The worst is yet to come for the U.S. housing market

Fortunately the following hyperbole is not mine. We are actually spilling bits and bytes of data denominated in dollars. Not that there's no pain involved, just not much blood.

Rate Rise Pushes Housing, Economy to `Blood Bath' (Update2) - Bloomberg.com
By Kathleen M. Howley

June 20 (Bloomberg) -- The worst is yet to come for the U.S. housing market.

The jump in 30-year mortgage rates by more than a half a percentage point to 6.74 percent in the past five weeks is putting a crimp on borrowers with the best credit just as a crackdown in subprime lending standards limits the pool of qualified buyers. The national median home price is poised for its first annual decline since the Great Depression, and the supply of unsold homes is at a record 4.2 million, the National Association of Realtors reported.

``It's a blood bath,'' said Mark Kiesel, executive vice president of Newport Beach, California-based Pacific Investment Management Co., the manager of $668 billion in bond funds. ``We're talking about a two- to three-year downturn that will take a whole host of characters with it, from job creation to consumer confidence. Eventually it will take the stock market and corporate profit.''

Fed sees "significant risks'' in the leveraged-buyout boom

In my youth when the Fed issued a statement denying the likelihood of a given condition or event I assumed that it was likely. Now that Bernanke is outlining significant risks in the leveraged buy out boom, I can only agree. Fortunately he's going to crack down on sub prime lending abuse later this summer, unfortunately the horse is not only out of the barn but he's been trampling the corn field since last year.

The argument here is not so much about curbing lending abuse -- declining home prices, imploding mortgage lenders, and rising/resetting mortgage interest rates are already enforcing some discipline there. The question is whose going to take the blame, and the losses. Suddenly the leveraged private equity investors who profited from the collateralized debt markets that financed the housing bubble believe that fault lies with inadequate oversight and regulation, a lack of due diligence, by credit rating agencies. Imagine that.

The short CNBC video on this page "Avoiding a Falling Knife in the U.S. Mortgage Market" will give you some sense of the issues that lie behind Ben's comments below.
.....

Bernanke Says Subprime Curbs to Hurt Housing Market (Update6)

May 17 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke issued a double-barreled warning on the U.S. economy, saying the housing market will continue to struggle and the Fed sees ``significant risks'' in the leveraged-buyout boom.

Bernanke, speaking at a conference in Chicago today, said curbs on subprime lending ``are expected to be a source of some restraint on home purchases and residential investment in coming quarters.'' And he said the Fed is ``beginning to look at'' what he called ``the risks that are associated with working with private-equity firms.''

The Fed chief's comments suggest the central bank has raised its guard against a second credit bubble emerging in the form of leveraged buyouts at a time when the U.S. economy is dealing with the mortgage bust. Lawmakers and consumer advocates have blamed the Fed and other regulators for lax enforcement while lenders wrote a record $2.8 trillion in mortgages from 2004 to 2006."
....

Democratic Senator Charles Schumer of New York said in a statement today that ``it's good news that Chairman Bernanke and the Fed may finally be cracking down on abusive lending in the housing market later this summer.''

China says: Pollution complaints unfair

China: Pollution complaints unfair -- Shanghai Daily | -- English Window to China News
2007-6-22

CHINA said yesterday that it is unfair for rich countries to buy its cheap goods and then condemn its greenhouse gas pollution, a day after one study suggested the nation was already the world's biggest carbon dioxide emitter.

Foreign Ministry spokesman Qin Gang said other countries need to consider China's role as a low-cost export powerhouse that in effect helps rich Western consumers avoid emissions at home.

"China is now the factory of the world," Qin told a regular news briefing in Beijing. "The developed countries have moved a lot of manufacturing to China. What many Western consumers wear, live in, even eat is made in China."

The Netherlands Environmental Assessment Agency said on Tuesday that China's carbon dioxide emissions - the main greenhouse gas responsible for global warming - surpassed those of the United States by 7.5 percent in 2006.

But Qin pointed out that per-capita emission of greenhouse gases in the Netherlands was 11.4 tons per year, while the figure for China was just 3.66 tons.

Surging Oil Demand Fuels Higher Prices

Surging Oil Demand Fuels Higher Prices, Volatility - WSJ.com
Global Growth Adds To Strain on Industry Operating Near Edge [not to say peak]

By BHUSHAN BAHREE
June 21, 2007 2:13 p.m.

World oil demand is growing twice as fast as a year ago, straining the petroleum industry's ability to keep up with global needs and likely resulting in higher and more-volatile prices for some time to come.

On a short-term basis, many industry specialists see prices rising in the second half of the year unless the Organization of Petroleum Exporting Countries relents from its recent tough stance and starts pumping more crude oil very soon, and unless refiners can churn out more products such as gasoline and diesel. Longer term, the trends suggest the growing global economy has adapted to the doubling of oil prices over the past three years, bolstering demand and paving the way for higher prices in coming years.

"I wouldn't be surprised to see prices at new highs" this year, says Roger Diwan, an analyst at PFC Energy, a Washington-based industry consulting group. "It just needs a trigger to go to $79 a barrel." The trigger could be anything that threatens to reduce the flow of oil, he said, ranging from a Gulf of Mexico hurricane to turmoil in the Middle East to an industrial accident at producing or refining facilities.

Trust issues at Whole Foods Market

Plus ça change, plus c’est la même chose...
Organic food grows up: attempts to adopt dominant paradigm...

FTC Says Whole Foods, Wild Oats Merger Unhealthy - Forbes.com
Ruthie Ackerman, 06.05.07, 5:31 PM ET

Whole Foods Market, one of the leading retailers of organic and natural foods, and Wild Oats announced Tuesday that the Federal Trade Commission will file a lawsuit barring Whole Foods from buying its rival because of concern that the acquisition will squash competition in the natural and organic food store market.

The FTC’s position is that the organic food store is its own business and that Whole Foods (nasdaq: WFMI - news - people ) would create a monopoly by buying its competitor. John Mackey, chairman and chief executive officer of Whole Foods Market, said both companies will challenge the FTC’s decision because Whole Foods and Wild Oats (nasdaq: oats - news - people ) are by definition supermarkets. “The FTC has failed to recognize the robust competition in the supermarket industry, which has grown more intense as competitors increase their offerings of natural, organic, and fresh products,” said Mackey.

Home Depot sells US wholesale supply division, buys 12-store Chinese retail chain

Hit hard by the US housing market downturn Home Depot posted a 30% decline in profits last month. This month they are cashing out their wholesale supply division and buying a 12-store retail chain in China. Guess you gotta go where the money is...

Home Depot agrees to sell supply division - U.S. Business - MSNBC.com
Report: Unit sale to three private equity firms is worth $10 billion

Reuters: NEW YORK - Home Depot Inc. has agreed to sell its supply division to three private equity firms, sources said on Tuesday, in a roughly $10 billion deal that unloads a business the home-improvement retailer’s former chief executive worked to expand.

Bain Capital, Carlyle Group and Clayton, Dubilier & Rice won the auction and were finalizing the deal early on Tuesday, sources close to the process told Reuters.

HD Supply, which sells building materials, waste water and utility products to municipalities and contractors, was put up for sale earlier this year, with investment bank Lehman Brothers overseeing the auction....

The sale price of about $10 billion was somewhat lower than investors and analysts had expected, said Keith Davis, an analyst with Farr Miller Washington.

With the sale of the supply business done, Davis said Home Depot would be free to take steps to improve retail sales that have slumped amid the housing weakness and aggressive competition from smaller rival Lowe’s Cos Inc.

Davis said Home Depot, which is boosting capital spending by 29 percent this year to improve stores and win back market share, can improve shareholder returns by raising its dividend as it matures.

“Over the long term, I don’t think (Home Depot’s) growth is going to be anywhere near where it was historically,” Davis said.

Home Depot and the other firms declined to comment.

Nova Scotia News - TheChronicleHerald.ca
Home Depot boss: We’ll reinvent for Chinese
By BILL POWER Business Reporter

You cannot sell lawn mowers in China — not yet, at any rate.

That’s why Home Depot will totally reinvent itself in the world’s biggest emerging consumer marketplace, Annette Verschuren, president of the home renovation chain for Canada and China, said Friday in Halifax.

"In 10 years we will be the biggest home renovation retailer in China, but entering one of our stores there will be nothing like entering one of our stores in Canada or in the United States," the North Sydney-raised corporate chief said.

"When people obtain a home in China, they obtain just the shell. All the interior work is up to them."

Ms. Verschuren, whose Dutch family moved to Nova Scotia when she was a child, said Home Depot will modify its operations in China to meet the demands of the marketplace, as it has in Canada with such tremendous success.

The next few years will be crucial for Home Depot in China, she said.

She said the potential of a customer pool of over $1.3 billion is "phenomenal" and the competition will be fierce.

With the recent acquisition of a 12-store retail chain in China, Home Depot in Canada gained immediate access to a marketplace larger than Canada and Mexico combined.

"The biggest challenge will be to keep up with this growing market," she said.

China Sells Treasuries, Signaling Diversification

Or is China actually signaling their irritation with our posturing protectionist senators?

Bloomberg.com: Worldwide
China Sells Treasuries, Signaling Diversification (Update1)
By Kevin Carmichael and Ye Xie

June 15 (Bloomberg) -- Chinese investors sold more U.S. Treasury securities in April than any time in at least seven years, a signal the nation may be diversifying the world's largest foreign-exchange reserves.

China, which owns more U.S. debt than any foreign nation except Japan, sold a net $5.8 billion of Treasuries, the first drop in holdings since October 2005, according to Treasury Department figures that go back to 2000. The nation held $414 billion of the $4.4 trillion of marketable Treasuries in April, according to today's report.

China, whose reserves reached $1.2 trillion in March, and other Asian and oil-exporting nations are seeking to lift returns on their investments. That may push up yields on Treasuries, traditionally among the top investments for reserves, and erode demand for the dollar.

Interest rates beyond the Fed's control?

A Brave New World

This note (below) from the RGE Monitor email teaser/newletter acknowledges an important point that is often glossed over:

Discussions of US currency depreciation note the relationships between trade balances, deficit spending, global liquidity, bond yields and dollar denominated foreign reserves held by the rest of the world's Central Banks. Yet, discussions of whether or not the Federal Reserve is going to raise target interest rates focus on the US Consumer Price Index or other measures of US inflation / or economic performance making little or no reference to global dynamics.

As global economic growth continues to out perform current US economic weaknesses there will be less and less need for foreign Central Banks to buy weakening US dollars. Global factors may then begin to dominate real US interest rates regardless of US economic performance or internal rates of inflation and regardless of the policies of the Federal Reserve.

Last week, U.S. yields on the 10-year notes shot above 5%. Explanations for the sudden move abound: Bill Gross, mortgage convexity hedging, a shift in Asian demand toward the short-end of the curve, stronger global growth, concerns about rising global inflation and monetary tightening by central banks, capitulation by long-standing U.S. economy bears/bond bulls. Check out “Recasting the Outlook for U.S. Bonds: 10yr Note Exceeds 5%.”

Certainly expectations for stronger U.S. growth and the possibility of a mild acceleration of inflation – still the Fed’s “predominant” concern – played a role. Talk has shifted from a future Fed cut to a persistent Fed pause or even a possible year-end rate hike. But it is also possible that U.S. rates – not just rates in the formerly capital-importing emerging world – are increasingly shaped as much by global as by local developments. Are U.S. long-term yields being pushed up by changing expectations about the U.S., or by stronger growth, rising inflation and expectations of higher rates globally?

(This note originally had several links to more in depth articles, unfortunately they were all within the subscribers only sections of the RGE Monitor site. You'll have to settle for the teaser...)

U.S. Sets New China Duties

While these measures intend to protect US companies the impact on US companies busy moving manufacturing capacity overseas may be quite different. New duties could significantly impact IP's cost/benefits analysis of "downsizing" domestic mills coupled with "ambitious expansion plans into Russia, China and Brazil."

I googled Printing Industries of America (PIA) to find out which companies are members, but the main website has no public listing...

US places tariffs on Chinese paper imports to rescue local industry | printweek.com
Matt Whipp, printweek.com, 08 June 2007

The US Commerce Department has said it will impose tariffs on paper imports from China to help save its struggling paper industry...

The planned tariffs will also affect paper imported from South Korea and Indonesia, although these will be lower than those imposed on imports from China.

Nearly 100 paper and paperboard mills have closed in the US over the past six years.

However, industry body Printing Industries of America (PIA) reacted negatively to the news, which will result in higher paper prices for printers...

"PIA is a strong supporter of free and fair trade both at home and globally. As such, we believe that striking an appropriate balance between protecting the domestic producer and the end-user of an internationally traded product is critical. We hope that the full anti-dumping and countervailing duty investigations weigh seriously the impact of the printing industry as it considers the economic ramifications of imposing tariffs on foreign sources of CFS paper, and that it determines such penalties are unwarranted."

...

US giant International Paper has closed four US mills in the past two years and laid off 25,000 staff – more than a fifth of the its total workforce...
The other side of the equation has been rising timber prices, eating into paper margins, especially with the news that Russia is to impose export duties on timber in order to bolster its domestic paper industry...
It's something International Paper is well aware of. At the same time as its domestic downsizing, it is funding ambitious expansion plans into Russia, China and Brazil with £1bn ($2bn)."

...

The paper industry in Canada is also troubled, this time by the dynamics of currency more than competition... UPM-Kymmene executive vice president, magazine division, Jyrki Ovaska told printweek.com: “The combination of weak rates between the US dollar and Canadian dollar and between the Euro and US dollar have meant operation is not profitable.”

And, globally, paper is under pressure from overproduction, he added. “There is still overcapacity in the magazine paper production industry (not just UPM but all businesses operating in this area).

“In addition, the continued decreasing prices for magazine papers means the combination of poor exchange rates, operating costs and unprofitability means the company has taken the decision for a minimum nine-month shutdown.”

Over the past year, UPM-Kymmene permanently ceased production of 530,000 tonnes of coated magazine paper to reduce overcapacity and improve profitability...

U.S. Sets New China Duties - WSJ.com
Move Opens Door For a Wide Array Of Trade Complaints
By GREG HITT
March 31, 2007; Page A3

WASHINGTON -- The Bush administration imposed new economic sanctions against China, a vivid reflection of the increasingly tough climate in the U.S. toward free trade -- particularly with Beijing.

The new duties apply narrowly to complaints that Chinese producers of glossy, high-quality paper used in books and magazines are unfairly subsidized by their government -- just $224 million of annual imports, or less than 1% of the total goods and services Americans buy each year from China.

But the action is likely to have much wider ramifications. It opens the door to a potential rush of similar complaints by American manufacturers, from steel to plastics producers, that face stiff competition from the Chinese. And it signals, more broadly, an increasingly harder line on trade emerging both at the White House and in Congress.

John Engler, president of the National Association of Manufacturers, has long called on the Bush administration to take a tougher stance on trade and praised the decision for giving U.S. companies new "recourse" to blunt "China's distortions of trade."

The dollar slipped in the foreign-exchange market following the late-morning announcement, as currency traders showed nervousness about rising trade tensions -- particularly since China happens to hold a large quantity of U.S. currency, stocks and bonds.

Bush administration calls for cutting spotted owl habitat

Might as well call for cuts in log and lumber prices.

The housing (read framing lumber) market is in the tank, interest rates are on the rise and lumber mills have cut production all over the northwest and beyond. The last two weeks Random Lengths' Framing Lumber Composite Price made some incremental moves off the bottom after first quarter production levels were down 17% relative to the same period last year. In this context mandating increased logging on federal lands only ensures that western framing lumber prices, and log prices, will stay low for private landowners as well as federal forest managers. Of course below cost log sales could subsidize struggling lumber mills, but as free market advocates will tell you, such subsidies will only distort the market (and create windfall profits) and delay a rational drop in production.

It will offer little protection to struggling rural communities as mill efficiencies rise and markets fall.

Humboldt forest managers should take note that green Doug fir managed to fall an additional couple of bucks to $240 a thousand board feet in spite of the general uptick off the bottom.

Bush administration calls for cutting spotted owl habitat
JEFF BARNARD
June 12, 2007

GRANTS PASS, Oregon -- The Bush administration Tuesday proposed cutting 1.5 million acres (610,000 hectares) from Northwest forests considered critical to the survival of the northern spotted owl, reopening the 1990s battle between timber production and wildlife habitat on public lands...

Recent research has noted that while old growth forests suitable for owl habitat have increased, owl numbers have continued to decline, and that the owl faces a new threat from a cousin, the barred owl, that has been invading its territory.

The proposal by the U.S. Fish and Wildlife Service was published in the Federal Register. It calls for cutting critical habitat for the owl from the 6.9 million acres (2.79 million hectares) designated in 1992 to 5.4 million acres (2.19 million hectares)...

Under court order, timber production on national forests in Washington, Oregon and Northern California was cut by more than 80 percent in 1994 to protect owl habitat, contributing to mill closures and job losses that were particularly painful in rural areas with no other industry. Since then, the Northwest economy has turned to other industries, particularly high-tech, retirement and tourism, but some rural areas continue to struggle.

Since taking office in 2000, the Bush administration has been working to change the Northwest Forest Plan to allow more timber production, but has been largely stymied by court rulings, including several that tossed out plans to log in critical habitat for the owl.

Senate bill aims to press Beijing on currency

The recent (and continuing) rise in bond yields halted, at least temporarily, the stock market's ability to "climb a wall of worry". There is speculation that rising yields are the result of Asian Central banks holding back on purchases of US debt, sending a signal to US policy makers that unpegging China's currency from the dollar could have repercussions for the US economy perhaps not fully understood by US lawmakers. But this isn't necessarily punitive retaliation for aggressive US policy. In the ROTW (rest of the world) the global economy is heating up. As global markets gain strength, there is less reason for China and other exporters with a positive current accounts balance to continue to invest in subsidizing US markets.

In any case the implications for the US housing market are dire. With many adjustable rate mortgages originated in 2005-2006 due to reset these rising rates kick the housing market while it's down.

FT.com / World
Senate bill aims to press Beijing on currency
By Eoin Callan in Washington
Published: June 11 2007 03:00

A bill will be introduced in the US Senate this week that intends to increase pressure on China to float its currency but avoid action that would violate international trade rules, according topeople close to the process.

The legislation is viewed by the Bush administration as the best chance for Congress to let off some steam without blowing a hole in relations with Beijing.

The Senate bill is more moderate than alternatives being floated on Capitol Hill, but will still create headaches for the administration and could become a dividing issue in the next election.

"We don't have any tools to forestall the potential legislation coming down the tracks," said James Baker, former US secretary of state, in a speech on US-China relations.

Lawmakers argue China's weak currency unfairly subsidises the country's exports and contributes to a record annual bilateral US trade deficit of $233bn (€174bn; £118bn). Beijing says it wants to shift the economy towards consumer-driven growth, but fears instability if it moves too quickly.

The Senate bill will serve to step up the pressure after unsuccessful attempts by Hank Paulson, US Treasury secretary, to persuade Beijing to accelerate reform."

Stocks fall as bond yields climb

Stocks Fall As Yields Climb - washingtonpost.com

By MADLEN READ
The Associated Press
Thursday, June 7, 2007; 11:17 AM

NEW YORK -- Stocks fell for a third straight session Thursday after rising bond yields stoked concerns that an interest rate cut later in the year is less likely.

The 10-year Treasury note's yield surpassed 5 percent in overnight trading.

With rates rising in the market, the Federal Reserve is expected to be less inclined to cut short-term interest rates. And a dip in applications for unemployment benefits last week, which indicates a healthy labor market, also made a rate cut seem less likely.

Additionally, mixed May sales reports from major retailers indicated that consumer spending remains uncertain, particularly as gas prices rise and perhaps cut into consumers' spending money. While the array of fresh economic data didn't appear overly downbeat, stock market investors continued to pull back.

10-Year Treasury Yield Passes 5 Percent - washingtonpost.com

By MADLEN READ
The Associated Press
Thursday, June 7, 2007; 10:45 AM

NEW YORK -- The yield on the Treasury's 10-year note passed 5 percent Thursday, hitting a 10-month high as investors see their hopes for an interest rate cut evaporating.

The 10-year yield broke through 5 percent mark overnight and rose as high as 5.07 percent in mid-morning trading in New York, reaching its highest point since late July. U.S. bond markets were following a trend toward lower prices and higher yields in trading abroad.

Some market experts say the 10-year yield is likely to climb higher as bond prices weaken _ making it even harder for consumers to finance home puchases, and also for companies to borrow money.

Fixed mortgage rates, closely linked to the 10-year yield, have been advancing recently, adding to worries about sluggish home sales and faltering home prices. The average U.S. 30-year fixed mortgage rate was at 6.12 percent Thursday, up from 5.98 percent a week ago, according to Bankrate.com.

Ron Paul is Bill Maher's New Hero

Okay, one more on Ron Paul. I'm not giving my endorsement. But, this is an interesting development. Democrats: take notes.

Ron Paul is Bill Maher's New Hero

Ron Paul on easy money and the true cost of petrodollars

I'm not a republican, nor am I a libertarian. But, there's something about the willingness of Ron Paul to say clearly what he believes to be true, in conflict with republican party doctrine, that has caused me to look a little closer. His analysis of the 35 year bi-partisan attack on the integrity of the dollar is worth a read. After reading this I went back and read Williams Jennings Bryan's Cross of Gold speech just to remind myself of the justifications for inflationary monetary policy. Yet current monetary policy is creating easy money for the heavily leveraged investment gambles that have been driving the stock market through the roof -- not necessarily protecting the American citizen whose paycheck's global purchasing power is taking the hit.

Check out this graph of the growth in US money supply (M3)since the '70's. Then read Ron Paul.

The End of Dollar Hegemony (excerpt)
Ron Paul: Republican presidential hopeful...
February 15, 2006

The agreement with OPEC in the 1970s to price oil in dollars has provided tremendous artificial strength to the dollar as the preeminent reserve currency. This has created a universal demand for the dollar, and soaks up the huge number of new dollars generated each year. Last year alone M3 increased over $700 billion.

The artificial demand for our dollar, along with our military might, places us in the unique position to “rule” the world without productive work or savings, and without limits on consumer spending or deficits. The problem is, it can’t last.

Price inflation is raising its ugly head, and the NASDAQ bubble-- generated by easy money-- has burst. The housing bubble likewise created is deflating. Gold prices have doubled, and federal spending is out of sight with zero political will to rein it in. The trade deficit last year was over $728 billion. A $2 trillion war is raging, and plans are being laid to expand the war into Iran and possibly Syria. The only restraining force will be the world’s rejection of the dollar. It’s bound to come and create conditions worse than 1979-1980, which required 21% interest rates to correct. But everything possible will be done to protect the dollar in the meantime. We have a shared interest with those who hold our dollars to keep the whole charade going.

Greenspan, in his first speech after leaving the Fed, said that gold prices were up because of concern about terrorism, and not because of monetary concerns or because he created too many dollars during his tenure. Gold has to be discredited and the dollar propped up. Even when the dollar comes under serious attack by market forces, the central banks and the IMF surely will do everything conceivable to soak up the dollars in hope of restoring stability. Eventually they will fail.

Most importantly, the dollar/oil relationship has to be maintained to keep the dollar as a preeminent currency. Any attack on this relationship will be forcefully challenged—as it already has been.

In November 2000 Saddam Hussein demanded Euros for his oil. His arrogance was a threat to the dollar; his lack of any military might was never a threat. At the first cabinet meeting with the new administration in 2001, as reported by Treasury Secretary Paul O’Neill, the major topic was how we would get rid of Saddam Hussein-- though there was no evidence whatsoever he posed a threat to us. This deep concern for Saddam Hussein surprised and shocked O’Neill.

It now is common knowledge that the immediate reaction of the administration after 9/11 revolved around how they could connect Saddam Hussein to the attacks, to justify an invasion and overthrow of his government. Even with no evidence of any connection to 9/11, or evidence of weapons of mass destruction, public and congressional support was generated through distortions and flat out misrepresentation of the facts to justify overthrowing Saddam Hussein.

There was no public talk of removing Saddam Hussein because of his attack on the integrity of the dollar as a reserve currency by selling oil in Euros. Many believe this was the real reason for our obsession with Iraq. I doubt it was the only reason, but it may well have played a significant role in our motivation to wage war. Within a very short period after the military victory, all Iraqi oil sales were carried out in dollars. The Euro was abandoned.

In 2001, Venezuela’s ambassador to Russia spoke of Venezuela switching to the Euro for all their oil sales. Within a year there was a coup attempt against Chavez, reportedly with assistance from our CIA.

After these attempts to nudge the Euro toward replacing the dollar as the world’s reserve currency were met with resistance, the sharp fall of the dollar against the Euro was reversed. These events may well have played a significant role in maintaining dollar dominance.

It’s become clear the U.S. administration was sympathetic to those who plotted the overthrow of Chavez, and was embarrassed by its failure. The fact that Chavez was democratically elected had little influence on which side we supported.

Now, a new attempt is being made against the petrodollar system. Iran, another member of the “axis of evil,” has announced her plans to initiate an oil bourse in March of this year. Guess what, the oil sales will be priced Euros, not dollars.

Most Americans forget how our policies have systematically and needlessly antagonized the Iranians over the years. In 1953 the CIA helped overthrow a democratically elected president, Mohammed Mossadeqh, and install the authoritarian Shah, who was friendly to the U.S. The Iranians were still fuming over this when the hostages were seized in 1979. Our alliance with Saddam Hussein in his invasion of Iran in the early 1980s did not help matters, and obviously did not do much for our relationship with Saddam Hussein. The administration announcement in 2001 that Iran was part of the axis of evil didn’t do much to improve the diplomatic relationship between our two countries. Recent threats over nuclear power, while ignoring the fact that they are surrounded by countries with nuclear weapons, doesn’t seem to register with those who continue to provoke Iran. With what most Muslims perceive as our war against Islam, and this recent history, there’s little wonder why Iran might choose to harm America by undermining the dollar. Iran, like Iraq, has zero capability to attack us. But that didn’t stop us from turning Saddam Hussein into a modern day Hitler ready to take over the world. Now Iran, especially since she’s made plans for pricing oil in Euros, has been on the receiving end of a propaganda war not unlike that waged against Iraq before our invasion.

It’s not likely that maintaining dollar supremacy was the only motivating factor for the war against Iraq, nor for agitating against Iran. Though the real reasons for going to war are complex, we now know the reasons given before the war started, like the presence of weapons of mass destruction and Saddam Hussein’s connection to 9/11, were false. The dollar’s importance is obvious, but this does not diminish the influence of the distinct plans laid out years ago by the neo-conservatives to remake the Middle East. Israel’s influence, as well as that of the Christian Zionists, likewise played a role in prosecuting this war. Protecting “our” oil supplies has influenced our Middle East policy for decades.

But the truth is that paying the bills for this aggressive intervention is impossible the old fashioned way, with more taxes, more savings, and more production by the American people. Much of the expense of the Persian Gulf War in 1991 was shouldered by many of our willing allies. That’s not so today. Now, more than ever, the dollar hegemony-- it’s dominance as the world reserve currency-- is required to finance our huge war expenditures. This $2 trillion never-ending war must be paid for, one way or another. Dollar hegemony provides the vehicle to do just that.

For the most part the true victims aren’t aware of how they pay the bills. The license to create money out of thin air allows the bills to be paid through price inflation. American citizens, as well as average citizens of Japan, China, and other countries suffer from price inflation, which represents the “tax” that pays the bills for our military adventures. That is until the fraud is discovered, and the foreign producers decide not to take dollars nor hold them very long in payment for their goods. Everything possible is done to prevent the fraud of the monetary system from being exposed to the masses who suffer from it. If oil markets replace dollars with Euros, it would in time curtail our ability to continue to print, without restraint, the world’s reserve currency.

Brazil and India 'to boost trade'

BBC NEWS | Business
Brazil and India 'to boost trade'
Brazil and India plan to strengthen their trade ties significantly, after meetings between political leaders.

The two developing nations aim to increase bilateral trade three-fold, to reach $10bn (£5bn) by 2010, from $2.4bn in 2006, reports the Associated Press.

Brazilian President Luiz Inacio Lula da Silva also called for co-operation on defence, nuclear energy and oil.

Both nations have been strong voices in trying to boost the role of developing nations in international trade.

Syria to end dollar peg

I don't know if they read Peter Schiff in Syria, but they do think a declining currency leads to internal inflation. Therefore they want to uncouple the Syrian pound from the US dollar and peg it to a stronger currency. If it's true that following the dollar down leads to internal inflation, then as various central banks begin to move to the euro rising import costs (raw materials and finished product) will have an effect in the US as well. This inflation won't be a sign of an overheating economy, rising wages, etc. that needs to be slowed by increasing interest rates. It will instead contribute to the burden on US consumer spending which, at 70+% of GDP, is the mainstay of the US economy. Yet increasing rates will be necessary to stabilize the dollar's fall and refinance the US national debt.

Could Peter be right? Do they dare to cut us off?


Syria to End Dollar Peg, 2nd Arab Country in 2 Weeks (Update3)
By Zainab Fattah and Matthew Brown
Bloomberg.com: Worldwide

June 4 (Bloomberg) -- Syria became the second Middle Eastern nation in two weeks to say it will dump its currency's peg to the dollar to curb rising import costs and inflation.

The country will link the Syrian pound to a broader range of currencies starting in the middle of July, central bank Governor Adib Mayaleh said.

``The decision is final,'' he said in a phone interview from Abu Dhabi. ``This will help stabilize the Syrian pound and bring down inflation.''

The shift away from the dollar among Middle East countries is a sign of the waning attraction of the currency for central banks around the world. The dollar made up 64.7 percent of global foreign-exchange reserves in the fourth quarter, down from 65.8 percent in the prior three months, International Monetary Fund data show. The euro's share was 25.8 percent, the highest since its 1999 debut.

Syria is broadening its peg after the country's currency was dragged lower against the euro by a 10 percent slide in the dollar last year, pushing up the cost of imports from Europe. Kuwait switched to a basket of currencies on May 20 because of gains in consumer prices, which are also accelerating in the United Arab Emirates and Qatar.

``The weaker dollar is fueling inflation,'' said Dorothee Gasser, an analyst at ING Bank in London. ``We see the U.A.E. as the next possible shifter.''

Bear baiting: Peter Schiff on CNBC

As CNBC's pet bear Peter Schiff is convinced the end is near. It's true he's trying to sell his book, (Crash Proof: How to Profit from the Coming Economic Collapse) but some of his arguments are pretty compelling. Peter thinks American consumers have been "borrowing money like drunken sailors and blowing it." But he's really talking about all the dollar reserves piling up in foreign central banks. He expects the rest of the world to cut us off with significant impacts on the value of the dollar and interest rates leading to a serious recession.

The discussion, ok staged argument with CNBC bulls, in the video interview below is pretty interesting. Here's an excerpt from his latest commentary followed by the CNBC video:


When will all this bad news sink in?
Peter Schiff -- June 1st 2007

Yesterday we learned that 1st quarter GDP “grew” at an annualized rate of only .6% (of course if the government used honest inflation numbers, real GDP is already contracting). Slower growth means fewer jobs and declining incomes, which will further pressure the housing market as homeowners have less income to confront rising adjustable rate mortgages. For potential home buyers the situation is even worse. Not only do they face higher mortgage payments but they must now come up with actual down-payments (which they do not have) and meet far stricter lending standards, including documenting their inadequate incomes.

Today we received further evidence that our imbalanced economy is moving further off kilter as another 19,000 manufacturing jobs were lost and the personal savings rate fell to minus 1.3%. Fewer goods being produced means even larger future trade deficits, which will be made more difficult to finance as a result of rising interest rates. Tighter credit and inadequate income growth will also make record personal indebtedness that much more costly to service.

My guess is that Wall Street's blissful slumber may be ended by the shrilling wake-up call of the collapsing dollar. In the last ten weeks the Canadian dollar has risen by over 10% against the greenback. That’s about one percent per week - incredible! With the weakness in the U.S. economy becoming increasingly apparent overseas, and global interest rates continuing their ascent, it will not be much longer before foreigners pull the plug on the dollar. When they do, it’s the American economy, and Wall Street's phony rally, that will go down the drain.

If you'd like to hear Peter argue with the CNBC bulls check the video out.

Euro Pacific Capital | Video Interviews
CNBC Kudlow & Company 6/1/07

bioenergy may save BC forest industry

The Canadian forest products industry provides 30+% of the US lumber supply. Admittedly much of this additional supply is not needed in the near term given current closures and curtailments in the industry due to the housing market freefall.

It will be interesting to see how industry on both sides of the border responds to rising energy costs. Four or five years from now when housing recovers we may be looking at a significantly restructured industry.

Will the declining US dollar and increasing transportation costs create de facto protections for US industry? Or will the AF&PA call for a tarrif on imported megawatt hours...

Forest industry faces major changes:
Much of B.C.'s wood supply will be used for bioenergy instead of pulp and lumber, expert says
Gordon Hamilton, Vancouver Sun
Published: Friday, May 11, 2007

Natural Resources: The B.C. forest industry turned in one of the world's worst performances in 2006, but a transformation of historic proportions is just over the horizon, one of the province's leading industry consultants said Thursday.

PricewaterhouseCoopers partner Craig Campbell said traditional pulp and lumber production, particularly in the pine beetle-ravaged Interior, is going to give way to bioenergy, smoothing over the boom-and-bust cycles that characterize the industry today.

Campbell's forecast of a prosperous future comes at a time when the industry is the world's basket case. He said mountains of logs are piling up alongside forest roads today because companies cannot economically convert them to lumber.

The industry tumbled from the world's top performing region two years ago, when it had $1.5 billion in profits, to the bottom of the heap in 2006, losing $500 million, according to findings released Thursday by PricewaterhouseCoopers.

Life among the Econ tribe

Perhaps this helps to explain why local sustainable development strategies are continually sideswiped by economic reality....

Economist's View: Axel Leijonhufvud: Life Among the Econ

The Econ tribe occupies a vast territory in the far North. Their land appears bleak and dismal to the outsider, and travelling through it makes for rough sledding; but the Econ, through a long period of adaptation, have learned to wrest a living of sorts from it. They are not without some genuine and sometimes even fierce attachment to their ancestral grounds, and their young are brought up to feel contempt for the softer living in the warmer lands of their neighbours such as the Polscis and the Sociogs. [Not to mention the Ecologs...] Despite a common genetical heritage, relations with these tribes are strained-the distrust and contempt that the average Econ feels for these neighbours being heartily reciprocated by the latter-and social intercourse with them is inhibited by numerous taboos. The extreme clannishness, not to say xenophobia, of the Econ makes life among them difficult and perhaps even somewhat dangerous for the outsider. This probably accounts for the fact that the Econ have so far-not been systematically studied. Information about their social structure and ways of life is fragmentary and not well validated. More research on this interesting tribe is badly needed.

Chinese eco-protest takes high-tech path

Chinese eco-protest takes high-tech path

Mitchell Landsberg, Los Angeles Times
Saturday, June 2, 2007

(06-02) 04:00 PDT Beijing -- In the cat-and-mouse game that characterizes political protest in China, the mice won a round this week. They did it by finding a new way to use a familiar form of technology.

Opponents of a chemical plant being built in the coastal city of Xiamen used cell phone text messaging to broadcast their warning of dire consequences if the factory opened.

"Once this extremely poisonous chemical is produced, it means an atomic bomb will have been placed in Xiamen," the text message said in Chinese characters. "The people of Xiamen will have to live with leukemia and deformed babies. We want our lives and health!"

Spreading like a virus, the message was repeated more than a million times, environmentalists said, until it had reached practically everyone in Xiamen, a southeastern city of 1.5 million known for its clean air and scenic views. It also spread beyond cell phones, splashed on walls in the form of graffiti and posted in blogs and other Web sites throughout China.

On Wednesday, in a move that caught almost everyone by surprise, municipal authorities announced that they were suspending construction of the plant.