America's Race to the Bottom

Our collective fate was sealed in an after hours senate session in 1913.

"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation the banks and corporations that grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered." - Thomas Jefferson

Anyone who cares to have a historical insight would do well to read Jackson's farewell address:

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He was the last president who really fought for the country economically, the way the Founders and Framers intended.

"The real truth of the matter is, as you and I know, that a financial element in the large centers has owned the government of the U.S. since the days of Andrew Jackson. History depicts Andrew Jackson as the last truly honorable and incorruptible American president." - Franklin D. Roosevelt

 

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"... The yields on long-term U.S. Treasurys, such as the benchmark 10-year bond, have tumbled sharply over the last six weeks, hitting as low as 3.1% in early trading Friday before they rebounded to 3.2% late in the day. Some experts say this is a sign a lot of major investors are betting on tough times ahead.

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"There is big money making big bets that at a minimum we we'll have a recession if not a depression* that could last for years," said Kevin Giddis, managing director of fixed income at Morgan Keegan. "It's a scary scenario to subscribe to, but that's the current one being batted around."

From: http://money.cnn.com/2010/05/21/news/economy/bonds_warning/index.htm

PS when the current crisis is over, and the bond vigilantes arrive in DC, the yields will go back up quickly as the "flight to safety" ends. Probably then the rating agencies will drop the fiction that US debt is AAA. Gold and other commodities will soar in dollar terms but not much in real terms.

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* Some are now saying what I predicted ~ 4 years ago. I.e. now using the "D word."

 

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Updating post 108:

In 2010, 78 US banks have failed* as of 28May2010, which is day 151of 2010. (31+31+ 31+ 30+ 28 = 151). Thus 78/151 = 0.516 failures per calendar day. A linear projection in 365 days of 188.5 failures in 2010. That is well above my prediction of 156 and a great acceleration from post 108’s extrapolation of 155 failures in 2010. Also note that 78 failures is exactly half of my prediction for the full year, but the half year point is at the end of June, more than a month away still.

SUMMARY: Things are bad for banks and getting worse.

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*Data from: http://www.bloomberg.com/apps/news?pid=20601087&sid=aHUA0KvvHCRw&pos=5

 

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"... Jobs gains were primarily Census-related. Nonfarm payrolls rose by 431,000 jobs in May, short of the Bloomberg estimate of a 536,000 increase in jobs, and April and March were revised 22,000 lower, while excluding government hiring, private sector payrolls grew by a mere 41,000, versus the forecast of a gain of 180,000, and after expanding by a downwardly revised 218,000 in April. The unemployment rate fell to 9.7% from 9.9%, as the labor force contracted by 322,000 in the month, while the expectation was for it to come in at 9.8%. Average hourly earnings rose 0.3% versus the Street's forecast of a 0.1% increase, while average weekly hours ticked higher to 34.2, versus the forecast to remain flat at 34.1. Government payrolls rose as Census hiring added 411,000 temporary workers. ..."

From C. Schwab's morning letter today.

 

Up dating post 123:
83 banks now failed. That is 5 more in last three weeks - Rate of failures still accelerating.

"U.S. regulators on Friday shuttered Reno, Nevada-based Nevada Security Bank, pushing up U.S. bank failures to 83 so far in 2010. This compares with a total number of 140 bank failures in 2009, 25 in 2008 and only 3 in 2007. Although the economy is showing signs of a gradual recovery with the stabilization of large financial institutions, tumbling home prices, soaring loan defaults and a high unemployment rate continue to impact small banks. ..."

From: http://www.zacks.com/stock/news/35831/U.S. Bank Failures Rise to 83

 

US badly needs to invest in its infrastructure, as China is doing:

"... According to the US Dept of Energy, the average US power facility was built in the 1960s using technology developed in the 1940s and 1950s. Substation transformers are 50 years old on average, more than a decade past their expected life span. Meanwhile, US electricity demand has grown more than 25 percent over the past two decades.

Wide-scale implementation of alternative energy would require a massive upgrade to our nation’s energy infrastructure. Already, power outages cost the US $150 billion a year in lost productivity, and outages are up 41 percent over the past five years.

For alternative energy to make a meaningful contribution to the US consumption mix, huge installations would need to be built in remote areas of the country. That, in turn, would necessitate the construction of a huge number of transmission lines and substations to deliver the energy to urban consumers.

And the US power grid actually comprises three separate grids with surprisingly few interconnections. Although electricity can cross between grids, just a few strategically located outages can wreak havoc--recall the Great Northeast Blackout of 2003. In its investigation of this outage, the US-Canada Power System Outage Task Force found that overgrown tree limbs brought down more than 250 power plants in just a few hours. ..."

Quote from Email to me From: ETF Weekly <postoffice@kci-com.com>

Billy T comment:
China is building many modern nuclear power plants - a new one coming on line at least every month! It is also building "supper heated steam" coal fired plants which get almost 50% more power from same amount of coal. I think the average age of China's power transformers is about 5, not 50, years old.* Every few months a major dam in the US fails - last month a big one in Iowa made TV news in Brazil. US infrastructure is in near state of collapse and little is being done about it as benefits do not appear before the next election. China is lead by engineers, not lawyers, and works from 10 five year plans. China is signing long term (30 year) contract for the energy and minerals it will need years from now. (Just today signed one for developing large iron ore reserve in Ginia, Africa.)

*I think this because I happen to own stock in Chinese company Jinpan (www.jstusa.com) which makes world's best high voltage transformers, especially for remote PV and wind instillations as they are resin, not oil, filed so never require any maintaince, even to check for oil leaks. They export a lot too but mainly serve China's growing domestic power system including new high rise buildings etc. as "step down" transformers. China's electric grid is better than the US's and they are building a "smart grid", not just talking about it.

 

See photos of 8 condos on market for less than many new cars at:
http://money.cnn.com/galleries/2010/real_estate/1007/gallery.condos_for_less_than_cars/index.html
Here is the first ($25,000 & 770 Sq.Ft in Dear Park, Florida):

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It's just north of Fort Lauderdale on the Atlantic Coast and less than an hour from the attractions of Miami.

They are small (600 to 900 square feet) nice looking often with private to group pools etc. except those in more northern states. One has price only $3000 more than it sold for 26 years ago! Some have association restrictions against renting so that lowers the price.

Viewing these 8 will help you understand what a great collapse in home values has occurred, especially considering these are in the "down sizing" price range many with foreclosed bigger homes are forced into now - I.e. the greater demand price range.

You might as well face the reality - neither jobs nor home prices will return to pre-crisis levels. GWB's depression is coming.
I continue to predict it will quickly follow a run on the dollar, which will happen no later than Halloween 2014.

 

Although GWB gets all the "credit" for the coming depression for reason I have described many times it is interesting to see / understand some of the detailed forces driving it forward now:

Potential home buyers are delaying their purchase, not only because they expect they can buy the same house cheaper next year, much cheaper if it goes to foreclosure, but also are delaying buying as mortgage fiance rates are steadily and significantly dropping:

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Bernanke and others fear the US economy is on the verge of a Japanese style deflation and homes have been in one for several years. The number of underwater owners who turn their keys over to the bank is increasing. That with the foreclosures is driving prices down as banks are not in the business of trying to rent homes - they dump them at less than the remaining mortgage balance, just to raise cash, which they rarely lend out. Instead they buy "safe" Treasury bonds. This is driving the yields on bonds to historic lows and tomorrow, the FED will announce that it is starting to buy treasury bonds too to pump out more money into the financial system. (FED preferrs to call that "quantative easing" but by any name it is still "printing press money.")

The trouble is that with many more jobs lost than created each month, the banks don't think lending money to people who need it is a good risk, so the banks take this newly made printing press money and buy Treasury paper with it. It is an accelerating downward spiral: Treasury prints bonds which the FED buys with printing press money and also creates new funds in the major banks (quantative easing) which also is used mainly to buy treasury bonds.

China once financed the US deficits but has been scared by all this so is actually reducing its holding of treasury paper. Now Americans, also scared, are financing some of the deficit (saving rate is now 6.4%) but mainly the deficit is being financed by the printing press. This increase in "paper wealth" is trying in Keysenian style to compensated for the reduced spending of Joe American and the negative "wealth effect" as he watches the value of his home drop. It is scary and the more paper money is made, the more of it joe will be save (in banks, etc. and thus be returned to the Treasury.) Thus the economy is not be protected from going into deflation as the new "quantative easing" money is mainly just bouncing back to the treasury. With deflation in the general economy, not only will people delay buying houses, but will delay buying everything they can. More jobs will be lost etc.

If you think there is no way out of this trap, you are right. The dollar will collapse and the depression in US & EU will quickly follow. This post has been a discussion of some of the mechanistic details leading to the depression, but without going into the mechanisms, you could predict a depression was coming back when GWB was still POTUS. - I did and posted that prediction back then.

 

Banks are sitting on a lot of homes and just leaving them empty. I don't know how long banks can afford to pay the taxes and maintain the homes but it may be for quite a while.

I have backed off on the dollar collapse and Depression happening soon because it is already twenty years late. Apparently an economy can run on delusions for a very long time. Based on fundamentals you could predict the depression you are waiting for back in the time of Clinton and the first Bush Presidency.

Every decade brings more outsourcing and the USA's economy gets more hollow every year. If this is China's way of fighting a war against the USA then China is brilliant but I think the Chinese leaders are every bit as in the dark about the long term implications of basic economics as the American leaders are.

The Japanese deflation phase lasted a long time and may not be over.

 

I don't have any numbers on that, do you? I can understand that a bank might want to falsely carry the under water home on books at the mortgage balance value rather than put a loss on it books by selling it at greatly depressed price. I am not sure to what extent this false accounting is legal or if some "mark to market" law applies.

On (1) I dis agree because GWB fundamentally changed the US economy and its future obligations and opportunities in ways no prior president has.

He started two needless (Iraq had nothing to do with9/11, but had oil) and I think un-winnable wars with huge and continuing cost to the US. Clinton started none.

GWB caused, for the first time in US history, I think, a net decrease in the average salary. Certainly there have been times, like the great depression, when total of all salaries decrease. I speak of the average salary's purchasing power being lower when GWB left office than when he entered. That is very hard on an economy that is 2/3 consumer based.

GWB reduced taxes on the wealthy instead of the poor who would spend the extra money on consumption in the US. The wealthy in contrast invested their extra money where the GDP growth rate was ~4 times greater than in the US. I.e. they built modern, efficient factories in China. (I have mention Buffet's 10% ownership of BYD motors as one example. Those GWB tax relief funded factories will be more competitive than the US's even when GWB is dead - he make a long lasting and fundamental change to the US economy.) Under Clinton and prior presidents, with few if any exceptions, the most profitable place in the world to invest was the richest nation of the world as its worker had more real purchasing power each year (prior to GWB).

Because GWB reduced real purchasing power and the wealthy's "trickle down" tax relief funds were going to China, many US factories started to close (and still are) or out source jobs to stay competitive. Under Clinton a net of a 24 million jobs were created but un GWB less than 4 million were and many that were created were making things just to be destroyed, like bombs for his wars. Just to say even with the growing labor force the US need about 20 million jobs created in eight years, so GWB handed Obama a 16 million job deficit even though GWB got a 4 million more than needed job increase from Clinton.

There are other difference between GWB & Clinton related to how much the debt increased (Clinton ran surpluses at least one year) but just looking at the debt changes during the term of any administration is not very meaning full. The debt burden on the US due to GWB's decisions is still very large and still increasing as Obama has not been able to end GWB's wars nor fill the 16 million job hole deficit GWB gave him. Thus war and unemployment etc. aid remains costly but it should, IMHO, be charged as part of the deficit GWB created.

The US may have had some economic problem under Clinton (and prior presidents) but they were nothing that the US could not cope with. The problems GWB created and left behind are lethal. I expect they will destroy the dollar during the year after Obama's first term ends.

Briefly on (2): Yes the US has always outsourced some jobs. (For example 100 years ago, Noway and Iceland caught most of the Cod fish eaten in the US, I think). But untul GWB, EVERY US president (actually the well run US economy) made many more new jobs in the US than were out sourced.
GWB's only significant production of jobs was via his tax relief for the already wealthy and those jobs were in China for Chinese workers.

Further more, GWB's SEC et.al. agencies were restrained from doing their regulatory jobs. To mention just one example, lesser known than Bernie Maddoff, Barr Pharm invented the "plan B" morning after pill and ALL scientific reviews of it show it was safe and effective, but the religious right supporter of GWB did not want it on the market, so GWB's FDA keep asking for more support data, more reviews, etc and delayed it more than three years due to political pressure from GWB (or his staff)

SUMMARY: The US was blessed to have WWII greatly increase (instead of destroy) its productive capacity. Its people are by nature optimistic productive and willing to work long hours. (They get half the vacation time of workers in most developed nations). It can and has survived some terrible stresses, but GWB has destroyed it like no prior president could.

 

IIRC real median takehome hourly wages in the US have been flat or dropping since Reagan's first tax cuts.

The reason this matters, is that it is politically crucial to get across the fact that W's administration - its ideology, policies, programs, public relations, political strategy, even specific people - was merely an extension of Reagan's. He wasn't a new and strange phenomenon, or a break in a trend - he was the direct continuation of a change in governance already a generation in progress.

It took thirty years, not eight, for those people to succeed in revoking the New Deal, and wreck the US economy.

 

Below are the facts, unfortunately in decade intervals. There is a decrease in salary purchasing power ONLY when the increase in the "Prices column" is greater than the increase in the "Wages column."

On a decade average that only happen between 1980 & 1990; but note the there was a huge gain in purchasing power the prior decade. Thus the first years of the 1980s very likely continued to show real gains in purchasing power.

Reagan came into office in 1981 then GWH Bush was POTUS until start of 1993, so you are correct - it seems Reagan's tax relief for the wealthy decreased Joe American's purchasing power even more than GWB did (most of which were losses in his last three years but chart stops in 2006). I appear to be correct that wages have always (prior to Reagan) increased fast than prices. I did not realize that the Republicans Reagan+GHW Bush did so much damage to the purchasing power of Joe American's salary.

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From: http://www.freemoneyfinance.com/2008/04/purchasing-powe.html Possibly you can find data by presidential terms?

 

What if the truth is we've been buggering up the economy for so many decades that there is nothing anyone can do except conquer Iraq and steal it's oil resources? Maybe Bush Jr. was doing what he thought was the only way he could "save" the American Way of Life (not sure if it's worth saving but you get the point). Of course things didn't turn out as planned BUT maybe his intentions were somewhat sound?

Or not, but, we all know the Iraq Wars I and II were all about our absolute dependence on foreign oil.

 

I started a new thread on this topic.
http://www.sciforums.com/showthread.php?p=2601500#post2601500

Officially the banks owned about 600,000 homes that they were not trying to sell in 2009. Unofficially the number is higher especially when you add in homes that the banks could foreclose on but choose to wait and foreclose on later.

 

Also Clinton cooked the books on inflation. I believe Shadowstats and do not believe the BLS. Also I think inflation has been higher for lower income people than for wealthier people. Different economic classes and ages of people buy different sorts of things.

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Chart above is from http://www.shadowstats.com/alternate_data/inflation-charts

Using the Shadowstats chart for inflation and the freemoneyfinance chart for wages, inflation adjusted wages declined under Clinton and Bush junior as well as under Reagan. Wages is not the same as income.

Wealthier Americans have kept ahead of inflation but nobody knows what the multiplier effect of all the foreign loans the USA receives is so nobody knows how badly even the wealthier Americans would be doing if that foreign lending stopped.


I wonder how the BLS handles the loss of medical insurance as a benefit at the lower incomes. Even though medical costs are going up faster than inflation lower income people maybe spending less on doctors when employer provided insurance costs are figured in because uninsured people don't see doctors. Contrary to pro-universal healthcare myth, (in money terms not quality and quantity of life terms) the added cost of illnesses becoming worse by delayed care and being paid for by others is not as great as the savings from no medical care.

 

I agree with Iceaura. While GWB was the worst and his wars were a waste of money and his tax cuts for the wealthy ballooned the deficit, Reagan, both Bushes, Clinton and now Obama are all essentially following the same policies, listening to the same people and having the same wrong thinking. The unconscious choice to allow the USA to lose it's ability to provide for itself is a choice that presidents Reagan through Obama have all made.

I could also fault Johnson, Nixon, Ford and Carter but during their administrations you would have to be astute to perceive how dangerous an overvalued US dollar combined with relatively free trade would be to the American economy. By the 1981 recession the intelligence needed was the intelligence to understand the present rather than the more difficult ability to understand the future.

Reagan through Obama have failed to understand the present. These presidents whether intelligent or not are self-programmed to please the status quo and therefore will not allow themselves to understand that undermines the status quo.

 

These wars were about a lot of things. Some of what they were about is just the kind of psychology that has pervaded foreign policy advisers for thousands of years. They always err on the side of expansion of power. The same type of thinking that surrounded Bush surrounded Napoleon. The craving for expanded dominance comes first and the rationals for why dominance should be expanded comes second and can be fitted to the current time and place and leader into who's ears the rationals are told.

Looking at PNAC I think the primary rational for invading Iraq was a long term plan for containing China and whatever allies China might acquire in the future.

Pleasing the defense contractors, the oil companies and the Israel backers was secondary.

The USA was allied and opposed to Saddam repeatedly. I don't know what to make of April Gillespie's seeming granting of the USA's permission for Saddam to invade Kuwait. I wonder if Saddam was suckered into Kuwait so that he could be punished for ending the Iran Iraq war without the USA's permission. I know even having that that thought is cynical as all hell but the more I learn about US foreign policy the more I think extreme cynicism is appropriate when trying to interpret US foreign policy and all other nation's foreign policies as well.

 

".. existing home sales plunged 27.2% in July, marking their largest-ever monthly decline. Meanwhile, inventories of unsold homes swelled to 3.98 million in July, representing the largest stockpile in more than a decade. ..."

AND, government released 25 minutes ago:

"... Sales of U.S. new homes unexpectedly dropped in July to the lowest level on record, signaling that even with cheaper prices and reduced borrowing costs the housing market is retreating. ..." From: http://noir.bloomberg.com/apps/news?pid=20601087&sid=azwTNjOR4V8Q

I am still looking for those "green shoots." - Strange how no one speaks of them any more. Now the talk comes from the ice cream parlor - Something about two scoops, but that is not good for your health.