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Ear to the Ground

Dow Drops Over 300 Points

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Posted on Jan 17, 2008
NYSE
AP photo / Richard Drew

Winter 2008 is shaping up to be a gloomy season for the American economy, with mounting concerns over subprime mortgage prices and a plunging stock market.  Thursday was a particularly dreary day on Wall Street, with the Dow Jones industrial average down 307 points and the Standard & Poor’s 500 falling almost 3 percent.


AP via My Way News:

Stocks opened higher but quickly gave up their gains after the Philadelphia Federal Reserve said its survey of regional manufacturing activity registered a negative 20.9 from a revised reading of negative 1.6 in December. The reading came in well short of what Wall Street had been expecting and underscored the seriousness of the economic concerns that have gripped both Wall Street and Washington in recent weeks.

Credit concerns also dogged Wall Street after rating agency Moody’s Investors Service placed bond insurer Ambac Assurance Corp. on review for a possible downgrade. That possibility alarmed Wall Street because it would place all bonds insured by Ambac on review as well. Ratings agencies are concerned that bond insurers would be unable to absorb a spike in claims.

Investors fears of a slowing economy again dominated trading.

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By Douglas Chalmers, January 18, 2008 at 8:14 pm Link to this comment

Are We On the “Dollar Brink? - By ocjim, January 17: “With our huge spending spree for Chinese products, China has a big stake in the American dollar. While a quick shift in the value of the dollar can be extremely de-stabilizing for the global economy, a gradual shift is already happening…”

Buying from China is not so much a spending spree as a replacement market for purchasing a wide range of manufactured essentials. That is, it is no longer possible to buy them “made in the USA” as those industries have already voted with their feet years ago and relocated to Asia.

In other words, Americans will have to continue to buy from China/Asia even as prices rise (viz a viz a falling $US) just as they were happy to make use of lower production costs in Asia to underwrite their unsustainable cost of living at home. Gradually, now, costs will rise through inflationary prices in China as their own standards of living rise.

Too bad that it will come at an inconvenient time for Americans. However, once costs have fallen in the USA through falling wages, etc, production will resume as manufacturing industries return to take advantage of the market and cheaper costs. And too bad that they might base themselves in Mexico instead, uhh.

For countries outside the USA, the cost of doing business in the US has been to purchase US debt. Thus any “tsunami-like crisis” will occur in the USA and the other countries will be less affected as they free themselves of that cost one way or another. That is, the Bush regime could disintegrate any day now, uhh.

As it turns out, the worst possible scenario is likely to be that Israel will act unilaterally against Iran when it is most inconvenient to the USA. Same with Pakistan which is under desperate pressure not only from the USA but more significantly from India and it could launch a foolish first-strike to everyone’s disadvantage.

Ironically, all of these stark scenarios have been exacerbated if not instituted by the USA and the Bush administration in particular. China itself is relatively harmless as, with 14 countries on their borders and 2 more off the coast,  they have no intention or advantage in launching an aggressive war against anyone.

That could change overnight too, though, if the USA resumes its “dog in the manger” approach with manipulating Taiwan before their presidential elections as a last-ditch attempt at controlling and manipulating China (as regards US foreign debt). The mainland PRC would then not hesistate in invading Taiwan which it regards as a renegade state anyway.

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By Conservative Yankee, January 18, 2008 at 10:12 am Link to this comment
(Unregistered commenter)

By Enemy of State, January 17 at 6:17 pm #

“Given that we had Republicans in office, and that Republicans are congenitally incapable of reigning in capitalistic excesses”

Nice partisan “sound bite” But the truth is; The only president (in the 20th century) to actually “reign in” capitalistic excesses was a Republican.

Nixon began deregulation Carter continued it, Reagan expanded it. Bush proposed “Globalizing” it, Clinton pushed Globalization (NAFTA,WTO, and MFN for China) and the current Bush disengaged any remaining brakes on the system.

Once we cared about doing business with thugs, cheats, and abusers, no more….

When you see the wealthy beginning to move their wealth into Euros, it’s time to bail out yourself…. Oops, too late!

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By ocjim, January 18, 2008 at 8:14 am Link to this comment

Cyrena,
I don’t expect it because the self interest of countries holding our money is involved. But our feckless leaders have certainly left us open to that distinct possibility.

Are you really expecting financial Armageddon?

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By cyrena, January 18, 2008 at 2:05 am Link to this comment

ocjim,

I hope everybody ‘gets’ your very calm explanation for what I personally am expecting…the global tsunami-like financial panic sweeping many to their economic ruin.

I think we’re safer somewhere other than here, and with Euros, not dollars.

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By P. T., January 18, 2008 at 12:20 am Link to this comment

A rise in the stock market is often reported as good news that readers should be happy about. In fact, a rise in the stock market is not generally good news for everyone, and may actually be bad news for the economy as a whole.

In principle, the stock market represents the value of the future earnings of the corporations listed on the exchanges. If the market rises, this should mean that future earnings are now expected to be higher. This can be viewed as being generally good, if it means that profits are rising in step with overall growth. In this case, higher profits would mean that most people would be better off in the future.

However, the stock market could be rising because of a redistribution from wages or taxes to profits. In this case, the rise in stock prices represents the gains of some segments of society (large shareholders) at the expense of other segments (workers or taxpayers). In this situation the rise in stock prices is not good news for most people.

It could also be the case that the stock market is rising for irrational reasons, unrelated to future profits, as was the case in the late nineties boom. This situation is clearly not good for the economy. An overpriced stock market distorts investment decisions and consumption choices (people spend based on their stock bubble wealth). There is no reason to be happy about a stock bubble that grows ever larger. This is bad news for everyone, except those who are clever or lucky enough to get out before the bubble bursts.

It is also important to remember that more than 40 percent of the population still does not own any stock at all, even through a mutual fund in a retirement account. Even among the group of people who do own stock, most have relatively little wealth in the market, with the median shareholder having less than $25,000 in stock.

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By ocjim, January 17, 2008 at 11:24 pm Link to this comment

While polls show that working and middle class people have lost hope that times will be better for their children, Americans in general are not buying the frequently heard predictions of our ultimate doom – concerning our system of government, or our economy.

Nevertheless, there are a number of economists, who bathe in the “dismal science” (economics), who are at least predicting potential short-term crisis.

Howard M. Wachtel, a professor of economics at American University, just last week in the Los Angeles Times asked the question, “Has the tipping point arrived when the U. S. dollar ceases to be the preeminent reserve currency in the global economy – a status it has held for 60 years?”

Once again that doesn’t cause widespread panic. Those concerns are for our leadership.

But wait a minute, we are talking about partisan men and women in Congress, who can’t stop a war that 75 percent of Americans want to end; who can’t give children health insurance; and who, through regulatory laxity and expediency, allowed the subprime fiasco to happen?

And certainly we are not referring to that lame-duck, stubborn-as-an-army-mule ideologue president, who if he saw a new idea, would shoot it (no, we aren’t talking about Cheney)?

China alone holds $1.4 trillion in dollar reserves and adds over $500 billion per year to this total. Normally we would like such countries to use this money, representing a recurring balance of trade surplus for them, to buy our products so that they buy as much from us as we buy from them. This is called a trade balance.

A truism we all know—you don’t hold something of value as a reserve if it keeps declining in value. That’s why you call property – real estate, rare paintings, etc. – an investment. You hold it because it won’t decline in value.

Since World War II, the dollar has been held as reserves by other countries in their financial portfolios because of its universal acceptance in the world economy and its stable value.

More and more global leaders are calling for the use of other currencies as reserves. The euro is a good candidate because of its strength and stability.

Advocating that the petrol euro replace the petrol dollar can strike terror in the hearts of western financial leadership. But many leaders are beginning to believe that the overseers of the euro are more responsible than American leaders—political and financial.

The bottom line is that countries make decisions to hold their trade surpluses in a reserve currency based on several considerations: the rate of return, degree of risk, relative strength of economies competing for reserve status, and a more subjective perceived confidence in decision-making.

Some critics of the Iraqi war gave Saddam Hussein’s decision to accept currencies other than dollars for his oil as America’s reason for attacking Iraq. But it is certain that since our invasion of Iraq, confidence in U. S. policymaking has declined.

With our huge spending spree for Chinese products, China has a big stake in the American dollar. While a quick shift in the value of the dollar can be extremely de-stabilizing for the global economy, a gradual shift is already happening.

The euro was introduced in 1999. At that time 71 percent of all reserves were held in dollars. Today it is about 65 percent for dollars and 25 percent for euros.

For such creditor countries, there might be a critical point – a perceived threat, civil war, a natural disaster—at which the cost of holding dollars exceeds the cost of jettisoning them.

For example, a perceived military threat from the U.S. by China could prompt a pre-planned sudden real-time sale of $1.4 trillion dollars of reserves, separate transactions in multiple financial markets – this, to protect the dollar-value of their sale.

Such a sale within twenty-four hours could cause a global tsunami-like financial panic sweeping many to their economic ruin.

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By Marshall, January 17, 2008 at 9:30 pm Link to this comment

All due respect, but there’s more participation in the market now than at any time in history - all those 401Ks, IRAs, pensions, etc… not to mention that the wealth created over the last eight years has been much channeled into the market.  I do believe the emphasis should be on wages and unemployment, but unfortunately the market and the economy go hand in hand, comprising a tide that lifts (or lowers) all boats.

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By P. T., January 17, 2008 at 7:49 pm Link to this comment

The stock market should not be a worry of the average person.  The average person’s stake in the market is about nil.  And Wall Street’s interests and the average person’s interests can be opposed to each other.

For the average person the economy, wages, and unemployment are things to worry about, not the market.

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By Enemy of State, January 17, 2008 at 7:17 pm Link to this comment

Wall Street no longer believes that Ben Bernanke’s helicopter can lift the economy. The inevitable reckoning for the smoke and mirrors economy “Free money -get your kicks for free” that we have been enjoying for the past few years can no longer be delayed.

  Given that we had Republicans in office, and that Republicans are congenitally incapable of reigning in capitalistic excesses -the subprime disaster was inevitable.

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By Douglas Chalmers, January 17, 2008 at 6:58 pm Link to this comment

So what? Oil has dropped back to $90 per barrel from near $100. What does this mean? For a start, winter inventories/supplies have finally caught up with demand, and reduced usage of gasoline and reduced expectation of oil use from the general effects of the recession on industry, etc.

But how much of the barking dog mentality in the M.East (Israel) and Washington has been a prop for oil prices anyway? There’s nothing quite like ongoing risks to continuity of supply to send prices soaring.

So why is Bush asking the Saudis to increase consumption in the face of reducing prices and reducing demand? Getting desperate - as a result of his own policies??? Oil falls near $90 on recession fears http://www.reuters.com/article/hotStocksNews/idUST3904820080117?sp=true

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