March 20, 2008

The Slow, Inevitable Collapse of the Narcissists' Tautology

[Updated below.]

Via Calculated Risk (which you should make regular reading, if you wish to keep apprised of the details of the ongoing economic unraveling), I see that the spreading financial gloom has touched even the Empire of Coffee:
Starbucks Corp. Chief Executive Officer Howard Schultz said the U.S. economy is in a "tailspin" and the coffee-shop chain will offer discounts and new drinks to lure back customers.


"You have an economy that really is in a tailspin, and many would say the consumer is in a recession," Schultz told more than 6,000 shareholders at the company's annual meeting in Seattle. "We are dealing with things that we haven't seen before in terms of how people are responding to how tough it is."

Schultz, who built the Seattle-based coffee chain into a corporation with almost 16,000 cafes, is counting on new styles of coffee and a slowdown in store openings to halt two quarters of customer declines. First-quarter revenue rose 17 percent, the smallest gain in two years, as consumers cut spending and McDonald's Corp. promoted lattes and cappuccinos.


Starbucks fell 74 cents, or 4.1 percent, to $17.50 at 4 p.m. New York time in Nasdaq Stock Market composite trading. The stock is trading near its lowest level in more than four years and is worth half what it was at the beginning of 2007.

Starbucks reported its first quarterly drop in U.S. customer visits last year. U.S. consumers have tightened spending amid rising gasoline prices and the deepest housing slump in a quarter century.

"We began to see a slowdown in traffic that we believed was economy-driven," Schultz said today. "As we look at the balance of calendar '08, I don't see any reason to believe that we're going to see a change."
Unsurprisingly, the bad news continues to affect the Empire of Cars:
The Big Three U.S. auto makers are preparing cost cuts and other belt-tightening measures in case a slumping U.S. economy hurts sales more than expected.

General Motors Corp. has pushed some capital expenses from the first quarter to later in the year to make sure it has enough cash if the downturn in the U.S. market worsens, the company's chief financial officer said yesterday.

Separately, Ford Motor Co. executives said the auto maker is considering options to cut costs further to reach its goal of becoming profitable by 2009.

Chrysler LLC, meanwhile, said it completed previously planned moves that will lower production at several plants in anticipation of weak sales this year.

Speaking to reporters at the New York auto show, Chrysler Chief Executive Robert Nardelli acknowledged Chrysler isn't yet generating positive cash flow. He also said that the company planned "aggressively conservative" production cuts so it would be able to deal with a down year and that it didn't assume auto sales would rebound in the second half of the year.
In "When the Pretense and the Lies Unravel," I noted certain parallels in the collapses of the various American Empires:
It occurs to me that a certain crucial similarity can be identified when one compares what continues to transpire with regard to the United States as a political entity to the continuing economic downward spiral.


For some time now, a huge part -- perhaps the major part -- of our alleged economic "prosperity" has been utter fantasy, just as our central national myths are fantasy: phony credit leveraged against nonexistent wealth, which in turn depends on more phony credit, which also relies on credit backed by nothing...and on and on it goes. Everyone apparently assumed that even if one or two parts of this make-believe structure collapsed, a sufficient number of other parts would keep it largely intact. No one thought too long or too seriously about what could happen if one collapse triggered another, which brought down a major beam, which collapsed an entire wing...and so on. Very few people bothered to wonder about what might bring down the whole, fantastical thing.


Whatever may happen, and barring miracles of a kind I do not rely upon, the future is likely to be very bad, and possibly very grim indeed. I would apologize for this serious lack of cheerful news, but I can only do my best to assess the facts, and try to see where they lead. For a long time, the United States, its entire political class, almost all of the media, and the majority of its citizens have relied on myths, avoidance, equivocation and outright lies. Pretense cannot last forever. At a certain point, facts will reassert themselves. We have tried to have our way for more than a century, and it did not matter what methods of coercion and brutality we employed. For a long time, we succeeded. The United States may engage in one last desperate effort to avoid these readjustments, and an attack on Iran may be the preferred method. This is why I desperately try to encourage people to resist such an attack on the scale required, as I did in the concluding part of this recent essay. But our denial still remains impregnable, and the response to my pleas is close to non-existent.

The days remaining to such denial, and to the myths and lies that have sustained us, are now very limited in number. There is still time to make a different choice, but almost no one is interested in that. And given the breadth and complexity of the forces in play, there may be nothing we can do at this point.
Even now, our national leaders rush to assure us that it won't be that bad, and that the Government of the Most Specially Special Nation that Ever Existed in All the Universes will do...well, something. We will be saved! At the moment, the preferred method of salvation appears to be the government's basement printing press. Not enough confidence in the financial markets? Here's a few hundred billion! Still worried? Have another $200 billion! It's rather like one commonly described phenomenon of drug dependency: the user needs continually larger and more powerful doses in the doomed attempt to achieve the same effect. Perhaps the government should skip the intermediate steps, and inject a trillion (or five) directly into the national bloodstream. At least we can enjoy the temporary high, which should be absolutely spectacular. I suppose it might kill us, but, hey, that's not until next week! No problem, dude.

And I imagine the conversations, as Exceptional Model American Citizen A says: "You worry too much, man. The government will do something to stop all this. This is America!"

And Exceptional (but Slightly Transgressing) Model American Citizen B asks: "But it's all been make-believe! Don't you think a major readjustment is necessary? Don't we need to get back to something that's more, well, real?"

Citizen A responds: "Yeah, there might be some of that. It may be a little rough. But, dude, this is America! Sure, terrible things happen all over the world, but they happen to them, not to us!"

Citizen B then transgresses a bit too far: "But are we really unique in all of history? Haven't all the other great civilizations said the same thing? Where are they now?"

To which Citizen A, who is truly a model Model American Citizen, has the definitive answer: "But this is the United States, man! Things like that don't happen to us! We're the last, best hope of Earth!"


It threatens to be a terribly interesting time.

UPDATE: I was partially joking above, with my reference to the government injecting unlimited amounts of money into the economy. As Mike Whitney explains, there are certain constraints on what the Fed can do in this regard:
The powers of the [Plunge Protection Team] are greatly exaggerated; eventually the liquidity they provide has to be drained from the system. The popular myth that the Fed simply creates as much money as it chooses and spreads it around like confetti is pure rubbish. The Fed has very definite balance constraints. The system is not quite as rigged as many people imagine. According to Bloomberg News, the Fed has already depleted most of its resources:
The Fed has committed as much as 60 percent of the $709 billion in Treasury securities on its balance sheet to providing liquidity and opened the door to more with yesterday's decision to become a lender of last resort for the biggest Wall Street dealers." ("Bernanke May Run Low on Ammunition for Loans, Rates", Bloomberg)
The troubles in the credit markets and real estate are bigger than the Fed or the PPT; and they know it. The next step is massive government intervention; mortgage-rate freezes, bailouts and fiscal stimulus. Big government is back; Reaganism has gone full-circle.
But later in his column, Whitney explains the crucial ways in which the system is rigged:
Paulson is clearly out of his depth. He's simply not the man to deal with a crisis of this magnitude. His only concern is bailing out his rich friends in the banking industry. The interests of workers and consumers are just brushed aside. Has anyone from the Dept of the Treasury (or the Fed) suggested a bailout for the 14,000 Bear Stearns employees who just lost not only their jobs but the entire retirement when the company was purchased by JP Morgan?

Of course, not. Because both Paulson and Bernanke take a class oriented approach to the problem that narrows their range of vision and limits their ability to pose viable remedies. They are unable to see the whole playing field. For example, Bernanke assumes that if he keeps cutting rates, he can reflate the equity bubble by stimulating consumer spending. But that is not going happen. First of all, the banks are not passing on the savings to customers. And, second, the banks are only lending to applicants with a flawless credit history. In other words, the Fed's cuts may be good for Bernanke and Paulson's buddies, but they do nothing for either the consumer or the broader economy.


[A]n article on Tuesday in the Wall Street Journal ... explained the real reasons behind the Bear bailout....


So all it took was a little nudge from his banking cohorts for Paulson to swing into action and firm up the deal. That says it all. The interests of the American people were never even considered. It was all choreographed to bail out the financial industry. No wonder so many people believe that the Federal Reserve and the US Treasury are merely an extension of the banking establishment. The Bear bailout proves it.
One might say, "It's Called the Ruling Class Because It Rules."

Whitney has much more. It is worth including this further excerpt:
"Sucker rallies", like Tuesday's 400 point surge on Wall Street just helps to conceal the deeply rooted problems that need to be addressed before investor confidence can be restored. Blogger Rick Ackerman summed it up succinctly in last night's entry:
"These psychotic, 400-point rallies in the Dow do not augur renewed confidence. They are being driven almost entirely by short-covering, and even the otherwise clueless news anchors are starting to dismiss them as meaningless. One of these days, moments after the last surviving bear's short position has been liquidated, stocks are going to fall so steeply that even the Plunge Protection Team will call for back-up. Then, the financial collapse that so many have been expecting will unfold in just a few days, with enough power to leave the global economy in ruins for a generation." (Rik's Piks Rick Ackerman)
Whether Ackerman's dire predictions materialize or not, there's no denying that the situation is getting worse by the day. In the last week alone, two major financial institutions, Carlyle Capital and Bear Stearns have either gone under or been bailed out wiping out tens of billions in market capitalization. These flameouts have increased the rate of the deflation adding to the already-prodigious losses from housing foreclosures, delinquent credit card debt, defaulting car loans, and the deleveraging in the hedge fund industry. Fortress America has sprung a leak, and capital is escaping in a torrent.
Whitney's full column.