China to Exceed Predictions by 50 Percent

Just last month Beijing made its predictions for economic expansion in 2010. The official target is 8 percent GDP growth. As usual, Chinese authorities are under-promising with an eye to over-delivering.
As we note in this month’s issue of the China Stock Digest, The World Bank estimates the China will deliver 9.5 percent growth over the course of the year.

Deutsche Bank had the most optimistic projection we had seen to date with a prediction of 9.8 percent economic acceleration. It turns out, that’s still too low.

A prominent researcher working for the State Council (cabinet) says China will surpass all estimates with 12 percent growth in the first quarter.
 
Yu Bin, head of macroeconomic research at the State Council Development Research Centre, made his comment in published remarks, as economists were ratcheting up growth forecasts in the wake of unexpectedly strong industrial output increases in the past two months.
 
The fact that Yu’s words made their way into the popular press indicates that they were sanctioned by higher officials.
Yu tempered his booming outlook with a prediction that the Chinese economy would face relatively heavy downward pressure on the pace of growth in the second quarter, and for the rest of the year.

An article in the official Shanghai Securities News also quotes Fan Jianping, a senior economist with the State Information Centre, as forecasting 12 percent growth in the first quarter followed by a possible drop to 10.8% in the second quarter and 9% or less in the third and fourth quarters.

It appears that economists are predicting an easing of growth in later quarters of the year to prepare investors and businessmen for a pullback in government stimulus measures. Nevertheless, one of the big unknowns is the rate of recovery of the rest of the industrialized world and the effects this will have on Chinese exports.

So far, exports are bouncing back strongly. China’s latest industrial output data showed robust 20.7 percent year-over-year growth for January and February. Even if that can’t be maintained, it seems very likely that China is on track to exceed its 8 percent growth target for the year by a healthy margin. Economic expansion in the last quarter of 2009 was 10.7 percent, a roaring pace going into the current year and what’s expected to be a bang-up first quarter of 2010.

Inbred Fear

The United States has lived with mounting fear all through the Bush/Cheney Administration.

Fear was constantly being thrown at the people.

One of the reasons that President Obama was elected is that he offered, in his campaign, Change – change that fear could be put behind you.

Unfortunately, you have yet to see that change. 

We see it, as a result of the ‘Fear’ that was spread all those years, the name-calling, brick-throwing, and unrest we read about daily in our newspapers and blogs and hear constantly on the news.

Some of your politicians have gotten so use to using ‘fear’ in their campaigns and in talking to their fellow citizens, that it has become a way of life for them to spread lies and to continue to listen to those that make a living out of teaching fear.

Fear breeds hatred and greed.

We are seeing a resurgence of hate for your fellow men because they look different, have different customs, or have different religious beliefs than yourselves.

This hatred is result of the fear that you feel – the fear of losing your jobs – the fear that your children might actually think for themselves and believe differently than how you’ve taught them – the fear that the way of life you grew up with is changing.

You have become a country of greed – and have forgotten one of the first things your mothers taught you – to share.

Only, “We the People”, can defeat fear.

You have to look into our inner souls to find the love that resides there and display that love so that the hatred and greed that fear breeds can be defeated.

Greenspan Signals warnings for Bubble-maniacs

The Break-out of Inflation Has Already Begun

“Everything depends upon proper listening. Of ten individuals who listen to the same speech or story, each person may well understand it differently, - perhaps only one of them will understand it correctly,” an eighteenth century theologian observed. So it was of great interest, listening to a March 27th, interview presented on Bloomberg TV, with the maestro, - Mr Greenspan, who is settling into the twilight years of his life-time. This time, Greenspan spoke more clearly, about such arcane subjects such as “Asset Targeting,” and the manipulation of markets.

When asked about his outlook for the US-economy, Greenspan answered by saying everything depends upon the direction of the stock market, “Ordinarily, we think of the economy affecting stock prices. I think we miss a very crucial connection here in that this whole economic recovery, as best as I can judge, is to a very large extent, the consequence of the market’s bottoming last March, and coming all the way back-up. It is affecting the whole structure of the economy, as well as creating the usual wealth effect impact,” Greenspan said.
Imagine for just a moment, that the Dow Jones Industrials has become a key instrument of national economic policy, and that by “actively managing” its direction, the government could impact the wealth of tens of millions of US households, and by extension, influence consumer confidence and spending. By ramping up the growth of the money supply, and slashing interest rates to zero percent, in order to inflate market bubbles, the Fed could in theory, fuel an economic rebound.

Greenspan generally pursued an “asymmetric” monetary policy, - in other words, - always quick to slash interest rates and flood the markets with liquidity whenever the stock market was tumbling, but was very slow in draining liquidity or raising interest rates, when stock markets were booming. There was always an inherent bias towards asset bubble inflation, under the Greenspan Fed’s policies.

For big-time risk takers in the US stock markets, speculators could usually rely on the safety net of the “Greenspan put,” - or a quick easing of monetary policy, to cushion the market from steep losses, when risky bets turned sour. Under the tenure of the Fed chief Ben “Bubbles” Bernanke, speculators have celebrated the easiest monetary policy in history, which earned Mr Bernanke the designation of Time magazine’s “Man of the Year,” for his creativity in running the printing press.
According to Greenspan, the aggregate value of stock markets worldwide have increased by $15-trillion, with the US-stock markets recouping $5.4-trillion of lost wealth. “We’re going to get a significant rise in employment,” he predicted. All this was accomplished in coordination with the G-20 clique of central bankers that pumped more than $5-trillion of liquidity into the money markets over the past year, along with another $9-trillion of state guarantees for bank debt and deposits.

In the United States, the central mechanism for inflating the stock market and fueling the powerful recovery in junk bonds, was Bernanke’s shift to the radical “quantitative easing” (QE) scheme, in which the Fed printed $1.75-trillion of high powered money, - channeled the excess cash into the coffers of the Oligarchic banks on Wall Street, which in turn, bid-up the prices of high-grade corporate and junk bonds, thus narrowing yield spreads with US-Treasuries.

In Green-speak, - the blossoming of finance – is the massive monetization of debt, and carry trades - borrowing at near-zero percent to lend longer-term, at higher interest rates.


Thanks to the booming stock market, there were $311-billion of new stock offerings on Wall Street, including IPO’s, and secondary offerings, in the second half of 2009. Junk bond sales worldwide reached a record $38.3-billion in March 2010, as rising profits and ultra-low interest rates, attracted swarms of yield hungry buyers, who are fed-up with zero rates of return on CD’s and money market funds.
US companies have slashed 8.4-million jobs over the past 27-months, cut wages and medical benefits, but boosted their profitability. US corporate profits jumped $109-billion in Q’4, to $1.47-trillion, up 31% from a year ago. S&P-500 companies have increased their cash hoard to a combined $1.2-trillion, while simultaneously impoverishing the American middle class, to levels of three decades ago.
Yet there is great optimism on Wall Street that a virtuous cycle will soon begin, in which cash-flush S&P-500 companies would start to hire new workers. However, the vast bulk of hiring over the next several months would be for temporary workers by the US-government, for the census report.

According to the Census Bureau, about 17,000 temporary workers were hired in the first quarter, with an additional 181,000 hires planned for the three months from January to March. The remaining hires for 971,000 temporary workers, are scheduled for the April-to-June period.

At this critical juncture, with the Dow Jones Industrials index bumping against the psychological 11,000-level, Greenspan was asked about the longevity of the “green-shoots” rally.

What worries Greenspan is the slumping Treasury bond market, which has been trending lower for the past 15-months. Yields on the benchmark 10-year note, are climbing dangerously higher, towards the key resistance level of 4-percent. “It is a canary in the mine at this stage,” Greenspan warned.
“The way I would look at it, if the markets are working well, the short term outlook is one of increasing momentum. You can see it developing,” he said. “But if the 10-year note and the 30-year bond yields begin to move up, in other words, if the ten-year note begins to move aggressively above 4-percent that is a signal that we are in some difficulty. There is basically this huge overhang of federal debt which we have never seen before. It is going to have a marked impact eventually unless it is contained, on long-term rates. That will make a housing recovery very difficult to implement and put a dampening on capital investment as well,” Greenspan added.

Greenspan is describing is a “dangerous divergence” that is developing between a high and rising S&P-500 stock index, and a slumping US Treasury bond market.

They are moving in opposite directions, and at a certain point in the future, if the Treasury bond market begins to tumble sharply lower, - lifting yields sharply higher, - either under the weight of massive new supplies, or Chinese dumping of T-bonds, ahead of a probable revaluation of the yuan against the US-dollar, the divergence between the asset classes would grow even wider, to the breaking point – that triggers a stock market slide or crash of unknown magnitude.

However, among today’s stock market bulls, there’s an unshakeable faith in the magical powers of the “Plunge Protection Team,” (PPT), convinced that the Fed and Treasury can prevent 10-year yields from spiraling above 4-percent, not matter how much supply hits the debt market, and prevent a replay of the Greek tragedy. For now, the Fed is putting a safety-net under the T-bond market, by promising to keep the fed funds rate pegged near zero-percent for an “extended period of time,” hoping to attract yield starved investors to the long-end of the curve.

“The economy continues to require the support of accommodative monetary policies,” Bernanke told lawmakers on March 25th.

"If it were positive to take interest rates into negative territory I would be voting for that,” said the radical inflationist, San Francisco Fed chief Janet Yellen on Feb 22nd.

Yet the Fed is winding down its year-long, $1.75-trillion monetization scheme this week, which could make it difficult for Washington to finance its massive budget deficit in the months ahead.
Instead, there could be a torrent of T-bond sales by Beijing, if the US-Congress can marshal a veto-proof majority, for a fast track bill in May, to slap tariffs on Chinese imports, if Beijing continues to keep the yuan “misaligned” with the US-dollar. “My belief is that China will not do anything unless they’re required to, and every day we wait is a day we lose wealth, we lose economic advantage, we lose jobs,” said New York Senator Charles Schumer on March 23rd.
Senator Lindsey Graham, a South Carolina Republican, said he agreed quick congressional action was needed because China’s currency reforms are frozen in suspended animation. “I think our pressure is going to make a difference, not only to China, but to the administration,” Schumer said. “At the end of the day, China is too big to be allowed to have this under-valued currency advantage. The only thing they seem to respond to is pressure,” Graham said.

“The US internal and external deficits remain large, and its unemployment rate is extremely high. Since US politicians don’t want to blame themselves, the best available scapegoat is China and its exchange rate,” said Fan Gang, of the People’s Bank of China on March 26th.

Yet Fan conceded, that China may resume a managed float of the yuan, once the uncertainty of the overall post-crisis economic situation diminishes,” he said. Yet a stronger Chinese yuan could fuel a generalized rally in the commodity markets, and ignite a whole new round of inflation worldwide.
Another headache for the “Plunge Protection Team,” is the high and rising price of crude oil, which has hitched a ride to the global stock market rallies, and is now trading above OPEC’s implied target zone of $70-to-$80 /barrel.

The OPEC cartel has tried to slow the surge of crude oil, by boosting its output to 26.8-million barrels per day (bpd), or roughly 2-million bpd above its self imposed quotas. OPEC slashed it oil output quotas by 4.2-million bpd in December 2008 to stop the slide in oil prices at $35 /barrel.

However, although OPEC’s compliance with the quotas has dropped to 53%, oil prices have continued to climb sharply higher, helped by stronger demand of roughly 900,000-bpd by China and India, and rapidly depleting oil output by Mexico’s giant oil company – Pemex.


Any significant rally by the Dow Jones Industrials above the psychological 11,000-level, could be matched by a similar rise in the price of crude oil, into the $85-to-$90 /barrel region, which in turn, could strengthen the Canadian dollar, Mexican peso, and Russian rouble, and the precious metals.

In order to avoid another “Oil Shock” to the global economy, Washington and its European allies might ask Saudi Arabia to boost its oil output further, since Riyadh has about 2-million bpd of spare capacity that it can unleash on the market at a moment’s notice


While Greenspan said he sees little threat of inflation now, in the long-run, inflation will pick up unless the Fed withdraws the massive stimulus it has pumped into the economy.

“We are still by any measure in a disinflationary environment.” However, “unless we sterilize or unwind the big monetary base we’ve built-up, inflation will begin to take hold.”

The size of the Fed’s balance is “not sustainable” and will eventually have to be reduced to “something just north of $1-trillion,” he said

“My concern is that legislation or other actions on the part of Congress may prevent the Fed from withdrawing the stimulus,” Greenspan added.  Such actions have already taken place in Seoul, where the government has completely hijacked the monetary policy of the Bank of Korea.

Texas Representative Ron Paul, a Republican, is leading an effort in Congress to repeal the Fed’s immunity to audits of monetary policy, which could expose any clandestine intervention in the stock index futures market by the Fed and its agents on Wall Street.

Still, there’s a deep-seeded suspicion in the gold market, that at some point, the Fed will resume its massive money printing operations, in order to prevent a surge in Treasury bond yields, sparking the next big round of inflation.

Greenspan mostly lingered far behind the inflation curve when he was Fed chief, and never saw a bubble he didn’t like. According to the commodities markets, the break-out of inflation has already begun and is buoying gold above $1,100 /oz.

Krugman’s Chinese renminbi fallacy

Paul Krugman is one of the international economists I most respect. He is a towering figure in the study of international trade. But his understanding of some international economic policy issues is, to put it generously, naïve. In fact, were the Obama administration to follow his policy advice, the world economy could encounter more serious difficulties, if not another recession, in the years ahead.

In the year 2010, Krugman suddenly found a new and passionate interest in China’s exchange rate policy. On 1 January, in his piece ‘Chinese New Year’, Krugman claimed that America had lost 1.4 million jobs because of the undervalued renminbi and, therefore, he endorsed trade protectionism against China.

On 11 March, in another piece, ‘China’s swan song‘, he advised the Treasury Department to name China as a currency manipulator. And on 12 March, at an Economic Policy Institute event, in Washington, he said that global economic growth would be about 1.5 percentage points higher if China stopped restraining the value of its currency and running a trade surplus.

Most economists would agree with Krugman that the renminbi is probably undervalued . But the extent of misalignment remains a controversial subject. For instance, applying purchasing power parity (PPP) approach, Menzie Chinn of University of Wisconsin, Madison, and his collaborators used to discover undervaluation of about 40 per cent.

But after the World Bank’s 40 per cent downward revision of Chinese GDP in PPP terms, that undervaluation disappeared completely. Nick Lardy and Morris Goldstein of the Peterson Institute of International Economics suggested that renminbi was probably only undervalued by 12-16 per cent at the end of 2008. My colleague Yang Yao and his collaborator at the Peking University found even less misalignment.

The renminbi exchange rate is but one , and perhaps not even the most important, factor behind China’s large trade and current account surpluses. Among other factors, economic studies have attributed the recent surge in China’s external imbalances to the unique population dividend and the relocation of industries from other Asian economies. My own research has also highlighted the importance of distortions in domestic factor markets, which were largely legacies of the pre-reform economic systems of central planning.

To resolve the global imbalance problem, China, US and other countries will need to work together and adopt more comprehensive reform packages, focusing not only on the exchange rate regime but also on domestic structural reforms in their respective countries. Exclusive focus on the renminbi exchange rate issue is likely to be both ineffective and counter-productive. Between mid-2005 and mid-2008, the renminbi appreciated by 22 per cent against US dollar and by 16 per cent in real effective terms. But China’s external imbalances continued to widen rapidly.

The US started to lose manufacturing jobs way before China emerged as a global manufacturing centre.

China’s current account surplus increased after 2004. But America’s current account deficits mushroomed from around the turn of the century. There is no denying that China and the US should work together to resolve the imbalance problem. But to say that China’s surplus caused America’s deficits, which emerged much earlier, is simply at odds with common sense.

So what would happen were the Obama administration to follow Krugman’s advice?

First of all, it would delay, not accelerate China’s exchange rate policy reform. On 6 March, the People’s Bank of China (PBOC) Governor Zhou Xiaochuan made it clear that the current soft peg of renminbi to the US dollar was a temporary response to the global financial crisis and that this would have to end. These statements clearly suggest that the Chinese authorities are searching for an appropriate time for exit from the soft peg and I think this could happen any moment from now.

But finding the appropriate time is not always easy. The China-US policy game on renminbi exchange rate can be best characterised as a ‘prisoners’ dilemma’. It is important to keep in mind that, like American politicians, Chinese leaders also have to entertain domestic political pressure. And to be seen as giving in to American pressure can substantially weaken the leaders’ political standing and capacity to act in everyone’s best interests. China is more likely to move ahead quickly if the US maintains a calm and rational stance. This was largely what happened in the lead up to the July 2005 exchange rate reform.

But the prisoners’ dilemma arises here. American politicians and commentators will not want to keep quiet since that will lose them the opportunity to take political credit, even if China liberalises the exchange rate policy. In fact, some American politicians may be secretly hoping that China does not do anything.

Many of them understand perfectly well that revaluation of renminbi will not bring jobs back to the US If that happens, then they will have to find a new scapegoat for the double digit unemployment problem. In the meantime, the Chinese government is reluctant to make any significant change under foreign pressure.

This is why Krugman’s intervention only makes things worse.

Let’s imagine some scenarios in which Krugman gets what he asks for: the US Treasury Department names China as a currency manipulator and the Obama administration launches trade war against China.

If this were to happen, the most likely scenario is that China would then stick to its current exchange rate regime and retaliate with trade sanctions against America.

This would reduce trade between the two countries but, more importantly, seriously damage investor confidence worldwide. Trade war between the two largest economies is a non-trivial event for the world economy. In face of much more uncertain economic future, investors would scale back their investment plans and consumers would cut back their spending.

A less likely scenario is that China would be forced to appreciate the currency sharply by, say, 40 per cent. This is likely to cause significant difficulties for Chinese companies if the exchange rate adjustment were forced abruptly. Again, there could be two possible outcomes. The first is that Chinese companies would no longer be able to export because of sudden loss of competitiveness. The market vacuum newly made available by exit of Chinese products would be taken up by products from other low-cost countries like Vietnam and India.

American companies would not be able to compete with these countries. So this would not add new jobs in the US, but the inflation rate would move higher.

Since exports account for more than one-third of the Chinese economy, collapse of exports would cause serious difficulties for China. Chinese growth would decelerate sharply, as happened in late 2008. This would be unfortunate since most major economies are still struggling with recovery. And sudden weakening of the world’s most dynamic economy would send chilling messages across the world markets. Investor confidence would again fall sharply.

The second possible outcome is that China would continue to export to the US market, at higher prices but lower profits. This would push up inflation rates significantly in the US and force the Fed to tighten monetary policy quickly. Both steps could hurt the momentum of America’s recovery, which is still not yet on steady footing. New difficulties in the US and China, the two largest economies of the world, would impact global investor confidence negatively.

In either case, global economic growth would be about 1.5 percentage points lower, not higher, if China revalued the currency as Krugman demands. The magnitude is probably exaggerated, but the direction is certain.

Related articles:

1.The valuation of China’s currency – Special editorial

2.US-China economic imbalance: Alternatives to appreciating the Chinese yuan

3.China’s role in international currency arrangements – Weekly editorial

4.The China syndrome on exchange rates

The pen is censored and its might extinguished

There was a time when the pen was mightier than the sword. That was a time when people believed in truth and regarded truth as an independent power and not as an auxiliary for government, class, race, ideological, personal, or financial interest.

Today Americans are ruled by propaganda. Americans have little regard for truth, little access to it, and little ability to recognize it.

Truth is an unwelcome entity. It is disturbing. It is off limits. Those who speak it run the risk of being branded “anti-American,” “anti-semite” or “conspiracy theorist.”

Truth is an inconvenience for government and for the interest groups whose campaign contributions control government.

Truth is an inconvenience for prosecutors who want convictions, not the discovery of innocence or guilt.

Truth is inconvenient for ideologues.

Today many whose goal once was the discovery of truth are now paid handsomely to hide it. “Free market economists” are paid to sell offshoring to the American people. High-productivity, high value-added American jobs are denigrated as dirty, old industrial jobs. Relicts from long ago, we are best shed of them. Their place has been taken by “the New Economy,” a mythical economy that allegedly consists of high-tech white collar jobs in which Americans innovate and finance activities that occur offshore. All Americans need in order to participate in this “new economy” are finance degrees from Ivy League universities, and then they will work on Wall Street at million dollar jobs.

Economists who were once respectable took money to contribute to this myth of “the New Economy.”

And not only economists sell their souls for filthy lucre. Recently we have had reports of medical doctors who, for money, have published in peer-reviewed journals concocted “studies” that hype this or that new medicine produced by pharmaceutical companies that paid for the “studies.”

The Council of Europe is investigating the drug companies’ role in hyping a false swine flu pandemic in order to gain billions of dollars in sales of the vaccine.

The media helped the US military hype its recent Marja offensive in Afghanistan, describing Marja as a city of 80,000 under Taliban control. It turns out that Marja is not urban but a collection of village farms.

And there is the global warming scandal, in which NGOs. the UN, and the nuclear industry colluded in concocting a doomsday scenario in order to create profit in pollution.

Wherever one looks, truth has fallen to money.

Wherever money is insufficient to bury the truth, ignorance, propaganda, and short memories finish the job.

I remember when, following CIA director William Colby’s testimony before the Church Committee in the mid-1970s, presidents Gerald Ford and Ronald Reagan issued executive orders preventing the CIA and U.S. black-op groups from assassinating foreign leaders. In 2010 the US Congress was told by Dennis Blair, head of national intelligence, that the US now assassinates its own citizens in addition to foreign leaders.

When Blair told the House Intelligence Committee that US citizens no longer needed to be arrested, charged, tried, and convicted of a capital crime, just murdered on suspicion alone of being a “threat,” he wasn’t impeached. No investigation pursued. Nothing happened. There was no Church Committee. In the mid-1970s the CIA got into trouble for plots to kill Castro. Today it is American citizens who are on the hit list. Whatever objections there might be don’t carry any weight. No one in government is in any trouble over the assassination of U.S. citizens by the U.S. government.

As an economist, I am astonished that the American economics profession has no awareness whatsoever that the U.S. economy has been destroyed by the offshoring of U.S. GDP to overseas countries. U.S. corporations, in pursuit of absolute advantage or lowest labor costs and maximum CEO “performance bonuses,” have moved the production of goods and services marketed to Americans to China, India, and elsewhere abroad. When I read economists describe offshoring as free trade based on comparative advantage, I realize that there is no intelligence or integrity in the American economics profession.

Intelligence and integrity have been purchased by money. The transnational or global U.S. corporations pay multi-million dollar compensation packages to top managers, who achieve these “performance awards” by replacing U.S. labor with foreign labor. While Washington worries about “the Muslim threat,” Wall Street, U.S. corporations and “free market” shills destroy the U.S. economy and the prospects of tens of millions of Americans.

Americans, or most of them, have proved to be putty in the hands of the police state.

Americans have bought into the government’s claim that security requires the suspension of civil liberties and accountable government. Astonishingly, Americans, or most of them, believe that civil liberties, such as habeas corpus and due process, protect “terrorists,” and not themselves. Many also believe that the Constitution is a tired old document that prevents government from exercising the kind of police state powers necessary to keep Americans safe and free.

Most Americans are unlikely to hear from anyone who would tell them any different.

I was associate editor and columnist for the Wall Street Journal. I was Business Week’s first outside columnist, a position I held for 15 years. I was columnist for a decade for Scripps Howard News Service, carried in 300 newspapers. I was a columnist for the Washington Times and for newspapers in France and Italy and for a magazine in Germany. I was a contributor to the New York Times and a regular feature in the Los Angeles Times. Today I cannot publish in, or appear on, the American “mainstream media.”

For the last six years I have been banned from the “mainstream media.” My last column in the New York Times appeared in January, 2004, coauthored with Democratic U.S. Senator Charles Schumer representing New York. We addressed the offshoring of U.S. jobs. Our op-ed article produced a conference at the Brookings Institution in Washington, D.C. and live coverage by C-Span. A debate was launched. No such thing could happen today.

For years I was a mainstay at the Washington Times, producing credibility for the Moony newspaper as a Business Week columnist, former Wall Street Journal editor, and former Assistant Secretary of the U.S. Treasury. But when I began criticizing Bush’s wars of aggression, the order came down to Mary Lou Forbes to cancel my column.

The American corporate media does not serve the truth. It serves the government and the interest groups that empower the government.

America’s fate was sealed when the public and the anti-war movement bought the government’s 9/11 conspiracy theory. The government’s account of 9/11 is contradicted by much evidence. Nevertheless, this defining event of our time, which has launched the US on interminable wars of aggression and a domestic police state, is a taboo topic for investigation in the media. It is pointless to complain of war and a police state when one accepts the premise upon which they are based.

These trillion dollar wars have created financing problems for Washington’s deficits and threaten the U.S. dollar’s role as world reserve currency. The wars and the pressure that the budget deficits put on the dollar’s value have put Social Security and Medicare on the chopping block. Former Goldman Sachs chairman and U.S. Treasury Secretary Hank Paulson is after these protections for the elderly. Fed chairman Bernanke is also after them. The Republicans are after them as well. These protections are called “entitlements” as if they are some sort of welfare that people have not paid for in payroll taxes all their working lives.

With over 21 per cent unemployment as measured by the methodology of 1980, with American jobs, GDP, and technology having been given to China and India, with war being Washington’s greatest commitment, with the dollar over-burdened with debt, with civil liberty sacrificed to the “war on terror,” the liberty and prosperity of the American people have been thrown into the trash bin of history.

The militarism of the U.S. and Israeli states, and Wall Street and corporate greed, will now run their course.

As the pen is censored and its might extinguished.

Good-Bye; Truth Has Fallen and Taken Liberty With It

Mass Unemployment and the Current Economic Crisis

On March 17 Congress passed the “Hire Now Tax Cut” giving companies a break from paying Social Security taxes for the remainder of the year on any new workers hired who have been unemployed for at least 60 days.

The legislation is a token response to the emerging consensus in both the mainstream and independent media that the economy’s unemployment problem is cumulative, structural and long term. But the prescription is entirely inadequate to the diagnosis. This should come as no surprise, as official sources have offered muddled and confusing accounts of the patient’s malaise.

The Official Story: Unrealistic Optimism and Misleading Statistics

The White House and the Fed can’t seem to coordinate their stories. In January the president’s Council of Economic Advisors reported that the official unemployment rate would remain close to 10 percent for at least 3 years, through 2012. The Council foresees unemployment above 6% through 2015 and above 5% through 2020. But on Feb. 24 Ben Bernanke reported to Congress a projected unemployment rate of 6.5 to 7.5 percent by the end of 2012.

Both estimates almost certainly display the typical overoptimism of official economic forecasts. There are two main reasons for the chronic unrealistic optimism. The official measure of unemployment excludes both those who have given up looking for work because of the lack of jobs, and involuntary part-time workers. If these are taken into account, the more realistic unemployment rate would be at least 16-17 percent.

A second factor distorting unemployment projections is the unrealistic rate of economic growth projected by official sources. The Council assumed real GDP growth of 3.0 percent this year, and 4.3 percent in 2011.

Bernanke forecast “a moderate-paced economic recovery, with economic growth of roughly 3 to 3.5 percent in 2010 and 3.5 to 4.5 percent in 2011, consistent with modern economic growth.”

By “modern economic growth” Bernanke refers to the healthy growth rates of what economists call the “Golden Age”, the period from 1949 to 1973.

This was the longest period of sustained economic expansion in American history: the economy grew at an average annual rate of 4.3 percent -the growth rate foolishly predicted, recall, for next year by the Council of Economic Advisors- and private-sector jobs increased at a rate of 3.5 percent a year. And in 1973 the real median wage was the highest it’s ever been.

The Golden Age is a benchmark for the authorities, and “recovery” is taken to mean a return to growth and employment rates at or close to those of 1949-1973.

It is worth looking at some of the ways the administration and the media suggest the implausible scenario that Golden-Age economic conditions are on the way to resurrection.

Statistical manipulation and half-truths are not uncommon.

For example, in January the economy continued to bleed jobs, which is bad; it was also widely reported that the unemployment rate fell, which looks good. Both stats are accurate. How is this possible? The official unemployment rate fell because the number of workers leaving the workforce declined more rapidly than job losses.

For the week ending February 20, first-time jobless claims increased by 20,000.

But we were told there was a silver lining: the number of unemployed workers collecting federally sponsored extended benefits dropped by 323,000. But this does not mean that those workers found employment. The decline is almost entirely due to workers having exhausted extended benefits prior to Congress approving another extension.

On February 25 the Commerce Department reported a 3 percent January increase in sales of durable goods. This looks especially promising: increased purchases of consumer durables such as autos, refrigerators and other big-ticket items had been a major factor in reversing most post-Second-World-War recessions.

But a closer look reveals that when defense and aircraft purchases are subtracted durable goods sales fell by 2.9 percent. This comes as no surprise: with the number of unemployed continuing to increase, we should expect sales of higher-priced consumer goods to decline accordingly.

The media have claimed a rebound in manufacturing over the last few months, suggesting a corresponding job rebound in the making. In fact, an inventory bounce was in play. Businesses were re-stocking after an extended hiatus on new orders.

The evisceration of US manufacturing which began with the “deindustrialization” of the late 1960s persists through the recession, with the reorganized General Motors currently planning the export of more jobs to low-wage countries.

There is a telling indicator of the state of US manufacturing: we have no domestic consumer electronics industry.

Wal-Mart’s fortunes are considered a good measure of consumer spending.

The company is after all the world’s largest retailer and the country’s single biggest employer. The business press reports that Wal-Mart’s profits continued to climb during the downturn, implying that consumers are managing to hold up in spite of the recession. But we want to know about the company’s domestic sales, a more accurate indicator of consumer purchasing power than total profits, which include overseas sales.

In fact, Wal-Mart recently announced its first drop in domestic sales in its history, a decline of 1.6 percent, compared to a 2.4 percent increase for the same period a year ago. The relatively rosy profit picture is due to international sales, especially in Brazil and China. The sales decline is of course yet another indicator of cumulative unemployment.

Finally, there is the statistical sleight-of-hand of the Bureau of Labor Statistics (BLS). BLS performs a "net birth/death adjustment" on its unemployment data. The birth/death model uses business deaths to "impute" employment from business births.

Thus, as more businesses fail, more new jobs are imputed to have materialized through business births. The birth/death model is based on statistics covering 1998-2002. This was a period during which explosive telecom and dot.com startups outumbered business failures. That period bears no resemblance to today's flat economic landscape.

While the "surplus" jobs created by start-up firms has been revised lower this year, BLS continues to report from the indefensible assumption that jobs created by start-up companies tend to offset jobs lost by companies going out of business.

John Williams of Shadow Government Statistics estimates that at least 50,000 birth/death jobs were conjured up in this way in the most recent BLS report.

The Overall Employment Picture and the Handwriting on the Wall

What’s relevant for assessing the health of the economy is that job losses continue to be cumulative. Things continue to get worse at a slower rate, but this should be no comfort in the context of an economy that has lost 8.4 million jobs since December 2007, including more than 4 million in the last 12 months alone.

More than 15 million Americans are looking for work, and 6.3 million have been unemployed for 6 months or longer, the largest number since the government began keeping records in 1948 and more than double the number in the next-worst recession, Reagan-Volcker’s downturn of the early 1980s. 2.7 million will lose their unemployment benefits before the end of April unless Congress extends payments. On top of all this, the economy must add 100,000 new jobs every month just to absorb first-time entrants to the labor force.

Obama acolytes will point out that while this is a regrettable picture, it does not imply that administration policy has produced no jobs whatsoever. But on examination none of the job additions announced by the administration since the fourth quarter of 2009 is indicative of an economy in recovery or the return of permanent jobs.

Most fall under the category of “saved” jobs.

Employment improved for a while in sectors that are the direct beneficiaries of monetary or fiscal stimulus: government, healthcare, financial services, education and retail sales. These jobs don’t reflect the independent strength of the real economy; they would not have materialized absent the stimulus.

Meanwhile, sectors such as manufacturing, the most reliable indicator of an intact real economy, continued to shed jobs at an alarming rate. The stimulus will not persist forever, and when it is withdrawn, the "saved" jobs will be among the first to go. Some have already begun to evaporate: schools, hospitals and state and local governments have been shedding jobs like crazy.

These data point to the atypical nature of the current stream of job losses. We are not witnessing the kind of unemployment that attends a garden-variety recession. That type of unemployment disappears as the economy recovers.

Peter S. Goodman points out in a detailed analysis in The New York Times that the recovery, whenever it begins, will not bring sufficient jobs to absorb the record-setting ranks of the long-term unemployed.

(“The New Poor: Millions of Unemployed Face Years Without Jobs”, February 21, 2010) He describes the new poor as “people long accustomed to the comforts of middle-class life who are now relying on public assistance for the first time in their lives – potentially for years to come.”

Goodman fleshes out an emerging consensus among mainstream business observers that he had described this time last year.

In “Job Losses Hint at Vast Remaking of Economy” (NYT, March 7, 2009) we were told that “…growing joblessness may reflect a wrenching restructuring of the economy…. In key industries – manufacturing, financial services and retail – layoffs have accelerated so quickly in recent months as to suggest that many companies are abandoning whole areas of business.

“These jobs aren’t coming back,” [said a chief economist at Wachovia] “a lot of production either isn’t going to happen at all, or it’s going to happen somewhere other than in the United States. There are going to be fewer stores, fewer factories… Firms are making strategic decisions that they don’t want to be in their businesses.”

The article quotes a Stanford Hoover Institution economist as saying “The decimation of employment in legacy American brands such as General Motors is a trend that’s likely to continue. We have to stimulate the economy to create jobs in other areas.” This was one of the first allusions to what is now referred to as “the new normal.”

The especially intractable unemployment problem is the result of structural and institutional changes in the economy. Institutional investors have come to own an increasing percentage of large companies. The new owners are driven to increase shareholder value by going for quick profits. Cutting payroll is standard procedure.

The structure of the labor market has been affected by the decline of union power: employers can reduce costs by relying increasingly on part-time and temporary workers. Exporting manufacturing and even white collar jobs to lower-wage countries further reduces the demand for US labor.

Unless a political movement emerges with the explicit goal of directly reversing these tendencies, none of this will change under current policy.

That these developments have been in the making for decades is evident in employment changes in business cycles -the economy’s inhaling and exhaling, successive periods of expansion and contraction- since the 1950s. During the Golden Age, from the 1950s through the mid-1970s, private-sector jobs increased during economic upturns/expansions at a rate of 3.5 percent a year.

During 1980s and 1990s expansions, job growth dropped to 2.4 percent annually. Since 2000, the figure fell to 0.9 percent. The pace of job growth has steadily declined in each post-Golden-Age expansion.

That this is indicative of an unfolding structural deficiency in the economy is also shown by trends in the time it takes for a cyclical upturn to regain the jobs lost in the preceding recession. Between 1950 and 1990 it took the economy an average of 21 months to return employment to its previous peaks. After the 1990 and 2001 recessions the respective durations were 31 and 46 months.

This ongoing deterioriation in the performance of the labor market has led to the notion of the “jobless recovery.” For most of US economic history this term would have been considered self-contradictory. That it is now part of common economic discourse is testimony to a major conceptual revision in the discourse of propaganda: that the economy is recovering is no reason to expect unemployed workers to find work. Economic recovery is now treated as consistent with declining standards of living. Lowered expectations and acquiescence in long term working-class hardship are now built into what we are told to regard as recovery.

The Old Economics as Irrelevant to the Current Crisis

Within the framework of mainstream neoclassical economic theory, there are two outstanding confusions concerning the notion of “recovery.” There is the misconception that once the economy begins its recovery it is on the way to sustained growth. That is not how capitalism works.

The standard use of ‘recovery’ connotes a resumption of economic growth out of a cyclical recession. An economy has recovered when it has regained what was lost since the peak of the previous expansion. A new period of expansion is under way only if growth persists beyond the recovery.

Restoring the economy to health requires not only a period of successful recovery, but also sustained growth beyond the previous peak. The prevailing talk erroneously assumes that only the first condition is at stake.

As things stand now with respect to employment, spending, bank lending, sales of consumer goods, the downward trajectory of wages, and investment in the real economy, there is no policy in place that gives reason for optimism regarding a recovery. A fortiori, there is even less reason to expect renewed expansion.

A second confusion surrounds the very use of the term ‘recovery’.

No alternative terminology is at hand, but ‘recovery’ needs to be replaced. For the term suggests a return to a prior state of economic normalcy, a healthy economy. But the state of the economy prior to the onset of the meltdown, prior to the burgeoning of the housing bubble, and even prior to the dot.com bubble, was neither normal nor healthy.

The bubble years began in the early 1990s, around the time Al Gore started nattering about the “information superhighway.” Bubble- and debt-driven growth is neither normal nor healthy. Since the late 1970s the US was well into deindustrialization, depressing net investment in the widget-producing economy and correlatively goosing investment in the financial sector, which began its now-infamous disproportionate growth relative to both total investment and GDP growth.

Household debt had also begun racing ahead of the growth of both disposable income and GDP. Since 1973 the median wage has essentially flatlined. Put this all together and what do you get? GDP growth increasingly driven by speculative activity rather than real production, and household spending decreasingly fueled by current income and increasingly driven by debt, the mortgaging of future years’ expected income. “expected” is key here. Bubbles inevitably burst and the connection between the real and the financial economies reasserts itself with a vengeance. Income expectations are not met and debts cannot be repaid. Crisis ensues.

No serious commentator expects a return to anything resembling Golden-Age prosperity. The economy is in the process of reconfiguration. Postwar recessions through the 1970s were typically reversed by means including Fed monetary policy of reducing interest rates. The Fed is now treating the crisis as if it were a standard downturn, only a lot bigger. Accordingly, Bernanke has been releasing a virtually continuous flood of liquidity to no discernible effect.

A greatly expanded stimulus is needed, and one that directly creates jobs. The Obama administration has no such intention.

Obama’s Jobs Policy

The administration wants to get the credit machine running again so that the private sector can resume what is taken to be its natural function as principal creator of jobs. Obama’s advisors reason that since most Americans are employed by small businesses, priority must be given to enticing these operations to start hiring. So Obama proposed $33 billion in new tax credits for small businesses, and on Wednesday the Senate sent the “Hire Now Tax Cut” for Obama’s signature.

The administration is pitch blind to the fact that businesses will not invest and hire unless they have reason to believe that they will have customers, consumers ready, willing and able to spend. Consumers would be ready and willing to spend were they able. But they are not. Piss-poor and declining wages, joblessness and record indebtedness are of course the principal obstacles.

Commercial establishments hire when they expect customers/buyers, and capitalists invest in production when they expect profits. No rational employer/investor has any such expectations. The circle is vicious: businesses won’t hire because workers have no money, and workers have no money because businesses won’t hire.

The circle will remain unbroken unless the lead actor in this tragedy, the consumer/worker, is provided with the means of spending from a source outside the circle. This can only be government.

As labor militancy forced FDR to acknowledge, government must become a direct provider of employment. Obama has ruled this out. At the December 3, 2009 “jobs summit” he repeated one of his favorite refrains:

“I want to be clear: While I believe the government has a critical role in creating the conditions for economic growth, ultimately true economic recovery is only going to come from the private sector.”

He admonished those who push for a government jobs program “to face the fact that our resources are limited….It’s not going to be possible for us to have a huge second stimulus, because frankly, we just don’t have the money.”

He was of course referring to the massive federal budget deficit of $1.4 trillion. He left unnoted that the major reasons for the tripling of last year’s deficit and explosive growth of the national debt was the bailout of the banks and the titanic “defense” budget.

(The administration plans to spend more on defense in real terms than any administration since 1948 – a period encompassing the entire duration of the Cold War. Recall that this includes two large-scale, protracted regional wars in Korea and Vietnam.) One searched in vain among the newspapers and magazines of the Ministry of Information for any critical suggestion that imperialism and the plutocracy are for Obama a higher priority than rescuing working people from creeping mass destitution.

Wednesday’s gesture towards addressing the jobs catastrophe is recognized as play-acting.

A February 10 Associated Press report titled “Promises, Promises: Jobs bill won’t add many jobs” commented that the Senate bill “has a problem: It won’t create many jobs…. Even the Obama administration acknowledges the legislation’s centerpiece – a tax cut for businesses that hire unemployed workers – would work only on the margins.”

The Congressional Budget Office has estimated that the tax break just passed will generate only 18 full-time jobs per $1 million spent.

The ineffectiveness of these policies is crystal clear. The administration either doesn’t care, or will not allow itself to grasp the obvious. It’s commitment to market fundamentalism requires blindness, and the requirement is met.

The Longstanding Travails of Small Business

The focus of the current legislation on small business is oblivious to finance capital’s decades-long disdain of this sector. In December 2009 the Federal Deposit Insurance Corporation (FDIC) released figures showing that the amount of loans outstanding in the nation's banks fell $210.4 billion in the third quarter of 2009.

That was the largest quarterly decline since the FDIC began tracking loans in 1984. "We need to see banks making more loans to their business customers," Federal Deposit Insurance Corporation (FDIC) Chairwoman Sheila Bair told reporters.

The FDIC figures show that banks have been deemphasizing business lending for many years, long before the current contraction commenced. Since September 2008 the trend has intensified, with business lending contracting at a much faster pace than consumer lending.

The FDIC’s tracing of this shift over the past decade underscores banks’ increasing preoccupation with financial shenanigans at the expense of investment in the real economy.

At the end of the third quarter of 1999, the assets of the nation's banks totaled $5.5 trillion. As of September 30 of 2009, bank assets had grown to $13.2 trillion. But commercial and industrial loans outstanding barely budged, only growing from $947 billion a decade ago to $1.27 trillion by September 30 this year.

At the same time, loans secured by real estate increased from $1.43 trillion in the fall of 1999 to $4.5 trillion this fall. And investment in securities doubled, rising from $1.03 trillion to $2.4 trillion. Last month the FDIC reported that bank lending contracted 7.4 percent in 2009, at the fastest pace since 1942, the first year of US involvement in the Second World War

Banks have lent sparingly to businesses for the past 35 years. Businesses report that in each quarter since 1974 -the very beginning of post-Golden-Age austerity-ease of borrowing was either worse or the same as it was the prior quarter. Business loans were increasingly hard to get over this entire period.

The data reveal a secular shift away from productive lending to businesses toward nonproductive lending to consumers and speculative investments.

Here is yet another indication of the structural deficiencies and institutional transformations discussed above that are generating a reconfigured economy. Neither standard monetary pump-priming nor Obama’s anemic measures are up to the task of addressing this historic transformation of the US economy. The deindustrialized, financialized, debt-bloated private economy is no longer a feasible basis of economic revitalization. The public sector must shift into gear. How? Well, it’s not as if we lack historical precedent.

Two Kinds of Long-Term Public Investment/Employment

The administration’s opposition to long-range public investment is adamant. The Washington Post (November 8, 2009) noted that White House officials reject the idea because it “does not produce long-term value”. One suspects that “long-term value” means long-term private profit.

But why should public investment be expected to produce private profit… unless the administration adheres to the metaphysical premise that all public and private needs can and should be met through the market. We have seen above that Obama is just such a metaphysician. He channels his advisors. Lawrence Summers, the chief economic advisor, asserted on October 19, 2007:

“Policy measures to spur growth or achieve other objectives should wherever possible go with, rather than against, the grain of the market….There is no such thing as the success of the American economy that doesn’t involve very substantial success for America’s entrepreneurs and for American companies.”

This is the old-time economic religion that is adhered to by the Washington powerful, and which can be defeated only by mass action.

If we are talking seriously about a genuine economic recovery, we advocate what we might call a “national economic project”. I mean a large-scale public investment policy that would employ millions of workers in a range of projects and services designed to address immediate and pressing needs.

Most advocates of such a plan envisage government-funded public works programs to hire the unemployed. They are right. But more is required, namely public-service employment designed to meet needs not addressed by relying solely on infrastructure projects.

The case for infrastructure rehabilitation is powerful. The most reliable source of information regarding the state of the US infrastructure is the American Society of Civil Engineers, which has released a “2009 Report Card for America’s Infrastructure”. (Read it here: http://www.asce.org/reportcard/2009/grades.cfm )

The Report Card stresses the advanced decay of roads, surface transit and aviation, tunnels, dams, bridges, public parks and recreation, schools, drinking water, levees and sewerage facilities. Accordingly, Uncle Sam earned a grade of “D” . The engineers describe in exacting detail the most urgent problems, and price the investment need in infrastructure repair at $2.2 trillion.

In recent years there has been especially rapid deterioration in an infrastructure already in a state of advanced decay. There were, for example, almost four times as many “high hazard” deficient dams in 2007 (1,826) as there were in 2001 (488). The Report states that

“Many state dam safety programs do not have sufficient resources, funding, or staff to conduct dam safety inspections, to take appropriate enforcement actions, or to ensure proper construction by reviewing plans and performing construction inspections.”

The $787 billion “stimulus package” monies that might address what is in fact an emergency situation are the $71.76 billion allocated to construction projects, most of which remains unspent. This comes to one thirtieth of the required $2.2 trillion, a shortfall of $1.176 trillion.

It is clear that the relevant project is national in scope and therefore requires the creation of new jobs on a coast-to-coast scale. This task cannot be met by the private sector alone.

In the light of what’s been outlined above, Obama’s promotion of alternative energy and “green” investment as a cure-all for mass unemployment is ridiculous. We have been told that incentivizing homeowners to weatherize their houses -“cash for caulkers”- would represent a major step in addressing the jobs crisis.

Like Obama’s other proposals, “cash for caulkers” would have the teensiest impact on unemployment, but it will provide major bucks for special business interests like Home Depot, whose chief executive was the most enthusiastic proponent of this idea at the jobs summit.

The New Deal’s public employment projects were on the whole great successes. The 1933 Civilian Conservation Corps (CCC) provided men (no women) work in the national forests and employed 2.5 million through 1942. In the same year the Civil Works Administration was established by executive order and within one year it created jobs for 4.3 million people.

The Works Progress Administration (WPA) of 1935 employed millions and oversaw, over the course of 8 years, the construction and repair of 650,000 miles of roads and the building of schools, libraries and recreational centers. It’s support of the construction of neighborhood parks employed skilled and unskilled workers, architects and artists. It also established the only federal arts program the US has ever had.

As for the administration’s claim that public investment “does not produce long-term value”, the CCC and WPA contributed hospitals, schools, auditoriums, museums, city halls, court houses, fire stations, water works, parks, fairgrounds, farmers’ markets, and a range of other facilities. Many of these are in use to this day.

What was created is astonishing: Hoover Dam, the San Francisco Cow Palace, DC’s Reagan National Airport, Houston’s City Hall, the San Antonio River walk, Bandelier National Monument in New Mexico, the Mountain Theater on California’s Mount Tamalpais and the Eighteenth Precinct police station in New York City.

Many of us have forgotten, or never knew, that these were New Deal projects. Most remember the collapse in August 2007 of the I-35W bridge in Minneapolis, opened in 1967. This drives home how impressive it is that a depression-era contribution to the US transportation system like New York’s Triborough Bridge still carries traffic every day.

The notion that government should assist or even take the lead in this kind of investment was not born of the Depression. It’s almost as American as apple pie. Alexander Hamilton, and later the early nineteenth century Whigs, advocated “internal improvements” like canals, turnpikes and, later on, railroads. (Hamilton’s motives were mixed. He intended of course to foster economic expansion westward, but he also had in mind the parallel development of America’s financial markets.)

That government needed to be involved in these projects was plain economic good sense: because these undertakings required substantial initial outlays but delivered returns only over time, private investors could not foot the bill by themselves. They thus needed government assistance, either in the form of financing, or, as with the railroads, spectacular gifts of public land, to make them possible.

Investing in physical infrastructure and green energy will give the greatest stimulus to two kinds of jobs, construction and manufacturing. We who urge these types of spending have given insufficient attention to the distributive desiderata of public spending.

We have not addressed two essential criteria of an equitable jobs program: public investments should be selected with the aims of maximizing the extent of immediate job creation, and of ensuring that the benefits of job creation are available to the broadest possible category of worker, especially the most vulnerable to job insecurity.

The results of a recent study by the Levy Economics Institute of Bard College are helpful in this respect. The Levy research shows that social-sector investment in areas such as early childhood education and home-based care are especially suited to meet the needs identified by these two criteria.

Social care investment generates more than twice the number of jobs as infrastructure spending and 1.5 times the number of jobs as green energy spending. And social care investment is more effective than each of the other types in providing work to those with the least education, low-income households and women.

It also creates jobs in occupations identified in a 2006 Bureau of Labor Statistics study as among those most likely to add the greatest number of jobs between 2006 and 2010:

teaching, child care and home health care. While most social-care jobs would be suited to the above categories, a significant number of jobs would also require some college education and are geared toward middle- and top-income groups. Even Tim Geithner acknowledged two Januaries ago that “social sector job creation delivers more bang for the buck.”

We have seen that the administration’s predilection for indirect job provision, through financial institutions, will not succeed. Social care expansion consists in direct job-creating investment in social infrastructure, unlike the “welfare reform” welfare-to-work of Bill Clinton or public cash assistance.

And mainstream-type arguments support social infrastructure investment: it is more cost effective than hospital or institutional care for certain chronic patients, and home-based care lifts a burden off family members and allows them to be more productive at work. According to a 1999 Metropolitan Life Insurance Company study, this would save the economy more than $33 billion a year in lost productivity.

That should water the mouthes of private employers.

Appeals to the more progressive are also at hand. Women provide a treasury of unpaid care to children and the elderly. Social care investment would provide direct payment for these highly valued services.

The employment crisis is as urgent as urgent gets, and intractable under the present economic settlement. The inneffectuality of politics as usual could not be clearer. The stubborn liberal hope, that mainstream politicians - financial investments made flesh- can be talked or voted into repudiating their masters’ priorities, persists as if unfalsifiability were a virtue. This delusion cannot be undefeatable.

That would mean, by implication, that history has come to its conclusion. But history has no conclusion. America has in hand a workable and desirable middle-term prescription for ordinary folks’ mounting afflictions.

The task is to get it out.

Pressure Increasing on China to Revalue Yuan

Pressure on China to do something about its allegedly undervalued currency is mounting by the day. Please consider the following articles.

The World Bank Says China Must Pare Stimulus to Counter Bubbles

The World Bank indicated that China, the world’s third biggest economy, should raise interest rates to help contain the risk of a property bubble and allow a stronger yuan to help damp inflation expectations.

The nation’s “massive monetary stimulus” risks triggering large asset-price increases, a housing bubble, and bad debts from the financing of local-government projects, the Washington- based World Bank said in a quarterly report on China released in Beijing today. The group raised its economic growth forecast for this year to 9.5 percent from 9 percent in January.

The World Bank’s call echoes the assessment of private economists -- analysts at Morgan Stanley this week said higher reserve requirements for banks may be “imminent” and interest rates could start to climb as early as next month. China’s economic rebound has also sparked increasing calls for an end to its exchange-rate peg to the dollar, adopted in mid-2008 to help shelter exporters amid the global recession.

Bloomberg reports Senate May Force Obama to Take Tougher Yuan Stance

Five senators including Charles Schumer of New York and Lindsey Graham of South Carolina introduced legislation yesterday to make it easier for the U.S. to declare currency misalignments and take corrective action. Even if the bill stalls, it may have “ripple effects” that lead the Treasury Department to declare China a currency manipulator, William Reinsch, president of the National Foreign Trade Council, said.

Obama’s goal of doubling U.S. exports in five years depends on his ability to get China to raise the value of its currency, said Sherrod Brown, an Ohio Democrat and co-author of the legislation. China’s intervention in currency markets to keep the value of the yuan, or renminbi, at a set value acts as a subsidy to exports and tax on imports, Brown said at a news conference yesterday.

Senator Debbie Stabenow, a Michigan Democrat, and Sam Brownback, a Kansas Republican, are also supporting the legislation. Graham is a Republican and Schumer is a Democrat.

The senators said the U.S. recession could boost the political prospects for the legislation, which Schumer has proposed in various forms since 2003. Schumer said the Senate proposal will be attached “very soon” as an amendment to “must-pass legislation.”

“The only way we will change them is by forcing them to change,” Schumer said.

The yuan is undervalued by as much as 40 percent, which is “blatant protectionism,” Bergsten said. Brown and Schumer quoted the analysis of Bergsten and Nobel Prize winning economist Paul Krugman in support of their efforts.

Business Sours On China

China's relationship with foreign companies is starting to sour, as tougher government policies and intensifying domestic competition combine to make one of the world's most important markets less friendly to multinationals.

Patent rules imposed Feb. 1 threaten to increase costs in China for foreign innovators in industries such as pharmaceuticals, and let authorities force foreign drug companies to license production to local companies at state-set prices.

A year ago, in a move foreign critics called protectionist, Chinese regulators rejected a bid by Coca-Cola Co. for China Huiyuan Juice Group Ltd., saying it could crowd out smaller companies and raise consumer prices. The two combined held just a fifth of China's juice market.

In July, four executives of Anglo-Australian mining giant Rio Tinto were detained, initially accused of stealing "state secrets," amid tense negotiations between global miners and China's steel industry over iron ore prices. Rio Tinto denies wrongdoing by the men, who await trial on reduced charges of bribery and theft of commercial secrets.

Google Inc.'s woes highlight the angst. The search company, long troubled by Chinese censorship rules, threatened Jan. 12 to depart China after it said a Chinese hacking attack penetrated its computer network. Related attacks hit dozens of other multinationals. Google is expected soon to close its Chinese site, Google.cn., leaving local companies dominating an Internet market of 400 million users.

"The Google issue has had a crystallizing effect," says Lester Ross, managing partner in Beijing for U.S. law firm Wilmer Cutler Pickering Hale and Dorr. "It raised the consciousness of government and of the boardrooms and other stakeholders" about the difficulties of doing business in China, he says.

Inquiring minds are reading Taking On China by Paul Krugman.

Tensions are rising over Chinese economic policy, and rightly so: China’s policy of keeping its currency, the renminbi, undervalued has become a significant drag on global economic recovery. Something must be done.

Today, China is adding more than $30 billion a month to its $2.4 trillion hoard of reserves. The International Monetary Fund expects China to have a 2010 current surplus of more than $450 billion — 10 times the 2003 figure. This is the most distortionary exchange rate policy any major nation has ever followed.

So how should we respond? First of all, the U.S. Treasury Department must stop fudging and obfuscating.

If Treasury does find Chinese currency manipulation, then what? Here, we have to get past a common misunderstanding: the view that the Chinese have us over a barrel, because we don’t dare provoke China into dumping its dollar assets.

It’s true that if China dumped its U.S. assets the value of the dollar would fall against other major currencies, such as the euro. But that would be a good thing for the United States, since it would make our goods more competitive and reduce our trade deficit. On the other hand, it would be a bad thing for China, which would suffer large losses on its dollar holdings. In short, right now America has China over a barrel, not the other way around.

For starters, Krugman conveniently ignores one side of the equation.

A sinking dollar is good for exports, however, given China's regulatory policies as noted in Business Sours on China, it's not at all clear exports to China would rise by much. Indeed, I suspect that China's regulatory restrictions are a far bigger impediment to trade than currency fluctuations.

Furthermore, one cannot (or at least should not) ignore what would happen to the price of imports. A falling currency is not a free lunch.

While I agree with Krugman that China would not dump US Treasuries, the idea that the U.S. has China over a Barrel is preposterous. Mutual deadly embrace with unbalanced winners and losers is more like it.

What the PBoC cannot do with its reserves

by Michael Pettis.

It is a real toss-up as to which generates more bizarre comment in the international press: Beijing’s long-feared dumping of US Treasuries, or the use and value of the PBoC’s central bank reserves. The revelation last week that Chinese holdings of US Treasury obligations fell in December by $34.2 billion, to $755.4 billion, generated a frisson of fear and excitement, leading one prominent newspaper to worry that “If there is one thing that gets investors twitchy, it is the fear that China is losing its appetite for US government bonds.”

Remember that China has a large current account surplus which necessarily must be recycled abroad, and the US has a large current account deficit which necessarily must be funded abroad. It would be astonishing if, under these circumstances, total Chinese holdings of USD assets declined, and of course it is impossible that they declined faster than the willingness of other foreigners to replace them.

If China runs a current account surplus, it must accumulate net foreign claims by exactly that amount, and the entity against which it accumulates those claims (adjusting for actions by other players within the balance of payments) ultimately must run the corresponding current account deficit. And as long as China ran the largest current account surplus ever recorded as a share of global GDP, and the US the largest current account deficit ever recorded, and especially since China also ran an additional capital account surplus (i.e. other non-PBoC agents ran a net capital inflow), it was almost impossible for the PBoC to do anything but buy US dollar assets. Given the sheer amounts, a substantial portion of these assets had inevitably to be USG bonds.

This was not a discretionary lending decision. It is the automatic consequence of China’s currency regime, in which it pegs the RMB to a foreign currency, in this case the dollar. Why? Because when the PBoC decides on the level of the RMB against the dollar, it does not do so by passing a law, and making it a capital crime for anyone to trade at a different price. What it does is far simpler. It offers to buy or sell unlimited amounts of RMB against the dollar at the desired price.

If it stops buying dollars, it must let the market decide by itself on the new equilibrium price of the dollar. In that case the value of the dollar has to plunge in RMB terms (or the RMB soar, which is the same thing) in order for buyers and sellers to match up and for the market to clear. The moment the PBoC stops buying, in other words, the RMB will rise in value – and so it cannot stop buying in anticipation of the RMB rising in value, as the FT article suggested.

Here is where things get interesting. China’s reserves are often thought of as if they were a treasure trove available for spending. They are not. They are simply the asset side of the mismatched balance sheet. If the PBoC wanted to “spend” $100, say for example to recapitalize a bank, it could do so, but this would automatically create a $100 dollar hole in its balance sheet. – it would still owe the RMB that it borrowed originally to purchase the $100. To put it another way, the reserves are not a savings account, free for the PBoC to spend as it likes. Reserves are effectively borrowed money.

So what are reserves good for? As long as China maintains its own currency and denominates all domestic transactions in RMB, the PBoC reserves cannot be used in China. They cannot go to pay doctors’ salaries, to build bridges, to lower taxes or to subsidize consumption. They can only be used to purchase or pay for things from outside China. This means that reserves ensure that China can import foreign commodities and other goods as long as it can pay for them domestically. It also means that the PBoC can ensure the availability of dollars to repay foreign debt and foreign investment. .....

... if the RMB is revalued by 10%, the value of the PBoC’s assets will immediately decline by $250 billion in RMB terms. Since the Chinese measure their wealth in RMB, isn’t this a real additional loss for China?

No, because remember that the only thing you can do with reserves is pay for foreign imports or repay foreign obligations. And just as the value of the reserves drops 10% in RMB terms, so does the value of all those foreign payments – by definition they must go down by exactly the same amount in RMB terms.

This means that China takes no loss. It can buy and pay for just as much “stuff” after the revaluation, and with less implied PBoC borrowing, as it could before the revaluation – and the real value of money is what you can buy with it. So the real value of the reserves hasn’t changed at all – just the accounting value in RMB, but this simply recognizes losses that were already taken long ago when the trade was first made, and should be a largely irrelevant number (except perhaps for conspiracy theorists).

For the sake of argument, let's assume The RMB is undervalued by 40%. Who is the winner?

To answer the question let's return to a snip from Pettis:

"generally speaking China is likely to gain from a revaluation because after the revaluation it will be exchanging the stuff it makes for stuff it buys from abroad at a better ratio. The value of what it sells abroad will rise relative to the value of what it buys from abroad, and if we could correctly capitalize those values on the balance sheet, it would probably show that the Chinese balance sheet would improve with a revaluation of the RMB."

If that is true generally speaking, then the US is a beneficiary now, generally speaking. This implies we should be careful of what we ask. However, the situation is more complex because as Pettis explains there are individual winners and losers:

"..it is not whether or not China as a whole loses or gains from a revaluation that can be measured by looking at the reserves, and I would argue that it gains, but how the losses are distributed and what further balance sheet impacts that might have."

Shock Effect

Let's consider the global shock effect of a sudden large revaluation of the Renmimbi. The key is the RMB does not float. To get a 40% rise in valuation, China must buy or sell unlimited amounts of RMB against the dollar to maintain the desired price. That might mean a huge hike in Chinese interest rates to make holding the RMB attractive.

In turn, sharp interest rate hikes would likely cause a huge slowdown in China, decreasing China's demand for imports. This is yet another factor that Krugman and those crying "currency manipulator" miss.

And should the US impose a revaluation via tariffs, a little thing called Smoot-Hawley.

China is on an unsustainable course, and the sooner and harder China slows the better for everyone in the long run.

However, the consequences of such a slowdown would be huge on the commodity exporters like Canada and Australia. Moreover, a slowdown in trade would slow global consumption.



http://globaleconomicanalysis.

"The Second Coming"

Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.
Surely some revelation is at hand;
Surely the Second Coming is at hand.
The Second Coming! Hardly are those words out
When a vast image out of Spiritus Mundi
Troubles my sight: somewhere in the sands of the desert
A shape with lion body and the head of a man,
A gaze blank and pitiless as the sun,
Is moving its slow thighs, while all about it
Reel shadows of the indignant desert birds.
The darkness drops again; but now I know
That twenty centuries of stony sleep
Were vexed to nightmare by a rocking cradle,
And what rough beast, its hour come round at last,
Slouches towards Bethlehem to be born?

Wm. Butler Yeats. "The Second Coming" (1920)

Beyond Orwell: The Electronic Police State, 2010

A truism perhaps, but before resorting to brute force and open repression to halt the "barbarians at the gates," that would be us, the masters of declining empires (and the chattering classes who polish their boots) regale us with tales of "democracy on the march," "hope" and other banalities before the mailed fist comes crashing down.

Putting it another way, as the late, great Situationist malcontent, Guy Debord did decades ago in his relentless call for revolt, The Society of the Spectacle:

"The reigning economic system is a vicious circle of isolation. Its technologies are based on isolation, and they contribute to that same isolation. From automobiles to television, the goods that the spectacular system chooses to produce also serve it as weapons for constantly reinforcing the conditions that engender 'lonely crowds.' With ever-increasing concreteness the spectacle recreates its own presuppositions."

And when those "presuppositions" reproduce ever-more wretched clichés promulgated by true believers or rank opportunists, take your pick, market "democracy," the "freedom to choose" (the length of one's chains), or even quaint notions of national "sovereignty" (a sure fire way to get, and keep, the masses at each others' throats!) we're left with a fraud, a gigantic swindle, a "postmodern" refinement of tried and true methods that would do Orwell proud!

Ponder Debord's rigorous theorem and substitute "cell phone" and "GPS" for "automobile," and "Internet" for "television" and you're soon left with the nauseating sense that the old "infobahn" isn't all its cracked up to be. As a seamless means for effecting control on the other hand, of our thoughts, our actions, even our whereabouts; well, that's another story entirely!

In this light, a new report published by Cryptohippie, The Electronic Police State: 2010 National Rankings, delivers the goods and rips away the veil from the smirking visage of well-heeled corporate crooks and media apologists of America's burgeoning police state.

"When we produced our first Electronic Police State report" Cryptohippie's analysts write, "the top ten nations were of two types:

1. Those that had the will to spy on every citizen, but lacked ability.
2. Those who had the ability, but were restrained in will.

But as they reveal in new national rankings, "This is changing: The able have become willing and their traditional restraints have failed." The key developments driving the global panopticon forward are the following:

● The USA has negated their Constitution's fourth amendment in the name of protection and in the name of "wars" against terror, drugs and cyber attacks.
● The UK is aggressively building the world of 1984 in the name of stopping "anti-social" activities. Their populace seems unable or unwilling to restrain the government.
● France and the EU have given themselves over to central bureaucratic control.

In France, the German newsmagazine Spiegel reported that a new law passed by the lower house of Parliament in February "conjures up the specter of Big Brother and the surveillance state."

Similar to legislation signed into law by German president Horst Köhler last month, police and security forces in France would be granted authority to surreptitiously install malware known as a "Trojan horse" to spy on private computers. Remote access to a user's personal data would be made possible under a judge's supervision.

While French parliamentarians aligned with right-wing President Nicolas Sarkozy insist the measure is intended to filter and block web sites with criminal content or to halt allegedly "illegal" file sharing, civil libertarians have denounced the legislation.

Sandrine Béllier, a member of the European Parliament for the Green Party, said that "when it comes to restrictions, this text is preparing us for hell."

Additionally, the new law will include measures that will further integrate police files and private data kept by banks and other financial institutions. French securocrats cynically insist this is a wholly innocent move to "maintain the level and quality of service provided by domestic security forces," Interior Minister Brice Hortefeux told Spiegel.

Generalized political measures such as these that hinder free speech and expression, whilst enhancing the surveillance capabilities of the state, also indicate that so-called "Western democracies" are not far behind beacons of freedom such as China, North Korea, Belarus and Russia when it comes to repressive police measures. Indeed, Cryptohippie's rankings place the United States a mere 2/100ths of a point behind Russia when it comes to Internet and other forms of electronic spying.

The top ten scofflaws in 2010 are: 1. North Korea; 2. China; 3. Belarus; 4. Russia; 5. United States; 6. United Kingdom; 7. France; 8. Israel; 9. Singapore and, 10. Germany.

A Profit-Driven Panopticon

In a capitalist "democracy" such as ours where the business of government is always business and individual liberties be damned, grifting North American and European telecommunications and security firms, with much encouragement and great fanfare from their national security establishments and a lap-dog media blaze the path for Western versions of the sinister "Golden Shield."

Recently in the United States, whistleblowing web sites such as Cryptome and Slight Paranoia have come under attack. Both sites have been hit by take down notices under the onerous Digital Millennium Copyright Act for posting documents and files that exposed the close, and very profitable arrangements, made by giant telecommunications firms and ISPs with the American secret state.

In Cryptome's case, administrator John Young had his site shuttered for a day when the giant software firm, Microsoft, demanded that its so-called "lawful spying guide" be removed by Young. All five files are currently back on-line as Zipped files at Cryptome and make for a very enlightening read.

But the harassment didn't stop there. When Young published PayPal's "lawful spying guide," the firm froze Cryptome's account, in all likelihood at the behest of America's spy agencies, allegedly for "illegal activities," i.e., offering Cryptome's entire archive for sale on two DVDs!

Why would the secret state's corporate partners target Young? Perhaps because since 1996, "Cryptome welcomes documents for publication that are prohibited by governments worldwide, in particular material on freedom of expression, privacy, cryptology, dual-use technologies, national security, intelligence, and secret governance--open, secret and classified documents--but not limited to those. Documents are removed from this site only by order served directly by a US court having jurisdiction. No court order has ever been served; any order served will be published here--or elsewhere if gagged by order. Bluffs will be published if comical but otherwise ignored."

In previous reports, Cryptohippie characterized an electronic police state thusly:

1. It is criminal evidence, ready for use in a trial.
2. It is gathered universally ("preventively") and only later organized for use in prosecutions.

Silent and seamless, our political minders have every intention of deploying such formidable technological resources as a preeminent--and preemptive--means for effecting social control. Indeed, what has been characterized by corporate and media elites as an "acceptable," i.e. managed political discourse, respect neither national boundaries, the laws and customs of nations, nor a population's right to abolish institutions, indeed entire social systems when the governed are reduced to the level of a pauperized herd ripe for plunder.

How then, does this repressive metasystem work? What are the essential characteristics that differentiate an Electronic Police State from previous forms of oppressive governance? Cryptohippie avers:

"In an Electronic Police State, every surveillance camera recording, every email sent, every Internet site surfed, every post made, every check written, every credit card swipe, every cell phone ping... are all criminal evidence, and all are held in searchable databases. The individual can be prosecuted whenever the government wishes."

"Long term" Cryptohippie writes, the secret state (definitionally expanded here to encompass "private" matters such as workplace surveillance, union busting, persecution of whistleblowers, corporate political blacklisting, etc.), "the Electronic Police State destroys free speech, the right to petition the government for redress of grievances, and other liberties. Worse, it does so in a way that is difficult to identify."

As Antifascist Calling and others have pointed out, beside the usual ruses deployed by ruling class elites to suppress general knowledge of driftnet spying and wholesale database indexing of entire populations, e.g., "national security" exemptions to the Freedom of Information Act, outright subversion of the rule of law through the expansion of "state secrets" exceptions that prohibit Courts from examining a state's specious claims, one can add the opaque, bureaucratic violence of corporations who guard, by any means necessary, what have euphemistically been christened "proprietary business information."

In a state such as ours characterized by wholesale corruption, e.g., generalized financial swindles, insider trading, sweetheart deals brokered with suborned politicians, dangerous pharmaceuticals or other commodities "tested" and then certified "safe" by the marketeers themselves, the protection of trade secrets, formulas, production processes and marketing plans are jealously guarded by judicial pit bulls.

Those who spill the beans and have the temerity to reveal that various products are harmful to the public health or have deleterious effects on the environment (off-loaded onto the public who foot the bill as so-called "external" costs of production) are hounded, slandered or otherwise persecuted, if not imprisoned, by the legal lackeys who serve the corporatist state.

How does this play out in the real world? According to Cryptohippie, the objective signs that an electronic net has closed in to ensure working class compliance with our wretched order of things, are the following:

Daily Documents: Requirement of state-issued identity documents and registration.

Border Issues: Inspections at borders, searching computers, demanding decryption of data.

Financial Tracking: State's ability to search and record all financial transactions: Checks, credit card use, wires, etc.

Gag Orders: Criminal penalties if you tell someone the state is searching their records.

Anti-Crypto Laws: Outlawing or restricting cryptography.

Constitutional Protection: A lack of constitutional protections for the individual, or the overriding of such protections.

Data Storage Ability: The ability of the state to store the data they gather.

Data Search Ability: The ability to search the data they gather.

ISP Data Retention: States forcing Internet Service Providers to save detailed records of all their customers' Internet usage.

Telephone Data Retention: States forcing telephone companies to record and save records of all their customers' telephone usage.

Cell Phone Records: States forcing cellular telephone companies to record and save records of all their customers' usage, including location.

Medical records: States demanding records from all medical service providers and retaining the same.

Enforcement Ability: The state's ability to use overwhelming force (exemplified by SWAT Teams) to seize anyone they want, whenever they want.

Habeas Corpus: Lack of habeas corpus, which is the right not to be held in jail without prompt due process. Or, the overriding of such protections.

Police-Intel Barrier: The lack of a barrier between police organizations and intelligence organizations. Or, the overriding of such barriers.

Covert Hacking: State operatives copying digital evidence from private computers covertly. Covert hacking can make anyone appear as any kind of criminal desired, if combined with the removing and/or adding of digital evidence.

Loose Warrants: Warrants issued without careful examination of police statements and other justifications by a truly independent judge.

Sound familiar? It should, since this is the warped reality manufactured for us, or, as Debord would have it: "The spectacle cannot be understood as a mere visual excess produced by mass-media technologies. It is a worldview that has actually been materialized, a view of a world that has become objective."

That such a state of affairs is monstrous is of course, an understatement. Yet despite America's preeminent position as a militarist "hyperpower," the realization that it is a collapsing Empire is a cliché only for those who ignore history's episodic convulsions.

If, as bourgeois historian Niall Ferguson suggests in the March/April 2010 issue of Foreign Affairs, the American Empire may "quite abruptly ... collapse," and that this "complex adaptive system is in big trouble when its component parts lose faith in its viability," what does this say about the efficacy of an Electronic Police State to keep the lid on?

Despite the state's overwhelming firepower, at the level of ideology as much as on the social battlefield where truncheons meet flesh and bullets fly, Marx's "old mole" is returning with a vengeance, the "specter" once again haunting "rich men dwelling at peace within their habitations," as Churchill described the West's system of organized plunder.

Against this loss of "faith" in the system's "viability," Debord points out, although the working class "has lost its ability to assert its own independent perspective," in a more fundamental sense "it has also lost its illusions." In this regard, "no quantitative amelioration of its impoverishment, no illusory participation in a hierarchized system, can provide a lasting cure for its dissatisfaction."

Forty years on from Debord, sooner rather later, an historical settling of accounts with the system of global piracy called capitalism will confront the working class with the prospect of "righting the absolute wrong of being excluded from any real life."

As that process accelerates and deepens, it will then be the "watchers" who tremble...