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Vol. 72/No. 5      February 4, 2008

 
Consumer prices rise as
workers’ real wages decline
Financial institution losses signal deeper crisis
(front page)
 
BY PAUL PEDERSON  
The U.S. Department of Labor reported in mid-January that consumer prices in 2007 increased by the highest percentage in 17 years, especially for basic necessities. It reported that workers’ wages, after adjusting for inflation, dropped last year. Meanwhile, holiday sales were the lowest they’ve been in five years.

In January, two major capitalist institutions, Citigroup and Merrill Lynch, reported multibillion-dollar losses in the last quarter of last year, an indication of the broader world financial crisis.

The Labor Department reported 4.1 percent inflation in 2007, but that figure does not tell the real story. Bread prices jumped by nearly twice that rate, 7.4 percent last year. Eggs were up 29.2 percent, milk 13.1 percent, coffee 6.3 percent, chicken 5.8 percent.

The cost of energy leapt by 17.4 percent last year, with gasoline prices up 29.6 percent. Tuition and other college expenses were pushed up by 6.2 percent. And health insurance, already out of reach for millions, rose by 10.1 percent. Even the cost of funerals increased, by 5 percent.

According to Department of Labor statistics, real wages—that is, taking into account inflation—dropped by 0.9 percent in 2007, the fourth decline in five years.

Recent reports confirmed that December was the weakest holiday shopping season in five years. Sales fell across the board, from big chains like Target to higher-end stores like Nordstrom.

More than 1 million homes went into foreclosure in the first three quarters of 2007, according to RealtyTrac, a California firm that releases monthly figures. Another 1.8 million home loans made to borrowers with little or no credit are due to “reset” to higher rates this year and next, signaling that the current wave of foreclosures has not yet passed.

Auto loans are also contributing to the increase in personal debt. The average amount drivers owe on their cars has ballooned—up 40 percent in the last decade to $30,738.

Citigroup, one of the largest banking and credit-card firms in the United States, has announced that it is now building its loan-loss reserves in anticipation of a possible unraveling of auto loan and credit card debt. At the same time the bank is tightening credit card lending standards.  
 
Bush ‘stimulus’ plan
Pointing to the instability in the housing and financial markets, the Bush administration announced it is working to enact a $140 billion economic “stimulus” package.

The plan, similar in many ways to those proposed by the leading Democratic presidential candidates, is based on income tax relief directed at the middle class and workers as well as tax incentives for business investment.

Speaking at a lawn-mower factory in Maryland January 19, President Bush told the owner, “I’m proud to be with your workers … .And if they get a little more money in their pocket as a result of the growth package, it will help make sure this economy continues to grow.”

That assumes that the money will be spent on consumer goods, rather than saved or used to pay off debts.

“In 2001, Bush and Congress instituted a huge stimulus program, sending out billions,” John Mauldin, a hedge fund manager and financial analyst, wrote January 18. “Academic studies found that most of that money went into savings, which is hardly a stimulus. Further, we are in far worse credit shape now than then. How much of the $150 billion would be spent to pay down credit card debt?”  
 
Financial crisis
The world financial crisis that lies behind the worsening economy is deepening. For years personal debts, including for homes, cars, and credit cards, were bundled together and sold like stocks, becoming a lucrative and growing form of speculation for giant banks, investment firms, hedge funds, and others. Now many are beginning to come to grips with the fact that a sizable amount of this paper is worthless.

In the fourth quarter of last year, Merrill Lynch and Citigroup wrote off $16.7 billion and $18 billion, respectively, in assets on their balance sheets. These huge losses are linked to the unraveling mortgage market.

In addition, the credit crisis wiped out most of the fourth-quarter earnings for two major U.S. banks, Bank of America and Wachovia.

“Our modern shadow banking system craftily dodges the reserve requirements of traditional institutions and promotes a chain letter, pyramid scheme of leverage, based in many cases on no reserve cushion whatsoever. Financial derivatives of all descriptions are involved,” William Gross, director of PIMCO, a giant bond trader, wrote in January.

The worldwide holdings of derivatives reached $516 trillion in 2007. Derivatives are contracts that are traded like stocks whose value is determined by bets on the changes in the value of one or more underlying assets such as stocks, bonds, currency, or commodities.

Gross pointed out that one shaky category of debt-based derivatives called credit default swaps, accounted for $43 trillion as of last year—“more than half the size of the entire asset base of the global banking system.”

As these speculative schemes unravel, the big-business media is more openly voicing worries held by a section of the capitalist class that the economy is headed for a deep recession.

“The U.S. has suffered recessions only twice in the past quarter century and both were short and mild. There are good reasons to fear that the looming recession, if it arrives, could be worse,” wrote Wall Street Journal columnist Justin Lahart January 21. “Housing is in the midst of its worst downturn since at least the 1970s … The combination of heavy debt loads, still-high energy and food prices and a weakening job market has households tightening their belts.”  
 
 
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