Friday, December 09, 2005

December 8, 2005

Squeezing The Grapes of Wrath

Just last month GOP compassionate conservatives, who have given nearly $2 trillion in tax cuts largely benefiting the rich, cut $50 billion from programs for the poor. This wasn't a "let them eat cake" move by the GOP, because they took the cake too and dutifully parsed it out to their friends.

Washington Post -- The House passed three separate tax cuts yesterday and plans to approve a fourth today, trimming the federal revenue by $94.5 billion over five years -- nearly double the budget savings that Republicans muscled through the House last month....GOP leaders portray the tax bills -- for the hurricane-ravaged Gulf Coast, affluent investors, U.S. troops serving in Iraq and taxpayers who otherwise would be hit by the alternative minimum tax -- as vital to keeping the economy rolling. (Full Story)

But wait, the math doesn't add up. They squeezed the poor as hard as they dared but could only get $50 billion out of them. Where'd the other $44.5 billion come from?

Well, they borrowed it from your kids, of course. (Screw the little bastards! They can't vote yet.) So Republicans borrowed again. They just shoved the national platinum card into the ATM (China) and took a $44.5 billion cash advance, then gave it to their already comfortable constituents. It's a win/win for the GOP. The poor, if they vote at all, vote Democrat. And the kids don't vote at all. But corporations vote with their checkbooks and the wealthy vote twice -- once with their checkbooks then their ballots. A win/win.

But I predict this will be the final squeezing of the grapes of wrath. At a certain point there's just no juice left, and we've reached that point.

(I know all this stuff is mind-numbingly boring, and I apologize for throwing it in your path during the Holidays like this. But this is going to have more impact on your everyday life for the next five years or so than anything else going on right now. But, if you stop reading, I understand.)

Economies and the natural ecology have a lot in common. They both rely on interlocking systems to run properly. And they both have at least some natural abilities to repair themselves when damaged. But, if abused too much, too many sub-systems can't hold up their ends of the bargain and go into some level of collapse. If we're lucky it's just a localized collapse. But if the damage is deep and widespread it can trigger a cascade of sub-system failures leading to a total systemic collapse. In the natural environment it's called "mass extinction." In the economy it's called a depression.

The GOP has abused our economic ecology in dramatic and, I fear, catastrophic ways. At the very least we will see localized collapse, but I fear worse.

But wait, you say, didn't we just hear that the economy is healthy and moving along at a brisk pace? How's that jive with predictions of doom and gloom?

Have you ever seen someone drive a work horse into the ground? It looks a lot the same. The driver whips and whips the poor beast, which in turn keeps pulling the wagon. If the horse slows, the driver whips him more, and the poor old horse again struggles on. Some bystanders warn the driver, "Hey, if you keep driving that horse so hard you're gonna kill him," The driver scoffs. "You keep saying that but, look, he keeps pulling the wagon." And the horse will keep bravely pulling that wagon, right up until the moment his legs go out from under him, and he crashes to ground, stone dead. You can never predict exactly when that moment will come, only that it will.

GOP conservatives have driven our economy in just that way, whipping up economic activity by giving away trillions of dollars in tax cut. Like spraying gasoline on smoldering embers these tax cuts have created flare ups of economic activity. But, in the process, they gutted the national treasury, weakening the horse that pulls our economic wagon, the US dollar. , which is now, though still bravely pulling the wagon, is nearing collapse.

Want proof. Just watch the gold bugs. Gold is to investors what fox holes are to soldiers. When you see investors closing out their stock and bond positions and moving to historically high positions in precious metals, particularly gold and silver, it's time to start digging your own fox hole.

New York – Gold has marched to its highest level in 24 years in response to a new wave of buying triggered by a growing acceptance of the metal's strong supply-demand fundamentals. The price surge also comes at a time when gold's traditional hedge status is increasingly being called on because of global currency and inflation risks. (Full Story)

Yep. When you gut the US Treasury by giving too much money back in tax cuts, you gut the value of the US dollar. Suddenly it takes more the green little buggers to convince foreigners to trade them for the stuff they have we want, like oil and cheap crap from China.

The price of gold is a mirror image of the value of the dollar. It's a leading indicator warning that the buck has sprung a serious leak. When that happens savvy investors start dragging their assets into gold-lined foxholes so they don't get washed away by the approaching tsunami.

Now it is true that the gold bugs are not always right. Sometimes they dive into their foxholes only to miss another sunny day at the beach. But when gold makes the kind of dramatic moves it's making now, they're usually right. The last time I saw a move like this it was back in 1979-80 when the deficits we ran up paying for the war in Vietnam came home to roost. Inflation soared as did interest rate. That in turn popped what had been a very hot housing bubble. And gold took off, eventually reaching $850 an ounce in April 1980.

Today we have much the same going on. The only difference is that the deficits this time are so enormous they are trigging trouble a lot sooner than the Vietnam era "guns and butter" policies. But like now, in late 70's we are also coming to the end of a six year housing price boom. Unlike 1979 this time the war that broke us is still on. And, despite all the recent blather about withdrawing, we will continue spending billions of dollars a month in Iraq for years to come. (We broke it, now we have to pay up to fix it.)

So, remember that "cascading collapse" I mentioned above? Well here's how one begins:

"According to World Gold Council figures, India — which accounts for 20 per cent of world demand — had the highest-ever quarterly demand in the second quarter of 2005, 42 per cent up from the year before in tonnage terms. China accounts for only 3 per cent of global demand, although jewelry demand there grew by 11 per cent in the second quarter of 2005. (Full Story)

These are the early signs of trouble. First, the demand for gold bullion is demonstrably up, way up. And that much gold is not going into bling, but vaults..

But it's the mention of China's growing interest in the metal that should send chills up the spine. Because for the last decade China has been salting all the money it's making selling us stuff into US Treasury bonds. In other words, China is America's lender. And since the US now lives almost entirely on credit, if China begins dumping those bonds to buy gold, we're in deep do-do.

There's also trouble looming right on US soil as well. The University of California just released a study warning that the housing bubble has begun deflating at a faster rate than earlier admitted. The study predicts that cooling will result in the loss of around 860,000 jobs, half a million of which will be lost in one of last well-paying blue collar profession in the US, construction.

Wait, there's more. The American consumer has come to think of their home equity as a piggy bank they dip into to maintain a middle class standard of living their new jobs can no longer support. That's about to change too, a change that could well spark a collapse in retail sector. With consumers buying less stuff, companies will cut back. We could see job losses in what few manufacturing jobs still remain in the US as well as major layoffs in the now critical service sector.

That's the scenario gold bugs are preparing for now. That's why gold has soared to it's highest value in a quarter century.

So, what can you do about it? If you are a working stiff, damn little I'm afraid. It's too late. We let supply-side sociopaths run barefoot through our treasury for too long. The damage they've inflicted on our fiscal ecology is too deep, too widespread. We can now only hope that whatever punishment the economy imposes on us will be restricted to certain sectors and will not trigger a systemic-wide collapse.

How long do we have? It's already begun. Once the obligatory holiday spending season ends you'll begin seeing the first bodies washing ashore.