The Main Stream Media (MSM) goes on about how the economy has bottomed out. We are told that things will be looking up soon. When is soon? The end of the year perhaps? Crazy-ness. The trends we see in the economy these days are self-reinforcing. A vicious circle as at were.
The U.S.A. is still the engine of the world: maybe for not that much longer, but definitely at present. And here in Canada we are directly influenced by events in the U.S. The traditional saying in this regard was: When the U.S. catches a cold, Canada gets the ‘flu.
With these thoughts in mind let’s take a brief look at the state of the U.S. economy both in relation to the near past and the near future.
As you know Capitalism proceeds in a boom and bust cycle. When there is money to be made in a particular field more producers are drawn to that field. This snowballs to the point where more product is coming on the market than is required or desired: a crisis of overproduction. This has happened in the U.S. in several areas (fields) simultaneously. The phenomenon has been aggravated by the prices of houses being run up and by people borrowing against these inflated assists.
The Banks, instead of holding the mortgages, sold them bundled together and then sliced up according to how likely they were to be paid off. Many errors were made in these assumptions. To make a long story short, far more people defaulted on their mortgages than the assumptions suggested. It seems to have gone unnoticed that the wages of working people have been falling behind the cost of living for over 30 years. (Our lives are being devalued.) Thus it turned out that millions of people have been relying on debt of one form or another to maintain their standard of living.
Something that can’t go on forever doesn’t. It comes to a rather rude and often ragged end. In February of 2007 we have the Shanghai hiccup. The Shanghai stock market dropped 7% in one day. What??? And two hedge funds bled real dollars. The emergency first aid teams were soon on the scene. The patient was patched up and sent on his way. However that August more holes were discovered in the garment. In fact the economy started to unravel. Housing prices and construction peaked. This hidden unemployment added to stagnant and indeed falling wages to rein in consumption (retail mainly).
This February (2008) there was another crisis in the financial sector that was hastily patched up. Regional and local banks, credit unions and other local financial institutions were back stopped by U.S. federal agencies. On July 13,14 and 15 these federal agencies came unstuck. Emergency measures were enacted to back stop the Federal Agencies with the U.S. Federal government itself. Amongst other measures was included raising the cap on the U.S. Federal debt from US$ 9.6 Trillion to US$ 10.4 Trillion. This additional $800,000,000,000 should be eaten up under 18 months. Assuming a ten trillion dollar debt held at 3% interest we see that the U.S. is borrowing $300,000,000,000 per year to cover the interest alone. Who is going to loan that kind of money to the U.S. when everyone knows that the value of the U.S. $ is dropping and therefore one is paid back in smaller dollars? Well the interest rate will rise. Also there is a very good chance the credit will dry up.
This brings us to the current situation. Two or three times a week a bank fails in the U.S. Retail is hurting.
A list of some of the retail chains that failed in July:
o Ann Taylor closing 117 stores nationwide.
o Eddie Bauer to close more stores after closing 27 stores in the first quarter.
o Cache, a women’s retailer is closing 20 to 23 stores this year.
o Lane Bryant, Fashion Bug, Catherines closing 150 stores nationwide
o Talbots, J. Jill closing stores. Talbots will close all 78 of its kids and men’s stores plus another 22 underperforming stores. The 22 stores will be a mix of Talbots women’s and J. Jill.
o Gap Inc. closing 85 stores
o Foot Locker to close 140 stores
o Wickes Furniture is going out of business and closing all of its stores. The 37-year-old retailer that targets middle-income customers, filed for bankruptcy protection last month.
o Levitz - the furniture retailer, announced it was going out of business and closing all 76 of its stores in December. The retailer dates back to 1910.
o Zales, Piercing Pagoda plans to close 82 stores by July 31 followed by closing another 23 underperforming stores.
o Disney Store owner has the right to close 98 stores.
o Home Depot store closings 15 of them amid a slumping US economy and housing market. The move will affect 1,300 employees. It is the first time the world’s largest home improvement store chain has ever closed a flagship store.
o CompUSA (CLOSED).
o Macy’s - 9 stores closed
o Movie Gallery – video rental company plans to close 400 of 3,500 Movie Gallery and Hollywood Video stores in addition to the 520 locations the video rental chain closed last fall as part of bankruptcy.
o Pacific Sunwear - 153 Demo stores closing
o Pep Boys - 33 stores of auto parts supplier closing
o Sprint Nextel - 125 retail locations to close with 4,000 employees following 5,000 layoffs last year.
o J. C. Penney, Lowe’s and Office Depot are all scaling back
o Ethan Allen Interiors: plans to close 12 of 300 stores to cut costs.
o Wilsons the Leather Experts – closing 158 stores
o Bombay Company: to close all 384 U.S.-based Bombay Company stores.
o KB Toys closing 356 stores around the United States as part of its bankruptcy reorganization.
o Dillard’s Inc. will close another six stores this year.
From this and hundreds of other examples we can see that unemployment and underemployment are rising rapidly in the U.S. The cost of fuel and food is also rising. Now the U.S. government can falsify numbers ’til its blue in the face. But reality is out there. Tax receipts are also falling rapidly. Tax receipts in New York State from banks are down 97% from last year. Ninety days into this year’s State budget it turns out that the budget was in no way related to reality. I called it at the time. California was supposed to have a new budget starting July first. It hasn’t happened yet. Tough choices will have to be made. As it stands now 10,000 State employees have been laid off and 200,000 more have have their wages reduced to US$ 6.55 (C$ 6.40). This includes forest workers, teachers, nurses, highway maintenance workers, Librarians, etc.
Many trends are coming together at present, scaled back construction, reduced auto production, dropping retail sales, etc. which point to continuing increases in unemployment. This means dropping government revenue and rising government costs. It also means increasing debt loads for individuals, families, companies of all sizes and governments at all levels.
This does not bode well for Xmasse sales. Goods have to be ordered in May so that factories can retool, line up suppliers and a work force and produce the goods. If the goods are coming from the far East they should be on board by mid-August. In May the wise man were still talking about the economy improving in the second half. Hopefully that was just lies for the masses. If anyone in responsibility believed that fantasy, they will find themselves with a heap of surplus stock come January first. As it is we can assume that some chains overbought. This will be a quiet Xmasse.
The U.S. Federal government, several states and many corporations including the “Big 3″ auto-makers start their fiscal year on 1 Oct. The Bush administration has already drawn up the 2009 budget. It is a poison pill for the incoming administration. When all is said and done, the 2009 budget will have a deficit of at least half a trillion dollars. In other words $500,000,000,000,000 will be added to the federal debt by August 2009. That will leave three hundred billion of the new cap. The Federal government should burn through that by April 1 2010. What we are looking at is massive new borrowing by the U.S. federal government. This will further weaken the dollar forcing the cost in dollars of imported stuff (like oil) to increase. In other words the standard of living of Yanks, and tax revenue will continue to go down throughout 2009 and 2010.
Thus the 2009 New York budget which must be in place by April 1st 2009 and the 2010 California budget which is supposed to be in place by 1 July 2009 will both demand extra-ordinary cuts to services. School buses will most likely go. Many government schools will be replaced with Radical Right Born Again church schools. Will the U.S. postal service survive?
