Thread: GEAB April 2007: New Great Depression –Implosion US Societ

GEAB in April 2007 - A Chronicle of America’s Very Great Depression – Two growing trends: A historical reversal of global financial balances / An implosion of the US society

- Excerpt GEAB N°14 (April 16, 2007) -

America’s 2007 Very Great Depression has indeed begun; and represents the US dimension of the phase of impact of the global systemic crisis LEAP/E2020 anticipated early 2006, knowing that the US are the central pillar of the global order created after 1945. The structural weakening of the US is therefore both the cause and consequence of the global systemic crisis, international trends directly influencing the US domestic situation. At this stage, LEAP/E2020 researchers identify that two aspects of this « very great depression » are now established and emerge clearly from the current statistical, economic, financial and strategic chaos:

I- A historical reversal of global financial balances: For the first time since 1913, the US lost their status of world’s largest financial centre

II- An implosion of the US society: The middle class is sacrificed between the endless collapse of housing prices and a revenue disparity ratio now above that of 1928.

All along the year 2006, LEAP/E2020 described many times the characteristics of the on-going global systemic crisis. On various occasions, our team highlighted the link existing between this crisis and the place of the US on the international arena, given that today’s world is to a large extend shaped up by forces inherited from the after-WWII, characterised by the fading away of Europe and the ascent of USSR and USA. The collapse of USSR between 1989 and 1992 then left the US unrivalled until today, this country thus literally becoming the keystone of our current global system. The global systemic crisis initiated in 2006, one extensively detailed by LEAP/E2020 along the GEAB’s various issues, and which entered its phase of impact in 2007, is hitting the US full stride, with two trends of high historical velocity now appearing: on the one hand, a fast change in the US relative position on the global scale; and on the other hand, a radical reorganisation of US society’s internal balances that prevailed since 1940/1950.

I- A historical reversal of global financial balances: For the first time since 1913, the US lost their status of world’s largest financial centre
LEAP/E2020 already described many of the trends at work in the decreasing role of the US in the field of international trade or in the field of wealth production. For instance, GEAB N°6 detailed the now dominant place of the EU (1) in the external trade of oil-producing countries: « One just needs to know that in 2005 the EU represented more than 50% of Russian foreign trade, 65% of Algerian foreign trade, 31% of Iranian foreign trade (followed by Japan with 12%), 78% of Norwegian foreign trade, more than 55% of the foreign trade of Gabon, more than 40% of Nigerian foreign trade, more than 50% of the Congo foreign trade, 20% of Saudi Arabian foreign trade (against 16% only in the United States), nearly 30% of the foreign trade of Kuwait (against 11% only in the United States) and more than 20% of the foreign trade of the United Arab Emirates (against only 6% in the United States) ». In the decades following 1945, the US held this first place by far; and not only with regards to oil-producing countries.

This example, as well as the fact that China has now surpassed the US as first importer in the EU (2), illustrates clearly a historical trend of which another facet was recently identified by the British consultants Absolute Strategy Research (ASR): according to the findings of Thomson Financial, at the end of March 2007, European financial markets surpassed in value their US counterparts. Such a change constitutes a major systemic break, putting an end to a century-long tendency initiated during the first World War. According to Ian Harnett (managing director of ASR and former UBS-Warburg’s Head of European Strategy) who identified this change, it is indeed a « seismic tremor » for the global financial markets as it shows a displacement in the centre of gravity of the global financial sphere out of the US and towards the Old Continent. For instance, at the end of March 2007, European markets (including Russia) totalled up €11,819 billion against €11,760 billion only for US markets. In the past few years, they grew by 160% while US markets only grew by 70%. Of course the US dollar’s depreciation contributed to strengthen this trend (3).

According to the LEAP/E2020 team, the trends at work in this disruption of global financial markets’ hierarchy are profound and sustainable: relentless and durable decline of the US currency, decreasing share of the US in international trade and the production of global wealth, geographic remoteness of the US compared to the « Old Continent’s » Eurasian economic centres, impoverishment of the US consumer, collapsing competitiveness related to collapsing quality of education, … Due to these reasons, the trend identified by Absolute Strategy Research will amplify throughout the year 2007 and the whole decade. The consequences for financial and stock players are considerable, as they turn upside down all reflex actions acquired for nearly a century. LEAP/E2020 will come back later in GEAB N°14 on the practical consequences of this seism for market players.

II- An implosion of the US society: The middle class is sacrificed between the endless collapse of housing prices and a revenue disparity ratio now above that of 1928

A remarkable work conducted by Thomas Piketty and Emmanuel Saez on the evolution of high revenues in the US (4), shows that the revenue disparity ratio is now comparable to what it was on the eve of the Great Depression at the end of the 20s. According to this work, the revenue ratio between the richest 0.01% richest and the poorest 90% lingered around 170/180 all along the years 1950 to 1980, and lept to 880 in 2005, i.e. about the same level (891) as in 1928. The chart below clearly illustrates the return of the US society to the level of income disparity that prevailed during the pre-1929 period.



US top decile total income share

According to LEAP/E2020, beyond the mere economic analyses, such a situation corroborates the idea that 2007 will signal the entry of the US into the « Very Great Depression » because it conveys tremendous social and political tensions, already illustrated by the amount of foreclosure evictions (5) that the economic recession will multiply even further. The US society is being split into two groups, one poor and the other very rich, with the middle class about to fall in the poor group.

Thus, according to our researchers, the on-going economic trends, because they relate to heavy historical trends affecting all social and economic balances for many decades (cf. GEAB N°11, 12 and 13), convey a increased devastating impact. As we indicated in the previous issue of GEAB, the 1929 crisis happened in a historical context of US ascent. Underlying fundamental trends were therefore favourable to the United-States. The current depression takes place in the opposite historical context. In April 2007, as we pass by the tipping point of the global systemic crisis, trends speed up and their impact intensify and become visible to each and everyone.

In GEAB N°14, LEAP/E2020 will describe four other trends that will preside over the coming quarter:

1. On-going explosive contagion of the subprime crisis to other types of home loans and other sectors of the economy

2. The return of stagflation: Towards a US growth falling beneath 1 percent by this summer

3. Sharp increase in US public deficit by mid-2007

4. Intensification of the geopolitical oil crisis in May 2007 – Iran and Venezuela on the frontline: Oil on the rise (100 USD) and Dollar on the fall (1,50) by summer 2007

-------
Notes:

(1) Of course Japan and China too hold an increasing share in international trade and the production of global wealth, reducing all the more the US share in this field.

(2) Source: Financial Times, 03/22/07

(3) Read also « Europe tops US in stock market value », Financial Times, 04/02/2007

(4) “The evolution of top incomes: a historical and international perspectiveâ€

GEAB in June 2007 - Summer 2007: Fed loses control on US interest rates and crisis reaches China and EU

- Excerpt GEAB N°16 (June 16, 2007) -

This second quarter’s fundamental event about to shove most players’ anticipations over the coming months, is certainly the final and simultaneous failure of the two key-strategies defined by US leaders, i.e.:

. in the economic, financial and monetary fields, the Fed’ policy initiated a year ago when M3 publishing was abandoned and aimed at substituting a financial and stock bubble to the bursting housing bubble in order to maintain US growth (and capital attractiveness) has now patently failed, thus entailing a historical loss of the Fed’s control on US interest rates (for the first time since 1918, except in times of war or social/economic depression)

. in the military, strategic and diplomatic fields, the stability plan for Iraq is a complete failure taking place in the framework of Washington’s growing political paralysis (which LEAP/E2020 plans to describe in GEAB N°17 - on subscription.

Spring 2007 indeed appears as the tipping point of the global systemic crisis: the US economy went into recession, US interest rates were restored, the bond market is in crisis, the subprime crisis begins to hit large US financial institutions such as Bear Stearns (1), Goldman Sachs (2) and Freddie Mac (3), the US housing crisis is speeding up (4), the paralysis of Washington’s political power grows (5), the isolation of the US on the international arena increases, the security plan for Iraq proves to be a complete failure, the US is powerless against Iran, the relaunch of the Israelo-Arab peace process aborts, trade tensions between China and the US rise, a growing number of countries (Kuwait, Syria,…) flee from the US dollar, etc…

However, according to LEAP/E2020 researchers, it is undeniably this Fed’s and White House’s (Pentagon’s) double simultaneous failure which affects most the unfolding of the global systemic crisis for the months to come, as it precipitates China and the EU into the « vacuum » thus created and thrusts the US into « recessflation ».



Rest of the world holdings of US financial assets / Source US Federal Reserve - PrudentBear

With regard to the consequences of this failed attempt of economic relaunch conducted by Ben Bernanke, the Fed’s loss of control over US interest rates is of historical dimension (6).

Today, the Fed’s official stance pretends that the US economy will grow again in the coming months and reduces to a mere anecdote the collapse of US growth in the first quarter (down to 0.6 percent only), anticipating a 2.5 see 3 percent growth altogether in 2007 (7), knowing that recent economic previsions published by the UN place US growth around 0.5 percent in 2007 and 2008 ( 8 ). As early as March 2007, LEAP/E2020 anticipated a growth below 1 percent in the third quarter of 2007 (in consideration of the first terms 0.6 percent, annual growth is very likely indeed to be at best below 2 percent, more likely negative in the end).



Liquidities withdrawn by US homeowners between 1991 and 2006 / Source Washington Post - Alan Greenspan & James E. Kennedy
Nevertheless this official stance is contradicted by most available objective indicators (corporate performance, employment,...), even if it seems supported by a whole range of other indicators, either indicators carefully ‘cooked’ by the Federal government or subjective indicators reflecting for instance the impact of official statements on public opinion. LEAP/E2020 already described in 2006 how opinion manipulations work; and in the present issue of GEAB, our team of researchers details a number of objective indicators that can help to anticipate precisely US economic trends in the next quarters (in particular: hidden unemployment rise, « phantom-GDP » mechanism of US growth overrating, or increasingly devastating impact of the housing and subprime crises).

A great lack of transparency reigned over the Fed’s actions in terms of monetary mass and global assets in USD (such as the end of M3 publication at the end of March 2006) (9). Well this strategy proved to be a complete failure. The attempt to substitute a financial/stock bubble instead of the housing bubble, like Greenspan did when he turned the internet bubble into a housing bubble, in order to maintain US growth did not succeed.

-------
Notes:

(1) Bear Stearns opens the bal with second-quarter profits dropping by 10 percent, in relation to the subprime crisis. But this second quarter is probably the first of a long series to experience the full effect of a crisis that is only beginning (described in the previous issues of the Global Europe Anticipation Bulletin. Recent declarations by Bear Stearns leaders provide a clear picture of what large US investment banks outght to be expecting : after the subprime loans, Alt-A loans (less risky) are beginning to provoke corporate losses and hedge-funds liquidations for 4 billion worth of mortgage-backed bonds. Source : Bloomberg, 06/14/2007

(2) Source : MarketWatch/DowJones, 06/14/2007

(3) Source : MarketWatch/DowJones, 06/14/2007

(4) In June 2007, Harvard University released the yearly « Joint Center for Housing Studies » on housing trends in the US. The study clearly suggests that the housing crisis is only beginning as « prices only begin to fall, riskiest loans are only about to enter refinancing period, and credit restrictions only started ». The impact on the financial sphere, consumption and employment is still ahead and will materialize more and more roughly from this summer onward.

(5) President G.W. Bush’s approval rating fell to 29 percent, with 66 percent of respondents disapproving of him (his lowest result ever). In the same Wall Street Journal/NBC poll, reported by MarketWatch/Dow Jones 06/13/2007, 68 percent of Americans consider that their country is headed in the wrong direction. 23 percent approve the performance of the 1-year long Democrat-controlled Congress. Iraq and the economy being key-factors of US public opinion today, the gap between the « official » figures and the optimistic statements we hear today on the US economy on the one hand, and the American opinion on the state of their country on the other hand, is clearly abyssal.

(6) The military and strategic aspects will be described in GEAB N°17 (on subscription.

(7) Source : GlobalInsight.

( 8 ) Source : Rob Vos, Director of the Development Policy and Analysis Division of the Department of Economic and Social Affairs (DESA), UN, 05/30/2007

(9) In the second issue of GEAB (February 2006), LEAP/E2020 announced the discontinuance of M3 publication.

(10) Recent UN economic revised forecasts anticipate a 0.5 percent US growth in 2008, far from the 2 to 3 percent announced by the US authorities and largest banks and financial media. Director of the Development Policy and Analysis Division of the Department of Economic and Social Affairs (DESA), UN, 05/30/2007

(11) Source : MarketWatch/DowJones, 06/12/2007

(12) Source : Financial Times, 06/12/2007

(13) Source : MsnMoneyCentral / Financial Times, 06/12/2007

Lundi 30 Août 2010

http://www.leap2020.eu/GEAB-in-June-200 ... a5094.html

many links on this post; go to the link above if you wish to view them