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US/Mex:
Failed System & Failed State
By Jim Willie CB
08/31/07 "FSU"
-- -- Amusement is my response when other writers call
me or my work ‘extremist’ as Claude Cormier recently has. He
is a topnotch analyst out of Quebec, whose work is respected
and admired. He himself cites extreme events, like
comparisons between the United States and Argentina, in the
decimation of the middle class amidst prolific inflation and
financial sector foul play. Labels are not kind, but my job
is to analyze the extreme situation on a host of fronts. To
be honest, the label is taken here as an extreme compliment,
since it means my perceptions are squarely on target.
Additional extreme observations can be detailed, which
points to systemic breakdown. The US financial system shows
signs of failure, the US Economy suffering deeply in
association. If one were to list the extreme events and
factors in the last few years, reaching a climax nowadays,
the recitation would flow over into several dozen pages.
As an important US holiday approaches
(Labor Day), a reflection is in order of the extremely dangerous
footing we find our nation in, and the predicament that a nation
of laborers finds itself in. Workers find their situation
extremely tenuous, especially in light of the corporate sell-out
of the American worker in favor of Asians, aided by USGovt
incentives and Wall Street cheers. Our workers became accustomed
to the betrayal during the 1980 decade with the Pacific Rim
powered by the Asian Tigers. Why cannot economists see that a
decade of Vietnam War inflation, a Johnson-Kennedy Guns & Butter
agenda, and US Dollar benefit from high Volcker interest rates
(leading to Plaza Accord to bring down the US$), resulted in a
colossal cost to the US Middle Class and workers??? They took
more blows with the 1990 NAFTA betrayal, as Mexican assembly
plants cropped up across the border. The current Chinese and
Indian outsource movement is yet another betrayal to the
American worker. Outsource the job, enjoy the lower cost to the
corporate profit margin, and send the US employees into the
street, especially if they are near retirement with pensions.
Let us all celebrate Labor Day,
marred by a skein of betrayals. What is needed is a national
program to put Americans to work. Instead, we fight an endless
winless war abroad, in support of private syndicates who profit
heavily. How about a national mandate and high priority
initiative to rebuild the US bridges, access roads to major
cities, tunnels, railroads, sewer pipes, water pipes, natural
gas pipes, crude oil pipes, airports, and port facilities? And
yes, forbid Halliburton and other connected crooks to
participate in any and all bidding? FD Roosevelt initiated
numerous plans. Why not now? High speed trains are common in
France, Germany, and Japan, soon to China. The US lags badly.
In fact, one can conclude that the US
is morphing into a bizarre Third World nation with a powerful
military and a banking system well equipped to abuse the power
extended from printing unbacked money marked as the world
reserve currency. Reflection at holiday time brings front and
center thoughts of how insistence on placing the Iron Triangle
(Pentagon, Defense firms, Lobby firms) in the catbird seat has
contributed mightily to the weakening of the US Economy, the
undermine of the American worker, and slow bleed of the US
Middle Class. That portion of the federal budget receives almost
no debate, no accountability, no prosecution for fraud.
WAGES & PENSION
DESTRUCTION
In the last 30 years, the inflation
adjusted wage per adult has fallen by 30% to 35%, inflicting
great hardship on the family structure. A household needs to
enjoin three wage earners, but such is impractical since most
offspring are reckless spenders, not effective workers, and
since Uncle Charlie (as in the television show My Three Sons)
do not fit the mold anymore. It is next to impossible to put
one’s savings to work without engaging in high jinks gambling.
Entire pension funds were killed in the 2000 stock bust. Outside
of TIAA-CREF, where academic and many institutional pensions are
managed, some hefty losses were inflicted. The advent of 1%
official Treasury yields enticed many pension managers to take
risks which are biting deeply into future retirement income.
This all seems wicked and extreme. In fact, the details of the
entire national financial and economic landscape seem like out
of a futuristic science fiction novel with little basis in
sanity. The incredible part of the story seems to be that few
smart folks cite the extreme nature of it all. The US financial
system, the USEconomy, the global economy, the US$-based banking
system, they are all on the brink. Asset-backed bonds have nuked
the banking industry. The housing decline puts the US Economy at
grave risk. The global economy leaves Asians and Persian Gulf
nations owning enough US$-based debt so as to jeopardize US
sovereignty. Call me an extremist. If others do not see the
extreme precariousness of the situation, they are compromised,
unaware, sleepy, or corrupted.
FRAUDULENT STATISTICS
AS BASE
The 2000 tech telecom stock bust
provided an earthquake across both the financial sector and the
general economy. An official recession was admitted and
acknowledged, late. That means Gross Domestic Product growth
fell below minus 5%, since the USGovt gimmicks build in
exaggeration by over 4% at least. That fact alone sounds
extreme, especially in view of additional distortions, like the
Consumer Price Index claimed at 3% when it runs closer to 11%.
Extreme gimmicks remove rising components. And then the
unemployment rate is claimed at 4% to 5%, when in reality it is
more like 9% when those without jobs are counted, using data
released by the same spin doctors at the Bureau of Labor
Statistics. Productivity would be negative if not for the same
gimmicks on hedonic adjustments which assist the GDP. They got
caught with bogus statistics last summer, on the relationship
between productivity and import prices. You cannot import
productivity! Distortions in the compass readings are skewed to
the extreme, to such a degree that monetary and economic policy
cannot remotely be adequate in response to current conditions.
The gulf between official statistics and reality seem extreme.
UNFIXABLE UPSIDE DOWN
ECONOMY
In the wake of the great 2000 stock
bust came another even greater extreme. In bizarre yet desperate
fashion (hidden), the Greenspan Fed encouraged a housing bubble
in order to save its own reputation. The USEconomy could not
afford a recession, with all the inherent debt liquidation. So a
myth of an Asset Driven Economy was promoted. That seems extreme
for any central bank. Imagine proclaiming as healthy, valid, and
with firm foundation an economic dependence on assets (housing &
stocks) pushed higher by inflation!!! A strong economy would
rely upon business investment, production, income growth, and
sensible spending, not the lunatic retail mania that we find the
USEconomy dependent upon. Almost 30% of all new jobs created
since 2002 have been tied to the housing construction bubble.
Some call it a boom, but in my view just another absurd bubble.
Imagine instilling a dependence for economic growth on a
non-producing asset like a house, instead of a manufacturing
plant where value can be added with intellectual capital and
jobs created. That is a cockeyed extreme. Imagine the extreme
structural imbalance of having 70% of the USEconomy derived from
consumption, led by retail. Here a graph displays the extreme
clutter of retail chains within the US landscape. This 7-fold
greater retail footprint of the US consumption over European
footprints is absurd. This is a ridiculous extreme.
Click Here For Retail Sales Footprint Chart
INDICATORS & PRIORITIES
Then we saw a stock market reach new
nominal highs, set records, as an economic boom is heralded. All
pure extreme nonsense, since the USDollar fell by roughly the
same 15% to 20% as the stock market indexes rose. Hence,
purchasing power of one Dow share or one S&P500 share has been
preserved. That is a wash, not a boom. One might even ask why
the S&P stock index is part of the US-based Leading Economic
Indicators, when over 30% of profit from such firms is derived
from outside the USEconomy. The recent Cisco Systems quarterly
report highlighted this effect, strong business abroad, weak at
home. The US Federal Reserve in the meantime has made official
statements incessantly referring to their fears of price
inflation, when what they really mean is the USDollar might fall
to such low levels that imported price inflation would threaten
the entire USEconomy. They fear a backlash from exported
inflation, soon importing it! So the USFed cannot talk about the
US$ currency exchange rate directly, yet its policy can easily
cause a rout on the USDollar with all its price inflation
consequences. That puts the USFed in an extreme box.
MUSICAL CHAIRS & HOT
POTATOES
The aftermaths of extremely
incompetent economic guidance and planning, combined with
irresponsible heretical banking policy, have led to an utterly
unfixable housing crisis and mortgage finance debacle. This mess
has years for dust to clear! The entire non-government bond
market has fallen into a situation difficult to adequately
describe. How about comparisons to a human body suffering from
seizures from bubbles in its arteries (from inflation of assets,
then deflation) but also beset by constipation from fraudulent
asset-backed bonds (like mortgages and associated leveraged CDO
bond derivatives)? Sounds about right, but again, quite an
extreme situation. With the threat to money market funds,
whether insured or not, the entire banking system seems to be at
risk of proper function. Musical chairs come to mind, which
demand players to find a seat when the music (credit flow)
stops. Hot potato comes to mind, much like the Drexel Burnham
plight, which demands players not to hold the acidic worthless
bonds. My claim is that all subprime mortgage bonds are worth
under 25 cents of par value, and ALL Collateralized Debt
Obligations with dominant subprime mortgage bonds are totally
worthless (as in 100% loss). Actually, the CDO bond losses are
much greater than 100%, sure to bite deeply into the value of
other assets of good value, like gold and crude oil contracts.
To me, the banking situation is on the ropes, an extremely dire
picture.
WALL STREET JUNK
With most Wall Street firms facing
junk bond status downgrades according to Credit Default Swaps on
their corporate debt, yet enjoying wonderful investment grade
debt ratings, we have more extreme corruption in the banker
brokerage system. Conversations with foreign analysts strongly
indicate a global perception of institutionalized fraud and
dishonesty in the US financial sector. In my view it spans
almost its entire spectrum. No, not all corporations engage in
fraud. But every suite in the US financial sector house contains
prevalent fraud. This is utterly extreme, but not surprisingly,
as a consequence to the Green Light given to deceit and swindle
with the USDollar no longer backed by gold. The end of a fiat
currency game is replete with extremes. Gigantic bailouts are
part and parcel of the extreme resolutions.
GIANT VEILED BAILOUT
The size of the mess, from housing
and mortgage bond bubbles, is an order of magnitude larger than
the lunatic LongTerm Capital Mgmt mess in 1999. Expect a larger
bailout, especially since it is denied vigorously. Worse this
time though, since confusion will abound. Questions remain
unanswered. Did the USFed accept mortgage bonds offered only by
Wall Street firms? Or only major banks? Major banks seem listed
as big beneficiaries so far. Was the injection of $30 odd
billion of funny money, otherwise called counterfeit funds in
private sectors, a secret Wall Street bond bailout disguised
poorly? Methinks yes. This seems extreme.
GLOBALIZATION BACKFIRE
The global economy seems like a
rubber band stretched far past its specifications for usage.
Labor arbitrage sends jobs to Asia. In return they own vast
tracts of US$-based debt securities. The US workers lose their
jobs in droves. A giant step backward has taken place on product
safety and quality. The end game seems to be trade sanctions,
scuffles over currency manipulation, blame game, market
ambushes, and lost sovereignty. Globalization sounds good, but
in practice it results in dislocation, conflict, and chaos, more
extremes.
RAMPANT DENIALS OF
REALITY
Denials have been so broadly uttered
by banking and economic and financial market leaders, that your
heads should spin. It becomes easier to make sense if you
conclude that every denial is wrong, and the louder the denial,
the more serious the effect. Now Premier Bank in the Kansas City
area is on the ropes, a Fed Reserve Bank. Like with a drunk, why
ask if Uncle Jack is a drunk, if his behavior and life does not
scream of alcoholism? Contagion of subprime mortgages to other
debt securities is evident. Spillover to the real economy is
evident, but not total, yet. Borrowing for consumption is
impossible anymore. The housing recovery is a mirage. Housing
sales and prices are nowhere near the bottom, as July existing
home inventory shot up to 9.6 months supply! The denials form an
Orwellian backdrop where the system intends to deceive, to lie,
and to misguide, so as to retain power and to keep the Middle
Class impoverishment process intact. What is missing is the
recognition that past denials of important concepts have almost
all been incorrect. No learning seems to result in Wall Street,
just ongoing compromise and deception.
MERGER OF STATE &
CORPORATION
The diabolic yet accepted merger of
state and corporate interests is preached as something
beneficial, a movement to keep America strong, to meet foreign
competition and even aggression. Nonsense! The merger invites
fraud and extreme profiteering, if not roll the carpet to a
totalitarian state. What extreme drivel. My experiment has
resulted in one person out of 30 adequately citing what fascism
is!!! The merger, called the Mussolini Fascist Business Model,
is the penultimate in inefficiency and the ultimate framework
for colossal theft with near zero prosecution. The Goldman Sachs
reduction from 9% to 2% in the gasoline weight of the GSCI
commodity index serves as best understandable evidence of such
fraud. Did GoldSax short the gasoline futures before the
decision to cut the weight by 7%? Of course, since if not,
people would lose their jobs for a missed opportunity to
profit.
LATEST DENIALS ON
RECESSION
The permitted aristocratic fleecing
inside financial markets is unspeakable, and surely extreme. The
latest denials have been reformulated into key questions. IS THE
USECONOMY HEADING INTO RECESSION ??? IS THE US FEDERAL RESERVE
GROSSLY OUT OF TOUCH ??? The answers in my opinion are YES and
YES. The USEconomy is furiously addicted to easy credit, which
has been curtailed. The home equity easy access wellspring has
run dry. What an easy call recession is! Look for more extreme
statistical distortion to prevent an official admission of
recession. New infusions of liquidity will in all likelihood
assist the friends of the powerful groups, not the rank & file,
not the run of the mill banks. Recent USFed injections went to
the major banks, almost without exception. The US Federal
Reserve is led by a university professor who has never run a
business, never managed a financial account, never even worked
in either, let alone worked in the private sector, but did serve
as an apprentice on the Fed Board itself. Such does not instill
confidence or adequately prepare for the job of leading the US
Politburo of central planner look-alikes. Fortunately, his
endless drivel about ‘inflation expectations’ has ended. Reality
will pull him at his leg, maybe the short arm.
NATIONALISM & FEAR
Then we have a mania of fear and
political fixation on terrorism. In my estimation, the USGovt,
the USMilitary, and the shadowy groups who bear alphabet soup on
unmarked lapels instill 1000 times as much fear in my life as
any Moslem lunatic in a faraway land. When a youngster with a
relatively undeveloped brain, it was an easy call for me to
conclude the Warren Commission was a whitewash in the wake of
the JFKennedy assassination. One can learn of unnatural deaths,
with some investigation, for all who stood on the Dallas Grassy
Knoll. A similar whitewash is my conclusion for the 911
Commission in the wake of the World Trade Center attack. A scad
of 30-year Treasury Bonds issued before the 1971 departure from
gold-backed USDollars were stored in the WTC vaults. And a scad
of financial records pertaining to the JPMorgan & Enron case
were stored in the third building. A scad of engineering
professors have challenged the official reports, citing mere
laws of physics. Are such engineers enemies of the state? The
Nazis developed what was called Reich Physics back in their day,
so that science would salute the fascist regime. Other
scientific disciplines followed suit. Even Robert Fisk casts
much doubt on the truth beyond the 911 events in The UK
Independent editorial dated 25 August 2007. He is their
Middle East correspondent. He outlines numerous questionable
facts and seeming contradictions. My view is simpler. A
syndicate took control of the White House since 1982, marred by
a certain event, which pursues a secret agenda and a clandestine
business. Enough.
When Habeas Corpus is suspended, when
internment camps are completed on US soil, when torture is
debated as justified, when pre-emptive attack is debated as
justified, when confiscation of personal assets can be ordered
in response to obstruction of a war whose cause was mostly
faked, when unchecked executive decrees flow like a river, my
fears are mainly directed within the 50 states and their federal
commandants. This is an extreme situation leading potentially to
a veiled military dictatorship. All precedent points to the
Fascist Business Model leading in parallel to a fascist
government regime. A lot of effort is going into this
unpublicized plan, probably not an idle exercise. It seems
extreme.
INSTITUTIONAL DISTRUST
The degree of public trust in US
institutions is at rock bottom. The level of foreign distrust
has never been greater, which likely will result in continued
vengeance taken against both the USDollar and its traded vehicle
the USTreasury Bond. That retribution could turn extreme. Over
70% of Americans do not trust their own Congress, the
representatives who sit in their stead. They seem grotesquely
compromised, bought and paid. The 2006 midterm election mandate
by the people has been ignored. The war commission report and
its recommendations have been ignored. Over 70% of Americans do
not trust their own Military to accurately and honestly report
the status of the Iraqi War. Probably a higher proportion of
Americans regard Wall Street as liars, parasites, con men, and
fraud artists. The entire nation appears at extreme crossroads.
As though the Untied States were not in enough trouble with
systemic tremors, take a look south of the border for an even
bigger nightmare unfolding. It is sure to spill over into the US
back yard.
RISING DISTRESS SOUTH
OF THE BORDER
South of the border is Mexico, whose
fiscal wagon is quietly and dangerously careening down a hill,
most assuredly over a precipice. This would constitute another
extreme development. The decline of their giant oil field
Cantarell, combined with the mismanagement of their PEMEX
national oil industry, hampered by their corrupt powerful labor
union, stymied by their compromised Parliament, these guarantee
a monstrous fiscal problem in Mexico. The reduction in their
FOREX trade surplus accelerates from greater gasoline import, a
whiplash factor. This story has so far eluded the sleepy lapdog
press, but not the oil industry. This story was covered in the
August Hat Trick Letter in greater depth. My forecast is
for Mexico to disintegrate into a failed state within two years,
owing to its lost FOREX trade surplus and utter breakdown of law
and order. Mexico City soon will be forced to turn to desperate
measures.
The Mexican
Peso tumbled in July, and has continued lower in August. The
financial conditions behind their FOREX revenues from their
energy account are being revealed. The MexPeso has fallen from
9.25 to the 9.0 level, well below its 50-day moving average,
without recovery. As the USDollar falters against the euro
currency, the MexPeso does also. So the MexPeso has faltered
even worse relative to world currencies. European exports rise
in price to Mexicans. Currency markets sense trouble. The
Mexican economy suffers from a significant decline in cash
transfers (remittances) from workers in the US sending money
home to families. This was addressed in my work as evidence of
lost home construction jobs. The volume of money involved in
remittances exceeds the total foreign direct investment in
Mexico, an alarming data point, so not a small sum. This
cramps consumer spending and small business investment, and
leads to wider poverty. Count that as another contagion from the
US housing crisis, of course denied.
Click Here For Mex/Peso - U.S. Dollar Chart
The situation
in Mexico continues to deteriorate. As their nation falls
further into outright chaos, three key questions arise: 1)
What happens to the reliable supply of crude oil to the United
States, even as Cantarell sees further decline? 2) What happens
to the plans for implementation of the North American Alliance,
the economic merger of the US, Canada, and Mexico? 3) What
happens to foreign mining rights to Mexican properties, under
possible threat of confiscation or hiked royalty demands?
These are central questions addressed in the August Hat Trick
Letter report.
Violence has
spread widely across Mexico, including murders of police
officials in the northern regions. Even judges and foreign press
reporters have been threatened. A splinter group from the
Peoples Revolutionary Army claimed responsibility for the July
10th oil pipeline explosions in Guanajuato and Queretaro states.
Other pipelines have been threatened. Armed battles in small
city streets have erupted, without report in the debilitated
compromised US media networks. Rival drug lords are engaged in
three-way battles with the Mex Govt.
A failed
nation state is the likely outcome south of the US border. Such
a failure has numerous criteria. Energy network attacks, growing
poverty and inequality, inadequate government services, growing
power of organized crime, corruption & desertion of police
forces, assassination of judges and officials without
consequences, and growing farmer bankruptcy are contributing to
a failed system in Mexico. Needs of people, upheld laws, tax
structures, allegiance to authority, and sense of urgency all
seem to be in breakdown mode. The division between rich and poor
is stark, and growing worse. Their tycoon Carlos Slim has
accumulated three times the wealth that Rockefeller did a
century ago, relative to respective national economy size. The
failed state of Mexico will be evident from the top down, with
origin the financial deterioration of its federal government.
Gigantic federal deficits will be the next major story coming
from Mexico, with associated disruption and chaos.
UGLY DETAILS ON MEXICAN
OIL INDUSTRY
The supply of
crude oil to the United States is substantial from Mexico,
behind only Saudi Arabia and Canada. The Mexican energy picture
is deteriorating. The elephant oil field Cantarell is in an
established 15% annual decline, offset by inadequate expansion
elsewhere. Some details are provided by the Mexico City business
journal El Financiero. Current oil output is at 3.624
million barrels per day. Gasoline production follows the
trend of oil production, with output down 56.4% at PEMEX
refineries to 463.2 thousand bbl/day. The shocking data
point here is that their gasoline imports rose by 92.1% in
June, versus last June 2006. No new gasoline refinery
has been built in Mexico in over 20 years, not as bad as in the
US, where no new refinery has been built in 35 years. The net
financial impact is that Mexico earned $34.7 billion in FOREX
reserves in 2006 from oil export, but of that, $10 billion was
spent on gasoline import, or 29% of the gain. The great boon
from oil discovery in the 1970 decade is coming to an end. Their
oil exports in the first half of 2007 stood at 1.718 million
bbl/day. That compares to 1.907 mb/day in 1H2006, or 10% less.
The decline is amplified by greater gasoline imports. The saving
grace is the 40% reduction in natural gas imports. The
Mexican trade surplus from energy is vanishing. Analysts
expect it to be gone by 2011. My forecast is sooner, due to
disruption and a breakdown of order. The effect on their
national politics will be severe, causing a failure of state,
with a broad internal breakdown of order.
THE IMBALANCED ALLIANCE
The North
American Alliance is intended (without debate, analysis, or
vote) to share US bank sector might, broad technology expertise,
pharmaceutical depth, augmented by military prowess WITH
Canadian energy supply and mineral wealth WITH Mexican cheap
labor, energy supply and mineral wealth, and a bonus of new port
facilities. The hidden component is the supply of Mexican
soldiers to fight in the US war machine. See data. The Alliance
increasingly looks like having one horse (Canadian Dollar)
pulling the FOREX stagecoach, with two lame horses from the
United States and Mexico. Perhaps the US horse will be an
image from a printing press that nobody will notice! The
prospects for mining rights and constant royalties remain in
debate, an uncertainty. Some conjecture and speculation is given
in my August report.
Jim Willie CB is a statistical
analyst in marketing research and retail forecasting. He holds a
Ph.D. in Statistics. His career has stretched over 24 years. He
aspires to thrive in the financial editor world, unencumbered by
the limitations of economic credentials. Visit
His Website
FSU
© 2007
Jim Willie, CB
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