Government Debt

This months update will deal with a variety of issues both economic and political. The nation of America is in a very serious crisis. However, before we discuss this with any detail there are some things that need to be understood. Fear-mongering aside, it should behoove us all to remember that any household that must continually go to the bank to borrow the money it needs for rent, food, clothing and energy is in serious trouble. Those who cannot or will not see this are destined for the poor house, or if the loans were made on fraudulent pretenses, jail. A household that will not pay for its children's medical care but goes out every month to buy numerous rifles and shotguns is not one that a reasonable person would call responsible. A household that that will not fix critical problems in the structure of its house and leaves the back door wide open all day and all night could hardly be called secure. This month we will look at how America is destroying itself and why it is likely to take the world with it. While some will call obvious observations the talk of 'chicken littles', it is incumbent on all who still are capable of coherent thought to not be caught in the propaganda of the day which essentially says that what you are seeing is not what you are seeing. It is a propaganda model best summed it by the comedian who once said, 'who you gonna believe, me (the mainstream press) or your lying eyes?!'

The US government released its trade figures in February that showed a marked deterioration in our trade position in that the US was able to rack up a trade deficit of $726 billion, which as perilously close to one trillion dollars in one single solitary year (2005). The one word that can sum up this situation is this; unsustainable. America's deficits, as many of you who are familiar with this series know, are not to be dismissed lightly, as many mainstream pundits do. All talk of 'Dark Matter'¹ aside, there is no miracle cure for this serious problem other than two, America must consume considerably less and it must become a nation that produces tangible marketable goods once again². The economists of today, looking for ways to ingratiate themselves with the power elite are not likely to write forcefully explaining that the US really is on an unsustainable path and will not recover from this bitter pill without significant economic pain. The scope of America's trade problem can be seen in global shipping patterns. Ships that arrive in the US full of goods, return to their home ports in Asia, half-full or empty.

Of every 100 containers that crossed the Pacific Ocean from Asia to North America last year, 60 came back empty - Drewry Shipping Consultants

Spiegel wrote on this problem in an interesting series on Globalization.

The ships are usually fully laden when they leave the Far East and head farther east to the West, but relatively little cargo heads in the other direction. Ships sometimes sail from U.S. ports half-empty: a graphic illustration of the imbalance of trade, and a discrepancy reflected in the price. Sending a container from Shanghai to Hamburg can cost over $2,000; the return journey may be had for less than a tenth. - Der Spiegel

This is the trend as much in America where it is much more pronounced as it is in the west generally. The real problem is that Gobalization is doing what many have wanted it to do all along, equalize the world and its business environments, including and especially wages and benefits for the world's laborers. This is forcing those in the west to do one of two things; move their industries overseas or reduce overall compensation packages for its workers. The US has tried to ease the pain of globalization with irresponsible money creation, putting enormous pressure on its dollar in order to maintain consumption. This tactic has worked fairly well until now but the trend will have to change now.

America's fiscal situation has deteriorated to the point that foreign lenders (those whom we depend on to lend us the money to continue on our spending spree) are getting tired and are shying away from our Treasury paper. Even the reintroduction of the 30 year note was not enough to stop the decline. Weakness is across the board in government debt auctions. Inflation is scaring investors to death. Now, let us remember what inflation is and what it is not. Inflation main SYMPTOM is a rise in prices, but that is not what inflation is. Inflation is the growth of the money supply that makes money worth less. Think about it this way. Money is only a claim on wealth, it is not wealth. When there are more claims on wealth than actual wealth, the claims become correspondingly worth less and less.

The patterns of inflows to the US is changing, so says Reuters.

A net $910.7 billion of foreign capital flowed into U.S. financial assets last year, according to U.S. Treasury Department data released on Wednesday, more than enough to fund the country's record $725.8 billion trade gap. This was despite the latest monthly figures, also released on Wednesday, that showed December's net $56.6 billion inflow falling short of the month's $65.7 billion trade deficit. - Reuters

How have these inflows changed? There is less and less transparency these days as to who is actually buying our notes. But one key source has been OPEC³. These largely Arab nations have put billions into our T-bills and now that we need this source of borrowing, the Arabs appear to want something in return. This looks like a quid-pro-quo to this author insofar as that in exchange for these inflows, they get key pieces of American infrastructure of which the ports that bring in all of the goods America consumes is pivotal. Proof? None. However, why would the President allow nations (any nation) buy up such an important and truly vital part of America? Did you know our troops equipment gets shipped from these ports? These ports are absolutely critical to America and Bush wants to sell it them to a foreign government? This man should register as a foreign agent.

The Fed will try to inflate us out of our budgetary dilemma. They have already done what is necessary to hide this from you and me. Once the printing press cranks up in earnest it will be impossible to hide. Everything will go up in price, including and most notably energy. This is what investors are afraid of because if inflation is running at about 8% annually and an investor is only earning 4% on a US Government note, their investment is not really appreciating. Rather, it is depreciating at a rate of 4% a year in terms of its purchasing power.

Thus, we can see the dilemma the Fed is in and at least one of the reasons why Greenspan is probably not crying too many tears over leaving the Fed now. The US economy is in trouble and he is more than a little to blame for it. The inflationary scenario is in my estimation the most likely to transpire. While others seem to think deflation is not a threat to the economy if it ever happened⁴, I and almost any reputable economist (which I am not) will tell you what deflation does to an economy. It closes industries and puts millions out of work when profits turn into losses because goods must sell for considerably less than the production costs associated with their manufacture. Both paths lead to a painful 'death' but inflation is somewhat less painful than the alternative because the means of production is not typically destroyed.

Defense Spending, Defense Profits

In light of America's fiscal crisis it is absolutely amazing to me the astronomical amounts of money the US is spending on what is euphemistically called 'defense'. Major defense contractors are making money hand-over-fist while Bush cuts everything from Medicare to Education. Those of you who think this is unrelated to America's economic predicament need to go and figure out just how much money gets spent on war, weapons and the National Security state⁵ and the graft that is becoming increasingly apparent that is associated with each.

Defense Matrix

Rank		Company Name	Awards (Billion$)		05 Profit Summary
2004	2003		2004		2005
1	1	LOCKHEED MARTIN CORPORATION	20.7		Profits Up 53% Link
2	2	BOEING COMPANY, THE	17.1		Profits Doubled Link
3	3	NORTHROP GRUMMAN CORPORATION	11.9		Profits Soar Link
4	4	GENERAL DYNAMICS CORPORATION	9.6		Overall Profits Up 11% Link
5	5	RAYTHEON COMPANY	8.5		Up 13% in 4th qtr - Link
6	7	HALLIBURTON COMPANY	8.0		Huge profits and malfeasance tracked here.
7	6	UNITED TECHNOLOGIES CORPORATION	5.1		Profits Up 11% Link
8	9	SCIENCE APPLICATIONS INTERNATIONAL CORP.	2.5		Revenue up 6.9% Link (Private Company)
9	10	COMPUTER SCIENCES CORPORATION	2.4		Data for 05 not available Link
10	11	HUMANA, INCORPORATED	2.4		Profits Up 34% 4th Qtr Link

It is abundantly clear that the US is spending far too much money on 'defense⁶' and this is where the bulk of the money is being spent when the government borrows billions of dollars as it signs Mr. And Mrs. America's name to the IOU. If you are rich and well connected, you are making a lot of money. Even Bush's uncle, the former President Bush's brother is making large sums of money on defense contractors.

President Bush's uncle made more than $450,000 last month by selling stock in a defense contractor whose profits are growing because of the Iraq war, records show. - AP

All of this money is being made from this looting while troops on the ground are bing bled to death. Listen folks, the Army is having to scavenge parts for its M1 tanks, it is going around the globe to get them because there are no more available.

Where is the money?

The Army is having trouble getting ammunition. That's right, troops are having to ration it because there is not enough stockpiled.

Where is the money?

One Officer was forced to pay $700 for body armor that saved his life after an attack from an enemy bomb. How could any nation in good conscience do this kind of thing to its troops?

Where is the money?

I watched as the Joint Chiefs of staff fired off an angry letter to the Washington Post about a cartoon that appeared. In it was a quadriplegic GI who was laying in a hospital bed. Rumsfeld was standing next to him saying (paraphrased) “I am listing your condition as 'battle hardened', your treatment is to be stretched thin” The chiefs took exception with the Post because they felt that they were showing disrespect to the wounded. Yet it is they, the Joint Chiefs Of Staff (every one of them) who are the ones who were responsible for charging a man for the amour that saved his life and stopping those who were forced to purchase their own armor from taking it with them to the battlefield. Our Joint Chiefs do not seem concerned with the longevity of our troops. They seem eminently concerned about ensuring that contracts are awarded to GOP cronies that never deliver on the services and materials contracted for and forcing GI's to wait for it to never arrive to the battlefield. This is the mentality of the bumbling bobble-headed Generals Rumsfeld has around him. They are concerned about cartoons but not the troops. From the conduct of the war, they need to spend less time reading cartoons in the Washington Post with their feet on the desk, drinking coffee and a lot more time doing their jobs. Their is a word for the behavior of our military commanders. It starts with a T and rhymes with reason. While many of my readers have scoffed at me for speaking so plainly I do not apologize. The opinions of those who get their cognitive abilities from sitcoms and anti-depressants are of little importance or interest to me.

Yet, I have wondered what is really going on here. While the DOD has more than its fair share of incompetents, it seems that the conduct of this war goes beyond simple ineptness to something deeper. I cannot say exactly what it is but if one wanted to intentionally destroy the world's most powerful military and get rich in the process, I could hardly think of a better way to do it than our ill conceived and poorly executed invasion of Iraq. I cannot look into the hearts and minds of America's generals and National Security appointees. I can say that if the real plan was to destroy America's war machine and make certain people rich in the process, they have done a brilliant job. The constant stream of complaints coming from US troops are not to be scoffed at. You have troops being rotated for their third tour in Iraq, Navy personnel now going in to do the jobs of Soldiers because there is no one left in the US to go. The National Guard is tapped out, so are the reserves, the army is having a hard time recruiting and with the deployment of other branches to act as soldiers, it is an untenable situation. Soon you will see recruitment in the other branches fall off as well. Bad food to tainted water is being served to our troops from the company that is still paying the Vice President (while he is in office and gets no bid contracts). Am I the only person that is seeing what is happening? Why is it that when I go out to where Americans gather the only thing I hear is the idle chatter of movies, gossip and sports?

Those who really care about America's troops, as opposed to just wanting to sound patriotic and politically correct, are sounding the alarm but few are listening. The contractors are getting rich while the troops are being bled to death by our own leaders through bad decisions and I truly believe on the part of some, malicious intent⁷. Pay problems abound as many are getting the shaft for serving their nation in a time of war by their own Pentagon. Some troops are fighting back as they are now realizing that not only do they have the Iraqi insurgents to deal with but their own government is turning on them as well. Several have filed a class action lawsuit to force the DOD to give them back pay for their travel expenses.

The Bush administration has an inverted sense of priorities. They want to line the pockets of the oil and defense conglomerates, but must cut into critical budget items to do it. The troops are expendable, their real equipment needs are unimportant. What is essential is that the defense contractors make billions in profits and keep Americans in the dark, waving a flag in an idiotic display of Madison-avenue manufactured patriotism. Money is going to services and equipment that never get to the battlefield, or if it does as in the case of Halliburton's polluted water, the services are substandard. Sometimes the services are not delivered at all, the money is simply pocketed. The American people are not being told.

A simple search on Google's news search engine shows on contractors stealing $8 billion in Iraq show ONLY foreign press reports! While I am sure that some US papers covered the issue, the Grammy awards seem to be more important than missing billions, dead US soldiers and money cut from education and Medicare. Here is a cut and paste (left)on Iraq reconstruction money the day after the story broke. Notice the bylines and that they are all foreign. This is what is happening and why the people are so clueless. They are not being told of the treason and thefts of this administration. This is what Rumsfeld means when he says 'information warfare'; 'We won't tell you how we are robbing you blind'.

Jobs

The jobs situation is being touted as great by the Bush administration. They are making wild predictions of full employment. Nothing could be further from the truth. First time filers for unemployment benefits rose to 297,000 for the week ended 11 February 2006. The BLS is providing cover for the administrations blatant fictions with new methodology (survey) to keep the numbers they release from making headlines. Here is the release from the Bureau of Labor Statistics.

Jobs are still hemorrhaging in America as the tens of thousands of jobs that Americans who work at Ford and GM are going to lose demonstrates. Across the board people are out of work or are working temp jobs that are counted as full employment in the BLS's fictions. The reality is deeper than the BLS's statistics but requires a little analysis that goes back a few years. One person has done this and given us an excellent picture of what is really happening in the jobs market.

Of the 194,000 private-sector jobs created in January, 46,000 were in construction (and most likely went to Mexican immigrants, both legal and illegal) and 136,000 were in domestic services: Financial activities (essentially credit agencies) account for 21,000. Administrative and waste services account for 17,600. Health care and social assistance account for 37,500. Waiters, waitresses and bartenders account for 31,000. Wholesalers account for 15,100. - Paul Craig Roberts

That little tidbit of information didn't make the nightly news. In fact the above article shows the real trends ind US employment and why the numbers from the BLS are a sham. As long as the BLS can keep picking unemployed people out the denominator of their statistics (what they euphemistically call ' updated population controls' in the BLS release) they will always be able to claim low unemployment rates. Yet, large numbers of people are sill showing up for low wage jobs when they are advertised.

Real incomes for Americans are falling and this is a trend that is likely to continue, especially if inflation begins to kick in in earnest. Jobs are paying less and goods are costing more. Americans are beginning to feel a squeeze. Thus if one is not rich or connected the specter of declining living standards is real and growing thanks to the dynamics of globalization.

Housing Market

The Housing market is certainly worth watching these days as their appears to be a broad based cooling transpiring. Existing home sales were still setting records, as in 2005 which saw an over all increase in sales of 4.2% from the previous year. Housing is where so many people are looking and thinking that this is what will ultimately put the economy into recession. This may be, but for those of you who have already made up your minds I ask you to consider this. As America's fiscal situation continues to worsen, The FED will be forced (as I believe it is doing now) to inflate the money supply. This will not send housing prices lower, rather, is likely to send them higher with all other hard assets. While many see higher interest rates ahead thus dampening the red hot market, I am not convinced that this is the direction Bernanke will take. I think he will inflate the currency, and try his best to keep rates low so as to keep borrowing costs low, necessary for business expansion and housing. I think he is willing to some degree to see the dollar Fall 20-30% across the board to accomplish this over the long term. His fight will be against the threat of deflation.

Housing is clearly one of those things to watch. As late payments and foreclosures rise across the nation. Many of the people who find themselves in trouble now financially, should never have been given the green light for a mortgage in the first place.

It took less than eight months for Dustin Suposs' "American Dream" to become a nightmare. He and his girlfriend, both in their early 20s, got caught up in the better-buy-now mentality that fueled the Sacramento area's housing market last spring. They bought a $365,000, 1,550-square-foot home in Elk Grove with no money down. The result: A $2,300-a-month payment that was more than 2 1/2 times the rent they were paying. By December the couple were drowning in bills and debt. Now they're two months behind on the mortgage. - Sacbee

Some of these folks have no business owning a home and the banks ought to be ashamed of themselves for lending a couple like this the money.

These troubles are showing up around the nation, but the trends in housing are much better tracked regionally. While the problems are very significant in California, in states like Wisconsin little trouble has been noted. The fly in the housing ointment is going to be Adjustable Rate Mortgages (ARM's). Folks who thought they were safe with eternally low rates may find that they can no longer afford the house they live in if (or when) rates rise⁸. The good news is that many homeowners are locking in rates now with fixed rates. A trend referred to as dis-ARMing.

But the specter of foreclosures is growing as December 2005 showed a 13.5% increase from the previous month. Sales are cooling, especially in the hot California market. Fewer homes are being sold, and prices appear to be leveling off. In San Diego, while prices overall are moving slowly upwards, the prices of new houses have suffered a significant drop.

But, in the new-housing category, which included newly built homes as well as apartments converted to condos for sale, there was a $104,000 drop from $539,500 in December to $435,000 last month. - San Diego Union Tribune

The article goes on the explain some of the price drops in the market. Such a decline in price will certainly put a damper on new building in the area. This trend is being noted in various regions around the nation. I see this as a sign that the market is topping and that a slow decrease in prices will begin to hit the more expensive homes in upscale areas. I also believe that more moderately priced homes will level off in price, but I do not see a significant decline in the near to medium term. This is because there is always a high demand for moderately priced housing, especially in more economically vibrant parts of the nation. As people in large homes sell and look to downsize, they will want to move into smaller and less expensive houses. I simply do not see interest rates climbing high enough to destroy the housing market; cool it down yes, but only enough to dampen the rapid price inflation we have seen. Thus, I see the housing market cooling significantly but I do not see the bottom falling out of it. If real interest rates must rise, then I expect new financial instruments to be created to assist the market to keep rates low enough so as to keep the market alive, albeit not red hot as it has been the past few years. More on housing trends can be found in this AP article.

Below is a chart of new US home sales for the past year

New Units sold Jan 05- Jan 06.(in thousands). Source Census Bureau

Below is a Chart of Average Home Pricess for new homes for the same period.

In dollars.

The entire PESR is now available in a pdf file. - MSW