The 21st Century World

Making the World Safe for Hypocrisy

2011-07-02T13:39:00.000-07:00

Whyhas the United States government supported counterinsurgency in Colombia,Guatemala, El Salvador, and many other places around the world, at such a lossof human life to the populations of those nations? Why did it invade tinyGrenada and then Panama? Why did it support mercenary wars against progressivegovernments in Nicaragua, Mozambique, Angola, Ethiopia, Afghanistan, Indonesia,East Timor, Western Sahara, South Yemen, and elsewhere?

Isit because our leaders want to save democracy? Are they concerned about thewell-being of these defenseless peoples? Is our national security threatened? Ishall try to show that the arguments given to justify U.S. policies are falseones.

Butthis does not mean the policies themselves are senseless. American interventionmay seem "wrongheaded" but, in fact, it is fairly consistent andhorribly successful.

Thehistory of the United States has been one of territorial and economicexpansionism, with the benefits going mostly to the U.S. business class in theform of growing investments and markets, access to rich natural resources andcheap labor, and the accumulation of enormous profits.

TheAmerican people have had to pay the costs of empire, supporting a huge militaryestablishment with their taxes, while suffering the loss of jobs, the neglectof domestic services, and the loss of tens of thousands of American lives inoverseas military ventures.

Thegreatest costs, of course, have been borne by the peoples of the Third Worldwho have endured poverty, pillage, disease, dispossession, exploitation,illiteracy, and the widespread destruction of their lands, cultures, and lives.

Asa relative latecomer to the practice of colonialism, the United States couldnot match the older European powers in the acquisition of overseas territories.But the United States was the earliest and most consummate practitioner ofneoimperialism or neocolonialism, the process of dominating thepolitico-economic life of a nation without benefit of direct possession.

Almosthalf a century before the British thought to give a colonized land its nominalindependence, as in India-while continuing to exploit its labor and resources,and dominate its markets and trade-the United States had perfected thispractice in Cuba and elsewhere.

Inplaces like the Philippines, Haiti, and Nicaragua, and when dealing with NativeAmerican nations, U.S. imperialism proved itself as brutal as the French inIndochina, the Belgians in the Congo, the Spaniards in South America, thePortuguese in Angola, the Italians in Libya, the Germans in Southwest Africa,and the British almost everywhere else. Not long ago, U.S. military forcesdelivered a destruction upon Vietnam, Laos, and Cambodia that surpassedanything perpetuated by the older colonizers. And today, the U.S.counterinsurgency apparatus and surrogate security forces in Latin America andelsewhere sustain a system of political assassination, torture, and repressionunequaled in technological sophistication and ruthlessness.

Allthis is common knowledge to progressive critics of U.S policy, but mostAmericans would be astonished to hear of it. They have been taught that, unlikeother nations, their country has escaped the sins of empire and has been achampion of peace and justice among nations. This enormous gap between what theUnited States does in the world and what Americans think their nation is doingis one of the great propaganda accomplishments of the dominant politicalmythology.

Itshould be noted, though, that despite the endless propaganda barrage emanatingfrom official sources and the corporate-owned major media, large sectors of thepublic have throughout U.S. history displayed an anti-interventionistsentiment, an unwillingness to commit U.S. troops to overseas actions-asentiment facilely labeled "isolationism" by the interventionists.

The Rational Function of Policy Myths

WithinU.S. ruling circles there are differences of opinion regarding interventionistpolicy. There are conservatives who complain that U.S. policy is plagued byweakness and lacks toughness and guts and all the other John Wayne virtues. Andthere are liberals who say U.S. policy is foolish and relies too heavily onmilitary solutions and should be more flexible and co-optive when protectingand advancing the interests of the United States (with such interests usuallyleft unspecified).

Acloser look reveals that U.S. foreign policy is neither weak nor foolish, buton the contrary is rational and remarkably successful in reproducing the conditionsfor the continued international expropriation of wealth, and that while it hassuffered occasional setbacks, the people who run the foreign policyestablishment in Washington know what they are doing and why they are doing it.

Ifthe mythology they offer as justification for their policies seems irrational,this does not mean that the policies themselves are irrational from thestandpoint of the class interests of those who pursue such policies. This istrue of domestic myths and policies as well as those pertaining to foreignpolicy.

Oncewe grasp this, we can see how notions and arrangements that are harmful,wasteful, indeed, destructive of human and social values-and irrational from ahuman and social viewpoint-are not irrational for global finance capitalbecause the latter has no dedication to human and social values. Capitalism hasno loyalty to anything but itself, to the accumulation of wealth. Once weunderstand that, we can see the cruel rationality of the seemingly irrationalmyths that Washington policy makers peddle. Some times what we see asirrational is really the discrepancy between what the myth wants us to believeand what is true.

Butagain this does not mean the interests served are stupid or irrational, as theliberals like to complain. There is a difference between confusion anddeception, a difference between stupidity and subterfuge. Once we understandthe underlying class interests of the ruling circles, we will be less mystifiedby their myths.

Amyth is not an idle tale or a fanciful story but a powerful cultural force usedto legitimate existing social relations. The interventionist mythology doesjust that, by emphasizing a community of interests between interventionists inWashington and the American people when in fact there is none, and by blurringover the question of who pays and who profits from U.S. global interventionism.

Themythology has been with us for so long and much of it sufficiently internalizedby the public as to be considered part of the political culture. Theinterventionist mythology, like all other cultural beliefs, does not just floatabout in space. It must be mediated through a social structure. The nationalmedia play a crucial role in making sure that no fundamentally critical viewsof the rationales underlying and justifying U.S. policy gain national exposure.A similar role is played by the various institutes and policy centers linked toacademia and, of course, by political lead ers themselves.

Saving Democracy with Tyranny

Ourleaders would have us believe we intervened in Nicaragua, for instance, becausethe Sandinista government was opposed to democracy. The U.S.-supported invasionby right-wing Nicaraguan mercenaries was an "effort to bring them toelections." Putting aside the fact that the Sandinistas had alreadyconducted fair and open elections in 1984, we might wonder why U.S. leadersvoiced no such urgent demand for free elections and Western-styleparliamentarism during the fifty years that the Somoza dictatorship-installedand supported by the United States-plundered and brutalized the Nicaraguannation.

Nortoday does Washington show any great concern for democracy in any of theU.S.-backed dictatorships around the world (unless one believes that the electoralcharade in a country like El Salvador qualifies as "democracy").

Ifanything, successive U.S. administrations have worked hard to subvertconstitutional and popularly accepted governments that pursued policies ofsocial reform favorable to the downtrodden and working poor. Thus the U.S.national security state was instrumental in the overthrow of popular reformistleaders such as Arbenz in Guatemala, Jagan in Guyana, Mossadegh in Iran, Boschin the Dominican Republic, Sukarno in Indonesia, Goulart in Brazil, and Allendein Chile.

Andlet us not forget how the United States assisted the militarists inoverthrowing democratic governments in Greece, Uruguay, Bolivia, Pakistan,Thailand, and Turkey. Given this record, it is hard to believe that the CIA trained,armed, and financed an expeditionary force of Somocista thugs and mercenariesout of a newly acquired concern for Western-style electoral politics inNicaragua.

Indefense of the undemocratic way U.S. leaders go about "savingdemocracy," our policy makers offer this kind of sophistry: "Wecannot always pick and choose our allies. Sometimes we must support unsavoryright-wing authoritarian regimes in order to prevent the spread of far morerepressive totalitarian communist ones."

Butsurely, the degree of repression cannot be the criterion guiding White Housepolicy, for the United States has supported some of the worst butchers in theworld: Batista in Cuba, Somoza in Nicaragua, the Shah in Iran, Salazar inPortugal, Marcos in the Philippines, Pinochet in Chile, Zia in Pakistan, Evrenin Turkey, and even Pol Pot in Cambodia.

Inthe 1965 Indonesian coup, the military slaughtered 500,000 people, according tothe Indonesian chief of security (New York Times, 12/21/77; some estimates runtwice as high), but this did not deter U.S. leaders from assisting in thattakeover or from maintaining cozy relations with the same Jakarta regime thatsubsequently perpetuated a campaign of repression and mass extermination inEast Timor.

U.S.leaders and the business-owned mainstream press describe "Marxistrebels" in countries like El Salvador as motivated by a lust for conquest.Our leaders would have us believe that revolutionaries do not seek power inorder to eliminate hunger; they simply hunger for power. But even if this weretrue, why would that be cause for opposing them?

Washingtonpolicy makers have never been bothered by the power appetites of the"moderate" right-wing authoritarian executionists, torturers, andmilitarists.

Inany case, it is not true that leftist governments are more repressive thanfascist ones. The political repression under the Sandinistas in Nicaragua wasfar less than what went on under Somoza. The political repression in Castro'sCuba is mild compared to the butchery perpetrated by the free-market Batistaregime. And the revolutionary government in Angola treats its people much moregently than did the Portuguese colonizers.

Furthermore,in a number of countries successful social revolutionary movements have broughta net increase in individual freedom and well-being by advancing the conditionsfor health and human life, by providing jobs and education for the unemployedand illiterate, by using economic resources for social development rather thanfor corporate profit, and by overthrowing brutal reactionary regimes, endingforeign exploitation, and involving large sectors of the populace in the taskof rebuilding their countries. Revolutions can extend a number of real freedomswithout destroying those freedoms that never existed under prior reactionaryregimes.

Who Threatens Whom?

Ourpolicy makers also argue that right-wing governments, for all theirdeficiencies, are friendly toward the United States, while communist ones arebelligerent and therefore a threat to U.S. security. But, in truth, everyMarxist or left-leaning country, from a great power like the Soviet Union to asmall power like Vietnam or Nicaragua to a minipower like Grenada under the NewJewel Movement, sought friendly diplomatic and economic relations with theUnited States.

Thesegovernments did so not necessarily out of love and affection for the UnitedStates, but because of something firmer-their own self-interest. As theythemselves admitted, their economic development and political security wouldhave been much better served if they could have enjoyed good relations withWashington.

IfU.S. Ieaders justify their hostility toward leftist governments on the groundsthat such nations are hostile toward us, what becomes the justification whenthese countries try to be friendly? When a newly established revolutionary orotherwise dissident regime threatens U.S. hegemonic globalists with friendlyrelations, this does pose a problem.

Thesolution is to (1) launch a well-orchestrated campaign of disinformation thatheaps criticism on the new government for imprisoning the butchers, assassins,and torturers of the old regime and for failing to institute Western electoralparty politics; (2) denounce the new government as a threat to our peace andsecurity; (3) harass and destabilize it and impose economic sanctions; and (4)attack it with counterrevolutionary surrogate forces or, if necessary, U.S.troops. Long before the invasion, the targeted country responds with angrydenunciations of U.S. policy.

Itmoves closer to other "outlawed" nations and attempts to build up itsmilitary defenses in anticipation of a U.S.-sponsored attack. These moves areeagerly seized upon by U.S. officials and media as evidence of the othercountry's antagonism toward the United States, and as justification for thepolicies that evoked such responses.

Yetit is difficult to demonstrate that small countries like Grenada and Nicaraguaare a threat to U.S. security. We remember the cry of the hawk during the Vietnamwar: "If we don't fight the Vietcong in the jungles of Indochina, we willhave to fight them on the beaches of California."

Theimage of the Vietnamese getting into their PT boats and crossing the Pacific toinvade California was, as Walter Lippmann noted at the time, a grievous insultto the U.S. Navy. The image of a tiny ill-equipped Nicaraguan army driving upthrough Mexico and across the Rio Grande in order to lay waste to our land isequally ludicrous.

Thetruth is, the Vietnamese, Cubans, Grenadians, and Nicaraguans have neverinvaded the United States; it is the United States that has invaded Vietnam,Cuba, Grenada, and Nicaragua, and it is our government that continues to try toisolate, destabilize, and in other ways threaten any country that tries to dropout of the global capitalist system or even assert an economic nationalismwithin it.

Remember the Red Menace

Formany decades of cold war, when all other arguments failed, there was always theRussian bear. According to our cold warriors, small leftist countries andinsurgencies threatened our security because they were extensions of Sovietpower. Behind the little Reds there supposedly stood the Giant Red Menace.

Evidenceto support this global menace thesis was sometimes farfetched. President Carterand National Security Advisor Brezinski suddenly discovered a "Sovietcombat brigade" in Cuba in 1979- which turned out to be a noncombat unitthat had been there since 1962. This did not stop President Reagan fromannouncing to a joint session of Congress several years later: "Cuba ishost to a Soviet combat brigade...."

In1983, in a nationally televised speech, Reagan pointed to satellite photos thatrevealed the menace of three Soviet helicopters in Nicaragua. Sandinistaofficials subsequently noted that the helicopters could be seen by anyonearriving at Managua airport and, in any case, posed no military threat to theUnited States. Equally ingenious was the way Reagan transformed a Grenadianairport, built to accommodate direct tourist flights, into a killer-attackSoviet forward base, and a twenty-foot-deep Grenadian inlet into a potentialSoviet submarine base.

In1967 Secretary of State Dean Rusk argued that U.S. national security was atstake in Vietnam because the Vietnamese were puppets of "Red China"and if China won in Vietnam, it would overrun all of Asia and this supposedlywould be the beginning of the end for all of us. Later we were told that theSalvadoran rebels were puppets of the Sandinistas in Nicaragua who were puppetsof the Cubans who were puppets of the Russians.

Intruth, there was no evidence that Third World peoples took up arms and embarkedupon costly revolutionary struggles because some sinister ringmaster in Moscowor Peking cracked the whip. Revolutions are not push-button affairs; rather,they evolve only if there exits a reservoir of hope and grievance that can begalvanized into popular action. Revolutions are made when large segments of thepopulation take courage from each other and stand up to an insufferable socialorder.

Peopleare inclined to endure great abuses before risking their lives inconfrontations with vastly superior armed forces. There is no such thing as afrivolous revolution, or a revolution initiated and orchestrated by amanipulative cabal residing in a foreign capital.

Noris there evidence that once the revolution succeeded, the new leaders placedthe interests of their country at the disposal of Peking or Moscow. Instead ofbecoming the willing puppets of "Red China," as our policy makerspredicted, Vietnam found itself locked in combat with its neighbor to the north.And, as noted earlier, almost every Third World revolutionary country has triedto keep its options open and has sought friendly diplomatic and economicrelations with the United States.

Whythen do U.S. Ieaders intervene in every region and almost every nation in theworld, either overtly with U.S. military force or covertly with surrogatemercenary forces, death squads, aid, bribes, manipulated media, and riggedelections? Is all this intervention just an outgrowth of a deeply conditionedanticommunist ideology? Are U.S. Ieaders responding to the public'slongstanding phobia about the Red Menace?

Certainlymany Americans are anticommunist, but this sentiment does not translate into ademand for overseas interventionism. Quite the contrary. Opinion polls over thelast half-century have shown repeatedly that the U.S. public is not usuallysupportive of com mitting U.S. forces in overseas engagements and prefersfriendly relations with other nations, including communist ones. Far fromgalvanizing our leaders into interventionist actions, popular opinion has beenone of the few restraining influences.

nbsp;

Thereis no denying, however, that opinion can sometimes be successfully manipulatedby jingoist ventures. The invasion of Grenada and the slaughter perpetratedagainst Iraq are cases in point. The quick, easy, low-cost wins reaffirmed forsome Americans the feeling that we were not weak and indecisive, not sittingducks to some foreign prey.

Buteven in these cases, it took an intensive and sustained propaganda barrage ofhalf-truths and lies by the national security state and its faithful lackeys inthe national media to muster some public support for military actions againstGrenada and Iraq.

Insum, various leftist states do not pose a military threat to U.S. security;instead, they want to trade and live in peace with us, and are much lessabusive and more helpful toward their people than the reactionary regimes theyreplaced.

Inaddition, U.S. Ieaders have shown little concern for freedom in the Third Worldand have helped subvert democracy in a number of nations. And popular opiniongenerally opposes interventionism by lopsided majorities. What then motivatesU.S. policy and how can we think it is not confused and contradictory?

Theanswer is that Marxist and other leftist or revolutionary states do pose a realthreat, not to the United States as a national entity and not to the Americanpeople as such, but to the corporate and financial interests of our country, toExxon and Mobil, Chase Manhattan and First National, Ford and General Motors,Anaconda and U.S. Steel, and to capitalism as a world system.

Theproblem is not that revolutionaries accumulate power but that they use power topursue substantive policies that are unacceptable to U.S. ruling circles. Whatbothers our political leaders (and generals, investment bankers, and corporateheads) is not the supposed lack of political democracy in these countries buttheir attempts to construct economic democracy, to depart from theimpoverishing rigors of the international free market, to use capital and laborin a way that is inimical to the interests of multinational corporatism.

ANew York Times editorial (3/30183) referred to "the undesirable andoffensive Managua regime" and the danger of seeing "Marxist powerensconced in Managua." But what specifically is so dangerous about"Marxist power ?"

Whatwas undesirable and offensive about the Sandinista government in Managua? Whatdid it do to us? What did it do to its own people? Was it the literacycampaign?

Thehealth care and housing programs? The land reform and development of farmcooperatives? The attempt at rebuilding Managua, at increasing production orachieving a more equitable distribution of taxes, services, and food?

Inlarge part, yes. Such reforms, even if not openly denounced by our government,do make a country suspect because they are symptomatic of an effort to erect anew and competing economic order in which the prerogatives of wealth andcorporate investment are no longer secure, and the land, labor, and resourcesare no longer used primarily for the accumulation of corporate profits.

U.S.Ieaders and the corporate-owned press would have us believe they opposedrevolutionary governments because the latter do not have an opposition press orhave not thrown their country open to Western style (and Western-financed)elections. U.S. Ieaders come closer to their true complaint when they condemnsuch governments for interfering with the prerogatives of the "freemarket."

Similarly,Henry Kissinger came close to the truth when he defended the fascist overthrowof the democratic government in Chile by noting that when obliged to choosebetween saving the economy or saving democracy, we must save the economy. HadKissinger said, we must save the capitalist economy, it would have been thewhole truth. For under Allende, the danger was not that the economy wascollapsing (although the U.S. was doing its utmost to destabilize it); the realthreat was that the economy was moving away from free-market capitalism andtoward a more equitable social democracy, albeit in limited ways.

U.S.officials say they are for change just as long as it is peaceful and notviolently imposed. Indeed, economic elites may some times tolerate very limitedreforms, learning to give a little in order to keep a lot. But judging fromChile, Guatemala, Indonesia, and a number of other places, they have a lowtolerance for changes, even peaceful ones, that tamper with the existing classstructure and threaten the prerogatives of corporate and landed wealth.

Tothe rich and powerful it makes little difference if their interests are undoneby a peaceful transformation rather than a violent upheaval. The means concernthem much less than the end results. It is not the "violent" in violentrevolution they hate; it is the "revolution." (Third World elitesseldom perish in revolutions. The worst of them usually manage to make it toMiami, Madrid, Paris, or New York.)

Theydread socialism the way the rest of us might dread poverty and hunger. So, whenpush comes to shove, the wealthy classes of Third World countries, with a greatdeal of help from the corporate-military-political elites in our country, willuse fascism to preserve capitalism while claiming they are saving democracyfrom communism.

Asocialist Cuba or a socialist North Korea, as such, are not a threat to thesurvival of world capitalism. The danger is not socialism in any one countrybut a socialism that might spread to many countries. Multinationalcorporations, as their name implies, need the entire world, or a very largepart of it, to exploit and to invest and expand in. There can be no such thingas "capitalism in one country."

Thedomino theory-the view that if one country falls to the revolutionaries, otherswill follow in quick succession-may not work as automatically as its morefearful proponents claim, but there usually is a contagion, a power of exampleand inspiration, and sometimes even direct encouragement and assistance fromone revolution to another.

Support the Good Guys?

Ifrevolutions arise from the sincere aspirations of the populace, then it is timethe United States identify itself with these aspi rations, so liberal criticskeep urging. They ask: "Why do we always find ourselves on the wrong sidein the Third World? Why are we always on the side of the oppressor?"

Toobad the question is treated as a rhetorical one, for it is deserving of aresponse. The answer is that right-wing oppressors, however heinous they be, donot tamper with, and give full support to, private investment and profit, whilethe leftists pose a challenge to that system.

Thereare those who used to say that we had to learn from the communists, copy theirtechniques, and thus win the battle for the hearts and minds of the people. Canwe imagine the ruling interests of the United States abiding by this? The goalis not to copy communist reforms but to prevent them.

Howwould U.S. interventionists try to learn from and outdo the revolutionaries?Drive out the latifundio owners and sweatshop bosses? Kick out the plunderingcorporations and nationalize their holdings? Imprison the militarists andtorturers? Redistribute the land, use capital investment for home consumptionor hard currency exchange instead of cash crop exports that profit a rich few?

Installa national health insurance program and construct hospitals and clinics atpublic expense? Mobilize the population for literacy campaigns and for work inpublicly owned enterprises? If U.S. rulers did all this, they would have donemore than defeat the communists and other revolutionaries, they would havecarried out the communists' programs. They would have prevented revolution onlyby bringing about its effects-thereby defeating their own goals.

U.S.policy makers say they cannot afford to pick and choose the governments theysupport, but that is exactly what they do. And the pattern of choice isconsistent through each successive administration regardless of the party orpersonality in office. U.S. Ieaders support those governments, be they autocraticor democratic in form, that are friendly toward capitalism and oppose thosegovernments, be they autocratic or democratic, that seek to develop anoncapitalist social order.

Occasionallyfriendly relations are cultivated with noncapitalist nations like China ifthese countries show themselves in useful opposition to other socialist nationsand are sufficiently open to private capital exploitation. In the case ofChina, the economic opportunity is so huge as to be hard to resist, the laborsupply is plentiful and cheap, and the profit opportunities are great.

Inany one instance, interventionist policies may be less concerned with specificinvestments than with protecting the global investment system. The UnitedStates had relatively little direct investment in Cuba, Vietnam, and Grenada-tomention three countries that Washington has invaded in recent years.

Whatwas at stake in Grenada, as Reagan said, was something more than nutmeg. It waswhether we would let a country develop a competing economic order, a differentway of utilizing its land, labor, capital, and natural resources. A socialrevolution in any part of the world may or may not hurt specific U.S.corporations, but it nevertheless becomes part of a cumulative threat toprivate finance capital in general.

TheUnited States will support governments that seek to suppress guerrillamovements, as in El Salvador, and will support guerrilla movements that seek tooverthrow governments, as in Nicaragua. But there is no confusion or stupidityabout it. It is incorrect to say, "We have no foreign policy" or"We have a stupid and confused foreign policy."

Again,it is necessary not to confuse subterfuge with stupidity. The policy isremarkably rational. Its central organizing principle is to make the world safefor the multinational corporations and the free-market capital-accumulationsystem. However, our rulers cannot ask the U.S. public to sacrifice their taxdollars and the lives of their sons for Exxon and Chase Manhattan, for theprofit system as such, so they tell us that the interventions are for freedomand national security and the protection of unspecified "U.S.interests."

Whetherpolicy makers believe their own arguments is not the key question. Sometimesthey do, sometimes they don't. Sometimes presidents Richard Nixon, RonaldReagan, George Bush, and Bill Clinton were doing their hypocritical best whentheir voices quavered with staged compassion for this or that oppressed peoplewho had to be rescued from the communists or terrorists with U.S. missiles andtroops, and sometimes they were sincere, as when they spoke of their fear andloathing of communism and revolution and their desire to protect U.S.investments abroad.

Weneed not ponder the question of whether our leaders are motivated by theirclass interests or by a commitment to anti-communist ideology, as if these twothings were in competition with each other instead of mutually reinforcing. Thearguments our leaders proffer may be self-serving and fabricated, yet alsosincerely embraced. It is a creed's congruity with one's material self-interestthat often makes it so compelling.

Inany case, so much of politics is the rational use of irrational symbols. Thearguments in support of interventionism may sound and may actually beirrational and nonsensical, but they serve a rational purpose.

Oncewe grasp the central consistency of U.S. foreign policy, we can move from aliberal complaint to a radical analysis, from criticizing the"foolishness" of our government's behavior to understanding why the"foolishness" is not random but persists over time against allcontrary arguments and evidence, always moving in the same elitist, repressivedirection.

Withthe collapse of the Soviet Union and other Eastern European communist governments,U.S. Ieaders now have a freer hand in their interventions. A number of leftreformist governments that had relied on the Soviets for economic assistanceand political protection against U.S. interference now have nowhere to turn.The willingness of U.S. Ieaders to tolerate economic deviations does not growwith their sense of their growing power.

Quitethe contrary. Now even the palest economic nationalism, as displayed in Iraq bySaddam Hussein over oil prices, invites the destructive might of the U.S.military. The goal now, as always, is to obliterate every trace of analternative system, to make it clear that there is no road to take except thatof the free market, in a world in which the many at home and abroad will workstill harder for less so that the favored few will accumulate more and morewealth.

Thatis the vision of the future to which most U.S. Ieaders are implicitlydedicated. It is a vision taken from the past and never forgotten by them, amatter of putting the masses of people at home and abroad back in their place,divested of any aspirations for a better world because they are struggling toohard to survive in this one.

How Safe is Your Food? GMO, Foodborne Illnesses and Biotechnology

2011-05-10T15:02:00.000-07:00

GRAIN has released a global report, Food Safety for Whom? Corporate Wealth vs. Peoples’ Health, showing how governments and corporations use “food safety” to manipulate market access and control. Rather than making food safer, domestic and trade rules “force open markets, or backdoor ways to limit market access.” Highlighting aspects of the report, GRAIN states:

“Across the world, people are getting sick and dying from food like never before. Governments and corporations are responding with all kinds of rules and regulations, but few have anything to do with public health. The trade agreements, laws and private standards used to impose their version of ‘food safety’ only entrench corporate food systems that make us sick and devastate those that truly feed and care for people, those based on biodiversity, traditional knowledge, and local markets.”

Graph: Data compiled by GRAIN from government and UN sources, 2008-2010 (except Australia=2005)

Canadian raw milk producer Michael Schmidt makes a brief statement about these fake food safety laws that violate food freedom in this video (though he has confused it with food sovereignty, which is the right of a nation to determine food safety standards and appropriate ag technologies despite trade agreements): http://www.youtube.com/watch?v=AGa04mNr5p0&

In the next video, Paul Noble discusses raw milk and government intrusion. “If God had intended us to drink pasteurized milk, he would have put a pasteurizer on the cow.”

http://www.youtube.com/watch?v=miPj0xeeaus

GRAIN notes, “During US President Obama's visit to India in November 2010, Indian Agriculture Minister Sharad Pawar made it clear that the United States can produce all the scientific studies it wants, and they will be respectfully reviewed, but India will not import US dairy products that offend domestic religious sensitivities.”

That corporations control governments is undeniable, and we see this with the Food Safety Modernization Act. On May 4th, citing the FSMA for its authority, the US Food and Drug Administration declared it can seize food without evidence of contamination. This blatantly violates the U.S. Constitution protecting citizens from unreasonable search and seizure.

In its 37-page report, GRAIN spends time showing how bilateral trade agreements inhibit developing nations from controlling imports and exports. Rules generated by the World Trade Organization, in the name of food safety, “do little to protect public health, serving only corporate growth imperatives and profit margins.” Several specific examples are given. (To follow developing and ongoing bilateral trade agreements, visit Bilaterals.org.)

But strict food standards disappear when it comes to genetically modified foods:

“At the trade negotiating table, the US government is well known –and feared– for pushing lax standards on genetically modified foods. Indeed, a diplomatic cable uncovered by Wikileaks shows that the George W. Bush administration pressured the French government to ease its stance against GMOs. In a 2007 cable, the US ambassador to France went so far as to suggest that ‘we calibrate a target retaliation list that causes some pain across the EU since this [acceptance of GMOs] is a collective responsibility, but that also focuses in part on the worst culprits.’ He added: ‘The list should be measured rather than vicious and must be sustainable over the long term, since we should not expect an early victory.’

“Such ‘diplomacy’ is for the clear and direct benefit of Monsanto, DuPont and other agricultural biotechnology corporations that do not like foreign countries banning GM seeds or foods, much less requiring labels that inform consumers of the presence of GM ingredients. US firms, especially the members of the Biotechnology Industry Organisation, religiously use FTA talks by Washington officials as a platform to secure market access for GMOs through aggressive regulatory reforms.”

Though the FDA makes a big deal of improper labeling, it refuses to label genetically modified foods in the US. This only serves biotech corporations, since 95% of the population wants GMO labeling.

“Besides GMOs,” GRAIN continues, “US trade policy is also seen as destabilising other countries' sovereignty over food safety and health matters, insofar as Washington regularly demands relaxation of rules against the import of US farm products that others deem risky, such as beef (BSE, hormones), veal (hormones), chicken (chlorine) and pork (swine flu).”

The report goes on to cover the growing halal food market, animal welfare, and transnational supermarkets. Mentioning Bayer CropScience and Syngenta, GRAIN writes:

“With the pesticide industry so intimately involved in developing and implementing supermarket standards, it’s hardly surprising that pesticide contamination remains prevalent on supermarket produce. Tests done by Greenpeace in China in 2008 and 2009 on popular vegetables and fruit found far more serious pesticide pollution on those collected from Walmart and the other major supermarkets than on those collected at wet markets.”

GRAIN also focuses on the rising number of indigenous movements resisting “corporate food safety” from the jungles of the South, to rural Maine towns declaring food sovereignty, to major urban centers across the globe. Like a feedback loop, these small, localized movements foster a growing sense of self-rule:

“The Korean people's resistance to US beef has grown into an expression of profound distrust toward Korea's system of representational democracy, including the state's relationship with the US, not an irrational fear of prions. In Australia, the campaign has been more about keeping Australian food within Australian hands, a concern that many peoples across the world share with regard to governance and control of their own country's food supplies.

“As to anti-GMO struggles, they are as diverse as the anti-US beef campaigns, but they have also been about profound issues of democracy, the survival of local cultures and food systems against the onslaught of Western "solutions", about keeping seeds and knowledge alive in communities’ hands and challenging whole models of development.”

Recognizing that super-hygienic, sterile food destroys probiotics, the raw food movement is taking off in industrialized nations:

“Many producer organisations and consumers groups, not to mention large movements like Slow Food, are convinced that biodiversity and ecological complexity – as opposed to extreme hygiene – are the keys to healthy and stable systems. Nature abhors a vacuum, after all. Of course, these sounder approaches to food safety also rely on short distribution circuits, getting food from the farm or the small-scale processing plant into people's homes through less complex, more direct distribution schemes (food clubs, all sorts of community-support agriculture systems, co-ops, and so on).”

Heat destroys enzymes; cooked milk lacks the probiotics that make milk a natural wholesome food. The U.S. requires that milk be pasteurized if sold across state lines. Not only that, but the same milk is adulterated with genetically modified ingredients and antibiotics, both of which are fed to the cows and which transfers into the milk.

GRAIN concludes that “we may want to stop talking about food safety altogether and assert instead our own demands for food quality, or something similarly more holistic. Food safety, or food quality in broader terms, is a ground on which big corporate agriculture and supermarket cultures cannot outperform small producers and local markets. The challenge is to ensure that the small and the local can remain alive and turn today's heightened concerns for food safety in our favour.”

The report is timely and relevant and a must-read for those who want a global picture of the move to control the world's food.

If You Want Electric Cars, You Need Electricity

2011-03-05T12:46:00.000-08:00

As of March 2011, China is
building 27 new
nuclear power plants (and plans 50). Russia is building 10, India and South
Korea five each, Japan and Canada two. In the US, there is exactly one new
reactor complex being built.

France gets 80% of its
power from fission. Most major nations have used nuclear power to make their
environment cleaner and their economies less vulnerable to $100/barrel oil. Yet
the US remains in superstitious dread of fission… even while dependent on the
20% of our electricity that comes from our 40-year-old Homer Simpson
specials.

US Nuclear Industry:
From Pollyanna to Panic

The US built the first
nuclear reactors. We even built the first nuclear rocket engines, way back
in the misty pre-Internet days of the 1960s. (It was misty from all the coal and
high-sulfur diesel smoke). Why did we turn into a nuclear backwater? Because the
US government in all its genius "helped" nuclear power with
subsidies.

The US government shoved
nuclear power into use in the 1960s, before it was ready for prime time. Early
reactors and their fuel were subsidized, and the Price-Anderson act dumped the
liability for accidents onto the taxpayers. (Taxpayers do seem to attract
liability for everything from subprime mortgages to shaky foreign dictators,
don’t we? It’s a wonder we can get insurance at all…)

Then, once nuclear
technology actually became reliable, US policy turned against it. Our new
electricity needs are now met almost entirely by frantic construction of
fossil-fuel plants, while we publicly bemoan the potential problem of Global
Warming from those very fossil-fuel plants.

US nuclear power was killed
by media-generated fears. Most of those fears were imaginary, and all were
exaggerated. But fear still trumps the actual numbers. It’s time for a look at
the current realities of nuclear power.

Not Your Grandfather’s
Reactor

The first hard fact about
switching to nuclear power: it reduces your radiation exposure. Nuclear power
plants, even old ones, release very little radiation. In fact, they release from
100 to 400 times less than coal plants, per kilowatt-hour. (There is a
significant amount of radium and polonium in coal). You get more radiation by escaping to NH from Vermont than you
would by living next to a reactor for your whole life (manly NH granite is full
of uranium and thorium, unlike the soft, limp sediments of Vermont).

So the net environmental
effect of US anti-nuclear policy has been… to raise our radiation dose for the
last 30 years. But don’t worry; compared to the tons of mercury and vast
quantities of organic chemical carcinogens released by the coal smokestacks, the
trivial extra radiation from coal doesn’t matter. Of course, in addition to
cancer there is the little matter of Global Warming CO2 from fossil fuels.
Nuclear plants are entirely carbon-free (which will be a good thing in a few
centuries, once we get enough CO2 into the atmosphere to stave off the Final Ice
Age).

New nuclear plants are also
meltdown free. There are several ways to make nuclear fuel rods or pellets that
stop fissioning when they reach a certain temperature. The US built the first
intrinsically safe reactor in 1986, the Argonne
EBR-II. The Argonne system used fuel rods made of an alloy that expanded
with heat to beyond critical density. Newer designs have used pebble beds and
Doppler scattering, but the result is the same: fuel elements that shut off over
a certain temperature, even if Homer Simpson turns off every cooling system.

Yet another breed of new
nuclear plants uses cooling systems which use convection instead of pumps;
again, even if everything is switched off, they can’t overheat. The Westinghouse
AP1000 uses this principle. (The Westinghouse nuclear division is now owned
by Toshiba, a company that thinks more than one fiscal quarter ahead.)

Other concepts include
small mass-produced reactors like the Hyperion. These
town-sized (only 25 megawatt) units would be more decentralized than most
current fossil or nuclear generators. They would also have passive safety
features… in fact the reactor itself is a sealed unit, with no way for Homer to
get inside.

The US has none of the
newer, safer plants yet (the one reactor under construction in Georgia is an
AP1000). Yet just like the ex-Soviet satellite nations, we remain economically
dependent on our 1970s reactors. Again, our anti-nuclear policy has put us at
more risk than other nations.

No Recycling
Allowed

Then there’s nuclear
"waste". Nuclear fuel rods are about 3% uranium-235 when they go into a
light-water reactor. They quit producing energy when they are roughly 1%
uranium, 1% plutonium, and 1% radioactive elements like strontium-90 and
cobalt-60.

In other countries the rods
are removed from the reactor, the uranium and plutonium are recycled into new
fuel rods, and the other radioactive elements are used by industry for various
purposes. Excess non-fissionable isotopes can be mixed with Pyrex glass and made
back into radioactive "rocks"… which, after all, is what uranium ore is in the
first place.

But in the US, no nuclear
recycling is allowed because of Carter-era regulations. Used but radioactive
nuclear fuel rods must stay in open ponds outside the reactors just in case
terrorists might need some. Thus the US has a "nuclear waste problem", while
other nations do not.

Speaking of recycling, it’s
hard to do much recycling of any kind without electric power. Conversely,
cheaper and more plentiful electricity will make recycling profitable…. and thus
universal.

"Peak Uranium" A Long
Way Off

Currently known reserves of
uranium are enough for a couple hundred years or so… enough that no one puts
much effort into finding more. Breeder reactors can make more uranium out of
thorium; estimates of thorium reserves get us up to 20,000 years. By the year
22,211, fission reactors will be in museums next to the flint-knapping tools.
The lights will stay on from fusion… or more likely, something we haven’t even
imagined.

Even on a shorter time
scale, nuclear fuel cycles are very stable. Once fueled, a reactor will run for
years, independent of possible wars, blockades or interruptions of
trade.

Obama: Nuclear OK As
Long As It’s Taxpayer-funded

On February 16, 2010,
President Obama announced $8.33 billion dollars in federal loan guarantees to
construct the two AP1000 units at the Vogtle plant in Georgia. This continues a
long tradition of meddling and favoritism (in other countries, we call giving
tax money to private companies "corruption"). Corruption of course knows no
technological boundaries; all forms of
power production have been distorted by subsidy.

Time For A Level Playing
Field

Nuclear power is the
cleanest rapidly expandable source of electricity. It produces no greenhouse
gases, no acid rain, no chemical pollutants. It doesn’t need ecologically
disruptive dams. It doesn’t cover up thousands of square miles of forest with
solar panels, it doesn’t kill migrating birds with eyesore windmill blades.

But is new nuclear
technology better than other alternatives? That is the question that matters,
and it can only be answered by the market. Let all power technologies compete
against the same safety and emission standards, and all be liable for any damage
they cause. Let coal plants have to meet the same radiation emission standards,
and let non-subsidized solar plants pay for the forest land they cover up (and
for their own capital costs).

Since the Congress and
Administration can’t seem to find anything to cut from the budget, here’s a
suggestion that would save a few billion: cut all corporate welfare to all forms
of energy companies. Government bureaucracy is no more likely to pick the right
technology this time than in the 1970s, when they decided to leave the US
forever dependent on burning coal.

The "right technology"
depends on time and place. Solar cells are fine, if they’re covering buildings
in Albuquerque instead of snowy
forest in Vermont. Windmills, wood-burning plants, methane from cow pies,
whatever can pull its weight on the market is great.

But neither windmills nor
wood chips will take us to the stars

The Shame Of Being An American...

2011-02-18T12:13:00.000-08:00

The United States government has overestimated the amount of shame that it and American citizens can live down.

On February 15 “the indispensable people” had to suffer the hypocrisy of the U.S. Secretary of State delivering a speech about America’s commitment to Internet freedom while the U.S. Department of Justice (sic) brought unconstitutional action against Twitter to reveal any connection between WikiLeaks and Bradley Manning, the American hero who, in keeping with the U.S. Military Code, exposed U.S. government war crimes and who is being held in punishing conditions not permitted by the U.S. Constitution.

The corrupt U.S. government is trying to create a “conspiracy” case against Julian Assange in order to punish him for revealing U.S. government documents that prove beyond every doubt the mendacity of the U.S. government.This is pretty bad, but it pales in comparison to the implications revealed on February 15 in the British newspaper, The Guardian.
The Guardian obtained an interview with “Curveball,” the source for Colin Powell’s speech of total lies to the United Nations about Iraqi Weapons of Mass Destruction.

Colin Powell’s speech created the stage for the illegal American invasion of Iraq.

The Guardian describes “Curveball” as “the man who pulled off one of the greatest confidence tricks in the history of modern intelligence.” As The Guardian puts it, “Curveball” “manufactured a tale of dread.”U.S. “intelligence” never interviewed “Curveball.”

The Americans started a war based on second-hand information given to them by incompetent German intelligence, which fell for “Curveball’s” lies that today German intelligence disbelieves.As the world now knows, Saddam Hussein had no weapons of mass destruction (WMD).

The Bush/Cheney Regime, of course, knew this, but “Curveball’s” lies were useful to their undeclared agenda. In his interview with The Guardian, “Curveball,” Rafid Ahmed Alwan al-Janabi, admitted that he made the whole story up. He wanted to do in Saddam Hussein and told whatever fantasy lie he could make up that would serve his purpose.

If the Bush/Cheney Regime had really believed that Saddam Hussein had world-threatening weapons of mass destruction, it would have been a criminal act to concentrate America’s invading force in a small area of Kuwait where a few WMD could have wiped out the entire U.S. invasion force, thus ending the war before it began.

Some Americans are so thoughtless that they would say that Saddam Hussein would never have used the weapons, because we would have done this and that to Iraq, even nuking Baghdad. But why would Saddam Hussein care if he and his regime were already marked for death?

Why would a doomed man desist from inflicting an extraordinary defeat on the American Superpower, thus encouraging Arabs everywhere?

Moreover, if Saddam Hussein was unwilling to use his WMD against an invading force, when would he ever use them?

It was completely obvious to the U.S. government that no such weapons existed. The weapons inspectors made that completely clear to the Bush/Cheney Regime.

There were no Iraqi WMD, and everyone in the U.S. government was apprised of that fact.Why was there no wonder or comment in the “free” media that the White House accused Iraq of possession of terrible weapons of mass destruction, but nevertheless concentrated its invasion force in such a small area that such weapons could easily have wiped out the invading force?

Does democracy really exist in a land where the media is incompetent and the government is unaccountable and lies through its teeth every time if opens its mouth?

“Curveball” represents a new level of immorality. Rafid al-Janabi shares responsibility for one million dead Iraqis, 4 million displaced Iraqis, a destroyed country, 4,754 dead American troops, 40,000 wounded and maimed American troops, $3 trillion of wasted US resources, every dollar of which is a debt burden to the American population and a threat to the dollar as reserve currency, ten years of propaganda and lies about terrorism and al Qaeda connections, an American "war on terror" that is destroying countless lives in Afghanistan, Pakistan, Yemen, Somalia, and which has targeted Iran, and which has destroyed the Bill of Rights, the US Constitution, and the civil liberties that they guarantee. And the piece of lying excrement, Rafid al-Janabi, is proud that he brought Saddam Hussein's downfall at such enormous expense.Now that Rafid al-Janabi is revealed in the Guardian interview, how safe is he?

There are millions of Iraqis capable of exterminating him for their suffering, and tens of thousands of Americans whose lives have been ruined by Rafid al-Janabi’s lies. Why does the U.S. government pursue Julian Assange and WikiLeaks for telling the truth when “Curveball,” whose lies wiped out huge numbers of people along with America’s reputation, thinks he can start a political party in Iraq? If the piece of excrement, Rafid al-Janabi, is not killed the minute he appears in Iraq, it will be a miracle.So we are left to contemplate that a totally incompetent American government has bought enormous instability to its puppet states in the Middle East, because it desperately wanted to believe faulty “intelligence” from Germany that an immoralist provided evidence that Saddam Hussein had Weapons of Mass Destruction.

And America is a superpower, an indispensable nation.

What a total joke!

"Hate Speech" and the Risks of Free Speech

2011-01-13T16:08:00.000-08:00

As sure as rain follows upon dark clouds, the cry has gone up to “do something” about so-called hate speech. Fairly typical of the reactions to the shooting of Congreswoman Gifford and several others by Jared Loughner was ' Tikkun’s' Rabbi Michael Lerner, who rhetorically intoned: “Isn't it time for us to demand that our government investigate the violence-generating discourse of the racists and the haters?”

The Constitutional answer is: absolutely not! Lerner and those of like mind need to read -- thrice and slowly -- the words of James Madison on this very issue:

"There are ... two methods of removing the causes of [political] faction: the one, by destroying the liberty which is essential to its existence; the other, by giving to every citizen the same opinions, the same passions, and the same interests.

"It could never be more truly said of the first remedy, than it was worse than the disease. Liberty is to faction what air is to fire, an aliment without which it instantly expires. But it could not be less folly to abolish liberty, which is essential to political life, because it nourishes faction, than it would be to wish the annihilation of air, which is essential to animal life, because it imparts to fire its destructive agency.

"The second expedient is as impracticable as the first would be unwise. As long as the reason of man continues fallible, and he is at liberty to exercise it, different opinions will be formed." (Federalist Paper No. 10.)

What Lerner is urging, in modern form, is the revival of laws against sedition. The “protected values” (or in modern legal lingo, the “cognized groups”) may be different but the principle is the same: words which have a “tendency” to incite violence and/or threaten the security or wellbeing of ... [insert your cherished value-of choice here]... need to be outlawed and criminally punished.

Whether enacted in 1789, 1918 or 2011, laws against sedition are inimicable to a free society; and no amount of spurious sociological “impact studies” (so-called) can change that constitutional fact.

What does it actually mean to call for government “investigation” of “violence-generating” speech?

The investigation part is fairly easy to answer: it means police and FBI agents keeping tabs of what you say, interviewing your neighbors about what do, getting warrants to poke into your reading habits and ultimately detaining you for further questioning. Such investigations inevitably entail what the Nazis called “block wardens” -- neighbors and other snitches who make it their business to overhear your chat and take note of the books and guests you bring home. Already both the government and various interest groups have set up networks and web pages to recruit security-volunteers to poke around and keep an ear out for terrorism- or racist- generating violence.

What then is to be the casus for such inquisitions? What exactly is 'violence-generating' speech?

Let us be plain and simple, for Thucydides tells us that simplicity of speech is the mark of a noble man. Websters (1913 edition), defines violence as “physical force, strength of action or motion; as the violence of a storm; the violence of a blow or conflict;” also, “to assault or injure”. By metaphorical extension: “moral force; vehemence.”

Clearly (and simply) words are not violence; they do not cause physical injury. Concoctions like 'verbal assault' are confusions of speech which are the marks of hysteria or sophistry.

Words may be uttered with “moral vehemence.” Preachers do it all the time. Implacable foes along the Great Abortion Divide are very morally vehement. But is it 'violence generating' to call abortion murder?

According to Lerner, violence-generating words are those which “create a climate of hate.” Murder is certainly loathsome. Pictures of aborted foetuses certainly engender revulsion and disgust. But are the pictures false? If abortion foes cannot call abortion “murder” then what must they call it? Whether it is or is not murder is the whole issue of the debate. In effect, Lerner’s demand “creates a climate” where abortion foes are intimidated (under threat of government investigation) into silence. The same holds true when the intimidation works in the other direction.

Attentive readers of Lerner’s article will have noticed a subtle switch from his vaguish opening reference to “violence-generating” speech to the ensuing and even more vague reference to “rhetoric” which “contributes” to a “climate of hate” which “individuals act on.”

The reason for the verbal shuffling is that Lerner can’t quite get himself to say that speech causes violence. It doesn’t, period. The quintessential scientific test of causality is replication and predictability; and no one has ever demonstrated that a particular word, phrase or book has consistently and predictably caused a violent reaction -- the dread 'Mein Kampf' included. Even if human predispositions are genetically determined or environmentally influenced, action is the result of free will.

Sometimes, action is the result of craziness as in Loughner’s case or as in the case of Don Quixote who devoured novels of chivalry until “being quite out of his wits, he hit upon the strangest notion that ever a madman in this world hit upon, and that was that it was right and requisite that he should make a knight-errant of himself, roaming the world in full armor on horseback ... righting every kind of wrong, and exposing himself to peril and danger from which he was to reap eternal renown and fame.” In other words, he became a militia-man.

But the underlying point of Cervantes’ satire was precisely that books do not cause madness. In case anyone might not get it, he made this clear in a prefatory couplet where he wrote that madness is the “cure” for sadness. What drove Don Quixote on his errands of mayhem, chaos and absurdity was an inner grief.

The fact is that people make of words what they will, often bending them all out of shape to suit some inner purpose or drive. Perhaps we might all be better off without speech altogether. As Jesus advised, “let your speech be, Yea or Nay: for whatsoever is more than these cometh of evil.” (Math. 5:37) But Man is nothing if not a loquacious animal, and the desire to speak freely is the foremost urge of our souls or at least of our egos.

Laws against sedition, in whatever guise, are an attack on free speech. They are always couched in vague, open ended terms because the real target is not the alleged “dangers” protected against but some political agenda or ideology that is opposed.

Section 2 of the Alien and Sedition Act of 1789 provided

“...be it further enacted, That if any person shall write, print, utter, or publish,... any false, scandalous and malicious writing or writings against the government of the United States, ... with intent to defame the said government, ... or to excite against [it] ... the hatred of the good people of the United States, ...”

The Sedition Act of 1918 made it a crime to

“willfully utter, print, write, or publish any disloyal, profane, scurrilous, or abusive language about the form of government of the United States, or the Constitution of the United States, or the military or naval forces of the United States....”

California’s Criminal Syndicalism Act 1919 made it a crime to advocate or teach “any doctrine or precept” that espoused “unlawful acts of force and violence or unlawful methods of terrorism as a means of accomplishing a change in industrial ownership or control or effecting any political change.”

Section 13 of the Reich Editorial Law (4 October 1933) prohibited publication of anything which “tends to weaken the strength of: the German Reich, outwardly or inwardly, the common will of the German people, the German defense ability, culture or economy....” (1933 Reichsgesetzblatt, Part I, page 713.)

What all these laws have in common is a heap of nefarious adjectives coupled with a “tendency” connected to some protected good.

The United States Supreme Court initially upheld these laws precisely on the grounds that they combatted a subversive climate.

In Frohwerk v. United States (1919) 249 U.S. 204 the Court held that “a person may be convicted of a conspiracy to obstruct recruiting by words of persuasion.” In that case the defendant had published a pamphlet in which he called war “murder” and in which he went “on to give a picture, made as moving as the writer was able to make it, of the sufferings of a drafted man.” Most horribly, the author had sneered at various British nobles and had said that “the sooner the public wakes up to the fact that we are led and ruled by England, the better.”

In Debs v. United States (1919) 249 U.S. 211, the Court followed suit and upheld the criminalization of a pamphlet by Eugene Debs in which the famous labor leader had given:

"illustrations of the growth of Socialism, a glorification of minorities, and a prophecy of the success of the international Socialist crusade, with the interjection that 'you need to know that you are fit for something better than slavery and cannon fodder.' "

That statement, the Court held, did not simply oppose war in general but opposed the present and the particularly noble war the nation was embarked upon and “opposition was so expressed that its natural and intended effect would be to obstruct recruiting.” (Id., at p. 251.)

This line of reasoning culminated in Whitney v. California, (1927) 274 U.S. 357, where the Court ruled that "the Constitution d[id] not confer an absolute right to speak, without responsibility, whatever one may choose," and that government had the power to punish those who "abused" their rights of speech "by utterances inimical to the public welfare, tending to incite crime, disturb the public peace, or endanger the foundations of organized government and threaten its overthrow." (Id., at p. 371.)

The common theme of these and too many like cases is that they sought to punish a “tendency” which is subjectively perceived to “endanger” some asserted good. Just as typically, some untoward event such as a Reichstag Fire, a bombing or the murder of an official, was exploited as the necessity to protect “public safety.”

Tyranny always rides to town on the pony of safety.

Today’s political correctness mavens may use adjectival gerunds and verbal-burble which has an impressive sociological sounding ring, but the mental paradigm is the same. They either seek to mandate a uniformity of opinion on whatever subject they are obsessing over, or they seek to cast any opposition to their pet-rocks as creating some kind of danger.

Often times they heighten the “climatology” by invoking a so-called “clear and present danger” to something or other. But this erstwhile standard -- derived from Schenck vs. United States (1919)249 U.S. 47 -- is simply a rhetorically tweaked version of the “bad tendencies” rule. Any danger is always "present" precisely because a ‘danger’ is simply the present prospect of some possible future harm. Schenck was overruled because, as Justice Douglas put it, "[t]he only difference between the 'expression of an opinion' and an 'incitement' ... is the speaker's enthusiasm for the result. (Brandenburg v. Ohio (1969) 395 U.S. 444, 452.)

And Man is certainly an enthusiastic animal. Once again it behooves us to listen to Madison:

"As long as the reason of man continues fallible, and he is at liberty to exercise it, different opinions will be formed. As long as the connection subsists between his reason and his self-love, his opinions and his passions will have a reciprocal influence on each other....

"The latent causes of faction are thus sown in the nature of man; and we see them everywhere brought into different degrees of activity, according to the different circumstances of civil society. A zeal for different opinions concerning religion, concerning government, and many other points, as well of speculation as of practice; an attachment to different leaders ambitiously contending for pre-eminence and power; or to persons of other descriptions whose fortunes have been interesting to the human passions, have, in turn, divided mankind into parties, inflamed them with mutual animosity, and rendered them much more disposed to vex and oppress each other than to co-operate for their common good. So strong is this propensity of mankind to fall into mutual animosities, that where no substantial occasion presents itself, the most frivolous and fanciful distinctions have been sufficient to kindle their unfriendly passions and excite their most violent conflicts.” (Federalist Paper No. Ten.)

Madison's misanthropy is more than justified by the media's screaming rabble-rousers and by Palin's smart-alec thuggishness. But Madison also understood that “the most common and durable source of factions has been the various and unequal distribution of property.” (Ibid) Put another way, the human tendency toward disputatious vehemence is increased by inequality and insecurity.

Thus, it is a useless, if pretty, piety to urge everyone to be “civil” in their discourse. The reason for the inflamed nature of present political debate in the United States is that the country is in decline and economic inequality and insecurity have destroyed our social and cultural fabric. This creates a terminal downward spiral because the insecurity-generated yelling and accusing prevents the emergence of fair and reasonable solutions to economic and social problems whose very gravitational pull is aggravated by the inflamed rhetoric generated.

To make matters even worse, some of the very forces which generate the economic inequality also finance the spewing of inflamed rhetoric which they then assert needs to be controlled in the name of personal or national safety.

It is a false consciousness to think that “civility” in discourse can be restored by political correctness or laws against seditious incivility. A greater modicum of civility will be restored to political discourse when and only when our civis itself becomes more fair and just and when we cease chasing after the chimera of militarized security. That will be a hard reversal to manage.

End penny-pinching protectionism at the border

2011-01-10T13:46:00.000-08:00

Over the past several decades, Canada’s federal governments have been superb at advancing free trade with the rest of the world. From Brian Mulroney’s government in the 1980s and the original Canada-U.S. free trade agreement in 1989, to NAFTA, negotiated by the Tories but inked by Jean Chretien’s Liberals in 1994, and on to other Liberal and then Conservative agreements, successive governments have understood that open markets spur productivity, create wealth, employment, and lower poverty. The most recent example is the Harper government’s free trade agreement with Panama.

But if there has been a notable omission in the free trade approach, it’s how it doesn’t apply at the border for consumers, something many Canadians notice this time of year as they vacation in the United States or elsewhere. When they return to Canada, they’re subject to continual protectionist penny-pinching.

To be sure, a free market in goods and services always benefits Canadians in the form of lower prices even when applied to business transactions. After all, if a Canadian restaurant buys kitchen equipment in the U.S. instead of being forced to choose just among Canadian suppliers, it benefits its clientele in the form of lower menu prices. The same applies in reverse to an American business that, for example, buys Blackberrys from Ontario-based RIM, instead of just being limited to a made-in-the-USA product.

That noted, successive federal governments have missed an opportunity to make free trade even more beneficial and popular than it already is by cutting consumers a break at the border.

Currently, if a Canadian crosses the border and returns the same day, we are dinged for duties. Stay on the U.S. side (or anywhere else in the world) for more than 24 hours, and you can bring back all of $50 worth of goods before border services collects taxes and duties for Ottawa and the provinces. Stay out of Canada for more than two days, and you can bring back $400 before being asked for spare change. And after a week, one can bring back $750 worth of goods.

But some of the very items many Canadians might like to bring back in bulk—inexpensive American beer, wine and spirits—are exempt from such limits. That means Canadians cannot bring back $750 worth of wine tax and duty-free. We’re limited to two bottles of wine or 24 cans of beer—even after a week or months abroad.

In general, how do Canada’s Grinch-like border restrictions for consumers compare to U.S. exemptions for Americans? Mostly poorly. An American can traipse up to Vancouver, Whistler, Banff, Montreal, perhaps the Niagara region, or anywhere else they find charming, and their government won’t nickel-and-dime them upon their return.

An American can bring back up to $200 worth of goods tax and duty free for cross-border trips of less than 48 hours. After that, they have an $800 exemption. So, for Americans, there is none of the immediate tax and duty imposts applied to Canadians’ day trips. Nor is there the chintzy $50 limit applied to our post-border hops of less than two days.

There are several useful reasons Canadian and American governments should drop duties and taxes at the border, or at least significantly raise the limits of what can be brought over tax- and duty-free.

First, there is the attraction of not being forced to pay tax and duty on the border for minor purchases. If Canada’s (mostly) free trade Conservative government wishes to persuade more consumers about the virtues and benefits of free trade, give them the non-punitive experience of choice between U.S. and Canadian retailers—that, and a more pleasant, hassle-free experience at the border.

Our federal government need not wait for American agreement. Canada’s federal government could free up Canadian consumers tomorrow by abolishing border taxes and duties on us as we return from trips abroad.

Second, and to speak in the currency politicians most care about—votes—such a move would be popular move around election time.

Third, and not unimportantly, it makes eminent sense to have Canadian and U.S. border guards spend less time analyzing consumer purchases. That would speed up cross-border flows for consumers and businesses alike. Critically, it would leave border guards free to concentrate on potential threats, instead of how much beer flows north across the 49th parallel.

The Axis of Greed

2010-11-23T12:08:00.000-08:00

The Nature and Structure of the Economic Elite

“The money powers prey upon the nation in times of peace and conspire against it in times of adversity. It is more despotic than a monarchy, more insolent than autocracy, and more selfish than bureaucracy. It denounces as public enemies, all who question its methods or throw light upon its crimes… As a result of the war, corporations have been enthroned and an era of corruption in high places will follow, and the money powers of the country will endeavor to prolong it’s reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the Republic is destroyed. Abraham Lincoln

U.S. Elite

Institutions:

Federal Reserve

Business Council

Bilderberg Group

Conference Board

Brookings Institute

Advertising Council

Heritage Foundation

Trilateral Commission

Business Round Table

Chamber of Commerce

Federal Trade Commission

Council on Foreign Relations

American Petroleum Institute

American Enterprise Institute

American Bankers Association

Pharm Research & Manufacturers

Public Relations Society of America

American Psychological Association

Project for a New American Century

Securities and Exchange Commission

Committee for Economic Development

National Association of Manufacturers

Carnegie / Ford / Rockefeller foundations

Military / Media / Prison Industrial Complex

I don’t view the Economic Elite as a small group of men who meet in secrecy to control the world. They do feature elements of conspiracy and are clearly composed of secretive organizations like the Bilderberg Group - this is not a conspiracy theory, this is a conspiracy fact - but as a whole the Economic Elite are primarily united by ideology. They’re made up of thousands of individuals who subscribe to an ideology of exploitation and the belief that wealth and resources need to be concentrated into the fewest hands possible (theirs), at the expense of the many.

That being said, there are some definite lead players in this group and it is important that we are not too vague and expose the individuals who publicly lead them. Focusing on the fundamental structure of the US economy, we have people like Hank Paulson, Tim Geithner, Ben Bernanke, Robert Rubin, Larry Summers, Alan Greenspan, Lloyd Blankfein, Jamie Dimon, John Mack, Vikram Pandit, John Thain, Hank Greenberg, Ken Lewis, John J. Castellani, Edward Yingling and Tom Donohue.

In total, the Economic Elite are made up of about 0.5% of the US population. At the center of this group is the Business Roundtable, an organization representing Fortune 500 CEOs that is also interlocked with several lead elite organizations. Most Americans have never heard of the Business Roundtable. However, in my analysis, it is the most influential and powerful Economic Elite organization.

“The Business Roundtable joined the Business Council at the heart of both the corporate community and the policy-formation network and now has the most powerful role…. The Roundtable’s interlocks with other policy groups and with think tanks are presented [below].

” G. William Domhoff, Who Rules America?

The Roundtable’s first year of operation was 1972, which coincided with the beginning of the CEO salary explosion, and has been the driving force behind the unprecedented concentration of wealth since their inception. Their dominance over the US economy and government is unparalleled. Their members are a Who’s Who of everything that is wrong with our economy. Here is a partial list of some of their lead members:

——-Lloyd C. Blankfein, Goldman Sachs

——-James Dimon, JPMorgan Chase & Co.

——-James P. Gorman, Morgan Stanley

——-Vikram S. Pandit, Citigroup, Inc.

——-Brian T. Moynihan, Bank of America

——-Brendan McDonagh, HSBC

——-Robert W. Selander, MasterCard Incorporated

——-Kenneth I. Chenault, American Express Company

——-Rupert Murdoch, News Corporation

——-Glenn A. Britt, Time Warner Cable Inc.

——-Philippe Dauman, Viacom, Inc.

——-Jeffrey R. Immelt, General Electric Company

——-Brian L. Roberts, Comcast Corporation

——-Steven A. Ballmer, Microsoft Corporation

——-John T. Chambers, Cisco Systems, Inc.

——-Randall L. Stephenson, AT&T Inc.

——-Ivan G. Seidenberg, Verizon Communications

——-David G. DeWalt, McAfee, Inc.

——-Steven R. Loranger, ITT Corporation

——-Paul T. Hanrahan, AES Corporation, The

——-Riley P. Bechtel, Bechtel Group, Inc.

——-W. James McNerney , Boeing Company, The

——-Rex W. Tillerson, Exxon Mobil Corporation

——-Marvin E. Odum, Shell Oil Company

——-John S. Watson, Chevron Corporation

——-James J. Mulva, ConocoPhillips

——-John B. Hess, Hess Corporation

——-James E. Rogers Duke Energy Corporation

——-J. Larry Nichols, Devon Energy Corporation

——-Ronald A. Williams, Aetna Inc.

——-David Cordani, CIGNA

——-Jeffrey B. Kindler , Pfizer Inc.

——-Angela F. Braly, WellPoint, Inc.

——-John C. Lechleiter, Eli Lilly and Company

——-Edward B. Rust, Jr., State Farm

——-Andrew N. Liveris, Dow Chemical

——-James W. Owens, Caterpillar Inc.

——-Ellen J. Kullman, DuPont

——-Edward E. Whitacre Jr., General Motors Company

——-Michael T. Duke, Wal-Mart Stores, Inc.

The Business Roundtable is the most powerful activist organization in the United States. Their leaders regularly lobby members of Congress behind closed doors and often meet privately with the President and his administration. Any legislation that affects Roundtable members has almost zero possibility of passing without their support.

For three major examples, look at healthcare and financial reform, along with the military budget. The healthcare reform bill devolved into what amounts to an insurance industry bailout and was drastically altered by Roundtable lobbyists representing interests like WellPoint, Aetna, Cigna, Pfizer, Eli Lilly and Johnson & Johnson. Obama and Congress are trying to please the Roundtable with a bill that supports their interests. This led to the dropping of the public-option put forth in the House bill. However, when it came to finishing the bill, Roundtable members began to walk away from the process. That’s the real reason why the reform bill has stalled. Obama will be meeting with the Roundtable on February 24th, in hopes of getting healthcare reform back on track. After that meeting, he will then hold a bipartisan healthcare meeting with members of congress.

Also being addressed in Obama’s upcoming meeting with the Roundtable are issues concerning financial reform. Almost every aspect of financial reform has been D.O.A. thanks to Roundtable lobbyists representing the interests of Goldman Sachs, JP Morgan, Morgan Stanley, Citigroup, Bank of America, HSBC, Master Card and American Express. They even pushed to make sure Ben Bernanke was reconfirmed as the head of the Federal Reserve and they have also guided Obama into focusing on deficit reduction, now that their member companies are healthy again and making record profits after receiving trillions in government subsidies. The Roundtable played a pivotal role in the appointment of Hank Paulson, formerly the CEO of Roundtable member Goldman Sachs, who replaced Roundtable member John Snow as US Treasury Secretary. The Roundtable also strongly lobbied on behalf of current Treasury Secretary Tim Geithner and White House National Economic Council Director Larry Summers. Although there has been recent talk of Geithner being replaced at the Treasury, the lead choice to replace him is Jamie Dimon, Roundtable member and CEO of JP Morgan Chase.

The drastic rise in military spending is also a result of Roundtable lobbyists pushing the interests of large military companies like Boeing and Bechtel, along with the largest oil companies like ExxonMobil, Shell, Hess and Chevron.

The Roundtable tells politicians what they want done, and the politicians do it. At times, Roundtable members even write the laws themselves. On financial reform alone, those representing Wall Street firms gave “$42 million to lawmakers, mostly to members of the House and Senate banking committees and House and Senate leaders.” During the 2008 election cycle, they gave $155 million: $88 million to Democrats and $67 million to Republicans. Keep in mind, this is the spending on just their financial reform initiative. When it came to health reform, they gave even more.

When it comes to getting elected, over 90% of the time the candidate who simply spends more money on their campaign wins the election. The Roundtable and politicians recognize this fact, so the overwhelming majority of current elected officials relied heavily on campaign funding from Roundtable members, including President Obama.

Shortly after Obama’s inauguration he held a meeting with Roundtable members at the St. Regis Hotel. The president of the Business Roundtable is John J. Castellani. Throughout the first nine months of Obama’s presidency, Castellani met with him at the White House more than any other person, with the exception of Chamber of Commerce CEO Tom Donohue. If you look at the records of people who have spent the most time with Obama in the White House, other than these two, another frequent visitor is Edward Yingling, the president of the American Bankers Association.

These organizations - the Business Roundtable, Chamber of Commerce and the American Bankers Association - along with the Federal Reserve, a secretive quasi-government private institution, form the center of the Economic Elite’s power structure. Since the bailout, the Federal Reserve has been working closely with private firm BlackRock. Due to this relationship, BlackRock has emerged as the world’s largest money manager and now manages more assets than the Federal Reserve. They also “manage many of the Treasury Department’s big investments.”

On a global level, you have economic institutions like the World Trade Organization (WTO), the International Monetary Fund (IMF) and the World Bank, and international treaties like NAFTA. These organizations already form a de facto world government that has rights beyond our constitutional rights and national sovereignty. If the WTO makes a ruling that goes against US law, the WTO ruling supersedes US law and wins out.

Here is how Global Exchange explains these global institutions:

“The World Trade Organization is the most powerful legislative and judicial body in the world. By promoting the ‘free trade’ agenda of multinational corporations above the interests of local communities, working families, and the environment, the WTO has systematically undermined democracy around the world…. Unlike United Nations treaties, the International Labor Organization conventions, or multilateral environmental agreements, WTO rules can be enforced through sanctions. This gives the WTO more power than any other international body. The WTO’s authority even eclipses national governments.

World Bank and International Monetary Fund (IMF)

When the Bank and the Fund lend money to debtor countries, the money comes with strings attached. These strings come in the form of policy prescriptions called ’structural adjustment policies.’ These policies—or SAPs, as they are sometimes called—require debtor governments to open their economies to penetration by foreign corporations, allowing access to the country’s workers and environment at bargain basement prices. Structural adjustment policies mean across-the-board privatization of public utilities and publicly owned industries. They mean the slashing of government budgets, leading to cutbacks in spending on health care and education…. And, as their imposition in country after country in Latin America, Africa, and Asia has shown, they lead to deeper inequality and environmental destruction.”

In addition to dominating our political and economic system, the Economic Elite have already created their own private military. Their private military is now more powerful than the US military. As mentioned earlier, private mercenaries now outnumber US soldiers and receive the lion’s share of military spending.

Corporations like SAIC, Blackwater, Bechtel, Raytheon and Halliburton are composed of the most elite worldwide intelligence and military officers. These are the highly profitable and powerful entities that the Economic Elite turn to when national militaries and intelligence agencies - like the CIA, FBI or other government run entities - can’t get the job done.

For instance, SAIC, a “stealth company” that most people have never heard of, is considered to be the brains of the entire US intelligence apparatus, more powerful than the much more popularly known CIA, NSA and FBI - all agencies that SAIC is deeply intertwined with. I urge you to research SAIC to get a crash course in how the true power structure functions. You can start by reading an excellent investigative report by Donald L. Barlett and James B. Steele titled, “Washington’s $8 billion shadow.”

The Economic Elite dominate US intelligence and military operations. Other than the obvious geo-strategic reasons, the never-ending and ever-expanding War on Terror’s objective is to drain the US population of more resources and further rob US taxpayers, while using our tax money to create a private military that is more powerful than the US military.

I think any logical person can see the ominous implications of having such a vast and powerful private military and intelligence complex, created for and used, in secrecy, by the Economic Elite. Outside of the blatant economic policy attacks, heavily armed and sophisticated covert powers led by small groups of Economic Elite are now a serious risk and present danger.

In conclusion, these economic and government policy forming organizations, along with their private military and intelligence corporations, form the core of the Economic Elite power structure.

“I think one has to say it’s not just simply a matter of capturing people and holding them accountable, but removing the sanctuaries, removing the support systems. Paul Wolfowitz

Radical Difference Between Monetization 1 and QE2

2010-11-21T21:26:00.000-08:00

Overview

It's official: the Federal Reserve announced on November 3rd that it will create approximately $600 billion of new money to fund US Treasury bond purchases, and will also utilize another $250-$300 billion of money that had been previously created (also out of the nothingness). The usual term in the media for these planned purchases is "QE2", as in the second round of quantitative easing.

The "2" in "QE2" implies that this is something that has been done before.

This implication is dead wrong.

"QE2" is radically different – and radically more dangerous – than the risky games that were played with earlier "quantitative easings". The Fed's current actions are all too likely to go down into financial infamy, and this brief article is intended to warn readers about some of the key differences this time around.

The most significant difference is that this time there appears to be no references to "sterilization" of the newly created money. It's likely good old-fashioned monetization in other words, with potentially quick and dire results.

It is also essential to note that the Fed won't be directly buying Treasury bonds from the US Treasury, but will instead be intervening in the Treasury bond markets. In other words, the Fed will be creating an artificial Treasury bond market, where it uses an unlimited amount of newly created public money to buy from private investment banks.

No Apparent "Sterilization"

As I wrote about extensively earlier this year, the previous "quantitative easing" (which means exactly the same thing as directly creating vast sums of money out of thin air, but sounds more responsible) has been done by the Federal Reserve and European Central Bank in a manner which economists refer to as "sterilized". This concept is confusing to most people, and I do my best to explain the process in understandable terms in the three articles linked below.

The Federal Reserve directly creates money in whatever volume it feels like - no need for borrowing despite the common myth - through creating "excess reserve balances" and using that new money to pay banks for securities purchases, as explained in "Creating A Trillion From Thin Air."

http://danielamerman.com/articles/Trillions.htm

However, while a (desperate) central bank wants to be able to spend money without limits, letting that new money escape into the general money supply can lead to major inflation in a hurry. So with the previous rounds, the Fed and ECB each used their "sterilization" powers to essentially put a corral up around the new money, and keep it from escaping out into the economy, as described in my article "Containing Inflation Via Unlimited Monetary Creation".

http://danielamerman.com/articles/Containment.htm

This "magic" process of "painlessly" creating trillions of dollars to bail politically connected banks out of their mistakes is far from free, and besides the enormous risks to the general population and to the value of their savings, has the nasty side effect of effectively "hollowing out" the real economic basis underlying the banking system. This is because the banks can't really spend their "sterilized" money, but must have an ever larger share of their balance sheet assets consist of those economically meaningless excess reserve balances, as described in my article "The Fed's Hollowing Out Of US Banks".

http://danielamerman.com/articles/Hollow.htm

Now, when central banks create vast new sums of "sterilized" money, they are usually very, very careful to emphasize that the new money can't escape into general circulation. They do this to reassure the markets and their trading partners that their currency isn't (they hope) about to implode in value in an inflationary meltdown.

I've carefully studied the Federal Reserve statement of November 3 that described the Treasury bond purchase program. I studied Bernanke's detailed October 15 speech about the upcoming "nonconventional" steps which the Fed would be taking. I read Bernanke's simplistic public explanation of the actions in yesterday's Washington Post. There were a number of phrases that could be interpreted in different ways – but there was no direct reference to the sterilization of these funds. There were no promises that the funds would be kept out of the money supply. I'm profoundly skeptical that this lack of direct mention was some sort of omission.

Instead, it is a powerful offensive weapon in a currency war.

Keep in mind, that this has always been a monetization designed to meet multiple purposes. As covered in my article of two weeks ago, "Falling Dollar Means Rising Consumer Price Inflation", in an effort to revive the failing US economy, the US is attempting to slash the value of the dollar compared to other world currencies. If this can be done without setting off a wide scale currency war, then US jobs are helped in two ways, as the weaker dollar means that US exported goods become relatively cheaper and thus win more business overseas, even as the weaker dollar removes the artificial advantage that China and other nations have had in exporting their goods into the US.

As Chinese and other imported goods rise in price, they would lose market share, with the sales going to US based companies. The eventual goal would be for US workers producing US goods to fill the shelves of Wal-Mart rather than China doing so (which also necessarily means these goods cost more than they do today).

The threat that has successfully driven down the value of the US dollar since September is now being used in practice. Despite the doublespeak official announcements that you may read in the papers, this is a communication between central banks, and everyone involved knows what's going on. The US is threatening inflation that will drive down the value of its currency, making other nations unwilling to hold dollars, and the lack of demand drops the value of the dollar relative to those nations' currencies, with benefits passing through to US companies that then hopefully revive the US economy - albeit at a terrible cost to US savers, and older Americans in general.

Spending Real Money

In evaluating why this so-called "QE2" is so different from the first rounds of quantitative easing, we need to understand that the use of the funds is quite different. In the autumn of 2008 the Federal Reserve used the original round of money to create artificial liabilities when there were no lenders, thereby keeping the highly leveraged banking system from collapsing. The money wasn't actually being spent on anything you could reach out and touch; this was more about balance sheets and accounting manipulations on a massive scale.

During 2009 and early 2010, for the true second round of quantitative easing (which involved rolling the new dollars over from the first round of bank loans and creating substantially more new dollars), the Federal Reserve created an artificial mortgage market, so that mortgage interest rates would be lower than what a free market would've allowed, and thereby would hopefully help slow down or avert a collapse in the housing market. The new money was used to acquire financial instruments (mortgage securities), but "sterilization" meant that the newly created money would not be allowed to escape from the Federal Reserve's and banks' balance sheets. So again, the new money wasn't being used to buy or create anything you could actually reach out and touch. The mortgage money had already been lent by the bank, so the newly created Fed money didn't go to the home purchasers.

What makes this current round night-and-day different is that the new money is being created to pay real people for real jobs and real tangible goods. The United States government budget deficit is not about market values of financial instruments, but rather about paying workers on a massive scale for "stimulus" projects. It's about massive road reconstruction projects and expensive high-speed rail lines – with the money being given to workers to go out and spend, in return for their labor. It's about paying a vast army of federal workers - who spend their paychecks. The federal budget deficit is about massive transfers and redistributions of wealth within the US, including Social Security and Medicare, low income housing and many other purposes. All of which require real money that really gets spent by real people.

This is about "stimulating" the economy, not sterilizing the hidden bailout funds. "Stimulating" means the money reaches the economy.

In other words, this money goes directly into the general money supply at a rate of about $110 billion per month through at least June, (the money is the sum of the to-be-created $600 billion, and the cash flow from the Fed's mortgage security portfolio that was purchased with created money). This adds up to lots more newly created government dollars chasing the same goods and services, and competing with savings earned over a lifetime.

There are about 111 million US households, so $110 billion per month in government spending funded by direct monetary creation is equal to about $1,000 a month per household in new money that is competing with our salaries and savings. And add another $1,000 in government money the next month. And so forth.

Another way of looking at this is that with an annual economy of a little over $14 trillion, total private and government spending runs about $1.2 trillion per month. Creating $110 billion a month in new money for the government to spend, means that about 9% of the economy will be purchased by newly created dollars. So 9% of purchases in this new economy would be made by brand new dollars, competing with and just as good as yours and mine, being spent for whatever purposes the government desires.

Some commentators are already noting that the Fed's plan would buy about the same amount of US Treasury bonds as net new Federal borrowing, meaning the entire US government budget deficit is being covered by the Federal Reserve's manufacturing new money, month by month. That is an interesting coincidence, isn't it? However, there is a much more fundamental "coincidence" at play here. The graph below is from my article "Soaring Government Spending 'Crowds Out' Private Investment Returns":

http://danielamerman.com/articles/Crowding.htm

Understand the graphs above and below, and you will see the heart of what is happening. Even using (suspect) official government statistics, the damage to the private sector has been catastrophic. The private sector shrank by $1.3 trillion between 2007 and 2009. But the economy "only" shrank by $300 billion. The difference was "covered" by an explosive growth in government spending, with federal, state and local government spending rising by $1 trillion per year - at a time when tax revenues were falling.

This is no mere recession, and it is only massive government growth that has kept the plausible deniability in place. In two years, the government's share of the economy grew by 8%, from 35% to 43%. Without this fundamental change in the economy - which destroys the very basis of conventional stock market investing, as explained in the linked article - the US economy is in a collapse scenario.

What the Federal Reserve is doing is directly creating money equal to 9% of the economy, to artificially increase the government's share of the economy by 9%. It is artificial money for an artificial economy to avert collapse. With again, the night and day difference between this monetization and previous "quantitative easing" being that this new money is going directly into the economy, and competing with your money and your savings.

The only way out, as the government may be belatedly realizing, is to grow the real US economy. But you can't grow the real economy when the dollar is too high, because of currency manipulations by other countries. US goods become too expensive to export, even as domestic US industries are destroyed by subsidized foreign competition.

To grow the real economy - the value of the dollar must be slashed. Which, very conveniently, can be done through open monetization. So, you create vast sums of money out of thin air to artificially fund the economy, hoping to string things out as long as possible. Simultaneously, this very public monetization slashes the value of your currency, thereby stimulating real economic growth, which if you get really, really lucky, might grow the real economy fast enough to recover to a healthy level, and allow you to find an exit strategy from the insanely dangerous monetization policy before the value of the currency is annihilated.

That's the theory, anyway.

Not Direct Purchases, But Open Manipulation

There is something else essential for investors and savers to understand about the process which the Federal Reserve has just outlined. The Federal Reserve is not directly purchasing treasury bonds from the US government. Instead, US banks are purchasing the bonds from the US Treasury to fund the deficit, and then selling an equal amount of other bonds (likely at a nice profit) to the Federal Reserve. It would be reasonable to get annoyed at what appears to be the Fed's paying banks additional money to do effectively nothing, but to do so would be to miss the real point of this arrangement and the real danger.

To understand, let's explore what would happen if the Federal Reserve directly bought bonds from the Treasury (with appropriate legal changes if needed), but did not intervene in the Treasury bond markets. If there were a free bond market that was controlled by the self-interested investment decisions of private US investors (the foreign central banks and investors having fled because of Federal Reserve actions), then these investors might look at the Fed directly monetizing and say "I don't think I am being adequately compensated for my risk." And next thing you know, Treasury bonds might be going for 10% yields, or 15%+ yields. With ripple effects almost instantly going out into all interest rates throughout the US economy.

That's not what's going to happen (or apparently not yet, anyway).

Instead, the Federal Reserve, with effectively unlimited money at its disposal (targets can always be changed), can intervene at any time it wishes, in whatever volume it wishes, to make sure that Treasury bond and bill prices and yields are exactly what the Fed wants them to be. The US Treasury bond market then becomes an artificial market, much like the US mortgage market, with no connection to objective reality, and no discipline when it comes to the relationship between irresponsible government behavior and interest rates.

The private investors in the market play along, and maybe even increase their investments, because they understand that their "counterparty" can create money at will, and therefore (from a short term and terribly flawed perspective) it may look like risk-free profits. So long as they play along with the Fed.

If bond traders go the other direction, and speculate against the Fed - the Fed crushes them with its control of the market. In an openly and massively manipulated market, the governing factor is not theoretical fundamentals, but playing ball with the manipulator, and cooperating for your share of the rigged "profits".

What this means – for so long as this farce can hold together – is that there are no checks and balances on government spending, or on the share of the US economy that is controlled by the US government.

Even over the medium term this is a disaster scenario. But over the short term, it holds the game together for an increasingly desperate Federal Reserve and US government. Treasury yields ripple throughout all borrowings, and it is this absolute control of treasury yields that allows the Federal Reserve to keep interest rates low regardless of real inflation levels, even as stimulus funds continue to flow in unlimited volume, and regardless of what is happening with real wealth in the real US economy.

If you are a native-born US citizen – there's nothing "2" about this.

We've never seen anything like this in our lifetimes.

Similar things have happened in the world enough times before, however, even if the words "quantitative easing" were never used.

What If The New Cash Is Sterilized?

The Fed has been deliberately vague about how exactly it will handle this program, which leaves open the possibility that the Fed could "sterilize" the new cash, or partially sterilize, or sterilize future purchases for future months.

The problem with this approach is that it effectively leads to the rapid systemic destruction of the economic basis of the US banking system, and also worsens the situation in the private sector of the economy. As covered in my "Hollowing Out" article linked above, by the end of the Federal Reserve's mortgage security purchase program (the previous "quantitative easing"), about 10% of the approximately $12 trillion in US banking system assets consisted of sterilized money held at the Federal Reserve. The Federal Reserve is committed as a matter of policy to keeping this money from escaping into general circulation – effectively preventing the bank from actually lending it out to a company for instance.

New monetary creation at a rate of approximately $110 billion per month is equal to a monthly volume of about 1% of total banking assets. The announced program, if "sterilized", would mean that by June, about 16% of total US bank assets would consist of "sterilized money", i.e. balances at the Federal Reserve that can't be used anywhere else.

Another way of phrasing this is that the US government budget deficit would be funded by essentially "taking" 1% of the assets of the US banking system every month, and using that to cover the excess US government spending. How this works is that in the first month, the primary dealer banks would purchase $110 billion in newly issued Treasury bonds, and would sell $110 billion in already existing Treasury bonds to the Federal Reserve. The Fed would pay for the bonds with money newly created on the spot – but because the money has been "sterilized", the $110 billion in sale proceeds isn't really spendable by the selling bank. The actual Treasury bonds bought and sold are different. It would be pure coincidence if the sector of the bond market whose prices and yields the Fed was most interested in manipulating that month were to match what the Treasury department was selling (and there is no need for dates or dollar amounts to precisely match up).

The following month, when the primary dealers purchase another $110 billion of newly issued Treasury securities to fund the Federal budget deficit, they don't have access to the $110 billion from the previous month (*), so they have to take a new $110 billion out of their other assets to purchase the new bonds. They also make the sale of $110 billion of whatever already outstanding Treasury bonds the Fed is most interested in manipulating the price of that month, and the Fed pays them a nice price, but they have to leave the second $110 billion in sale proceeds at the Fed too (it's not technically mandatory, but Bernanke is proud of the tools he uses to sterilize the cash, as covered in my "Containing Inflation Via Unlimited Money Creation" article). (*) If they did use the previous month's Fed payment to buy new Treasury bonds, then it is a direct monetization scenario, not a sterilization scenario.

So now the banking system is out $220 billion in terms of accessible cash, and when the third month's $110 billion of Treasury bonds needs to be bought, that can't come from the newly created Fed money either. Which means another $110 billion has to come out of other assets of the US banking system.

This rapid hollowing out of the US banking system to fund a voracious and apparently never-ending federal deficit, where every month a greater share of banking assets becomes the debt of a bankrupt government, is obviously a dangerous strategy that grows more likely to blow up each month it is employed. It also means that with each month, there are less banking assets available to be lent to businesses and consumers, which then makes economic recovery that much less likely. In other words it would be an insane strategy for a government that is desperately trying to revive the private sector economy, which is one of the reasons I find further sterilization to be unlikely.

With the much more likely monetization scenario, the Fed purchases from the primary dealers $110 billion in whatever Treasury bonds it is most interested in manipulating the price of, in order to control interest rates. The primary dealer banks take the $110 billion, which is non-restricted (as it isn't sterilized) and buy $110 billion of that month's new Treasury bond issuance. Because the bank cash flow between buying and selling is a wash (except for their profits on each side), from a cash flow perspective this is the same as the Federal Reserve directly creating money to buy all newly issued Treasury bonds. However, the advantage to doing it this way, as previously discussed, is that the Fed not only directly funds the deficit, but it takes direct control of the Treasury market, which more or less translates to direct control over most US interest rates.

As for what the Fed is doing – Bernanke is effectively mumbling when it comes to the explanations. He's being careful not to be clear, so he can claim to have his cake and eat it too (maintaining even a semblance of plausible deniability is also very important in the diplomatic maneuverings accompanying the nascent currency war). As explained above, when the central bank creates vast sums of new money – and doesn't explicitly say it is "sterilizing" – the odds are quite high that in fact, it is not sterilizing. But even if it is sterilizing, the results of this unprecedented monetary creation still lead to another disaster scenario. Further sterilization accelerates the collapse of the private sector and banking system in real terms, which must then be covered by still more monetization.

It has to be one or the other: either newly created money is going directly into the economy in straight up monetization, or the assets of the US banking system are being sucked out by the voracious Federal Government deficit at a very fast rate, leaving a hollow shell. What the Fed is doing to the banks with sterilization is much like a spider consuming an insect: punching a hole in the exoskeleton with its fangs and sucking the innards out, while the exoskeleton remains an intact but hollow shell. (For those who would say the Fed would never do that to the banks that run it - the Fed has already been doing it, and don't forget the crucial distinction between the interests of the banks and the personal financial interests of the senior executives who run the banks.)

Either about $1,000 a month per US household is being created and spent in the economy in direct monetization, competing with your dollars and savings - or about $1,000 a month per US household will be sucked out of the banking system by the government through sterilization, meaning less money for business and consumer lending, and an acceleration in the decline of the real economy. The former in my opinion is the much more likely route, and represents a radical change, but either way, there is no such thing as "free money", and the piper will be paid. By all of us.

Finding Refuge

We have a good idea of the path ahead - which is the destruction of the value of the currency, as well as the impoverishment of a good part of the population. By far, the heaviest punishment will fall on the older members of the population whose savings are destroyed, and who do not have the remaining years to recapture what they have lost.

There are solutions, however, and not everyone will see their savings destroyed. By taking the right series of steps, assets can be preserved – or even expanded, even in after-inflation and after-tax terms. The difference between being destroyed, and saving your assets, quite simply comes down to a matter of making informed decisions. It is a matter of education, in other words.

A good starting step is to read and understand the three articles linked earlier in this article which cover the essentials of direct monetary creation, sterilization, and hollowing out the banking system. I've done my very best to make these articles understandable, and from the feedback which I received at the time they were published, these articles provide valuable new insights into what is really happening and what the central banks have really been doing.

When it comes time for action, the simple and increasingly popular solution is to pull all you can out of paper investments and symbolic currencies, put them in gold, and hunker down to survive the storm that is building in strength by the week.

Unfortunately, however, we live in a complex and deeply unfair world, that makes mincemeat of emotional reactions and simple solutions. As illustrated in step-by-step, easy to understand – but irrefutable – detail in the article "Hidden Gold Taxes: The Secret Weapon Of Bankrupt Governments" (linked below), a simple solution of just buying gold leaves you handing a good chunk, or perhaps most of your starting net worth, over to the government by the time all is said and done. The way the government – under existing laws – effectively confiscates the wealth of gold investors in a highly inflationary environment is little understood by most gold investors, but should form the central point for their investment strategies.

http://danielamerman.com/articles/GoldTaxes1.htm

Let me suggest an alternative approach, which is to study, learn and reposition. To have a chance, you must learn not just how wealth will redistribute, but how unfair government tax policies (that can be relied upon to increase in unfairness) will cripple most simple methods of attempting to survive inflation.

Then, yes – buying gold (and perhaps a lot of it) can be one key component of a portfolio approach, as discussed in my Gold Out-Of-The-Box DVD set. Use multiple components, each doing what they do best, shift the components in a dynamic strategy over time, and position yourself so that wealth will be redistributed to you in a manner that reverses the effects of government tax policy. So that instead of paying real taxes on illusionary income, you're paying illusory taxes on real income. And the higher the rate of inflation and the more outrageous the government actions – the more your after-inflation and after-tax net worth grows.

Best wishes to you in these perilous times.

Do you know how to Turn Inflation Into Wealth? To position yourself so that inflation will redistribute real wealth to you, and the higher the rate of inflation – the more your after-inflation net worth grows? Do you know how to achieve these gains on a long-term and tax-advantaged basis? Do you know how to potentially triple your after-tax and after-inflation returns through Reversing The Inflation Tax? So that instead of paying real taxes on illusionary income, you are paying illusionary taxes on real increases in net worth? These are among the many topics covered in the free “Turning Inflation Into Wealth” Mini-Course. Starting simple, this course delivers a series of 10-15 minute readings, with each reading building on the knowledge and information contained in previous readings. More information on the course is available at DanielAmerman.com or InflationIntoWealth.com

Daniel R. Amerman, CFA

Many nations have been here before – and watched the value of their currencies collapse. The creation of "free" money that is so attractive to politicians for a brief period of time, becomes the most expensive possible way of funding government expenditures. Particularly for the savers, and especially the older savers, who see their life savings wiped out as a result of these grossly irresponsible actions.

Fed’s “QE 2″ Actions Will Likely Go Down As Financial Infamy

2010-11-21T20:55:00.000-08:00

“QE 2″ is radically different – and radically more dangerous – than the risky games that were played with earlier “quantitative easings”. This brief article is intended to warn readers about some of the key differences this time around.

So says Daniel R. Amerman, CFA (danielamerman.com) in an article* which Lorimer Wilson, editor of http://www.munknee.com/ has reformatted into edited [...] excerpts below for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.) Amerman goes on to say:

The Federal Reserve has announced that it will create approximately $600 billion of new money to fund US Treasury bond purchases which the media is referring to as “QE 2″, as in the second round of quantitative easing. The “2″ in “QE 2″ implies that this is something that has been done before. This implication is dead wrong because this time there appears to be no references to “sterilization” of the newly created money. It’s likely good old-fashioned monetization in other words, with potentially quick and dire results.

It is also essential to note that the Fed won’t be directly buying Treasury bonds from the US Treasury as a result of the most recent “QE 2″ but will, instead, be intervening in the Treasury bond markets. In other words, the Fed will be creating an artificial Treasury bond market, where it uses an unlimited amount of newly created public money to buy from private investment banks.

No Apparent “Sterilization” in Most Recent “QE 2″

The previous “QE” (which means exactly the same thing as directly creating vast sums of money out of thin air, but sounds more responsible) has been done by the Federal Reserve and European Central Bank in a manner which economists refer to as “sterilized”. This concept is confusing to most people, and I do my best to explain the process in understandable terms in the three articles linked below.

The Federal Reserve directly creates QE money in whatever volume it feels like – no need for borrowing despite the common myth – through creating “excess reserve balances” and using that new QE money to pay banks for securities purchases, as explained in “Creating A Trillion From Thin Air.” (Creating A Trillion From Thin Air Daniel R. Amerman)

However, while a (desperate) central bank wants to be able to spend QE money without limits, letting that new QE money escape into the general money supply can lead to major inflation in a hurry. So with the previous rounds, the Fed and ECB each used their “sterilization” powers to essentially put a corral up around the new QE money to keep it from escaping out into the economy, as described in “Containing Inflation Via Unlimited Monetary Creation.” (Containing Inflation Via Unlimited Money Creation Daniel R. Amerman)

The “magic” process of “painlessly” creating trillions of dollars to bail politically connected banks out of their mistakes is far from free, and besides the enormous risks to the general population and to the value of their savings, such QE has the nasty side effect of effectively “hollowing out” the real economic basis underlying the banking system. This is because the banks can’t really spend their “sterilized” money, but must have an ever larger share of their balance sheet assets consist of those economically meaningless excess reserve balances, as described in “The Fed’s Hollowing Out Of U.S. Banks”. (The Fed's Hollowing Out Of US Banks Daniel R. Amerman)

Now, when central banks create vast new sums of “sterilized” money, they are usually very, very careful to emphasize that the new QE money can’t escape into general circulation. They do this to reassure the markets and their trading partners that their currency isn’t (they hope) about to implode in value in an inflationary meltdown.

I have carefully studied the Federal Reserve statement of November 3 that described the Treasury bond QE purchase program and Bernanke’s detailed October 15 speech about the upcoming “nonconventional” QE steps which the Fed would be taking… [and while] there were a number of phrases that could be interpreted in different ways there was no direct reference to the sterilization of these QE funds. There were no promises that the QE funds would be kept out of the money supply[and, as such,] I am profoundly skeptical that this lack of direct mention was some sort of omission. Instead, [I believe this latest QE has been introduced as] a powerful offensive weapon in a currency war.

Keep in mind, that this QE has always been a monetization designed to meet multiple purposes. The U.S. is attempting to slash the value of the dollar compared to other world currencies in an effort to revive the failing U.S. economy. If this can be done without setting off a wide scale currency war, then U.S. jobs are helped in two ways, as 1) the weaker dollar means that U.S. exported goods become relatively cheaper and thus win more business overseas, even as 2) the weaker dollar removes the artificial advantage that China and other nations have had in exporting their goods into the U.S.. As Chinese and other imported goods rise in price, they would lose market share, with the sales going to U.S. based companies. The eventual goal would be for U.S. workers producing U.S. goods to fill the shelves of Wal-Mart rather than China doing so (which also necessarily means these goods cost more than they do today as discussed at length in my recent article, ”Falling Dollar Means Rising Consumer Price Inflation”).

The threat that has successfully driven down the value of the U.S. dollar since September is now being used in practice. Despite the doublespeak official announcements that you may read in the papers, this is a communication between central banks, and everyone involved knows what’s going on. The U.S. is threatening inflation that will drive down the value of its currency, making other nations unwilling to hold dollars, and the lack of demand drops the value of the dollar relative to those nations’ currencies, with benefits passing through to U.S. companies that then hopefully revive the U.S. economy – albeit at a terrible cost to U.S. savers, and older Americans in general.

The New “QE 2″ Is Spending Real Money

In evaluating why this so-called “QE 2″ is so different from the first rounds of QE, we need to understand that the use of the funds is quite different. In the autumn of 2008 the Federal Reserve used the original round of QE to create artificial liabilities when there were no lenders, thereby keeping the highly leveraged banking system from collapsing. The QE money wasn’t actually being spent on anything you could reach out and touch; this was more about balance sheets and accounting manipulations on a massive scale.

During 2009 and early 2010, for the true second round of QE (which involved rolling the new dollars over from the first round of bank loans and creating substantially more new dollars), the Federal Reserve created an artificial mortgage market, so that mortgage interest rates would be lower than what a free market would have allowed, and thereby would hopefully help slow down or avert a collapse in the housing market. The new QE money was used to acquire financial instruments (mortgage securities), but “sterilization” meant that the newly createdQE money would not be allowed to escape from the Federal Reserve’s and banks’ balance sheets. So again, the new QE money wasn’t being used to buy or create anything you could actually reach out and touch. The mortgage money had already been lent by the bank, so the newly created Fed QE money didn’t go to the home purchasers.

What makes this current round night-and-day different is that the new QE money is being created to pay real people for real jobs and real tangible goods. The United States government budget deficit is not about market values of financial instruments, but rather about paying workers on a massive scale for “stimulus” projects. It’s about massive road reconstruction projects and expensive high-speed rail lines – with the QE money being given to workers to go out and spend, in return for their labor. It’s about paying a vast army of federal workers – who spend their paychecks. The federal budget deficit is about massive transfers and redistributions of wealth within the U.S., including Social Security and Medicare, low income housing and many other purposes – all of which require real money that really gets spent by real people. This is about “stimulating” the economy, not sterilizing the hidden bailout funds. “Stimulating” means the QE money reaches the economy.

In other words, this QE money goes directly into the general money supply at a rate of about $110 billion per month through at least June, (the money is the sum of the to-be-created QE $600 billion, and the cash flow from the Fed’s mortgage security portfolio that was purchased with created QE money). This adds up to lots more newly created QE government dollars chasing the same goods and services, and competing with savings earned over a lifetime.

There are about 111 million U.S. households, so $110 billion per month in government QE spending funded by direct monetary creation is equal to about $1,000 a month per household in new QE money that is competing with our salaries and savings – and another $1,000 in governmentQE money the next month – and so forth.

Another way of looking at this is that with an annual economy of a little over $14 trillion, total private and government spending runs about $1.2 trillion per month. Creating $110 billion a month in new QE money for the government to spend, means that about 9% of the economy will be purchased by newly created dollars. So 9% of purchases in this new economy would be made by brand new QE dollars, competing with and just as good as yours and mine, being spent for whatever purposes the government desires.

Some commentators are already noting that the Fed’s QE plan would buy about the same amount of US Treasury bonds as net new Federal borrowing, meaning the entire U.S. government budget deficit is being covered by the Federal Reserve’s manufacturing new QE money, month by month. That is an interesting coincidence, isn’t it? However, there is a much more fundamental “coincidence” at play here. See my article “Soaring Government Spending ‘Crowds Out’ Private Investment Returns” for some very revealing graphs on the subject (Soaring Government Spending Crowds Out Private Investment Returns Daniel R. Amerman)

What the Federal Reserve is doing is directly creating QE money equal to 9% of the economy to artificially increase the government’s share of the economy by 9%. It is artificial money for an artificial economy to avert collapse. With again, the night and day difference between this monetization and previous “quantitative easing” being that this new QE money is going directly into the economy, and competing with your money and your savings.

The only way out, as the government may be belatedly realizing, is to grow the real U.S. economy but you can’t grow the real economy when the dollar is too high, because of currency manipulations by other countries causing U.S. goods to become too expensive to export, even as domestic U.S. industries are destroyed by subsidized foreign competition.

To grow the real economy the value of the dollar must be slashed which, very conveniently, can be done through open QE monetization. So, you create vast sums of QE money out of thin air to artificially fund the economy, hoping to string things out as long as possible. Simultaneously, this very public QE monetization slashes the value of your currency, thereby stimulating real economic growth, which if you get really, really lucky, might grow the real economy fast enough to recover to a healthy level, and allow you to find an exit strategy from the insanely dangerous monetization policy before the value of the currency is annihilated. That’s the theory, anyway.

“QE 2″ Is Not Undertaking Direct Purchases – Just Undertaking Open Manipulation

There is something else essential for investors and savers to understand about the QE 2 process which the Federal Reserve has just outlined. The Federal Reserve is not directly purchasing treasury bonds from the US government.

Instead, U.S. banks are purchasing the bonds from the US Treasury to fund the deficit, and then selling an equal amount of other bonds (likely at a nice profit) to the Federal Reserve. It would be reasonable to get annoyed at what appears to be the Fed’s paying banks additional money to do effectively nothing, but to do so would be to miss the real point of this arrangement and the real danger.

To understand, let’s explore what would happen if the Federal Reserve directly bought bonds from the Treasury (with appropriate legal changes if needed), but did not intervene in the Treasury bond markets. If there were a free bond market that was controlled by the self-interested investment decisions of private U.S. investors (the foreign central banks and investors having fled because of Federal Reserve actions), then these investors might look at the Fed directly monetizing and say “I don’t think I am being adequately compensated for my risk.” The next thing you know, Treasury bonds might be going for 10% yields, or 15%+ yields. With ripple effects almost instantly going out into all interest rates throughout the U.S. economy [and] that’s not what’s going to happen (or apparently not yet, anyway).

Instead, the Federal Reserve, with effectively unlimited QE money at its disposal (targets can always be changed), can intervene [with additional QE] at any time it wishes, in whatever volume it wishes, to make sure that Treasury bond and bill prices and yields are exactly what the Fed wants them to be. The U.S. Treasury bond market then becomes an artificial market, much like the U.S. mortgage market, with no connection to objective reality, and no discipline when it comes to the relationship between irresponsible government behavior and interest rates. The private investors in the market play along, and maybe even increase their investments, because they understand that their “counterparty” can create money at will, and therefore (from a short term and terribly flawed perspective) it may look like risk-free profits. So long as they play along with the Fed.

If bond traders go the other direction, and speculate against the Fed – the Fed crushes them with its control of the market. In an openly and massively manipulated market, the governing factor is not theoretical fundamentals, but playing ball with the manipulator, and cooperating for your share of the rigged “profits”. What this means – for so long as this farce can hold together – is that there are no checks and balances on government spending, or on the share of the U.S. economy that is controlled by the U.S. government.

While this is a disaster scenario over the medium term over the short term it holds the game together for an increasingly desperate Federal Reserve and U.S. government. Treasury yields ripple throughout all borrowings, and it is this absolute control of treasury yields that allows the Federal Reserve to keep interest rates low regardless of real inflation levels, even as stimulus funds continue to flow in unlimited volume, and regardless of what is happening with real wealth in the real U.S. economy.

If you are a native-born US citizen – there’s nothing “2″ about this. We’ve never seen anything like this in our lifetimes [although] manyother nations have been here before – and watched the value of their currencies collapse. The creation of “free” QE money that is so attractive to politicians for a brief period of time, becomes the most expensive possible way of funding government expenditures. Particularly for the savers, and especially the older savers, who see their life savings wiped out as a result of these grossly irresponsible actions.

What If The New “QE 2″ Cash Is Sterilized?

The Fed has been deliberately vague about how exactly it will handle this latest QE program, which leaves open the possibility that the Fed could “sterilize” the new cash, or partially sterilize, or sterilize future purchases for future months. The problem with this approach, [however,] is that it effectively leads to the rapid systemic destruction of the economic basis of the U.S. banking system, and also worsens the situation in the private sector of the economy. As covered in my “Hollowing Out” article linked above, by the end of the Federal Reserve’s mortgage security purchase program (the previous “QE”), about 10% of the approximately $12 trillion in U.S. banking system assets consisted of sterilized money held at the Federal Reserve. The Federal Reserve is committed as a matter of policy to keeping this QE 2 money from escaping into general circulation – effectively preventing the bank from actually lending it out to a company for instance.

New QE monetary creation at a rate of approximately $110 billion per month is equal to a monthly volume of about 1% of total banking assets. The announced QE program, if “sterilized”, would mean that by June, about 16% of total U.S. bank assets would consist of “sterilized money”, i.e. balances at the Federal Reserve that can’t be used anywhere else.

Another way of phrasing this is that the U.S. government budget deficit would be funded by essentially “taking” 1% of the assets of the U.S. banking system every month, and using that to cover the excess U.S. government spending. How this works is that in the first month, the primary dealer banks would purchase $110 billion in newly issued Treasury bonds, and would sell $110 billion in already existing Treasury bonds to the Federal Reserve. The Fed would pay for the bonds with money newly created on the spot – but because the money has been “sterilized”, the $110 billion in sale proceeds isn’t really spendable by the selling bank. The actual Treasury bonds bought and sold are different. It would be pure coincidence if the sector of the bond market whose prices and yields the Fed was most interested in manipulating that month were to match what the Treasury department was selling (and there is no need for dates or dollar amounts to precisely match up).

The following month, when the primary dealers purchase another $110 billion of newly issued Treasury securities to fund the Federal budget deficit, they don’t have access to the $110 billion from the previous month (**), so they have to take a new $110 billion out of their other assets to purchase the new bonds. They also make the sale of $110 billion of whatever already outstanding Treasury bonds the Fed is most interested in manipulating the price of that month, and the Fed pays them a nice price, but they have to leave the second $110 billion in sale proceeds at the Fed too (it’s not technically mandatory, but Bernanke is proud of the tools he uses to sterilize the cash, as covered in my “Containing Inflation Via Unlimited Money Creation” article). (**) If they did use the previous month’s Fed payment to buy new Treasury bonds, then it is a direct monetization scenario, not a sterilization scenario. So now the banking system is out $220 billion in terms of accessible cash, and when the third month’s $110 billion of Treasury bonds needs to be bought, that can’t come from the newly created Fed money either. Which means another $110 billion has to come out of other assets of the U.S. banking system.

This rapid hollowing out of the U.S. banking system to fund a voracious and apparently never-ending federal deficit, where every month a greater share of banking assets becomes the debt of a bankrupt government, is obviously a dangerous strategy that grows more likely to blow up each month it is employed. It also means that with each month, there are less banking assets available to be lent to businesses and consumers, which then makes economic recovery that much less likely. In other words it would be an insane strategy for a government that is desperately trying to revive the private sector economy, which is one of the reasons I find further sterilization to be unlikely.

With the much more likely monetization scenario, the Fed purchases from the primary dealers $110 billion in whatever Treasury bonds it is most interested in manipulating the price of, in order to control interest rates. The primary dealer banks take the $110 billion, which is non-restricted (as it isn’t sterilized) and buy $110 billion of that month’s new Treasury bond issuance. Because the bank cash flow between buying and selling is a wash (except for their profits on each side), from a cash flow perspective this is the same as the Federal Reserve directly creating money to buy all newly issued Treasury bonds. However, the advantage to doing it this way, as previously discussed, is that the Fed not only directly funds the deficit, but it takes direct control of the Treasury market, which more or less translates to direct control over most U.S. interest rates.

As for what the Fed is doing – Bernanke is effectively mumbling when it comes to the explanations. He’s being careful not to be clear, so he can claim to have his cake and eat it too (maintaining even a semblance of plausible deniability is also very important in the diplomatic maneuverings accompanying the nascent currency war). As explained above, when the central bank creates vast sums of new QE money – and doesn’t explicitly say it is “sterilizing” – the odds are quite high that in fact, it is not sterilizing. Even if it is sterilizing, though, the results of this unprecedented monetary creation still lead to another disaster scenario. Further sterilization accelerates the collapse of the private sector and banking system in real terms, which must then be covered by still more monetization.

It has to be one or the other: either newly created QE money is going directly into the economy in straight up monetization, or the assets of the U.S. banking system are being sucked out by the voracious Federal Government deficit at a very fast rate, leaving a hollow shell. What the Fed is doing to the banks with sterilization is much like a spider consuming an insect: punching a hole in the exoskeleton with its fangs and sucking the innards out, while the exoskeleton remains an intact but hollow shell. (For those who would say the Fed would never do that to the banks that run it – the Fed has already been doing it, and don’t forget the crucial distinction between the interests of the banks and the personal financial interests of the senior executives who run the banks.)

Either about $1,000 a month per U.S. household is being created and spent in the economy in direct monetization, competing with your dollars and savings – or about $1,000 a month per U.S. household will be sucked out of the banking system by the government through sterilization, meaning less money for business and consumer lending, and an acceleration in the decline of the real economy. The former in my opinion is the much more likely route, and represents a radical change, but either way, there is no such thing as “free money”, and the piper will be paid – by all of us.

Where to Find Refuge in a Post “QE 2″ World

We have a good idea of the path ahead – which is the destruction of the value of the U.S. dollar, as well as the impoverishment of a good part of the population. By far, the heaviest punishment will fall on the older members of the population whose savings are destroyed, and who do not have the remaining years to recapture what they have lost.

There are solutions, however, and not everyone will see their savings destroyed. By taking the right series of steps, assets can be preserved – or even expanded, even in after-inflation and after-tax terms. The difference between being destroyed, and saving your assets, quite simply comes down to a matter of making informed decisions. It is a matter of education, in other words.

A good starting step is to read and understand the three articles linked earlier in this article which cover the essentials of direct monetary creation, sterilization, and hollowing out the banking system. I’ve done my very best to make these articles understandable, and from the feedback which I received at the time they were published, these articles provide valuable new insights into what is really happening and what the central banks have really been doing.

When it comes time for action, the simple and increasingly popular solution is to pull all you can out of paper investments and symbolic currencies, put them in gold, and hunker down to survive the storm that is building in strength by the week but such a simple solution of just buying gold leaves you handing a good chunk, or perhaps most of your starting net worth, over to the government by the time all is said and done. The way the government – under existing laws – effectively confiscates the wealth of gold investors in a highly inflationary environment is little understood by most gold investors, but should form the central point for their investment strategies as illustrated in step-by-step, easy to understand – but irrefutable – detail in the article “Hidden Gold Taxes: The Secret Weapon Of Bankrupt Governments” (Hidden Gold Taxes The Secret Weapon Of Bankrupt Governments Daniel R. Amerman).

Let me suggest an alternative approach, which is to study, learn and reposition. To have a chance, you must learn not just how wealth will redistribute, but how unfair government tax policies (that can be relied upon to increase in unfairness) will cripple most simple methods of attempting to survive inflation.

Buying gold (and perhaps a lot of it) can be one key component of a portfolio approach [but it is important to] use multiple components, each doing what they do best; to shift the components in a dynamic strategy over time; to position yourself so that wealth will be redistributed to you in a manner that reverses the effects of government tax policy so that instead of paying real taxes on illusionary income, you’re paying illusory taxes on real income and the higher the rate of inflation and the more outrageous the government actions – the more your after-inflation and after-tax net worth grows.

Radical Difference Between Monetization 1 and QE2 by Daniel R. Amerman

Why the Federal Reserve's Quantitative Easing Strategy Won't Save the U.S. Economy

2010-11-21T16:25:00.000-08:00

With a second round of "quantitative easing" underway, the U.S. Federal Reserve wants us to believe that it is doing its duty as the nation's central bank – promoting maximum employment, keeping a lid on inflation and making sure that long-term interest rates remain at reasonable levels.

This is known as the Fed's "dual mandate," since the inflation and interest-rate objectives are really the same goal.

But here's a shocker: The Federal Reserve's real dual mandate is to enrich the banks the central bank is created by and works for – and to cover Congress when its laws enrich banks at the expense of jobless American taxpayers.

Understanding how quantitative easing works is simple. Understanding how banks and Congress are manipulating this economic tool is just a tad more complicated. Understanding how quantitative easing will impact your life – and your financial future – is just a matter of understanding the facts

Quantitative Easing Basics

The mechanics of quantitative easing are straightforward. For instance, the Federal Reserve can decide to lower interest rates for any number of reasons, but it's usually to encourage borrowing and consumption to stimulate the economy.

When the Fed decides to lower rates, it does so by reducing the so-called "Fed Funds" rate – the rate banks charge each other for overnight loans.

The Fed doesn't just say what it wants the Fed Funds rate to be. Through what's known as "open-market operations," the Fed actually lowers the rate to its target by purchasing U.S. Treasury securities from banks. The cash the banks receive in return can then be lent out.

And when a lot of banks have money to lend, there is usually a general decline in the overall level of interest rates in the broader marketplace.

Right now – because the Fed keeps purchasing short-term government securities – the Fed Funds rate is at roughly 0.00% to 0.25% (about one-quarter of 1.00%). This time around, however, low marketplace interest rates haven't been enough to stimulate the economy and generate reasonable growth. And those historically low rates have done nothing to bring down the high rate of unemployment.

So, to further stimulate the economy and encourage employment and prevent deflation (falling prices) the Fed is employing a second round of quantitative easing – a move the pundits refer to as "QE2," or even "QEII."

Regardless of what you call it, the maneuver simply means the central bank is buying still more government securities, focusing this time on those with longer-term maturities.

The Skinny on the Central Bank

The Fed doesn't actually "print" money to buy any of these securities. Only the U.S. Treasury Department can print money through the U.S. Bureau of Engraving and Printing that it controls (Indeed, the Bureau of Engraving's Web site address is most appropriate: http://www.moneyfactory.gov/).

The Fed pays for the securities it buys by electronically crediting the accounts of the primary dealers that sell the central bank U.S. Treasury bills, notes and bonds. The "credits" are passed along to the primary dealers' customers (other banks, securities broker-dealers, and financial institutions) who buy and sell their inventory to the Fed through the primary dealers.

So, while the Fed doesn't actually print money, it does create money – thanks to the credits that it pays out when it buys government or mortgage-backed securities.

The Federal Reserve is not a government entity. It is a private institution that functions at the courtesy of the U.S. government. It is essentially the banker to all other U.S. banks. It is beholden to Congress, which can amend the central bank's powers – or even strip them away. But it is permitted to operate with substantial independence.

U.S. government officials and the nation's most powerful banks created the institution under the Federal Reserve Act of 1913. Its creation – and even its early evolution – was fraught with intrigue and self-dealing. Today, however, it's viewed as necessary by most, and a necessary evil by some. But it is necessary.

The Deep Game Dealers Play

Thanks to its independence, the Fed, theoretically, controls monetary policy without the undue influence of politicians. While it might not be beholden to politicians in its role as a monetary policymaker, make no mistake: The central bank is beholden to the banks that make up its system – which are also the banks from whose ranks the Fed's positions of power and authority are filled.

Mechanically here's how the Fed is enriching its family of insiders. By keeping interest rates low for years – not to mention by aiding and abetting an unregulated derivatives market – the central bank helped foster the mortgage fiasco in the nation's prime and subprime mortgage markets.

Leveraged banks blew up and had to be rescued. The Fed did its part by opening its arms and offering unlimited funds to keep favored institutions liquid enough to survive.

Courtesy of the 0.00% Fed-Funds target rate, the central bank gave those banks what were essentially no-interest/low-interest loans to buy risk-free Treasury securities across different maturities. And now, through the miracle of quantitative easing, the Fed is buying those Treasuries back from the banks – thereby handing these institutions handsome capital gains on top of the free interest the banks collected while holding the securities.

The story is actually quite a bit more unseemly than it initially appears: There are currently 18 primary dealers that have the sole authority to buy and sell directly with the Federal Reserve Bank of New York, which conducts the Fed's open-market operations. All other banks and financial institutions – including such giant money managers as PIMCO and BlackRock Inc. (NYSE: BLK), and private individuals who buy or sell at the Fed – only do so as customers of the primary dealers.

The trading desk at the New York Fed is in constant touch with the primary dealers for input on markets and demand for securities. The dealers, of course, are in constant touch with their giant customers – as well as everyone else who matters.

The game goes like this …

Step I: Dealers and big institutional buyers of Treasuries all know the schedule of when the U.S. Treasury auctions new bills, notes and bonds (it's published).

Step II: They drive down the price of issues coming to auction by shorting enough of existing securities whose maturity they know is coming to market (it doesn't take a lot to lower prices, because all the dealers and customers are standing aside and waiting to buy later).

Step III: Since the dealers have lowered the price and raised the yield on existing securities, market buyers put in offers to buy from the Treasury close to the lowered prices for new securities.

Step IV: Once the new issues are bought at lowered prices, dealers and customers bid them up high enough so that when the Fed comes in under its announced schedule of quantitative-easing purchases to buy different maturity securities, the dealers sell back the now-inflated bonds held by them and their customers – netting a tidy profit in the process.

Who is paying these higher prices and providing the windfall to the banks?

The U.S. taxpayers, of course (in other words, you are).

A Look Ahead

The Fed is using credits backed by the taxing power that the U.S. Treasury holds over American taxpayers to hand the banks money to pay big bonuses and to start paying dividends again.

Why do they want to start paying dividends again? That's simple. By resuming dividend payouts, banks:

Will see their stock prices rise.

Will have more equity.

Will be able to leverage themselves more.

So they can take bigger risks in order to pay out bigger bonuses – much of which will be paid out in … you guessed it … each bank's stock.

That's the primary goal of QE2 -- enrich the banks. They're doing pretty well after the crisis they precipitated. Meanwhile, the almost $2 trillion spent on the first round of quantitative easing did nothing to reduce unemployment.

So while it's a given that the new round of QE2 will enrich banks, it's doubtful it will stimulate job growth.

There's another angle to this, too: The Nov. 3 announcement that QE2 would have the Fed buying $600 billion of securities through the end of the second quarter of next year wouldn't be completely accurate. The Fed will actually be buying nearly $900 billion worth of securities – if you factor in the reality that the central bank is buying more securities with maturing bonds running off its balance sheet.

While Congress might jawbone about forcing the Fed to abandon the part of its dual mandate to seek to maintain full employment, even as it attempts to keep inflation at bay, our elected leaders are just blowing smoke.

Our congressional representatives – the majority of whom have taken ungodly sums from financial-services industry lobbyists – are giving the banks what they paid for. And Congress likes the fact that if the Fed's QE2 initiative fails to cut U.S. unemployment, the blame can be passed to the central bank.

The sad-and-scary reality is that Congress has no policies to address fixing the economy or creating jobs. Our elected officials spend most of their time trying to get elected and re-elected. Given the latest political division in Congress, it looks like we're headed for more gridlock.

What's unspoken is that this scenario actually suits Congress pretty well. Because of their inability to create and implement desperately needed bipartisan policies to fix what's wrong with our economy and government, our congressional leaders get to punt policy decisions to their backroom masters, the Federal Reserve.

As long as the Fed is running this country, which it is, don't fool yourself: There will be no reduction in unemployment, and no job growth; the only industry that our central bank cares about is the one that it serves – the financial-services sector.

So if you're an investor who's currently "in" the market, here's how to bet: Banks will make a comeback, inflation will be a big part of our future in order to monetize our insane budget deficits, and there will be lots more trouble to come when the bubbles that the Fed is currently inflating finally pop.

Hunger in America

2010-11-20T10:39:00.000-08:00

Some 15 percent of US households, 17.4 million families or about 50 million people, were too poor to buy adequate food last year, according to a new report from the US Department of Agriculture (USDA). More than a third of these households, with as many as one million children, were missing meals on a regular basis, the study found.

The number of families classified as “food insecure” according to the USDA, which administers the food stamp program, has more than tripled since 2006, before the current economic slump which has brought near double-digit unemployment. Because most people are reluctant to admit they have a problem putting food on the table, particularly when they have children, “food insecurity” was calculated from survey questions about skipping meals or running out of food stamps, combined with comparisons of income and food prices.

Virtually the sole cause of food insecurity in America—the largest producer of agricultural and food products on the planet—is lack of money. The poverty rate has risen sharply over the past three years, with an estimated 50 million people living below the official poverty line, which grossly underestimates the income needed for basic necessities.

Highlighting the significant inequalities in food resource availability across US households, the USDA report noted that the typical food-secure household spent a whopping 33 percent more on food than the typical food-insecure household of the same size and household composition.

In keeping with the Obama administration’s policy of minimizing the depth of the social crisis, the USDA official who released the report, Under Secretary Kevin Concannon, said the latest hunger survey showed a “stabilization” of the problem compared to the year before. In other words, just as many people were hungry in 2009 as in 2008, as though that represented “progress” rather than making permanent a level of social misery not seen in America for 40 years.

Concannon said the report was a hopeful one, since the number of hungry people did not increase even though the number of unemployed Americans rose sharply from 9 million in 2008 to 14 million in 2009. He credited food stamps and other federal programs for staving off any further increase in hunger. “This report highlights just how critical federal nutrition assistance programs are for American families,” he said.

The number of Americans receiving food stamps under the Supplemental Nutrition Assistance Program (SNAP) rose to 42.4 million. Another one million children received free or subsidized school lunches daily, while some 400,000 pregnant women and nursing mothers received milk, butter, eggs and other food under the WIC program. All told, one quarter of US households have at least one person receiving food stamps or other food aid. However, 43 percent of food-insecure households were not participating in any of these three programs.

Despite the complacency voiced by the Obama administration official, there is ample reason to believe that the present nutrition programs, already inadequate to meet the social need, will be further slashed by Congress.

The Child Nutrition Act must be reauthorized this year, and the Senate version of the bill cuts more than $2 billion from food stamps in order to pay for the increasing cost of school lunches—essentially robbing children at home in order to feed them in school. Earlier this year, an extension of unemployment benefits for the long-term jobless was funded in part by cuts in the food stamp program.

In a society which took seriously the value of human life and the future of its children, the spectacle of 50 million people at risk of hunger, including 17 million children, would be a social emergency. Given that the United States once boasted of its ability to feed the planet, the indifference to the growth of hunger at home is a national scandal.

But in the America of 2010, the news about hunger was relegated to small items on the inside pages of newspapers (A21 in the Washington Post, nothing in the New York Times), and failed to make a splash on the evening news broadcasts, more concerned with the engagement of Britain’s Prince William.

The hunger report provides another dimension for measuring the social irresponsibility, greed and outright cruelty of the US financial aristocracy, which is far more concerned with fattening its own outrageous bank accounts and assets than with alleviating mass suffering in the richest country in the world.

The US Congress began its “lame duck” session Monday, to be followed by a bipartisan summit Thursday between President Obama and congressional Democratic and Republican leaders. The food crisis will not be on the agenda in these discussions. The only hunger being discussed is the truly insatiable craving of the rich for even more wealth.

The Obama administration and the Republicans are currently negotiating the terms for the Democratic Party’s surrender to right-wing demands for an extension of the Bush tax cuts for the wealthy. This will cost $700 billion over the next decade, or $70 billion a year, more than the cost of all federal nutrition programs combined.

Meanwhile, Obama has praised the proposal from the chairmen of his deficit reduction commission to impose drastic cuts in social programs for the elderly and the poor along with lower taxes for the rich and for corporations and higher taxes for the working class. The mantra of the White House, the political establishment and the media is that the American people have been living beyond their means and must accept a reduction in their consumption.

The US ruling elite and both its political parties, the Democrats as well as the Republicans, are indifferent to the growth of hunger and deprivation. Those most intoxicated by “free market” ideology likely regard such social evils as a positive good, since hungry workers are more willing to take any job available, no matter what the wages and conditions. They should be careful what they wish for.

The American ruling class is creating the conditions for an explosion from below that all its servants in the political establishment, the trade unions and the media will be unable to prevent. The most urgent task facing working people is to make the necessary preparations to give the coming movement a revolutionary political character. This means the building of the Socialist Equality Party.

The Mythical United States of America

2010-11-13T11:37:00.000-08:00

Rushing into Backwardness

Because my OED is inaccessible at the moment, I cannot specify exactly when the word 'philanthropy,' which etymologically means "love of mankind," came to be applied to the donating of money to build self aggrandizing enterprises. But alas, it has! People seem to have a way of twisting meanings in ways that make the malevolent appear benevolent. And so, enterprises of all kinds have been funded by such 'philanthropy.'

For instance, Carnegie Mellon University was founded by Andrew Carnegie, Andrew W. and Richard B. Mellon; Cornell University was founded by Ezra Cornell and Andrew Dickson White; Purdue University was founded by John Purdue; Rice University was founded by William Marsh Rice; Stanford University was founded by Leland Stanford and his wife. There are hundreds more.

There are museums, too (The Isabella Stewart Gardner Museum, The Amon Carter Museum of American Art, The Kimbell Art Museum, The Solomon R. Guggenheim Museum, The Whitney Museum of American Art and many more), concert halls (Louise M. Davies Symphony Hall, Carnegie Hall, Avery Fisher Hall, The Eastman Theatre, Morton H. Meyerson Symphony Center to name just a few), Opera Houses (The Nancy Lee and Perry R. Bass Performance Hall, The Dorothy Chandler Pavilion, The Peabody Opera House, The Margot and Bill Winspear Opera House, The BAM Howard Gilman Opera House), innumerable charitable foundations and buildings built for public use such a libraries.

Although it is difficult to deny some merit to most of these enterprises, it is also difficult to even imagine that when Christ said, "love thy neighbor as thyself," he was advocating the kind of love philanthropy has come to express. But belittling philanthropy is not the intent of this piece. These examples are intended solely to lay the basis for an exposition of some contrasts and to draw some revealing conclusions from them.

First of all, the kind of giving described above is not the only kind of giving that has become prevalent. During last week's midterm electioneering, unspecified amounts of money were donated anonymously to Political Action Committees in an attempt to influence the electoral process. What distinguishes this group of donors from those above is the anonymity. The benefactors, in the first group, like the Pharaohs of Ancient Egypt, have no qualms about putting their names on their projects. (I suspect that more often than not, they insist upon it.) But not the donors in the second group.

Why? I suspect a principle lies behind the difference: People do not hide that in which they take pride! The benefactors in the first group are proud of their giving, they want it made known to all, they want to be remembered for it. So why wouldn't the "benefactors" in the second group be equally proud of their beneficence? Are they merely cowards who lack the courage of their convictions? Or are they ashamed of what they are doing? Are they hiding their shame behind their anonymity? In either case, they cannot be judged kindly.

Anonymity, however, is just one manifestation of a deeper and growing tendency in American society—the trend toward more and more secrecy, and no one, to my knowledge, has revealed the ultimate, disastrous consequences of this tendency.

Recently, Sir John Sawers, the head of Britain’s Secret Intelligence Service, MI6, devoted much of a 30-minute address to the central role of secrecy in maintaining security. “Secrecy", he said, "is not a dirty word. Secrecy is not there as a cover-up. Secrecy plays a crucial part in keeping Britain safe and secure. If our operations and methods become public, they won’t work.”

Alas, Sir John is obviously not a master of the King's English. Secrecy is by definition a cover-up. But Sir John doesn't mean cover-up in the simple sense of hidden; he wants to claim that nothing unseemly or objectionable is being covered up. Unfortunately, that claim is impossible to verify and, if accepted, must be accepted on trust. If someone claims s/he did nothing wrong, the what and how of it must be revealed. How else could it be shown? Yet Sir John claims that the what and how of it must be kept secret.

Consider the claim that the universe contains absolutely undetectable attributes. The sentence appears to make perfectly good sense, but it doesn't. How could the claim ever be given a truth value? All one can really do upon hearing or reading it is shrug one's shoulders. The sentence has no content. The claim that secrets are not cover-ups is similar. To know that what is secret is not a cover-up, the secret must be revealed, but by definition alone, a secret cannot be revealed and be a secret. Such claims are entirely meaningless.

So why should anyone trust the pronouncements of governments and their agents anyhow? That they lie has been demonstrated over and over again in history. In reality, all that the secrecy actually does is arouse suspicion; secrecy leads people to distrust their governments. It also leads nations to distrust each other, and a world in which nations distrust each other is unstable, dangerous, and primed for disaster.

Governmental secrecy also annuls any trappings of democracy that a nation may exhibit. Even a perfectly rational citizenry would be unable to make rational judgments on matters of policy that are kept from it by secrecy. How can anyone be expected to make a rational judgment about something s/he is unaware of? Rational thinking requires premises that are factual. Without that knowledge, the electoral process is a mere formal, meaningless exercise. The people may be told that they are sovereign, but they do not even play a meaningful role in the process. The trappings of democracy do not make a nation democratic. Only transparently revealed truth and honesty do.

Most people assume that the American government is paralyzed by ideological intransigence. The assumption is that our political class has taken the attitude, "my way or no way." But another possibility exists. Perhaps those who truly hold power, those who like things the way they are and want to contravene any change, immediately corrupt or isolate all newly elected officials and all of the ideological rhetoric that is heard is merely theater played to give people the impression that the politicians care. How else can anyone explain how everything stays the same after election after election calls for change? How else can the Congress continue to act as it always has in the face of decades of approval ratings in the lowest quartile? How else can anyone explain why Congress after Congress is a do nothing Congress? Is it because American elections are totally fraudulent? Is it because the Congress has a secret master who functions behind the electoral system?

The mythical United States of America so highly lauded exists nowhere. It is a Shangri-la. The Preamble of the Constitution makes perfectly clear what kind of nation the United States was meant to be. Read it! What exists today fulfills none of those goals.

Some have argued that the nation was a fraud from day one, that the convention that drafted the Constitution was comprised of colonial elite who set out to create a nation that protected their privileges. The facts cited by those making the claim are accurate; the reasoning is often strained. Yet the claim cannot easily be refuted.

Even if the nation was not stillborn, it most certainly was quickly murdered. The dastardly deed took place on February 24, 1803. The killer was John Marshall, Chief Justice of the Supreme Court, who wrote the decision known as Marbury v. Madison, which is not only absurdly argued but treacherous on two accounts. First, Marshall takes the position that "It is emphatically the province and duty of the judicial department to say what the law is" which results in the Court's becoming the sole Constitutional authority subject to no review. Since that day, the Court has ruled the United States of America as a judicial oligarchy. Second, the decision provides the Court with a paradigm on which it could base clearly and obviously unjust decisions. Marshall agreed that Marbury was entitled to relief but refused to provide it. That is clearly unjust; yet the Constitution clearly says that one of the nation's purposes is to "establish justice."

Even though Marshall's argument is absurd, no one but Jefferson challenged it. He writes, "the opinion which gives to the judges the right to decide what laws are constitutional and what not, not only for themselves in their own sphere of action but for the Legislature and Executive also in their spheres, would make the Judiciary a despotic branch." It is clearly contradictory to say on the one hand that the Court has the duty to "say what the law is" and then say that the Court is constrained from providing Marbury with the relief he is entitled to because the written Constitution doesn't give the Court the authority to grant it. The written Constitution doesn't give the Court the authority to "say what the law is" either. Yet no one pointed out that if it were the Court's duty to say "what the law is," legislatures are superfluous. So Marshall on this day, murdered the Republic.

Why no one but Jefferson cared is curious. Was it, indeed, because the colonial elite who had taken control of the government never really fully supported the Constitution's republican principles? We will never know. But before the Constitution was ratified, the colonies were rife with political tracts both in favor of and against its ratification. The Federalist Papers are the most well known of these and were apparently written by Alexander Hamilton, James Madison, and John Jay. All three were alive when Marshall's opinion was issued; yet none wrote a single tract in opposition to Marshall's action. How strange!

Yet, the result is obvious. What John Marshall did was reproduce England's seventeenth century political economy absent only the monarchy, and the courts have promoted and maintained this abomination ever since. Today's United States of America is a seventeenth century nation adorned with twenty first century trinkets, many deadly. Instead of being as it claims "the leader of the free world," it is a backward authoritarian pre-enlightenment reactionary regime. That people is the big secret! It dare not be revealed.

In early modern Europe the state was organized to fight more and more intense wars which requirs professional armies and leads national governments into perennial debt. Some claim that the need to fight bigger and bigger wars created the state as we know it. Diplomacy was carried on by nations in secret from opponents, adversaries, and their own peoples. Although not yet known as such, Realpolitik characterized the age. Politics and diplomacy were based primarily on considerations of power and national interests, not ideals, morals, or principles. Balancing the power of authoritarian nations was said to be necessary to keep the peace, but it never did. How does this description of seventeenth century Europe differ from a description of the world's condition today? What is different?

Calling the United States a backward authoritarian pre-enlightenment reactionary nation may seem harsh, but how else can anyone explain, no less justify, the American willingness to overthrow democratically elected governments, support right-wing dictatorships, and become a willing partner with the most corrupt nations on earth? No nation steeped in the principles of democracy would engage in such practices.

So what do advocates of this seventeenth century realpolitik hope to achieve? To what end is this policy being pursued? Three hundred years of history has shown that it will never bring peace or security. Going to war to preserve the peace is absurd; anyone who advocates such nonsense should be ridiculed into hiding.

People, remember this. Empires upon which it was said that the sun never set disintegrated in plain daylight. All the king's horses and all the king's men could not bind them together. So I propose that everyone ask an Englishman this question: What of value does todays ordinary Englishman possess that s/he would not have possessed had the Empire never existed? When you learn the answer to that question you will realize how all the resources and lives lost to create and attempt to hold the Empire were totally wasted. And that is what always happens to the resources and people expended in empire building.

People, secrecy is an abomination. People do not hide that in which they take pride! When governments keep secrets, they're hiding shameful, immoral, or illegal acts. War is the opposite of peace and cannot secure it. Secrecy breeds distrust, suspicion, and conflict; they are not ways of winning friends and influencing people. Realpolitik is really Vilepolitik. Until the welfare of human beings everywhere rather than the welfare of institutions becomes the goal of human activity, the people will never be anything but canon and factory fodder to be sacrificed for absolutely nothing worthwhile.

So it's time, past time, way past time to close the door on seventeenth century authoritarian government.

The Fed and the Debased “Imperial Dollar”

2010-11-09T05:57:00.000-08:00

Inflation, Stagnation and Higher Interest Rates Ahead

"Under a paper money system, a determined government can always generate higher spending and hence positive inflation."Ben Bernanke, future Fed Chairman (in 2002)

“My thesis here is that cooperation between the monetary and fiscal authorities in Japan could help solve the problems that each policymaker faces on its own. Consider for example a tax cut for households and businesses that is explicitly coupled with incremental BOJ purchases of government debt – so that the tax cut is in effect financed by money creation. Moreover, assume that the Bank of Japan has made a commitment, by announcing a price-level target, to reflate the economy, so that much or all of the increase in the money stock is viewed as permanent.”Ben Bernanke, future Fed Chairman (in 2002)

“The Fed, in effect, is telling the markets not to worry about our fiscal deficits, it will be the buyer of first and perhaps last resort. There is no need - as with Charles Ponzi - to find an increasing amount of future gullibles, they will just write the check themselves. I ask you: Has there ever been a Ponzi scheme so brazen? There has not.” Bill Gross, PIMCO's managing director

On Wednesday, November 3rd, the Bernanke Fed announced that it stands ready to resume money printing to stimulate the economy through quantitative money easing, an euphemism for printing more dollars. Indeed, it intends to buy $600-billion of longer-term Treasury securities until the end of the second quarter of 2011, plus some $300 billion of reinvestments, on top of the some $1.75 trillion of various types of securities, many of which were mortgage backed securities, that it has added in 2009 to its balance sheet, currently standing at a total of $2.3 trillion. There could even be additional increases in newly printed money as the Fed intends to "regularly review and adjust the program as needed to best foster maximum employment and price stability."

After the election of fiscal conservatives on November 2nd, it seems that printing money is the only instrument left for the Obama administration to stimulate the economy. I fail to see, however, what is “conservative” about that. Actively debasing a currency to stimulate an economy used to be a Third-World economic recipe, —A recipe for disaster. Now, the United States government feels that is the only way to get out of the economic doldrums.

But U.S. economic problems are essentially structural in nature, and are due to a bad housing mortgage policy, a bad industrial policy, a bad financial policy, a bad fiscal policy, a bad foreign investment policy, too much entitlement debt, severe demographic problems related to the aging baby-boomers, and to very costly wars abroad. Relying exclusively on monetary quick fixes to correct them misses the mark and may have serious unintended negative consequences down the road.

In fact, it is likely that in the long run, this extreme monetary policy risks exacerbating rather than correcting the problems. Economic structural problems cannot be corrected with monetary means. They rather require real economic solutions. That means correcting the housing mortgage mess and devising an industrial strategy, a fiscal strategy, and an investment strategy that can put the economy back on its tracks of economic growth.

But, for better or worse, the Federal Reserve Board (Fed) seems to be the only branch of the U.S. government left that can still function properly, i.e. that is not caught in a permanent political gridlock. As a consequence, for the time being at least, bankers are in charge of the U.S. economy. Since they are the ones who created many of the current problems, this is not very reassuring.

Let's remind ourselves that the Fed is a semi-public, semi-private organization that has a long history of creating financial asset price bubbles in the U.S and around the world, essentially because the U.S. dollar is an international key-currency widely used around the world and is an important part of other central banks' official reserves.

Thus, the real danger is that the Fed will again overdo it and create unmanageable financial and monetary bubbles in the coming years. —It did it in the past. It did it in the late 1960's and early '70s, and we witnessed the same scenario unfolding with the Greenspan Fed in the late 1990s, when excessive easy money helped inflate the Internet and tech stock market bubble. We saw this again in the early 2000s, when easy Fed money helped inflate the housing bubble. And now, we're seeing it again with the Bernanke Fed. As a general rule, a central bank should not push the monetary gas pedal to the floor and be obliged to slam on the monetary brakes later, thus placing the real economy on a roller-coaster of booms and busts. That is not the way to run a large economy.

But because of the circumstances, the Fed may be at it again. This time it is busy creating a massive bond bubble, some important currency misalignments and a massive gold and commodity price bubble. We should also not forget that abnormally low interest rates and lower bond yields increase the present value of pension liabilities of most defined benefit pension plans.

Therefore, I would not be surprised to see a pension crisis developing in the coming years under the current Fed monetary policy. Of course, all of these bubbles are interrelated but when they come crashing down, four or five years down the road, maybe sooner, the economy may then be in worse shape than it is today. My most likely scenario is for the Fed to keep the monetary gas pedal way down until the 2012 election, and then slam on the monetary brakes thereafter to salvage what will be left of the imperial dollar.

If so, this could be a partial repeat of Japan's experience in mismanaging its economy in the early 1990's until 2000, a period known as the lost decade.

The current Fed's monetary policy is to flood financial markets with liquidity, i.e. newly created dollars, and, in the process, devalue the U.S. dollar, spur American exports and prevent deflationary expectations from taking hold and from making already high debt loads even heavier. For this, the Fed has been engaged since 2009 in round after round of money creation and interest rate reductions to the point of pushing short-term monetary rates close to zero and keeping short-term real rates negative. But if the economy is in a liquidity trap, as it is fair to assume it is, although a central bank can print all the money it wants, this is unlikely to stimulate the real economy for very long. —This is like pushing on a string. Printing money, if it is an emergency temporary measure, can help mitigate the effect of having too much debt and debt-service costs relative to income, as is the case today with many debtors in a debt liquidation mode. However, if this becomes a feature of monetary policy for too long, it can have disastrous consequences.

In general, it can be said that the Fed can manipulate short term interest rates by artificially increasing demand for short term securities, but inflation expectations are a big component of long term interest rates and are much less influenced by the Fed. Therefore, if the Fed's intention of printing large amounts of new money raises fears of future inflation, long term interest rates may rise rather than fall, and this is bound to hurt long-term productive investments.

Moreover, make no mistake, with globalized financial markets, a large chunk of the newly created dollars is flowing out of the United States and is invested in higher interest rate countries, pushing the dollar further down and these countries' currencies further up. Of course, some of the newly created money will immediately find its way in the stock market, but there is no certainty that this will induce already stretched banks to increase their banking loans to businesses.

Another consequence is this: The current outflow of U.S. dollars helps keep the dollar exchange rate low, but when the Fed is forced to aggressively raise interest rates, as it will inevitably be forced to do later on, the reverse will happen and the U.S. dollar will likely overshoot and then become overvalued. This is the case today with the Japanese yen which became unduly strong when the Japanese carry trade (too much cheap money invested abroad returns home) collapsed.

What counts for most people, however, is that the Fed’s zero-interest rate policy has not cured the structural housing mortgage crisis, since home foreclosures are still very high. The Fed now places most of its hopes on a currency devaluation, which is the old trick of the “beggar thy neighbor” policy, i.e. trying to export one country's unemployment to its trading partners by devaluating the currency. This was a form of protectionism much relied upon during the 1929-39 Great Depression. This may work for a while, at least as long as other countries can absorb American exports without launching their own money printing process in order to prevent an appreciation of their currencies.

Indeed, is it likely that countries which see their currencies being revalued by the Fed will remain passive? The Fed is implicitly making the bet that these countries will not retaliate, and that the international dollar-based currency system will remain intact. But for how long? Sooner or later, some central banks around the world will have no choice but to impose capital controls in order to slow down the inflow of unwanted outside money and the onslaught of imported inflation, and prevent their exchanges rates from rising too high too fast. If they do, the entire process of economic globalization may begin to unravel.

Meanwhile, foreign central banks, for example, could accelerate their rush to dump the U.S dollar and to accumulate gold and other more stable currencies such as the euro, the Swiss franc, the British pound, the Canadian dollar and the Australian dollar. China has already begun to do just that. The share of dollar official reserves would then decline from about 60 percent presently to perhaps less than 50 percent. That may signal the beginning of the end for the “imperial dollar” which has dominated the international monetary system since the Bretton Woods conference of 1944.

This is to be followed closely

Death Of Bond Bull

2010-11-08T15:14:00.000-08:00

The Fed’s announcement of a renewed commitment to Quantitative Easing has been well telegraphed and the market’s reaction is likely to be subdued.

We are in a “liquidity trap,” where interest rates or trillions in asset purchases may not stimulate borrowing or lending because consumer demand is just not there.

The Fed’s announcement will likely signify the end of a great 30-year bull market in bonds and the necessity for bond managers and, yes, equity managers to adjust to a new environment.

They say a country gets the politicians it deserves or perhaps it deserves the politicians it gets. Whatever the order, America is next in line, and as we go to the polls in a few short days it’s incumbent upon a sleepy and befuddled electorate to at least ask ourselves, “What’s going on here?” Democrat or Republican, Elephant or Donkey, nothing much ever seems to change. Each party has shown it can add hundreds of billions of dollars to the national debt with little to show for it or move our military from one country to the next chasing phantoms instead of focusing on more serious problems back home. This isn’t a choice between chocolate and vanilla folks, it’s all rocky road: a few marshmallows to get you excited before the election, but with a lot of nuts to ruin the aftermath.

Run Turkey, Run

Each party’s campaign tactics remind me of airport terminals pre-9/11 when solicitors only yards apart would compete for the attention and dollars of travelers. “Save the Whales,” one would demand, while the other would pose as its evil twin – “Eat Whale Blubber,” the makeshift sign would read. It didn’t matter which slogan grabbed you, the end of the day’s results always produced a pot of money for them and the whales were neither saved nor eaten. American politics resemble an airline terminal with a huckster’s bowl waiting to be filled every two years.

And the paramount problem is not that we contribute so willingly or even so cluelessly, but that there are only two bowls to choose from. Thomas Friedman, the respected author of The World Is Flat, and a weekly New York Times Op-Ed author, recently suggested “ripping open this two-party duopoly and having it challenged by a serious third party” unencumbered by special interest megabucks. “We basically have two bankrupt parties, bankrupting the country,” was the explicit sentiment of his article, and I couldn’t agree more – whales or no whales.

Was it relevant in 2004 that John Kerry was or was not an admirable “swift boat” commander? Will the absence of a mosque within several hundred yards of Ground Zero solve our deficit crisis? Is Christine O’Donnell really a witch? Did Meg Whitman employ an illegal maid? Who cares! We are being conned, folks; Democrats and Republicans alike. What have you really heard from either party that addresses America’s future instead of its prurient overnight fascination with scandal? Shame on them and of course, shame on us. We’re getting what we deserve. Vote NO in November – no to both parties. Vote NO to a two-party system that trades promises for dollars and hope for power, and leaves the American people high and dry.

There’s another important day next week and it rather coincidentally occurs on Wednesday – the day after Election Day – when either the Donkeys or the Elephants will be celebrating a return to power and the continuation of partisan bickering no matter who is in charge. Wednesday is the day when the Fed will announce a renewed commitment to Quantitative Easing – a polite form disguise for “writing checks.” The market will be interested in the amount (perhaps as much as an initial $500 billion) as well as the targeted objective (perhaps a muddied version of “2% inflation or bust!”). The announcement, however, has been well telegraphed and the market’s reaction is likely to be subdued. More important will be the answer to the long-term question of “will it work?” and perhaps its associated twin “will it create a bond market bubble?”

Whatever the conclusion, not only investors, but the American people should recognize that Wednesday, even more than Tuesday, represents a critical inflection point in determining our future prosperity. Of course we’ve tried it before, most recently in the aftermath of the Lehman crisis, during which the Fed wrote $1.5 trillion or so in “checks” to purchase Agency mortgages and a smattering of Treasuries. It might seem a tad dramatic then, to label QEII as “critical,” sort of like those airport hucksters, I suppose, that sold whale blubber for a living. But two years ago, there was the implicit assumption that the U.S. and its associated G-7 economies needed just an espresso or perhaps an Adderall or two to get back to normal. Normal just hasn’t happened yet, and economic historians such as Kenneth Rogoff and Carmen Reinhart have since alerted us that countries in the throes of delevering can take many, not several, years to return to a steady state.

The Fed’s second round of QE, therefore, more closely resembles an attempted hypodermic straight to the economy’s heart than its mood elevator counterpart of 2009. If QEII cannot reflate capital markets, if it can’t produce 2% inflation and an assumed reduction of unemployment rates back towards historical levels, then it will be a long, painful slog back to prosperity. Perhaps, as a vocal contingent suggests, our paper-based foundation of wealth deserves to be buried, making a fresh start from admittedly lower levels. The Fed, on Wednesday, however, will decide that it is better to keep the patient on life support with an adrenaline injection and a following morphine drip than to risk its demise and ultimate rebirth in another form.

We at PIMCO join with Ben Bernanke in this diagnosis, but we will tell you, as perhaps he cannot, that the outcome is by no means certain. We are, as even some Fed Governors now publically admit, in a “liquidity trap,” where interest rates or trillions in QEII asset purchases may not stimulate borrowing or lending because consumer demand is just not there. Escaping from a liquidity trap may be impossible, much like light trapped in a black hole. Just ask Japan. Ben Bernanke, however, will try – it is, to be honest, all he can do.

He can’t raise or lower taxes, he can’t direct a fiscal thrust of infrastructure spending, he can’t change our educational system, he can’t force the Chinese to revalue their currency – it is all he can do, and as he proceeds, the dual questions of “will it work” and “will it create a bond market bubble” will be answered. We at PIMCO are not sure.

Still, while next Wednesday’s announcement will carry our qualified endorsement, I must admit it may be similar to a Turkey looking forward to a Thanksgiving Day celebration. Bondholders, while immediate beneficiaries, will likely eventually be delivered on a platter to more fortunate celebrants, be they financial asset classes more adaptable to inflation such as stocks or commodities, or perhaps the average American on Main Street who might benefit from a hoped-for rise in job growth or simply a boost in nominal wages, however deceptive the illusion.

Check writing in the trillions is not a bondholder’s friend; it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme. Public debt, actually, has always had a Ponzi-like characteristic. Granted, the U.S. has, at times, paid down its national debt, but there was always the assumption that as long as creditors could be found to roll over existing loans – and buy new ones – the game could keep going forever. Sovereign countries have always implicitly acknowledged that the existing debt would never be paid off because they would “grow” their way out of the apparent predicament, allowing future’s prosperity to continually pay for today’s finance.

Now, however, with growth in doubt, it seems that the Fed has taken Charles Ponzi one step further. Instead of simply paying for maturing debt with receipts from financial sector creditors – banks, insurance companies, surplus reserve nations and investment managers, to name the most significant – the Fed has joined the party itself. Rather than orchestrating the game from on high, it has jumped into the pond with the other swimmers. One and one-half trillion in checks were written in 2009, and trillions more lie ahead. The Fed, in effect, is telling the markets not to worry about our fiscal deficits, it will be the buyer of first and perhaps last resort.

There is no need – as with Charles Ponzi – to find an increasing amount of future gullibles, they will just write the check themselves. I ask you: Has there ever been a Ponzi scheme so brazen? There has not. This one is so unique that it requires a new name. I call it a Sammy scheme, in honor of Uncle Sam and the politicians (as well as its citizens) who have brought us to this critical moment in time. It is not a Bernanke scheme, because this is his only alternative and he shares no responsibility for its origin. It is a Sammy scheme – you and I, and the politicians that we elect every two years – deserve all the blame.

Still, as I’ve indicated, a Sammy scheme is temporarily, but not ultimately, a bondholder’s friend. It raises bond prices to create the illusion of high annual returns, but ultimately it reaches a dead-end where those prices can no longer go up. Having arrived at its destination, the market then offers near 0% returns and a picking of the creditor’s pocket via inflation and negative real interest rates. A similar fate, by the way, awaits stockholders, although their ability to adjust somewhat to rising inflation prevents such a startling conclusion.

Last month I outlined the case for low asset returns in almost all categories, in part due to the end of the 30-year bull market in interest rates, a trend accentuated by QEII in which 2- and 3-year Treasury yields approach the 0% bound. Anyone for 1.10% 5-year Treasuries? Well, the Fed will buy them, but then what, and how will PIMCO tell the 500 billion investor dollars in the Total Return strategy and our equally valued 750 billion dollars of other assets that the Thanksgiving Day axe has finally arrived?

We will tell them this. Certain Turkeys receive a Thanksgiving pardon or they just run faster than others! We intend PIMCO to be one of the chosen gobblers. We haven’t been around for 35+ years and not figured out a way to avoid the November axe. We are a survivor and our clients are not going to be Turkeys on a platter.

You may not be strutting around the barnyard as briskly as you used to – those near 10% annualized yields in stocks and bonds are a thing of the past – but you’re gonna be around next year, and then the next, and the next. Interest rates may be rock bottom, but there are other ways – what we call “safe spread” ways –to beat the axe without taking a lot of risk: developing/emerging market debt with higher yields and non-dollar denominations is one way; high quality global corporate bonds are another.

Even U.S. Agency mortgages yielding 200 basis points more than those 1% Treasuries, qualify as “safe spreads.” While our “safe spread” terminology offers no guarantees, it is designed to let you sleep at night with less interest rate volatility. The Fed wants to buy, so come on, Ben Bernanke, show us your best and perhaps last moves on Wednesday next. You are doing what you have to do, and it may or may not work. But either way it will likely signify the end of a great 30-year bull market in bonds and the necessity for bond managers and, yes, equity managers to adjust to a new environment.

If a country gets the politicians it deserves, then the same can be said of an investor – you’re gonna get what you deserve. Vote No to Republican and Democratic turkeys on Tuesday and Yes to PIMCO on Wednesday. We hope to be your global investment authority for a new era of “SAFE spread” with lower interest rate duration and price risk, and still reasonably high potential returns. For us, and hopefully you, Turkey Day may have to be postponed indefinitely.

Dismantling the Iraqi State, Destroying an Entire Country

2010-11-07T07:39:00.000-08:00

The United Nation's Human Rights Council in Geneva reviews the human rights record of the United States on the 5th of November 2010, on the occasion of the Ninth Session of the Universal Periodic Review (UPR), 1 to 12 November 2010. The following is a presentation given by Dirk Adriaensens in Geneva on 3 November.

Just days after the devastating attacks of 9/11 Deputy Defense secretary Paul Wolfowitz declared that a major focus of US foreign policy would be “ending states that sponsor terrorism”. Iraq was labelled a “terrorist state” and targeted for ending. President Bush went on to declare Iraq the major front of the global war on terror. US forces invaded illegally with the express aim to dismantling the Iraqi state.

After WWII focus of social sciences was on state-building and development model. Little has been written on state-destruction and de-development. We can now, after 7 years of war and occupation, state for certain that state-ending was a deliberate policy objective.

The consequences in human and cultural terms of the destruction of the Iraqi state have been enormous: notably the death of over 1,3 million civilians; the degradation in social infrastructure, including electricity, potable water and sewage systems; over eight million Iraqis are in need of humanitarian assistance; abject poverty: the UN Human rights report for the 1st quarter of 2007 found that 54% of Iraqis were living on less than $1 a day; the displacement of minimum 2.5 million refugees and 2.764.000 internally displaced people as to end 2009.

One in six Iraqis is displaced. Ethnic & religious minorities are on the verge of extinction. UN-HABITAT, an agency of the United Nations, published a 218-page report entitled State of the World’s Cities, 2010-2011. Prior to the U.S. invasion of Iraq in 2003, the percentage of the urban population living in slums in Iraq hovered just below 20 percent. Today, that percentage has risen to 53 percent: 11 million of the 19 million total urban dwellers.

Destroying Iraqi education

The UNESCO report “Education Under Attack 2010 – Iraq”, dated 10 February 2010, concludes that “Although overall security in Iraq had improved, the situation faced by schools, students, teachers and academics remained dangerous”. The director of the United Nations University International Leadership Institute published a report on 27 April 2005 detailing that since the start of the war of 2003 some 84% of Iraq's higher education institutions have been burnt, looted or destroyed.

Ongoing violence has destroyed school buildings and around a quarter of all Iraq’s primary schools need major rehabilitation. Since March 2003, more than 700 primary schools have been bombed, 200 have been burnt and over 3,000 looted. Populations of teachers in Baghdad have fallen by 80%. Between March 2003 and October 2008, 31,598 violent attacks against educational institutions were reported in Iraq, according to the Ministry of Education (MoE). Since 2007 bombings at Al Mustansiriya University in Baghdad have killed or maimed more than 335 students and staff members, according to a 19 Oct 2009 NYT article, and a 12-foot-high blast wall has been built around the campus.

MNF-I, the Iraqi Army and Iraqi police units occupied more than 70 school buildings for military purposes in the Diyala governorate alone, in clear violation of The Hague Conventions. The UNESCO report is very clear: “Attacks on education targets continued throughout 2007 and 2008 at a lower rate – but one that would cause serious concern in any other country.” Why didn’t it cause serious concern when it comes to Iraq? And the attacks are on the rise again, an increase of 50%, as these statistics show:

Murdered Academics (source: Brussels’ Tribunal)

Date unknown 115 killed in 2003-2005

2003 16

2004 36

2005 65

2006 113

2007 63

2008 19

2009 10

2010 16 (Until 15 October 2010)

Murdered Media-professionals (source: BRussells Tribunal)

2003 26 - 6 Iraqis

2004 59 - 53 Iraqis

2005 59 - 58 Iraqis

2006 90 - 88 Iraqis

2007 82 -81 Iraqis

2008 19 - 19 Iraqis

2009 8 - 8 Iraqis

2010 12 -12 Iraqis (Until 15 October 2010

(On the 20th of March 2008, Reporters Without Borders reported that hundreds of journalists were forced into exile since the start of US-led invasion.)

Eliminating the Iraqi middle class

Running parallel with the destruction of Iraq’s educational infrastructure, this repression led to the mass forced displacement of the bulk of Iraq’s educated middle class — the main engine of progress and development in modern states. Iraq’s intellectual and technical class has been subject to a systematic and ongoing campaign of intimidation, abduction, extortion, random killings and targeted assassinations.

The decimation of professional ranks took place in the context of a generalized assault on Iraq’s professional middle class, including doctors, engineers, lawyers, judges as well as political and religious leaders. Roughly 40 percent of Iraq's middle class is believed to have fled by the end of 2006. Few have returned. Up to 75 percent of Iraq's doctors, pharmacists and nurses have left their jobs since the U.S.-led invasion in 2003. More than half of those have emigrated. Twenty thousand of Iraq’s 34,000 registered physicians left Iraq after the U.S. invasion. As of April 2009, fewer than 2,000 returned, the same as the number who were killed during the course of the war.

To this date, there has been no systematic investigation of this phenomenon by the occupation authorities. Not a single arrest has been reported in regard to this terrorization of the intellectuals. The inclination to treat this systematic assault on Iraqi professionals as somehow inconsequential is consistent with the occupation powers’ more general role in the decapitation of Iraqi society.

Destroying the Iraqi culture and erasing collective memory

All these terrible losses are compounded by unprecedented levels of cultural devastation, attacks on national archives and monuments that represent the historical identity of the Iraqi people. On America’s watch we now know that thousands of cultural artefacts disappeared during “Operation Iraqi Freedom”. These objects included no less that 15.000 invaluable Mesopotamian artefacts from the National Museum in Baghdad, and many others from the 12.000 archaeological sites that the occupation forces left unguarded.

While the Museum was robbed of its historical collection, the National Library that preserved the continuity and pride of Iraqi history was deliberately destroyed. Occupation authorities took no effective measures to protect important cultural sites, despite warnings of international specialists. According to a recent update on the number of stolen artefacts by Francis Deblauwe, an expert archaeologist on Iraq, it appears that no less than 8.500 objects are still truly missing, in addition to 4.000 artefacts said to be recovered abroad but not yet returned to Iraq. The smuggling and trade of Iraqi antiquities has become one of the most profitable businesses in contemporary Iraq.

The attitude of the US-led forces to this pillage has been, at best, indifference and worse. The failure of the US to carry out its responsibilities under international law to take positive and protective actions was compounded by egregious direct actions taken that severely damaged the Iraqi cultural heritage. Since the invasion in March 2003, the US-led forces have transformed at least seven historical sites into bases or camps for the military, including UR, one of the most ancient cities of the world and birthplace of Abraham, including the mythical Babylon where a US military camp has irreparably damaged the ancient city.

Destroying the Iraqi state

Rampant chaos and violence hamper efforts at reconstruction, leaving the foundations of the Iraqi state in ruins. The majority of Western journalists, academics and political figures have refused to recognise the loss of life on such a massive scale and the cultural destruction that accompanied it as the fully predictable consequences of American occupation policy. The very idea is considered unthinkable, despite the openness with which this objective was pursued.

It is time to think the unthinkable. The American-led assault on Iraq forces us to consider the meaning and consequences of state-destruction as a policy objective. The architects of the Iraq policy never made explicit what deconstructing and reconstructing the Iraqi state would entail; their actions, however, make the meaning clear. From those actions in Iraq, a fairly precise definition of state-ending can be read.

The campaign to destroy the state of Iraq involved first the removal and execution of the legal head of state Saddam Hussein and the capture and expulsion of Baath figures. However, state destruction went beyond regime change. It also entailed the purposeful dismantling of major state institutions and the launching of a prolonged process of political reshaping.

Bremer's 100 orders turned Iraq into a giant free-market paradise, but a hellish nightmare for Iraqis. They colonized the country for capital - pillage on the grandest scale. New economic laws instituted low taxes, 100% foreign investor ownership of Iraqi assets, the right to expropriate all profits, unrestricted imports, and long-term 30-40 year deals and leases, dispossessing Iraqis of their own resources.

This desecration of the past and undermining of contemporary social gains is now giving way in occupied Iraq to the destruction of a meaningful future. Iraq is being handed over to the disintegrative forces of sectarianism and regionalism. Iraqis, stripped of their shared heritage and living today in the ruins of contemporary social institutions that sustained a coherent and unified society, are now bombarded by the forces of civil war, social and religious atavism and widespread criminality.

Iraqi nationalism that had emerged through a prolonged process of state-building and social interaction is now routinely disparaged. The regime installed by occupation forces in Iraq reshaped the country along divisive sectarian lines, dissolving the hard-won unity of a long state-building project. Dominant narratives now falsely claim that sectarianism and ethnic chauvinism have always been the basis of Iraqi society, recycling yet again the persistent and destructive myth of age-old conflicts with no resolution and for which the conquerors bear no responsibility.

Contemporary Iraq represents a fragmented pastiche of sectarian forces with the formal trappings of liberal democracy and neo-liberal economic structures. We call this the divide and rule technique, used to fracture and subdue culturally cohesive regions. This reshaping of the Iraqi state resulted in a policy of ethnic cleansing, partially revealed by the Wikileaks files.

The Wikileaks documents

The Wikileaks documents, first made public on 22 October 2010, show how the US military gave a secret order not to investigate torture by Iraqi authorities discovered by American troops.

The data also reveal how hundreds of civilians were killed by coalition forces in unreported events, how hundreds of Iraqi civilians: pregnant women, elderly people and children, were shot at checkpoints.

There are numerous claims of prison abuse by coalition forces even after the Abu Ghraib scandal. The files also paint a grim picture of widespread torture in Iraqi detention facilities. Two revelations await the reader of the Wikileaks section dealing with civilian deaths in the Iraq War: Iraqis are responsible for most of these deaths, and the number of total civilian casualties is substantially higher than has been previously reported.

The documents record a descent into chaos and horror as the country plunged into so-called “civil war”. The logs also record thousands of bodies, many brutally tortured, dumped on the streets of Iraq.

Through the Wikileaks files we can see the impact the war had on Iraqi men, women and children. The sheer scale of the deaths, detentions and violence is here officially acknowledged for the first time.

A thorough research of these documents will give us a further insight into the atrocities committed in Iraq. The Wikileaks logs can serve as evidence in courts. They are important material for lawyers to file charges against the US for negligence and responsibility for the killing of thousands. A fair compensation for the families of the victims and the recognition of their suffering can help to heal the wounds. I

n the first official US State Department response to the massive WikiLeaks release of these classified Iraq War documents, spokesman P.J. Crowley shrugged off the evidence that US troops were ordered to cover up detainee abuse by the Iraqi government, insisting the abuse wasn’t America’s problem. This response is infuriating.

The perpetrators of this violence and those who ordered the soldiers to turn a blind eye when being confronted with torture and extra-judicial killings should be convicted for war crimes. The US and UK forces and Governments clearly refused to fulfil their obligations under international law as a de facto occupying power.

However, these logs reveal only the 'SIGACT's or Significant Actions in the war “as told by soldiers in the United States Army”: the reports of the “regular” US troops. The logs contain nothing new, they merely confirm and officialize what the Iraqis and un-embedded Western observers have been trying to convey to the public for years. While all of the press is now reporting the Wikileaks story, few media outlets are going back to their own coverage and acknowledging how they have failed to honestly report about the crimes.

What these 400.000 documents do not reveal is the US involvement of “irregular troops” in Special Operations, counter-insurgency war and death squads activities. When will the documents of the “dirty war” be revealed? The BRussells Tribunal, monitoring this horrendous invasion and occupation since 2003, is convinced that the leaked logs only scratch the surface of the catastrophic war in Iraq. What we can extract from the Wikileaks documents is only the tip of the iceberg. It is time to take a dive into the troubled waters of the Iraq war and try to explore the hidden part of the iceberg.

Ethnic cleansing

It became clear after the invasion in 2003 that the Iraqi exile groups were to play an important role in the violent response to dissent in occupied Iraq. Already on January 1st 2004, it was reported that the US government planned to create paramilitary units comprised of militiamen from Iraqi Kurdish and exile groups including the Badr brigades, the Iraqi National Congress and the Iraqi National Accord to wage a campaign of terror and extra-judicial killing, similar to the Phoenix program in Vietnam: the terror and assassination campaign that killed tens of thousands of civilians.

The $87 billion supplemental appropriation for the war in November 2003 included $3 billion for a classified program, funds that would be used for the paramilitaries for the next 3 years. Over that period, the news from Iraq gradually came to be dominated by reports of death squads and ethnic cleansing, described in the press as “sectarian violence” that was used as the new central narrative of the war and the principal justification for continued occupation. Some of the violence may have been spontaneous, but there is overwhelming evidence that most of it was the result of the plans described by several American experts in December 2003.

Despite subsequent American efforts to distance US policy from the horrific results of this campaign, it was launched with the full support of conservative opinion-makers in the USA, even declaring that “The Kurds and the INC have excellent intelligence operations that we should allow them to exploit... especially to conduct counterinsurgency in the Sunny Triangle” as a Wall Street Journal editorial stated.

The Salvador Option

In January 2005, more than a year after the first reports about the Pentagon’s planning for assassinations and paramilitary operations emerged, the “Salvador Option” hit the pages of Newsweek and other major news-outlets. The outsourcing of state terrorism to local proxy forces was regarded as a key component of a policy that had succeeded in preventing the total defeat of the US-backed government in El Salvador. Pentagon-hired mercenaries, like Dyncorp, helped form the sectarian militias that were used to terrorize and kill Iraqis and to provoke Iraq into civil war.

In 2004 two senior US Army officers published a favourable review of the American proxy war in Colombia: “Presidents Reagan and Bush supported a small, limited war while trying to keep US military involvement a secret from the American public and media. Present US policy toward Colombia appears to follow this same disguised, quiet, media-free approach.”

It reveals the fundamental nature of “dirty war”, like in Latin America and the worst excesses of the Vietnam War. The purpose of dirty war is not to identify and then detain or kill actual resistance fighters. The target of dirty war is the civilian population.

It is a strategy of state terrorism and collective punishment against an entire population with the objective to terrorizing it into submission. The same tactics used in Central America and Colombia were exported to Iraq. Even the architects of these dirty wars in El Salvador (Ambassador John Negroponte and James Steele) and in Colombia (Steven Casteel) were transferred to Iraq to do the same dirty work.

They recruited, trained and deployed the notorious “Special Police Commandos”, in which later, in 2006, death squads like the Badr Brigades and other militias were incorporated. US forces set up a high-tech operations centre for the Special Police Commandos at an “undisclosed location” in Iraq. American technicians installed satellite telephones and computers with uplinks to the Internet and US forces Networks. The command centre had direct connections to the Iraqi Interior Ministry and to every US forward operating base in the country.

As news of atrocities by these forces in Iraq hit the newsstands in 2005, Casteel would play a critical role in blaming extrajudicial killings on “insurgents” with stolen police uniforms, vehicles and weapons. He also claimed that torture centres were run by rogue elements of the Interior Ministry, even as accounts came to light of torture taking place inside the ministry headquarters where he and other Americans worked. US advisers to the Interior Ministry had their offices on the 8th floor, directly above a jail on the 7th floor where torture was taking place.

The uncritical attitude of the Western media to American officials like Steven Casteel prevented a worldwide popular and diplomatic outcry over the massive escalation of the dirty war in Iraq in 2005 and 2006, consistent with the “disguised, quiet, media-free approach” mentioned before. As the Newsweek story broke in January 2005, General Downing, the former head of US Special Forces, appeared on NBC.

He said: “This is under control of the US forces, of the current Interim Iraqi government. There’s no need to think that we’re going to have any kind of killing campaign that’s going to maim innocent civilians.”

Within months, Iraq was swept by exactly that kind of a killing campaign. This campaign has led to arbitrary detention, torture, extra-judicial executions and the mass exodus and internal displacement of millions.

Thousands of Iraqis disappeared during the worst days of this dirty war between 2005 and 2007. Some were seen picked up by uniformed militias and piled into lorries, others simply seemed to vanish. Iraq’s minister of human rights Wijdan Mikhail said that her ministry had received more than 9,000 complaints in 2005 and 2006 alone from Iraqis who said a relative had disappeared. Human rights groups put the total number much higher. The fate of many missing Iraqis remains unknown. Many are languishing in one of Iraq's notoriously secretive prisons.

Journalist Dr. Yasser Salihee was killed on June 24th 2005 by an American sniper, so-called “accidentally”. Three days after his death Knight Ridder published a report on his investigation into the Special Police Commandos and their links to torture, extra-judicial killings and disappearances in Baghdad. Salihee and his colleagues investigated at least 30 separate cases of abductions leading to torture and death. In every case witnesses gave consistent accounts of raids by large numbers of police commandos in uniform, in clearly marked police vehicles, with police weapons and bullet-proof vests. And in every case the detained were later found dead, with almost identical signs of torture and they were usually killed by a single gunshot to the head.

The effect of simply not pointing out the connection between the US and the Iranian-backed Badr Brigade militia, the US-backed Wolf Brigade and other Special Police Commando units, or the extent of American recruitment, training, command, and control of these units, was far-reaching. It distorted perceptions of events in Iraq throughout the ensuing escalation of the war, creating the impression of senseless violence initiated by the Iraqis themselves and concealing the American hand in the planning and execution of the most savage forms of violence. By providing cover for the crimes committed by the US government, news editors played a significant role in avoiding the public outrage that might have discouraged the further escalation of this campaign.

The precise extent of US complicity in different aspects and phases of death squad operations, torture and disappearances, deserves thorough investigation. It is not credible that American officials were simply innocent bystanders to thousands of these incidents. As frequently pointed out by Iraqi observers, Interior Ministry death squads moved unhindered through American as well as Iraqi checkpoints as they detained, tortured and killed thousands of people.

As in other countries where US forces have engaged in what they refer to as “counter-insurgency”, American military and intelligence officials recruited, trained, equipped and directed local forces which engaged in a campaign of state-sponsored terror against the overwhelming proportion of the local population who continued to reject and oppose the invasion and occupation of their country.

The degree of US initiative in the recruitment, training, equipping, deployment, command and control of the Special Police Commandos made it clear that American trainers and commanders established the parameters within which these forces operated. Many Iraqis and Iranians were certainly guilty of terrible crimes in the conduct of this campaign. But the prime responsibility for this policy, and for the crimes it involved, rests with the individuals in the civilian and military command structure of the US Department of Defense, the CIA and the White House who devised, approved and implemented the “Phoenix” or “Salvador” terror policy in Iraq.

The report of the Human Rights Office of UNAMI, issued on September 8th 2005, written by John Pace was very explicit, linking the campaign of detentions, torture and extra-judicial executions directly to the Interior Ministry and indirectly to the US-led Multi-National Forces.

The final UN Human Rights Report of 2006 described the consequences of these policies for the people of Baghdad, while downplaying their institutional roots in American policy. The “sectarian violence” that engulfed Iraq in 2006 was not an unintended consequence of the US invasion and occupation but an integral part of it. The United States did not just fail to restore stability and security to Iraq. It deliberately undermined them in a desperate effort to “divide and rule” the country and to fabricate new justifications for unlimited violence against Iraqis who continued to reject the illegal invasion and occupation of their country.

The nature and extent of involvement of different individuals and groups within the US occupation structure has remained a dirty, dark secret, but there are many leads that could be followed by any serious inquiry.

The Surge

In January 2007, the US government announced a new strategy, the “surge” of US combat troops in Baghdad and Al-Anbar province. Most Iraqis reported that this escalation of violence made living conditions even worse than before, as its effects were added to the accumulated devastation of 4 years of war and occupation.

The UN Human Rights report for the 1st quarter of 2007 gave a description of the dire conditions of the Iraqi people. The violence of the “surge” resulted i.e. in a further 22% reduction of the number of doctors, leaving only 15.500 out of an original 34.000 by September 2008. The number of refugees and internally displaced has risen sharply during the period 2007-2008.

Since Interior Ministry forces under US command were responsible for a large part of the extra-judicial killings, the occupation authorities had the power to reduce or increase the scale of these atrocities more or less on command. So a reduction in the killings with the launch of the “security plan” should not have been difficult to achieve. In fact, a small reduction in violence seems to have served an important propaganda role for a period until the death squads got back to work, supported by the new American offensive.

The escalation of American firepower in 2007, including a five-fold increase in air strikes and the use of Spectre gun-ships and artillery in addition to the “surge” was intended as a devastating climax to the past 4 years of war and collective punishment inflicted upon the Iraqi people. All resistance-held areas would be targeted with overwhelming fire-power, mainly from the air, until the US ground forces could build walls around what remained of each neighbourhood and isolate each district. It’s worth mentioning that General Petraeus compared the hostilities in Ramadi with the Battle of Stalingrad without qualms about adopting the role of the German invaders in this analogy. Ramadi was completely destroyed as was Fallujah in November 2004.

The UN Human Rights reports of 2007 mentioned the indiscriminate and illegal attacks against civilians and civilian areas and asked for investigations. Air strikes continued on an almost daily basis until August 2008 even as the so-called “sectarian violence” and US casualties declined. In all the reported incidents where civilians, women and children were killed, Centcom press office declared that the people killed were “terrorists”, “Al Qaeda militants” or “involuntary human shields”. Of course, when military forces are illegally ordered to attack civilian areas, many people will try to defend themselves, especially if they know that the failure to do so may result in arbitrary detention, abuse, torture, or summary execution for themselves or their relatives.

Forces involved in “Special Operations”:

Another aspect of the “surge” or escalation appears to have been an increase in the use of the American Special Forces assassination teams. In april 2008 i.e. President Bush declared: ”As we speak, US Special Forces are launching multiple operations every night to capture or kill Al-Qaeda leaders in Iraq”. The NYT reported on 13 May 2009: “When General Stanley McChrystal took over the Joint Special Operations Command in 2003, he inherited an insular, shadowy commando force with a reputation for spurning partnerships with other military and intelligence organizations.

But over the next five years he worked hard, his colleagues say, to build close relationships with the C.I.A. and the F.B.I. (...) In Iraq, where he oversaw secret commando operations for five years, former intelligence officials say that he had an encyclopaedic, even obsessive, knowledge about the lives of terrorists, and that he pushed his ranks aggressively to kill as many of them as possible. (...) Most of what General McChrystal has done over a 33-year career remains classified, including service between 2003 and 2008 as commander of the Joint Special Operations Command, an elite unit so clandestine that the Pentagon for years refused to acknowledge its existence.” The secrecy surrounding these operations prevented more widespread reporting, but as with earlier US covert operations in Vietnam and Latin America, we will learn more about these operations over time.

- An article in the Sunday Telegraph in February 2007 pointed towards clear evidence British Special Forces recruited and trained terrorists in the Green Zone to heighten ethnic tensions. An elite SAS wing, called “Task Force Black”, with bloody past in Northern Ireland operates with immunity and provides advanced explosives. Some attacks are being blamed on Iranians, Sunni insurgents or shadowy terrorist cells such as Al Qaeda.

- the SWAT teams (Special Weapons and Tactics), extensively used in counter-insurgency operations. The mission of SWAT is to conduct high-risk operations that fall outside the abilities of regular patrol officers to prevent, deter and respond to terrorism and insurgent activities. It was reported that “The foreign internal defense partnership with Coalition Soldiers establishes a professional relationship between the Iraqi Security and Coalition forces where the training builds capable forces. Coalition soldiers working side-by-side with the SWAT teams, both in training and on missions.

” On 7 October 2010 the Official website of US Forces in Iraq reported that “The Basrah SWAT team has trained with various Special Forces units, including the Navy SEALs and the British SAS. The 1st Bn., 68th Arm. Regt., currently under the operational control of United States Division-South and the 1st Infantry Division, has taken up the task of teaching the SWAT team.”

- the Facilities Protection Services, where the “private contractors” or mercenaries, like Blackwater, are incorporated, are also used in counter-insurgency operations.

- the Iraq Special Operations Forces (ISOF), probably the largest special forces outfit ever built by the United States, free of many of the controls that most governments employ to rein in such lethal forces.

The project started in Jordan just after the Americans conquered Baghdad in April 2003, to create a deadly, elite, covert unit, fully fitted with American equipment, which would operate for years under US command and be unaccountable to Iraqi ministries and the normal political process. According to Congressional records, the ISOF has grown into nine battalions, which extend to four regional "commando bases" across Iraq.

By December 2009 they were fully operational, each with its own "intelligence infusion cell," which will operate independently of Iraq's other intelligence networks. The ISOF is at least 4,564 operatives strong, making it approximately the size of the US Army's own Special Forces in Iraq. Congressional records indicate that there are plans to double the ISOF over the next "several years."

Conclusion: the “dirty war” in Iraq continues. Even as President Barack Obama was announcing the end of combat in Iraq, U.S. forces were still in fight alongside their Iraqi colleagues. The tasks of the 50,000 remaining US troops, 5,800 of them airmen, are “advising" and training the Iraqi army, "providing security" and carrying out "counter-terrorism" missions.

According to the UN Human Rights report, upon a request for clarification by UNAMI, the MNF confirmed that “the US government continued to regard the conflict in Iraq as an international armed conflict, with procedures currently in force consistent with the 4th Geneva Convention” and not that the civil rights of Iraqis should be governed by the International Covenant on Civil and Political Rights and other human rights laws, because this would have strengthened the rights of Iraqis detained by US or Iraqi forces to speedy and fair trials. The admission that the US was still legally engaged in an “international armed conflict” against Iraq at the end of 2007 also raises serious questions regarding the legality of constitutional and political changes made in Iraq by the occupation forces and their installed government during the war and occupation.

Legitimizing torture

When the public revelations of abuse and torture at Abu Ghraib prison created a brief furor in the world, the ICRC, Human Rights First, AI, HRW and other Human Rights groups documented far more widespread and systematic crimes committed by US forces against people they extra-judicially detained in Iraq. In numerous human rights reports they established that command responsibility for these crimes extended to the highest levels of the US government and its armed forces.

The forms of torture documented in these reports included death threats, mock executions, water-boarding, stress positions, including excruciating and sometimes deadly forms of hanging, hypothermia, sleep deprivation, starvation and thirst, withholding medical treatment, electric shocks, various forms of rape and sodomy, endless beatings, burning, cutting with knives, injurious use of flexicuffs, suffocation, sensory assault and/or deprivation and more psychological forms of torture such as sexual humiliation and the detention and torture of family members. The ICRC established that the violations of international humanitarian law that it recorded were systematic and widespread. Military officers told the ICRC that “between 70% and 90% of the persons deprived of their liberty in Iraq had been arrested by mistake”.

All these facts are well known, but only the lower ranks in the Army were mildly punished. The “Command’s Responsibility” report revealed that the failure to charge higher ranking officers was the direct result of the “key role” that some same officers played “in undermining chances for full accountability”. By delaying and undermining investigations of deaths in their custody, senior officers compounded their own criminal responsibility in a common pattern of torture, murder and obstruction of justice. Senior officers abused the enormous power they wield in the military command structure to place themselves beyond the reach of law, even as they gave orders to commit terrible crimes. It was in recognition of the terrible potential for exactly this type of criminal behaviour that the Geneva Conventions were drafted and signed in the first place, and that is why they are just as vital today.

Nevertheless, the responsibility for these crimes is not limited to the US army. The public record also includes documents in which senior civilian officials of the US government approved violations of the Geneva Conventions, the 1994 Convention against Torture and the 1996 US War Crimes act. The United States government should thus be held accountable for this terrible tragedy it inflicted upon millions of Iraqi citizens and should be forced to pay appropriate compensations to the victims of its criminal policy in Iraq.

We learned that on Tuesday the 26th of October the United Nations High Commissioner for Human Rights Navi Pillay urged Iraq and the United States to investigate allegations of torture and unlawful killings in the Iraq conflict revealed in the Wikileaks documents.

We are very surprised by this statement. Does the High Commissioner think it is appropriate for criminals to investigate their own crimes? Wijdan Mikhail, the Iraqi Minister of Human Rights in Iraq has called for putting Julian Assange on trial instead of investigating the crimes. And since the Obama administration has shown no desire to expose any of the crimes committed by US officials in Iraq, an international investigation under the auspices of the High Commissioner of Human Rights is necessary.

Different Special Rapporteurs should be involved: i.e. the Special Rapporteur on extrajudicial, summary or arbitrary executions, the Special Rapporteur on the promotion and protection of human rights while countering terrorism and the Special Rapporteur on torture and other cruel, inhuman or degrading treatment or punishment. A Special Rapporteur on the situation of human rights in Iraq should be urgently appointed.

Although the U.N. did not authorize the invasion of Iraq, it did “legalize” the occupation a posteriori in UNSC resolution 1483 (22 May 2003), against the will of the overwhelming majority of the world community, that didn’t accept the legality or the legitimacy of that UN resolution. And it was during the occupation that the war crimes brought to light by WikiLeaks took place. As should the U.S., the U.N. has the moral and legal duty to respond.

The world community has the right to know the complete and unbiased truth about the extent and responsibilities of American involvement in Iraq’s Killing Fields and demands justice for the Iraqi people.

We appeal to all states to ask the US about all these crimes against the Iraqi people during the UPR on the 5th of November.

We also demand that procedures be set up to compensate the Iraqi people and Iraq as a nation for all the losses, human and material destruction and damages caused by the illegal war and the occupation of the country lead by the US/UK forces.

Dirk Adriaensens is Member of the BRussells Tribunal Executive Committee

The 21st Century World: Time for a New Theory of Money

2010-11-06T19:06:00.000-07:00

The 21st Century World: Time for a New Theory of Money: "Time for a New Theory of Money"

Time for a New Theory of Money

2010-11-06T19:05:00.000-07:00

The reason our financial system has routinely gotten into trouble, with periodic waves of depression like the one we’re battling now, may be due to a flawed perception not just of the roles of banking and credit but of the nature of money itself. In our economic adolescence, we have regarded money as a “thing”—something independent of the relationship it facilitates. But today there is no gold or silver backing our money. Instead, it’s created by banks when they make loans (that includes Federal Reserve Notes or dollar bills, which are created by the Federal Reserve, a privately-owned banking corporation, and lent into the economy). Virtually all money today originates as credit, or debt, which is simply a legal agreement to pay in the future.

Money as Relationship

In an illuminating dissertation called “Toward a General Theory of Credit and Money” in The Review of Austrian Economics (vol. 14:4, pages 267-317, 2001), Mostafa Moini, Professor of Economics at Oklahoma City University, argues that money has never actually been a “commodity” or “thing.” It has always been merely a “relation,” a legal agreement, a credit/debit arrangement, an acknowledgment of a debt owed and a promise to repay.

The concept of money-as-a-commodity can be traced back to the use of precious metal coins. Gold is widely claimed to be the oldest and most stable currency known, but this is not actually true. Money did not begin with gold coins and evolve into a sophisticated accounting system. It began as an accounting system and evolved into the use of precious metal coins. Money as a “unit of account” (a tally of sums paid and owed) predated money as a “store of value” (a “commodity” or “thing”) by two millennia; the Sumerian and Egyptian civilizations using these accounting-entry payment systems lasted not just hundreds of years (as with some civilizations using gold) but thousands of years. Their bank-like ancient payment systems were public systems—operated by the government the way that courts, libraries and post offices are operated as public services today.

In the payment system of ancient Sumeria, goods were given a value in terms of weight and were measured in these units against each other. The unit of weight was the “shekel,” something that was not originally a coin but a standardized measure. She was the word for barley, suggesting the original unit of measure was a weight of grain. This was valued against other commodities by weight: So many shekels of wheat equaled so many cows equaled so many shekels of silver, etc. Prices of major commodities were fixed by the government; Hammurabi, Babylonian king and lawmaker, has detailed tables of these. Interest was also fixed and invariable, making economic life very predictable.

Grain was stored in granaries, which served as a form of “bank.” But grain was perishable, so silver eventually became the standard tally representing sums owed. A farmer could go to market and exchange his perishable goods for a weight of silver, and come back at his leisure to redeem this market credit in other goods as needed. But it was still simply a tally of a debt owed and a right to make good on it later. Eventually, silver tallies became wooden tallies became paper tallies became electronic tallies.

The Credit Revolution

The problem with gold coins was that they could not expand to meet the needs of trade. The revolutionary advance of medieval bankers was that they succeeded in creating a flexible money supply, one that could keep pace with a vigorously expanding mercantile trade. They did this through the use of credit, something they created by allowing overdrafts in the accounts of their depositors. Under what came to be called “fractional reserve” banking, the bankers would issue paper receipts called banknotes for more gold than they actually had. Their shipping clients would sail away with their wares and return with silver or gold, settling accounts and allowing the bankers’ books to balance. The credit thus created was in high demand in the rapidly expanding economy; but because it was based on the presumption that money was a “thing” (gold), the bankers had to engage in a shell game that periodically got them into trouble. They were gambling that their customers would not all come for their gold at the same time; but when they miscalculated, or when people got suspicious for some reason, there would be a run on the banks, the financial system would collapse, and the economy would sink into depression.

Today, paper money is no longer redeemable in gold, but money is still perceived as a “thing” that has to “be there” before credit can be advanced. Banks still engage in money creation by advancing bank credit, which becomes a deposit in the borrower’s account, which becomes checkbook money. In order for their outgoing checks to clear, however, the banks have to borrow from a pool of money deposited by their customers. If they don’t have enough deposits, they have to borrow from the money market or other banks.

As British author Ann Pettifor observes:

[T]he banking system . . . has failed in its primary purpose: to act as a machine for lending into the real economy. Instead the banking system has been turned on its head, and become a borrowing machine.

The banks suck up cheap money and return it as more expensive money, if they return it at all. The banks control the money spigots and can deny credit to small players, who wind up defaulting on their loans, allowing the big players with access to cheap credit to buy up the underlying assets very cheaply.

That’s one systemic flaw in the current scheme. Another is that the borrowed money backing the bank’s loans usually comes from shorter-term loans. Like Jimmy Stewart’s beleaguered savings and loan in It’s a Wonderful Life, the banks are “borrowing short to lend long,” and if the money market suddenly dries up, the banks will be in trouble. That is what happened in September 2008: According to Rep. Paul Kanjorski, speaking on C-Span in February 2009, there was a $550 billion run on the money markets.

Securitization: “Monetizing” Loans Not with Gold But with Homes

The money markets are part of the “shadow banking system” where large institutional investors park their funds. The shadow banking system allows banks to get around the capital and reserve requirements now imposed on depository institutions by moving loans off their books. Large institutional investors use the shadow banking system because the conventional banking system guarantees deposits only up to $250,000, and large institutional investors have much more than that to move around on a daily basis. The money market is very liquid, and what protects it in place of FDIC insurance is that it is “securitized,” or backed by securities of some sort. Often, the collateral consists of mortgage-backed securities (MBS), the securitized units into which American real estate has been sliced and packaged, sausage-fashion.

Like with the gold that was lent many times over in the 17th century, the same home may be pledged as “security” for several different investor groups at the same time. This is all done behind an electronic curtain called MERS (an acronym for Mortgage Electronic Registration Systems, Inc.), which has allowed houses to be shuffled around among multiple, rapidly changing owners while circumventing local recording laws.

As in the 17th century, however, the scheme has run into trouble when more than one investor group has tried to foreclose at the same time. And the securitization model has now crashed against the hard rock of hundreds of years of state real estate law, which has certain requirements that the banks have not met—and cannot meet, if they are to comply with the tax laws for mortgage-backed securities. (For more on this, see here.)

The bankers have engaged in what amounts to a massive fraud, not necessarily because they started out with criminal intent (although that cannot be ruled out), but because they have been required to in order to come up with the commodities (in this case real estate) to back their loans. It is the way our system is set up: The banks are not really creating credit and advancing it to us, counting on our future productivity to pay it off, the way they once did under the deceptive but functional façade of fractional reserve lending. Instead, they are vacuuming up our money and lending it back to us at higher rates. In the shadow banking system, they are sucking up our real estate and lending it back to our pension funds and mutual funds at compound interest. The result is a mathematically impossible pyramid scheme, which is inherently prone to systemic failure.

The Public Credit Solution

The flaws in the current scheme are now being exposed in the major media, and it may well be coming down. The question then is what to replace it with. What is the next logical phase in our economic evolution?

Credit needs to come first. We as a community can create our own credit, without having to engage in the sort of impossible pyramid scheme in which we’re always borrowing from Peter to pay Paul at compound interest. We can avoid the pitfalls of privately-issued credit with a public credit system, a system banking on the future productivity of its members, guaranteed not by “things” shuffled around furtively in a shell game vulnerable to exposure, but by the community itself.

The simplest public credit model is the electronic community currency system. Consider, for example, one called “Friendly Favors.” The participating Internet community does not have to begin with a fund of capital or reserves, as is now required of private banking institutions. Nor do members borrow from a pool of pre-existing money on which they pay interest to the pool’s owners. They create their own credit, simply by debiting their own accounts and crediting someone else’s. If Jane bakes cookies for Sue, Sue credits Jane’s account with 5 “Favors” and debits her own with 5. They have “created” money in the same way that banks do, but the result is not inflationary. Jane’s plus-5 is balanced against Sue’s minus-5, and when Sue pays her debt by doing something for someone else, it all nets out. It is a zero-sum game.

Community currency systems can be very functional on a small scale, but because they do not trade in the national currency, they tend to be too limited for large-scale businesses and projects. If they were to grow substantially larger, they could run up against the sort of exchange rate problems afflicting small countries. They are basically barter systems, not really designed for advancing credit on a major scale.

The functional equivalent of a community currency system can be achieved using the national currency, by forming a publicly owned bank. By turning banking into a public utility operated for the benefit of the community, the virtues of the expandable credit system of the medieval bankers can be retained, while avoiding the parasitic exploitation to which private banking schemes are prone. Profits generated by the community can be returned to the community.

A public bank that generates credit in the national currency could be established by a community or group of any size, but as long as we have capital and reserve requirements and other stringent banking laws, a state is the most feasible option. It can easily meet those requirements without jeopardizing the solvency of its collective owners.

For capital, a state bank could use some of the money stashed in a variety of public funds. This money need not be spent. It can just be shifted from the Wall Street investments where it is parked now into the state’s own bank. There is precedent establishing that a state-owned bank can be both a very sound and a very lucrative investment. The Bank of North Dakota, currently the nation’s only state-owned bank, is rated AA and recently returned a 26 percent profit to the state. A decentralized movement has been growing in the United States to explore and implement this option. [For more information, see www.public-banking.com.]

We have emerged from the financial crisis with new clarity: Money today is simply credit. When the credit is advanced by a bank, when the bank is owned by the community, and when the profits return to the community, the result can be a functional, efficient, and sustainable system of finance.

The scary actual U.S. government debt

2010-11-01T17:30:00.000-07:00

Boston University economist Laurence Kotlikoff says U.S. government debt is not $13.5-trillion (U.S.), which is 60 per cent of current gross domestic product, as global investors and American taxpayers think, but rather 14-fold higher: $200-trillion – 840 per cent of current GDP. “Let’s get real,” Prof. Kotlikoff says. “The U.S. is bankrupt.”

Writing in the September issue of Finance and Development, a journal of the International Monetary Fund, Prof. Kotlikoff says the IMF itself has quietly confirmed that the U.S. is in terrible fiscal trouble – far worse than the Washington-based lender of last resort has previously acknowledged. “The U.S. fiscal gap is huge,” the IMF asserted in a June report. “Closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 per cent of U.S. GDP.”

This sum is equal to all current U.S. federal taxes combined. The consequences of the IMF’s fiscal fix, a doubling of federal taxes in perpetuity, would be appalling – and possibly worse than appalling.

Prof. Kotlikoff says: “The IMF is saying that, to close this fiscal gap [by taxation], would require an immediate and permanent doubling of our personal income taxes, our corporate taxes and all other federal taxes.

“America’s fiscal gap is enormous – so massive that closing it appears impossible without immediate and radical reforms to its health care, tax and Social Security systems – as well as military and other discretionary spending cuts.”

He cites earlier calculations by the Congressional Budget Office (CBO) that concluded that the United States would need to increase tax revenue by 12 percentage points of GDP to bring revenue into line with spending commitments. But the CBO calculations assumed that the growth of government programs (including Medicare) would be cut by one-third in the short term and by two-thirds in the long term. This assumption, Prof. Kotlikoff notes, is politically implausible – if not politically impossible.

One way or another, the fiscal gap must be closed. If not, the country’s spending will forever exceed its revenue growth, and no one’s real debt can increase faster than his real income forever.
Prof. Kotlikoff uses “fiscal gap,” not the accumulation of deficits, to define public debt. The fiscal gap is the difference between a government’s projected revenue (expressed in today’s dollar value) and its projected spending (also expressed in today’s dollar value). By this measure, the United States is in worse shape than Greece.

Prof. Kotlikoff is a noted economist. He is a research associate at the U.S. National Bureau of Economic Research. He is a former senior economist with then-president Ronald Reagan’s Council of Economic Advisers. He has served as a consultant with governments around the world. He is the author (or co-author) of 14 books: Jimmy Stewart Is Dead (2010), his most recent book, explains his recommendations for reform.

He says the U.S. cannot end its fiscal crisis by increasing taxes. He opposes further stimulus spending because it will simply increase the debt. But he does suggest reforms that would help – most of which would require a significant withering away of the state. He proposes that the government give every person an annual voucher for health care, provided that the total cost not exceed 10 per cent of GDP.

(U.S. health care now consumes 16 per cent of GDP.) He suggests the replacement of all current federal taxes with a single consumption tax of 18 per cent. He calls for government-sponsored personal retirement accounts, with the government making contributions only for the poor, the unemployed and people with disabilities.

Without drastic reform, Prof. Kotlikoff says, the only alternative would be a massive printing of money by the U.S. Treasury – and hyperinflation.

As former president Bill Clinton once prematurely said, the era of big government is over. In the coming years, the U.S. will almost certainly be compelled to deconstruct its welfare state.

Prof. Kotlikoff doesn’t trust government accounting, or government regulation. The official vocabulary (deficit, debt, transfer payment, tax, borrowing), he says, is vulnerable to official manipulation and off-the-books deceit. He calls it “Enron accounting.” He also calls it a lie. Here is an economist who speaks plainly, as the legendary straight-shooting film star Jimmy Stewart did for an earlier generation.

But Prof. Kotlikoff’s economic genre isn’t the Western. It’s the horror story – “and scarier,” one reviewer of his book suggests, than Stephen King.

A hidden world, growing beyond control

2010-07-19T10:43:00.000-07:00

The top-secret world the government created in response to the terrorist attacks of Sept. 11, 2001, has become so large, so unwieldy and so secretive that no one knows how much money it costs, how many people it employs, how many programs exist within it or exactly how many agencies do the same work.

These are some of the findings of a two-year investigation by The Washington Post that discovered what amounts to an alternative geography of the United States, a Top Secret America hidden from public view and lacking in thorough oversight.

After nine years of unprecedented spending and growth, the result is that the system put in place to keep the United States safe is so massive that its effectiveness is impossible to determine. The investigation's other findings include:

* Some 1,271 government organizations and 1,931 private companies work on programs related to counterterrorism, homeland security and intelligence in about 10,000 locations across the United States.

* An estimated 854,000 people, nearly 1.5 times as many people as live in Washington, D.C., hold top-secret security clearances.

* In Washington and the surrounding area, 33 building complexes for top-secret intelligence work are under construction or have been built since September 2001. Together they occupy the equivalent of almost three Pentagons or 22 U.S. Capitol buildings - about 17 million square feet of space.

* Many security and intelligence agencies do the same work, creating redundancy and waste. For example, 51 federal organizations and military commands, operating in 15 U.S. cities, track the flow of money to and from terrorist networks.

* Analysts who make sense of documents and conversations obtained by foreign and domestic spying share their judgment by publishing 50,000 intelligence reports each year - a volume so large that many are routinely ignored.

These are not academic issues; lack of focus, not lack of resources, was at the heart of the Fort Hood shooting that left 13 dead, as well as the Christmas Day bomb attempt thwarted not by the thousands of analysts employed to find lone terrorists but by an alert airline passenger who saw smoke coming from his seatmate.

They are also issues that greatly concern some of the people in charge of the nation's security. "There has been so much growth since 9/11 that getting your arms around that - not just for the DNI [Director of National Intelligence], but for any individual, for the director of the CIA, for the secretary of defense - is a challenge," Defense Secretary Robert M. Gates said in an interview with The Post last week.

In the Department of Defense, where more than two-thirds of the intelligence programs reside, only a handful of senior officials - called Super Users - have the ability to even know about all the department's activities. But as two of the Super Users indicated in interviews, there is simply no way they can keep up with the nation's most sensitive work.

"I'm not going to live long enough to be briefed on everything" was how one Super User put it. The other recounted that for his initial briefing, he was escorted into a tiny, dark room, seated at a small table and told he couldn't take notes. Program after program began flashing on a screen, he said, until he yelled ''Stop!" in frustration.

"I'm not aware of any agency with the authority, responsibility or a process in place to coordinate all these interagency and commercial activities," he said in an interview. "The complexity of this system defies description."

The result, he added, is that it's impossible to tell whether the country is safer because of all this spending and all these activities.

"Because it lacks a synchronizing process, it inevitably results in message dissonance, reduced effectiveness and waste," Vines said.

"We consequently can't effectively assess whether it is making us more safe."

The Post's investigation is based on government documents and contracts, job descriptions, property records, corporate and social networking Web sites, additional records, and hundreds of interviews with intelligence, military and corporate officials and former officials.

Most requested anonymity either because they are prohibited from speaking publicly or because, they said, they feared retaliation at work for describing their concerns. The Post's online database of government organizations and private companies was built entirely on public records.

The investigation focused on top-secret work because the amount classified at the secret level is too large to accurately track. Today's article describes the government's role in this expanding enterprise. Tuesday's article describes the government's dependence on private contractors. Wednesday's is a portrait of one Top Secret America community.

On the Web, an extensive, searchable database built by The Post about Top Secret America is available at washingtonpost.com/topsecretamerica. Defense Secretary Gates, in his interview with The Post, said that he does not believe the system has become too big to manage but that getting precise data is sometimes difficult. Singling out the growth of intelligence units in the Defense Department, he said he intends to review those programs for waste.

"Nine years after 9/11, it makes a lot of sense to sort of take a look at this and say, 'Okay, we've built tremendous capability, but do we have more than we need?' " he said. CIA Director Leon Panetta, who was also interviewed by The Post last week, said he's begun mapping out a five-year plan for his agency because the levels of spending since 9/11 are not sustainable.

"Particularly with these deficits, we're going to hit the wall. I want to be prepared for that," he said. "Frankly, I think everyone in intelligence ought to be doing that."

In an interview before he resigned as the director of national intelligence in May, retired Adm. Dennis C. Blair said he did not believe there was overlap and redundancy in the intelligence world.

"Much of what appears to be redundancy is, in fact, providing tailored intelligence for many different customers," he said. Blair also expressed confidence that subordinates told him what he needed to know.

"I have visibility on all the important intelligence programs across the community, and there are processes in place to ensure the different intelligence capabilities are working together where they need to," he said.

Weeks later, as he sat in the corner of a ballroom at the Willard Hotel waiting to give a speech, he mused about The Post's findings.

"After 9/11, when we decided to attack violent extremism, we did as we so often do in this country," he said. "The attitude was, if it's worth doing, it's probably worth overdoing."

Outside a gated subdivision of mansions in McLean, a line of cars idles every weekday morning as a new day in Top Secret America gets underway. The drivers wait patiently to turn left, then crawl up a hill and around a bend to a destination that is not on any public map and not announced by any street sign. Liberty Crossing tries hard to hide from view.

But in the winter, leafless trees can't conceal a mountain of cement and windows the size of five Wal-Mart stores stacked on top of one another rising behind a grassy berm. One step too close without the right badge, and men in black jump out of nowhere, guns at the ready.

Past the armed guards and the hydraulic steel barriers, at least 1,700 federal employees and 1,200 private contractors work at Liberty Crossing, the nickname for the two headquarters of the Office of the Director of National Intelligence and its National Counterterrorism Center. The two share a police force, a canine unit and thousands of parking spaces.

Liberty Crossing is at the center of the collection of U.S. government agencies and corporate contractors that mushroomed after the 2001 attacks. But it is not nearly the biggest, the most costly or even the most secretive part of the 9/11 enterprise.

In an Arlington County office building, the lobby directory doesn't include the Air Force's mysteriously named XOIWS unit, but there's a big "Welcome!" sign in the hallway greeting visitors who know to step off the elevator on the third floor. In Elkridge, Md., a clandestine program hides in a tall concrete structure fitted with false windows to look like a normal office building.

In Arnold, Mo., the location is across the street from a Target and a Home Depot. In St. Petersburg, Fla., it's in a modest brick bungalow in a run-down business park. Every day across the United States, 854,000 civil servants, military personnel and private contractors with top-secret security clearances are scanned into offices protected by electromagnetic locks, retinal cameras and fortified walls that eavesdropping equipment cannot penetrate.

This is not exactly President Dwight D. Eisenhower's "military-industrial complex," which emerged with the Cold War and centered on building nuclear weapons to deter the Soviet Union. This is a national security enterprise with a more amorphous mission: defeating transnational violent extremists.

Much of the information about this mission is classified. That is the reason it is so difficult to gauge the success and identify the problems of Top Secret America, including whether money is being spent wisely. The U.S. intelligence budget is vast, publicly announced last year as $75 billion, 21/2 times the size it was on Sept. 10, 2001.

But the figure doesn't include many military activities or domestic counterterrorism programs. At least 20 percent of the government organizations that exist to fend off terrorist threats were established or refashioned in the wake of 9/11.

Many that existed before the attacks grew to historic proportions as the Bush administration and Congress gave agencies more money than they were capable of responsibly spending. The Pentagon's Defense Intelligence Agency, for example, has gone from 7,500 employees in 2002 to 16,500 today.

The budget of the National Security Agency, which conducts electronic eavesdropping, doubled. Thirty-five FBI Joint Terrorism Task Forces became 106. It was phenomenal growth that began almost as soon as the Sept. 11 attacks ended. Nine days after the attacks, Congress committed $40 billion beyond what was in the federal budget to fortify domestic defenses and to launch a global offensive against al-Qaeda.

It followed that up with an additional $36.5 billion in 2002 and $44 billion in 2003. That was only a beginning. With the quick infusion of money, military and intelligence agencies multiplied. Twenty-four organizations were created by the end of 2001, including the Office of Homeland Security and the Foreign Terrorist Asset Tracking Task Force.

In 2002, 37 more were created to track weapons of mass destruction, collect threat tips and coordinate the new focus on counterterrorism. That was followed the next year by 36 new organizations; and 26 after that; and 31 more; and 32 more; and 20 or more each in 2007, 2008 and 2009. In all, at least 263 organizations have been created or reorganized as a response to 9/11.

Each has required more people, and those people have required more administrative and logistic support: phone operators, secretaries, librarians, architects, carpenters, construction workers, air-conditioning mechanics and, because of where they work, even janitors with top-secret clearances.

With so many more employees, units and organizations, the lines of responsibility began to blur. To remedy this, at the recommendation of the bipartisan 9/11 Commission, the George W. Bush administration and Congress decided to create an agency in 2004 with overarching responsibilities called the Office of the Director of National Intelligence (ODNI) to bring the colossal effort under control.

While that was the idea, Washington has its own ways. The first problem was that the law passed by Congress did not give the director clear legal or budgetary authority over intelligence matters, which meant he wouldn't have power over the individual agencies he was supposed to control. The second problem: Even before the first director, Ambassador John D. Negroponte, was on the job, the turf battles began.

The Defense Department shifted billions of dollars out of one budget and into another so that the ODNI could not touch it, according to two senior officials who watched the process. The CIA reclassified some of its most sensitive information at a higher level so the National Counterterrorism Center staff, part of the ODNI, would not be allowed to see it, said former intelligence officers involved.

And then came a problem that continues to this day, which has to do with the ODNI's rapid expansion. When it opened in the spring of 2005, Negroponte's office was all of 11 people stuffed into a secure vault with closet-size rooms a block from the White House. A year later, the budding agency moved to two floors of another building.

In April 2008, it moved into its huge permanent home, Liberty Crossing. Today, many officials who work in the intelligence agencies say they remain unclear about what the ODNI is in charge of. To be sure, the ODNI has made some progress, especially in intelligence-sharing, information technology and budget reform.

The DNI and his managers hold interagency meetings every day to promote collaboration. The last director, Blair, doggedly pursued such nitty-gritty issues as procurement reform, compatible computer networks, tradecraft standards and collegiality.

"I wasn't remembering any of it," he said. Underscoring the seriousness of these issues are the conclusions of retired Army Lt. Gen. John R. Vines, who was asked last year to review the method for tracking the Defense Department's most sensitive programs. Vines, who once commanded 145,000 troops in Iraq and is familiar with complex problems, was stunned by what he discovered.

But improvements have been overtaken by volume at the ODNI, as the increased flow of intelligence data overwhelms the system's ability to analyze and use it. Every day, collection systems at the National Security Agency intercept and store 1.7 billion e-mails, phone calls and other types of communications. The NSA sorts a fraction of those into 70 separate databases.

The same problem bedevils every other intelligence agency, none of which have enough analysts and translators for all this work. The practical effect of this unwieldiness is visible, on a much smaller scale, in the office of Michael Leiter, the director of the National Counterterrorism Center.

Leiter spends much of his day flipping among four computer monitors lined up on his desk. Six hard drives sit at his feet. The data flow is enormous, with dozens of databases feeding separate computer networks that cannot interact with one another. There is a long explanation for why these databases are still not connected, and it amounts to this:

It's too hard, and some agency heads don't really want to give up the systems they have. But there's some progress: "All my e-mail on one computer now," Leiter says. "

That's a big deal." To get another view of how sprawling Top Secret America has become, just head west on the toll road toward Dulles International Airport. As a Michaels craft store and a Books-A-Million give way to the military intelligence giants Northrop Grumman and Lockheed Martin, find the off-ramp and turn left.

Those two shimmering-blue five-story ice cubes belong to the National Geospatial-Intelligence Agency, which analyzes images and mapping data of the Earth's geography. A small sign obscured by a boxwood hedge says so.

Across the street, in the chocolate-brown blocks, is Carahsoft, an intelligence agency contractor specializing in mapping, speech analysis and data harvesting. Nearby is the government's Underground Facility Analysis Center. It identifies overseas underground command centers associated with weapons of mass destruction and terrorist groups, and advises the military on how to destroy them.

Clusters of top-secret work exist throughout the country, but the Washington region is the capital of Top Secret America. About half of the post-9/11 enterprise is anchored in an arc stretching from Leesburg south to Quantico, back north through Washington and curving northeast to Linthicum, just north of the Baltimore-Washington International Marshall Airport.

Many buildings sit within off-limits government compounds or military bases. Others occupy business parks or are intermingled with neighborhoods, schools and shopping centers and go unnoticed by most people who live or play nearby. Many of the newest buildings are not just utilitarian offices but also edifices "on the order of the pyramids," in the words of one senior military intelligence officer.

Not far from the Dulles Toll Road, the CIA has expanded into two buildings that will increase the agency's office space by one-third. To the south, Springfield is becoming home to the new $1.8 billion National Geospatial-Intelligence Agency headquarters, which will be the fourth-largest federal building in the area and home to 8,500 employees.

Economic stimulus money is paying hundreds of millions of dollars for this kind of federal construction across the region. It's not only the number of buildings that suggests the size and cost of this expansion, it's also what is inside: banks of television monitors. "Escort-required" badges. X-ray machines and lockers to store cellphones and pagers.

Keypad door locks that open special rooms encased in metal or permanent dry wall, impenetrable to eavesdropping tools and protected by alarms and a security force capable of responding within 15 minutes. Every one of these buildings has at least one of these rooms, known as a SCIF, for sensitive compartmented information facility. Some are as small as a closet; others are four times the size of a football field.

SCIF size has become a measure of status in Top Secret America, or at least in the Washington region of it. "In D.C., everyone talks SCIF, SCIF, SCIF," said Bruce Paquin, who moved to Florida from the Washington region several years ago to start a SCIF construction business. "They've got the penis envy thing going. You can't be a big boy unless you're a three-letter agency and you have a big SCIF."

SCIFs are not the only must-have items people pay attention to. Command centers, internal television networks, video walls, armored SUVs and personal security guards have also become the bling of national security.

"You can't find a four-star general without a security detail," said one three-star general now posted in Washington after years abroad. "Fear has caused everyone to have stuff. Then comes, 'If he has one, then I have to have one.' It's become a status symbol."

Among the most important people inside the SCIFs are the low-paid employees carrying their lunches to work to save money. They are the analysts, the 20- and 30-year-olds making $41,000 to $65,000 a year, whose job is at the core of everything Top Secret America tries to do.

At its best, analysis melds cultural understanding with snippets of conversations, coded dialogue, anonymous tips, even scraps of trash, turning them into clues that lead to individuals and groups trying to harm the United States.

Their work is greatly enhanced by computers that sort through and categorize data. But in the end, analysis requires human judgment, and half the analysts are relatively inexperienced, having been hired in the past several years, said a senior ODNI official. Contract analysts are often straight out of college and trained at corporate headquarters.

When hired, a typical analyst knows very little about the priority countries - Iraq, Iran, Afghanistan and Pakistan - and is not fluent in their languages. Still, the number of intelligence reports they produce on these key countries is overwhelming, say current and former intelligence officials who try to cull them every day.

The ODNI doesn't know exactly how many reports are issued each year, but in the process of trying to find out, the chief of analysis discovered 60 classified analytic Web sites still in operation that were supposed to have been closed down for lack of usefulness.

"Like a zombie, it keeps on living" is how one official describes the sites. The problem with many intelligence reports, say officers who read them, is that they simply re-slice the same facts already in circulation.

"It's the soccer ball syndrome. Something happens, and they want to rush to cover it," said Richard H. Immerman, who was the ODNI's assistant deputy director of national intelligence for analytic integrity and standards until early 2009.

"I saw tremendous overlap." Even the analysts at the National Counterterrorism Center (NCTC), which is supposed to be where the most sensitive, most difficult-to-obtain nuggets of information are fused together, get low marks from intelligence officials for not producing reports that are original, or at least better than the reports already written by the CIA, FBI,

National Security Agency or Defense Intelligence Agency. When Maj. Gen. John M. Custer was the director of intelligence at U.S. Central Command, he grew angry at how little helpful information came out of the NCTC. In 2007, he visited its director at the time, retired Vice Adm. John Scott Redd, to tell him so.

"I told him that after 41/2 years, this organization had never produced one shred of information that helped me prosecute three wars!" he said loudly, leaning over the table during an interview. Two years later, Custer, now head of the Army's intelligence school at Fort Huachuca, Ariz., still gets red-faced recalling that day, which reminds him of his frustration with Washington's bureaucracy.

"Who has the mission of reducing redundancy and ensuring everybody doesn't gravitate to the lowest-hanging fruit?" he said.

"Who orchestrates what is produced so that everybody doesn't produce the same thing?"

He's hardly the only one irritated. In a secure office in Washington, a senior intelligence officer was dealing with his own frustration. Seated at his computer, he began scrolling through some of the classified information he is expected to read every day:

CIA World Intelligence Review, WIRe-CIA, Spot Intelligence Report, Daily Intelligence Summary, Weekly Intelligence Forecast, Weekly Warning Forecast, IC Terrorist Threat Assessments, NCTC Terrorism Dispatch, NCTC Spotlight . . . It's too much, he complained.

The inbox on his desk was full, too. He threw up his arms, picked up a thick, glossy intelligence report and waved it around, yelling. "Jesus! Why does it take so long to produce?" "Why does it have to be so bulky?" "Why isn't it online?"

The overload of hourly, daily, weekly, monthly and annual reports is actually counterproductive, say people who receive them. Some policymakers and senior officials don't dare delve into the backup clogging their computers.

They rely instead on personal briefers, and those briefers usually rely on their own agency's analysis, re-creating the very problem identified as a main cause of the failure to thwart the attacks: a lack of information-sharing. The ODNI's analysis office knows this is a problem.

Yet its solution was another publication, this one a daily online newspaper, Intelligence Today. Every day, a staff of 22 culls more than two dozen agencies' reports and 63 Web sites, selects the best information and packages it by originality, topic and region. Analysis is not the only area where serious overlap appears to be gumming up the national security machinery and blurring the lines of responsibility.

Within the Defense Department alone, 18 commands and agencies conduct information operations, which aspire to manage foreign audiences’ perceptions of U.S. policy and military activities overseas. And all the major intelligence agencies and at least two major military commands claim a major role in cyber-warfare, the newest and least-defined frontier.

"Frankly, it hasn't been brought together in a unified approach," CIA Director Panetta said of the many agencies now involved in cyber-warfare. "Cyber is tremendously difficult" to coordinate, said Benjamin A. Powell, who served as general counsel for three directors of national intelligence until he left the government last year. "Sometimes there was an unfortunate attitude of bring your knives, your guns, your fists and be fully prepared to defend your turf."

Why? "Because it's funded, it's hot and it's sexy." Last fall, U.S. Army Maj. Nidal Malik Hasan allegedly opened fire at Fort Hood, Tex., killing 13 people and wounding 30. In the days after the shootings, information emerged about Hasan's increasingly strange behavior at Walter Reed Army Medical Center, where he had trained as a psychiatrist and warned commanders that they should allow Muslims to leave the Army or risk "adverse events."

He had also exchanged e-mails with a well-known radical cleric in Yemen being monitored by U.S. intelligence. But none of this reached the one organization charged with handling counterintelligence investigations within the Army.

Just 25 miles up the road from Walter Reed, the Army's 902nd Military Intelligence Group had been doing little to search the ranks for potential threats. Instead, the 902's commander had decided to turn the unit's attention to assessing general terrorist affiliations in the United States, even though the Department of Homeland Security and the FBI's 106 Joint Terrorism Task Forces were already doing this work in great depth.

The 902nd, working on a program the commander named RITA, for Radical Islamic Threat to the Army, had quietly been gathering information on Hezbollah, Iranian Republican Guard and al-Qaeda student organizations in the United States. The assessment "didn't tell us anything we didn't know already," said the Army's senior counterintelligence officer at the Pentagon.

Secrecy and lack of coordination have allowed organizations, such as the 902nd in this case, to work on issues others were already tackling rather than take on the much more challenging job of trying to identify potential jihadist sympathizers within the Army itself.

Beyond redundancy, secrecy within the intelligence world hampers effectiveness in other ways, say defense and intelligence officers. For the Defense Department, the root of this problem goes back to an ultra-secret group of programs for which access is extremely limited and monitored by specially trained security officers.

These are called Special Access Programs - or SAPs - and the Pentagon's list of code names for them runs 300 pages. The intelligence community has hundreds more of its own, and those hundreds have thousands of sub-programs with their own limits on the number of people authorized to know anything about them.

All this means that very few people have a complete sense of what's going on. "There's only one entity in the entire universe that has visibility on all SAPs - that's God," said James R. Clapper, undersecretary of defense for intelligence and the Obama administration's nominee to be the next director of national intelligence.

Such secrecy can undermine the normal chain of command when senior officials use it to cut out rivals or when subordinates are ordered to keep secrets from their commanders. One military officer involved in one such program said he was ordered to sign a document prohibiting him from disclosing it to his four-star commander, with whom he worked closely every day, because the commander was not authorized to know about it. Another senior defense official recalls the day he tried to find out about a program in his budget, only to be rebuffed by a peer.

"What do you mean you can't tell me? I pay for the program," he recalled saying in a heated exchange. Another senior intelligence official with wide access to many programs said that secrecy is sometimes used to protect ineffective projects.

"I think the secretary of defense ought to direct a look at every single thing to see if it still has value," he said. "The DNI ought to do something similar." The ODNI hasn't done that yet.

The best it can do at the moment is maintain a database of the names of the most sensitive programs in the intelligence community. But the database does not include many important and relevant Pentagon projects. Because so much is classified, illustrations of what goes on every day in Top Secret America can be hard to ferret out.

But every so often, examples emerge. A recent one shows the post-9/11 system at its best and its worst. Last fall, after eight years of growth and hirings, the enterprise was at full throttle when word emerged that something was seriously amiss inside Yemen. In response, President Obama signed an order sending dozens of secret commandos to that country to target and kill the leaders of an al-Qaeda affiliate.

In Yemen, the commandos set up a joint operations center packed with hard drives, forensic kits and communications gear. They exchanged thousands of intercepts, agent reports, photographic evidence and real-time video surveillance with dozens of top-secret organizations in the United States.

That was the system as it was intended. But when the information reached the National Counterterrorism Center in Washington for analysis, it arrived buried within the 5,000 pieces of general terrorist-related data that are reviewed each day. Analysts had to switch from database to database, from hard drive to hard drive, from screen to screen, just to locate what might be interesting to study further.

As military operations in Yemen intensified and the chatter about a possible terrorist strike increased, the intelligence agencies ramped up their effort. The flood of information into the NCTC became a torrent. Somewhere in that deluge was even more vital data. Partial names of someone in Yemen. A reference to a Nigerian radical who had gone to Yemen.

A report of a father in Nigeria worried about a son who had become interested in radical teachings and had disappeared inside Yemen. These were all clues to what would happen when a Nigerian named Umar Farouk Abdulmutallab left Yemen and eventually boarded a plane in Amsterdam bound for Detroit.

But nobody put them together because, as officials would testify later, the system had gotten so big that the lines of responsibility had become hopelessly blurred. "There are so many people involved here," NCTC Director Leiter told Congress. "Everyone had the dots to connect," DNI Blair explained to the lawmakers.

"But I hadn't made it clear exactly who had primary responsibility." And so Abdulmutallab was able to step aboard Northwest Airlines Flight 253. As it descended toward Detroit, he allegedly tried to ignite explosives hidden in his underwear. It wasn't the very expensive, very large 9/11 enterprise that prevented disaster. It was a passenger who saw what he was doing and tackled him.

"We didn't follow up and prioritize the stream of intelligence," White House counterterrorism adviser John O. Brennan explained afterward. "Because no one intelligence entity, or team or task force was assigned responsibility for doing that follow-up investigation."

Blair acknowledged the problem. His solution:
Create yet another team to run down every important lead. But he also told Congress he needed more money and more analysts to prevent another mistake. More is often the solution proposed by the leaders of the 9/11 enterprise.

After the Christmas Day bombing attempt, Leiter also pleaded for more - more analysts to join the 300 or so he already had. The Department of Homeland Security asked for more air marshals, more body scanners and more analysts, too, even though it can't find nearly enough qualified people to fill its intelligence unit now.

Obama has said he will not freeze spending on national security, making it likely that those requests will be funded. More building, more expansion of offices continues across the country.

A $1.7 billion NSA data-processing center will be under construction soon near Salt Lake City. In Tampa, the U.S. Central Command’s new 270,000-square-foot intelligence office will be matched next year by an equally large headquarters building, and then, the year after that, by a 51,000-square-foot office just for its special operations section.

Just north of Charlottesville, the new Joint-Use Intelligence Analysis Facility will consolidate 1,000 defense intelligence analysts on a secure campus. Meanwhile, five miles southeast of the White House, the DHS has broken ground for its new headquarters, to be shared with the Coast Guard. DHS, in existence for only seven years, already has its own Special Access Programs, its own research arm, its own command center, its own fleet of armored cars and its own 230,000-person workforce, the third-largest after the departments of Defense and Veterans Affairs. Soon, on the grounds of the former St. Elizabeths mental hospital in Anacostia, a $3.4 billion showcase of security will rise from the crumbling brick wards.

The new headquarters will be the largest government complex built since the Pentagon, a major landmark in the alternative geography of Top Secret America and four times as big as Liberty Crossing.

Government Policies Pushing U.S. Towards Depression

2010-07-15T21:11:00.000-07:00

Despite several quarters of rising GDP, and the upbeat exertions of Administration spokespeople, the National Bureau of Economic Research (NBER) has yet to announce the recession is over. Their reluctance is well-founded. It is beginning to dawn on even the more optimistic analysts that the tepid growth we have seen over the past three quarters is only an interlude in an otherwise grave and prolonged recession. Moreover, the respite will cost dearly as the United States has racked up a generation worth of debt for dubious benefit.

The paltry number of new jobs currently being created still fall far short of the 375,000 per month needed to offset the 125,000 new entrants to the job market due to population growth and to erode the 8 million people laid off in the past year alone. Meanwhile, house prices continue to fall and credit continues to contract. With retail sales dropping in June and the Leading Economic Index (LEI) standing at minus 7.7 per cent, it should be clear that the US economy is heading back towards recession, following a temporary distortion created by some $1.3 trillion in federal stimulus. In short, the stimulus has failed.

While there can be no doubt that an increase in government spending will result in a boost to GDP figures, the evidence of history shows that such growth is short-lived. Unfortunately as leaders around the world look to tighten the reins on out of control spending, President Obama and his Democratic supporters in Congress believe that their stimulus actions have succeeded and should be redoubled. Armed with nothing more than faith in government and a belief that spending is both a means and an end, it appears that the US stimulus policy will continue. The net result of these efforts will not be a more vibrant economy, but the perpetuation of fear and confusion in the business community and the continuing expansion of deficits that will lead inevitably to higher taxes.

The more indebted an economy becomes, the greater the burden that must be borne by the wealth-creating private sector. Indeed, at the present rate of government debt-financing, the private sector will have to contribute some $2 trillion each year in interest costs alone. This money must be raised by taxation or inflation.

This week, in response to their fears of increased regulations, higher taxes, and greater government stewardship of the economy, discontent among business leaders flared into the open. Gathering in Washington, leaders of the US Chamber of Commerce lashed out at current regulatory changes in healthcare. In other forums, business executives and investors questioned the efficacy of the freshly passed financial regulation bill.

Academic economists have identified a phenomenon they call 'fiscal drag.' Their studies show that each dollar raised in taxation incurs a government cost (tax collection and spending administration) or reverse multiplier.

The Administration estimates that the expiration of the Bush-era tax cuts will raise additional revenues of some $1.5 trillion over the next decade. In addition, some economists estimate that the Obama Health Act will raise a further $500 billion over the same time period. Using the average reverse multiplier of two, this additional taxation of $2 trillion will suck a further $4 trillion out of the wealth-producing private sector by 2020, or some $400 billion each year.

By facing the stark reality of the above factors (as more and more clear thinking individuals are), it becomes increasingly clear that a continuation of the current Administration's policies will push America into a depression.

As America is still by far the largest international consumer, an American depression would likely reshape the entire global economy. In a world where a huge number of countries, businesses, and individuals are grossly indebted, any sustained crash in asset values could be catastrophic. The dollar would be threatened severely, leaving those who have invested in gold and silver as financial survivors.

Rethinking Iran-Contra: A Much Darker Story?

2010-07-03T07:41:00.000-07:00

The Iran-Contra/ October Surprise was the missing link in a larger American political narrative

The conventional view of the Iran-Contra scandal is that it covered the period 1985-86, when President Ronald Reagan became concerned about the fate of American hostages in Lebanon and agreed to secretly sell weapons to Iran’s Islamist government to gain its help in freeing the captives.

Supposedly, the scheme went awry when White House aide Oliver North and other participants got carried away, including North’s decision to divert profits from the arms sales to another one of Reagan’s priorities, the Nicaraguan contra rebels whose CIA assistance had been cut off by Congress.

The Iran-Contra scandal was exposed in fall of 1986 after the shooting down of a North supply plane over Nicaragua and revelations in Lebanon of Reagan’s arms sales to Iran. A White House staff shake-up, including North’s firing, and some wrist-slaps from Congress for Reagan’s alleged inattention to details resolved the scandal, at least that was how Official Washington saw it.

The few dissenters who wouldn’t accept that tidy conclusion – such as Iran-Contra special prosecutor Lawrence Walsh – were mocked and marginalized by the news media, including the Washington Post (which ran an article concluding that Walsh’s consistency in pursuing the scandal was “so un-Washington” and that he would depart as “a perceived loser”).

But an accumulating body of evidence suggests that the traditional view of Iran-Contra was mistaken, that this conventional understanding of the scandal was like starting a novel in the middle and assuming you’re reading the opening chapter.

Indeed, it now appears clear that the Iran-Contra Affair began five years earlier in 1980, with what has often been treated as a separate controversy, called the October Surprise case, dealing with alleged contacts between Reagan’s presidential campaign and Iran.

In view of the latest evidence – and the crumbling of the long-running October Surprise cover-up – there appears to have been a single Iran-Contra narrative spanning the entire 12 years of the Reagan and Bush I administration, and representing a much darker story.

And it was not simply a tale of Republican electoral skullduggery and treachery, but possibly even more troubling, a story of rogue CIA officers and Israel’s Likud hardliners sabotaging a sitting U.S. president, Jimmy Carter.

Plus, with Washington’s failure to get at the larger truth about the Iran-Contra Affair, crucial patterns were set: Republicans acted aggressively, Democrats behaved timidly, and the U.S. national news media was transformed from Watergate-era watchdogs, to lapdogs and finally to guard dogs protecting national security wrongdoing.

In that sense, the Iran-Contra/October Surprise scandal represented the missing link in a larger American political narrative covering the sweep of several decades, explaining how the United States shifted away from a nation grappling with epochal problems, from energy dependence and environmental degradation to bloated military budgets and an obsession with empire.

For all his shortcomings and half-measures, President Carter had begun promoting solar and other alternative energies; he pushed conservation programs and worked to reduce the federal deficit; and abroad, he advocated greater respect for human rights and pulled back from the imperial presidency.

More on point, he cashiered many of the freewheeling Cold Warriors of the CIA and demanded land-for-peace concessions from Israel.

Unacceptable Dangers

Carter’s potential second term presented unacceptable dangers to some powerful interests at home and overseas. The CIA Old Boys (whom legendary CIA officer Miles Copeland deemed “the CIA within the CIA”) thought they understood the true national interests even if the lazy-minded public and weak-kneed politicians didn’t.

Israeli Prime Minister Menachem Begin and his Likud Party believed in a “Greater Israel” and were determined not to trade any more land conquered in the Six-Day War of 1967 for promises of peace with Palestinians and other Arabs. In 1980, Begin was still fuming over Carter’s Camp David pressure on him to surrender the Sinai in exchange for a peace deal with Egypt.

In other words, the deep-seated concerns of many influential forces intersected in 1980, all with a common desire to sink Carter’s reelection campaign. And the best way to do that was to undermine his efforts to gain the freedom of 52 American hostages then held in Iran. [For details, see Consortiumnews.com’s “The CIA/Likud Sinking of Jimmy Carter.”

The secret relationships, born of the 1980 hostage dealings, created the framework for the Reagan administration’s approval of Israel’s clandestine arms shipments to Iran beginning immediately after Reagan took office in 1981, just as the American hostages were finally released. Those initial Israeli arms sales gradually evolved into the Iran-Contra weapons transfers.

Thus, when the Iran-Contra scandal surfaced in fall 1986, the subsequent cover-up was not simply to protect Reagan from possible impeachment for violating the Arms Export Control Act and the congressional ban on military aid to the Nicaraguan contras, but from exposure of the even darker, earlier phase of the scandal, which would implicate Israel and the CIA

In authorizing the first investigation of Iran-Contra, Reagan’s Attorney General Edwin Meese set the chronological parameters as 1985 and 1986. Congressional inquiries also focused on that narrow time frame, despite indications that the scandal began earlier, such as the mystery of an Israeli-chartered arms flight that was shot down in July 1981 after straying into Soviet air space.

Only late in the Iran-Contra criminal investigation did Walsh and his investigative team begin suspecting that the only explanation for the futile arms-for-hostage dealings regarding Lebanon in 1985-86 – when each freed hostage was replaced by a new captive – was that the tripartite relationship of Iran-Israel-and-Reagan predated the Lebanese crisis, going back to 1980.

That was one reason why Walsh’s investigators asked George H.W. Bush’s national security adviser (and former CIA officer) Donald Gregg about his possible role in delaying the release of the hostages in 1980. His denial was judged deceptive by an FBI polygrapher.

‘People on High’

Nicholas Veliotes, Reagan’s assistant secretary of state for the Middle East, described his discovery of the earlier Iran connections after the Israeli plane went down in the Soviet Union in 1981.

“It was clear to me after my conversations with people on high that indeed we had agreed that the Israelis could transship to Iran some American-origin military equipment,” Veliotes said in an interview with PBS Frontline.

In checking out the Israeli flight, Veliotes came to believe that the Reagan camp’s dealings with Iran dated back to before the 1980 election.

“It seems to have started in earnest in the period probably prior to the election of 1980, as the Israelis had identified who would become the new players in the national security area in the Reagan administration,” Veliotes said. “And I understand some contacts were made at that time.”

Though some two dozen witnesses – including senior Iranian officials and a wide range of other international players – have expanded on Veliotes’s discovery, the pressure became overpowering in the final years of George H.W. Bush’s presidency not to accept the obvious conclusions. [For details of the evidence, see Robert Parry’s Secrecy & Privilege.]

It was easier for all involved – surely the Republicans but also the Democrats and much of the Washington press corps – to discredit the corroborated 1980 allegations. Taking the lead was the neoconservative New Republic.

In fall 1991, as Congress was deliberating whether to conduct a full investigation of the October Surprise issue, Steven Emerson, a journalist with close ties to Likud, produced a cover story for The New Republic claiming to prove the allegations were a “myth.”

Newsweek published a matching cover story also attacking the October Surprise allegations. The article, I was told, had been ordered up by executive editor Maynard Parker who was known inside Newsweek as a close ally of the CIA and an admirer of prominent neocon Elliott Abrams.

The two articles were influential in shaping Washington’s conventional wisdom, but they were both based on a misreading of attendance documents at a London historical conference which William Casey had gone to in July 1980.

The two publications put Casey at the conference on one key date – thus supposedly proving he could not have attended an alleged Madrid meeting with Iranian emissaries. However, after the two stories appeared, follow-up interviews with conference participants, including historian Robert Dallek, conclusively showed that Casey wasn’t at the conference until later.

Veteran journalist Craig Unger, who had worked on the Newsweek cover story, said the magazine knew the Casey alibi was bogus but still used it. “It was the most dishonest thing that I’ve been through in my life in journalism,” Unger later told me.

However, even though the Newsweek and New Republic stories had themselves been debunked, that didn’t stop other neoconservative-dominated publications, like the Wall Street Journal, from ladling out ridicule on anyone who dared take the October Surprise case seriously.

Peculiar Journalism

Emerson also was a close friend of Michael Zeldin, the deputy chief counsel for the House task force that investigated the October Surprise issue in 1992. Though the task force had to jettison Emerson’s bogus Casey alibi, House investigators told me Emerson frequently visited the task force’s offices and advised Zeldin and others how to read the October Surprise evidence.

Subsequent examinations of Emerson’s peculiar brand of journalism (which invariably toed the Likud line and often demonized Muslims) revealed that Emerson had financial ties to right-wing funders such as Richard Mellon Scaife and had hosted right-wing Israeli intelligence commander Yigal Carmon when Carmon came to Washington to lobby against Middle East peace talks.

In 1999, a study of Emerson’s history by John F. Sugg for Fairness and Accuracy in Reporting’s magazine “Extra!” quoted an Associated Press reporter who had worked with Emerson on a project as saying of Emerson and Carmon: “I have no doubt these guys are working together.”

The Jerusalem Post reported that Emerson has "close ties to Israeli intelligence." And “Victor Ostrovsky, who defected from Israel's Mossad intelligence agency and has written books disclosing its secrets, calls Emerson ‘the horn’ -- because he trumpets Mossad claims,” Sugg reported.

Yet, the way Washington was working by the end of the 12-year Reagan-Bush-41 era, there was little interest in getting to the bottom of a difficult national security scandal. The House task force simply applied some fantastical logic, such as claiming that because someone wrote down Casey’s home phone number on another key date that proved he was at home, to conclude nothing had happened.

Between the House task force’s finding of “no credible evidence” and the subsequent ridicule heaped on the allegations by major U.S. news outlets, the October Surprise case was cast aside as a “conspiracy theory,” which is how it is still categorized by Washington’s insiders and by Wikipedia.
However, subsequent disclosures have revealed that a flood of new evidence incriminating the Republicans arrived at the House task force in its final weeks, in December 1992, so much so that chief counsel Lawrence Barcella says he recommended that task force chairman, Rep. Lee Hamilton, D-Indiana, extend the investigation for several months. However, Barcella said Hamilton refused, citing procedural difficulties.

Instead, the incriminating evidence was simply kept from other task force members, and the investigation was shut down with a finding of Republican innocence. It even appears that a late-arriving report from the Russian government about its own intelligence on the case – corroborating allegations of a Republican-Iranian deal – was not even shown to Hamilton, the chairman.

When questioned this year, Hamilton told me he had no recollection of ever seeing the Russian report (though it was addressed to him) and Barcella added that he didn’t “recall whether I showed [Hamilton] the Russian report or not.” [See Consortiumnews.com’s “Key October Surprise Evidence Hidden.”]

According to other recent interviews, dissent within the task force over some of the irrational arguments being used to clear the Republicans was suppressed by Hamilton and Barcella. [See Consortiumnews.com’s “The Tricky October Surprise Report.”]

In other words, Official Washington preferred to sweep this unpleasant scandal under the rug rather than confront the facts and their troubling implications.

Yet, with Reagan remaining a conservative icon and his anti-government policies still in vogue among millions of Americans – slashing taxes for the rich, weakening corporate regulations, rejecting alternative energy, and expanding the military budget – the lost history of this broader Iran-Contra scandal has turned out to be a case that what the country didn’t know did turn out to hurt it.

The End of the U.S. Dollar’s Reign?

2010-07-01T15:43:00.000-07:00

The U.S. dollar is facing tough times these days as talk of the dollar being discarded as the world’s reserve currency is becoming increasingly hard to ignore. Joseph Quinlan, chief market strategist at Banc of America, argues that the U.S. dollar’s reign will continue — but for all the wrong reasons.

In light of the U.S. dollar’s three-year swoon, many observers believe we are witnessing the beginning of the end of the dollar’s role as the world’s reserve currency.

That the dollar remains the best of the world’s currencies speaks volumes about the unbalanced and unsettled state of the global economy.

A number of interrelated factors support this view, ranging from America’s abysmal savings rate to the soaring U.S. trade deficit.

Unchecked, according to the consensus, current trends are putting the dollar’s role as the world’s dominant currency at risk.

If the dollar’s 60-year reign is in its twilight, then what other currency is in position to supplant or usurp the dollar’s role as the world’s reserve currency?

Requirements of a reserve currency

Obtaining reserve currency status is not easy. The requirements include a large and open economy, a well-developed and highly liquid financial market and a convertible and widely accepted currency in which large volumes of trade and commerce are transacted.

Political stability, a history of stable economic growth and a country of global importance or stature are also prerequisites.

Potential candidates

That said, in a world with more than 150 national currencies, viable candidates to supplant the U.S. dollar are slim, but I offer up a short list:

The dollar reigns by default. Benign neglect on the part of the rest of the world has left few, if any, challengers.

The euro is a serious contender to the dollar given the fact that Europe’s financial markets are deep and liquid and that the euro is fully convertible.

What also helps is that the EU economy is about the size of the U.S. economy and is an essential component of global trade.

Now the bad news. Europe is increasingly viewed as a dithering dysfunctional family, unwilling and unable to make tough economic decisions regarding future economic growth

European policies a concern

In just the past few months, the Stability and Growth pact has been watered down. The Lisbon agenda — a blueprint to increase EU competitiveness on the global scale by 2010 — has all but been abandoned. And the European Services Directive was rejected thanks to opposition from France and Germany.

The latter would have enhanced the competitiveness of Europe’s inefficient service sector and may have gone a long way in bolstering the attractiveness of the euro as a reserve currency.

EU Constitution in doubt

Fiscal tensions in Europe, coupled with numerous structural deficiencies — labor market rigidities, for instance — hardly make the euro more appealing than the dollar.

Both China's and Japan’s trade is largely denominated in U.S. dollars — and exports are increasingly a key ingredient of growth

Add to this the possibility of a French veto to Europe’s impending constitutional vote, the effect of which would not doom the euro, but would likely hamper efforts in creating a more unified and dynamic European Union.

Without a ratified constitution, the EU forgoes the opportunity to have a new full-time president, a single EU foreign minister and other institutions supportive of a strong currency. In the end, the prospects for the euro upending the U.S. dollar as the world’s reserve currency appear slim.

The Japanese yen

Japan’s currency is not a serious contender to the U.S. dollar for several reasons.

Firstly, Japan has long been governed by a political elite that has embraced domestic concerns far more than it has its global ambitions.

A formidable challenger?

In addition, the Japanese economy is highly export-dependent — and Japanese policymakers generally prefer a weak currency. Also, a great deal of Japan’s trade is still denominated in dollars.

Transnarency matters in achieving reserve currency status — and Switzerland fails on this score.

A formidable challenger?

In addition, the Japanese economy is highly export-dependent — and Japanese policymakers generally prefer a weak currency. Also, a great deal of Japan’s trade is still denominated in dollars.

Add to the above sluggish economic growth and a resistance to shifting the status quo and the yen hardly appears as a formidable relative to the dollar.

Also working against the yen are regional hostilities toward Japan, negative sentiments that would run counter to any move towards making the yen a regional or global reserve currency.

The Chinese yuan

China’s currency is often mentioned as a candidate to dethrone the U.S. dollar, although it would take decades — rather than just a few years — for the yuan to present a serious challenge to the greenback.

Presently, China possesses very few attributes that are supportive of a reserve currency.

A weak currency

The country’s capital account remains closed, the currency is non-convertible and the banking sector is fragile and in need of an overhaul.

It would take decades — rather than just a few years — for the yuan to present a serious challenge to the greenback.

China’s trade, like Japan’s, is largely denominated in U.S. dollars and exports are increasingly a key ingredient of growth. This portends a preference by China for a weaker — rather than a stronger — yuan.

Meanwhile, the recent diplomatic row between Japan and China, with bilateral relations hitting a multi-decade low, does nothing to engender added confidence in either the yen or yuan.

The Swiss Franc

The Swiss franc is certainly a strong currency, but I do not think it is a contender for reserve currency status since Switzerland’s financial system, in general, can be described as nothing short of opaque.

Transparency matters — and Switzerland fails on this score.

It’s the dollar by default

Call it a case of “been there, done that.” There is little appetite among the world’s major nations to revert back to a gold standard, given the limitations to monetary sovereignty that come with such an arrangement.

Europe is increasingly viewed as a dithering dysfunctional family — unwilling and unable to make tough economic decisions regarding future economic growth.

All the talk about the U.S. dollar losing its favor as the world’s reserve currency is just that — talk. The dollar reigns by default.

Benign neglect on the part of the rest of the world has left few, if any, challengers demonstrating the core competencies required to underwrite the world’s reserve currency.
Scanning the global horizon, there is know spot a viable alternative to the dollar.

That, of course, does not say much for Europe, Japan and Asia. That the dollar remains the best of the lot speaks volumes about the unbalanced and unsettled state of the global economy.

Stimulus or Austerity: The People vs. the Banks

2010-07-01T10:02:00.000-07:00

The most powerful nations in the world met recently at the G-20 in Toronto and managed to agree on only one thing of significance: the need to reduce deficits, “half by 2013.” Implied by the statement is the need to lower deficits via “austerity,” meaning eliminating or reducing social programs.

Why does every mainstream political pundit or corporate CEO fanatically agree that reducing deficits is the most important thing to do now? Let Obama explain:

“… if financial markets are skittish and don't have confidence in a country's fiscal soundness, that is also going to undermine our recovery."

Apparently, the most important policy for the world economy cannot be said in plain English. What does Obama mean? Essentially, he is saying that “financial markets” should determine how wealth is distributed and how the economy is directed.

What are financial markets? And why must every country be at their mercy?

A financial market is anyplace the super-rich invest their money. It can be done through a bank, hedge fund, or a private equity firm, etc. The rich demand that their investments are safe and therefore are especially “skittish” at the slightest hint of inflation or other economic distress.

The rich who dominate financial markets advocate only one solution to balancing budgets: reducing or eliminating social programs. They ignore the other solution— a massive public works project— because it directly affects them in a negative way: raising taxes on the wealthy.

This raises another issue. The investors who control financial markets know that a day of reckoning is coming: the massive debt that was pushing forward the world economy for years needs to be paid back, and those who own the banks don’t want the responsibility. Better for millions of workers to sacrifice social services, pensions, wages, etc., than for thousands of rich investors to be taxed.

Some people will argue that it is counterproductive to tax the rich, since they will then choose not to invest their money, causing further harm to the economy. But this is already happening and happens every time a recession hits.

The New York Times describes one example of the rich hoarding their money, until better, profitable times return:

“Only on Wall Street, in the rarefied realm of buyout moguls, could you actually have too much money…. Private equity firms, where corporate takeovers are planned and plotted, today sit atop [are hoarding] an estimated $500 billion. But the deal makers are desperate to find deals worth doing…” (June 24, 2010).
Rich investors are not investing in companies because consumers are not buying the products that corporations produce. And where mainstream economists blame “consumer confidence” for this problem, the real issue remains “consumer impoverishment.”

It is the rich investor that lacks the “confidence” that the unemployed or low-waged worker can buy enough of the products produced by corporations. This is the problem that will continue to haunt the establishment economists, who will incessantly preach that the economy is on a perpetual verge of recovery.

This illusion of recovery is being instituted into government policy. The Obama administration has argued that federal stimulus money is only needed in small doses to put the economy back on track. With politicians agreeing that the recession is “basically over,” less stimulus money is being offered.

Indeed, Congress has had a terrible time passing the tiniest stimulus bill, which would extend unemployment benefits and help states with Medicaid costs. If such a bill is eventually passed, it will be a mere fraction of what is needed.

Because Obama insists that “reducing deficits” is the new governmental priority, the stimulus faucet will quickly dry up (since government stimulus is financed through deficit spending).

But for millions of U.S. workers, the debate over stimulus spending is not theoretical, but a matter of life and death. If no federal stimulus is passed— and the current one has virtually died in Congress— millions of unemployed people will have zero income. Meanwhile, the states budget crises will worsen, shutting off state-run health care, social services and education, while slashing public sector jobs by the thousands.

Both Democrats and Republicans agree that “financial markets” should dictate the economic policy of the U.S. The two parties disagree only to what degree and how quickly to implement the same policy.

The American labor movement must find an independent voice to demand that a stimulus bill be passed. Labor — especially public sector workers — must ally themselves with the unemployed, students and teachers, and other victims of the states’ budget crises who will suffer real tragedies unless a federal stimulus bill is passed.

Controlled-Burn Inflation

2010-06-28T18:40:00.000-07:00

Suppose all the Good Guys (Joe Consumer and Homeowner) are loaded with debt, and suppose that this debt is payable to the Bad Guys (Rich People and Foreigners). What can you do about it? Oh, and also suppose that the debt is mostly in nominal terms. Answer: You inflate.

We cringe when inflation is mentioned. Maybe it is from the horror stories of hyperinflation; maybe it is from memories of the inflationary episode of the mid-1970s. (Remember Ford’s WIN buttons)? But I am not talking about hyperinflation, or even inflation in the double digits. Rather, a controlled burn inflation, something that is, say, in the six or seven percent range. Something that will drop the debt burden by twenty or thirty percent after a few years.

On the positive side, controlled-burn inflation will drop the real obligations we will “pass on to our children” – put that phrase into Google and see how many hits you get – for our $8 trillion of public debt. It will reduce the real effect of our nearly $1 trillion to China – China being recently highlighted by Paul Krugman as a Big Problem of 2010.

Not to mention the nearly equal amount we have with Japan, which Krugman does not see being as much of a problem. It will drop the real debt obligation for mortgage borrowers in terms of their principal, and, for those with fixed rate mortgages, drop the real cost of servicing their debt as well. Anyone with adjustable rate mortgages or short-term revolving debt will be running in place in terms of their debt servicing. But the real value of their principal obligation will drop for them as well.

The negative is the stickiness of wages versus prices. For those who remember the 1970’s, it seemed like wage levels were always one step behind in ratcheting up to meet the higher prices. And there were costs in making the price adjustment, both in terms of processing and informational lags. But we are in a different world today, and I wonder if the frictions of a “helicopter drop” would be anywhere near as significant.

In our electronic age, prices can be adjusted with far less cost, information on prices is quickly and cheaply accessible. And I believe wages can similarly be adjusted for less cost; there are fewer institutional and processing constraints to keep wages sticky – although this is a proposition that has not had to be broadly tested because inflation has been a non-issue for a generation.

To do inflation right, you have to be a little sneaky. Especially if you don’t want your creditors feeling totally screwed and have them walk away the next time you need to borrow. Don’t announce it as a policy. Have it just happen. In fact, have it happen in spite of all of your best efforts to reign it in. So you need a controlled burn that looks like it is spontaneous. Who knows, maybe this idea actually is making the rounds.

The Third Depression

2010-06-28T16:22:00.000-07:00

are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31.

Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

In 2008 and 2009, it seemed as if we might have learned from history. Unlike their predecessors, who raised interest rates in the face of financial crisis, the current leaders of the Federal Reserve and the European Central Bank slashed rates and moved to support credit markets. Unlike governments of the past, which tried to balance budgets in the face of a plunging economy, today’s governments allowed deficits to rise. And better policies helped the world avoid complete collapse: the recession brought on by the financial crisis arguably ended last summer.

But future historians will tell us that this wasn’t the end of the third depression, just as the business upturn that began in 1933 wasn’t the end of the Great Depression. After all, unemployment — especially long-term unemployment — remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly. And both the United States and Europe are well on their way toward Japan-style deflationary traps.

In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.

As far as rhetoric is concerned, the revival of the old-time religion is most evident in Europe, where officials seem to be getting their talking points from the collected speeches of Herbert Hoover, up to and including the claim that raising taxes and cutting spending will actually expand the economy, by improving business confidence. As a practical matter, however, America isn’t doing much better. The Fed seems aware of the deflationary risks — but what it proposes to do about these risks is, well, nothing. The Obama administration understands the dangers of premature fiscal austerity — but because Republicans and conservative Democrats in Congress won’t authorize additional aid to state governments, that austerity is coming anyway, in the form of budget cuts at the state and local levels.

Why the wrong turn in policy? The hard-liners often invoke the troubles facing Greece and other nations around the edges of Europe to justify their actions. And it’s true that bond investors have turned on governments with intractable deficits. But there is no evidence that short-run fiscal austerity in the face of a depressed economy reassures investors. On the contrary: Greece has agreed to harsh austerity, only to find its risk spreads growing ever wider; Ireland has imposed savage cuts in public spending, only to be treated by the markets as a worse risk than Spain, which has been far more reluctant to take the hard-liners’ medicine.

It’s almost as if the financial markets understand what policy makers seemingly don’t: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating.

So I don’t think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between deficits and jobs. It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times.

And who will pay the price for this triumph of orthodoxy?

The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again.

Risks to Canada's Financial Stability in an Uncertain World

2010-06-27T16:56:00.000-07:00

The recent past has underscored the fact that, in finance and the economy, most things are interconnected on a global scale. Throughout its history, Canada has been powerfully affected by events elsewhere. Manitobans in particular are well aware of this reality. Waves of immigration, rapid changes in commodity prices, the Great Depression, two World Wars, and technological advances – all have had an enormous impact here. More recently, the global financial crisis has been a stark reminder that everyone – even citizens in countries with sound “fundamentals” – is affected by major shocks, regardless of where those shocks originate.

Global realities and their impact on the domestic financial system inform much of the Bank of Canada’s most recent issue of its Financial System Review (FSR), which was published yesterday. In the FSR, the Bank identifies and evaluates risks and vulnerabilities in the financial system. Our goal in doing this is to contribute to the long-term resiliency of the Canadian financial system by promoting informed discussion of various relevant issues and developments.

In my remarks today, I’d like to discuss two issues that are discussed in the FSR, which, directly or indirectly, pose risks to financial stability. These issues are sovereign debt and global macroeconomic imbalances. Both are “global” issues, but they will have to be managed at the national, as well as the international, level. As such, they are at the core of ongoing G–20 discussions, including those taking place this week in Toronto.

I’ll start by taking a very brief look at the Canadian economy – where we are now, and where we appear to be headed. Then, I’ll elaborate on the two issues I’ve identified. I’ll welcome comments and questions at the end.

The Canadian Economy

The global economic recovery is under way, but it is an uneven one. In the emerging-market economies, growth has been vigorous – indeed it has been stronger than we expected a few months ago. At the same time, in most advanced economies, the recovery has been subdued and heavily dependent on the exceptional stimulus provided by monetary and fiscal policies. In recent months, concerns over European sovereign debt have dampened prospects for the recovery in Europe. So far, these concerns have had limited effects on Canada – mainly, a modest fall in commodity prices and some tightening of financial conditions – but they are an important risk to the recovery.

In Canada, the economic recovery is proceeding somewhat more rapidly than expected. Growth has been very strong in the past two quarters, although we expect it to moderate, starting this quarter. Several factors have been supporting the recovery: fiscal and monetary stimulus, improved financial conditions, the rebound in global economic growth, more favourable terms of trade, and increased business and household confidence. At the same time, the persistent strength of the Canadian dollar, our poor relative productivity performance, and the low absolute level of demand in the United States are acting as a drag on the recovery. The Bank projects GDP growth of 3.7 per cent in 2010, with a gradual slowing to 3.1 per cent in 2011 and 1.9 per cent in 2012. Inflation is expected to remain close to our 2 percent target through this period.

In view of this outlook, the Bank of Canada indicated in late April that the need for extraordinary monetary policy stimulus – which we had been providing since the beginning of the financial crisis and through the recession – was passing. On 1 June, we increased our policy interest rate from ¼ of a per cent to ½ of a per cent. Of course, that still leaves interest rates at a very stimulative level. But because of the uncertainties – particularly those emanating from Europe – we’ve been careful to emphasize that the extent and timing of any additional withdrawal of monetary stimulus would depend on how the outlook for economic activity and inflation evolves. In making those decisions, we will always stay focused on achieving the 2 per cent inflation target.

In our monetary policy decisions, we are mindful of the risks to the economic outlook, both on the upside and the downside. In assessing financial stability, the downside risks are our main focus. So let me turn now to a discussion of two areas of risk that may bear on the health and stability of the financial system, both here and abroad. First, I’ll look at the issue of sovereign debt.

Sovereign Debt

Sovereign debt – and unsustainable fiscal deficits – have been front and centre in recent global economic events. Concerns about sovereign debt have flared up in recent months in a number of European countries. But in the coming years, many advanced countries will face major challenges in achieving and maintaining sustainable fiscal positions. In Canada, we are fortunate that this task will be more manageable than elsewhere, and continued resolve is required.

The current sovereign debt problems were exacerbated and brought to a head by the global financial crisis and recession. Of course, a number of countries entered the crisis with weak fiscal positions, but their situations have deteriorated substantially. In part, this reflects the direct support many governments provided to keep troubled financial institutions afloat. Although the final bill for this support is not yet known, it could be very large. Another important element is the massive fiscal stimulus that governments in all major countries delivered to mitigate the recession. And, of course, reduced tax revenues, associated with the recession, have added substantially to the problem.

Both financial system support and fiscal stimulus were necessary, since the alternative would have been much worse. When private sector spending was no longer sufficient to support growth, governments had to step in to fill the gap. But the result was a shifting of the debt build-up from the private sector to the public sector.

Growing sovereign debt is a source of risk for two main reasons. First, high levels of public debt tend to constrain economic growth.1 Second, when concerns about sovereign debt become acute – even if they are limited to a few countries – they can have pervasive effects on the financial system. These effects stem from the fundamental importance of government liabilities in the financial system. Government debt instruments are typically viewed as risk-free and highly liquid assets that are held by financial institutions and individual investors, and are used as a benchmark for pricing other financial assets. What happens, then, when these assets are perceived as risky – and when they become increasingly illiquid (as we saw in early May, when European sovereign debt markets seized up)?

First, consider the chain of exposures to the credit risk – from the holders of those government securities, to their creditors, and their creditors’ creditors, and so on. And since many of these exposures are uncharted, the uncertainty about where the exposures lie may cause a spike in perceived counterparty risk, and thereby affect short-term financing decisions. As a result, funding markets become increasingly illiquid, with widening spreads and diminishing access to financing.

Finally, there is a general retrenchment in risk-taking, which results in a decline in the prices of risky assets – including currencies and commodities. We saw all of these transmission channels in Europe in early May. If the situation had deteriorated further, the impact on Canada’s financial conditions, and on financial conditions more generally, could have been substantial.

The market turmoil in Europe was met by a forceful policy response. In the affected countries – as happens with most sovereign debt crises – there are two dimensions to the problem: the short-term challenge of rolling over debt, and the medium-term challenge of attaining a sustainable fiscal position. Of course, these two challenges are mutually reinforcing: the markets’ skepticism about the medium-term fiscal position makes it more difficult to roll over debt, while the higher debt-refinancing costs make it more difficult to balance the budget. Thus, both problems have to be addressed in a credible manner. The funding problem is currently being addressed with the massive financing packages being provided by the European governments and the International Monetary Fund. The medium-term fiscal challenge will require hard decisions, painful adjustment, and perseverance.

The fiscal austerity that is required in such a situation involves a painful dilemma. Such adjustment can impede the economic recovery. On the other hand, as I’ve stressed, in countries where sovereign debt concerns have become paramount, failing to adjust will have adverse financial effects – which will also harm the recovery. In theory, this dilemma could be sidestepped by committing to undertake serious adjustment only later, when the economy is stronger; but promises of future action are rarely enough to convince markets. The solution typically involves taking the bull by the horns: making a bold start with serious structural measures that will have a lasting effect on the fiscal position. The pension reforms that have been undertaken in some European countries are a good example.

But there is a problem here for the global economy. For the past several months, there has been concern about the risks associated with the “hand-off” from public demand to private demand. The concern is that if fiscal stimulus runs out before the private sector has gathered sufficient momentum, the global economic recovery could falter. This points to the need for the pace of fiscal austerity to be consistent with continued recovery.

So far, I have been focusing on two channels through which excessive sovereign debt at the global level can create risk for the financial system here in Canada – more difficult liquidity and funding conditions, and a weaker global economic outlook. These are two of the five areas of risk examined in the current FSR. I would now like to focus on a third, and related, area of risk: global macroeconomic imbalances.

Global Imbalances

An important backdrop to the global financial crisis and the ensuing recession was the configuration of large current account imbalances in major economies. These global imbalances were evident in the high levels of savings, and the persistent current account surpluses in China and many Asian countries, counterbalanced by the credit-fuelled spending by households and governments, and the large and persistent current account deficits in the United States and some other Western economies.

These imbalances were not the proximate cause of the crisis, but they contributed to its scope and intensity. In the years leading up to the crisis, high savings rates in surplus countries, together with inflexible exchange rates, helped to keep global interest rates low, encouraging consumers and governments in some advanced economies to take on more debt than was wise. The low interest rates also led to a “search for yield,” meaning that investors and financial institutions acquired riskier assets. At the same time, debt was being repackaged in various ways – sometimes into hard-to-understand, and often illiquid, products – and distributed throughout the financial system. Many of these products then unravelled – with devastating consequences – during the crisis. Global imbalances engendered financial fragility because there were also underlying weaknesses in the financial systems of many countries – including deficiencies in supervision and regulation and inadequate risk management within financial institutions. Addressing these underlying weaknesses is one of the principal objectives of the G–20 agenda.

Global imbalances have narrowed significantly during the past couple of years. However, this was largely the temporary effect of the recession and the policies adopted to counter it. In the United States in particular, savings rates have increased as households have been trying to recuperate from the loss of housing and equity wealth. In China, substantial stimulus measures have boosted domestic demand – including consumer spending and infrastructure. And the sizable drop in commodity prices from their 2008 peak contributed importantly to the narrowing of global imbalances.

What is worrying, however, is that global imbalances appear to be growing once again as the recovery advances, and their nature is changing. Whereas before the crisis, these imbalances primarily corresponded to unsustainable household spending in the United States, they now increasingly reflect unsustainable government deficits in a number of countries.

It is clear that what is needed is a “rotation of demand”: surplus countries need to increase their domestic spending, while deficit countries need to decrease theirs. Together with those adjustments in spending, exchange rates need to adjust – with a depreciation of the U.S. dollar against Asian currencies – to support the corresponding adjustment of external current accounts. In this regard, China’s recent decision to enhance the flexibility of its exchange rate is an important step forward; its full implementation will contribute to strong, sustainable, and balanced global economic growth.

In the absence of these necessary policy changes, there are three main risks to the global financial system and to the global economy. One is that the status quo becomes increasingly untenable. If the surplus countries do not increase their domestic demand, the United States and other deficit countries will have trouble weaning their economies off fiscal stimulus. The result could be a buildup of public debt relative to the size of these economies, which could not continue indefinitely. These higher debt levels would tend to drive up long-term interest rates, by both increasing demand for available funds and by feeding concerns about how the ever-increasing debt burden would be resolved. Recently, the Bank of Canada looked at the implications of this status quo scenario for global economic growth. Following a short-term boost, global economic growth would fall steadily from the 4 per cent average of 2002–07 to below 3 per cent by 2013. In addition, macroeconomic imbalances would continue to grow, possibly setting the stage for another crisis.

A second risk is that adjustment may be lopsided. Even if the surplus countries do not expand their demand, the deficit countries may be forced by markets to reduce their fiscal deficits. In that case, there would be a deficiency of demand worldwide. With monetary policy constrained by the zero lower bound, deflation could emerge. As a result, real interest rates would increase, fiscal consolidation would be more difficult, and growth would stall.

A third risk is that exchange rates may adjust, but in a disorderly way. If increasing concerns about the U.S. current account triggered a portfolio shift away from the U.S. dollar, the resulting exchange rate adjustment could overshoot the level required to bring current accounts to sustainable levels. If that occurred, it would likely send shock waves throughout the global financial system, adversely affecting the world economy. Such an adjustment did not happen during the recent financial crisis; on the contrary, the retrenchment of risk-taking that occurred led to a shift into U.S.-dollar-denominated assets, resulting in an appreciation of that currency. But disorderly exchange rate adjustment remains one of the important risks associated with global imbalances.

It is because of these risks that the G–20 is placing so much emphasis on policies to achieve strong, sustainable, and balanced growth, in tandem with measures to build a more robust global financial system. The rotation of demand required to achieve such balanced global growth will require policy changes in both deficit and surplus countries. It will also involve adopting greater flexibility in exchange rates, which would facilitate adjustment to both current imbalances and future economic shocks.

How can this adjustment come about? An important step is the G–20 Mutual Assessment Process, now under way, through which G–20 members strive to ensure that the “policies pursued by individual G–20 countries are collectively consistent with more sustainable and balanced trajectories for the global economy.”2 Each member country will submit its policies to the G–20 for assessment by other members, with a view to promoting coherence among macroeconomic policies. Details of this process are now being worked out, but the most important thing is that the required policy changes be implemented, and in a timely manner. Failing that, we leave ourselves on the same unsustainable, and risky, path.

Conclusion

The financial system makes a vital contribution to our welfare. A sound financial system, one that is stable, efficient, and resilient to shocks, is crucial to a well-functioning economy.

While the world’s financial system is stronger than it was during the crisis, risks and vulnerabilities remain. The G–20 agenda for financial and macroeconomic reform is sound and far-reaching. It provides a blueprint for building a sound foundation. But the time for action has arrived.

We cannot afford to be complacent. Although Canada fared relatively well in the crisis, we are not immune to risk. We must continue to make our own financial system more resilient. Together with its partners, the Bank of Canada works to do just that. The Bank will also continue its work in international forums to reduce systemic risk in the global financial system. The issues I discussed – sovereign debt and global imbalances – are important, and they must be resolved effectively, and in a timely fashion. Our future well-being is at stake.

Remarks by Tim Lane

Deputy Governor of the Bank of Canada

Following the Worst Crisis Since the Great Depression

2010-06-26T10:52:00.000-07:00

There were three memorable currency crises in the 1990s, all of which included a fixed exchange rate system that was under attack.

But regardless of the type of currency policy (fixed or free-floating or a monetary union), a currency crisis is broadly defined as a loss of confidence in a country’s currency. Something we’ve seen very clearly in recent months with the euro.

For a reference point on how these trends unfold, there’s a good academic study from MIT on historical currency crises that lays their progression out like this …

Three Stages of a Currency Crisis

Stage #1: Loss of Confidence

The number one cause of a currency crisis is when investors flee a currency because they expect it to be devalued.

Here’s the current situation …

When the euro zone stepped in and threatened to cough up $1 trillion dollars in an attempt to save the euro monetary union, it was a conscious decision to devalue the euro.

Why did they do it?

They had no choice!

The euro zone has committed to do whatever it takes to keep its members afloat.

The European banking system was, and still is, too exposed to the sovereign debt of the euro zone’s weak spots. An imminent default of a euro member country would have meant a crushing blow to European banks and likely another wave of global financial crisis — this time worse.

Here’s why: Last year the European Central Bank was flooding the banking system with unlimited loans for a paltry 1 percent. What did the banks do with the money? They bought government debt — specifically, debt from the PIGS (Portugal, Ireland, Greece, Spain).

In all, European banks own $1.5 trillion worth of debt from the fiscally challenged countries of the euro zone. As a result, politicians in Europe felt they had their backs against the wall and their response was one of “all-in.”

All countries involved in the monetary union went headlong into the crisis because they had no choice. The strategy: Buy time and devalue the euro.

Stage #2: Herding

When it’s thought that investors are moving out of a currency, others follow. This is typical “herding” psychology.

Here’s the current situation …

Short positions in the euro hit an all-time high.

Every week the Commodity Futures Trading Commission releases its Commitments of Traders (COT) report, which tracks the positioning of market participants. While it’s just an indication of how the general market is positioned, it’s a great reference point.

The recent reports provide an excellent example of this herding mentality that tends to be associated with currency crises. I’m talking specifically about the euro.

In fact, the uncertain outlook has triggered a massive wave of short positions in the euro — the largest in the currency’s 11-year history.

When the market is heavily positioned one way — and the fundamentals support it and an intentional devaluation appears underway — big institutions have to react. Put simply, they have too much to lose by getting caught the wrong way.

Given the euro is the second most widely held currency in the world, there is a lot of unloading that could take place …

For example, Iran’s central bank has announced they will be diversifying euro exposure — trading into gold and U.S. dollars. And China and the UK have shown a significant increased interest in owning U.S. dollars as opposed to euros.

Stage #3: Contagion

The next step is contagion. And contagion is a phenomenon in which a currency crisis in one country triggers crisis in other countries with similar weaknesses.

Here’s the current situation …

The catalyst for sovereign debt crises: Bloated debt and deficits. And as I’ve said, sovereign debt crises tend to lead to currency crises.

Dubai’s debt problems were just the beginning of the global sovereign debt crisis.

You don’t have to look far to find countries that carry bloated debt loads and deficit burdens.Over 40 percent of the world’s GDP comes from countries running deficits in excess of 10 percent of GDP — a level proven to be dangerous territory.We’ve already seen the sovereign debt contagion.

A crisis that started in Dubai now confronts Greece, Spain, Portugal … and will likely spread to the UK, Japan and even the U.S.It’s clear there are a number of reasons why global investors could lose confidence in currencies in this global economic environment.

So a contagion of currency crisis is a reasonable expectation.The bottom line: The day-to-day ebb and flow of economic data and news can be distracting. That’s why it’s important, especially with all that is going on, to keep the big picture in perspective.

History shows us that a global recession when combined with a financial crisis tends to stifle economic activity longer than normal recessions. History also shows us that financial crises tend to lead to sovereign debt crises, which tend to lead to currency crises.

So with that in mind, it’s fair to say that a V-shaped economic recovery has always been very unlikely.

What’s more likely is that we’ll see more shocks to the global economy, more challenges and more investors fleeing risky investments in favor of safe havens.

U. S. Financial Reform

2010-06-25T19:47:00.000-07:00

The More Things Change, The More They Stay The Same

The Senate finally pushes the financial reform bill through after battling it out with lawmakers, banks and lobbyists of all sorts.

The result: banks win and consumers lose. Surprise surprise.

SWAPS PUSH-OUT: Wall Street firms that dominate the $615-trillion over-the-counter derivatives market would have to spin off dealing operations in some swaps, but could keep many swaps in-house, including derivatives to hedge their own risk.

Much OTC derivatives trading would be redirected through more accountable channels such as exchanges and clearinghouses. Many OTC contracts end-users could carry on as before.

VOLCKER RULE: A new rule would bar proprietary trading by banks for their own accounts unrelated to customers; limit the growth of the biggest banks; and curb banks’ involvement in private equity and hedge funds, except for small investments allowed by a loophole added to the rule late in debate.

Some big banks’ profits would be pinched by both the Volcker rule and the Lincoln swaps plan, with a few Wall Street giants potentially facing structural changes.

WALL ST ‘DEATH PANEL’: Aiming to prevent massive bailouts like AIG’s and disastrous bankruptcies like Lehman Brothers’, the bill calls for a new government “orderly liquidation” process for financial firms on the verge of collapse.

Authorities could seize and liquidate them, with costs covered by sales of assets and fees on other firms if needed.

CONSUMER WATCHDOG: Protection of financial consumers would be enhanced by increased government regulation.

The bill would set up a new bureau in the Federal Reserve to regulate mortgages and credit cards. The watchdog has sharp teeth, but couldn’t bite car dealers, who won an exemption.

THE BIG PICTURE: A new council of federal regulators would try to monitor the entire financial forest, not just the trees. High-risk firms could be singled out for stricter policing.

BEHIND THE HEDGE: Private equity and hedge funds would have to register with regulators and open their books to scrutiny. Not so for venture capital funds, which would be exempt.

INSURANCE COPS: The first federal monitor for state-policed insurers would be formed. It’s not federal regulation — yet.

BANK CUSHIONS: Banks would have to set aside more capital to ride out tough times, but will get several years to comply.

FED SCRUTINY: The Fed’s emergency lending during the crisis would be reviewed, but not its decisions on interest rates.

DEBIT CARDS: Fees charged on debit card transactions would be reduced — a victory for retailers over the banks.

Below are some of the likely winners and losers under the regulation bill.

CREDIT RATING AGENCIES - WIN AND LOSE

* Credit rating agencies — such as Moody’s Corp, Standard & Poor’s and Fitch Ratings — will be subject to greater liability.

* Rating agencies could be sued if they “recklessly” failed to review key information in developing a rating.

* The Securities and Exchange Commission will be given two years to find a way to mitigate conflicts of interests at the biggest rating agencies, Moody’s, S&P and Fitch, which are paid by the issuers whose debt they rate. The two years give the agencies breathing space but if the SEC does not find a solution, the regulator is required to implement a proposal by Senator Al Franken and create a board to match rating agencies with debt issuers.

* Federal regulators will be required to remove references to credit rating in their rules in an effort to reduce reliance on the credit rating agencies.

LARGE FINANCIAL FIRMS - WIN AND LOSE

* Large financial firms such as Bank of America and Goldman Sachs will be prohibited from proprietary trading and only be allowed to make minimum investments in hedge funds and private equity funds.

* Large firms will also face tougher standards in what qualifies for capital they are required to set aside to ensure that they do not threaten the stability of the financial system.

* Banks such as Goldman and JPMorgan Chase will be forced to spin off some of their profitable derivatives business or risk losing access to the Federal Reserve’s emergency funds. But banks’ biggest volume instruments such as foreign exchange and interest rate swaps will still be allowed to be traded by banks.

* The firms’ financial products such as mortgages and credit cards will be subjected to new rules from a newly created bureau designed to protect customers from risky products.

* Most derivatives will be forced on to exchanges or through clearinghouses, in an attempt to limit the effect that large, risky trades can have on the economy, another factor that could curb bank profits. Non-financial players such as manufacturers, however, would be exempt.

SMALL BANKS - WIN

* The Federal Reserve will continue supervising small banks. Small banks wanted to maintain a supervisory structure they were familiar with.

* Banking regulators will be the primary regulator to enforce rules for small banks’ financial products. The new consumer financial regulator will provide backup enforcement.

U.S. FEDERAL RESERVE - WIN

* Gains powers to supervise systemically important financial firms.

* Retains authority to supervise banks of all sizes.

* Part of a “risk council” that will have authority to monitor risk in the financial system and decide whether a large complex company needs to divest assets.

* Becomes home for the new Consumer Financial Protection Bureau. Will have power along with other regulators to appeal consumer protection bureau’s rules if deemed to undermine stability of financial system or banks’ deposits.

* The Fed escaped congressional reviews of its monetary policy but will be subject to reviews of its emergency lending and open market activities.

* Democrats and Republicans originally wanted to strip the Fed of its powers to supervise banks and confine the central bank to setting monetary policy and acting as the lender of last resort.

CONSUMERS - WIN

* New rules to protect consumers from risky financial products could only be overturned by banking regulators if banking regulators believe the rules could threaten the financial system or banks’ deposits.

* The new consumer regulator will be housed in the Federal Reserve, which has been criticized for failing to rein in the risky lending that contributed to the financial crisis.

* The consumer regulator will get funding from the Fed and would get the authority to request more funds from Congress.

* The consumer regulator will be able to write its own rules for a slew of products such as mortgages and credit cards and enforce those rules.

INVESTORS/SHAREHOLDERS - WIN AND LOSE

* Broker-dealers who provide financial advice will not immediately be required to have fiduciary duties, which would require them to act in their clients best interests. The SEC must first study the issue for six months and then would have authority to impose those duties on brokers if the regulator determines they are necessary.

* Publicly-traded companies will be required to ask their shareholders whether they want a non binding vote on executive pay annually, once every two years or once every three years. Originally, Democrats wanted to give shareholders an annual say on executive pay.

* The SEC will have the authority to give shareholders and easier and cheaper way to nominate corporate board directors.

* The Municipal Securities Rulemaking Board will be required to impose fiduciary duties on municipal bond advisers.

AUTO DEALERS - WIN

Auto dealers that do financing will be exempt from oversight by the new consumer bureau, and stay within the jurisdiction of the Federal Trade Commission.

PRIVATE POOLS OF CAPITAL - WIN

* Advisers to hedge funds and private equity funds with more than $150 million in assets will be required to register with the SEC. Venture capital funds will be exempt.

CLEARINGHOUSES - WIN

* Derivatives clearinghouses will be able to borrow in emergencies from the Federal Reserve, as long as the systemic risk council, a majority of Fed governors and the Treasury Secretary decide it is necessary.

LAW FIRMS - WIN

* Regulators like the Commodity Futures Trading Commission and Securities and Exchange Commission will have scores of rules to write in coming months to implement the legislation, meaning lots of billable hours for law firms and consultants advising clients on how to respond to proposed rules.

CFTC/SEC - WIN

* The CFTC and SEC will gain new authority to regulate the $615 trillion over-the-counter derivatives market.

* The SEC will win power to oversee the hedge fund industry.

Twenty-Two Reasons Why American Working People Hate the State

2010-06-21T09:50:00.000-07:00

Why does the rightwing attack on “Big Government” increasingly resonate with working people?

Liberals claim wage and salaried workers are acting against their “self-interest”, citing government welfare programs like social security and unemployment payments. Progressives argue that workers hostile to the state are ‘racists”, “fundamentalists” and/or irrational, blinded by misplaced fears of threats to individual freedoms.

I will argue there are many sound, rational, material reasons for working people to be in revolt against the state.

Twenty-Two Reasons Why Working People Hate the State

1.) Most wage and salaried workers pay disportionately higher taxes than the corporate rich and therefore, millions of Americans work in the “underground economy” to make ends meet; thus subjecting themselves to arrest, and prosecution by the state for trying to make a living by avoiding onerous taxes.

2.) The state provides generous multi-year tax exemptions for corporations thus raising the tax rate for wage and salaried workers or eliminating vital services. The state’s inequitable tax revenue policies provoke resentment,.

3.) High taxes combined with fewer and more expensive public services, include growing costs of public higher education and higher health charges, feed popular antagonism and frustration that they and their children are being denied opportunities to get ahead and stay healthy.

4.) Many working people resent the fact that their tax money is being spent by the state on endless distant wars and to finance bailouts of Wall Street instead of investing it in reindustrializing America to create well paying jobs or to aid unemployed or underemployed workers unable to meet mortgage payments and facing eviction or homelessness. Most workers reject the inequitable budget expenditures that privilege the rich and deny the working people.

5.) Working people are appalled by the states hypocrisy and double standards in prosecuting “welfare cheats” for taking hundreds but overlooking corporate and banking swindlers, and Pentagon military cost overruns of hundreds of billions. Few working people believe there is equality before the law, implicitly rejecting its claims of legitimacy.

6.) Many working class families resent the fact that the state recruits their sons and daughters for wars, leading to death and crippling injuries instead of public service jobs, while the children of the rich and affluent pursue civilian careers.

7.) The state subsidizes and upgrades public infrastructure – roads, parks and utilities in upper end neighborhoods while ignoring the demands for improvements of low income communities. Moreover the state locates contaminants – incinerators, high polluting industries etc. – in close proximity to workers housing and schools.

8.) The state holds the minimum wage below increases in the cost of living but encourages and promotes excess profits.

9.) Law enforcement is strict in high end neighborhoods and lax in low income communities resulting in higher rates of homicides and robberies.

10.) State imposes constraints on labor organizations struggling to secure wages and benefits and ignores corporate intimidation and arbitrary firings of workers. The state encourages corporate mergers and acquisitions leading to monopolies but discourages collective action from below.

11.) State economic institutions recruit policymakers from banks and financial houses who make decisions favoring their former employers, while wage and salaried workers are excluded and have no representation in economic policy positions.

12.) The state increasingly infringes on individual freedoms of social activists via the Patriot Act, arbitrary arrests, and grants impunity to police violence and punishes whistle blowers, rejecting citizen reviews with punitive powers.

13.) The state is highly responsive to and increases funding for the military-industrial complex, the relocation of MNC overseas and the high income Israel lobby while cutting funding for public investment in productive activity, applied technology and high tech job training for US workers and salaried employees and their children.

14.) State policies have increased inequalities between the top 10% and the bottom 50% for decades, turning the US into the industrial country with the greatest inequalities.

15.) State policies have led to declining living standards as wage and salary earners work longer hours with less job security,for a greater number of years before receiving pensions and social security and under greater environmental hazards.

16.) Elected state officials break most campaign promises to working people while fulfilling promises for the upper class/corporate banking elite.

17.) State officials pay greater attention and are more responsive to a few big financial contributors than to millions of voters.

18.) State officials are more responsive to payoffs from corporate lobbies protecting corporate profits than to the health, educational and income needs of the electorate.

19.) State-corporate links lead to deregulation, which results in contamination of the environment leading to the bankruptcy of small businesses and loss of many jobs, as well as the loss of recreational areas, spoiling rest and recreation for working people.

20.) The state increases the retirement age rather than increase the social security payments by the rich, with the result that workers in unhealthy work environments will enjoy fewer years of retirement in good health.

21.) The state judicial system is more likely to render favorable decisions to wealthy plaintiffs with high paid, politically connected lawyers against workers defended by inexperienced public defenders.

22.) State tax collectors are more likely to pursue wage and salary tax payers than upper class corporate executives employing accountants with expert knowledge in tax loopholes and tax free shelters.

Conclusion

The state in its multiple activities, whether in law enforcement, military recruitment, tax and expenditure polices, environmental, pension and retirement legislation and administration, systematically favors the upper class and corporate elite against wage, salaried and small business people.

The state is permissive with the rich and repressive of the working and salaried employees, defending the privileges of the corporations and the impunity of the police state while infringing on the individual freedoms of the working people.

State policies increasingly extract more from the workers in terms of tax revenues and provide less in social payments, while lessening tax payments from Wall Street and inflating state transfers.

Popular perceptions of a hostile and exploitative state correspond to their everyday practical experiences; their anti-state behavior is selective and rational; most wage and salaried workers support social security and unemployment benefits and oppose higher taxes because they know or intuit that they are unfair.

Liberal academics and experts who claim workers are “irrational” are themselves practioners of highly selective criticisms – pointing to (shrinking) state social benefits while ignoring the unjust, inequitable tax system and the biased behavior of the judicial, law enforcement, legislative and regulatory system.

State personnel, policy makers and enforcement officials are attentive to and responsive and deferential to the rich and hostile and indifferent or arrogant toward workers.

In summary the real issue is not that people are anti-state, but that the state is anti the majority of the people. In the face of the economic crises and prolonged imperial wars, the state becomes more brazenly aggressive in slashing living standards in order to channel record levels of public funds toward Wall Street speculators and the military industrial complex.

While liberal-progressives’ remain embedded in ‘neo-keynsian’ statest ideology, outmoded in the face of a state thoroughly embedded in corporate networks, the New Right’s “anti-statest” rhetoric resonates with the feelings, experiences and reasoning of important sectors of wage and salaried workers and small businesspeople

The attempt by liberals and progressives to discredit this popular revolt against the state, by pointing to the corporate financing and rightwing manipulation behind the anti-statist movement is doomed to failure, because it fails to deal with the profound injustices experienced by working people today in their daily dealings with a state, largely administered by liberal corporate-militarists. The absence of an anti-statist left has opened the door for the rise of a mass based ‘New Right’.

A ‘new left’will emerge from civil society when it recognizes the pernicious exploitative role of the state, and is capable of dealing with the powerful ties between liberalism-militarism-corporate “welfarism”. The revival and expansion of the debilitated public welfare programs for working people can only take place by dismantling the current state apparatus, and that depends on a complete break with both corporate parties and an agenda that ‘revolutionizes’ the way in which politics works in America.