Wednesday, February 08, 2006

Long Range Economic Indicators Are All Pointing To Disaster


By Elaine Meinel Supkis

Despite all the economic pundits pretending oil has little to do with prosperity or stocks, the DOW went up today based entirely and only on the news that oil is slightly cheaper than in December. Alas, this is due to a 44% hike in imported oil! The graph above clearly shows how, after the first oil crisis, when Reagan started tax cutting when oil prices soared, our collective economic good health has deteriorated in dangerous ways, making our country vulnerable to foreign powers as our economy dies.

From the Northern Trust Company, Mr. Kasriel:
On the day that Ben Bernanke, the nominee for the next Fed chairman, appears before the Senate Banking Committee for his confirmation hearing, it is only fitting that his predecessor's legacy be reviewed. Although it is true that under Alan Greenspan's command of the Fed the U.S. economy has experienced unusually low volatility, this low volatility may turn out to have been a Faustian bargain. That is, the low volatility was achieved by increasing the indebtedness of the U.S. economy, especially the household sector, to record levels. And increasingly, the debt is owed to foreign entities, not ourselves. The final chapter on Greenspan's legacy will not be written until we see how this indebtedness issue is resolved.
Collective home asset equity extraction has averaged, over a 50 year span, around zero since the people using their homes for second mortgages and other debt instruments have been balanced by people paying off their mortgages. It is not uncommon, before 2000, to see most people competely paying off the last of a mortgage by the time they retire, if not much earlier.

Now, it is the reverse. We have gone from zero to -$280.3 billion last year. This is way off the historic scale.

Here is another chart, based on Mr. Kasriel's fine research. Unlike him, he notes only when Greenspan took over, I note the much stronger correlation between tax cutting and shooting up debts that accompany each cycle. I remember the excuse for the first Reagan/Bush tax cuts: many middle and lower classes were, due to hyperinflation, shoved into higher tax catagories and wanted relief with some justification. But upon getting this surprising hike in income, they seem to have run off and used it to corral more loans. I know how this works, they say, "Hey, my take-home pay is now $600 a week! I can afford a second mortage for $35,000! Imaging what I could buy with that loot!" and so many merrily ran up big debts.

The public budget then ran up huge debts due to lack of tax revenues and so the twin cycle of destruction, rising personal and public debt, was born, for we managed to keep an even keel fiscal/personal culture for fifty years, now that was completely destroyed and is now in total ruin.

Clinton raised taxes and Greenspan raised interest rates and thanks to Russia suddenly entering the oil selling market, forcing OPEC prices down, we had a great economy. Despite few Americans being able to run up huge debts, there was a lot of business and a great deal of investment in infrastructure/corporate building. Now, just like at the beginning of the Reagan/Bush reign before, we have steep oil price hikes and inflation beginning to rage. Our trade deficit stinks because this is one of the few ways we can reduce overhead caused by oil inflation so it seems as if inflation is low but it is not for instead of seeing worker's wages inflating we are seeing them deflate just like the three year period leading up to the Great Depression!

From Marketwatch:
"Demand (for more oil) seems to be holding up OK, despite relatively high gasoline prices at the pump," Shankar said, pointing out that a surge in product imports -- up 44% on a year-ago basis -- is "clearly helping bolster product stocks in the U.S."

Motor gasoline inventories were up 2.8 million barrels, the American Petroleum Institute said in a separate report also released Wednesday.

"The strong build in gasoline coupled by the fact that every major product has inventories above the high end of their average range for this time of year will add to the recent bearish sentiment," said James Williams, an economist at WTRG Economics.
Far from being good news, this shows starkly how facts that are horrible are seen as great by standard economic pundits. Namely, we import much more oil now right when even oil soaked Bush admits we are "oil addicts"! And just because everyone has decided to purchase oil no matter what, it being hard to change SUVs mid-stream, this means Americans are going to buy more and more what? Any idea?

I know the answer to that riddle!

More debt.

This last year, every time corporations have cheated oil inflation by destroying America's working class/middle class, investors have celebrated and Bush is heady with joy, they think all of this terrible stuff will end up with America ruling the planet.

Look at my top chart. Foreigners are rapidly buying up our assets! No sovereign nation can be sov-anything if they are insolvent!
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