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virgin novelist, middle school teacher for the morally handicapped, government bureaucrat, most famous unknown photographer in LA, PhD dropout, coat hanger sorter, presidential campaign worker, sewer worker, and retired guy -- but not in that order.

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MARCH 18, 2012 1:35AM

A Danger Point?

Rate: 20 Flag

In reading the animal spirits of the world economy, a major sea change has occurred in the last six months.  We went from a time of great fear, where a collapse of the euro and Greece seemed imminent, to a time where it's been publicly announced that the transition on Greek debt has been finessed.  The US stock market has rocketed quite handsomely since October, and many indices are near the highs that they were in 2007.    And there are signs in the economy that green shoots are actually starting to re-emerge again. The electoral picture has brightened considerably for Barack Obama as well as the odds of a Democratic victory seem much more likely now.

And yet....

 There are a number of areas where our peace and prosperity might be threatened now.  In no particular order of likelihood they are:

China  I've said for many years that China is an accident waiting to happen, and 2012 may very well be the year that this prediction shows itself.  There are a variety of storm clouds on the horizon.  You should be well aware of the "ghost cities" of incredible overbuilding with financing from underground banks in collusion with corrupt local officials.

It's no accident that the number of civil protests has been rising exponentially over the years.  From 3,000 to 7,000 to 13,000, and in the latest year I heard about -- 30,000 separate outbursts have occurred all over the country.  Once again, the pro-democracy movement in China is spreading like a wildfire underground. And it's gotten harder and harder for the government to put a lid on this civil unrest.  Hu Jintao, China's Premier has paid lip service to democratizing, even as the old guard has been too powerful for now.

Last week's sacking of Bo Xilai, political head of Chongqing in the Central Committee is indicative of significant unrest this year, and an omen of significant future unrest at the highest levels of government.  By law, the Chinese Communist Party is expecting a major turnover of personnel from the old generation to another younger age cohort.  The fear within the Party is, that a split in its homogenaity will lead to a Tianamen Square incident. 

A stockmarket pullback Recently, technical indicators for the Dow Jones and S&P  indices have been overbought conditions, and complacency has been at historic highs as well (as judged by various technical indicators).  One symptom of the potential frothiness of the current market can be seen in Apple Computer.  Six months ag0, a share cost $335.  Today, that same share is $600 -- over a 79% increase.

If someone tells me that Apple is 79% more valuable fundamentally than where it was six months ago -- I would eat my hat.    Is  Apple really worth more than the entire country of Poland? The decline of Apple alone could put market indices into a 10% to 15% correction. When coupled with a move into more speculative stocks overall, and a total ignorance of the proven fragility of megabanks like Citigroup and Bank of America,  this does not look like a good time to jump with both feet into the water of speculative investment right now.

The price of gasoline  Of course, $106 a barrel oil is a tax on 99% of all Americans. And no, it's not the fault of President Obama.  It's not even Benyamin Netanyahu's insane fixations with taking out Iran.  No, the chief culprit is Wall Street speculation.  Remember, in 2007 the crash was preceded by a spike in oil and commodity prices.  And here we are again, although with lesser intensity than 2007.

It has been estimated that Wall Street speculation accounts for 30% of the pump price of gas.  And remember, 60 Minutes ran an expose in 2008 about the last run-up in oil prices, and they found that the largest holder of oil reserves ready for the refinery back in 2007 was in fact, J.P. Morgan Chase. 

Iran  Let's be honest, realistically the chances of unilateral military action by the Israelis this year has been estimated at only 15%.  However, that means that there is a 1 in 6 chance that Nutanyahu might actually decide to attack Iran, and then the whole world economy will truly be in the tank.  But the greatest fear  for now is from the speculators who would encourage rumors of war (as they did on Friday) to keep the price of oil elevated far beyond what it should be.

The European Union  Yes, it looks like the European Central Bank has arm-twisted Greek creditors into accepting much lower interest, watered down securities. And official spokespeople say this is a great engineered victory.  However, Standard & Poors rating agency recently put Greece on its absolutely worst credit rating, as Greece had officially entered into default by its rating indicators.

Even more troubling is the fact that an official condition of Greek default still leaves a potentially dangerous condition of liability for holders of the new Greek securities.  We do not know how any individual bank may be affected by an official unwinding of derivatives leveraging their books, not do we have any idea of the interrelations of debt swaps between financial institutions affected by a default.  

But we do know that this financial engineering puts more long term pressure on Italy, Spain, and Portugal.  And we do know that a program of further austerity for Greece and other PIIGS is a long term recipe for disaster.

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As someone born with pessimistic bones and an almost total disgust with the people in control now grinding all decency and basic good sense to dust I sincerely doubt any grounds for an optimistic outcome, whatever that might be. The financial sector is redirecting all available funds away from productive investment into derivative nonsense which may fill already fat wallets but does nothing for the economy and the rapid growth of restrictive laws and technologies to destroy whatever public protest is left. The growing stainless steel grip of totalitarian control is pretty naked from the federal government down to local officialdom and US democracy is pretty much a black farce. There is no real growth in jobs or wages and the housing situation is frightful with the crooks and scammers getting off scot free.
Now that the USA is getting kicked out of Iraq and Afghanistan I'm sure the military industrial ogres are eager to kick up dust where ever there is potential to dump more misery and murder to further expend government funds to line their pockets.
onl – I’m glad that you post articles like this here. There are several reasons why I hang out on OS but bloggers like you are one of the main ones.

I’m not sure what to make of your gas price analysis. The claim that 30% of the price being due to speculation relies on the greater fool theory. The underlying premise is that there’s some “correct” price of X but traders pump it up to 1.42 X on the expectation that a greater fool might pay 1.43 X tomorrow. The “greater fool” theory explains a lot about market behavior and bubbles but the flip side is that it’s always a convenient culprit. You might be right in this case but with the BRICs and most everyone else industrializing the trend for gas prices is inexorably upwards.

No quibbles with how you’ve sized up Iran or Greece. Both situations seem devilishly complicated to me, especially Greece. I wonder if it’s advancing old-ageism of whether some aspects of our globalized, high-tech world are just getting too complex for enough mere mortals to keep on top of its intricacies.

And what the hell with Iran? The drums of war were deafening a month or two ago and now they’re not? Quiet before the storm? A bluff that worked? A tale full of sound and fury signifying nothing?
Gotta agree with Abra, here - Reading ONL ALONE, if there were no other reason, makes the OS experience worth it.


-R-
An analysis of gas prices can be found at http://www.counterpunch.org/2012/02/28/whats-really-pushing-up-the-price-of-gas/
I agree that humans could fuck up China at any given moment, but in the meantime there are all sorts of factors beyond human control that just keep grinding along, and here we are again at the beginning of drought-season, when their crazy dams are only a fraction of the problem.

What they really have is a 300 year problem, and with all due respect for the long-term planning of the CPC, those desert sands that are steadily rolling down upon Beijing have a way of exceeding projections, and if the soil burns out in front of them, with another drought like 2011, they could run all the way to Hong Kong without waiting much more than 300 days.
I agree with Abrawang that the modern global world is too complex for humans. In the high-tech environment, where I'm living even the basic things, which you need to survive are very costly and difficult to maintain.

You simply cannot live here without computers, mobile phones and power stations to feed those machines with electricity. And very few people can fix themselves their basic machines, if they stop working.

And all those machines and the power for them are controlled by multinational global companies, whose leaders are not elected by any kinds of democratic means...

I think that for example in America it is still the state, which controls especially arms industries, because it is only the state, which buys sophisticated weapons. But I think it is not Obama, nor Congress, it is big state offices, Pentagon, Dod. In China, in Russia and in India, even in smaller countries, the situation is the same.

It is not elected people, whom we could change after a few years, but big state offices, whose leaders we cannot change, who are in the control of the things.

It is the high time, when people should take the power in their own hands. To stop those madmen controlling the system to start again a new big war.
Oh shit, there seem to be too many holes in our boat. I am flummoxed and wish all of this just were not possible.
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Thanks for this analysis. As always right on!
This is really, really good. This is better analysis than I think I could find in a major publication.

Jan's answering rant actually isn't bad either.
You are very wise, friend. r.
China: With 3500 years of history based on "The Mandate of Heaven," the People's Republic is but a flash of light. The people of China have their own way of sorting out corruption and economic imbalance.
US stock market: Overpriced and overvalued, has better controls than in the past so that corrections may be less painful and panics avoided. International markets are another story. Apple is only worth $200 a share if that? Google???
Gasoline & petroleum are commodities and at the mercy of speculation. Prices will correct with reductions of use and retractions of economic development in China, India and SE Asia.
Iran, see Gasoline & petroleum. If war happens it will be short and swift, followed by the same asymmetric conflict that's been going on since 1954.
EU and the PIIGS will sort itself out: Portugal, Ireland, Italy, Greece and Spain have had marginal economies throughout the history of the continent.

Shit happens in the short term, but in time shit becomes fertilizer for change.
I heard on the news this morning that a part of gas prices includes the fact that our refineries are selling finished product to the highest bidder, which means other countries, and not just supplying it to their own gas stations. How would that factor in and how much effect would regulating the oil derivatives have on the price per gallon?
Great post Lefty. I see one more problem (well dozens, but..,) the men and women getting out of the military when we leave Afghanistan. There is talk of cutting the military budget and a 100,000 new people looking for jobs will definitely have an affect on the economy. Plus, the loss of jobs in the defense industry, if it happens. China, who knows?
I agree it's wise not to be too complacent. I think your list of things that could go wrong is way too short, of course. As an example, I personally think we're not far from seeing some really bad Climate events that are at the same order of magnitude as some of these other things you've mentioned. Storms, floods, droughts, and crop failures due to heat are all well within range. And anything that affects food could, in turn, affect international relations in unpredictable ways.

As others have suggested, your remarks on the fuel matter seem the weakest here, but mostly in your argument as presented, not in the reality of things. The fuel matter is so complicated that doing it right in a short space is hard, so I'm inclined to just not care if I disagree with you on the details and just conclude that we need to pay attention to this and get off of fossil fuels, which would solve it regardless of how you characterize things.
Insightful piece OLN--reading your review of hot spots, it struck me that ALL of them (correct me if I'm wrong) center on either foreign countries OR US relations with foreign countries.

Perhaps a conclusion could be---we are on our way to better times internally but the world is still fucked up? Which of course is intimately intertwined with US policy since it is a global economy.

We ain't done at home! Maybe the President knows something positive about being in bed with the banks that I don't know. But much to the horror of the Clown Car Crew of Republican candidates (with Mittens Dog on the Roof) things on the home front are trending positive.

Out in the world---not so much. Which makes me very happy that Hilary Clinton is in charge of the rest of the world. When I saw her bitch slap Syria on TV the other day, in real people language, I stood up and cheered.
I just want us to wake up and see what we are doing to ourselves.
To Abrawang and everyone else, thank you very much for your kind words. A guy's gotta do what a guy's gotta do. It's in my blood.

Jan Sand is totally correct in his assessment. Yesterday, I was in a conversation about the metastatic growth in financial derivatives and other exotic financial instruments, as compared to the real world economy. It seems time for people to actually consider a Biblical concept of jubilee, where once every fifty years all debts were forgiven.

Certainly given the present nature of power in this country and world, this would be an extremely unlikely thing to happen. However, I saw a chart on the area of ice in the Arctic Ocean which was quite startling. If you extrapolate the line on the decrease, it would look like the Arctic Ocean could be completely ice free in September within a space of four years or less. And if this takes place, then there will be an exponential increase in the rate of global warming due to the release of methane from the permafrost.

As horrible as this would be for the human species, every crisis also represents an opportunity. One can only hope that there is intelligent life on Earth.

Of course, this longer term cause for concern was not part of my essay on what's facing the world economy at this very instant.
As far as I understand the things it is American banks(ters), who are controlling rating agencies. The recent problem of Greece was made by them. The original problem was of course made by German and French banks(ters), who gave the original loans. The right thing to do in this situation would be to let those banks to quarrell and solve their own problems themselves. Now eu has unfortunately made some political agreements so that the interests will be partly paid by European taxpayers. Let's see how it will work out.

In general I think that it would be best for the rest of the world, if we could build a fence araund American continent to stop Americans forcing others to pay these problems... But we can't make such a fence and so we need big and rich people, Chinese, Indians and Russians to help Americans out from their financial crise and to stop them making more wars, too. Europe is too small and poor.
The euro crisis is far from over, the stock market is not indicative of anything, underemployment in the U.S. remains at near 19%, the yuan will remain devalued unless the Chinese want to see a run on their banks' investments, and the political class remains frozen in place by ideologies that have failed.

Also I don't think you've ever understood the "Greek crisis." It is a manufactured event meant to act as a spectacle to terrorize and threaten the working class throughout Europe into accepting the biggest reduction in wages and benefits seen since the end of World War II. Most of the money from the "tranches," by the way, has been recirculated out of the country by the banks. People there have been reduced to nothing. There may have been some unconsciousness to what happened in 2008--certainly nobody was watching the overall picture until near the end, and then the major financial players didn't want to pull the plug on their own profitable game--but what has happened in the Eurozone is as obvious an example of class war perpetrated by a financial aristocracy as we've seen in several lifetimes.
Bo Xalai fell asleep in Parliament. That's a big red no no.
I'm late to the show, so let me just say that as long as $20-60 trillion dollars (but who's counting?) still hangs in limbo, thanks to the obscene and obtuse derivatives market, the up indicators are evidence only that the game is rigged. And as with any other casino, rigged in favor of the house -- which in this case is a house of cards.
BREAKING NEWS: Beijing was on high alert during the night of March 19th and into March 20th. There were unusual police and military movements, and it was rumored that renegade military forces had mobilized to "support and defend Bo Xilai." There is no coup. There is no coup. There is no coup. There is no coup....