Michael Hirsh | Newsweek

The plunging greenback threatens to cripple U.S. power. Why are the candidates ignoring this critical issue?

Great powers die slowly. It took years before the world realized that Great Britain was an imperial corpse, sapped of its strength by two world wars. The funeral finally occurred on Feb. 21, 1947, a freezing winter day in bomb-torn, bedraggled London, when the British wrote their own epitaph. That was the day that London cabled Washington: “His Majesty’s Government, in view of their own situation, find it impossible to grant further financial assistance to Greece,” amounting to a half billion dollars a year and a garrison of 40,000 troops. The British also announced the same day that they were withdrawing from Turkey. “The British are finished,” remarked a stunned Dean Acheson, who was soon to be Harry Truman’s secretary of State. And so they were. It was the early cold war. With the Soviet Union threatening to extend its influence over Greece and Turkey, there was no time for elegies. Instead, a quick passing of the baton took place: the United States would now fill Britain’s role and become the central, stabilizing power in the West. This was the moment of “creation” of the U.S.-led world order, Acheson later realized.

One has to wonder now whether the American superpower is also experiencing a terminal illness, with its decline marked by the dollar’s downward drift. The one difference being that there is no successor on the horizon (the Chinese have a long, long way to go), and the currency that is replacing the dollar, the euro, is backed not by an emerging superpower but by the feeble cacophony of voices that is the European Union. Yet the signs of imperial decadence are unmistakable. The world is losing confidence in the dollar, in no small part because it has lost confidence in America’s strategic judgment and in its sustainability as a great power in the face of record budget and trade deficits, which are forcing the United States to borrow ever more money from future rivals like China and Russia.

Even as the Bush administration savors the calming news out of Iraq, and prepares for a major Mideast peace conference in Annapolis on Tuesday that will look and feel like grand American gestures of the past, finance ministries and central banks around the world–especially in places like Beijing and the wealthy Persian Gulf states–are making decisions that will further undermine U.S. power, perhaps permanently. The irony for George W. Bush, of course, is that more than anything else he began as a president who wanted to build up American power, which he presumed to have been frittered away by Bill Clinton. Bush believed that enemies such as Osama bin Laden and Saddam Hussein perceived America as soft. “It was clear,” he said after 9/11, “that bin Laden felt emboldened and didn’t feel threatened by the United States.” Bush vowed to reverse that image.

Instead, the world monetary system now is making unfavorable comparisons to America at the height of the Clinton years. And bin Laden seems to be achieving his publicly avowed goal of provoking the United States into overextending itself and draining its economy. In a blistering essay in the current Vanity Fair, Nobel laureate Joseph Stiglitz, a former World Bank economist, notes that Bush took a nation with a budget surplus upon assuming office and turned it into a global debtor, and he has underinvested in education and alternative energy. “In breathtaking disregard for the most basic rules of fiscal propriety, the administration continued to cut taxes even as it undertook expensive new spending programs and embarked on a financially ruinous ‘war of choice’ in Iraq. A budget surplus of 2.4 percent of gross domestic product (GDP), which greeted Bush as he took office, turned into a deficit of 3.6 percent in the space of four years. The United States had not experienced a turnaround of this magnitude since the global crisis of World War II,” Stiglitz writes. “Up to now, the conventional wisdom has been that Herbert Hoover, whose policies aggravated the Great Depression, is the odds-on claimant for the mantle ‘worst president’ when it comes to stewardship of the American economy. The economic effects of Bush’s presidency are more insidious than those of Hoover, harder to reverse, and likely to be longer-lasting. There is no threat of America’s being displaced from its position as the world’s richest economy. But our grandchildren will still be living with, and struggling with, the economic consequences of Mr. Bush.”

If the passing of American hegemony happens, it will occur very slowly–death by a thousand cuts of credit. One reason why it’s so hard for Americans to contemplate their loss of prestige, symbolized by the fall of the once-almighty dollar, is that politicians and pundits tend to cast the issue as all-or-nothing. What would happen, they say, if China suddenly decided to dump the trillion dollars of U.S. debt it holds in reserves? This, however, will almost certainly never occur. While China and other big dollar-holding countries such as Singapore, Russia and the Persian Gulf states are very worried about the erosion in value of their dollar-denominated holdings and inflationary pressure, they also know that an abrupt move to cut their pegs to the dollar or to sell off in large amounts would force a run on the currency. That would leave them even poorer. Instead these countries are pursuing careful reallocations of their investment holdings, shifting slowly to the euro or a “basket” of currencies that will allow them to hedge against the dollar’s decline. Credit will become more expensive, the U.S. economy will find itself increasingly crimped, and America’s ability and willingness to act as the defense umbrella to the world will gradually peter out. The effect will be more like a slow-acting poison: drip, drip, drip.

But the financial world order is such a precarious house of cards today that the markets are getting increasingly jittery. Markets operate on confidence. And today’s markets seem to have little confidence that the Bush administration can emerge from its economic never-never land, one in which as Dick Cheney’s first-term pronouncement that “deficits don’t matter” was allowed to stand unchallenged, in which zero-saving Americans continue their profligate spending habits and descent into deeper indebtedness by simply assuming the rest of the world will continue to fund those habits. “The American consumer is dramatically overleveraged,” says Bob Hormats a vice chairman of Goldman Sachs International. That “means we have to borrow roughly $3 billion a day from rest of world. That inflow is now slowing down. Foreigners will say ‘we’re concerned about lending in dollars, so we’re going to be more cautious about lending money to you.’ At some point, if we get a lot less money, the dollar will plunge and interest rates will go up.” Even wealthy Americans, Hormats notes, are beginning to ship their money abroad, to Europe and Asia, to hedge the dollar.

We should be careful, of course, not too pronounce the death of Pax Americana too quickly. That has been done before. The illness need not be terminal: deficits can be cured, and foreigners still crowd cargo containers and the backs of trucks to sneak into the land of opportunity. (China, by contrast, is not undergoing an immigration debate.) But the country is in such a fiscal hole right now that, as David Walker, the comptroller general of the United States, told my colleague Jeff Bartholet last week, “You could decide not to renew the Bush tax cuts, you could eliminate all foreign aid, eliminate all earmarks, eliminate NASA, eliminate the National Endowment for Humanities and eliminate the entire Defense Department tomorrow, and you still wouldn’t solve the problem.” This most critical of issues has barely made it into the presidential debates. The drooping dollar is driving it to the public’s attention, particularly as gas, oil and other essentials continue to go up in price. Perhaps the next president, whoever he or she is, ought to pay more attention, too.

http://www.newsweek.com/id/71888

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By Ronald D. White, Los Angeles Times Staff Writer
November 24, 2007

Restaurants are feeling the pinch as people cut back on their spending in the face of tightening household budgets.

Lisa Johnson would be happy to eat IHOP’s strawberry waffles every morning. Her husband, Steve, is such a fan of the omelets and taco salads served by Glendale-based IHOP Corp.’s restaurants that he paid homage on his website, Junk Food Blog.

The Johnsons of Riverside County, an area racked by high home-foreclosure rates, once dined out daily, usually at the nation’s biggest pancake-house chain. But lately, the couple have been indulging only once a week.

“We’re just cutting back, trying to save money for gifts for the family for the holidays,” said Steve, 41, a website publisher with about 20 clients. “There are just a lot of people here worried about higher costs and debt, people we know who are trying to save enough just to make their house payments.”

The slowing economy is giving restaurants heartburn, with experts calling this the worst period for eateries in years.That’s because consumers are having their pockets picked by high energy prices, declining home values, tightening credit from the sub-prime real estate bust and the falling value of the dollar, which makes imported goods more expensive.

“It’s a perfect storm, with the industry being bit by several negatives at the same time. And we don’t think gas prices are at the top of that list. Mortgage payments for people with adjustable rates are already higher. Couple that with higher interest rates for people who are maxed out on their credit cards and you have an immediate squeeze on income on a monthly basis,” said Ron Paul, president of Chicago-based Technomic Inc., a food industry consulting firm.

Examples abound.

P.F. Chang’s China Bistro Inc. recently reported a nearly 20% decline in third-quarter profit from a year earlier. Panera Bread cafes predicted that fourth-quarter earnings were unlikely to surpass those of 2006. Brinker International Inc., owner of Chili’s Grill & Bar and other chains, reported a 21% drop in fiscal first-quarter profit.

IHOP fell short of Wall Street expectations last month when it reported an $11.6-million third-quarter loss, contrasted with an $11.3-million profit a year earlier. Its conference call with analysts and investors included repeated references to the “difficult economic climate” faced by the restaurant industry.

Sales at eating and drinking establishments grew 5.6% during the first 10 months of the year, the Commerce Department said, the slowest pace since 2002.

“We are all facing the same pressures,” IHOP Chief Executive Julia Stewart said in an interview. “There are things you can’t necessarily control: the rising cost of gas, commodities, concerns about the war, concerns about layoffs. What usually winds up happening is that people look more selectively at their trips out of the house, and we are fighting for the same dollar.”

National restaurant chains aren’t the only ones feeling the pinch. Some smaller, local chains complain that business is even slower than it was in 2001, when the 9/11 terrorist attacks brought dining out to a crawl for about two months.

“We are doing about 30% less business than we ordinarily do. Since June, it has really fallen off,” said Fernando Lopez, owner of Guelaguetza, a chain of four Oaxacan-style Mexican restaurants in the Los Angeles area that thrive on a strong following of customers from as far away as San Francisco and Las Vegas. On a recent afternoon, Lopez looked over too many empty tables at his 300-seat restaurant on Olympic Boulevard.

“Families are coming less often, and so are all of the gardeners and small-business contractors we used to see so often,” he said. “People still have money in their pockets, but they have less of it to spend.”

One is Deisy Marquez, 33, an event production manager for the entertainment industry who lives near downtown L.A. and is raising her 13-year-old son and a 13-year-old nephew.

Marquez says she has done all she can to reduce costs, even switching from a car to a motorcycle for her daily commute to work.

“I take the kids out to dinner at Guelaguetza once every two weeks now,” Marquez said, down from at least three times a week. “Now when we go out, it’s a luxury. It has to be a reward, one of their birthdays, for getting good grades.”

Still, she can’t always keep up with the appetites of two hungry teenage boys. Instead, she turns to cheaper places. “If I don’t have time to cook, we don’t go to restaurants now; we go to fast food.”

That trading-down strategy has become more common recently among middle- and lower-income households, said Jerry Nickelsburg, an economist with the UCLA Anderson Forecast.

“It’s much more difficult to limit your use of gasoline than it is to limit your purchase of hamburgers and fries. As gasoline prices and other costs go up, something has to give,” Nickelsburg said.

Higher-end restaurants remain relatively unaffected by the more difficult economic climate, experts said. As Randall Hiatt, a Costa Mesa restaurant consultant, put it: “The cream of the $5-million homeowners whose homes are now worth $4 million — they really aren’t feeling this pinch.”

But the chains that appeal to a less affluent crowd are feeling it, and they were not prepared to weather a sudden challenge.

“These chains need to be rejuvenated and given a new life. Their menus are too similar. In discussions with consumers in focus groups, you often hear that they can remember a commercial advertisement, but they couldn’t remember whether it was for an Applebee’s or a TGI Friday’s or a Ruby Tuesday. It was a sea of sameness,” said consultant Paul of Technomic.

Stewart, who is trying to close a $2-billion purchase of Applebee’s International Inc. before the end of the year, said IHOP’s challenge was to capture diners who might try it as an alternative to more expensive restaurants while not losing customers to cheaper competitors.

The chain is unveiling new menu offerings, a new national advertising campaign and a push on gift-card and carry-out sales.

“In tough times, the chain that is best able to take from both ends of the spectrum as well as the middle is absolutely going to win,” Stewart said.

For Guelaguetza owner Lopez, the challenge is similar but waged on a local level that includes a direct cultural appeal. During the recent Day of the Dead holiday, his restaurants installed elaborate shrines decorated with flowers and gifts.

“For Oaxacans, if we do not deliver the real thing, they are not going to come to our restaurant,” said Lopez, whose mobile telephone number is clearly displayed near the entrance to field any and all complaints, even for something as innocuous as a hostess not smiling sweetly enough when greeting guests.

“It’s not enough to try to win the customer with your food,” he added. “You have to win their hearts.”

http://www.latimes.com/business/la-fi-restaurants24nov24,1,4065752.story?coll=la-headlines-business&ctrack=3&cset=true

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by Jim Kunstler
November 26, 2007

The great debate among those of us on the Economy Deathwatch seems to be whether the debacle we observe around us will resolve as a crash or a slow-motion financial train wreck. It seems to me that at every layer of the system, we’re susceptible to both — in tradable paper, institutional legitimacy, individual solvency, productive activity, real employment, “consumer” behavior, and energy resources. Some things are crashing as I write.

The dollar is losing about a cent every three weeks against other currencies. A penny doesn’t seem like much, but keep that pace up for another year and the world’s “reserve currency” becomes the world’s reserve toilet paper. Oil prices are poised to enter the triple-digit realm, the psychological effect of which may be jarring to 200 million not-so-happy motorists. The value of chipboard-and-vinyl houses is tanking beyond question. Of course, the government’s consumer price inflation figures and employment numbers are dismissed broadly as lacking credence. But anybody who has bought a bag of onions and a jar of jam lately knows that things are way up in the supermarket aisles, and so many illegal Mexican migrants were employed in the Sunbelt housing boom, that their absence in the bust won’t register on any chart.

It’s hard to describe what constitutes the bulk of the stuff moving through the world’s financial markets for the simple reason that it was purposely-designed to be so abstruse and provisional that traders would be too intimidated to ask what it represents — and the growing terrified suspicion is that it’s mostly worthless. By this I refer to the global freak show of derivatives, concocted “plays” on hypothetical “positions,” credit default swaps, arbitrages in imagined “differentials,” nifty equations, hedges, promises, algorithms executed by robots, and “off-book” wishes chartered in the Cayman Islands. Probably all of them, in one way or another, are just scams, since they are unaffiliated with productive activity.

At a more fundamental level, these mutant “investments” were derived from a very tangible trade in loans and mortgages made to flesh-and-blood chumps, but even those are only the last in a long spiral of serial “bubbles,” or market frenzies based on unreal expectations. And this leads into the very real realm of poor choices, fiscal and fiduciary irresponsibility, deliberately deceptive policy, criminal malfeasance, and the broad abandonment of standards in acceptable behavior by people in authority. A lot of observers attribute this to the Gordon Gecko ethos — the discovery back in the 1980s that “greed is good,” which was meant to trump a previous ethos that life is tragic.

Anyway, the trade in mutant investment entities appears to be collapsing now as their worthlessness in market terms (as opposed to theoretical terms) becomes manifest. The major holders of this dreck are losing the ability to conceal their losses, but suspicion now reigns that the losses are far greater than even the massive multiple billions reported so far by the likes of Merrill Lynch, Citicorp, and others. I suppose that what we’ve been seeing lately is a desperate attempt to hold things together just long enough to cut those Christmas bonus checks so that when the pink slips do finally fly in 2008, at least some Big Boyz will walk away with enough cash to cover a hacienda in Uruguay and the salaries of a half-dozen private security goons to guard it.

But I must say, at the risk once again of sounding extreme, that the structural and systemic sickness in the finance realm is now so severe that it is hard to imagine we will get through the month of December without some major trauma in the markets. In fact, I’d go so far as to predict a thousand-point drop (or more) in the Dow just in this week after Thanksgiving. Real wealth “out there” is evaporating like popsicles dropped on the floor of Hell’s fifth circle. It is coming out of the system whether the Big Boyz or anybody else likes it or not, and its absence will assert itself.

At the risk of sounding even more extreme, I would be hard put to believe any reports that “consumer” spending in the days following Thanksgiving will match the hopes and wishes of economic officialdom. My own hunch is that average Americans are so maxed out on debt that they don’t know whether to shit or go blind. Perhaps lot of them are willing to take a last step into fatal insolvency in order to put a plasma TV screen under the Christmas tree and appear as heroes to their families. If that’s the case, it would only imply a greater bloodbath in credit card default thundering through the system in February and March, which would only deepen the carnage in collateralized debt instruments further up the food chain.

That stuff probably has a long way to unwind, even as the “train” of losses hits the immovable obstacle of reality and the “boxcars” of consequence fly off the rails. The slow-motion train wreck could sweep away an awful lot of familiar things in its path — banks, companies, government-sponsored enterprises, whole industries, whole economies, nations, up to and including the prospects for civilized existence, if severe hardship leads to war, which it often does.

To some extent, the speed and severity of the financial train wreck will occur in a mutually reinforcing relation to what happens in the oil markets. The rise in price is only the mildest symptom of growing instability for the system that allocates the world’s most critical resource. Even in the face of “demand destruction,” weird changes are occurring in the way that the oil producers do business. The decline in export rates and the new spirit of “oil nationalism” will take center stage now, even if the US economy seizes up. These phenomena will represent a new cycle in world affairs: the global contest for remaining fossil fuel resources.

Sooner rather than later, the next symptom will appear: spot shortages around the US and hoarding behavior. This is what will finally wake the American public out of its long sleepwalk (and Matthew Simmons said this first, by the way) — when the lines form at the gas stations and the tempers flare and the handguns come out of the glove compartments.

In the financial markets and the economies of nations, it’s not a case of either / or. It’s a matter of either / and.

http://jameshowardkunstler.typepad.com/clusterfuck_nation/2007/11/either-or-1.html
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By Joseph Altman, AP Business Writer

Abu Dhabi’s Sovereign Fund Agrees to Invest $7.5 Billion for a 4.9 Percent Stake in Citigroup

NEW YORK (AP) — Citigroup said late Monday that the Abu Dhabi Investment Authority will invest $7.5 billion in the nation’s largest bank, offering needed capital to offset big losses from mortgages and other investments.

The cash from the sovereign investment fund of the Gulf Arab state, which has been a beneficiary of this year’s surge in oil prices, will be convertible into no more than 4.9 percent of Citigroup Inc.’s equity. Citigroup characterized the investment as passive and said the fund will not be able to name any board members to the bank.

The Investment Authority would become one of Citi’s largest shareholders.

The Abu Dhabi investment, which was expected to close within the next several days, will be considered Tier 1 capital for regulatory purposes, helping Citi reach its goal of returning to its target capital ratios in the first half of 2008, the bank said.

Citigroup’s shares have lost about 45 percent of their value since the beginning of this year, wiping away $124 billion in market capitalization, as the drumbeat of bad news about its investment losses has mounted.

“We see in Citi a highly respected company with a premier brand and with tremendous opportunities for growth,” said the Investment Authority’s managing director, Sheikh Ahmed Bin Zayed Al Nahayan. “This investment reflects our confidence in Citi’s potential to build shareholder value.”

Charles Prince stepped down as Citigroup’s chairman and chief executive on Nov. 4, the same day Citi announced that it will likely write down the value of its portfolio by $8 billion to $11 billion in the fourth quarter.

In the third quarter, the bank’s exposure to assets tied to subprime mortgages led to a loss of about $6.5 billion.

The Investment Authority will receive equity units that pay an 11 percent annual yield until they are converted into Citigroup common shares at a price of up to $37.24 a share between March 15, 2010, and Sept. 15, 2011.

The investment is the latest by sovereign funds in the Middle East that have been building up their overseas investments recently, many of them on the back of oil prices that have risen more than 60 percent this year and have brought the region record cash flows.

Dubai International Capital, which is owned by the ruler of that booming Persian Gulf city-state, announced earlier Monday that it has acquired a stake of undisclosed size in the Japanese electronics and media company Sony Corp. Its other investments this year included acquiring a 3.12 percent of European Aeronautic Defence & Space Co., which builds Airbus commercial planes and military aircraft. The firm also holds stakes in Daimler AG and British bank HSBC Holdings PLC.

Many companies have welcomed such investments because the funds tend to be stable investors, but some U.S. officials have expressed concern that their acquisitions could target sensitive industries with links to national security.

Abu Dhabi’s move recalls the early 1990s investment in Citi made by Saudi Prince Alwaleed bin Talal. After Citi made some losing bets on U.S. real estate and Latin America, Alwaleed bought a stake in the bank for less than $600 million that has since ballooned into several billions of dollars.

The Abu Dhabi investment, which was expected to close within the next several days, comes at a time when Citi is trying to reassure investors amid heavy credit-related losses and its search for a new CEO.

“This investment, from one of the world’s leading and most sophisticated equity investors, provides further capital to allow Citi to pursue attractive opportunities to grow its business,” Acting Chief Executive Win Bischoff said in a statement.

Citi shares fell $1, or 3.2 percent, to close at $30.70 Monday after hitting a five-year low earlier in the day.

“This investment also enables us to access capital in an efficient manner, and is consistent with our strategy of maintaining a balance sheet that benefits from highly diverse sources of funding in terms of both geography and type of security,” Bischoff said.

http://biz.yahoo.com/ap/071126/citigroup_abu_dhabi.html

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By David R. Francis

These enormous government-owned funds may turn their economic clout into political gain.

Sovereign Wealth Funds are huge, scarily big.

Though unknown to most Americans, these ­government-owned funds have been getting lots of attention in the financial press as well as among the world’s top central bankers and finance ministers. The Senate Banking Committee heard lengthy testimony on them earlier this month.

These funds are mostly the product of accumulated US dollars by China, with its massive trade surplus, and by oil-exporting countries reaping generous profits from oil at $90 plus per barrel.

How big are they? Estimates vary. The 28 nations with Sovereign Wealth Funds (SWFs) have, in total, assets of $2.1 trillion, figures Edwin Truman, an expert at the Peterson Institute for International Economics in Washington.

By 2011 or 2012, SWFs could have piled up $7 trillion to $8 trillion, guesses Harvard University economist Kenneth Rogoff, a former chief economist for the International Monetary Fund (IMF).

SWF assets could be $3 trillion now and $10 trillion by 2012, reckons Simon Johnson, IMF research director.

Whatever their size, the huge piles of SWF money ready to be deployed across borders make some financiers edgy.

“Our nation is not doing well in the global economic competition,” Patrick Mulloy, Washington representative of the Alfred P. Sloan Foundation, told the Senate Banking Committee Nov. 14. He cited concerns that SWF money will be used not just for economic reasons but also for political and strategic purposes.

Securities and Exchange Commission Chairman Christopher Cox said in a speech at Harvard Oct. 24 that “the fundamental question presented by state-owned public companies and sovereign wealth funds does not so much concern the advisability of foreign ownership, but rather of government ownership.” These financial and business entities could act in the interests of foreign governments, not necessarily the interests of the United States.

Warren Buffett, the famed billionaire investor, has worried that as long as the US has major foreign trade deficits (some $700 billion a year), it has to “give away a little part of the country” each year. The US could end up with a “sharecropper economy,” where Americans largely work for foreign-owned firms.

Mr. Rogoff isn’t so bothered by SWFs. He figures SWFs will do “more good than bad” in an increasingly globalized world economy. He suspects that most of these funds will be “managed inefficiently” in their investments, losing a lot of money in many cases, perhaps getting an average annual return of 8 percent. That is far less than Harvard gets, for instance, on its endowment money.

But an 8 percent return is almost twice what most nations get with their huge stocks of surplus US dollars invested in US Treasury bills. And a higher return and diversification is what most nations are seeking with SWFs.

China has $200 billion in an SWF, part of $1.43 trillion in foreign-exchange reserves, the world’s largest. Most is in Treasuries. China’s SWF invested $3 billion last June in Wall Street investment bank Blackstone Group LP. Its stock promptly sank to $22 from its purchase price of $31.

To most people, $1 trillion is beyond comprehension. For perspective, the value of all traded securities (bonds and stocks) denominated in US dollars is $50 trillion. For the world, it’s $165 trillion. If SWFs have $3 trillion, that’s twice what global hedge funds manage and twice the size of global private equity, reckons the consulting firm McKinsey and Company.

So far the US government is inclined to take a free-market view of SWFs. Treasury Secretary Henry Paulson said Nov. 18 that SWFs “should be able to invest globally.” But he noted that because these funds are large, ­government-run, and often opaque in their investment strategies and portfolios, “questions will arise.”

The US has a system, strengthened by Congress last summer, to check on new foreign investment in the US. And the US and other well-to-do nations are pushing for the IMF to develop a system of “best practices” for SWFs.

In fact, the IMF concluded its first “annual roundtable of sovereign asset and reserve managers” on Nov. 16 in Washington. About 60 officials from 28 nations attended, including those of some of the biggest SWFs. It was a preliminary session, but “very successful,” says Adnan Mazarei, heading the IMF working group on the issue.

Mr. Truman warns that “a lot of countries” with SWFs must agree before the IMF can institute a “best practices” system. Rogoff says that some Middle East countries with SWFs may not be keen to meet “transparency” standards since national elites may be using the funds to enrich themselves.

http://www.csmonitor.com/2007/1126/p16s01-wmgn.html

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