EB articles on the economy, August 20

Published on 20 Aug 2007 by Energy Bulletin. Archived on 20 Aug 2007.

Economics - Aug 20

by Staff

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A debt culture gone awry
Hamid Varzi, International Herald Tribune
The U.S. economy, once the envy of the world, is now viewed across the globe with suspicion. America has become shackled by an immovable mountain of debt that endangers its prosperity and threatens to bring the rest of the world economy crashing down with it.

The ongoing sub-prime mortgage crisis, a result of irresponsible lending policies designed to generate commissions for unscrupulous brokers, presages far deeper problems in a U.S. economy that is beginning to resemble a giant smoke-and-mirrors Ponzi scheme. And this has not been lost on the rest of the world.

This new reality has had unfortunate side effects that go beyond economics. As a banker working in the heart of the Muslim world, I have been amazed by the depth and breadth of anti-Americanism, even among U.S. allies, manifested in reactions ranging from fierce anger to stoic fatalism. Muslims outside the United States interpret America's policies in the Middle East not as an effort to spread democracy but as a blatant neocolonialist attempt to solve its economic problems by force. Arabs and Persians alike argue that America's fiscal irresponsibility has forced the nation to seek solutions through military aggression.

Many believe that America's misguided adventure in Iraq was a desperate attempt to capture both a reliable source of cheap oil and a major export market for the United States.

...What have Americans gained from their nation's mountain of debt? A crumbling infrastructure, a manufacturing base that has declined 60 percent since World War II, a rise in the wealth gap, the lowest consumer-savings rate since the depths of the Great Depression, 50 million Americans without health insurance, an educational system in decline and a shrinking dollar that makes foreign travel a luxury.

The best cars, the best bridges and highways, the fastest trains and the tallest buildings are all to be found outside America's borders.

Hamid Varzi is an economist and banker based in Tehran.
(17 August 2007)




How Far Will the Crash Go and What Do we Do Now?
The “Crash of 2007-8” is underway
Richard C. Cook, Global Research
The immediate triggers are being described quite well: the collapse of the U.S. subprime mortgage market; the vulnerability of the rest of the economy to the subprime undertow, due to the “efficiency” of the markets in spreading risk; the worldwide overextension of cheap credit; the failure of large institutional investors and Wall Street brokerages to behave responsibly; and the long-term effects of the U.S. trade and fiscal deficits which are now coming home to roost.

Amazingly, some commentators have been asking “if the monetary crisis will affect the producing economy,” and whether a recession lies ahead. In reality, the U.S. producing economy has been in a recession for the last year. This is shown most clearly by the decline in M1, the portion of the money supply immediately available to people for making purchases.

The causes of the M1 decline are two-fold. One is the weak purchasing power of American consumers, at least half of whose decently-paying manufacturing jobs have been eliminated by the outsourcing, mergers, and productivity improvements during the past two decades. The other is that while many of the U.S. corporations not connected to housing have been doing all right, their success has been tied to overseas investments and sales, such as GE and GM who are heavily invested in China. ..
(18 Aug 2007)




Shares to fall further, banks will go bust
Julia Finch, The Guardian
A top-performing fund manager warned yesterday that the markets turmoil would result in "one of the greatest banking crises in decades".

Ken Murray of Edinburgh-based Blue Planet - whose Worldwide Financials Investment Trust has been one of the best-performing financial funds in recent years - said: "The credit cycle has turned, bad debts are soaring, banks will go bust and stock markets will fall much further."

His views are among the most pessimistic, but institutional UK shareholders are almost universally gloomy about the outlook for the markets and deals. ..

Robert Talbut, chief investment officer at Royal London Asset Management, said the events of the past three weeks were like the secondary banking crisis of 1974, when the Bank of England was forced to launch a lifeboat scheme.

"Some people are likening this situation to the Long-Term Capital Management hedge fund crisis [in 1998], but I think it's more like the secondary banking crisis of 1974. A number of secondary and tertiary financial organisations are not going to be able to continue - both in the US and elsewhere." He said the turmoil "could spiral out of control into the real economy". ..
(17 Aug 2007)