Econowrap: New signs of the Great Depression


Any doubts that we’re in the greatest economic crash since the one that began in 1929 should be dispelled by our latest roundup.

Particularly grim news is coming from China, where real estate prices are falling as dramatically as they did in the United States three years ago, which is the last item in today’s report.

But the news from China is critical, because it’s a confirmation of what we’ve been writing for the past two years: Economic crashes are reverberative phenomena, beginning with a collapse in one key market center, followed by subsequent crashes abroad, then followed by successions of rebounding waves.

What differentiates the contemporary collapse from all the others are two stark facts: The rapid decline of the raw materials consumed by an industrial society and the transition of so-called First World nations from productive to financialized “service” economies, where production has been significantly offshored and outsourced and the workforce left without the skills, factories, and resources needed to keep things running.

And then there’s the economic model itself, which is utterly dependent on infinite growth in a finite world.

Where money is created by debt, only endless expansion keeps things afloat, for how else can infinitely compounding interest be rapid? And that is precisely the one thing that is becoming, quite simply, impossible.

So much for the big picture.

Now for the details.

America slides deeper into poverty

Perhaps the most sobering numbers for Americans come from the latest data revealed by the 2010 census.

The harsh truth from Karl Rusnak of Economy In Crisis:

New figures released by the Census Bureau show that nearly half of all Americans are now classified as either low-income or living in poverty. This fact cannot be separated from the fact that our government’s policies are structured to make the rich richer, while failing to provide ways for the poor to legitimately improve their situation. The only real way out of poverty is good jobs, and we have less and less of those each year.

Over 49 million Americans are now classified as living below the poverty line. An additional 97.3 million individuals are classified as low-income, defined as a household income of less than 200 percent of the poverty line. Often those living as low-income individuals have nearly as difficult a time getting by as those living below the poverty line, because they do not qualify for many assistance programs.

Read the rest.

And some specifics

Doug Henwood of Left Business Observer has the numbers for one city, the place where the 21st Century’s Great Depression began:

The New York City Independent Budget Office is just out with an analysis (pdf ) of income distribution in the city. It’s no surprise that it’s very unequal. The surprise is that it’s far more unequal than Brazil’s.

Full details are available in the letter—which was in response to a request from City Council member James Oddo—but here are some highlights:

  • The poorest tenth (decile) of the city’s population has an average income of $988, and claim 0.1% of the city’s total income. Since the source of this data is tax returns, the very poor no doubt have hidden sources of income. Taxable income doesn’t include many social benefits, like public housing or Food Stamps. Even allowing for that, my god.
  • The bottom half of the city’s income distribution has 9% of total income; the bottom 80%, 29%. Comparable figures for the U.S. are 19% for the bottom half and 44% for the bottom four-fifths.
  • The richest 10% of New Yorkers have 58% of total income, and the richest 5%, 49%. The national average is 42% for the top 10%, and 32% for the top 5%
  • And here’s where the action is, the proverbial 1%: it has 34% of total income, compared with 19% for the U.S. as a whole.

Read the rest.

More grim news from the housing market

Turns out all those bad numbers we’re had on house sales since the crash began were way too optimistic.

From Reuters:

Data on sales of previously owned homes from 2007 through October this year will be revised down next week because of double counting, indicating a much weaker housing market than previously thought.

The National Association of Realtors said a benchmarking exercise had revealed that some properties were listed more than once and in some instances new home sales were also captured.

“All the sales and inventory data that has been reported since January 2007 is being downwardly revised. Sales were weaker than people thought,” NAR spokesman Walter Malony told Reuters.

“We’re capturing some new home data that should have been filtered out and we also discovered that some properties were being listed in more than one list.”

The benchmark revisions will be published next Wednesday and will not affect house prices.

Read the rest.

The IMF sounds yet another warning

And, quite frankly, it’s way too optimistic.

From The Guardian’s Larry Elliott, Heather Stewart, and Nicholas Watt:

The world risks sliding into a 1930s-style slump unless countries settle their differences and work together to tackle Europe’s deepening debt crisis, the head of the International Monetary Fund has warned.

On a day that saw an escalation in the tit-for-tat trade battle between China and the United States and a deepening of the diplomatic rift between Britain and France, Christine Lagarde issued her strongest warning yet about the health of the global economy and said if the international community failed to co-operate the risk was of “retraction, rising protectionism, isolation”.

She added: “This is exactly the description of what happened in the 1930s, and what followed is not something we are looking forward to.”

The IMF managing director’s call came amid growing concern that 2012 will see Europe slide into a double-dip recession, with knock-on effects for the rest of the global economy. “The world economic outlook at the moment is not particularly rosy. It is quite gloomy,” she said.

Since arriving in Washington in the summer, Lagarde has been forced to cut her organisation’s forecasts for global growth next year and is now putting pressure on countries outside the eurozone – including Britain – to play their part in containing Europe’s sovereign debt crisis.

Read the rest.

Call it whistling in the dark

When you’re trying to peddle killer technology [literally] on another continent, you have to spin things to give you buyer confidence both in your own product and in their ability to make the payments.

That’s just what one French government official did this week in South America.

From Radio France Internationale:

French Prime Minister François Fillon has warned that France can expect more trouble from the eurozone debt crisis on a visit to Brazil where he hopes to sell fighter-jets and drum up other trade.

“The crisis is not over and it is likely that we will to face jolts markets and agencies have their own logic,” Fillon told businessmen in a speech in Sao Paulo. “They deal with the immediate, the instantaneous.”

But, he added, what matters is “not the judgement on a given day” but the fact that France has adopted “the rigorous budget trajectory” agreed by most of the European Union.

Two agencies, Standard & Poor’s and Moody’s, have warned that they may downgrade France from its triple-A rating. On Monday French President Nicolas Sarkozy declared, “It would be another difficulty, but not an insurmountable one.”

Read the rest.

Economists take a grim view indeed

When polled this week, some of the world’s leading economists took off their rose-colored glasses, paring down their previous forecasts and predicting leaner times ahead.

Jonathan Cable of Reuters reports:

The sovereign debt crisis crippling the euro zone still threatens other developed economies, leaving Britain and Japan teetering on the edge of recession but with the United States seen several paces away from a slump, a Reuters poll found.

Reuters polls of over 250 economists taken over the past week found hatchets taken to 2012 forecasts for the euro zone, Britain and Japan as ultra-loose monetary policies have failed to stimulate enough growth.

Once-booming economies in Asia have also felt the effects of the slowdown, but earlier on Wednesday China pledged to guarantee growth in the face of an “extremely grim” outlook for the global economy in 2012.

>snip<

The 17-nation bloc is already in a recession that will last until next April and growth will be flat next year, according to the latest Reuters poll.

Britain’s 2012 growth forecast was slashed to just 0.6 percent from 1.0 percent a month earlier. Analysts gave an even chance that Britain, whose main trading partner is Europe, would fall back into recession within the next 12 months.

Economists predicted Japan’s economy will shrink in the fiscal year to next March thanks to the yen’s relentless strength as well as supply chain disruptions from a devastating earthquake earlier this year.

>snip<

[U.S.] GDP growth is expected to slow sharply to 1.8 percent in the first quarter, providing scant relief to U.S. President Barack Obama ahead of an election year.

Read the rest.

And Germany went deeply into hock

Seems it wasn’t only the Federal Reserve that lent vast sums to prop up the ailing European economy. Germany’s central bank has been doing the same thing — and it could lose the whole wad if the euro goes bust.

From Peter Coy of Bloomberg Businessweek:

Germany’s Bundesbank—BuBa for short—has quietly, automatically lent €495 billion to the European Central Bank via Target2. That lending has balanced correspondingly huge borrowings from Target2 by the central banks of weaker nations including Greece, Ireland, and Portugal—and lately Spain, Italy, and even France. They are technically “claims,” not loans. To find them you have to root around in the footnotes of the reports of the 17 national central banks of the euro zone.

If the euro zone breaks into sorry little pieces, Germany could possibly lose its entire €495 billion claim. That’s more than $650 billion. It is 60 percent bigger than Germany’s annual federal budget—and larger than the lending under the European Financial Stability Facility and other aid programs that have received more scrutiny.

Germany’s plight gives it an incentive to keep the euro zone intact. “If the euro breaks up then the whole claim is under risk,” Hans-Werner Sinn, president of the Ifo Institute, a Munich-based economic research group, says in an interview. Sinn, the first economist to focus attention on the Target2 imbalances earlier this year, wrote in a November research paper, “This may be the largest threat keeping Germany within the Eurozone.”

Read the rest.

More downgrades for European banks

Seems like hardly a day passes without another ratings agency downgrade for key Western financial institution.

The latest dose of cold water comes from Fitch.

Deutsche Welle’s Holly Fox reports:

Fitch Ratings downgraded the viability ratings of several of Europe’s biggest banks on Thursday, saying the move reflected growing uncertainty in the banking sector.

Banks remain vulnerable to market sentiment and confidence amid increased regulation and weak economic growth, Fitch said.

The ratings for Germany’s Deutsche Bank, Britain’s Barclays PLC, France’s BNP Paribas and Societe Generale and Switzerland’s Credit Suisse were all lowered, as well as America’s Bank of America Corp., The Goldman Sachs Group Inc. and Morgan Stanley.

The downgrades “reflected challenges faced by the sector as a whole, rather than negative developments in idiosyncratic fundamental creditworthiness,” Fitch said in a statement.

Read the rest.

The City’s secret lobbying revealed

The City, London’s version of Wall Street, played a key role in British Prime Minister David Cameron’s decision to opt out of last week save-the-euro deal.

Cameron stated at the time that Britain wasn’t willing to go along with the banking controls demanded by Merkozy.

Now it turns out that the Brit banksters have been playing it real cozy with the Cameron government, and on more than just that euro deal.

From Ben Chu of The Independent:

The full scale of big banks’ lobbying of the Chancellor, George Osborne, to get him to water down banking reforms can be revealed today. Senior bank executives met or called Treasury ministers nine times in the weeks after Sir John Vickers published his landmark proposals on how to prevent another banking crisis, The Independent can reveal.

Bank bosses are fighting furiously behind the scenes to limit any changes to the way they do business. Fears are growing – articulated by Sir John himself – that the banks are successfully thwarting the Government’s plans to overhaul the British banking system and the Treasury is weakening some of the key reforms as a result of intense lobbying.

Mr Osborne also personally met the Barclays boss Bob Diamond, the Royal Bank of Scotland’s Stephen Hester and Lloyds’ Antonio Horta-Osorio on separate occasions in the days before the Vickers report.

Mr Osborne will announce his official response to the Vickers Independent Commission on Banking proposals on Monday – it is certain to be scrutinised for any sign that the Government’s resolve to tackle the sector has been weakened.

The commission recommended that banks should be required to “ring fence” their high street banking operations away from their “casino” investment operations; and to increase their capital buffers in order to reduce the chances of British taxpayers being forced to rescue them in future. (Taxpayers had to pump in £65.9bn to save Lloyds, RBS and HBOS.)

Read the rest.

German banksters behaving badly

Hey, if you’re masters of the universe, why not party like you’re masters of the universe, right?

From Stephen Evans of the BBC:

What is it about German companies, you might ask?

First there was the Hamburg insurance company that took its high-performing sales staff to Budapest, where they engaged in a Roman-style orgy at a baths. Prostitutes had arm bands with different colours denoting which grade of manager could use their services.

Now, a venerable mortgage bank, Wuestenrot, is investigating a rewards trip to Rio de Janeiro which ended up in a club called Barbarella. Two staff have been suspended.

According to the German business paper Handelsblatt, there was “heavy partying” and some of the salesmen ended up with prostitutes.

Read the rest.

Barbarella, huh? We used to read the comic strip, way back in the 1960s when it appeared in the late, lamented Evergreen Review, well before Roger Vadim turned it into a film with Jane Fonda.

Three-card wins his confidence vote

Mario “Three-card” Monti, the technocrat brought in by European banksters to impose austerity on Italy, has passed his first parliamentary test.

From the BBC:

Italian Prime Minister Mario Monti has easily won a parliamentary confidence vote on his government’s package of crucial austerity measures.

The Chamber of Deputies (lower house) backed the 33bn-euro (£27bn; $43bn) package of cuts and reforms by 495 votes to 88.

The package still has to be approved by the Senate (upper house).

Mr Monti, appointed in November, heads a government of unelected technocrats grappling with huge public debts.

They are trying to tackle a collapse in market confidence that put Italy at the heart of the eurozone debt crisis.

Crucial to the government’s plans is the package of tax increases, spending cuts and pension reforms aimed at balancing Italy’s budget by 2013.

However, analysts say rising borrowing costs and the prospect of a deepening recession still threaten to undermine the government’s efforts.

Read the rest.

But some Italians aren’t happy

At least one Italian has expressed his unhappiness with the new technocratic government the old-fashioned way — with a bullet. Or two.

From Reuters:

Italian Prime Minister Mario Monti, politicians and newspaper editors have been sent letters containing bullets and threats over government austerity measures, police said on Friday.

In the latest episode of mailed threats in Italy, police said they intercepted 10 envelopes at a postal sorting office in Catanzaro in the southern region of Calabria.

Each envelope contained a bullet and a letter signed by a group calling itself the Armed Proletarian Movement with insults and threats regarding austerity measures, a police spokesman said. Investigators said the group had been unknown previously.

Italy’s government won a confidence vote in the lower house of parliament on Friday over a 33 billion euro ($43 billion) austerity package including spending cuts, tax hikes and pension reform aimed at shoring up public finances and calming Europe’s debt crisis.

Welfare Minister Elsa Fornero, who has outlined planned pension cuts in recent weeks, former Prime Minister Silvio Berlusconi and Democratic Party leader Pier Luigi Bersani were among the politicians the letters were addressed to, police said.

Other letters were addressed to editors of major newspapers including Corriere della Sera and La Repubblica.

Read the rest.

Well, at least nobody’s received one of those newspaper-wrapped fishes so popular with certain folk in Calabria.

Thai floods cripple world electronics industry

The recent floods in Thailand were a human tragedy, killing at least 700 people and inundating a third of the nation’s provinces.

But the monsoons also brought another kind of disaster — destruction of  much of the infrastructure on which the world’s electronic industries depend.

From Global Post:

[T]he global electronics sector is still reeling from Thailand’s floods, the worst to hit the nation in 50 years. As the last floodwaters recede, the crisis is exposing just how heavily the world’s tech sector leans on a drab industrial zone in a floodplain north of Bangkok.

If certain PCs, hard drives or other electronics are suddenly more expensive or backordered in your city, chances are their production relies on Thai factories recovering from neck-high floods. The pungent waters, which shut down more than 800 factories employing roughly 450,000 workers, are now struggling to repair or replace equipment left soaking for weeks.

Fixing all that highly specialized equipment will take months. The supply shortage and resultant price hikes, according to analysts, could last well into next year.

>snoip<

For investors, this is a frightful realization: floods can wipe out an industrial sector that stands as a pillar of Thailand’s export-driven economy and a crucial link in the global supply chain.

Hana is Thailand’s largest maker of semiconductors, used in mobile phones and tablet computers, and it’s located in one of the many industrial parks recently submerged by heavy flooding. As dykes around his complex burst, Han and his counterparts evacuated their pricey machinery on Thai navy boats deployed to save drowning factories.

California-based Western Digital, the world’s largest maker of hard disk drives, took an even harsher beating. While not quite a household name, the firm supplies many firms that are: Dell, Intel, Apple and others. Roughly 30 percent of all the world’s disk drives are made in Thailand, where cheap-but-skilled labor and tax breaks have attracted foreign-owned factories to the industrialized provinces north of Bangkok.

About 60 percent of Western Digital’s hard drives are made in Thailand, according to the firm, and all of its six factories were affected by flooding. When their production suddenly stopped, a global shortage ensued. Some Western Digital hard drives shot up as much as 80 percent and prices remain inflated.

Read the rest.

And, finally, the grim from China

From Ambrose Evans-Pritchard of the London Telegraph:

It is hard to obtain good data in China, but something is wrong when the country’s Homelink property website can report that new home prices in Beijing fell 35pc in November from the month before. If this is remotely true, the calibrated soft-landing intended by Chinese authorities has gone badly wrong and risks spinning out of control.

The growth of the M2 money supply slumped to 12.7pc in November, the lowest in 10 years. New lending fell 5pc on a month-to-month basis. The central bank has begun to reverse its tightening policy as inflation subsides, cutting the reserve requirement for lenders for the first time since 2008 to ease liquidity strains.

The question is whether the People’s Bank can do any better than the US Federal Reserve or Bank of Japan at deflating a credit bubble.

Chinese stocks are flashing warning signs. The Shanghai index has fallen 30pc since May. It is off 60pc from its peak in 2008, almost as much in real terms as Wall Street from 1929 to 1933.

>snip<

Professor Patrick Chovanec from Beijing’s Tsinghua School of Economics said China’s property downturn began in earnest in August when construction firms reported that unsold inventories had reached $50bn. It has now turned into “a spiral of downward expectations”.

A fire-sale is under way in coastal cities, with Shanghai developers slashing prices 25pc in November – much to the fury of earlier buyers, who expect refunds. This is spreading. Property sales have fallen 70pc in the inland city of Changsa. Prices have reportedly dropped 70pc in the “ghost city” of Ordos in Inner Mongolia. China Real Estate Index reports that prices dropped by just 0.3pc in the top 100 cities last month, but this looks like a lagging indicator. Meanwhile, the slowdown is creeping into core industries. Steel output has buckled.

Read the rest.

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