Tuesday, November 20, 2007

Dollar Slides to Record Low Against Euro Before Housing Data

Kim-Mai Cutler and Kosuke Goto
Bloomberg
Tuesday November 20, 2007

The dollar fell to a record low against the euro and the Swiss franc on speculation a U.S. government report will show a deepening property slump, prompting the Federal Reserve to lower interest rates.

The U.S. currency declined as economists forecast Commerce Department data today will show U.S. housing starts slipped to a 14-year low in October, prompting traders to raise bets the Federal Reserve will cut interest rates by December. The dollar also slid on speculation a group of six Arab nations will change their fixed exchange rates to the U.S. currency. The yen declined versus all 16 of the major currencies as European stocks rose.

``Credit and housing difficulties are continuing to rumble on,'' said Adam Cole, senior currency strategist at RBC Capital Markets Ltd. in London. ``There's more bad news in the pipeline, raising speculation the Fed is going to cut rates again.''

The dollar weakened to $1.4776 per euro as of 10:51 a.m. in London from $1.4665 late yesterday in New York. It touched $1.4797, the lowest since the 13-nation currency was started in 1999. It traded at 110.24 yen from 109.76 yen.

Cole forecasts the euro will fall to $1.45 and the yen will decline to 115 against the dollar by year-end.

The dollar fell to a record low of 1.1070 versus the franc from 1.1152 yesterday, and was last at 1.1086.

The yen fell as Asian stocks pared earlier declines, giving traders confidence to buy higher-yielding assets funded with loans from Japan. The currency slid 1.4 percent against the New Zealand dollar as investors returned to so-called carry trades.

Full article here.

As dollar weakens, Gulf nations look at currency pegs

Matthew Brown and Aaron Pan
Bloomberg
Tuesday November 20, 2007

DUBAI: When central bank officials in the Middle East say they have no plans to end their fixed exchange rates to the dollar, the currency market hears the opposite.

Merrill Lynch predicts that either the United Arab Emirates or Qatar will cut their dollar peg within six months. Standard Chartered says the six Gulf Cooperation Council nations need to raise the value of their currencies 20 percent. And currency traders are betting that Saudi Arabia will sever its 21-year link to the dollar, according to data compiled by Bloomberg.

"The dollar peg is doomed," said Jim Rogers, chairman of Rogers Holdings in New York and a former partner of the hedge fund manager George Soros.

The Gulf countries, which supply 22 percent of the world's oil, according to BP, are under pressure to abandon their fixed exchange rates after the dollar tumbled 10 percent against the euro so far this year. Inflation in the Gulf region is accelerating at the fastest pace in at least five years because central banks follow U.S. Federal Reserve policy as a result of the dollar link.

The ties are already weakening. Kuwait dropped the dinar's fixed exchange rate in May and the currency has strengthened 4.5 percent.

Full article here.

India, Russia to jointly build stealth war planes

AFP
Tuesday November 20, 2007

India and Russia will jointly build a fighter plane which will incorporate stealth technology and carry "super" missiles, India's defence minister said Monday.

The announcement came after Indian Prime Minister Manmohan Singh flew to Moscow on November 12 and held talks with Russian President Vladimir Putin.

"The Indian air force is planning to induct stealth technology and super manoeuvrability in the fifth-generation fighters to be jointly developed with Russia," Defence Minister A.K. Antony said in parliament.

Antony said the jet would also be armed with "super cruise missiles and smart weapons" and added top military aviation experts from the two countries were already working on blueprints.

"Delivery schedule, the cost of development and cost-sharing would also be worked out," Antony said separately at an official meeting.

Russia accounts for 70 percent of Indian military equipment but late deliveries, especially of tanks, and commercial disagreements have forced New Delhi to use other suppliers including Britain, France, Israel and the United States.

The delays have meant that India is no longer content simply to purchase arms but now favours joint production.

India has also floated a global tender to buy 126 fighter jets worth 10 billion dollars that has drawn the interest of US and European arms firms.

Chavez says US dollar's days numbered

Reuters
Tuesday November 20, 2007

Venezuela's Chavez arrives in Iran declaring the American empire will crash with the dollar.

Iran and Venezuela had called on OPEC to drop the dollar and price oil against a basket of currencies instead.

Deborah Lutterbeck reports.SOUNDBITES:

Venezuelan President Hugo Chavez, saying (Spanish):
"Soon we will not talk about dollars because the dollar is falling in value and the empire of the dollar is crashing. Naturally, by the crash of the dollar, America's empire will crash."



A Financial System under Siege

Prof. Rodrigue Tremblay
Global Research
November 15, 2007

The global dollar-based financial system is in crisis and is threatening the prosperity and stability of many economies. Financial excesses of all kinds have undermined its legitimacy and its efficiency. The U.S. dollar is losing its preeminence as the main international reserve currency while many banks are caught in the turmoil of the subprime credit crisis.

The overall background is the unprecedented real estate bubble that took place worldwide, from 1995 to 2005. In the United States, for example, owner-occupied home prices increased annually by an average of about 9 percent. The market value of the stock of owner-occupied homes in the U.S. rose from slightly less than $8 trillion in 1995 to slightly more than $18 trillion in 2005. It has been contracting ever since, confirming the working of the 18-year Kuznets realestate cycle, which has gone from the top of 1987 to the 2005 top.

What makes this period especially dangerous is the fact that the average 54-year long inflation-disinflation-deflation Kondratieff cycle is also at play, having begun in 1949 after prices were unfrozen. World inflation then rose for twenty years, until 1980, which was followed by a period of disinflation under the Volcker Fed. The entry of China into the World Trade Organization (WTO) on December 11, 2001, with its abundant labor and low wages, unleashed strong deflationary forces worldwide. This in turn led to lower inflation expectations paving the way for the Greenspan Fed to keep interest rates abnormally low.

Persistent low interest rates and low inflation expectations led to a binge in borrowing and to a vast increase in market valuation, not only in real estate but also in stocks and bonds. Banks and other mortgage lending institutions took advantage of the opportunity to introduce some financial innovations in order to finance the exploding mortgage market. These innovations resulted in the severing of the traditional direct link between borrower and lender and the reduction in the lending risk normally associated with mortgage loans.

Thus, with the connivance of the rating agencies and of the Federal Reserve System, large banks invented new financial products under various names such as “Collateralized Bond Obligations” (CBOs), “Collateralized Debt Obligations” (CDOs), also called “Structured Investment Vehicles” (SIVs), which had the characteristics of unfunded short term commercial paper. In the residential mortgage market, for example, mortgage brokers and retail lenders would sell their mortgage loans to banks, which in turn would package them together and slice them into different classes of mortgage-backed securities (RMBS), carrying different levels of risk and return, before selling them to investors.

Indeed, these new financial instruments were the end result of a process of “asset securitization” and were slices of bundles of loans, not only of mortgage loans but also of credit cards debts, car loans, student loans and other receivables. Each slice carried a different risk load and a different yield. With the blessing of rating agencies, banks went even one step further, and they began pooling the more risky financial slices into more risky bundles and divided them again to be sold to investors in search of high yields.

By selling these new debt instruments to investors in search of high yields and higher yields, including hedged funds and pension funds, banks were doubly rewarded. First, they collected handsome managing fees for their efforts. But second, and more importantly, they unloaded the risk of lending to the unsuspected buyer of such securities, because in case of default on the original loans, the banks would be scot-free. They had already been paid and had been released from the risk of default and foreclosure on the original loans.

The banks’ residual role was to collect and distribute interest, as long as borrowers made their interest payments. But if payments stopped, the capital losses incurred because of the decline in the value of unperforming loans would instead be carried by the investors in CBOs and CDOs. The banks themselves would suffer no losses and would be free to use their capital bases to engage in additional profitable lending. In fact, the end of the line investors became the real mortgage lenders (without reaping all the rewards of such risky loans) and the banks could reuse their capital to pyramid upward their loan operations. These were the best of times for banks and they gorged themselves without restraint. Some of them paid their employees tens of billions of dollars in year-end bonuses.

Indeed, and it is here that the Fed and other regulatory agencies failed, first line mortgage lenders became more and more aggressive in their lending, with the full knowledge that they could profitably unload the risk downstream. This explains the expansion of the “subprime” mortgage market where borrowing was done with no down payment, no interest payments for a while and no questions asked as to the income and creditworthiness of the borrower. These were not normal lending practices. Such Ponzi schemes could not last forever. And when housing prices started to decline, foreclosures also increased, thus shaking the new financial house of cards to its foundations. Banks became the reluctant owners of some of the foreclosed properties at very discounted values.

Why then are so many banks in financial difficulties, if the lending risk was transferred to unsuspecting investors? Essentially, because when the housing boom burst, the banks’ inventory of unsold “asset-backed securities” was unusually high. When the piper stopped playing and investors stopped buying the newly created risky investments, their value plummeted overnight and banks were left with huge losses still not fully reflected in their financial balance sheets. Indeed, banks that did not unload their stocks of packaged mortgages were forced to accept ownership of foreclose properties at very discounted values. With little or no collateral behind the loans, bad-debt losses became unavoidable.

Since noboby knows for sure the value of something which is not traded, it will take months before banks come to terms with the total losses they have suffered in their stocks of unsold pre-packaged “asset-based securities”. It is more than a normal “liquidity crisis” or “credit crunch” (which results when banks borrow short term and invest in illiquid long term assets); it is more like a “solvency crisis” if the banks’ capital base is overtaken by the disclosure of huge financial losses incurred when the banks are forced to sell mortgaged assets in a depressed real estate market.

This is this financial and banking mess which is unfolding under our very eyes and which is threatening the American and international financial system. There are four classes of losers. First, the homebuyers who bought properties at inflated prices with little or no down payment and who now face foreclosure. Second, the investors who bought illiquid mortgage-backed commercial paper and who stand to lose part or all of their investments. Third, the holders of bank stocks who profited when the system worked smoothly but who now face declining stock values. And, finally, anybody who stands to fall victim, directly or indirectly, to the coming economic slowdown.

The Dollar may recover, but the world will be different

Hamish McRae
Blink
17 November 2007

The US economy is shrinking whilst China and India’s economies are growing. The US economy also has a current account deficit of 6% of its GDP. Next year, China will pass Germany to become the world’s third largest economy after the US and Japan and, on present trends, will pass Japan within a decade. So while the US will retain the title of the world’s largest economy for another generation, it no longer dominates the world in the way it used to.

It is fun that supermodels don’t want to be paid in dollars but it is not what matters. What really matters is where investors want to put their savings and, currently, the answer seems to be anywhere but the US. The dollar has been weak before and has eventually recovered. So too, it needs to be recognised, has sterling – we know how to run a weak currency here.

And so, too, has the euro. Four years ago, the dollar was riding high and it was the euro that was on the ropes. The issue is whether this time things are different: that this time the dollar will find it harder to recover its position as the world’s main currency.

There are three main reasons why this period of dollar weakness may persist. The first is that there is a rival currency covering an economic zone of comparable size to the US, the euro. Even since the currency was created, the eurozone has grown more slowly than the US. This year it looks like changing, with Europe growing faster. That inevitably creates a demand for the currency, for people want to invest in a place that is doing well.

The second is that the current account deficit of the US is larger relative to GDP than in any previous bout of dollar weakness. It is improving a little but is still about 6 per cent of GDP and that is huge.

Foreigners don’t need to take money out of the US to put pressure on the dollar; they don’t even need to stop investing; they merely need to stop putting so much money in. That is what has been happening in recent months, particularly since the summer.

And the third is that the relative size of the US economy has been shrinking, while the Asian economies – China of course but also India – have been gaining ground every year. Next year, China will pass Germany to become the world’s third largest economy after the US and Japan and, on present trends, will pass Japan within a decade. So while the US will retain the title of the world’s largest economy for another generation, it no longer dominates the world in the way it used to.

So what will happen? Currencies generally overshoot their true underlying value. Why that should happen is bound up in the mists of market psychology. The dollar is probably already undervalued but that does not mean that it will not become more so. Its reputation is being chipped away by a series of events, small in themselves but large in total.

They include the story this week that the United Arab Emirates may cut the link with the dollar, as Kuwait already has done. If there were a general loss of confidence then the dollar could fall quite a lot more. Eventually there will be a floor – there always is – but the collapse would be disruptive, not least to the European economy, where exporters are suffering from the surge in the euro.

If things really get out of hand, there may have to be some dollar rescue but that – for the moment at least – seems some way off. The big point is even when the dollar does recover the world will be different. Maybe we will still price oil in dollars but a lot more people around the world will think – and place their assets – in

New al-CIA-duh Created to Fight Old al-CIA-duh

Kavkaz Center
November 18, 2007

U.S. creating gangs of mercenaries to fight Taliban, Al Qaeda

The US is considering a plan to create gangs of mercenaries from local population in the border areas of Pakistan to fight al-Qaida and the Taliban, emulating its tactics in Iraq’s Anbar province.

The plan would involve increasing the number of US trainers in Pakistan by dozens from the current number of around 50, and the direct financing of a separate tribal “paramilitary force” that has so far proved largely ineffective. Washington would also pay militias that agreed to fight al-Qaida and foreign “extremists”.

The plan, leaked to the New York Times, comes amid increasing concern over gains made by Islamic rebels in the region of Swat, near the Afghan border. In recent weeks, major battles have left many Pakistani soldiers, rebels and civilians dead.

Pervez Musharraf, the Pakistani president, said one of the main reasons for imposing emergency rule was to deal with the growing threat from Islamic rebels.

The tribal proposal - a strategy paper prepared by staff members of the US special operations command - has been circulated to counterterrorism experts, but has yet to be formally approved by the command’s headquarters in Tampa, Florida, the Times said.

Some other elements of the campaign, approved in principle by the US and Pakistan, await funding.
They include 0m (£170.7m) over several years to help train and equip the frontier corps, a “paramilitary force” that has around 85,000 members and is recruited from border tribes.

In the past, the US has expressed frustration at Musharraf’s tactics in dealing with rebels in the border area, especially a truce, agreed earlier this year, which has backfired, with pro-Taliban forces becoming stronger.

Ministry of Homeland Security Flunkey Steps Down

Kurt Nimmo
TruthNews
November 20, 2007

I don’t mean to be hard on Fran Townsend. I’m sure she’s a nice person. On the other hand, she may not be a nice person, as she is the former Assistant District Attorney in Brooklyn, New York, that is to say she sent a lot of people to prison.

“President Bush’s top adviser on homeland security is stepping down after 4½ years on the job, the White House said Monday,” reports CNN. “Homeland Security Adviser Fran Townsend turned in her letter of resignation to President Bush on November 6 and will be looking for new opportunities outside government.”

“I’m going to just take another job doing 20-hour days, but this time in the private sector,” said Townsend, attempting to make a funny.

“Fran has always provided wise counsel on how to best protect the American people from the threat of terrorism,” said Bush in a statement, that is to say a statement whipped up by one of his neocon aides. “We are safer today because of her leadership.”

Yadda yadda yadda.

In fact, Fran was put in the position because the neocons were grooming her for the AG position, that is until they decided to put Mike “Bill of Rights Destroyer” Mukasay in there.

“Townsend’s job, as the president’s top adviser on fighting terrorism, involved identifying terrorist groups around the globe and assessing their threat, and finding ways to track and cut off their funding. She said that experience should will be useful in the private sector as well.”

In other words, Fran talked with the CIA a lot. Most terrorist groups are created whole cloth by the CIA, MI6, the Mossad, and affiliated intelligence agencies and organizations. Small time terror groups are sort of like a disorganized street gang compared to a well-oiled Mafia operation. In other words, they don’t stand a chance in hell and certainly Fran does not need to be bothered by them.

“Townsend — the mother of two, ages 6 and 12 — said she first will look into public speaking, writing and board work before pursuing opportunities in global risk management for a large multinational corporation or financial institution.”

In other words, Fran will fatten up her bank account on the speaking circuit and then, like no shortage of government flunkies before her, find her place in the corporate world. No doubt she will do well, as “security” predicated on fake and over-dramatized terror is a growth business.

I should have been kinder to Fran. But the point is she has helped the neocons destroy the Bill of Rights and the Constitution. And now she will be wearing a corporate pantsuit for her effort and “earning” six figures or more.

Honestly, she should be wearing an orange jumpsuit.

Depopulation Linked Merck Pharma Announces “Philanthropic Initiative” in Africa

Kurt Nimmo
TruthNews
November 19, 2007

CSRwire reports:

The Merck Company Foundation announced today a $2.8 million commitment to establish two new immunization training centers in Uganda and Zambia and to expand the Foundation’s support of two existing centers in Kenya and Mali as part of the Merck Vaccine Network - Africa. The Merck Vaccine Network - Africa, a multi-year philanthropic initiative, supports academic partnerships in the development of sustainable immunization training centers to increase the number of skilled health professionals in Africa. Today’s announcement, when added to the Foundation’s initial commitment of $1.6 million, more than doubles the Foundation’s total commitment to $4.4 million in funding for these four centers.

In other words, when the big pharma “philanthropists” come calling with their “skilled health professionals,” people in Kenya and Mali should grab their kids and head for the hills.

Earlier this month, the Wall Street Journal reported:

New evidence suggests that Merck & Co.’s experimental HIV vaccine may have made its recipients more vulnerable to the deadly AIDS virus — and has prompted researchers to warn participants in other trials that similarly made vaccines for a range of other diseases might also increase their susceptibility to HIV….

The Merck vaccine, which includes only a few synthetic fragments of HIV loaded onto a genetically modified cold virus, called an adenovirus, couldn’t itself infect patients with HIV. Instead, the vaccine might have altered the immune system to facilitate infection. Some researchers are concerned that other vaccines made with the adenovirus could have the same effect.

As Dr. Leonard Horowitz noted in 2005, the UN’s World Health Organization “is rumored to have helped spread AIDS to Africa by way of contaminated hepatitis B and/or polio vaccinations. There is a reasonable amount of evidence to support this contention… the Rockefeller family, foundation, U.N. and WHO remain at the forefront of administering ‘population programs’ designed to reduce world populations to more manageable levels.”

In order to understand the mindset behind this eugenics program, take a look at Henry Kissinger’s 1974 Plan for Food Control Genocide, published by the Schiller Institute.

Starvation, however, is too unreliable. AIDS is much more efficient.


“Compelling national security documents reveal the intentional targeting of black Americans and Africans for population control, including depopulation, as is being accomplished by the AIDS epidemic today,” writes Christopher Rudy. “Not likely a coincidence, according to U.S. Government documents reprinted in Death in the Air: Globalism, Terrorism and Toxic Warfare (Tetrahedron, LLC, 2001; 1-888-508-4787), every sociopolitical and economic outcome secretly planned for Black America and Africa by intelligence agencies during the Nixon and Carter years, has come to pass. Dr. Horowitz, a Harvard graduate in public health and emerging diseases expert, likewise links the AIDS epidemic’s devastating toll on Black populations as reflective of the secret policies.”

During the early 1970s, Dr. Horowitz writes, National Secret Security Memorandum 200, advanced by Nixon’s National Security Advisor, Henry Kissinger, called for massive Third World depopulation among efforts to maintain the economic alignment of the superpowers. Zbigniew Brzezinski, who replaced Dr. Kissinger for the Carter administration, secretly dispatched National Security Memorandum 46 to cabinet chiefs only. This document, the most telling, authorized the FBI and CIA to initiate genocidal policies….

According to testimonies of CIA directors Richard Helms and William Colby before the U.S. Congress, Dr. Kissinger selected the option to develop immune system ravaging viruses similar in definition and function to the AIDS and Ebola viruses. “The curious manner in which HIV/AIDS disproportionately affects Black people in the United States and Africa today,” Dr. Horowitz concludes, “likely represents an extension of Dr. Kissinger’s African depopulation policies and the development of viruses best capable of effecting them. Brzezinski’s policies, too, foreshadow ongoing African American genocide.”

Moreover, Horowitz “unearthed and reprinted stunning scientific documents and National Institutes of Health contracts proving that chimpanzees, contaminated with numerous viruses, were used to produce hundreds of hepatitis B vaccine doses administered to central African Blacks along with homosexual men in New York City at precisely the time Dr. Myers and colleagues claim the origin of HIV ‘punctuated event’ occurred,” according to the Origin of AIDS website, citing Horowitz’s award winning book Emerging Viruses: AIDS & Ebola — Nature, Accident or Intentional? (Tetrahedron Press, 1998). For more detail, see Horowitz’s Early Hepatitis B Vaccines and the “Man-Made” Origin of HIV/AIDS.

As it turns out, Merck is at the center of the controversy: “Kissinger certainly maintained the means, through his official channels at Merck, Litton Bionetics, and the CIA, as well as the motive, to deploy AIDS-like viruses by 1974 in Merck’s HB [hepatitis B] vaccine. What is unconscionable to most people, Kissinger, a staunch advocate of African depopulation, would have considered it convenient that the emergence of HIV/AIDS in sub-Saharan Africa coincided synchronously with the massive depopulation policy institutionalized with primary funding from the Rockefeller Foundation and the Merck Fund,” writes Horowitz (see previous link).

This it should come as a warning to the people Uganda, Zambia, Kenya and Mali when the Merck Company Foundation announces a “philanthropic initiative” to establish “sustainable immunization” in the neighborhood. In effect, Merck is establishing “sustainable” depopulation, as the elite believe Africa—and indeed, America and Europe—are overpopulated and are in need of a Malthusian final solution.

The coming consumer crunch

The coming consumer crunch

Recession or not, American families will be forced to tighten their belts
By Michael Mandel
Business Week
updated 10:43 a.m. ET, Mon., Nov. 19, 2007

The long-awaited, long-feared consumer crunch may finally be here. That might not mean an economywide recession, but the pain for American households will be deep.

In recent years the U.S. mostly has seen narrowly focused downturns, where a few sectors are hit hard while the rest of the economy and financial markets remain relatively unscathed. In the dot-com bust of 2001, for example, tech companies and stocks took it on the chin, while consumer spending and borrowing sailed through without a pause. This time the positions will be reversed, as consumers tank while much of the corporate sector stays on track.

It's been a glorious run for the consumer. In the past 25 years, Americans have kept shopping through good times and bad. In every quarter except one since 1981, consumer spending rose over the previous year, adjusted for inflation. The exception was the first quarter of 1991, and even then the decrease was a mild 0.4% dip.

The main fuel for the spending was easy access to credit. Banks and other financial institutions were willing to lend households ever increasing amounts of money. Any particular individual might default, but in the aggregate, loans to consumers were viewed as low-risk and profitable.

The subprime crisis, however, marks the beginning of the end for the long consumer borrow-and-buy boom. The financial sector, wrestling with hundreds of billions in losses, can no longer treat consumers as a safe bet. Already, standards for real estate lending have been raised, including those for jumbo mortgages for high-end houses. Credit cards are still widely available, but it may only be a matter of time before issuers get tougher.

What comes next could be scary—the largest pullback in consumer spending in decades, perhaps as much as $200 billion to $300 billion, or 2%-3% of personal income. Reduced access to credit will combine with falling real estate values to hit poor and rich alike. "We're in uncharted territory," says David Rosenberg, chief North American economist at Merrill Lynch, who's forecasting a mild drop in consumer spending in the first half of 2008. "It's pretty rare we go through such a pronounced tightening in credit standards."

Don't expect the spending to come to a screeching halt, however. Remember the stock market peak in early 2000? It wasn't until a year later that tech spending fell off the cliff and the sector didn't hit bottom until 2003. The same delayed impact holds true here. The latest retail sales numbers, which showed a soft 0.2% gain in October, suggest that spending may hold up through this holiday season.

Next year, though, will be much tougher. The consumer slump may be deep and long-lasting, and the political implications could be enormous. "There's growing evidence that the economy will become a dominant, if not the dominant issue of 2008," says independent pollster John Zogby. "It's even to the point where the numbers of people who say Iraq is the No. 1 issue are starting to decline."

Wide-open credit window
Truth is, economists have been complaining about excessive borrowing and spending since the early 1980s. Journalists began writing about consumers being "tapped out," "profligate," and "spendthrift." Magazines and newspapers regularly ran stories about debt-ridden Americans not being able to buy holiday presents for their kids.

But no matter how many times economists predicted the demise of the consumer, the spending continued. The latest data from the Bureau of Economic Analysis show that the personal savings rate — the share of income left after consumption — fell from 12% in 1981 to just over zero today. And debt service, which is the share of income going to principal and interest on debt, kept rising. Those numbers aren't dead-on accurate: The data has been revised endlessly, and the BEA includes outlays on higher education as consumption rather than saving, which would seem odd to families who have socked away thousands of dollars for college.

But the story line is clear. Consumers' outlays have outpaced the growth of their income for a long time. Lenders learned how to judge risk and expand the pool of potential borrowers—and the party was on. "The most important factor has been that it is easier to borrow," says Christopher D. Carroll, a Johns Hopkins University economist.

While many companies struggled in the 2001 recession and afterward, American consumers just kept borrowing. "In 2001-02, the credit window was open for anyone who had a pulse," says Merrill's Rosenberg.

Not this time, though. "The consumer is retrenching, bigtime," says Richard Hastings, economic adviser to the Federation of Credit & Financial Professionals. "It's starting to get to the point where people are achieving levels of debt that are getting uncomfortable."

The question, though, is just how much consumers will restrain their free-spending ways. Research by economist Carroll suggests that every $1 decline in house prices lops about 9 cents off of spending. The current value of residential housing is about $21 trillion, according to the Federal Reserve. So if home prices fall by 10%, as many people expect, that would lead to roughly a $200 billion hit to spending over the next couple of years. A 15% tumble in home prices would produce a $300 billion pullback in spending, or about 3% of personal income.

That accords well with calculations by BEA economists. They figure that households took out $340 billion in cash from mortgage and home-equity financing in 2006. That source of funding could largely disappear over the next couple of years.

Three percent — that doesn't sound like a lot. Look a little closer, though, and it's a bigger hit than it seems. The reason is that much of what the government counts as consumer spending is not directly controlled by households. For example, the $1.7 trillion in medical costs is counted as consumer spending, but 85% of that is spent by the government and health insurers, not individuals. And $1.5 trillion in "housing services" is listed as part of consumer spending, but for homeowners it really just represents the value of living in a home rather than any spending they can change. It's mainly a bookkeeping convention, not a real outlay.

So that 2%-3% decline in income directly hits the wallet and the discretionary purchases that households actually control. One logical place for cutbacks is apparel. Autos will be hit. Another target could be luxury items, a surprisingly big part of discretionary spending. Pamela N. Danziger, president of Unity Marketing in Stevens, Pa., conducts a quarterly online survey of adults earning $75,000 a year and up. She found that people who make more than $150,000 have been unaffected, but the rest are cutting back on luxury goods such as fashion accessories. "They are taking a very cautious attitude," says Danziger.

A lift from exports
Will the consumer crunch spread to the rest of the economy? Conventional wisdom is that consumer spending makes up 70% of gross domestic product. While technically true, that figure is deceptive, because so much of what Americans buy these days is made overseas. Compared with the early 1980s, which was the last time consumers cut back, much more of what Americans buy is made abroad. Today, imports of consumer goods and autos run about $740 billion a year. That's fully one-third of consumer spending on goods outside of food and energy. As a result, most of the spending cutbacks won't cost Americans their factory jobs — those factory jobs have mostly fled offshore anyway. Workshop China, in contrast, will get hurt.

What's more, it's still a low-rate world for most nonfinancial corporations, which have access to relatively cheap funds for expansion and capital investment. Asia and Europe are continuing to expand, with German and French growth accelerating in the third quarter. Exports of aircraft and other big items are likely to rise, too, supplying the U.S. economy with an extra lift. In other words, globalization has made consumers less central to the American economy.

Still, the consumer recession will hit some parts of the economy harder than others. Particularly at risk are retailers, who have already seen sharp declines in their stock prices since the extent of the subprime crisis became clear. Nordstrom shares, for example, fell from 52 in September to as low as 32 before rebounding. On Nov. 14, Macy's cut its sales forecast for the fourth quarter, sending its stock down to $28 a share from $43 in July. "Retailers are looking to pare inventories," says Rosenberg.

Not everyone thinks American shoppers are tapped out. Consumers have about $4 trillion in unused borrowing capacity on their credit cards, enough to keep spending afloat, points out Stuart A. Feldstein, president of SMR Research in Hackettstown, N.J., which studies consumer loan markets.

But executives from Capital One Financial, Bank of America, Discover Card, Washington Mutual, and others have told investors in recent conference calls that they are using more caution in extending credit. Chief Financial Officer Gary L. Perlin of Capital One, the nation's No. 5 card issuer, says he believes last year's historically low defaults by credit-card holders were partly driven by the real estate boom, particularly in previously hot housing markets such as Arizona, California, and Florida. Those benefits also have seemed to run out. As a result, says Perlin, Capital One is tightening lending standards and limiting credit lines.

More rate cuts by the Fed can cushion the impact of the consumer cutbacks but not avert them altogether. It's best to think of this as the end of a long-term spending and borrowing bubble, where the role of policy is to keep the inevitable adjustment from turning into panic. "The Fed's job is to keep us all calm and reasoned," says Carroll.

Everyone now seems to be coming up with remedies. At a Nov. 8 congressional hearing, Fed Chairman Ben Bernanke suggested legislation that would temporarily add liquidity to the jumbo loan market. And the possibility of a consumer slump already has Presidential candidates and their staffs looking ahead. "Potentially, the next subprime crisis is the issue of credit-card debt," says Austan D. Goolsbee, economic adviser to Democratic hopeful Barack Obama and a professor at the University of Chicago Graduate School of Business. The Illinois senator's view, says Goolsbee, is that the U.S. needs to improve oversight in the credit-card market. Republican candidate Mitt Romney suggests eliminating taxes on savings and investment by low- and middle-class families, a move that could help make up for a tougher credit environment.

The politicians can say what they want. Recession or no, Americans had better get ready to tighten their belts.

URL: http://www.msnbc.msn.com/id/21838083/page/2/