Swans Commentary » swans.com February 22, 2010  



Blips #96
 From The Martian Desk


by Gilles d'Aymery





"The basic confrontation which seemed to be colonialism versus anti-colonialism, indeed capitalism versus socialism, is already losing its importance. What matters today, the issue which blocks the horizon, is the need for a redistribution of wealth. Humanity will have to address this question, no matter how devastating the consequences may be."

Frantz Fanon (The Wretched of the Earth)


(Swans - February 22, 2010)   POLITICAL ECONOMY: You are certainly familiar with the aphorism "There are three kinds of lies: lies, damned lies, and statistics," which Mark Twain attributed in 1907 to British prime minister Benjamin Disraeli (1804-1881). What Disraeli meant, of course, was that depending on how you used statistics or presented them you could in all practicalities say whatever you wanted. It was true then and remains so now. Accordingly, let's review the crop of feel-good statistics that has come out of Washington D.C. -- Q4 2009 increase in the Gross Domestic Product (GDP); in January, slight decrease in the rate of unemployment, housing construction up 2.8 percent, and production up 0.9 percent -- all indices that have allowed Fed Chairman Ben Bernanke to declare that the recession was over, and the news pundits to hail about the imminent recovery. Everything's looking good, we are told, and to deflect attention from the load of debts the U.S. is taking on, the media highlight the travails of the Euro Zone and the risks posed to the European currency by Greece's fiscal and financial crisis.

WELL, IF YOU LOOK carefully at the numbers you may realize that Sarah Palin was quite possibly correct when she said in a Q&A session at the recent Tea Party Convention, "It would be wise of us to start seeking some divine intervention again in this country, so that we can be safe and secure and prosperous again." Indeed, the time has come to start thinking about sacrificing young and tender virgins on the altar of our deities, for the realities hidden behind the rosy figures are stark. Take GDP. As you know GDP is calculated according to the formula Y = C + I + G + XM -- GDP equals Consumption plus Investment plus Government spending plus (eXports minus iMports). You also know that consumption accounts for over 70 percent of GDP. Yet, consumption was mostly flat during the 2009 4th quarter, which is somehow a notable achievement after a year of continued contraction. What accounted for the rise of GDP was the increase in inventories by businesses, after a year of deleveraging. Note that these new inventories will have to be consumed...a bet on the future of the economy.

CONSUMPTION is closely related to the labor market -- more employment, more consumption. In that light, the slight decrease in the rate of unemployment last month was good news. However, the figures are deceiving because the US Bureau of Labor Statistics uses what's known as the U-4 definition of unemployment; that is, "total unemployed plus discouraged workers, as a percent of the civilian labor force plus discouraged workers," not the definitions U-5 or U-6 (see http://www.bls.gov/lau/stalt09q4.htm). In addition, the BLS focuses on the active population, thus ignoring the People (or Persons) Not in the Labor Force (PNLF) -- people that are neither employed nor registered unemployed and that are not "actively" looking for a job. In 2009, the PNLF have increased by 3.1 million! Moreover, the stats released by the BLS do not bring to the fore a troubling trend, that of the length of unemployment. Long-lasting unemployment is defined as people remaining unemployed for more than 27 weeks. This figure has grown from 2.7 million in January 2009 to 6.3 million in January 2010. In other words, unemployment has become structural, not conjoncturel (short-term economic climate). It's here to stay for years to come. Exported jobs (to China, India, Mexico, and elsewhere) are not coming back. (There's going to be some governmental job creation in the spring due to the 2010 Census, but these will be temporary jobs that won't have any long-term incidence on the job market.)

THE MODEST RISE in home construction is due to the government's tax incentives (between $6 and $8,000) for first time buyers that are soon to be phased out and to the huge Fed program of special loans in which the Fed bought over $1 trillion of mortgage-backed securities (MBS) in 2009 -- a program that has been instrumental in keeping mortgage interest rates low (about 5 percent) and whose upper limit of $1.25 trillion will be reached this coming April. Take out the Fed program and the tax incentives and construction is back in deep voodoo. Commercial real estate is increasingly getting under water, and more homeowners are simply walking away from their homes, sending the keys back to the banks, as they owe more than the value of their homes -- a simple business decision. As Paul Volcker says, "The mortgage market in the U.S. is in trouble. It's totally dependent, heavily dependent on the government participation. It shouldn't be that way. That's going to have to be reconstructed." Good luck!

ADD THE BANKING PROFESSION to the picture. By all appearances the financial system is back on track; banks have made profits and paid bonuses...a direct result of the massive intervention by the Fed and the Treasury as well as the transfer of over $1 trillion of (rotten) MBS to the Fed. The hidden reality is far from rosy. Take the Federal Deposit Insurance Corporation (FDIC): Last June, it had to impose a special assessment of $5.6 billion on commercial banks. Then by the end of the year, it asked the banks to prepay 3 years worth of regular assessment, or $45 billion. The reason? Banks keep failing and the number of problematic banks is over 550. As of last Friday, 20 banks have already failed in 2010 and had to be rescued by the FDIC -- a number in sync with that of 2009, a year that saw 140 bank failures. Analysts are quick to point out that many more banks failed during the Savings and Loans crisis of the 1980/90s, which is correct with one caveat. The losses are far greater now. In 1989, the worst year of the S&L crisis, over 200 banks failed at a cost of $11 billion. The cost of rescuing the 140 banks last year was $36 billion! Also, on January 22, 2010, the FDIC and the Bank of England quietly announced that they had signed a memorandum of understanding to expand "their cooperation when they act as resolution authorities in resolving troubled deposit-taking financial institutions with activities in the United States and United Kingdom." Now, why is this newsworthy? In a recent New York Times Op-Ed ("How to Watch the Banks," February 16, 2010) former Goldman CEO and secretary of the treasury Henry Paulson called for "two vital changes" in the financial system. Wrote Paulson:

First, we must create a systemic risk regulator to monitor the stability of the markets and to restrain or end any activity at any financial firm that threatens the broader market. Second, the government must have resolution authority to impose an orderly liquidation on any failing financial institution to minimize its impact on the rest of the system.

RESOLUTION AUTHORITY "to impose an orderly liquidation..." That's exactly what was announced by the FDIC and the Bank of England last month. Now, there are not many banks that operate in both countries -- about 10 -- and they are big banks (e.g., B of A, JPMorgan Chase, Mellon, HSBC, Wells Fargo, etc.). It means that the possibility a too-big-to-fail institution may be "orderly liquidated" is clearly contemplated. Would there be a potential candidate? What about Citibank, currently the weakest link in the system? The bank lost another $7.6 billion in the last quarter of 2009. The US government has had to inject $50 billion in liquidities and guarantee $306 billion in toxic assets, all the while taking a 27 percent equity stake in the parent company, Citigroup. Somehow, the liquidation of Citibank, a Zombie bank all but in name, would be a sort of poetic justice, for you may recall Citigroup was instrumental in the repeal of the 1933 Glass-Steagall Act -- its former CEO Sandy Weill is known as "The Shatterer of Glass-Steagall" (with the helping hand of the nefarious Robert Rubin, Larry Summers, Phil Gramm, et al.).

AND DON'T FORGET the massive bull in the financial china shop, which nobody wants to address -- the over $600 trillion worldwide market in derivatives...those "financial weapons of mass destruction" (as called by Warren Buffet) that are suspended in thin air like a gigantic Sword of Damocles.

HERE YOU HAVE IT: A financial system much weaker than advertised that can implode again. Real estate, the economy's engine for the past decade, is not coming back within the foreseeable future. The structural rate of unemployment won't abate for years, and the consumers, already debt peons, are unlikely to go back to the consuming profligacy that has characterized the last 30 years, whatever incentives are thrown at them. People may not be highly schooled in the subtleties of economics, but they know where their pocketbook stands...deep, deep in the ravines dug by ravenous bankers doing "god's work" (cf. Goldman's CEO, Lloyd Blankfein) or small corner street swindlers selling pies in the sky. The game is over for two main reasons: First, debt and its corollary, insolvency; and, second, the willing refusal of our wealthy elites that are in power to reshuffle the deck of cards and propose a different socioeconomic structure that would benefit the many to the detriment of the few -- them.

DEBT AND INSOLVENCY: The fundamental error committed by both the Bush and Obama administrations has been their policy to pump up the economy through debt re-inflation, substituting the private sector that had hit the wall to a standstill by public expenses and investments with the hope that the economic cycle would turn around like in previous recessions. In doing so they underestimated or misestimated the level of indebtedness, both public and private, all the while finding themselves in a Catch-22 situation. Even if consumption could rise it still would put the country in a deeper hole since the majority of consumer goods are produced in other countries. As consumers have taken substantial equity losses in their homes and are credit-wise maxed out, the government injected huge amounts of liquidities in the economy thus dramatically increasing public indebtedness in an effort to combat, stop, and revert the portent deflationary trends that endangered the economy and risked to bring forth a repeat of the Great Depression. The predicament, of course, is that the U.S. is not the only country facing the same insoluble contradictions. Much has been said about the Greek situation. While Greece's share of the Euro Zone GDP is only 2.6 percent, it still has, according to the OECD, an official net debt over 100 percent of GDP and worse yet, when taking into account the total net liabilities (on and off balance sheet), the debt to GDP ratio reaches a stratospheric 800 percent. However, other countries in the EU face similar trends. France's net total liabilities to GDP ratio is over 500 percent. All in all the EU ratio is about 470 percent. In other words, the EU is essentially insolvent. (The real threat to the European single currency is not caused by Greek miseries. It has much more to do with the absence of political union and the differences in competitiveness between the various members.)

WHAT OF THE USA? The official tally of the federal debt is about $12.3 trillion, or about 85 percent of GDP. But this measure is misleading because it does not take into account the debts incurred by state and local governments that are an intrinsic part of the public debt. These debts (about $2.3 trillion) when added bring the total to almost 100 percent of GDP. Then there are the debts of the Government-sponsored enterprises (GSE) like Fannie Mae, Freddie Mac, and Ginnie Mae that are fully guaranteed by the federal government. Add these (close to $7 trillion) and now, the ratio of debts to GDP gets closer to 166 percent! If this is not enough, then include the OECD estimate of total US fiscal imbalance, that is the total net liabilities (on and off balance sheet) as a percentage of GDP, and the ratio becomes just about 520 percent. So, we are all insolvent and fighting to attract national and international savings to fill ever-increasing holes. At some point in the near future interest rates will have to begin hedging up in order to satisfy investors, or the printing press will have to be turned on more dramatically (it's already on), or both. When interest goes up the economy will go south again, which is not (yet) considered a desirable outcome by the elites. Printing money, on the other hand, will lead to rapid inflation and turn foreign investors away from the dollar.

THE CIRCLE CANNOT BE SQUARED in light of these contradictions. So, first, you can be sure that Disraeli's aphorism will be used full speed ahead; and, second, you can expect a direct attack against Medicare, Medicaid, and Social Security, a rise of the retirement age, and further cuts in social services. More ominously, the entire world faces a far greater danger: Spreading unlimited wars beyond the Greater Middle East. Of course, the world could heed the words of Frantz Fanon, choose to proceed with a major redistribution of wealth on the one hand, and the redefinition of our socioeconomic system on the other...which does not seem to be in the cards right now, at least in light of these three small snippets of Americana found in the March 2010 "Index" of the patrician Harper's magazine:

Percentage of U.S. public grade-school teachers who say they buy food for hungry students every month: 63

Number of U.S. university presidents who currently earn more than $1 million per year: 24

Number who did in 2002: 0

AS THEY SAY, you know where your social priorities reside.


HAITI'S CURSE: How a small country that in 1788 produced more goods (cotton, hardwood, coffee, indigo, half the globe's sugar, etc.) than the USA and was by far the richest colony of the French Empire became so impoverished is best explained by Femi Akomolafe's article in this issue of Swans, "Crocodile Tears For Haiti." By then, in the 1780s, half of the country's trees were gone. The other half would be felled in the next two centuries, leaving the place barren and prone to constant erosion. That rich country was essentially ransacked and eventually became "the poorest country in the Western hemisphere." Femi does an excellent job explaining the Haitian curse and pointing out where the responsibility lies for that sorry, heartbreaking story. No need to repeat what he wrote -- the rape and enslavement of our black brothers, the pilfering of their natural wealth, the subjugation of their culture...by the so-called civilized white compact.

HOWEVER, FEMI did not elaborate on the comparison of how France treated the U.S. and Haiti, respectively. He correctly notes that the Louisiana Purchase was directly related to the war the French were waging against the slaves who had revolted against their white masters. The French needed money, not just for their Haitian adventure, but in expectation of an impending war with Britain. They also wanted to beef up a competitor to British hegemony -- the USA was a good bet -- and they feared that eventually the U.S. would take the territories anyway.

ACCORDING TO Wikipedia, "The Louisiana Purchase (French: Vente de la Louisiane 'Sale of Louisiana') was the acquisition by the United States of America of 828,800 square miles (2,147,000 km2) of the French territory Louisiana in 1803. The U.S. paid 60 million francs ($11,250,000) plus cancellation of debts worth 18 million francs ($3,750,000), a total cost of 15 million dollars for the Louisiana territory.)"

In 1825, the French dispatched thousands of troops to reconquer the island to no avail. France eventually recognized the independence of Haiti in exchange for a payment of 150 million francs (reduced to 90 million in 1838 -- $17.308 million). The total area of Haiti is 10,714 square miles. So, I proceeded to use my calculator to compare the two deals. Here is what it cost the U.S. and Haiti, respectively:

Louisiana Purchase: 94.11 francs ($18.10) per square mile or 0.147 francs ($0.028) for one acre.

Haitian Recognition: 8,400.22 francs ($1,615.43) per square mile or 13.12 francs ($2.52) for one acre. (Based on 90M francs.)

Haiti's "freedom" cost the Haitians 89.26 time the cost of the Louisiana Purchase by the U.S. And that does not even include the interest that Haiti had to pay well into the 20th century. As the French say, deux poids, deux mesures!

 . . . . .

C'est la vie...

And so it goes...


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Swans -- ISSN: 1554-4915
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Published February 22, 2010