough times."

The loss of the dollar's purchasing power and international respect has some experts worrying that the euro might one day replace the dollar as the so-called primary reserve currency. And that could trigger a dollar rout as foreign governments and international investors flee from U.S. Treasury bonds and other dollar-denominated investments.

Making matters worse: The gaping U.S. current-account deficit — the amount by which the value of goods, services and investments bought in the U.S. from overseas exceeds the amount the U.S. sells abroad — and the low levels of domestic savings means that foreigners must purchase more than $3 billion every business day to fund the imbalance.

Since roughly half of the nation's nearly $10 trillion national debt is held by foreigners, mostly in Treasury bills and bonds, such a withdrawal could have enormous consequences.

Yet Washington finds its options limited.

President Bush asserts longtime support for a "strong" dollar, and made that point again Sunday in a news conference in Japan with Prime Minister Yasuo Fukuda. "In terms of the dollar, the United States strongly believes — believes in a strong dollar policy and believes that the strength of our economy will be reflected in the dollar."

But not once in his presidency has the U.S bought dollars on foreign exchange markets — called intervention — to help prop up the greenback. There's no telling where the buck will stop these days, although for the past few weeks it seems to be in a holding pattern. Even as three Bush Treasury secretaries in a row spouted the strong-dollar mantra, the dollar kept tumbling against the euro, the pound, the yen, the Canadian dollar and most other major currencies.

The Federal Reserve could prop up the dollar by increasing interest rates under its control. Increased yields would make dollar-denominated investments more attractive to foreigners. But that could undercut the already anemic economic growth in a frail U.S. economy rocked by soaring fuel costs, falling home prices and rising unemployment — and the lowest reading of consumer confidence in 16 years.

The Fed must do a balancing act between keeping the domestic economy from going into recession and keeping inflation at bay.

Furthermore, no Fed likes to raise rates aggressively in a presidential election year. It seems more inclined to hold interest rates low for now to give financial markets time to recover from the housing meltdown and credit crunch. It did just that in its meeting on June 25, leaving a key short-term rate at 2 percent. The rate reached that level in April after a series of aggressive cuts that brought it down 3.25 percentage points since September. Those cuts helped ease the housing and credit crises — but drove the dollar further down.

In early June, Bush declared before his trip to Europe: "A strong dollar is in our nation's interests. It is in the interests of the global economy." That, plus a warning by Fed Chairman Ben Bernanke that the dollar's weakness was contributing to U.S. inflation, seemed to temporarily break the dollar's tumble. Presidents and Fed chairmen don't usually talk directly about the dollar and exchange rates — leaving that up to the Treasury secretary — and international bankers and investors took note of the high-level attention.

Over the past few weeks, the dollar has remained relatively stable, although it took a dip after the Fed decided to leave rates unchanged. The long slide may not be over.

Still, if the Fed moves to lift rates later this year, as some traders and investors anticipate, it could buttress the dollar and spur an exodus of speculators from the oil market — helping to both prop up the dollar and drive down oil prices. But few economists are sanguine that the economy will improve any time soon.

The other main tool to move the dollar — intervention in currency markets by buying dollars and selling other currencies — is risky.

It would take great sums of money to make any difference. The foreign exchange market is the largest in the world, with over $1 trillion traded each day. Seeing the U.S. trying to prop up the greenback by buying dollars could be taken as a sign of desperation and possibly trigger a renewed round of selling.

Furthermore, there has been little encouragement for such a strategy from finance ministers from the Group of Eight wealthy democracies — Japan, Britain, Germany, France, Italy, Canada and Russia plus the U.S.

Leaders of the eight countries were to meet in Japan beginning Monday, but the falling dollar was not even on the formal agenda. It's too touchy an issue, and the dollar's relative stability over the past few weeks makes it easier for world leaders to steer clear. "People will be talking about it in the corridors," said Reginald Dale, a senior fellow with the Center for Strategic and International Studies.

Treasury Secretary Henry Paulson has suggested that nothing is "off the table" including intervention. But Bush has made statements suggesting he intends to let market forces set exchange rates.

The dollar has fallen so far, it will be difficult to halt or reverse its slide.

U.S. efforts to persuade Saudi Arabia and other major oil-producing nations to increase their production — and help ease pressure on both oil prices and the dollar — have brought scant results.

"There's no magic wand," said White House press secretary Dana Perino. "It's not going to be a problem that we solve overnight."

The impact of the falling dollar is not always visible to the average consumer. Not like the big numbers on gas pumps that give stark evidence of price levels.

But imported goods, from fuel to cars from Japanese automakers and toys from China — are getting more expensive just as U.S. wages are either stagnant or falling.

American companies suddenly look cheap to acquisition-minded foreigners, particularly those based in Europe.

Belgian-based InBev's hostile bid for Anheuser-Busch is a recent example. It has bid $46 billion to acquire the company — a 30 percent premium above where Anheuser's shares traded before the June 11 proposal.

A successful acquisition by InBev would put the last remaining mass-market American brewer in foreign hands. InBev is based in Belgium but run by Brazilians. Anheuser-Busch, which brews both Budweiser and Bud light, holds a 48.5 percent share of U.S. beer sales. Anheuser-Busch rejected InBev's bid, but the Belgian brewer forged ahead, seeking to unseat Anheuser's 13-member board and take its offer directly to shareholders.

If the takeover goes through, it might open the floodgates to other foreign takeovers of American companies.

Some of the dollar's decline depends on hard-to-measure factors, like the psychology of foreign investors.

When the U.S. economy is weakening, many investors stay away. The slide of the dollar has coincided with a long period of relatively low interest rates.

And some of the decline in the dollar's global role "is due to the foreign policy failures of the Bush administration, not just to recent economic developments and policies," suggests Adam S. Posen, deputy director of the Peterson Institute for International Economics and a former economist at the Federal Reserve Bank of New York. In other words, some international investors unhappy with Bush's policy on Iraq or toward other parts of the world might not wish to invest in American companies or buy U.S. bonds.

Still, he argues that the euro is unlikely to replace the dollar as the world's main reserve currency, and that the euro may be at "a temporary peak of influence."

David Wyss, chief economist at Standard & Poor's in New York, says he envisions a day when the dollar and the euro will share billing as the world's reserve currencies.

He predicts that the dollar will remain roughly at its present levels "for a couple years." Still, he says, "We might not be done with this down leg."

Another big problem for the dollar is that the European Central Bank is likely to hike rates while the Federal Reserve stands pat, giving euro-based investments a bigger yield advantage.

"I could see more downward pressure on the dollar, over the course of the summer, not dramatically, if the ECB does raise rates," said Robert Dye, an economist with PNC Financial Services Group. "If it is one and done, pressure will be minimal. But if it's an ongoing pattern of rate increases, there will be more substantial pressure."

A euro now buys as much as $1.55 in the United States.

The dollar has been the leading international currency for as long as most people can remember. But its dominant role can no longer be taken for granted.

Paul Volcker, who headed the Federal Reserve from 1979-87, warned in April that the nation was in a dollar crisis, and that what is happening now reminds him of the early 1970s, when serious inflation erupted as economic growth stagnated.

Then, as now, a weak economy limited the Fed's options. The result was a spiral of rising prices and wages — until the Fed, led by Volcker, suppressed double-digit inflation with huge interest rate increases that pushed the economy into a steep recession in 1982. He recently criticized the current Fed as defending the economy and the market, instead of defending the dollar. Volcker said that will make defending the greenback much harder later.

Energy consultant Yergin, chairman of Cambridge Energy Research Associates, recently told the House-Senate Joint Economic Committee that oil had become "the new gold."

"Oil has become a storehouse of value — reflecting broad global economic trends and imbalances. At the same time, oil is increasingly seen as an asset by financial investors, an uncorrelated alternative to equities, bonds, and real estate," he said.

When the credit crisis broke last summer, the result was a sharp reduction in interest rates by the Fed. That, in turn, accelerated the fall of the dollar.

"Instead of the traditional `flight to the dollar' during a time of instability, there has been a `flight to commodities' in search of stability during a time of currency instability and a falling dollar," Yergin said. "There's a painful irony here: The crisis that started in the subprime market in the United States has traveled around the world and, through the medium of a weaker dollar, has come back home to Americans in terms of higher prices at the pump."

Source. / AP / Google News

Thanks to Jim Baldauf / The Rag Blog

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