Tuesday, June 21, 2011
Free trade was sold to the American people as a tool that would open global markets to American goods and increase opportunities for American businesses and workers.
It hasn't quite turned out that way.
Because workers in developing nations make a fraction of what American workers earn, U.S. jobs have been outsourced by American companies seeking to reduce labor costs and increase profits.
The average wage in developed economies is about 10 times the average level in emerging economies. That's the inherent flaw in "free trade".
These developing nations are often absent the unions, environmental regulations and worker protections found in the US.
In short, the playing field is anything but level and American workers are on the wrong end of the field.
What Americans have come to realize — as they were warned of in advance by people such as Ross Perot — is that free trade is not free at all. In fact, it's been very costly to American workers.
Jobs in manufacturing, the kind that built the American middle-class, have been hit particularly hard. Largely due to outsourcing, the number of workers in manufacturing dropped by one-third over the past decade.
Manufacturing has declined from 14.2% of GDP in 2000 to just 11% of total output today. According to the Bureau of Economic Analysis, in 2009 U.S. GDP was $14.2 trillion. Manufacturing contributed just $1.5 trillion to the total.
One of the consequences of the contracting manufacturing base is that exports now represent just 12% of the economy. On the other hand, the U.S. has led the world in imports for decades. As a result, the U.S. has a massive trade deficit and is the world's biggest debtor nation.
The nation is faced with a real unemployment rate of 22.3 %. The official unemployment number does not include the millions who have stopped looking for work or are working part time. If you add these numbers together, the actual number of Americans without a real full-time job is close to 24 million.
The U.S. will never overcome its unemployment problem as long as American jobs are continually outsourced to developing nations. Sadly, the U.S. is hampered by the fact that it treats its workers much better those nations treat theirs. This amounts to a huge disadvantage for the U.S.
Domestic competition is waged on a more level playing field. In the U.S. we have worker's rights; a minimum wage; over-time; coffee, lunch and bathroom breaks; holidays and holiday pay; vacation time; medical leave; maternity leave; worker's compensation; unemployment insurance and whatever else I'm leaving out.
We even have a few private labor unions left.
Foreign workers, in the developing countries where American jobs continue to be outsourced, have none of the above. In short, it costs a lot less to employ foreign workers, and that makes profit margins much higher for the American corporations that employ them.
In many developing nations, worker safety, proper care and fair treatment are after thoughts — as are environmental regulations. These things cost U.S. employers a lot of money and make them even less competitive internationally.
With jobs so scare, American workers are often forced to take whatever they can get and are competing for lower paying jobs. Consequently, over the past six months, the purchasing power of the average American's paycheck has fallen at a 3.2% annual rate.
This will have unintended consequences for American companies. Americans need jobs and money to make the U.S. economy tick. However, these things are not nearly abundant enough; consumer spending declined in May.
This is a big problem for an economy that is 70% reliant on consumer spending.
So while outsourcing American jobs may have short-term benefits, it will likely have long-term negative consequences for the very businesses responsible for it.
The current system is short-sighted. But, beyond that, it is simply unsustainable.
Friday, June 17, 2011
The Greek debt problem may seem like a distant concern, but it could swiftly become an American problem. That's because American banks hold plenty of Greek debt.
U.S. banks had a total exposure of $41 billion to Greece by the end of 2010, according to the latest figures from the Bank for International Settlements.
If Greece defaults on its payments, U.S. banks risk losing tens of billions of dollars.
That risk is growing. On Monday, S&P said there is “a significantly higher likelihood of one or more defaults.”
Much of Greece’s precarious debt is held on the books of large European banks, which obviously puts them at risk. French banks, in particular, hold lots of that debt — to the tune of nearly $57 billion.
However, those French banks raise substantial amounts of money by selling debt to the ten largest U.S. money market funds, which has spread the risk across the Atlantic.
The problem with global markets being so interconnected is that financial risk follows the flow of capital. Consequently, U.S. banks are highly exposed to the stresses on European governments and banks.
A default by Greece could spark a chain reaction. The U.S. financial crisis in 2008 was ignited by a relatively small pool of subprime mortgages. A Greek default could cause wider defaults by subprime government borrowers like Portugal, Spain and Ireland.
Aside from the risk to French banks, a Greek default could also severely impair British and German banks, which hold copious amounts of Greek debt. The German banks alone have about $34 billion in exposure.
However, European banks are not the only ones at risk.
If American banks have to cover the bad bets of investors who insured themselves with credit default swaps — which are supposed to pay off if Greece defaults on its bonds — those Americans banks would also be in big trouble.
Such an outcome could overwhelm the U.S. financial system.
Yet, Greece is not the only concern for the U.S.
According to a recent report by the Bank for International Settlements, U.S. financial institutions have nearly $200 billion in direct and indirect exposure to the debt of Greece, Ireland, and Portugal.
The structural weaknesses in the U.S. financial system were never addressed after the 2008 crisis; they were just papered over. The banks are still too leveraged and hold too little capital in case of another emergency. In fact, there's a big fight going on over this very issue right now in Washington.
Since Wall Street and its allies spend $1.4 million a day and have about 3,000 lobbyists working for them, they will get what they want — as always.
The major concern is that the "too big to fail" banks have become even bigger since 2008. Bank of America bought Merrill Lynch and Countrywide; JP Morgan Chase bought Washington Mutual; and Wells Fargo bought Wachovia. You could now call them "too bigger to fail."
Most astonishingly, six megabanks collectively control assets amounting to more than 60 percent of the country's gross domestic product. These banks operate under the implicit, if not explicit, guarantee that the taxpayers will once again bail them out in the next crisis.
So, if you weren't sure how or why the European debt crisis affects the U.S. — and maybe even your bank — perhaps you're now seeing the big picture. And if you weren't paying attention before, perhaps you will be now.
It may not be long before we witness Financial Crisis 2.0.
Saturday, June 11, 2011
With oil prices hovering around $100 a barrel for the past few months, the resulting impacts are being felt throughout the global economy. Some OPEC members have even expressed concern that rising prices could hurt demand for their product.
Crude prices rose 25 percent from January to April, while US gas prices were up 28 percent in that period. Surveys show that Americans have already cut back on their driving in response.
Since OPEC supplies about 40 percent of the world's petroleum, it has the power to impact global oil prices.
Consequently, oil importing nations were hoping that OPEC members would decide to hike oil production quotas at their meeting in Vienna on Wednesday.
But it didn't turn out the way most had hoped and expected; divided OPEC ministers decided to leave production quotas where they are at present.
Higher oil prices lead to higher prices for food and all consumer goods, and they further constrain consumer spending. Higher oil costs result in less driving and traveling for motorists in the summer months. And higher oil prices also add the enormous US trade deficit, sending billions out of the country every month.
But in a bold step, Saudi Arabia decided to act unilaterally yesterday.
The world's biggest oil exporter reportedly plans to increase production from 9.3 million barrels per day to 10 million barrels, the highest level in 30 years.
This is a critical commitment because the fighting in Libya has taken 1.3 million barrels off the world market and the unrest in Yemen and Syria has subtracted an additional 300,000 barrels.
As a consequence, the Saudis need to raise output by 1.6 million barrels per day just to match former production levels. But even that won't balance global supply with a global demand of 89 million barrels per day.
Though any production increase will be welcomed, the Saudi decision will not solve the supply/demand problem.
OPEC says that world demand will exceed supply by 1.45 million barrels per day in the third quarter. However, the U.S. Energy Information Administration puts the shortfall at 1.81 million barrels per day.
That's significant enough to keep prices well over $100 a barrel. In fact, analysts now expect oil to average $130 a barrel for the rest of this year.
The tightness in global supplies is perhaps best illustrated by the following: among the 12 OPEC members, all but Saudi Arabia, Kuwait and the United Arab Emirates are said to be at capacity.
Is it any wonder, then, that they voted to maintain the status quo? Perhaps an increase wasn't even an option for most of them.
Under current OPEC production quotas — in effect since January of 2009 — 11 of its 12 members are allowed to produce 24.85 million barrels per day.
However, many of those members simply ignore their production quotas and pumped an average of 26.18 million barrels per day in April — more than 1.3 million above the set target, according to a Platts survey of OPEC, oil industry officials and analysts released in May.
That's a sign of a weak and divided cartel. Saudi Arabia's decision to act alone, and against the wishes of their fellow cartel members, only affirms this.
Interestingly, OPEC doesn't officially count the 1.3 million additional barrels that its members are pumping above the approved target.
Saudi Arabia, OPEC's biggest producer, doesn't follow production quotas and it is the only OPEC member that has any considerable spare capacity. But even that is the subject of much suspicion.
In his 2005 book, "Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy," oil analyst Matthew Simmons questioned Saudi Arabia's ability to raise production.
After much analysis, Simmons contended that Saudi Arabia may soon begin to lose production capacity. According to his research, the Saudi oil fields have matured, leading to their inevitable decline. As a result, Simmons concluded that worldwide oil production has already peaked and could in fact be less than it was in 2005.
WikiLeaks reinforced this contention just this year when it released secret US cables revealing that a senior Saudi government oil executive warned that the kingdom's crude oil reserves may have been overstated by as much as 300 billion barrels, or nearly 40%.
This indicates that Saudi Arabia does not have enough reserves to prevent oil prices from escalating.
Saudi Arabia's total production has been estimated to be as high as 12.5 million barrels per day.
However, the executive, a geologist and former head of exploration at the Saudi oil monopoly Aramco, told the US consul general in 2007 that Aramco could not reach a 12.5 million barrel-a-day capacity. The executive also noted that as early as 2012 global oil production would hit its peak.
Almost all of the new demand growth is coming from emerging countries, such as China and India.
Last year, global energy consumption rose at the fastest pace since 1973. That's a worrisome development considering OPEC's limitations.
China increased its energy consumption by 11.2 percent, moving ahead of the United States as the world's biggest energy consumer. China accounted for 20.3 percent of global demand compared with 19 percent for the U.S.
However, most of China's energy consumption was in the form of coal. The U.S. is still the world's leading consumer of oil, using 21 percent of the world's supply, double China's consumption.
Importantly, the top suppliers to the U.S. are Canada and Mexico. But since oil has a global market, and since the size of the pie seems to be fixed, any production constraints or demand spikes affect the U.S. as much as anyone else.
What is evident is that demand is continually rising and that all of the world's oil producers, including OPEC, may be unable to meet it. In the absence of a significant rise in production, oil prices will continue to increase, unsettling the global economy even further.
Unfortunately, higher prices are the new normal.
Wednesday, June 08, 2011
There's been a lot of focus given to the country’s $14.3 trillion debt, which has now reached the government's legal borrowing limit.
However, that amount is chicken scratch compared to what the government really owes.
The federal government's total unfunded obligations — the gap between spending commitments and revenue — has reached a record $61.6 trillion, or $534,000 per household.
These unfunded commitments include programs like Medicare and Social Security.
The federal debt only includes what the government owes to Treasury holders. It doesn't take into account what's owed to seniors, veterans and retired government employees.
This problem — this liability — is so big that it's hard to comprehend.
For perspective, $61.6 trillion represents more than one-third of the market value of all the goods and services produced in the United States.
It's also more than five times the amount that Americans have borrowed for ALL other debt, including mortgages and car loans.
The government has promised pension and health benefits worth more than $700,000 per retired civil servant. Yet, the government has no money set aside to pay for those benefits.
For example, military health care costs more than doubled in the past decade. They account for $52.5 billion in next year's proposed budget. Retired veteran's pay represents another $50 billion or so a year.
But the problem of unfunded obligations isn't just limited to civil servants and veterans.
The number of people on Medicare and Social Security is going to double in the next 10 years. The Baby Boomers — roughly a quarter of the US population — begin retiring next January and will swamp the Social Security and Medicare systems over the following two decades.
While Social Security collected $2.6 trillion more in revenues than it paid out in benefits over the past three decades, that surplus — the infamous Social Security "Trust Fund" — has already been spent by the government on other programs.
The Social Security trustees say this "Trust Fund" — which amounts to nothing more than IOUs, or government bonds — will be exhausted in 2036.
But remember, this money doesn't even exist. The government will have to make budget cuts, taking money from other programs, to come up with the $2.6 trillion (plus interest) to repay the American people the money it owes them.
The takeaway here is that the government has made promises it cannot possibly keep. It will never be able to come up with $62 trillion. Those monies do not even exist.
That's why they are referred to as "unfunded" obligations.
Remember, these unfunded obligations amount to $534,000 per household. So every American household could sell their home (if they even own one), plus all of their worldly possessions, and it still wouldn't cover the amount due.
The government's choices are to simply not pay the future medical and retirement costs of its senior citizens, or heavily tax its citizens to acquire the money needed to repay them for the previous debts it already owes them.
Either choice is a horrible one for the American people.
Friday, June 03, 2011
On Thursday we got word that the Manhattan District Attorney's office subpoenaed Goldman Sachs over its activities that led to the financial crisis.
Goldman marketed risky investments betting that the housing market would continue to climb just before the whole thing melted down. The bank simultaneously reaped billions of dollars from its own bets that the housing market would collapse.
Though many Americans are looking for justice to finally be served on Wall St., this subpoena is essentially a request for information from Goldman and does not necessarily mean the company will face any charges.
Since Goldman is part of the oligarchy that rules America, I'll wager that this investigation will go nowhere.
That doesn't mean that Goldman isn't as guilty as sin, because the facts indicate they're as dirty as hell.
In April, the Senate released a 639-page report showing that Goldman had steered investors toward mortgage securities it knew would likely fail.
The report found that Goldman marketed four sets of complex mortgage securities to banks and other investors. It also found that Goldman failed to tell the banks and investors that the securities were very risky, even as they secretly bet against the investors' positions and deceived them about its own positions. The report concluded this was part of Goldman's effort to shift risk from its balance sheet to those of investors'.
This is the smoking gun that reveals Goldman to be a criminal organization that should be put out of business. But that would require justice, which we no longer have in America. Goldman has bought our government and it now owns it.
It doesn't play by the rules; it makes them.
Last summer, Goldman agreed to pay $550 million to settle civil fraud charges by the SEC of misleading buyers of mortgage-related securities. It amounted to chump change for the multi-billion dollar investment bank. The fine was a mere slap on the wrist, making the government appear to be serious and committed.
However, it isn't. The investigation is nothing more than a charade.
Goldman acknowledged that its marketing materials for the deal in question omitted key information for buyers. But it refused to admit legal wrongdoing.
When you rule the world, you never have to admit wrongdoing. And when you make the rules, you're always right.
Goldman has paid off the regulators and the Congress. And it's convinced them all that if it were to face criminal charges, it would destroy the financial system and the economy. Goldman has the whole world believing it is too big to fail.
You can call it economic blackmail. You can also call it nonsense.
This kind of chicanery and fraud isn't unique to Goldman Sachs. It's pervasive on Wall St.
Does anybody remember Repo 105? It was the arcane mechanism by which Lehman Brothers hid its debt (leverage) from the world.
Using Repo 105, Lehman temporarily swapped assets (such as bonds) for cash. A Repo, or repurchasing agreement, is a way to borrow money. But an accounting rule allowed Lehman to book the transaction as a sale and reduce its reported borrowings, according to a report by the court-appointed Lehman bankruptcy examiner last year, a former federal prosecutor.
Wall St. gets away with these outrages (or criminality) because of ineptitude at best, or complicity at worst.
The government's most basic duty is the defense of its citizens, from both foreign and domestic forces. Fraud should be regarded as one of those forces.
A robber uses force to take what is not rightfully his. A fraudster uses stealth to take what is not rightfully his. The difference comes down to force versus stealth. However, the result is the same: the loss of property by its owner and the disordering of civil society.
In refusing to hold Wall St. to the letter of the law, and revealing a willingness to be bought, conned, manipulated, connived and controlled, our government has failed miserably to perform its basic function of defending its citizens.
That has undermined the Republic and further diminished the public's waning faith in our government.
Wednesday, June 01, 2011
The America of this nation's forefathers is a relic of the past. It is long gone, though its legacy will remain a subject for history books. Its ghost will haunt us, while providing a cautionary tale for future generations.
America is no longer the land of the free. It is now ruled by oligarchs and corporatists. And it is no longer governed by the rule of law. The rich, the powerful and the politically connected abide by their own, very different, set of laws.
The corporatocracy has taken hold of our government. We are now the United States of Corporate America.
The Supreme Court has even validated huge, powerful and influential corporations, ruling that they are the equivalent of individual citizens and thereby subject to all the same rights and privileges.
As absurd as this proposition is on its face, it is now affirmed as law.
The pharmaceutical industry wrote the Bush prescription drug law. Big Energy wrote the Cheney energy policy. Regulatory agencies are run by officials from the very industries they are supposed to regulate.
Officials from the Minerals Management Agency (MMA) were having drug-fueled sex parties with oil industry lobbyists before the BP spill predictably occurred. Good times.
The government regulators have been co-opted and now need their own regulators. The corporatists and oligarchs own them. The MMA, FDA and SEC are just some examples of failed regulators who have chosen to protect their corporate overlords rather than the public interest.
After Obama was elected, there was a public effort to draft author/journalist Michael Pollan as the next Agriculture Secretary. Pollan, an astute and learned man who knows all about the food and farming industries, said he would never take a job in which industry lobbyists would be in the same room as him writing laws.
The fact that such a state of affairs would preclude such a worthy candidate from serving in government tells you all you need to know about how corrupt and dysfunctional it is.
As of 2009, there were 185 former members of the House and Senate registered as Washington lobbyists. Congress simply serves as a gateway to the money and influence-peddling of lobbyists.
America is ruled by greedy Wall St. financiers, massive insurance companies, powerful real estate corporations, huge pharmaceutical companies, media conglomerates, Big Agribusiness and Big Energy companies.
These massively powerful and uber-wealthy special interests have turned our elected leaders into their servants.
However, most Americans remain apathetically unaware. They are asleep, ignoring serial injustices and outrages. This lax attitude only allows the downward spiral to continue.
There is little or no public outrage over the continual loss of our freedoms or the usurpation of the rule of law.
There is no outrage over the power and reach of the Military-Industrial Complex or of its Wall St. backers.
There is no outrage directed at the oligarchy that rules us and shirks our laws.
There is no outrage over the revolving door between Washington and Wall St.
There is no outrage over the cozy relationship between Washington and the private sector that it is supposed to regulate.
An FCC Chairwoman recently voted to approve the merger of Comcast and NBC/Universal, and subsequently took an executive position with that company. Somehow this was permissible. Only in a rotten, corrupt government would this be acceptable or legal.
The vote was a mere formality; all mergers and acquisitions are approved. No company is too big anymore. Competition no longer exists, and it doesn't even matter to our government. Big Business gets whatever it wants.
Small companies are the engines of innovation and job creation. But big companies buy them, exploit their ideas, ingenuity and inventions, then lay off their employees in the aftermath.
The public's trust has been destroyed. The people don't trust the media, politicians, government, bankers, corporations and most institutions in general.
Perhaps it's this lack of trust that has manifested itself in the form of apathy. It's too bad because that's what the corporatists and oligarchs count on, and how they corrupted and co-opted our government and its laws in the first place.
This country is broken in so many ways, yet we are never lacking for blind, jingoistic patriotism. Somehow America manages to maintain an over-abundance of self-esteem.
Too many Americans are intellectually lazy, incurious and brainwashed by propaganda. They don't know what they don't know, and they don't even care to find out. As long as they are fed a steady diet of trashy TV, celebrity gossip and televised sports, they're satisfied.
Where is the outrage at all of the injustice? It's nowhere to be found. This country has lost its soul. We're a pathetic bunch.
In a republic, you ultimately get the government you deserve.