We are in for a very nasty surprise in the spring of 2010... the economy and the markets will tank dramatically.

We are in for a very nasty surprise in the spring of 2010... the economy and the markets will tank dramatically.

November 21, (LPAC)—Speaking at the central school of the Chinese Communist Party, Italian Economy Minister Giulio Tremonti said yesterday that the crisis is not over, and a that real solution can come only from an international treaty among governments, which he called a new Bretton Woods.

"After the disaster, I was of the view that only those banks should be bailed out, which finance families and companies. Instead, all of them have been bailed out. In this way, we gained time, but did not solve the problem. And therefore, the threat of another crisis is around the corner."

"Stock markets are again at pre-crisis levels, and derivatives are growing again at a frightening rate.... The world can be precipitated again into the crisis because the chance of changing was lost." Throughout the world, "governments have intervened using two hands: with one, they injected an enormous amount of liquidity in the system. With the other, they turned private debt into public debt." Such interventions have fixed the balance sheets of large investment banks but not those of the state, and "an enormous part of this money has stayed in the banks themselves, which today are using it to make profits, by borrowing at 1% and reinvesting into financial instruments at 5.5%.

"At the end of the '90s, de facto the power of uttering currency, which was a power of sovereign states, was put into the hands of banks and the market," allowing large banks to count more than average nations.

"The crisis has put governments back on center stage, but nevertheless there is still an enormous mass of finance inside banks, out of control of the state. Now we must do something completely new."

"We cannot think of solving the problems that emerged out of the crisis through a series of new technical rules written by the bankers," Tremonti "roared" according to the daily Il Riformista, drawing applause from the audience.

The G20 was necessary but "not sufficient," Tremonti said. "Today we need a collective political effort to define the new order, an international treaty to define a new Bretton Woods, which must be the product of a multilateral effort, not only in joining it, but also in drafting it," Tremonti said. "I have the honor to deposit here a first draft of my treaty. I could not imagine a better place."
During his stay in Beijing, Tremonti will meet Chinese government officials.

There is a gigantic chess game being played behind the scenes on a Global scale....

There is a gigantic chess game being played behind the scenes on a Global scale....

To a certain extent all the critics of fed policy are sycophants, seeking to measure their own scant conceptual shadow against the giant of shadows cast by these colossal incubators of economic policy. The personage of A. Greenspan or B. Bernanke are little more than figureheads of gigantic think-tanks manned by experts with far more on their minds than economics or economic theory.

Leading the world is like climbing on board a bucking-bronco....

http://www.shadowstats.com/article/hyperinflation

Policies are less steerage than they are a
defensive grasping at some modestly safer harbor. Most often policies chosen are the least-worse of many different more-worse possible directions that are exhaustively explored and projected.

Yes, someone calls the shots, -but dozens upon dozens of well-connected people get the chance to say, "See, I told you so."

There is also a gigantic chess game being played behind the scenes.

It's not a fair game by any stretch of the imagination, but, there is a continual necessity to make the better defensive move to prevent seepage of the lopsidedness of the current game-board and its often unforgiving rules.

From the quite childish perspective of these critics, some interesting avenues are explored -for the common mind. But no one should be deceived into thinking there is any real impact going on here other than upon the delusions of a small segment of an ill-informed public.

It was pointed out long ago, how the human mind will watch an athlete, and find what that athlete is doing -is not only easy to loosely comprehend, but similarly easy to imagine oneself doing too, -too easy as it turns out.

Our minds are after all, finite, if complex.

Reality is infinitely complex by comparison.

Our minds have a sometimes movable but limited range in every expression, observation, or experience.

That limited range is best observed as we consider our fallible memories. It is seemingly easy for us to fill in the blanks.
The inherently limited range of expression, observation and experience is why our memories fail to conjure an exact reality for our reflective perception.

This same inherently limited range of expression, observation and experience is also why our dreams do have every appearance of reality.

It is as if we had a deck of fifty-two playing cards fulfilling the entire range of all our expression, observation and experience. The seemingly infinite variety we experience in life is due to however many hands we are dealt with just such a limited number of these same cards.

Most of us have a full deck. However, very few of us will ever be in the position to do what Tiger Woods does, or Ben Bernanke.

And in that position, only a fool believes it would not be all too easy to blow the chance.....

As a critic of the Fed (and the whole debt-based money system it presides over), I guess I am one of your sycophants. To me, it seems pretty obvious that the design of the money system is wrong. It creates more debt every year than it creates ability to service that debt and even a dumb guy like me can see that at some point that has to crash.

From this intellectual netherworld, I support the kinds of monetary reforms that is discussed in the post: Take the Power to Create Credit Away from the Giant Banks and Give It Back to the People (11.3.09)

US treasury Issue debt free money. Capital G Greenbacks. Banking system remains private, but it loses the ability to create money (fractional reserve banking). Money creation becomes a public utility, spent into existence by the government, ideally on things like bridges, education, and health care.

Look at it this way: with Greenback dollars, you only pay for the bridge once, when you build it. Not two or three times over, the way we do now letting the banks create the money and borrowing it from them.

If we had done this in 1960, there would be no National Debt right now, and if such a system were well managed we could have an economy that would require very few taxes.

Imagine how well capitalism could work if you just removed the drag of the national debt......

The Wall Street Journal admits this week that economists blew it:

The pain of the financial crisis has economists striving to understand precisely why it happened and how to prevent a repeat...

The crisis exposed the inadequacy of economists' traditional tool kit, forcing them to revisit questions many had long thought answered, such as how to tame disruptive boom-and-bust cycles...

"We could be looking at a paradigm shift," says Frederic Mishkin, a former Federal Reserve governor now at Columbia University.

That shift could change the way central bankers do their job, possibly leading them to wade more deeply into markets. They could, for example, place greater emphasis on the amount of borrowing in the economy, rather than just the interest rates at which borrowing is done. In boom times, that could lead them to restrict how much money various players, ranging from hedge funds to home buyers, can borrow

I have repeatedly pointed out the flaws in mainstream economics. See this, this, this, this and this.

But the Journal makes it sound like the policy-makers and economists who deployed faulty models were innocently ignorant of any larger truths:

The models "were not able to draw up the red flags," says Tim Besley, a professor at the London School of Economics who served on the Bank of England's policy-making committee until recently.

Barry Ritholtz has an excellent criticism of the article, pointing out:

There are many areas I would have liked to see the [journal's] article explore: The lack of Scientific Method, the mostly awful performance of economists, its misunderstanding of the value of modeling, the bias inherent in Wall Street variant of economics, and lastly, the corruption of economics by politics...

Let’s start with the basics. Hard “science” — Physics, Biology, Chemistry, and all variants thereto — begins humbly. They try to describe the universe around us by creating theories, and then testing them. These theorems are always preliminary. Even when testing validates them, Science is always prepared — even eager — to replace them with newer theories that are proven to be even more valid.

The humility of science begins with an admission: We know nothing. We seek to learn through experiment and logic, and constantly evolve more and more accurate explanations. Scientific belief evolves gradually over time. Nothing is assumed, presumed, or hypothesized as true. Indeed, research is a presumption that current theories are inadequate or incomplete. The practice of science is a an ongoing search for better explanations, more proof, further verification — for Truth.

Science is the ultimate “show me” state.

Economics has a somewhat, shall we call it, less rigorous approach. Indeed, the arrogance of economics is that it is the polar opposite of Science. It begins with a few basic assumptions, many of which are obviously untrue; some are demonstrably false.

No, Mankind is not a rational, profit maximizing actor. No, markets are not perfectly, or even nearly, efficient. No, prices do not reflect the sum total of all that is known about a given market, sector or stock. Those of you who pretend otherwise are fools who deserve to have your 401ks cut in half. That is called just desserts. The problem is that your foolishness helped cut nearly everyone else’s 401ks in half. That is called criminal incompetence.

Where was I? Ahhh, our sad tale of the practitioners of the dismal arts.

Starting from a false premise that fails to understand the most basic behaviors of the Human animal, economics proceeds to build an edifice of cards on a foundation of sand. (How could that possibly go astray?) Like a moonshot off by a few inches at launch, by the time the we reach further into time and space, the trajectory is off by millions of miles . . .

Economics ... creates an illusion of precision where none exists. The belief in their models led to all manner of mischief, from subprime to derivatives to risk management...

The Behaviorists have been fighting the mainstream for decades now, trying to correct the errors of the basic building blocks of the dismal science.

But I would go further in my criticism of the economic profession by arguing that the decisions to use faulty models was an economic and political choice, because it benefited the economists and those who hired them.

For example, the elites get wealthy during booms and they get wealthy during busts. Therefore, the boom-and-bust cycle benefits them enormously, as they can trade both ways.

Specifically, as Simon Johnson, William K. Black and others point out, the big boys make bucketloads of money during the booms using fraudulent schemes and knowing that many borrowers will default. Then, during the bust, they know the government will bail them out, and they will be able to buy up competitors for cheap and consolidate power. They may also bet against the same products they are selling during the boom (more here), knowing that they'll make a killing when it busts.

But economists have pretended there is no such thing as a bubble. Indeed, BIS slammed the Fed and other central banks for blowing bubbles and then using "gimmicks and palliatives" afterwards.

It is not like economists weren't warning about booms and busts. Nobel prize winner Hayek and others were, but were ignored because it was "inconvenient" to discuss this "impolite" issue.

Likewise, the entire Federal Reserve model is faulty, benefiting the banks themselves but not the public.

However, as Huffington Post notes:

The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession, an investigation by the Huffington Post has found.

This dominance helps explain how, even after the Fed failed to foresee the greatest economic collapse since the Great Depression, the central bank has largely escaped criticism from academic economists. In the Fed's thrall, the economists missed it, too.

"The Fed has a lock on the economics world," says Joshua Rosner, a Wall Street analyst who correctly called the meltdown. "There is no room for other views, which I guess is why economists got it so wrong."

Read more at: http://www.huffingtonpost.com/2009/09/07/priceless-how-the-federal_n_278805.html

The problems of a massive debt overhang were also thoroughly documented by Minsky, but mainstream economists pretended that debt doesn't matter.

And - even now - mainstream economists are STILL willfully ignoring things like massive leverage, hoping that the economy can be pumped back up to super-leveraged house-of-cards levels.

As the Wall Street Journal article notes:

As they did in the two revolutions in economic thought of the past century, economists are rediscovering relevant work.

It is only "rediscovered" because it was out of favor, and it was only out of favor because it was seen as unnecessarily crimping profits by, for example, arguing for more moderation during boom times.

The powers-that-be do not like economists who say "Boys, if you don't slow down, that bubble is going to get too big and pop right in your face". They don't want to hear that they can't make endless money using crazy levels of leverage and 30-to-1 levels of fractional reserve banking, and credit derivatives. And of course, they don't want to hear that the Federal Reserve is a big part of the problem.

Indeed, the Journal and the economists it quotes seem to be in no hurry whatsoever to change things:

The quest is bringing financial economists -- long viewed by some as a curiosity mostly relevant to Wall Street -- together with macroeconomists. Some believe a viable solution will emerge within a couple of years; others say it could take decades.

Note: I am not necessarily saying that mainstream economists were intentionally wrong, or that they lied because it led to promotions or pleased their Wall Street, Fed or academic bosses.

But it is harder to fight the current and swim upstream then to go with the flow, and with so many rewards for doing so, there is a strong unconscious bias towards believing the prevailing myths. Just like regulators who are too close to their wards often come to adopt their views, many economists suffered "intellectual capture" by being too closely allied with Wall Street and the Fed.

As Upton Sinclair said:

It is difficult to get a man to understand something, when his salary depends upon his not understanding it.

20 reasons America has lost its soul and collapse is inevitable

Fall of the Republic *VIDEO*

20 reasons America has lost its soul and collapse is inevitable...

.....http://www.bushstole04.com/newworld/editorial_secret.htm.

http://www.youtube.com/watch?v=Kpe--KKPt7k&feature=player_embedded. [ watch Paulson talk about an "ethics" office at the white house..... it will make your stomach turn.....]

.....http://www.zerohedge.com/article/overview-feds-intervention-equity-markets-primary-dealer-credit-facility.

Jack Bogle published "The Battle for the Soul of Capitalism" four years ago. The battle's over. The sequel should be titled: "Capitalism Died a Lost Soul." Worse, we've lost "America's Soul." And worldwide the consequences will be catastrophic.

That's why a man like Hong Kong's contrarian economist Marc Faber warns in his Doom, Boom & Gloom Report: "The future will be a total disaster, with a collapse of our capitalistic system as we know it today."

Insuring against economic calamity

Gold ETFs are so popular they now hold more of the shiny stuff than most central banks. What will it take to sustain the funds' big gains? Barron's Clare McKeen reports.

No, not just another meltdown, another bear market recession like the one recently triggered by Wall Street's "too-greedy-to-fail" banks. Faber is warning that the entire system of capitalism will collapse. Get it? The engine driving the great "American Economic Empire" for 233 years will collapse, a total disaster, a destiny we created.

OK, deny it. But I'll bet you have a nagging feeling maybe he's right, the end may be near. I have for a long time: I wrote a column back in 1997: "Battling for the Soul of Wall Street." My interest in "The Soul" -- what Jung called the "collective unconscious" -- dates back to my Ph.D. dissertation: "Modern Man in Search of His Soul," a title borrowed from Jung's 1933 book, "Modern Man in Search of a Soul." This battle has been on my mind since my days at Morgan Stanley 30 years ago, witnessing the decline.

Has capitalism lost its soul? Guys like Bogle and Faber sense it. Read more about the soul in physicist Gary Zukav's "The Seat of the Soul," Thomas Moore's "Care of the Soul" and sacred texts.

But for Wall Street and American capitalism, use your gut. You know something's very wrong: A year ago "too-greedy-to-fail" banks were insolvent, in a near-death experience. Now, magically they're back to business as usual, arrogant, pocketing outrageous bonuses while Main Street sacrifices, and unemployment and foreclosures continue rising as tight credit, inflation and skyrocketing Federal debt are killing taxpayers.

Yes, Wall Street has lost its moral compass. They created the mess, now, like vultures, they're capitalizing on the carcass. They have lost all sense of fiduciary duty, ethical responsibility and public obligation.

Here are the Top 20 reasons American capitalism has lost its soul:

1. Collapse is now inevitable

Capitalism has been the engine driving America and the global economies for over two centuries. Faber predicts its collapse will trigger global "wars, massive government-debt defaults, and the impoverishment of large segments of Western society." Faber knows that capitalism is not working, capitalism has peaked, and the collapse of capitalism is "inevitable."

When? He hesitates: "But what I don't know is whether this final collapse, which is inevitable, will occur tomorrow, or in five or 10 years, and whether it will occur with the Dow at 100,000 and gold at $50,000 per ounce or even confiscated, or with the Dow at 3,000 and gold at $1,000." But the end is inevitable, a historical imperative.

2. Nobody's planning for a 'Black Swan'

While the timing may be uncertain, the trigger is certain. Societies collapse because they fail to plan ahead, cannot act fast enough when a catastrophic crisis hits. Think "Black Swan" and read evolutionary biologist Jared Diamond's "Collapse: How Societies Choose to Fail or Succeed."

A crisis hits. We act surprised. Shouldn't. But it's too late: "Civilizations share a sharp curve of decline. Indeed, a society's demise may begin only a decade or two after it reaches its peak population, wealth and power."

Warnings are everywhere. Why not prepare? Why sabotage our power, our future? Why set up an entire nation to fail? Diamond says: Unfortunately "one of the choices has depended on the courage to practice long-term thinking, and to make bold, courageous, anticipatory decisions at a time when problems have become perceptible but before they reach crisis proportions."

Sound familiar? "This type of decision-making is the opposite of the short-term reactive decision-making that too often characterizes our elected politicians," thus setting up the "inevitable" collapse. Remember, Greenspan, Bernanke, Bush, Paulson all missed the 2007-8 meltdown: It will happen again, in a bigger crisis.

3. Wall Street sacked Washington

Bogle warned of a growing three-part threat -- a "happy conspiracy" -- in "The Battle for the Soul of Capitalism:" "The business and ethical standards of corporate America, of investment America, and of mutual fund America have been gravely compromised."

But since his book, "Wall Street America" went over to the dark side, got mega-greedy and took control of "Washington America." Their spoils of war included bailouts, bankruptcies, stimulus, nationalizations and $23.7 trillion new debt off-loaded to the Treasury, Fed and American people.

Who's in power? Irrelevant. The "happy conspiracy" controls both parties, writes the laws to suit its needs, with absolute control of America's fiscal and monetary policies. Sorry Jack, but the "Battle for the Soul of Capitalism" really was lost.

4. When greed was legalized

Go see Michael Moore's documentary, "Capitalism: A Love Story." "Disaster Capitalism" author Naomi Klein recently interviewed Moore in The Nation magazine: "Capitalism is the legalization of this greed. Greed has been with human beings forever. We have a number of things in our species that you would call the dark side, and greed is one of them. If you don't put certain structures in place or restrictions on those parts of our being that come from that dark place, then it gets out of control."

Greed's OK, within limits, like the 10 Commandments. Yes, the soul can thrive around greed, if there are structures and restrictions to keep it from going out of control. But Moore warns: "Capitalism does the opposite of that. It not only doesn't really put any structure or restrictions on it. It encourages it, it rewards" greed, creating bigger, more frequent bubble/bust cycles.

It happens because capitalism is now in "the hands of people whose only concern is their fiduciary responsibility to their shareholders or to their own pockets." Yes, greed was legalized in America, with Wall Street running Washington.

5. Triggering the end of our 'life cycle'

Like Diamond, Faber also sees the historical imperative: "Every successful society" grows "out of some kind of challenge." Today, the "life cycle" of capitalism is on the decline.

He asks himself: "How are you so sure about this final collapse?" The answer: "Of all the questions I have about the future, this is the easiest one to answer. Once a society becomes successful it becomes arrogant, righteous, overconfident, corrupt, and decadent ... overspends ... costly wars ... wealth inequity and social tensions increase; and society enters a secular decline." Success makes us our own worst enemy.

Quoting 18th century Scottish historian Alexander Fraser Tytler: "The average life span of the world's greatest civilizations has been 200 years" progressing from "bondage to spiritual faith ... to great courage ... to liberty ... to abundance ... to selfishness ... to complacency ... to apathy ... to dependence and ... back into bondage!"

Where is America in the cycle? "It is most unlikely that Western societies, and especially the U.S., will be an exception to this typical 'society cycle.' ... The U.S. is somewhere between the phase where it moves 'from complacency to apathy' and 'from apathy to dependence.'"

In short, America is a grumpy old man with hardening of the arteries. Our capitalism is near the tipping point, unprepared for a catastrophe, set up for collapse and rapid decline.

15 more clues capitalism lost its soul ... is a disaster waiting to happen

Much more evidence litters the battlefield:

1. Wall Street wealth now calls the shots in Congress, the White House

2. America's top 1% own more than 90% of America's wealth

3. The average worker's income has declined in three decades while CEO compensation exploded over ten times

4. The Fed is now the 'fourth branch of government' operating autonomously, secretly printing money at will

5. Since Goldman and Morgan became bank holding companies, all banks are back gambling with taxpayer bailout money plus retail customer deposits

6. Bill Gross warns of a "new normal" with slow growth, low earnings and stock prices

7. While the White House's chief economist retorts with hype of a recovery unimpeded by the "new normal"

8. Wall Street's high-frequency junkies make billions trading zombie stocks like AIG, FNMA, FMAC that have no fundamental value beyond a Treasury guarantee

9. 401(k)s have lost 26.7% of their value in the past decade

10. Oil and energy costs will skyrocket

11. Foreign nations and sovereign funds have started dumping dollars, signaling the end of the dollar as the world's reserve currency

12. In two years federal debt exploded from $11.2 to $23.7 trillion

13. New financial reforms will do little to prevent the next meltdown

14. The "forever war" between Western and Islamic fundamentalists will widen

15. As will environmental threats and unfunded entitlements

"America Capitalism" is a "Lost Soul" ... we've lost our moral compass ... the coming collapse is the end of an "inevitable" historical cycle stalking all great empires to their graves. Downsize your lifestyle expectations, trust no one, not even media.

Faber is uncertain about timing, we are not. There is a high probability of a crisis and collapse by 2012. The "Great Depression 2" is dead ahead. Unfortunately, there's absolutely nothing you can do to hide from this unfolding reality or prevent the rush of the historical imperative....

...........

• 
  

.

The Ongoing Cover Up of the Truth Behind the Financial Crisis May Lead to Another Crash

William K. Black - professor of economics and the senior regulator during the S & L crisis - says that that the government's entire strategy now - as during the S&L crisis - is to cover up how bad things are ("the entire strategy is to keep people from getting the facts").

Indeed, as I have previously documented, 7 out of the 8 giant, money center banks went bankrupt in the 1980's during the "Latin American Crisis", and the government's response was to cover up their insolvency....

Black also says:

There has been no honest examination of the crisis because it would embarrass C.E.O.s and politicians . . .

Instead, the Treasury and the Fed are urging us not to examine the crisis and to believe that all will soon be well.
....Now I've lived to hear everything. Mr. Bubbles admits too big to fail has been a disaster. What next, a mea culpa on structured finance? A "sorry" from the Free Market crowd for deregulation? Let's not stop at too big to fail when these corps are also too big to prosecute. Any corporation in a public utility business like banking should have to agree that they will not be too lawyered up to be prosecuted. Instead of Corporate Integrity Agreements CIAs) we need Corporate Regulation Agreements for Prosecution (CRAPs).....

PhD economist Dean Baker made a similar point, lambasting the Federal Reserve for blowing the bubble, and pointing out that those who caused the disaster are trying to shift the focus as fast as they can:

The current craze in DC policy circles is to create a "systematic risk regulator" to make sure that the country never experiences another economic crisis like the current one. This push is part of a cover-up of what really went wrong and does absolutely nothing to address the underlying problem that led to this financial and economic collapse.

Baker also says:

"Instead of striving to uncover the truth, [Congress] may seek to conceal it" and tell banksters they're free to steal again.

Economist Thomas Palley says that Wall Street also has a vested interest in covering up how bad things are:

That rosy scenario thinking has returned to Wall Street should be no surprise. Wall Street profits from rising asset prices on which it charges a management fee, from deal-making on which it earns advisory fees, and from encouraging retail investors to buy stock, which boosts transaction fees. Such earnings are far larger when stock markets are rising, which explains Wall Street’s genetic propensity to pump the economy.

The media has largely parroted what the White House and Wall Street were saying. As a Pew Research Center study on the coverage of the crisis found:

The gravest economic crisis since the Great Depression has been covered in the media largely from the top down, told primarily from the perspective of the Obama Administration and big business, and reflected the voices and ideas of people in institutions more than those of everyday Americans…

Citizens may be the primary victims of the downturn, but they have not been not the primary actors in the media depiction of it.

A PEJ content analysis of media coverage of the economy during the first half of 2009 also found that the mainstream press focused on a relatively small number of major story lines, mostly generating from two cities, the country’s political and financial capitals.

A companion analysis of a broader array of media using new “meme tracker” technology developed at Cornell University finds that phrases and ideas that reverberated most in the coverage came early on, mostly from government, particularly from the president and the chairman of the Federal Reserve...

• Three storylines have dominated: efforts to help revive the banking sector, the battle over the stimulus package and the struggles of the U.S. auto industry. Together they accounted for nearly 40% of the economic coverage from February 1 through August 31. Other topics related to the crisis have been covered much less. As an example, all the reporting of retail sales, food prices, the impact of the crisis on Social Security and Medicare, its effect on education and the implications for health care combined accounted for just over 2% of all the economic coverage.

• Actions by government officials and business leaders drove much of the coverage. The White House and federal agencies alone initiated nearly a third (32%) of economic stories studied through July 3. Business triggered another 21%. About a quarter of the stories (23%) was initiated by the press itself and did not rely on an external news trigger. Ordinary citizens and union workers combined to act as the catalyst for only 2% of the stories about the economy.

• Fully 76% of the datelines on economic stories studied during the first five months of the Obama presidency were New York (44%) or metro Washington D.C. (32%). Only about one-fifth (21%) of the stories originated in any other city in the U.S., and about a quarter of those emanated from two other major media centers: Atlanta and Los Angeles.

As I have previously reported, concentration in the mainstream media (along with a number of other dynamics) has severely undermined the credibility of the media.

Why Should We Care?

Why should we care if there has been a cover up?

Well, initially, if there has been activity which is harmful to the economy and may lead to another financial crisis, wouldn't we want to know about it, so that we prevent it from happening again?

The answer is obviously yes.

But if the government, Wall Street, and the media are all in cover-up mode, then independent auditors, financial analysts and economists cannot shine a light into financial practices to find out what really went wrong.

In addition, if we don't know what's really going on, we can't gauge whether the government's economic policies are working. For example, Time Magazine called Tim Geithner a "con man" and the stress tests a "confidence game" because those tests were so inaccurate.

William Black said:

How do you think we did the stress tests? Like doing a stress test on an airplane wing, but you don’t actually have airplane wing. And don’t know what airplane wing is made out of. It’s a farce.

I agree.

Without accurate information, we will not know if we're heading in the right or the wrong direction.

Fraud

One of the foremost experts on structured finance and derivatives - Janet Tavakoli - says that rampant fraud and Ponzi schemes caused the financial crisis.

University of Texas economics professor James K. Galbraith agrees:

You had fraud in the origination of the mortgages, fraud in the underwriting, fraud in the ratings agencies.

Congress woman Marcy Kaptur says that there was rampant fraud leading up to the crash (see this and this).

According to economist Max Wolff:

The securitization process worked by "packag(ing), sell(ing), repack(aging) and resell(ing) mortages making what was a small housing bubble, a gigantic (one) and making what became an American financial problem very much a global" one by selling mortgage bundles worldwide "without full disclosure of the lack of underlying assets or risks."

Buyers accepted them on good faith, failed in their due diligence, and rating agencies were negligent, even criminal, in overvaluing and endorsing junk assets that they knew were high-risk or toxic. "The whole process was corrupt at its core."

William Black says that massive fraud by is what caused the economic crisis. Specifically, he says that companies, auditors, rating agencies and regulators all committed fraud which helped blow the bubble and sowed the seeds of the inevitable crash. And see this.

Indeed, as I have previously noted, the giant ratings agencies have a culture of covering up improper ratings (and they essentially took bribes for giving higher ratings).

Black also notes:

• Everyone involved knew that the CDOs which packaged subprime loans were not AAA credit-worthy (which means that they are completely risk-free). He also said that the exotic instruments (CDOs, CDS, etc.) which spun the mortgages into more and more abstract investments were intentionally created to defraud investors

• The government knew about mortgage fraud a long time ago. For example, the FBI warned of an "epidemic" of mortgage fraud in 2004. However, the FBI, DOJ and other government agencies then stood down and did nothing. See this and this

• "Accounting is the weapon of choice in the financial sphere", with the top executives involved in these fraudulent schemes vacuuming out huge profits for themselves and select insiders, and having auditors rubber stamp what's being done
  

• In November 2007, one rating agency - Fitch's - dared to take a look at some loan files. Fitch concluded that there was the appearance of fraud in nearly every file reviewed

Black and economist Simon Johnson also state that the banks committed fraud by making loans to people that they knew would default, to make huge profits during the boom, knowing that the taxpayers would bail them out when things went bust.

See also this and this.

The Economy Won't Recover Until We Prosecute

So there was a little fraud, no big deal, right?

Wouldn't looking backwards at fraudulent conduct be distracting for the people, the government, and the economy? Shouldn't we look forward so we can recover?

No.

Specifically, the Wharton School of Business has written an essay stating that restoring trust is the key to recovery, and that trust cannot be restored until wrongdoers are held accountable.

The Wharton paper states:

The public will need to "hold the perpetrators of the economic disaster responsible and take what actions they can to prevent them from harming the economy again." In addition, the public will have to see proof that government and business leaders can behave responsibly before they will trust them again...

For more on the importance of trust in the economy, see this.

The stakes are high. As Pam Martens, who worked on Wall Street for 21 years, writes:

The massive losses by big Wall Street firms, now topping those of the Great Depression in relative terms, have yet to be adequately explained. Wall Street power players are obfuscating and Congress is too embarrassed or frightened to ask, preferring to just throw money at the problem and hope it goes away. But as job losses and foreclosures mount and pensions and 401(k)s shrink, public policy measures to address the economic stresses require a full set of unembellished facts...

It was four years after the crash of 1929 before the major titans of Wall Street were forced to give testimony under oath to Congress and the full magnitude of the fraud emerged. That delay may well have contributed to the depth and duration of the Great Depression. The modern-day Wall Street corruption hearings in Congress ... must now resume in earnest and with sworn testimony if we are to escape a similar fate....

......The Crime of Our Time: Was the Economic Collapse "Indeed, Criminal?"

As a form of economic terrorism, indeed so says Schechter and many others. Ellen Brown, author of Web of Debt, writes: Schechter "establishes the crime's elements, identifies the players, and exposes the weapons that have turned free markets into vehicles for mass manipulation and control."

More still, according to former high-level government and Wall Street insider Catherine Austin Fitts in describing a "financial coup d'etat" that includes inflating multiple market bubbles, pump and dump schemes, naked short selling, precious metals price suppression, and active market intervention by Washington and the Fed that lets powerful insiders game the system, commit massive fraud, and be able to transfer trillions of public wealth to themselves, then get open-ended bailouts when the inevitable crisis surfaces.

In his last book, Plunder, Schechter deconstructed one element of the economy's financialization - the outlandish amounts subprime lending, instrumental in inflating the housing bubble and the economic crisis that followed.

The Crime of Our Time is his latest attempt to explain "the financial collapse as a crime story (and) the high status white-collar crooks" who wreak havoc on "the lives of hundreds of millions worldwide." He quotes from author and labor activist Jonathan Tasini in his new book, The Audacity of Greed, saying:

"Over the past quarter century, we have lived through the greatest looting of wealth in human history." While an elite few profited hugely, "the vast majority of citizens have lived through a period of falling wages, disappearing pensions, and dwindling bank accounts, all of which led to the personal debt crisis that lies at the root of the current financial meltdown."

The fallout cost millions of Americans their jobs, homes, savings, and futures, the result of a Washington - Wall Street criminal cabal and their scandalous conspiracy against the US public. In the Crime of Our Time, Schechter, once again, does a superb job explaining it astutely, thoroughly, and clearly.

Introduction - Our Time and Financial Crime

(1) In Wall Street We Trust

Once again, the major media betrayed the public by cheerleading the inflating market bubbles, ignoring the cause and Wall Street/Washington's role, then downplaying the severity of the crisis that has a long way to run. Instead their reasoning goes: "we are all to blame, guilty of greed, over-spending and under-saving," so "when everyone's at fault, no one can be held responsible."

Yet capitalism's internal contradictions make it crisis-prone, unstable, ungovernable, and self-destructive because of its repeated cycles of booms creating bubbles, creating busts, then depressions, and inevitably decay and demise.

Initially, The New Times deflected attention by focusing on human errors like "wild derivatives, sky-high leverage, (and) a subprime surge," but avoided the core issue of white collar crime and Washington's complicity in it. When it was too late to matter, columnists like Bob Herbert wrote about financial "malefactors" who walk away "with a suspended sentence, and can't wait to get back to their nefarious activities." Where were they when it mattered most?

Still today, the corporate media ignores the crime scene, instead calling criminal bankers "egotistical jerk(s) as trapped as anyone" in their own mess, as much victims as their prey.

(2) Former Bank Regulator William Black Speaks Out

Economics Professor William Black is a former senior bank regulator and Savings and Loan prosecutor. In April 2009 interviews in Barrons and with Bill Moyers on public television, he referred to "failed bankers (advising) failed regulators on how to deal with failed assets" they all conspired to create, proliferate, and use to defraud unwary buyers. He explained that many failed banks were deliberately brought down, and:

"The way that you do it is to make really bad loans, because they pay better. Then you grow extremely rapidly, in other words, you're a Ponzi-like scheme. And the third thing you do is" leverage up. It's hugely profitable and "inevitable that there's going to be a disaster down the road."

Black explained it in his book, The Best Way To Rob A Bank Is To Own One, especially in a lax regulatory environment under the privately owned Federal Reserve and powerful financial giants that run the government, not the other way around. They write the laws, make the rules, install their people in top Washington posts, and get open-ended bailouts and absolution when their scam implodes.

In the 1930s, the Pecora Commission's Chief Counsel Ferdinand Pecora noted how "Legal chicanery and pitch darkness were the banker's stoutest allies." So weren't complicit government officials as well as media commentators turning a blind eye to their crimes.

(3) The Crime Wave Is Still With Us

In an environment of lax regulation, a Wall Street owned and operated Fed, the Treasury as their private piggy bank, a bipartisan criminal culture in Washington, and corporate lobbyists taking full advantage to get the best democracy their money can buy, it's little wonder that the same dirty game persists because who cares enough to stop it.

At the same time, millions of jobs are being lost. Home foreclosures are at record highs. Next year's 2010 mortgage resets will unleash a greater number, and ahead is the full impact of nationwide commercial real estate defaults plus any number of new unpleasant surprises.

Even so, little relief is in sight for beleaguered households or for 48 of the 50 states under water from their budget crises. But according to Fed Chairman Ben Bernanke, "the recession is very likely over at this point (even though) it's still going to feel like a weak economy for some time."

(4) "The Biggest Crime In The World"

That's what former Wall Street banker Nomi Prins told Schechter when he interviewed her last December. "You're talking double-digit trillions of dollars - minimum - already in the beginning of 2009, and we are nowhere near done with finding out how much loss there really is."

One estimate was $197.4 trillion, including "monies lost, value depreciated, and money spent to try to stabilize the system....and that (figure) may be low," yet it's incomprehensible. And getting to the bottom of it through a modern-day Pecora Commission may duplicate the 9/11 whitewash. According to economist Dean Baker:

"Instead of striving to uncover the truth, (an investigation) may seek to conceal it" and tell banksters they're free to steal again.

(5) Insiders Wanted

According to Schechter: "We need investigations by insiders who know where the bodies are buried, and in many cases, not yet" interred. We need more State Attorneys like Eliot Spitzer and enough honest politicians to embrace them. We need proof of who's on the take followed by "a jailout, not (another) bailout. We need to remember Balzac's insight (that) 'Behind every great fortune lies a great crime,' " in a culture where the only one is getting caught.

The Madoff Moment

In business since 1960, Bernard L. Madoff Investment Securities LLC provided executions for broker-dealers, banks, and financial institutions, and was one of the world's largest hedge fund managers, handling billions of dollars for a select clientele that included banks, insurance companies, other hedge funds, universities, charities, and numerous prominent wealthy individuals.

Madoff served as vice-chairman of the NASD, was a member of its board of governors, and chairman of its New York region. He also chaired the Nasdaq's board of governors, served on its executive committee, and was chairman of its trading committee.

In addition, he was chief of the Securities Industry Association's trading committee in the 1990s and earlier this decade in the same capacity when he represented brokerage firms in discussions with regulators about new stock market trading rules. He was highly respected and a pillar among his peers until the scam he created imploded.

On December 11, 2008, he was revealed as a world class swindler when federal agents arrested him for running a giant Ponzi scheme. According to the FBI's Theodore Cacioppi:

Madoff "deceived investors by operating a securities business in which he traded and lost investor money, and then paid certain investors purported returns on investment with the principal received from other, different investors, which resulted in losses of billions of dollars."

He was tried in federal court on charges of criminal securities fraud, convicted, and, on June 29, 2009, sentenced to 150 years in prison, the maximum under the law. In fact, his real crime was getting caught, and for ripping off the rich and famous, his own kind, who welcomed the steady high returns until what seemed too good to be true turned out to be a scam.

Section 4 of the Securities Exchange Act of 1934 established the SEC to prevent them. It's mandated to enforce the Securities Act of 1933, the Trust Indenture Act of 1939, the 1940 Investment Company Act and Investment Advisers Act, Sarbanes-Oxley of 2002, and the Credit Rating Agency Reform Act of 2006. Overall, it's responsible for enforcing federal securities laws, the securities industry, the nation's stock and options exchanges, and other electronic securities markets. It's charged with uncovering wrongdoing, assuring investors aren't swindled, and keeping the nation's financial markets free from fraud.

For years, there were suspicions about Madoff because no one understood how his strategy produced annual double-digit returns. The SEC was alerted but didn't act. Derivatives expert Harry Markopolos wrote a report for internal SEC use listing 29 Red Flags and accused Madoff of running a giant Ponzi scheme, to no avail.

Wall Street takes care of its own, and even internal SEC documents suggest that the agency is notorious for being lax, preferring wrist-slaps alone, and nearly always against lesser players, not prominent ones like Madoff or major Wall Street banks and investment firms.

As a result, the agency doesn't regulate. Investigations aren't conducted or are whitewashed. Criminal fraud goes undetected or is swept under the rug. Little is done to prevent it, and only rarely are figures like Madoff caught. Wall Street's criminal culture is in safe hands under its new head, Mary Schapiro, a consummate insider with close ties to the Street's rich and powerful, which is why she was chosen in the first place.

The White-Collar Prison Gang

Even though felons like Enron's Jeffrey Skilling, Worldcom's Bernie Ebbers, and Tyco's Dennis Kozlowski are in prison, corporate America's criminal class is thriving, untouched, and mindful that very few of their kind get caught.

So far during the current economic crisis, not only are most banksters unscathed, but they've been rewarded with trillions of taxpayer dollars, interest-free Federal Reserve money, and an open-ended checkbook for as much more as they want. Who said crime doesn't pay?

The Crimes of Wall Street

Schechter names many, including:

-- "Fraud and control frauds;

-- Insider trading;

-- Theft and conspiracy;

-- Misrepresentation;

-- Ponzi schemes;

-- False accounting;

-- Embezzling;

-- Diverting funds into obscenely high salaries and obscene bonuses;

-- Bilking investors, customers and homeowners;

-- Conflicts of interest;

-- Mesmerizing regulators;

-- Manipulating markets;

-- Tax frauds;

-- Making loans and then arranging that they fail;

-- Engineering phony financial products; (and)

-- Misleading the public."

Add to these:

-- buying a controlling stake in Washington;

-- assuring their own officials run the Treasury, Fed, and all functions related to the economy and finance, including the regulatory bodies; and

-- writing laws and regulations that govern their industry and activities.

In Washington, what Wall Street wants, it gets. As a result, financial fraud and other scams are thriving. According to the Treasury Department's Financial Crimes Enforcement Network, over 730,000 instances of suspected wrongdoing, or 13% more than in 2007, including a 23% rise in mortgage fraud to almost 65,000
incidents.

By the numbers, they amount to:

-- $994 billion in 2008 losses or a median loss of $175,000;

-- financial institutions or government agencies accounting for 27% of the total; and

-- an estimated 17 - 30 months elapse before a typical scheme is detected.

Examples include "shady lending practices....deepening debt, exploiting customers, overcharging borrowers with arbitrary late fees, and imposing other hidden costs that bilk consumers."

Most getting caught get off with mere wrist slaps or occasional fines amounting to a tiny fraction of the crimes, so it pays to keep committing them. According to Law Professor and corporate crime specialist John Coffee:

"Any criminal prosecution....must show either a specific intent to defraud or, what federal law calls, willfulness which means a real intent to deliberately defraud someone and engage in misconduct that you realize was causing injury."

So if fraud is committed with good intentions, criminal prosecutions won't follow, only civil ones can to redeem losses, and during the Bush administration, the Justice Department sought cash settlements most often to keep plaintiffs out of court. And over 60% of the relatively few tried and convicted served only about two years on average in country club prisons, and over one-fourth of them were never incarcerated.

It's why year after year, "The beat goes on (as) new scandals seem to surface daily....(yet) no sooner does one scandal erupt (when) another threatens to push it out of the public eye," or another unrelated issue is manufactured like the phony Swine Flu crisis tries to sweep them under the rug altogether. Sadly, it works because the public is none the wiser and never catches on to what investigative journalist IF Stone once explained:

"All governments are run by liars, and nothing they say should be believed." Or he simply said: "All governments lie," usually about the most important issues affecting everyone.

The Criminal Mind

The new Con Artist Hall of Infamy web site explains the art of the con, has a con watch, and lists current inductees, including many prominent past and more recent figures like Bernie Madoff, Jeff Skilling, Bernie Ebbers, and Conrad Black. But for everyone exposed, dozens more get away with cooking the books, manipulating markets, profiting from insider deals, selling toxic junk to unwary investors, and pocketing multi-millions as their legitimate right. Why not, when regulators and law enforcement are complicit in letting them.

They use "every angle to persuade people to believe" that their integrity is impeccable, their financial skills unmatched, and their strengths include:

-- "power & influence" because of friends in high places;

-- "charisma" to attract broad appeal; and

-- "strong cover" for being a respected financial community member.

They flourish best free from regulatory oversight during periods of economic prosperity and bull markets, or at least the illusion that these conditions exist. Former convicted felon Sam Antar explained:

"White-collar criminals are economic predators. We consider you, humanity, as a weakness to be exploited in the execution of our crimes. In order to commit (them), we have to increase your comfort level (by) build(ing) walls of false integrity around us....We have no respect for the laws. We consider your codes of ethics, your laws, weaknesses to be exploited in the execution of our crimes."

"You can't be prosecuted for being stupid. So all white-collar criminals always try to play stupid. They don't want to show intent. It's easier to say that this was a result of a mistake or an error of judgment, than to say that I intended to, to victimize or defraud somebody. It's relatively easy (and) the criminal element today is figuring out a way to exploit it" because of so much easy money around for the taking.

The Crime at the Heart of the Crime

Embracing fraud is simple when so many people in high places commit it, get away with it, and the few caught keep most of their gains and pay a small price for them. Further, "The line between legal and illegal can be a thin one or no line at all. It can also be complicated, even hard for government to investigate and prosecute."

Also, no widely accepted definition of economic crime exists because intent is so hard to prove, and in a lax regulatory environment no incentive to either, especially since unelected officials come from sectors they administer, then recycle themselves back to high-paying jobs.

Who Should Be Prosecuted?

Considering the extensive amount of fraud and harm caused, tough RICO prosecutions should be used the same as against organized crime that call for harsh sentencing penalties for the guilty.

More than ever today, the problem is endemic, the way William Black explains about the pressures on CEOs to keep up with their peers and generate impressive profits even if getting them means cooking the books and committing fraud.

He presented this paradigm in a public lecture:

-- "Corporate governance fails. Power is delegated to CEOs and collaborating members of management;

-- External controls fail through the manipulation of outside auditors and accounting firms as happened in the Enron and WorldCom frauds;

-- Rating agencies are co-opted and suborned through conflicts of interest; (and)

-- Regulation fails or is defanged with rules softened or changed (through)

(a) Deregulation

(b) No regulation

(c) Desupervision

(d) Lobbying by Companies to undercut regulators which is justified on ideological grounds as support for free markets (and)

(e) Capture - What regulators there are (are) drawn from the industry and share its outlook."

The result has been the greatest ever transfer of wealth from the many to an elite few that continues without missing a beat, and why not. No one stops them. In fact, the current environment under Democrats or Republicans lets them flourish.

Whenever a systemic collapse occurs, old scams continue and new ones emerge, always aimed at fleecing as much as possible from the unwary.

Investigating Financial Criminals

Given the unprecedented amount of financial fraud, a new independent Pecora Commission with teeth more than ever is needed to root it out and hold the guilty accountable. But getting one is another matter at a time Washington and Wall Street are co-conspirators with every incentive to facilitate criminality and whitewash attempts to expose it.

Nonetheless, economist Dean Baker lists questions needing answers:

-- asking financial executives under oath how they missed the inflating housing bubble; and

-- how they justify millions in compensation given the crisis they were complicit in creating.

However, getting straight answers will prove daunting at best, and what government authority will demand them. Perhaps a "People's Inquiry" can do better even with no teeth and no coverage by the dominant media.

Progressive web sites and online radio and television can feature the results and get them to growing audiences. Not millions but enough to spread the word and hope others pass it on.

If economic deterioration deepens over an extended period with millions more out of jobs, homes, savings and hope, then a public outcry for prosecutions might be unstoppable. Even then, it's a long shot but something worth watching.

Predatory Subprime Lending

According to Schechter, "subcrime over the years got millions of families into mortgages they couldn't afford, and that the lenders knew they couldn't sustain." Low teaser rates and financial institutions' collusion facilitated it to cash in on the enormous profits, then hang fleeced homeowners out to dry by unaffordable mortgage resets and eventual foreclosures.

According to the Center for Public Integrity, the largest Wall Street banks backed 25 of "the sleaziest subprime lenders," including CitiGroup, Wells Fargo, JP Morgan Chase, and Bank of America. Combined, they originated $1 trillion in toxic mortgages from 2005 - 2007, nearly three-fourths of the total.

Even worse, warnings a decade ago went unheeded, and former insider Catherine Austin Fitts saw an earlier scam unfolding, brought it to the attention of her GHW Bush administration superiors, and was told to shut up and mind her own business.

The idea was to pump as much money into the housing market to scam buyers with fraudulent mortgages designed to fail. It was predatory lending across the board with corporate CEOs of the top Wall Street firms involved. In 2004, the FBI first warned of a "fraud epidemic," then later launched "Operation Malicious Mortgage" that charged over 400 defendants, convicted 173 of crimes, but only accounted for around $1 billion in losses, a tiny fraction of the total fraud, none committed by major players, and that's the problem.

A Financial Crimes Enforcement Network (FinCEN) April 2008 study mortgage fraud study found that "the total for mortgage fraud SARs (suspicious activity report) filed reached nearly 53,000, an increase of 42 percent" over 2007. The February 2009 report is even worse at over 62,000 SARs, and filings increased 44% from the previous year.

Suspected crimes included:

-- falsifying financial information, including fake accounting entries, bogus trades to inflate profits or hide losses, and false transactions to evade regulatory oversight;

-- "self-dealing" through insider trading, kickbacks, backdating executive stock options, misusing corporate property for personal gain, and violating tax laws relating to "self-dealing" that amounts to illegally taking advantage of insider positions; and

-- obstruction of justice to conceal criminal conduct.

According to the Center for Public Integrity (based on the FBI's Mortgage Fraud Report), the same parties allegedly involved in fraud also created the housing crisis. On July 30, the Wall Street Journal reported that the Senate launched an investigation and subpoenaed leading financial institutions believed to be involved. But given how these investigations go, it's unlikely to expect much, let alone top executives publicly exposed and later prosecuted.

The Victims Are Everywhere

Besides millions of defrauded homeowners, the big money, according to former insider Nomi Prins, came from leveraging. She explained:

"The (big) money was made because several layers up a pyramid, Wall Street investment firms and commercial bank investment groups decided to repackage these mortgages, create layers of them, that they then resold to investors." They leveraged up 30 times or more "against those (toxic) layers, which is the real crime" and sold the junk to unwary buyers knowing that most of it would default. Adding layers of high-risk credit default swaps greatly compounded the problem that ballooned into many trillions of dollars of bad assets.

Witnesses for the Prosecution

Schechter interviewed many homeowners who explained how they were conned and the devastating effect on their lives. According to one:

"I'm a person (who's) trying to save my house. I'm in foreclosure right now. I feel like someone's hand is in my pocket, and I just want a fair break, a fair shake at the American dream."

Millions had it stolen by willful fraud and deception, capitalizing on their "low level of financial literacy" to pull off the most egregious mortgage abuses, and most often get away with them.

Wall Street Complicity

The big players are the smartest, most devious, and best able to reap the greatest profits knowing that regulators and prosecutors won't touch them, so why worry.

According to economist Max Wolff:

The securitization process worked by "packag(ing), sell(ing), repack(aging) and resell(ing) mortages making what was a small housing bubble, a gigantic (one) and making what became an American financial problem very much a global" one by selling mortgage bundles worldwide "without full disclosure of the lack of underlying assets or risks."

Buyers accepted them on good faith, failed in their due diligence, and rating agencies were negligent, even criminal, in overvaluing and endorsing junk assets that they knew were high-risk or toxic. "The whole process was corrupt at its core."

According to political scientist Ben Barber:

"Capitalism has sort of gone off the rails. It ceased to be capitalism - it's financialization. The fact that it's now all about speculation, the fact that it's about Ponzi schemes, the fact that it's about selling and buying paper," not producing real products with real worth for a real purpose, the essence of industrial capitalism.

The Insurers

AIG was the most prominent, but the industry was complicit overall, including through "credit default swaps to protect themselves against defaults" they knew were most likely would happen because the assets they insured were junk. In addition, hedge funds were "also a pit of fraud," and according to William Black:

Toxic junk "was created out of things like liars' loans, which were known to be extraordinarily bad. And now it was getting triple-A ratings....mean(ing) there is zero risk. So you take something that not only has significant risk, it has crushing risk. That's why it's toxic. And you create this fiction that is has zero risk. That itself, of course, is a fraudulent exercise. Again, there was nobody looking during the Bush years."

The result was "a 50-state-Katrina blast(ing) through America" causing millions of homeowner defaults, while criminal financiers prospered through massive securities fraud and racketeering.

According to economist Michael Hudson, it let the top 1% of the population raise their wealth level from 30% 10 years ago to 57% five years ago to almost 70% today. "It's unprecedented," he said (and) makes America look like a third world banana republic."

The Conspiratorial Role of the Media

They profit mainly through advertising revenue, and much of it comes from the FIRE industry (finance, insurance, and real estate). Newspapers especially depend heavily on real estate ads in weekend supplements and daily classified sections. In some communities, local broadsheets are the virtual "marketing arm of the real estate industry" so they have every incentive to ignore practices easily identified as fraudulent.

Overall, the media "politicized the problem....rarely acknowledging their laziness and superficial coverage." When it was too late to matter, they admitted irresponsibility but only asked questions like why didn't we see this coming. They did but failed to report it. As long as the economy appeared prosperous and big profits continued, why rock the boat? Why ask tough questions when it's easier saying nothing? Why risk offending bosses and jeopardizing careers? Why practice real journalism when the fake kind is demanded and rewards for it much greater?

Warnings Ignored

According to Washington Post columnist Robert Samuelson and others, most economists as well as journalists got it wrong, or more accurately didn't try to get it right.

Law Professor Linda Beale was unsympathetic in saying professional economists helped cause the crisis, didn't see it coming, and don't know how to fix it. Too few even try because they're paid by the industry, (or related ones), that engineered the fraud, profited hugely from it, and need professionals to trumpet successes and hide scams.

As a result, dissenting voices were silenced. Denial was the order of the day, and as long an emerging crisis wasn't evident, why sound the alarm when it's much easier and safer playing along.

Yet "One didn't have to be an expert to see the warning signs (that) led to a massive market meltdown, a collapse of the subprime mortgage market, bankruptcies by the leading financial lenders, billions of dollars in losses by top banks and financial lenders, and prediction of more pain to come for millions of Americans facing foreclosures" plus more job losses than at any time since the 1930s.

But you'd never know it from the public media discourse that cheerlead the scam until it imploded. Or as former activist and academic Alex Carey might have said - corporate propaganda protected Wall Street predators from the truth.

The Bear Stearns "Bleed Out"

The 85-year old Wall Street firm was the first major one to fail, and "Its stockholders would eventually be wiped out in what was described as the first government bailout." Many others, of course, followed with perhaps more to come once the next leg of the crisis begins.

Writing in Vanity Fair about Bear Stearns, Bryan Burroughs said there was never "anything on Wall Street to compare to it: a 'run' on a major investment bank, caused in large part not by a criminal indictment or some mammoth quarterly loss but by rumor and innuendo (that) had little basis in fact."

The questions are why, cui bono, and did the firm fall or was it pushed, even though like others on the Street it took huge risks that could backfire in hard times. But there was more going on than reported. "There were forces at work here that suggest illegal activities on a number of levels."

The firm was also independent enough to rile competitors, perhaps some arranging for it to fail, and if it did, they'd profit hugely through greater consolidation for larger market shares. So by some accounts, it was targeted by naked short selling, rumors of a liquidity problem at a time it was adequately capitalized, and heavy put option buying to sink its stock price and drive the company to the wall in a matter of days. It gave JP Morgan Chase a chance to buy it at a tiny fraction of its peak valuation, or in other words, profit hugely from a vulture purchase arranged by the Fed.

In short order, Lehman Bros., Merrill Lynch, and other noted firms failed, giving Wall Street survivors like Goldman Sachs, JP Morgan Chase, Citigroup, and Bank of America more power than ever.

The Lehman Liquidation

In asking "Did Lehman Brothers Fall or Was It Pushed," Ellen Brown quoted author Lawrence MacDonald saying the company was in no worse shape than other major Wall Street banks, so he concluded that Lehman was "put to sleep. They put the pillow over (its) face and they put her to sleep." But why is key.

Schechter quoted economist Michael Hudson blaming CEO Dick Fuld saying:

"Lehman Brothers essentially committed suicide. Its head, Mr. Fuld, had many offers from Korea and from investment banks in the US to take it over. He tried to bluff them. He tried to say, "Crisis? What crisis? Our loans are perfectly good. We haven't lost a penny. We want you to pay at the book value of what we say our loans are worth."

But no one believed it, and why should they. "These are guys who like to wipe out their partners, like to wipe out people they are doing business with. He (f'd) the whole firm and wiped out the shareholders (saying) 'We're too big to fail.' " Was Fuld complicit in a deliberate scheme to bring down Lehman, and if so why?

Apparently, he profited hugely, and so did the Street by removing a key competitor. First Bear Stearns, then Lehman. According to Brown:

"Although Lehman Brothers filed for bankruptcy on Monday, September 15, 2008, it was actually 'bombed' on September 11" when it was hit by the "biggest one-day drop in its stock" the result of manipulative naked short-selling and apparent sabotage to prevent the company from negotiating a deal to be bought. The UK-based Barclays Bank was interested and was willing to underwrite Lehman's debt.

But as Brown explained:

It "needed a waiver from British regulators of a rule requiring shareholder approval. (However,) UK Chancellor of the Exchequer Alistair Darling" stonewalled long enough to prevent it. He did the same thing with Britain's Northern Rock and "changed the rules of the game" by opening the spigot in both countries for open-ended bailouts for banks too big to fail.

Again, why so and cui bono? It "suggests that Lehman Brothers (Northern Rock and others) did not just fall over the brink but (were) pushed." The likely reasons were to engineer the financial crisis, create an emergency, pressure Congress (and the UK government) to provide billions in rescue funding, give selected major banks in both countries more power to consolidate, then use bailout proceeds to buy choice assets on the cheap plus reward themselves handsomely for their cleverness.

It's not new with numerous past examples of predatory bankers, including JP Morgan, engineering financial crises for profit. The difference is that today the stakes far higher and global with US giants Goldman Sachs, JP Morgan Chase, Citigroup, Bank of America, Wells Fargo, and Morgan Stanley the major survivors - bigger and more powerful than ever, and so far thriving with open-ended bailouts.

Ellen Brown adds:

"The international bankers who caused the financial crisis are indeed capitalizing on it, consolidating their power in 'a new global financial order' that gives them (more) top-down global control" than ever with the public exploited and stuck with the bill.

Are Our Markets Manipulated?

Forget about "animal spirits," random movements, and asset prices reflecting true values, and understand that all markets are manipulated up and down for profit with insiders profiting hugely both ways.

Catherine Austin Fitts calls it a "pump and dump" scheme to artificially inflate valuations, then profit more on the downside by short-selling. "The practice is illegal under securities law, yet it is particularly common" because the gains are enormous, in good and bad times. When carried to extremes, Fitts calls it "pump(ing) and dump(ing) of the entire American economy," duping the public, fleecing trillions, and it's more than just "a process designed to wipe out the middle class. This is genocide (by other means) - a much more subtle and lethal version than ever before perpetrated by the scoundrels of our history texts."

The so-called Plunge Protection Team is one of the tools, authorized on March 18, 1989 under Ronald Reagan's Executive Order 12631 creating the Working Group on Financial Markets (WGFM) with top government officials, including the President, Treasury Secretary and Fed chairman in charge.

It subverts market forces by theoretically intervening to avoid crises. In fact, it works both ways to drive valuations up or down along with active insider participation for huge profits with the public none the wiser.

Schechter explains that "this secret branch of government has a sophisticated war room, using every state of the art technology to monitor markets worldwide. It has emergency powers. It doesn't keep minutes. There is no freedom of information access to its deliberations." Google has 147,000 entries about it, but only 10 can be accessed, so the most secretive shenanigans are hidden along with the role of the Fed, the Treasury, and the White House.

Established by the 1934 Gold Reserve Act, the Treasury-run Exchange Stabilization Fund (ESF) originally operated free from congressional oversight "to keep sharp swings in the dollar's exchange rate from (disrupting) financial markets" through manipulation. Its operations now include stabilizing foreign currencies, extending credit lines to foreign governments, and more recently guaranteeing money market funds against losses of up to $50 billion. Overall, the ESF is a slush fund for Treasury officials to use as they wish and manipulate markets freely.

Established in 1999 after the Long Term Capital Management (LTCM) crisis, the Counterparty Risk Management Policy Group (CRMPG) manipulates markets to benefit giant Wall Street firms and their high-level insiders. It lets financial giants collude through large-scale program trading to move markets up or down. It bails out members in financial trouble, and manipulates markets short or longer-term with government complicity and approval to go either way for huge profits on stocks, bonds, commodities, currencies, futures, options, and an array of speculative vehicles like structured assets and derivatives. Market manipulation enriches insiders at the expense of the unwary, often fleeced by their chicanery.

The Testosterone Factor

Schechter wonders how different things might have been if "the Sheriff of the Street," Eliot Spitzer, hadn't been caught in a sex scandal and forced to resign as Governor. Two days before being outed in testimony before Congress and in a Washington Post op-ed, he accused the Bush administration of being a "partner in crime" with predatory lenders. He wrote:

"Several years ago, state attorneys general and others involved in consumer protection began to notice a marked increase in a range of predatory lending practices by mortgage lenders."

"Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye."

However, his comments were quickly buried, then forgotten after his sex scandal erupted, even though it's widely known that well-healed Wall Street and other corporate types have "kept a vibrant, upscale sex industry" thriving. What Schechter calls the "testosterone factor" is brought on by what experts call a sense of exuberance, a feeling of infallibility, and a sense of entitlement to engage in risky behavior, including with high-paid prostitutes. It's the same euphoria gamblers feel when winning. They get addicted to the action and can't stop.

The Role of Regulators and Politicians

Wall Street predators profited hugely with complicit help from regulators, politicians, and prosecutors. Further, "The financialization (of the economy) did not just happen; it was engineered, projected as socially beneficial 'modernization' and innovation" at the same time industrial capitalism was eroding because operations were offshored to cheap labor markets.

Financialization is ripe for plunder and fraud under a system favoring bigness, lax regulations, prosecutorial weakness, and FIRE sector companies and high-powered lobbyists' influence buying from criminally complicit politicians.

They got:

-- Glass-Steagall repealed;

-- the Commodity Futures Modernization Act that licensed high-risk derivatives speculation;

-- off-balance sheet accounting chicanery to hide financial liabilities;

-- the SEC letting investment banks be self-regulating;

-- an overall regulatory climate conducive to widespread fraud and abuse;

-- new rules to let commercial banks determine their own capital reserve requirements;

-- federal bank regulators empowered to supersede state consumer protection laws, thus facilitating predatory lending;

-- new federal rules preventing victims of abusive loans from suing firms that bought them from issuing banks;

-- antitrust laws weakened or abandoned and the door opened to "too-big-to-fail megabanks," and

-- much more, creating opportunities for the worst kinds of fraud and abuse with virtually no government oversight to stop it.

Worse still, it persists under Obama in more extreme forms with plans for greater global reach and dominance creating new opportunities for plunder. According to Michael Hudson, "It looks as if as little will be done to (curb) financial fraud as will be done to the Guantanamo torturers and the high-ups who condoned their actions."

Or as Schechter explains:

"Is economic justice even possible under circumstances riddled with so many banksters still in charge and tangled up in so many conflicts of interest? In this environment, can we look forward to any serious fraud or prevention effort, much less a mass prosecution?"

That said, can reckless speculation be halted or will it continue unabated, followed by greater boom and bust cycles until the entire system implodes in an inevitable collapse after which no recovery is possible and most people are left impoverished and on their own because government did nothing to stop it.

Judgment Day

On September 15, Bloomberg News quoted Fed chairman Ben Bernanke saying "....from a technical perspective the recession is very likely over at this point...." The dominant media agree, with commentators like CNN's Lou Dobbs stating months ago that the economy was improving and the recession would soon end. Others disagree, including former insider Nomi Prins saying:

"This economic cycle is not finished going downward. We are in the beginning of 2009. We've seen a decimated 2008. It's not getting better anytime soon."

According to economist Max Wolff:

"Sadly there is evidence that we're going to flush our tax dollars and our opportunity down the toilet to rebuild an unfair system that rewarded only the top at the expense of everybody and was fundamentally unsound."

Longtime market analyst Bob Chapman sees no recovery ahead "even with an official $23.7 trillion committed by the Treasury and the Fed....(Yet) we hear fairy tales of recovery in the US, Europe and Asia." Chapman sees the worst of times ahead and many dark years before returning to normality.

Leading monetary analyst Professor Tim Congdon explains that money and credit in America have been contracting at a pace comparable to the Great Depression. "There has been nothing like this in the USA since the 1930s. The rapid destruction of money balances is madness."

Economist David Rosenberg is also worried because "For the first time in the post-WW2 era, we have deflation in credit, wages and rents and, from our lens, this is a toxic brew."

Worse still, Wall Street is more powerful and rapacious than ever. Speculation remains unabated. New bubbles are being inflated with a "whole new wave of criminal" fraud, according to investigative journalist Gary Weiss. Even so, top financial officials have escaped prosecution. Instead, beleaguered households have been hung out to dry, while meaningful reforms aren't coming because "financial sector lobbies appear stronger than ever." As a result, business as usual continues accompanied by the kind of Washington and media cheerleading we've grown accustomed to hearing.

Absent is any concern for the common good when more than ever the business of America is big business with a strategic long-term plan for co-opting world governments, waging permanent wars for profit, dominating everywhere militarily, ending social safety net protections, crushing civil liberties and freedom, tolerating no concern for human rights, controlling global markets and resources, turning workers everywhere into serfs, and extracting, unimpeded, as much public wealth as possible.

That's America's future with no simple solutions in sight. Yet more than ever the old order must be stopped or a far greater calamity is coming than The Crime of Our Time....

Fed Intentionally Devalued U.S. Dollar

http://www.economist.com/opinion/displaystory.cfm?story_id=14699754

The following is an excerpt from Why Did U.S. SDR Holdings Increase Five Fold In The Last Week Of August? by Tyler Durden, Zero Hedge

With everyone lately focused on China's foreign reserve position, analysts have forgotten that America also has an International Reserve account consisting of foreign currency positions, as well as gold reserves and equivalents. And while the total combined holdings as of the most recently reported period are a joke compared to China's $2+ trillion, the most recent number of $133.6 billion does raise red flags, particularly when one traces this number's level throughout the year.

We present a graphic representation of the US International Reserve Position over the past year:

Click graph to enlarge.

The big question mark at the end of August is when the U.S. International Reserve Position increased by almost 50%. The reason for this: a near quintupling of S.D.R. holdings on the U.S. balance sheet in the span of one week - from August 21 to August 28.

The SDR balance increased by 500% practically overnight and has stayed that way ever since.

By purchasing $40 billion in SDRs virtually overnight, what the Fed has done is to increase the value of the entire basket pro-rata, while in the process reducing the actual value of the dollar (which is a weighted constituent of the SDR basket). This was an operation to reduce the dollar's value: pure and simple. In many ways it explains why the DXY has continued its straight one way decline since the beginning of September, when many pundits assumed the market was finally going to tank on profit taking after Labor day. By performing this dollar adverse transaction, the Fed sent a loud and clear signal what the Fed was going to do going forward vis-a-vis the i) dollar and ii) its derivative, the stock market.

Chart of the Trade Weighted US dollar from 1973-2009. Click to enlarge.

And what is worse, this is not a roundabout or circuitous way of devaluing the dollar: this is head on intervention. It is one thing to print trillions of MBS and Agencies and to monetize Treasuries, where one could say Tim Geithner's claim that the U.S. is for a strong dollar, and the dollar is only weak as a function of supporting housing prices. That could potentially fly as an explanation. However, when the Fed is actively and purposefully destroying the dollar's worth via transactions such as material SDR purchases, then it truly demonstrates Geithner's statement as a bold faced lie to the American public. When will Mr. Geithner be finally taken to task for his repeated fabrications of reality and intent?

For Those About to Rock We Salute You

Last but not least, the US was of course expected to bear the brunt of this reallocation, responsible for purchasing three times as much (SDR30 billion) as the second largest quota allocated country: Japan (SDR11 billion). China is far in the distance at SDR 6 billion. In essence: the monetary community increased its global liquidity position, by assuming that the U.S. is still the defacto reserve currency, and forcing it to take the majority of the devaluation hit relative to all other IMF constituents.

Well done, Ben.

~ ~ ~

Update via The Market Ticker:

Now I may be missing something here but Treasury doesn't appear to have that power without an explicit act of Congress. To wit, The US Constitution Article I, Section 7 provides:

To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures;

CONGRESS has sole authority to approve (or not) the acquisition and disposal of SDRs, which are nothing more or less than a foreign currency - in this case, one comprised of a basket of other currencies. The Executive has no power to engage in this sort of transaction on its own initiative.

But it did, and thought it wouldn't be noticed.

Well, it was.

The dollar continues to rattle around at key support. If it breaks then our import-based economy will be decimated. Oil will skyrocket and so will input costs to American business. Bye-bye profits - and businesses.

Congress, Treasury and The Fed are all counting on not only you being stupid but everyone in the International Markets being stupid. That's a bad bet, and I believe the time to buckle up is close at hand. While the "can kicking" of the last six months might seem to have been a good thing at the time, and might even look good now, I suspect that when we look back on it in a year or two we will recognize it as the disaster that it in fact was.

The Case for Deflation, Stagflation and Implosion

"When once a republic is corrupted, there is no possibility of remedying any of the growing evils but by removing the corruption and restoring its lost principles; every other correction is either useless or a new evil." Thomas Jefferson

As part of their program of 'quantitative easing' which is another name for currency devaluation through extraordinary expansion of the monetary base, the Fed has very obviously created an inflationary bubble in the US equity market.



Why has this happened? Because with a monetary expansion intended to help cure an credit bubble crisis that is not accompanied by significant financial market reform, systemic rebalancing, and government programs to cure and correct past abuses of the productive economy through financial engineering, the hot money given by the Fed and Treasury to the banking system will NOT flow into the real economy, but instead will seek high beta returns in financial assets.



Why lend to the real economy when one can achieve guaranteed returns from the Fed, and much greater returns in the speculative markets if one has the right 'connections?'



The monetary stimulus of the Fed and the Treasury to help the economy is similar to relief aid sent to a suffering Third World country. It is intercepted and seized by a despotic regime and allocated to its local warlords, with very little going to help the people.



Deflation

By far this presents the most compelling case for a deflationary episode. As the money that is created flows into financial assets, it is 'taxed' by Wall Street which takes a disproportionately large share in the form of fees and bonuses, and what are likely to be extra-legal trading profits.

If the monetary stimulus is subsequently dissipated as the asset bubble collapses, except that which remains in the hands of the few, it leaves the real economy in a relatively poorer condition to produce real savings and wealth than it had been before. This is because the outsized financial sector continues to sap the vitality from the productive economy, to drag it down, to drain it of needed attention and policy focus.

At the heart of it, quantitative easing that is not part of an overall program to reform, regulate, and renew the system to change and correct the elements that caused the crisis in the first place, is nothing more than a Ponzi scheme. The optimal time to reform the system was with the collapse of LTCM, and prior to the final repeal of Glass-Steagall, and the raging FIRE sector creating serial bubbles.

Stagflation

These injections of monetary stimulus to maintain a false equilibrium is in reality creating an increasingly unsustainable and unstable monetary disequilibrium within the productive economy. As the real economy contracts, the amount of money supply that the economy can sustain without triggering a monetary inflation decreases, and in a nonlinear manner. This is because the money multiplier does not 'work' the same in reverse, owing to the ability of private individuals and corporations to default on debt.

Ironically, with each iteration of this stimulus and seizure of wealth, the dollar becomes progressively weaker because there is a smaller productive economy to support it, even if there are less dollars, despite the nominal gains in GDP which are an accounting illusion. This has been further enabled by the dollar's status as reserve currency backed by nothing since 1971, which has created an enormous overhang of dollars in the hands of other nations.

One cannot have a sustained economy recovery in which the real median wage and domestic employment are stagnant or declining, and Personal Income is declining, as wealth is being increasingly concentrated in corporations and the upper 2% of the population.



This is why stagflation, rather than hyperinflation or a sustained monetary deflation with a stronger dollar, is most likely. There will be a mix of falling and rising prices, depending on the elasticity and source (imported content) of the products, with a wildly staggering dollar that could destabilize other parts of the world, and pernicious underemployment and growing civil unrest domestically.

Those who have taken a huge share of the last three bubbles would like to stop the bubble now, keep their gains, and return to a system of fiscal restraint with light taxation on their windfall of assets.



So why does this not just simply happen? Because the political risks become enormous. It is difficult to reduce a population of free men into debt slaves, without risking a significant reaction. Therefore, it seems most likely that the government and the Fed will try to 'muddle through' for the time being, and look for an exogenous event to break the stalemate.



The traditional solution has been a military conflict, which stifles dissent against the government while generating artificial demand sufficient to energize the productive economy. It is a means of exporting your social misery, official corruption, and fiscal irresponsibility to another, weaker people.

Implosion

One only has to look at the "German miracle" of the 1930's to see this progression from artificial stimulus, to domestic seizure of assets, to scapegoating and aggressive wars of acquisition, as described above. But this progress out of economic depression had made Hitler and Mussolini the darlings of Wall Street and the international financiers. Indeed, Time Magazine had even named Hitler their "Man of the Year" for this economic miracle, even though it was a fraudulent house of cards.



If the Fed continues to apply monetary stimulus and subsidy into this system, without a significant reform, the dollar will eventually "break" and the real economy will temporarily collapse. This will result in the mother of all stagflation, with a hyperinflationary edge to it, and a breakdown in the electoral process, the rise of demagogues, and soaring interest rates.

At this point the cure will not be a monetary stimulus, but more like a surgery to remove a life-threatening cancer, fraught with risk and a significant challenge to the continuing governance of the US not seen since the 1860's.

Conclusion

As you know, our own judgement on this is that we will go through a cycle of demand deflation, which we are in now, and then most likely a pernicious stagflation which may see some episodes that will be remniscent of the inflation of the 1970's. A persistent deflation with a stronger dollar, as well as hyperinflation, seem to be outliers that are dependent on exogenous factors.

If the world dumped its dollars tomorrow, we would see a US hyperinflation. If the Fed raised short term rates to 20 percent tomorrow under duress we would see a true monetary deflation. As a reminder, in a purely fiat currency regime with an absence of external standards, the question of inflation and deflation is a policy decision. The limiting factor is the latitude with which that policy decision can be made.

The most probable path is a lingering death for the dollar over the next ten years, with a produtive economy that continues to stagger forward under the rule of the financial oligarchs.

Hubris, Hegemons and the Currency of Fascism

Hubris, Hegemons and the Currency of Fascism

"The extensive wars wherewith Louis XIV was burdened during his reign, while draining the State's treasury and exhausting the substance of the people, nonetheless contained the secret that led to the prosperity of a swarm of those bloodsuckers who are always on the watch for public calamities, which, instead of appeasing, they promote or invent so as, precisely, to be able to profit from them the more advantageously. The end of this so very sublime reign was perhaps one of the periods in the history of the French Empire when one saw the emergence of the greatest number for these mysterious fortunes whose origins are as obscure as the lust and debauchery that accompany them." - Marquis de Sade, 120 Days of Sodom

With the announcement in the autumn of 2008 of government plans for equity ownership in banks came obituaries on the death of capitalism and claims, invariably expressed as insults, that the United States has become a socialist regime. Karl Marx is cited with reference to the fifth proposal in the Communist Manifesto calling for a state monopoly on banks and credit. Looking past the mock funerals, however, one sees fasces-fasces being the Latin root of fascism-deeply etched into the granite and marble banks and government buildings, not the peeling remnants of posters bearing the hammer and cycle.

This is the conclusion of someone who lived in the Soviet Union for several years, where there was no equivalent to the extravagant wealth and consumption of the western financial elite-the private jets, villas and art collections, or the mistresses dripping with world-class jewelry and other luxuries that scarcely existed behind the Iron Curtain. The Communist Party's First Class didn't own gold-plated helicopters, much less sports teams or palatial homes and hideaways, as was the case with Allen Stanford, who pleaded ignorance as to how his allegedly fraudulent Caribbean financial operation was run and refused to comment on the accuracy of reports that he worked for the CIA. He would never be reduced, as was the case with Mikhail Gorbachev, to appearing in advertisements for Louis Vuitton and Pizza Hut to earn money for his foundation.

If Marquis de Sade were alive today, he would heap scorn on the notion that party functionaries and financial bureaucrats at their run-down resorts in the Black and Baltic seas would be compared to the oligarchs exemplified by the snake-loving skinhead Henry Paulson. After moving from Goldman Sachs, where he earned the nickname of The Hammer, to the Treasury Department, Paulson would execute the demise of his former rival, Lehman Brothers, force Bank of America to complete its acquisition of Merrill Lynch despite better judgment from the bank's chief executive officer, and orchestrate the greatest theft in world history with the Troubled Assets Relief Program (TARP) to bail out the financial sector-most notably his former firm-resorting even to the threat of martial law with recalcitrant legislators who were backed by an unprecedented constituent outcry.

While recognizing the necessary split entailed with giving fixed meaning to an ongoing crisis and the pitfalls of historical prognostication, recent and current snapshots allow for a fairly clear view of the horizon to be pieced together. The empire emanating from Red Square didn't unravel because of its financial sector's ability to purloin state funds, as eventually could be the case with the empire ostensibly centered in Washington but commandeered from New York and London. The Soviet Union, by the most reliable accounts, imploded in large part because of its Afghan war. While the United States and its allies now have their crippling campaign in that unforgiving country, the weakest links to the empire controlled by Wall Street and The Square Mile are formed by a quadrillion dollars in derivatives and a hundred trillion dollars of securitized debt. It is in these debt instruments that one finds the contemporary equivalent of Sade's allusion to the obscure origins of the mysterious fortunes enjoyed by the bankster elite.

Before going further, I should make it clear that this is not an apology for the Soviet Union; the Marxist authors closest to me hold that the Bolsheviks were the first fascists. Although I understand their point about the totalitarian nature of the Soviet regime, I disagree. While fascists make populist, even revolutionary propaganda, on questions of class, they differ from socialists and are more inclined to work with and for the financial elite. In the case of Mussolini, he rewarded the financiers and industrialists who brought him to power and rescued their firms when they failed during the Depression, privatizing profits and socializing losses.

The response of party bureaucrats in Beijing to the crisis has been telling in this regard; they have instituted policies more in the interest of small businesses and the average citizen than the politicians and central bankers in Washington, who have been intent on protecting the financial elite by socializing losses after years of private profit from outsized risk. The elite that owns the government hails mostly, but not entirely, from the six banks that hold nearly all U.S. bank derivative positions: the Golden Circle formed by JPMorgan Chase, Bank of America, Citi, Goldman Sachs, Wells Fargo and HSBC USA.

If the assertions of well-informed protesters are not enough to make this point, we have former International Monetary Fund rescue expert Simon Johnson contending that "the finance industry has effectively captured our government" and comparing the situation with emerging-market crises in this regard. Illinois Democratic Senator Dick Durban concurs, saying, "And the banks-hard to believe in a time when we're facing a banking crisis that many of the banks created-are still the most powerful lobby on Capitol Hill. And they frankly own the place."

Goldman Sachs and AIG

Goldman Sachs (GS) sets the most lurid example. Paulson was recruited by Bush's chief of staff, who was a former GS executive; and another former GS chief executive officer, Robert Rubin, had the top slot at Treasury under Clinton. The chief of staff of the present treasury secretary is a former GS lobbyist, who is being replaced at Goldman by a top staffer from the House Financial Services Committee. Currently, GS alumni have landed at the head of the New York Federal Reserve, the Commodity Futures Trading Commission, the presidency of the World Bank, the governorship of the Bank of Canada and chief of the influential Financial Stability Forum associated with the Bank of International Settlements.

Lawrence Summers-the Clinton administration official who championed the repeal of the Glass-Steagall Act, which separated commercial and investment banking activity, and the official who did the most to prevent regulation of credit default swaps with his support of the Commodity Futures Modernization Act of 2000-is now an Obama presidential economic adviser. In April 2008 he took time off from peddling collateralized debt obligations for hedge fund D.E. Shaw to receive $135,000 for a one-day speaking visit at Goldman.

Another former GS executive, in addition to Paulson, was involved with the government takeover of the government-sponsored enterprises Fannie Mae and Freddie Mac; and the TARP funds were managed, if that is the right word for what amounted to theft, by yet another GS man, despite the fact that the firm was a recipient of those funds.

When Paulson bailed out insurance giant American International Group (AIG), with whom GS and other money-center banks had written credit default swap contracts, invisibly traded pseudo-insurance on bond defaults, a former member of the GS board was chosen as the new chief executive. "During Paulson's reign at Goldman Sachs, his traders arranged risky bets with AIG's financial products unit in credit default swaps, and yet, it was Paulson, a few years later, acting as U.S. Treasury chief, who wound up protecting GS's $12.9 billion CDS trade with AIG from default," notes financial analyst and former commodities trader Gary Dorsch. "This colossal conflict of interest, plus $165 billion paid to Merrill Lynch traders, with U.S. taxpayer money, have all been quietly swept under the rug by the ruling elite."

At last count, the government has given $180 billion to AIG, which used its insurance policyholders' capital to make highly leveraged, over-the-counter trades against credit defaults with money center banks in the United States and abroad. One has to ask whether AIG and its counterparties didn't know better and, as a well-established U.S. intelligence operation for the Central Intelligence Agency, recognize in advance that it would be protected and its counterparties paid in full.

Investigative journalist Wayne Madsen and his Asian sources have written extensively on these intelligence connections, which include data collection on foreign nationals using former Tiananmen dissidents, and leasing aircraft to known fronts such as Evergreen International and World Airways. None of this should come as a surprise to Obama, whose first job out of college was as a researcher and writer for Business International Corporation, a firm with deep ties to the CIA that eventually merged with the Economist Intelligence Unit, which is said to work closely with Britain's MI-6.

Was the Crisis Engineered?

With the lesson of 9/11 in mind-what was purported to be an intelligence failure was in fact a brilliant success-one must ask whether the same is the case for the current financial crisis. So far the central bank and U.S. government have committed $12.8 trillion dollars to the financial rescue effort, a sum that nears last year's gross domestic product of $14.2 trillion. The bailout will likely surpass the GDP once Treasury Secretary Geithner's Public-Private Investment Program goes into full swing, providing hedge funds 14/1 leverage with taxpayer money and no downside risk to buying toxic assets. Would this vast sum have been spent, lent or otherwise extended to financial institutions in the absence of a crisis? No. Was the crisis engineered? Quite possibly.

We know that on May 5, 2006, the same day that Porter Goss resigned as the director of the CIA, President Bush gave his intelligence czar, John Negroponte, the authority to excuse publicly traded companies from their accounting and securities disclosure obligations. This was the first time this authority has been delegated to someone outside of the Oval Office, giving Negroponte "the function of President" under the law in question. It was also in early 2006 that Wall Street's major firms agreed to standardize credit default swaps on collateralized debt obligations, enabling speculators to pay relatively small fees for what would prove to be huge rewards when these bonds began defaulting.

Greed motivated the general sequence of financial maneuvers at the epicenter of the crisis. Banks and the shadow banking system, including hedge funds, would issue commercial paper-short-term loans often provided by money market funds. Instead of investing directly in real estate or other assets, firms would invest in securities based on pools of those assets, commonly mortgages, in the form of collateralized mortgage obligations or CMOs. The financial engineers on Wall Street, notably Goldman Sachs, created these structured products with their many tranches, including the notorious super-senior tranches that would supposedly never default, not just out of mortgages but virtually any form of debt-student loans, car loans, credit card debt-packaging them into collateralized loan obligations or collateralized debt obligations.

So the bank or other firm that borrows via commercial paper for six weeks at 4 percent can invest for twenty years and capture a yield of 7.5 percent, making a profit on the net positive interest rate margin. It may not seem like much, but in finance circles this yield spread is highly profitable as the sums involved are quite large. Moreover, the risk involved could be explained away. If a money market fund refused to roll over the commercial paper, the bank could borrow from other banks as the first bank would have hedged this risk by opening lines of credit when it issued the paper. It was thought that the structured products would not default as they drew on mortgages or other forms of credit that were either highly rated or geographically dispersed.

In the summer of 2007, borrowers began to default on the debt behind these structured products and the products became virtually worthless. Officials such as Paulson and Federal Reserve Chairman Ben Bernanke discovered that these products based on debt had been treated as assets and were themselves the collateral for more structured products-CDOs squared and cubed. They also discovered that vast sums of commercial paper were issued off firm's books in the form of Enron-style structured investment vehicles, hiding the extent of a given firm's liabilities and the risks it, in turn, posed to the system as a whole.

In the worldwide system of fiat-issued money, money is debt. The firms holding CDOs accounted for these debts as assets, and firms such as AIG that wrote credit default swap contracts on these CDOs created obligations for their counterparties to pay premiums every year, usually for five years, creating money out of thin air. These CDS contracts were written without holding reserves or collateral backing the underlining debt. "So what backed them?" asks blogger Hellasious on suddendebt. "Faith, pure and simple. That's as close as we have ever come to creating the absolute faith-based financial instrument."

As faith is vanishing for these under-collateralized wagers created with unlimited leverage, the CDS market is crumbling, exposing the insolvency of the CDS dealer banks and their counterparties. According to Chris Whalen of Institutional Risk Analytics, Paulson and Geithner are using tax dollars to conceal the insolvency of not just AIG but of Citi and JPMorgan Chase as well as others. "The real issue," Whalen states, is "the bankrupt intellectual basis for the CDS contracts themselves."

He estimates that at least $15 trillion and likely more in CDS payouts will be required from governments worldwide as default rates rise. The problem is that because these contracts are made over the counter, they are invisible and no one knows the true size of the outstanding issues. Award winning documentary filmmaker Gary Null, commenting on interviews he has conducted with Wall Street insiders, says the net CDS liabilities of U.S. financial institutions could reach $100 trillion.

Much of this market comprises naked swaps in which the buyer has no material interest in the underling asset, unlike covered swaps, which are beginning to see some regulation and institutional clearing. So far, the plan has been for the U.S. government to make good on these gambling bets at par, indirectly bailing out the banks in the Golden Circle via AIG.

According to Weiss Research, the CDS market represents only 7.8 percent of the notional value of derivatives held by U.S. banks, with the interest-rate sector comprising 82 percent. "Especially alarming," writes Dr. Weiss, "is the fourth quarter OCC data demonstrating that record bank losses are spreading to interest-rate derivatives." Weiss named eight large banks at the risk of failure, including three of the nation's four largest, adding that the rescue of failing institutions would entail "unacceptable damage" to the borrowing power of the United States.

"There is not any playbook," Paulson famously said in characterizing how the administration responded to the crisis, which is hard to believe when one considers how, once the TARP funds were obtained, Paulson switched their allocation from the proposed acquisition of toxic assets to directly purchasing bank shares. This assertion by the former secretary also lacks credibility on the grounds that the premises of the credit crunch were more mythical than real.

In October 2008, researchers at the Minnesota Fed found interbank lending to be healthy, lending to nonfinancial institutions was unaffected by the crisis, and commercial paper issued to nonfinancial institutions was unchanged. It was, however, the reluctance of money market funds to roll over asset-backed commercial paper following the default of CDOs held by two Bear Stearns hedge funds that severely deepened the crisis in 2007. The researchers requested that lawmakers show the data upon which the lawmakers made their rescue decisions.

What if the real problem were a fraudulently engineered housing and debt bubble in which the debt was packaged into asset-backed securities such as collateralized debt obligations and sold around the world? These securities were then either insured or shorted by legitimate hedges or punters, as speculators are called in England and Australia, using the credit default swaps issued by the likes of AIG, Ambac and MBIA that had no reserves to cover them in the event of a default. This pseudo-insurance allowed banks to meet their capital requirements and increase leverage to buy still more CDOs, which, absurdly, could be CDOs squared and cubed and synthetic CDOs, i.e., CDOs of CDSs.

The financial industry was printing its own money with these hedge instruments on a scale that far exceeded that of the nation's central bank and its Federal Reserve Notes. Bernanke was reportedly furious when he learned that AIG's financial products unit had created so much debt with its credit default swap contracts. But how safe and sound are the other, much larger derivative markets? The U.S. banking system's total notional derivative exposure (comprising interest rate, currency and CDS derivatives) is estimated to be $200 trillion.

The worldwide notional value of outstanding derivatives is now estimated to be $1.405 quadrillion, up 22 percent from the 2008 level. DK Matai of the Asymmetric Threats Contingency Alliance notes that a conservative 10 percent default or decline could result in $100 trillion of payouts. Financial institutions, nation states, even blocs such as the European Union will be unable to fund these obligations, often owed to speculators by bankers that grossly mispriced risk.

These same bankers are grumbling at restrictions put on their salaries and bonuses by government rescue covenants. "Never trust someone with a bonus system to handle risk," Nassim Nicholas Taleb, a New York University professor of risk management, told this reporter, adding, they cannot do it because of the "free option" on their performance whereby they benefit from profits but do not suffer from losses. "The system as it is, is broken," he said, signaling out former Fed Chairman Alan Greenspan for blame. The system is "surviving on novocaine," he said of the rescue, but it "needs a root canal."

Whereas it was once only obscure graffiti artists who would call for the public to "drain bankers' blood in the Potomac," the anger has spread as the crisis exposes the excesses of the financial elite: the French-made luxury jets and use of corporate credit cards for $2,000 per hour prostitutes; the use of methamphetamine while processing mortgage applications at Washington Mutual and cocaine at Goldman's corporate finance department; and the $10,000 bottles of wine, chauffeurs and country club memberships. Goldman's CEO made $54 million in 2008, for example, and the firm's top five executives received a total of $242 million, with the cost of leased cars and drivers running as high as $233,000 per executive, according to figures compiled by Associated Press.

One Chicago-based bank that was given bailout funds created a scandal by sponsoring a professional golf event during the course of which it rented a private hangar at the Santa Monica Airport for dinner and threw a private party in the entire House of Blues with a performance by Sheryl Crow. Wells Fargo canceled a Vegas junket for its top employees "in light of the current environment" and Morgan Stanley cancelled company trips to Monte Carlo and the Bahamas.

When meeting with top bank executives, Obama reportedly told them to be careful in their public statements, adding, "My administration is the only thing between you and the pitchforks." With the president running interference for the financial elite, it will likely extend its empire by increasing taxpayer indebtedness until the derivative time blows up or history otherwise reasserts itself.

While it's very likely that workers and consumers will dig their own graves, as their skeletons are thrown into plastic caskets and buried without ceremony, or incinerated after being piled up for months at overwhelmed morgues, this is potentially a transformational period of time. The powers that be have acknowledged as much in a secret document that has circulated on Capitol Hill and several agencies. It cautions on the possibility for conflict with other nations should the U.S. default on its debt, or for revolution should taxes be raised to pay for the financial bailout.

Marquis de Sade was writing the work cited in the epigraph about private profit from public calamities when he yelled from Bastille drainpipe that prisoners were being killed, causing a riot. The storming of the prison twelve days later marked the beginning of the French Revolution.

Workers and consumers enslaved by the semi-autonomous system of production and consumption are learning how CEOs representing corporations engaged in financial speculation cashed out prior to the crisis to the tunes of tens if not hundreds of millions of dollars. Even the president has acknowledged that the anger is real. It remains to be seen whether the flames ignited by this financial crisis will leap out of control.

The Bank for International Settlements (BIS) Warns of Future Crises

The Economic Recovery is an Illusion....?

http://www.globalresearch.ca/index.php?context=va&aid=15501

The Bank for International Settlements (BIS) Warns of Future Crises By Andrew Gavin Marshall

Global Research, October 3, 2009

War is Peace, Freedom is Slavery, Ignorance is Strength, and Debt is Recovery In light of the ever-present and unyieldingly persistent exclamations of ‘an end’ to the recession, a ‘solution’ to the crisis, and a ‘recovery’ of the economy; we must remember that we are being told this by the very same people and institutions which told us, in years past, that there was ‘nothing to worry about,’ that ‘the fundamentals are fine,’ and that there was ‘no danger’ of an economic crisis. Why do we continue to believe the same people that have, in both statements and choices, been nothing but wrong? Who should we believe and turn to for more accurate information and analysis? Perhaps a useful source would be those at the epicenter of the crisis, in the heart of the shadowy world of central banking, at the global banking regulator, and the “most prestigious financial institution in the world,” which accurately predicted the crisis thus far: The Bank for International Settlements (BIS). This would be a good place to start. The economic crisis is anything but over, the “solutions” have been akin to putting a band-aid on an amputated arm. The Bank for International Settlements (BIS), the central bank to the world’s central banks, has warned and continues to warn against such misplaced hopes. What is the Bank for International Settlements (BIS)? The BIS emerged from the Young Committee set up in 1929, which was created to handle the settlements of German reparations payments outlined in the Versailles Treaty of 1919. The Committee was headed by Owen D. Young, President and CEO of General Electric, co-author of the 1924 Dawes Plan, member of the Board of Trustees of the Rockefeller Foundation and was Deputy Chairman of the Federal Reserve Bank of New York. As the main American delegate to the conference on German reparations, he was also accompanied by J.P. Morgan, Jr.[1] What emerged was the Young Plan for German reparations payments. The Plan went into effect in 1930, following the stock market crash. Part of the Plan entailed the creation of an international settlement organization, which was formed in 1930, and known as the Bank for International Settlements (BIS). It was purportedly designed to facilitate and coordinate the reparations payments of Weimar Germany to the Allied powers. However, its secondary function, which is much more secretive, and much more important, was to act as “a coordinator of the operations of central banks around the world.” Described as “a bank for central banks,” the BIS “is a private institution with shareholders but it does operations for public agencies. Such operations are kept strictly confidential so that the public is usually unaware of most of the BIS operations.”[2] The BIS was founded by “the central banks of Belgium, France, Germany, Italy, the Netherlands, Japan, and the United Kingdom along with three leading commercial banks from the United States, including J.P. Morgan & Company, First National Bank of New York, and First National Bank of Chicago. Each central bank subscribed to 16,000 shares and the three U.S. banks also subscribed to this same number of shares.” However, “Only central banks have voting power.”[3] Central bank members have bi-monthly meetings at the BIS where they discuss a variety of issues. It should be noted that most “of the transactions carried out by the BIS on behalf of central banks require the utmost secrecy,”[4] which is likely why most people have not even heard of it. The BIS can offer central banks “confidentiality and secrecy which is higher than a triple-A rated bank.”[5] The BIS was established “to remedy the decline of London as the world’s financial center by providing a mechanism by which a world with three chief financial centers in London, New York, and Paris could still operate as one.”[6] As Carroll Quigley explained: [T]he powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basle, Switzerland, a private bank owned and controlled by the world’s central banks which were themselves private corporations.[7] The BIS, is, without a doubt, the most important, powerful, and secretive financial institution in the world. It’s warnings should not be taken lightly, as it would be the one institution in the world that would be privy to such information more than any other. Derivatives Crisis Ahead In September of 2009, the BIS reported that, “The global market for derivatives rebounded to $426 trillion in the second quarter as risk appetite returned, but the system remains unstable and prone to crises.” The BIS quarterly report said that derivatives rose 16% “mostly due to a surge in futures and options contracts on three-month interest rates.” The Chief Economist of the BIS warned that the derivatives market poses “major systemic risks” in the international financial sector, and that, “The danger is that regulators will again fail to see that big institutions have taken far more exposure than they can handle in shock conditions.” The economist added that, “The use of derivatives by hedge funds and the like can create large, hidden exposures.”[8] The day after the report by the BIS was published, the former Chief Economist of the BIS, William White, warned that, “The world has not tackled the problems at the heart of the economic downturn and is likely to slip back into recession,” and he further “warned that government actions to help the economy in the short run may be sowing the seeds for future crises.” He was quoted as warning of entering a double-dip recession, “Are we going into a W[-shaped recession]? Almost certainly. Are we going into an L? I would not be in the slightest bit surprised.” He added, “The only thing that would really surprise me is a rapid and sustainable recovery from the position we’re in.” An article in the Financial Times explained that White’s comments are not to be taken lightly, as apart from heading the economic department at the BIS from 1995 to 2008, he had, “repeatedly warned of dangerous imbalances in the global financial system as far back as 2003 and – breaking a great taboo in central banking circles at the time – he dared to challenge Alan Greenspan, then chairman of the Federal Reserve, over his policy of persistent cheap money.” The Financial Times continued: Worldwide, central banks have pumped thousands of billions of dollars of new money into the financial system over the past two years in an effort to prevent a depression. Meanwhile, governments have gone to similar extremes, taking on vast sums of debt to prop up industries from banking to car making. White warned that, “These measures may already be inflating a bubble in asset prices, from equities to commodities,” and that, “there was a small risk that inflation would get out of control over the medium term.” In a speech given in Hong Kong, White explained that, “the underlying problems in the global economy, such as unsustainable trade imbalances between the US, Europe and Asia, had not been resolved.”[9] On September 20, 2009, the Financial Times reported that the BIS, “the head of the body that oversees global banking regulation,” while at the G20 meeting, “issued a stern warning that the world cannot afford to slip into a ‘complacent’ assumption that the financial sector has rebounded for good,” and that, “Jaime Caruana, general manager of the Bank for International Settlements and a former governor of Spain’s central bank, said the market rebound should not be misinterpreted.”[10] This follows warnings from the BIS over the summer of 2009, regarding misplaced hope over the stimulus packages organized by various governments around the world. In late June, the BIS warned that, “fiscal stimulus packages may provide no more than a temporary boost to growth, and be followed by an extended period of economic stagnation.” An article in the Australian reported that, “The only international body to correctly predict the financial crisis ... has warned the biggest risk is that governments might be forced by world bond investors to abandon their stimulus packages, and instead slash spending while lifting taxes and interest rates,” as the annual report of the BIS “has for the past three years been warning of the dangers of a repeat of the depression.” Further, “Its latest annual report warned that countries such as Australia faced the possibility of a run on the currency, which would force interest rates to rise.” The BIS warned that, “a temporary respite may make it more difficult for authorities to take the actions that are necessary, if unpopular, to restore the health of the financial system, and may thus ultimately prolong the period of slow growth.” Further, “At the same time, government guarantees and asset insurance have exposed taxpayers to potentially large losses,” and explaining how fiscal packages posed significant risks, it said that, “There is a danger that fiscal policy-makers will exhaust their debt capacity before finishing the costly job of repairing the financial system,” and that, “There is the definite possibility that stimulus programs will drive up real interest rates and inflation expectations.” Inflation “would intensify as the downturn abated,” and the BIS “expressed doubt about the bank rescue package adopted in the US.”[11] The BIS further warned of inflation, saying that, “The big and justifiable worry is that, before it can be reversed, the dramatic easing in monetary policy will translate into growth in the broader monetary and credit aggregates.” That will “lead to inflation that feeds inflation expectations or it may fuel yet another asset-price bubble, sowing the seeds of the next financial boom-bust cycle.”[12] With the latest report on the derivatives bubble being created, it has become painfully clear that this is exactly what has happened: the creation of another asset-price bubble. The problem with bubbles is that they burst. The Financial Times reported that William White, former Chief Economist at the BIS, also “argued that after two years of government support for the financial system, we now have a set of banks that are even bigger - and more dangerous - than ever before,” which also, “has been argued by Simon Johnson, former chief economist at the International Monetary Fund,” who “says that the finance industry has in effect captured the US government,” and pointedly stated: “recovery will fail unless we break the financial oligarchy that is blocking essential reform.”[13] [Emphasis added]. At the beginning of September 2009, central bankers met at the BIS, and it was reported that, “they had agreed on a package of measures to strengthen the regulation and supervision of the banking industry in the wake of the financial crisis,” and the chief of the European Central Bank was quoted as saying, “The agreements reached today among 27 major countries of the world are essential as they set the new standards for banking regulation and supervision at the global level.”[14] Among the agreed measures, “lenders should raise the quality of their capital by including more stock,” and “Banks will also have to raise the amount and quality of the assets they keep in reserve and curb leverage.” One of the key decisions made at the Basel conference, which is named after the Basel Committee on Banking Supervision, set up under the BIS, was that, “banks will need to raise the quality of their so-called Tier 1 capital base, which measures a bank’s ability to absorb sudden losses,” meaning that, “The majority of such reserves should be common shares and retained earnings and the holdings will be fully disclosed.”[15] In mid-September, the BIS said that, “Central banks must coordinate global supervision of derivatives clearinghouses and consider offering them access to emergency funds to limit systemic risk.” In other words, “Regulators are pushing for much of the $592 trillion market in over-the-counter derivatives trades to be moved to clearinghouses which act as the buyer to every seller and seller to every buyer, reducing the risk to the financial system from defaults.” The report released by the BIS asked if clearing houses “should have access to central bank credit facilities and, if so, when?”[16] A Coming Crisis The derivatives market represents a massive threat to the stability of the global economy. However, it is one among many threats, all of which are related and intertwined; one will set off another. The big elephant in the room is the major financial bubble created from the bailouts and “stimulus” packages worldwide. This money has been used by major banks to consolidate the economy; buying up smaller banks and absorbing the real economy; productive industry. The money has also gone into speculation, feeding the derivatives bubble and leading to a rise in stock markets, a completely illusory and manufactured occurrence. The bailouts have, in effect, fed the derivatives bubble to dangerous new levels as well as inflating the stock market to an unsustainable position. However, a massive threat looms in the cost of the bailouts and so-called “stimulus” packages. The economic crisis was created as a result of low interest rates and easy money: high-risk loans were being made, money was invested in anything and everything, the housing market inflated, the commercial real estate market inflated, derivatives trade soared to the hundreds of trillions per year, speculation ran rampant and dominated the global financial system. Hedge funds were the willing facilitators of the derivatives trade, and the large banks were the major participants and holders. At the same time, governments spent money loosely, specifically the United States, paying for multi-trillion dollar wars and defense budgets, printing money out of thin air, courtesy of the global central banking system. All the money that was produced, in turn, produced debt. By 2007, the total debt – domestic, commercial and consumer debt – of the United States stood at a shocking $51 trillion.[17] As if this debt burden was not enough, considering it would be impossible to ever pay back, the past two years has seen the most expansive and rapid debt expansion ever seen in world history – in the form of stimulus and bailout packages around the world. In July of 2009, it was reported that, “U.S. taxpayers may be on the hook for as much as $23.7 trillion to bolster the economy and bail out financial companies, said Neil Barofsky, special inspector general for the Treasury’s Troubled Asset Relief Program.”[18] Bilderberg Plan in Action? In May of 2009, I wrote an article covering the Bilderberg meeting of 2009, a highly secretive meeting of major elites from Europe and North America, who meet once a year behind closed doors. Bilderberg acts as an informal international think tank, and they do not release any information, so reports from the meetings are leaked and the sources cannot be verified. However, the information provided by Bilderberg trackers and journalists Daniel Estulin and Jim Tucker have proven surprisingly accurate in the past. In May, the information that leaked from the meetings regarded the main topic of conversation being, unsurprisingly, the economic crisis. The big question was to undertake “Either a prolonged, agonizing depression that dooms the world to decades of stagnation, decline and poverty ... or an intense-but-shorter depression that paves the way for a new sustainable economic world order, with less sovereignty but more efficiency.” Important to note, was that one major point on the agenda was to “continue to deceive millions of savers and investors who believe the hype about the supposed up-turn in the economy. They are about to be set up for massive losses and searing financial pain in the months ahead.” Estulin reported on a leaked report he claimed to have received following the meeting, which reported that there were large disagreements among the participants, as “The hardliners are for dramatic decline and a severe, short-term depression, but there are those who think that things have gone too far and that the fallout from the global economic cataclysm cannot be accurately calculated.” However, the consensus view was that the recession would get worse, and that recovery would be “relatively slow and protracted,” and to look for these terms in the press over the next weeks and months. Sure enough, these terms have appeared ad infinitum in the global media. Estulin further reported, “that some leading European bankers faced with the specter of their own financial mortality are extremely concerned, calling this high wire act ‘unsustainable,’ and saying that US budget and trade deficits could result in the demise of the dollar.” One Bilderberger said that, “the banks themselves don't know the answer to when (the bottom will be hit).” Everyone appeared to agree, “that the level of capital needed for the American banks may be considerably higher than the US government suggested through their recent stress tests.” Further, “someone from the IMF pointed out that its own study on historical recessions suggests that the US is only a third of the way through this current one; therefore economies expecting to recover with resurgence in demand from the US will have a long wait.” One attendee stated that, “Equity losses in 2008 were worse than those of 1929,” and that, “The next phase of the economic decline will also be worse than the '30s, mostly because the US economy carries about $20 trillion of excess debt. Until that debt is eliminated, the idea of a healthy boom is a mirage.”[19] Could the general perception of an economy in recovery be the manifestation of the Bilderberg plan in action? Well, to provide insight into attempting to answer that question, we must review who some of the key participants at the conference were. Central Bankers Many central bankers were present, as per usual. Among them, were the Governor of the National Bank of Greece, Governor of the Bank of Italy, President of the European Investment Bank; James Wolfensohn, former President of the World Bank; Nout Wellink, President of the Central Bank of the Netherlands and is on the board of the Bank for International Settlements (BIS); Jean-Claude Trichet, the President of the European Central Bank was also present; the Vice Governor of the National Bank of Belgium; and a member of the Board of the Executive Directors of the Central Bank of Austria. Finance Ministers and Media Finance Ministers and officials also attended from many different countries. Among the countries with representatives present from the financial department were Finland, France, Great Britain, Italy, Greece, Portugal, and Spain. There were also many representatives present from major media enterprises around the world. These include the publisher and editor of Der Standard in Austria; the Chairman and CEO of the Washington Post Company; the Editor-in-Chief of the Economist; the Deputy Editor of Die Zeit in Germany; the CEO and Editor-in-Chief of Le Nouvel Observateur in France; the Associate Editor and Chief Economics Commentator of the Financial Times; as well as the Business Correspondent and the Business Editor of the Economist. So, these are some of the major financial publications in the world present at this meeting. Naturally, they have a large influence on public perceptions of the economy. Bankers Also of importance to note is the attendance of private bankers at the meeting, for it is the major international banks that own the shares of the world’s central banks, which in turn, control the shares of the Bank for International Settlements (BIS). Among the banks and financial companies represented at the meeting were Deutsche Bank AG, ING, Lazard Freres & Co., Morgan Stanley International, Goldman Sachs, Royal Bank of Scotland, and of importance to note is David Rockefeller,[20] former Chairman and CEO of Chase Manhattan (now J.P. Morgan Chase), who can arguably be referred to as the current reigning ‘King of Capitalism.’ The Obama Administration Heavy representation at the Bilderberg meeting also came from members of the Obama administration who are tasked with resolving the economic crisis. Among them were Timothy Geithner, the US Treasury Secretary and former President of the Federal Reserve Bank of New York; Lawrence Summers, Director of the White House's National Economic Council, former Treasury Secretary in the Clinton administration, former President of Harvard University, and former Chief Economist of the World Bank; Paul Volcker, former Governor of the Federal Reserve System and Chair of Obama’s Economic Recovery Advisory Board; Robert Zoellick, former Chairman of Goldman Sachs and current President of the World Bank.[21] Unconfirmed were reports of the Fed Chairman, Ben Bernanke being present. However, if the history and precedent of Bilderberg meetings is anything to go by, both the Chairman of the Federal Reserve and the President of the Federal Reserve Bank of New York are always present, so it would indeed be surprising if they were not present at the 2009 meeting. I contacted the New York Fed to ask if the President attended any organization or group meetings in Greece over the scheduled dates that Bilderberg met, and the response told me to ask the particular organization for a list of attendees. While not confirming his presence, they also did not deny it. However, it is still unverified. Naturally, all of these key players to wield enough influence to alter public opinion and perception of the economic crisis. They also have the most to gain from it. However, whatever image they construct, it remains just that; an image. The illusion will tear apart soon enough, and the world will come to realize that the crisis we have gone through thus far is merely the introductory chapter to the economic crisis as it will be written in history books. Conclusion The warnings from the Bank for International Settlements (BIS) and its former Chief Economist, William White, must not be taken lightly. Both the warnings of the BIS and William White in the past have gone unheralded and have been proven accurate with time. Do not allow the media-driven hope of ‘economic recovery’ sideline the ‘economic reality.’ Though it can be depressing to acknowledge; it is a far greater thing to be aware of the ground on which you tread, even if it is strewn with dangers; than to be ignorant and run recklessly through a minefield. Ignorance is not bliss; ignorance is delayed catastrophe. A doctor must first properly identify and diagnose the problem before he can offer any sort of prescription as a solution. If the diagnosis is inaccurate, the prescription won’t work, and could in fact, make things worse. The global economy has a large cancer in it: it has been properly diagnosed by some, yet the prescription it was given was to cure a cough. The economic tumor has been identified; the question is: do we accept this and try to address it, or do we pretend that the cough prescription will cure it? What do you think gives a stronger chance of survival? Now try accepting the idea that ‘ignorance is bliss.’ As Gandhi said, “There is no god higher than truth.” For an overview of the coming financial crises, see: "Entering the Greatest Depression in History: More Bubbles Waiting to Burst," Global Research, August 7, 2009. Endnotes [1] Time, HEROES: Man-of-the-Year. Time Magazine: Jan 6, 1930: http://www.time.com/time/magazine/article/0,9171,738364-1,00.html [2] James Calvin Baker, The Bank for International Settlements: evolution and evaluation. Greenwood Publishing Group, 2002: page 2 [3] James Calvin Baker, The Bank for International Settlements: evolution and evaluation. Greenwood Publishing Group, 2002: page 6 [4] James Calvin Baker, The Bank for International Settlements: evolution and evaluation. Greenwood Publishing Group, 2002: page 148 [5] James Calvin Baker, The Bank for International Settlements: evolution and evaluation. Greenwood Publishing Group, 2002: page 149 [6] Carroll Quigley, Tragedy and Hope: A History of the World in Our Time (New York: Macmillan Company, 1966), 324-325 [7] Carroll Quigley, Tragedy and Hope: A History of the World in Our Time (New York: Macmillan Company, 1966), 324 [8] Ambrose Evans-Pritchard, Derivatives still pose huge risk, says BIS. The Telegraph: September 13, 2009: http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/6184496/Derivatives-still-pose-huge-risk-says-BIS.html [9] Robert Cookson and Sundeep Tucker, Economist warns of double-dip recession. The Financial Times: September 14, 2009: http://www.ft.com/cms/s/0/e6dd31f0-a133-11de-a88d-00144feabdc0.html [10] Patrick Jenkins, BIS head worried by complacency. The Financial Times: September 20, 2009: http://www.ft.com/cms/s/0/a7a04972-a60c-11de-8c92-00144feabdc0.html [11] David Uren. Bank for International Settlements warning over stimulus benefits. The Australian: June 30, 2009: http://www.theaustralian.news.com.au/story/0,,25710566-601,00.html [12] Simone Meier, BIS Sees Risk Central Banks Will Raise Interest Rates Too Late. Bloomberg: June 29, 2009: http://www.bloomberg.com/apps/news?pid=20601068&sid=aOnSy9jXFKaY [13] Robert Cookson and Victor Mallet, Societal soul-searching casts shadow over big banks. The Financial Times: September 18, 2009: http://www.ft.com/cms/s/0/7721033c-a3ea-11de-9fed-00144feabdc0.html [14] AFP, Top central banks agree to tougher bank regulation: BIS. AFP: September 6, 2009: http://www.google.com/hostednews/afp/article/ALeqM5h8G0ShkY-AdH3TNzKJEetGuScPiQ [15] Simon Kennedy, Basel Group Agrees on Bank Standards to Avoid Repeat of Crisis. Bloomberg: September 7, 2009: http://www.bloomberg.com/apps/news?pid=20601087&sid=aETt8NZiLP38 [16] Abigail Moses, Central Banks Must Agree Global Clearing Supervision, BIS Says. Bloomberg: September 14, 2009: http://www.bloomberg.com/apps/news?pid=20601087&sid=a5C6ARW_tSW0 [17] FIABIC, US home prices the most vital indicator for turnaround. FIABIC Asia Pacific: January 19, 2009: http://www.fiabci-asiapacific.com/index.php?option=com_content&task=view&id=133&Itemid=41 Alexander Green, The National Debt: The Biggest Threat to Your Financial Future. Investment U: August 25, 2008: http://www.investmentu.com/IUEL/2008/August/the-national-debt.html John Bellamy Foster and Fred Magdoff, Financial Implosion and Stagnation. Global Research: May 20, 2009: http://www.globalresearch.ca/index.php?context=va&aid=13692 [18] Dawn Kopecki and Catherine Dodge, U.S. Rescue May Reach $23.7 Trillion, Barofsky Says (Update3). Bloomberg: July 20, 2009: http://www.bloomberg.com/apps/news?pid=20601087&sid=aY0tX8UysIaM [19] Andrew Gavin Marshall, The Bilderberg Plan for 2009: Remaking the Global Political Economy. Global Research: May 26, 2009: http://www.globalresearch.ca/index.php?aid=13738&context=va [20] Maja Banck-Polderman, Official List of Participants for the 2009 Bilderberg Meeting. Public Intelligence: July 26, 2009: http://www.publicintelligence.net/official-list-of-participants-for-the-2009-bilderberg-meeting/ [21] Andrew Gavin Marshall, The Bilderberg Plan for 2009: Remaking the Global Political Economy. Global Research: May 26, 2009: http://www.globalresearch.ca/index.php?aid=13738&context=va

NABUCO, BTC, South Stream, it's a gas, gas, gas

NABUCO, BTC, South Stream, it's a gas, gas, gas.....Video (9 min): After 9/11, Why Afghanistan? Investment Banker Karl Schwartz lays it out

1. The Caspian Sea Basin (Kazakstan, Turkmenistan etc.) holds between 11 and 12 TRILLION dollars in oil and gas resources

2. There are only three ways to get it out:

- East to China

- West through Iran, Russia, and Turkey to Europe

- South through Afghanistan and Pakistan

3. The Taliban who controlled Afghanistan before 9/11 made pipeline deals with non-US companies and refused to change them to give control of the region's resources to the US......

BRUSSELS - Oil and natural gas prices may be relatively low right now, but don't be fooled. The new great game of the 21st century is always over energy and it's taking place on an immense chessboard called Eurasia. Its squares are defined by the networks of pipelines being laid across the oil heartlands of the planet. Call it Pipelineistan. If, in Asia, the stakes in this game are already impossibly high, the same applies to the "Euro" part of the great Eurasian landmass - the richest industrial area on the planet. Think of this as the real political thriller of our time.

The movie of the week in Brussels is: When NATO Meets Pipelineistan. Though you won't find it in any headlines, at virtually every recent summit of the North Atlantic Treaty Organization, Washington has been maneuvering to involve reluctant Europeans ever more deeply in the business of protecting Pipelineistan. This is already happening, of course, in Afghanistan, where a promised pipeline from Turkmenistan to Pakistan and India, the TAPI pipeline, has not even been built. And it's about to happen at the borders of Europe, again around pipelines that have not yet been built.

If you had to put that Euro part of Pipelineistan into a formula, you might do so this way: Nabucco (pushed by the US) versus South Stream (pushed by Russia). Be patient. You'll understand in a moment.

At the most basic level, it's a matter of the West yet again trying, in the energy sphere, to bypass Russia. For this to happen, however - and it wouldn't hurt if you opened the nearest atlas for a moment - Europe desperately needs to get a handle on Central Asian energy resources, which is easy to say but has proven surprisingly hard to do. No wonder the NATO secretary general's special representative, Robert Simmons, has been logging massive frequent-flyer miles to Central Asia over these last few years.

Just under the surface of an edgy entente cordiale between the European Union and Russia lurks the possibility of a no-holds-barred energy war - liquid war, as I call it. The EU and the US are pinning their hopes on a prospective 3,300-kilometer-long, US$10.7 billion pipeline dubbed Nabucco. Planning for it began way back in 2004 and construction is finally expected to start, if all goes well (and it may not), in 2010. So if you're a NATO optimist, you hope that natural gas from the Caspian Sea, maybe even from Iran (barring the usual American blockade), will begin flowing through it by 2015. The gas will be delivered to Erzurum in Turkey and then transported to Austria via Bulgaria, Romania, and Hungary.

Why, you might ask, is the pipeline meant to save Europe named for a Verdi opera? Well, Austrian and Turkish energy executives happened to see the opera together in Vienna in 2002 while discussing their energy dilemmas, and the biblical plight of the Jews exiled by King Nabucco (Nebuchadnezzar), a love story set amid a ferocious struggle for freedom and power, swept them away. Still, it's a stretch to turn aluminum tubes into dramatic characters.

Of course, the operatic theater here isn't really in the tubing, it's in the politics and strategic implications that surround the pipeline. In Eastern Europe, for instance, Nabucco is seen not as a European economic or energy project, but as a creature of Washington, just like the Baku-Tblisi-Ceyhan (BTC) pipeline from Azerbaijan to Turkey that president Bill Clinton and his crew backed so vigorously in the 1990s and which was finally finished in 2005. For those who have never believed the Cold War is over, the Eastern Europeans among them, once again it's the good guys (the West) against the commies ... sorry, the Russians ... at an energy-rich OK Corral.

The great borderless gas bazaar
Russia's answer to Nabucco is the 1,200-kilometer-long, $15 billion South Stream pipeline, also scheduled to be finished in 2015; it is slated to carry Siberian natural gas under the Black Sea from Russia to Bulgaria. From Bulgaria, one branch of the pipeline would then run south through Greece to southern Italy while the other would run north through Serbia and Hungary towards northern Italy.

Now, add another pipeline to the picture, the $9.1 billion Nord Stream that will soon enough snake from Western Russia under the Baltic Sea to Germany, which already imports 41.5% of its natural gas from Russia. The giant Russian energy firm Gazprom holds a controlling 51% of Nord Stream stock; the rest belongs to German and Dutch companies. The chairman of the board is none other than former German chancellor Gerhard Schroeder.

Put this all together and Russia, with its pipelines running in all directions and firmly embedded in Europe, spells trouble for Nabucco's future and frustration for Washington's New Great Game plans to contain the Russian energy juggernaut. And that's without even mentioning Ukhta which, chances are, you've never heard of. If you aren't in the energy business, why should you have? After all, it's a backwater village in Russia's autonomous republic of Komi, 350 kilometers from the Arctic Circle. Built by forced labor, it was once part of Alexander Solzhenitsyn's Gulag archipelago. By 2030, however, you'll know its name. By then, a pipeline from remote Ukhta will be flooding Europe with natural gas and the village will be one of Nord Stream's key transit nodes.
While Nabucco as well as South Stream remain virtual, Nord Stream is a Terminator on the run. By 2010, it will be tunneling under the Baltic Sea heading for Germany. By 2011, it should be delivering the goods and a second pipe - 12 meters wide, 100,000 tubes long - will be under construction to double its capacity by 2014. Gazprom CEO Alexei Miller pulls no punches: this, he says, will be "the safest and most modern pipeline in the world."

How can Verdi lovers possibly compete? In the middle of a global recession, Gazprom is spending at least $20 billion to conquer Europe via Nord and South Stream. The strategy is a killer: pump gas under the sea directly to Europe, avoiding messy transit routes across troublesome countries like Ukraine. No wonder Gazprom, which today controls 26% of the European gas market, is expected to have a 33% share by 2020.

In other words, in many ways, the Nabucco versus South Stream energy war already looks settled. Nabucco is, at best, likely to be a secondary pipeline, incapable, as Washington once hoped, of breaking the EU away from energy dependence on Russia.

Brussels, predictably, is in its usual multilingual policy mess. Most bureaucrats at its monster, directive-churning body, the European Commission, publicly bemoan the "pipeline war". On the other hand, Ona Jukneviciene, chairwoman of the committees at the European Parliament dealing with Central Asia, admits that Nabucco cannot be the only option.

As for Reinhard Mitschek, managing director of the Nabucco consortium, he tries to put a brave face on things when he stresses, "we will transport Russian gas, Azeri gas, Iraqi gas". As for the top European official on energy matters, Andris Piebalgs, he can't help being a pragmatist: "We'll continue to work with Russia because Russia has energy resources."

From a business point of view, it's tough to argue with South Stream's selling points. Unlike Nabucco, it will offer cheaper, all-Russian natural gas that won't have to transit through potential war zones, and while Nabucco will always deliver limited amounts of Caspian natural gas to market, South Stream, given Russian resources, will have plenty of room to increase its output.

The fact is that, as of now, Nabucco still has no guaranteed sources of gas. In order for the gas to come from energy-rich Turkmenistan, to take but one example, the Turkmen leadership would have to break a deal they've already made with Russia, which now buys all of that country's export gas. There's no way that Moscow is likely to let one of the former Soviet Republics do that easily. In addition, both Russia and Iran could well be capable of blocking any pipeline straddling the floor of the Caspian Sea.

Gazprom will pay to build South Stream, and then distribute and sell gas it already controls to Europe; Nabucco, on the other hand, has to rely on a messy consortium of six countries (Austria, Hungary, Romania, Bulgaria, Turkey, and Germany) simply to finance one-third of its prospective costs, and then convince wary international bankers to shell out the rest.

The Pentagon does the Black Sea
So what does Washington want out of this mess? That's easy. Rewind to then-prospective Secretary of State Hillary Clinton in her Senate confirmation hearings on January 13, 2009. There, she decried Europe's dependence on Russian natural gas and issued an urgent call for "investments in the Trans-Caspian energy sector". Think of it as a signal: the new Obama administration would be as committed to Nabucco as the Bush administration had been.

What is never spelled out is why. Enter the Black Sea, that crucial geo-strategic stage where Europe meets the Middle East, the Caucasus, and Central Asia. Enter, thus, Bulgaria, home to a new Pentagon air base in Bezmer, one of six new strategic bases being built outside the US and as potentially important to Washington's future games as the stalwart air bases in Incirlik, Turkey, and Aviano, Italy have been in the past. (Aviano was the key US/NATO base for the bombing of the Bosnian Serbs in 1995 and the 78-day bombing campaign against Serbia in 1999.)

With the Pentagon's bases already creeping within a stone's throw of Southwest and Central Asia, it doesn't take a genius to imagine the role Bezmer might play in any future attack on Iran (something the Russian defense establishment has already taken careful note of). With both Romania and Bulgaria now part of NATO, Article 5 of the alliance's charter now applies. NATO can take action "in the event of crises which jeopardize Euro-Atlantic stability and could affect the security of Alliance members."

In this way, Pipelineistan meets the American Empire of Bases.

Young Turks and wily Russians
Why is everyone so damn hooked on Central Asian oil and gas? Elshad Nasirov, deputy chairman of the state-owned Azerbaijani oil company SOCAR, sums the addiction up succinctly enough: "This is the place where there is oil and gas in abundance. It is not Arab, not Persian, not Russian, and not OPEC."

It's the Caspian and, unfortunately for Europe, the region could, in energy terms, turn out to be not the caviar for which it's renowned but so many rotten fish eggs. No one knows, after all, whether the EU will ever be able to buy Iranian gas via Nabucco. No one knows whether the Central Asian "stans" have enough gas to supply Russia, China, and Turkey, not to mention India and Pakistan. No one knows whether any of their leaders will have the nerve to renege on their deals with Gazprom.

Ever since a 2008 British study determined that Turkmenistan may have natural gas reserves second only to Russia, the European Commission has been on a no-holds-barred tear to lure that country into delivering some of its future gas directly to Europe - and not through the Russian pipeline system either. Turkmenistan's inscrutable leader, the spectacularly named Gurbanguly Berdymukhammedov, just has to say the word, but despite the claims of EU officials that he has agreed to send some gas Europe-wards, he's never offered a public word of confirmation.

No wonder: with Nabucco unbuilt and a pipeline from his country to China still under construction, Turkmenistan can play Pipelineistan games only with Russia and Iran. In fact, Russia essentially controls the flow of Turkmen gas for the next 15 years.
Should Gurbanguly someday say the magic word - and assuming the Russians don't throw a monkey wrench into the works - he can marry Turkey, as the key transit country, with the EU and let them all sing Verdi till the sheep come home. In the meantime, angst is the name of the game in Europe (and so in Washington).

A declassified dossier from the FSB, the Russian heir to the KGB, is adamant: considering Nabucco's shortcomings, "Russia will remain the primary supplier of energy to Europe for the foreseeable future." Call it a matter of having your gas and processing it, too. Prime Minister Vladimir Putin has been making the point for years. If Europe tries to snub it, Russia will simply build its own liquefied natural gas (LNG) plants, to facilitate storage and transport, and sell its LNG all over the world.

Anyway, it's worth paying attention to what the St Petersburg State Mining Institute (where Putin earned his doctorate) has to say. According to the institute, Russia has only 20 years' worth of its own natural gas reserves left. Since Russia plans to sell up to 40% of its gas abroad, "Russian" gas may in the future actually mean Central Asian gas. All the more reason for the Russians to make sure that those massive Turkmen and other reserves flow north, not west.

Whatever Washington thinks, the Europeans know that energy independence from Russia is, in reality, inconceivable. Bottom line when it comes to natural gas: Europe needs everything - Nord Stream, South Stream, and Nabucco. The bulk of the natural gas in this Pipelineistan maze may well turn out to be Central Asian anyway and a substantial part could be Iranian, if the Obama administration ever normalizes relations with Iran.

That, then, is the current state of play in the European wing of Pipelineistan. Russia seems to have virtually guaranteed its status as the top gas supplier to Europe for the foreseeable future. But that brings us to Turkey, a key regional power for both the US and the EU. As President Obama has recognized, Turkey is both a real and a metaphorical bridge between the Christian and Muslim worlds. It is also an ideal transit country for carrying non-Russian gas to Europe and is now playing its own suitably complex Pipelineistan game.

Chances are that, like Ukhta in far off Siberia, you've never heard of Yumurtalik either. It's a fishing port squeezed between the Mediterranean Sea and the Taurus mountains, very close to Ceyhan, the Turkish terminal for two key nodes of Pipelineistan: the Kirkuk-Ceyhan pipeline from Iraq and the monster BTC pipeline. Turkey wants to turn Yumurtalik-Ceyhan into nothing less than the Rotterdam of the Mediterranean.

Even as it dreams of future EU membership, however, Turkey worries about antagonizing Moscow. And yet, being aboard the Nabucco Express and already fully committed to the functioning BTC pipeline puts the country on a potential collision course with Russia, its largest trading partner. Of course, this does not displease Washington.

On the other hand, the Turkish leadership draws ever closer to Iran, which provides 38% of Turkey's oil and 25% of its natural gas. Ankara and Tehran also have geopolitical affinities (especially in fighting Kurdish separatism). Together, they offer the best alternative to the Caucasus (Azerbaijan, Georgia) in terms of supplying Europe with Iranian natural gas. All this, of course, drives Washington nuts.

Needless to say, the Nabucco consortium itself would kill to have Iran as a gas supplier for the pipeline. They are also familiar with realpolitik: this could happen only with a Washington-blessed solution to the Iranian nuclear dossier. Iran, for its part, knows well how to seduce Europe. Mohammad-Reza Nematzadeh, managing director of the National Iranian Oil Company (NIOC), has insisted Iran is Europe's "sole option" for the success of Nabucco.

Is Russia just watching all this gas go by? Of course not. In October 2007, Putin signed a key agreement with Iranian President Mahmud Ahmadinejad: If Iran cannot sell its gas to Nabucco - a likelihood given the turbulence of American domestic politics and its foreign policy - Russia will buy it. Translation: Iranian gas could end up, like Central Asian gas, heading for Europe as more "Russian" gas. With its European and Iranian policies at cross-purposes, Washington will not be amused.

When Turkish Prime Minister Recep Tayyip Erdogan threatened to "rethink Nabucco" if the tricky negotiations for Turkey to enter the EU drag on forever, EU leaders got the message (as much as France and Germany may be against a "Europe without borders"). Pragmatically, most EU leaders know very well that they need excellent relations with Turkey to one day have access to the Big Prize, Iranian gas; and that puts Europe's energy and EU membership inclinations at loggerheads.

Last July in Ankara, Nabucco was formally launched by an inter-governmental agreement. The representatives of Turkey, Austria, Bulgaria, Romania and Hungary were there. Obama's special Eurasian envoy, Richard Morningstar (a veteran of the BTC adventure), was there as well. The Central Asian stans were not there.

But crucially, Gurbanguly, ever the showman, finally made an entrance without ever leaving Turkmenistan, (almost) uttering the magic words in a meeting with his ministers in the capital, Ashgabat, on July 10: "Turkmenistan, staying committed to the principles of diversification of supply of its energy resources to the world markets, is going to use all available opportunities to participate in major international projects - such as, for example, [the] Nabucco project."

At the Vienna headquarters of Nabucco the mantra remains: this is "no anti-Russian project". Still, everyone knows that Russia's leaders are eager to kill it, and not a soul from Brussels to Vienna, Washington to Ashgabat, knows how to link Central Asia to Europe via a non-Russian pipeline, at the cost of more than $10 billion, without some assurance that Turkmeni, Kazakh, Azerbaijani, and/or Iranian natural gas will be fully (or even partially) on board. Who would be foolish enough to invest that kind of money without some guarantee that hundreds of miles of aluminum tubes won't remain empty? You don't need Verdi to tell you this is one hell of a quirky plot for a global opera.

Angst over oil and Peak Production

Fears that oil supplies have peaked are based on ignorance of how the industry operates.

Remember "peak oil"? It's the theory that geological scarcity will at some point make it impossible for global petroleum production to avoid falling, heralding the end of the oil age and, potentially, economic catastrophe. Well, just when we thought that the collapse in oil prices since last summer had put an end to such talk, along comes Fatih Birol, the top economist at the International Energy Agency, to insist that we'll reach the peak moment in 10 years, a decade sooner than most previous predictions (although a few ardent pessimists believe the moment of no return has already come and gone).

Like many Malthusian beliefs, peak oil theory has been promoted by a motivated group of scientists and laymen who base their conclusions on poor analyses of data and misinterpretations of technical material. But because the news media and prominent figures like James Schlesinger, a former secretary of energy, and the oilman T. Boone Pickens have taken peak oil seriously, the public is understandably alarmed.

A careful examination of the facts shows that most arguments about peak oil are based on anecdotal information, vague references and ignorance of how the oil industry goes about finding fields and extracting petroleum. And this has been demonstrated over and over again: The founder of the Association for the Study of Peak Oil first claimed in 1989 that the peak had already been reached, and Mr. Schlesinger argued a decade earlier that production was unlikely to ever go much higher.

Mr. Birol isn't the only one still worrying. One leading proponent of peak oil, the writer Paul Roberts, recently expressed shock to discover that the liquid coming out of the Ghawar Field in Saudi Arabia, the world's largest known deposit, is around 35 percent water and rising. But this is hardly a concern -- the buildup is caused by the Saudis pumping seawater into the field to keep pressure up and make extraction easier. The global average for water in oil field yields is estimated to be as high as 75 percent.

Another critic, a prominent consultant and investor named Matthew Simmons, has raised concerns over oil engineers using "fuzzy logic" to estimate reservoir holdings. But fuzzy logic is a programming method that has been used since I was in graduate school in situations where the factors are hazy and variable -- everything from physical science to international relations -- and its track record in oil geology has been quite good.

But those are just the latest arguments -- for the most part the peak-oil crowd rests its case on three major claims: that the world is discovering only one barrel for every three or four produced; that political instability in oil-producing countries puts us at an unprecedented risk of having the spigots turned off; and that we have already used half of the two trillion barrels of oil that the earth contained.

Let's take the rate-of-discovery argument first: It is a statement that reflects ignorance of industry terminology. When a new field is found, it is given a size estimate that indicates how much is thought to be recoverable at that point in time. But as years pass, the estimate is almost always revised upward, either because more pockets of oil are found in the field or because new technology makes it possible to extract oil that was previously unreachable. Yet because petroleum geologists don't report that additional recoverable oil as "newly discovered," the peak oil advocates tend to ignore it. In truth, the combination of new discoveries and revisions to size estimates of older fields has been keeping pace with production for many years.

A related argument -- that the "easy oil" is gone and that extraction can only become more difficult and cost-ineffective -- should be recognized as vague and irrelevant. Drillers in Persia a century ago certainly didn't consider their work easy, and the mechanized, computerized industry of today is a far sight from 19th- century mule-drawn rigs. Hundreds of fields that produce "easy oil" today were once thought technologically unreachable.

The latest acorn in the discovery debate is a recent increase in the overall estimated rate at which production is declining in large oil fields. This is assumed to be the result of the "superstraw" technologies that have become dominant over the past decade, which can drain fields faster than ever. True, because quicker extraction causes the fluid pressure in the field to drop rapidly, the wells become less and less productive over time. But this declining return on individual wells doesn't necessarily mean that whole fields are being cleaned out. As the Saudis have proved in recent years at Ghawar, additional investment -- to find new deposits and drill new wells -- can keep a field's overall production from falling.

When their shaky claims on geology are exposed, the peak-oil advocates tend to argue that today's geopolitical instability needs to be taken into consideration. But political risk is hardly new: A leading Communist labor organizer in the Baku oil industry in the early 1900s would later be known to the world as Josef Stalin.

When the large supply disruptions of 1973 and 1979 led to skyrocketing prices, nearly all oil experts said the underlying cause was resource scarcity and that prices would go ever higher in the future. The oil companies diversified their investments -- Mobil even started buying up department stores! -- and President Jimmy Carter pushed for the development of synthetic fuels like shale oil, arguing that markets were too myopic to realize the imminent need for substitutes. All sorts of policy wonks, energy consultants and Nobel-prize-winning economists jumped on the bandwagon to explain that prices would only go up -- even though they had never done so historically. Prices instead proceeded to slide for two decades, rather as the tide ignored King Canute.

Just as, in the 1970s, it was the Arab oil embargo and the Iranian Revolution, today it is the invasion of Iraq and instability in Venezuela and Nigeria. But the solution, as ever, is for the industry to shift investment into new regions, and that's what it is doing. Yet peak-oil advocates take advantage of the inevitable delay in bringing this new production on line to claim that global production is on an irreversible decline.

In the end, perhaps the most misleading claim of the peak-oil advocates is that the earth was endowed with only 2 trillion barrels of "recoverable" oil. Actually, the consensus among geologists is that there are some 10 trillion barrels out there. A century ago, only 10 percent of it was considered recoverable, but improvements in technology should allow us to recover some 35 percent -- another 2.5 trillion barrels -- in an economically viable way. And this doesn't even include such potential sources as tar sands, which in time we may be able to efficiently tap.

Oil remains abundant, and the price will likely come down closer to the historical level of $30 a barrel as new supplies come forward in the deep waters off West Africa and Latin America, in East Africa, and perhaps in the Bakken oil shale fields of Montana and North Dakota. But that may not keep the Chicken Littles from convincing policymakers in Washington and elsewhere that oil, being finite, must increase in price. (That's the logic that led the Carter administration to create the Synthetic Fuels Corporation, a $3 billion boondoggle that never produced a gallon of useable fuel.)

This is not to say that we shouldn't keep looking for other cost- effective, low-pollution energy sources -- why not broaden our options? But we can't let the false threat of disappearing oil lead the government to throw money away on harebrained renewable energy schemes or impose unnecessary and expensive conservation measures on a public already struggling through tough economic times.

What Happens When the US Loses Its Triple A Credit Rating?

Here's one to think about.

Investment rating services generally mark down the quality of AAA rated debt once interest payments exceed 10% of revenue.

Well, it turns out that subprime borrowers are not the only ones painting themselves into this well-known corner. Uncle Sam could be in this predicament as soon as the year 2012. That is, in 3 years!

Here's the story: "Uncle Sam Could Risk Triple AAA Status As Early As 2012"

Here's how the vicious cycle works.

Once you lose your AAA rating, you have to pay higher interest charges on debt - sometimes much higher. Then interest payments become an even larger component of your monthly expenses - and, of course, your credit rating drops further still. Then your interest payments rise again. Then your credit rating drops again.

You get the idea!

In its 19th century heyday, the US was a net creditor to the world. American savers funded international capital investment around the globe. This continued into the mid-20th century.

Now that situation is exactly reversed. American borrowers are paying ever higher interest payments on trillions of dollars of escalating debt and capital investment is withering.

Note: It is capital investment derived from savings that builds economic strength. Spending and borrowing breed economic weakness.

This is the road to ruin.

Mr Obama. Mr. Bernanke. Don't do it!

Our children and our grandchildren will pay for our mistakes - with devalued (or possibly non-existent) dollars!

Seeking Alpha

Recently, I've begun to read "Seeking Alpha" for more timely coverage of news and opinion regarding the broad markets.

This site's strength seems to be in its ability to bring together in a single forum individuals with very diverse viewpoints on the investment markets. There are enough timely articles and sufficient intelligent commentary there to keep me interested. Therefore, I have been adding my comments as well.

If you'd like to keep up with some of my ongoing thoughts on market developments, click here.

And if you enjoy Seeking Alpha, you might wish to sign on yourself, as it's quite a simple and painless process.

Enjoy!

P.S. If you're wondering why I haven't had much to say (in detail) about the gold market recently - well, I think I've said all that I have to say. This is a bull market, and it's going up in the intermediate and the long term. October 2008 was rough, and the crash in precious metal miners and explorers was unexpected on my part. But I'm glad to be positioned where I am, long gold and silver explorers and miners, right here, right now.

Buying and holding has worked even in the ugliest downturn in this market in 3 decades!

If you'd like more detail, look at Adam Hamilton's recent piece on the gold miners. He is using the same words that I am: "Gold Stocks Still Cheap."

Krugman best taken in reverse

Krugman best taken in reverse

If all the economists were laid end to end, they'd never reach a conclusion. - George Bernard Shaw

There are numerous versions of Shaw's dictum, boiling down to one thing - no matter how many economists one consults, the actual answer is almost never found, not even one that can be worked with profitably. An argumentative bunch, economists are forever derided for being a dismal bunch who see a cloud in every silver lining and an accident around every corner.

Still, even within this dismal bunch of people who are almost always wrong, there is one bunch that stands out with its habitual, if not predictable, wrongheadedness. That group is of course the folks who call themselves Keynesian economists, followers of a mystic religion formed in the earlier part of the last century and today attempts to pass itself on as a legitimate science. John Maynard Keynes was wrong about nearly everything, but in not following a lot of his own advice managed to turn a quick penny now and then, he garnered an aura of success where none should have legitimately existed.

As I wrote in a previous article, "the best thing about Keynes is that he is dead".

Leading acolyte who lags
This article, though, isn't about Keynes or Keynesian economics, but about the increasingly silly pronouncements coming out of the columns of America's leading exponent of Keynesian economics, namely Paul Krugman of the New York Times.

Now, perhaps I must confess two incidental points here: first, that there was a time when I was quite impressed with Krugman's acumen and his ability to make sense out of a complex series of numbers. Perhaps the most celebrated of his pieces was one in the mid-90s wherein he exposed the Asian economic "miracle" as nothing more than the effect of increased factor inputs; that is, that taking away the factor inputs (land, labor, capital, and raw materials) would inevitably end the miracle; indeed altering the prices of these inputs would do the same.

As it happened, once capital costs became prohibitive in the aftermath of the Asian financial crisis, the miracle did fall on its face and its most important illusion, that foreigners could benefit from interest rate arbitrages in Asian local currencies, evaporated with it as currencies sharply fell against the US dollar. This was an important statement, and one that went against the consensus of the day, which had been assiduously promoted by the International Monetary Fund as well as Asian regimes.

As foreigners pulled out of the local debt markets of Asia, currencies collapsed and soon investing behavior for the region had also changed so that all savings "had" to be in the so-called hard currencies, including the US dollar, and a few years later the euro. As a matter of policy, Asian central bankers also came to eschewing any currency rises against the US dollar.

In the aftermath of the crisis, I attended some lectures that included Krugman as a keynote speaker; these polemics, as I recall them, were generally in favor of the free market and the need for Asian governments to sell their banks to foreigners.

Today's version of the same person is a different kettle of fish. By now having pinned his lapel on left-leaning economics as a response to eight years of George W Bush, Krugman, winner of the 2008 Nobel Prize for economics, has also forgotten the very points that he made in Asia 12 years ago.

The second point I must confess to is that in general I do not read the New York Times, or its online version; in fact, most of the times that I find myself perusing its website is when redirected by one of the news aggregator websites (Huffington Post, Drudge Report and so forth).

But on a nice sunny day in the beginning of July, waiting in an airport lounge somewhere, I had no choice but to pick up a copy of the International Herald Tribune, the recycled international version of the New York Times. As always, a quick scan through to the editorial pages found the grimacing (smiling?) visage of Krugman staring back at me. His prose was as nonsensical as it had become of late, but one sentence really caught my attention

From his article titled "That 30s Show", dated July 2, 2009

And the deeper the hole gets, the harder it will be to dig ourselves out. The job figures weren't the only bad news in Thursday's report, which also showed wages stalling and possibly on the verge of outright decline. That's a recipe for a descent into Japanese-style deflation, which is very difficult to reverse. Lost decade, anyone?

Dig ourselves out? This is a bit of modern media phraseology that escapes me completely. If you are in a hole, the way I think about it is that you instantly STOP digging, not continue digging (unless you wish to proceed through Earth's hot core and end up coming out in China; which I believe a number of Americans have been trying lately, but that's a different story). Physically and logically, it isn't actually possible to DIG yourself out of a hole; what you need to do is to FILL the hole hopefully in a safe enough manner that those in the hole can walk out of it.

The US Federal Reserve under former chairman Alan Greenspan had to confront the aftermath of the technology bubble and decided to DIG itself out of the hole caused by job losses in the higher technology sector by lowering interest rates and essentially creating an asset bubble that helped to foster higher employment but didn't actually improve the net worth position of Americans. This is the reason millions of Americans chased the dream of easy money through house-flipping, and the Republican Party attempted to capitalize on the trend in order to move leverage down from large construction and homebuilding companies (typically Republican donors) to the poor of America, who typically voted Democrat.

As I wrote before on these pages (see Deaf frogs and the Pied Piper, Asia Times Online, September 30, 2008), Greenspan got away with it because of slavish Asian central bankers, who were following the dictum of Krugman ironically enough and moving away from investing through their local bond markets into investing purely in US government debt

. This in turn propped up the stupid policies of the Fed, caused the US housing bubble and so on ... but funnily enough, the intervention of Asian central bankers isn't mentioned in describing the mechanics of the above bubble.

Indeed, the moral pendulum somehow swung to the point of free markets being blamed for the crisis, rather than as being seen as the victims of manipulation (the Fed) and intervention (Asian central banks). In this new "Mad Max reality" it is the Keynesians who are the saviors, led by their cheerleader-in-chief, one Paul Krugman.

Reading other articles posted recently also don't help make sense of where Krugman is going with his pet theories. Take more of his July 2 article cited above:

Wait - there's more bad news: the fiscal crisis of the states. Unlike the federal government, states are required to run balanced budgets. And faced with a sharp drop in revenue, most states are preparing savage budget cuts, many of them at the expense of the most vulnerable. Aside from directly creating a great deal of misery, these cuts will depress the economy even further.

Wonderful, and right there, all readers should appreciate the use of the word "unlike" in the second sentence. Cutting through the jargon, what Krugman is saying here is that states in the US do not print the dollar currency, but since the federal government does, different rules apply for the management of debt and deficits.

That view is nonsensical of course - the only way to issue debt is to convince someone else that you are good for it come the time to make interest and principal repayments. US states, starting with California, have quickly come to realize that their wells could run dry rather quickly so why does anyone believe that the story is magically different for the US federal government?

There are only two possible answers: Convince someone else to buy all your debt (developing countries, commodity exporters and so forth) or print your own money (thereby debasing its purchasing power). The US government is clearly doing both - witness the rounds of "investor" meetings being done by Treasury Secretary Tim Geithner in Asia even as the Fed openly has started purchasing US government securities.

In a very short while, the US government could find that the strike by creditors afflicting California could adversely impact federal debt too.

But I digress. Here is Krugman again, in an article titled "The Stimulus Trap" dated July 9:

As soon as the Obama administration-in-waiting announced its stimulus plan - this was before Inauguration Day - some of us worried that the plan would prove inadequate. And we also worried that it might be hard, as a political matter, to come back for another round. ... Unfortunately, those worries have proved justified. The bad employment report for June made it clear that the stimulus was, indeed, too small. But it also damaged the credibility of the administration's economic stewardship. There's now a real risk that President Obama will find himself caught in a political-economic trap. ... And that's what the Obama administration should be doing right now with its fiscal stimulus. (It's important to remember that the stimulus was necessary because the Fed, having cut rates all the way to zero, has run out of ammunition to fight this slump.) That is, policy makers should stay calm in the face of disappointing early results, recognizing that the plan will take time to deliver its full benefit. But they should also be prepared to add to the stimulus now that it's clear that the first round wasn't big enough.

This stuff is delightful, if a geeky, guilty pleasure. Right in the beginning, Krugman pre-determines that the sole method of fighting an economic downturn is to expand the fiscal stimulus. And when that policy fails obviously in the next few months, his refrain isn't so much about "Is that the RIGHT policy?", but rather that "It was the WRONG amount".

There is the mumble about the Fed having no more ammunition because interest rates are close to zero; quite ignoring the fact that the failure of the economy to rebound at zero interest rates suggests obvious structural flaws, that shouldn't be made worse by Japan-style pump priming. He goes in the article as below:

Unfortunately, the politics of fiscal policy are very different from the politics of monetary policy. For the past 30 years, we've been told that government spending is bad, and conservative opposition to fiscal stimulus (which might make people think better of government) has been bitter and unrelenting even in the face of the worst slump since the Great Depression ... But there's a difference between defending what you've done so far and being defensive. It was disturbing when President Obama walked back ... [Vice president Joe] Biden's admission that the administration "misread" the economy, declaring that "there's nothing we would have done differently." There was a whiff of the Bush infallibility complex in that remark, a hint that the current administration might share some of its predecessor's inability to admit mistakes. And that's an attitude neither Mr Obama nor the country can afford ... What Mr Obama needs to do is level with the American people. He needs to admit that he may not have done enough on the first try. He needs to remind the country that he's trying to steer the country through a severe economic storm, and that some course adjustments - including, quite possibly, another round of stimulus - may be necessary.

I loved the bit about the Bush infallibility complex in the statement, but it should have been directed not so much at the poorly advised Mr Obama, as the people advising him; an august group of Keynesians that includes Krugman himself. It is they who have ridden the infallibility complex that has failed to make the most important observations about the US economy:
1. Leverage needs to shrink across the economy, not merely get shifted around between the hands of private individuals and the US government;
2. When consumption is almost three-quarters of any economy, you cannot cut leverage without hurting consumption. So live with it;
3. For the economy to generate profits, it probably needs to become smaller, a lot smaller.

Recycling waste
All that said, Krugman's uselessness is actually quite useful, with the right application. To turn George Bernard Shaw's maxim on its head, it is futile to follow any gaggle of economists not because they are wrong as a group but because individually some of them are right sometimes, but not always. It is almost impossible to find someone who is right all the time, but failing that it would be great to find someone who is wrong all the time.

Unfortunately for all of us, Krugman's pronouncements don't actually have enough market views thrown in for any of us to make money by taking the opposite view. The good news, though, is that it appears, with Fed chairman Ben Bernanke on a very short leash, he may be succeeded by Larry Summers in January 2010, and it could well be Krugman's new beat to take over the job that Larry Summers leaves - namely as head of the US president's economic advisory team.

Now, if only we could convince him to make market suggestions while in that new job (for example, "the economy will rebound in two quarters so the US government can cut borrowings"), then it would be trivially easy to position on the opposite trade (that is, "borrowings will continue to rise"). But don't tell him any of that.....

....the united states taxpayer and voter and citizen has just the politicos and business thieves it deserves, because the great majority of us think and talk as if we know what is going on up on wall street and down on capitol hill and Pennsylvania avenue, and that same great majority of us don't do a d*** thing about it.......

we keep on watching and expecting our favorite mouthpiece radio and TV talkers to make our points for us by proxy, but only a few of us probably realize that these same mouthpiece talkers are the interference runners and smokescreeners for the same disingenuous wall street and capitol hill tribe that has sold us out for the past 30 or 40 years.......

oh, yeah, it has been that long that the united states taxpayer, voter and citizen has been asleep at the switch, hypnotized by consumerism gluttony, mesmerized by the fake patriotism of mass-market cults, and brainwashed by the past glories of yesteryear.......

when the average Joe and Jane quit screaming bloody murder; revoke the proxies they have given to congress, the white house, and Madison avenue; quit buying junk they don't really need, the money-grubbing ruling class on wall street and in Washington might get the message........i doubt it, though......

United states democracy is a memory........only a second American revolution can bring that memory back to life.........at least Mr. Farrell is finally talking about it..........

....http://www.marketwatch.com/story/the-8-point-goldman-socialist-manifesto-2009-08-04?pagenumber=1.

....

A WARNING to the One-World Elite

Adrian Salbuchi

Regulatory reform and the NWO...

Regulatory reform and the NWO...

United States Treasury Secretary Tim Geithner and National Economic Council Director Larry Summers jointly wrote an op-ed piece in the Washington Post on Monday, June 15, to lay out the policy goal of the Barack Obama administration's regulatory reform plan to be announced two days later....http://www.truthdig.com/report/print/20090614_the_american_empire_is_bankrupt/.

The essay describes the current financial crisis as "the product of basic failures in financial supervision and regulation", by pointing out that "our framework for financial regulation is riddled with gaps, weaknesses and jurisdictional overlaps, and suffers from an outdated conception of financial risk. In recent years, the pace of innovation in the financial sector has outstripped the pace of regulatory modernization, leaving entire markets and market participants largely unregulated."

Yet the administration's regulatory reform plan is generally viewed as having backed away, due to the political difficulties involved, from a more extensive structural overhaul that would have consolidated all banking regulation into one unified agency.

The op-ed essay identifies "five key problems in our existing regulatory regime - problems that, we believe, played a direct role in producing or magnifying the current crisis".
...http://www.atimes.com/atimes/China_Business/KF19Cb01.html.
The essay states: "First, existing regulation focuses on the safety and soundness of individual institutions but not the stability of the system as a whole. As a result, institutions were not required to maintain sufficient capital or liquidity to keep them safe in times of system-wide stress. In a world in which the troubles of a few large firms can put the entire system at risk, that approach is insufficient. The administration's proposal will address that problem by raising capital and liquidity requirements for all institutions, with more stringent requirements for the largest and most interconnected firms. In addition, all large, interconnected firms whose failure could threaten the stability of the system will be subject to consolidated supervision by the Federal Reserve, and we will establish a council of regulators with broader coordinating responsibility across the financial system."

Yet, capital adequacy for large financial firms, while important, will not by itself eliminate systemic risk since systemic meltdown can be caused by massive counterparty defaults on the part of large number of small firms and investors holding structured financed instruments that are off the balance sheets of the big firms to cause insolvency of the big firms.

The problem is that even small firms are now "too big to fail" because of opaque interconnectedness that can cause the system to fail not at its big nodes but at its weakest points throughout the system. The administration's two top economists do not see fit to blame run-away "innovation", only the failure of regulation to keep pace with it. That is like blaming bank guards for bank robbers.

The essay states: "Second, the structure of the financial system has shifted, with dramatic growth in financial activity outside the traditional banking system, such as in the market for asset-backed securities. In theory, securitization should serve to reduce credit risk by spreading it more widely. But by breaking the direct link between borrowers and lenders, securitization led to an erosion of lending standards, resulting in a market failure that fed the housing boom and deepened the housing bust. The administration's plan will impose robust reporting requirements on the issuers of asset-backed securities; reduce investors' and regulators' reliance on credit-rating agencies; and, perhaps most significant, require the originator, sponsor or broker of a securitization to retain a financial interest in its performance. The plan also calls for harmonizing the regulation of futures and securities, and for more robust safeguards of payment and settlement systems and strong oversight of 'over the counter' derivatives. All derivatives contracts will be subject to regulation, all derivatives dealers subject to supervision, and regulators will be empowered to enforce rules against manipulation and abuse."

The non-banking financial system is essentially an anti-banking system in that it allows securitization to convert debt into security; that is, credit into capital. It is an insurgent war against capitalism itself. Pension funds are allowed to invest in debt instruments as if they were security instruments. Such instruments are in reality stripped of security, with returns commensurate with risk levels. The word security is derived from the Ancient Greek se-cura and literally translates to "without fear". Structural finance actually promotes fearlessness that no regulation can negate.

The essay states: "Third, our current regulatory regime does not offer adequate protections to consumers and investors. Weak consumer protections against subprime mortgage lending bear significant responsibility for the financial crisis. The crisis, in turn, revealed the inadequacy of consumer protections across a wide range of financial products - from credit cards to annuities. Building on the recent measures taken to fight predatory lending and unfair practices in the credit card industry, the administration will offer a stronger framework for consumer and investor protection across the board."

Improved consumer protection is certainly needed, but the best way to protect the consumer is to adopt a full-employment economy with rising wages so that workers do not have to assume unsustainable debt in order to buy the products they make.

The essay states: "Fourth, the federal government does not have the tools it needs to contain and manage financial crises. Relying on the Federal Reserve's lending authority to avert the disorderly failure of nonbank financial firms, while essential in this crisis, is not an appropriate or effective solution in the long term. To address this problem, we will establish a resolution mechanism that allows for the orderly resolution of any financial holding company whose failure might threaten the stability of the financial system. This authority will be available only in extraordinary circumstances, but it will help ensure that the government is no longer forced to choose between bailouts and financial collapse."

There is no "appropriate" government mechanism to contain and manage financial crises. The solution is to prevent recurring financial crises. A new resolution mechanism to shift private debt into public debt does little to prevent recurring financial crises. In fact, it may well make such crises routine.

The essay states: "Fifth, and finally, we live in a globalized world, and the actions we take here at home - no matter how smart and sound - will have little effect if we fail to raise international standards along with our own. We will lead the effort to improve regulation and supervision around the world."

US promotion of neoliberal globalization of trade and finance has been the main cause of recurring global financial crises. The lack of international labor standards and wage scales has permitted US corporations to exploit cross-border wage arbitrage that has caused global wage stagnation to generate wage/price imbalance, notwithstanding the essay's misapplied claim of a saving/consumption imbalance. US opposition to international financial regulatory standard has allowed US financial firms to exploit cross-border arbitrage of risk in the name of innovation.

Neither the op-ed essay nor the administration's plan addresses the need for a federal regulatory regime for the insurance sector, which is now governed by state insurance commissions in a tradition of state rights. This issue is particularly central since under-regulated financial risk insurance practices have been a key contributor to run-away systemic risk.

The administration aims to curb excessive risk-taking through reform of structured finance and compensation practices that encourages risk taking, including "say on pay" for shareholders and regulation against abuses of risk induced by short term compensation while leaving the penalty of future loss to shareholders.

Under the Obama plan, the Federal Reserve will retain day-to-day supervision of the largest bank-holding companies, which the George W Bush administration had proposed taking away. The Fed may become the sole regulator for both banks and non-bank financial companies that reach a comparable size and complexity. The Fed is also likely to be given the final authority on bank capital requirements, including a surcharge for the systemically important financial institutions.

However, not all systemic risk powers will be concentrated in the Fed. The Obama plan will propose giving the Federal Deposit Insurance Corporation (FDIC) special resolution powers to wind down important large financial institutions. These powers will extend the capacity of FDIC to manage the orderly failure of a complex financial company, which policymakers hope will mitigate the moral hazard created by recent bail-outs.

Nonetheless, the plan places great reliance on the Fed, which is likely to be controversial in Congress, with critics charging that the Fed had failed to exert its existing regulatory powers over banks in mortgage lending.

Fed chairman Ben Bernanke believes that macroprudential powers (systemic risk powers) may allow a central bank to prevent credit and asset price bubbles not easily addressed with interest rates. But other Fed officials are apprehensive that the central bank is setting itself up for predictable failure, and that the exercise of macroprudential powers will entangle the Fed in political fights that will undermine independent monetary policy-making.

Larry Summers likes to say the Obama administration inherited the financial crisis from the Bush administration, but the Obama plan for regulatory reform essentially inherits the plan of Henry Paulson, the last Treasury secretary in the Bush administration. Paulson advocated consolidation of a regulatory regime "largely knit together over the last 75 years, put into place for particular reasons at different times and in response to circumstances that may no longer exist".

The Geithner plan eliminates the Office of Thrift Supervision (OTS), which oversaw an array of collapsed large institutions such as IndyMac, Washington Mutual and AIG. The OTS is to be merged with the Office of the Comptroller of the Currency (OCC). The shotgun marriage was first proposed by Paulson.

Paulson also wanted to merge the Commodity Futures Trading Commission (CFTC) into the Securities and Exchange Commission (SEC) to ensure that derivatives, the weapons of mass financial destruction, would be properly put under financial arms control. The proposal is not in the Geithner plan, not because the Treasury did not like the idea but because the CFTC, with long historical ties to Chicago, has a powerful lobby. But the SEC will have to devolve some power to a new commission responsible for supervising consumer financial products.

Plans on securitization will force lenders to retain at least 5% of the credit risk of loans that are securitized. Asset-backed securities and the entire over-the-counter derivatives market will face new reporting rules. Large "systemically risky" institutions will have to hold more capital, and hedge funds

will have to provide more data on their trading positions.

George Soros, the speculator who broke the Bank of England over its defense of the pound sterling, said in the Financial Times that a requirement for lenders selling securitized loans as securities to retain 5% exposure "is more symbolic than substantive". Yet the wider regulatory reform plan has already attracted criticism from bankers who say it will add to the cost of capital.

Republicans are preparing to fight several of the Obama proposals, with lawmakers particularly skeptical about giving more powers to the Federal Reserve, even though much of the Obama plan has been inherited from the previous Republican administration.

The Era of Cheap Oil Is Over

Every summer, the Energy Information Administration (EIA) of the US Department of Energy issues its International Energy Outlook (IEO)--a jam-packed compendium of data and analysis on the evolving world energy equation. For those with the background to interpret its key statistical findings, the release of the IEO can provide a unique opportunity to gauge important shifts in global energy trends, much as reports of routine Communist Party functions in the party journal Pravda once provided America's Kremlin watchers with insights into changes in the Soviet Union's top leadership circle.

As it happens, the recent release of the 2009 IEO has provided energy watchers with a feast of significant revelations. By far the most significant disclosure: the IEO predicts a sharp drop in projected future world oil output (compared to previous expectations) and a corresponding increase in reliance on what are called "unconventional fuels"--oil sands, ultra-deep oil, shale oil and biofuels.....(De-Dollarization: Dismantling America’s Financial-Military Empire).

So here's the headline for you: For the first time, the well-respected Energy Information Administration appears to be joining with those experts who have long argued that the era of cheap and plentiful oil is drawing to a close. Almost as notable, when it comes to news, the 2009 report highlights Asia's insatiable demand for energy and suggests that China is moving ever closer to the point at which it will overtake the United States as the world's number-one energy consumer. Clearly, a new era of cutthroat energy competition is upon us.

Peak Oil Becomes the New Norm

As recently as 2007, the IEO projected that the global production of conventional oil (the stuff that comes gushing out of the ground in liquid form) would reach 107.2 million barrels per day in 2030, a substantial increase from the 81.5 million barrels produced in 2006. Now, in 2009, the latest edition of the report has grimly dropped that projected 2030 figure to just 93.1 million barrels per day--in future-output terms, an eye-popping decline of 14.1 million expected barrels per day.

Even when you add in the 2009 report's projection of a larger increase than once expected in the output of unconventional fuels, you still end up with a net projected decline of 11.1 million barrels per day in the global supply of liquid fuels (when compared to the IEO's soaring 2007 projected figures). What does this decline signify--other than growing pessimism by energy experts when it comes to the international supply of petroleum liquids?

Very simply, it indicates that the usually optimistic analysts at the Department of Energy now believe global fuel supplies will simply not be able to keep pace with rising world energy demands. For years now, assorted petroleum geologists and other energy types have been warning that world oil output is approaching a maximum sustainable daily level--a peak--and will subsequently go into decline, possibly producing global economic chaos. Whatever the timing of the arrival of peak oil's actual peak, there is growing agreement that we have, at last, made it into peak-oil territory, if not yet to the moment of irreversible decline.

Until recently, Energy Information Administration officials scoffed at the notion that a peak in global oil output was imminent or that we should anticipate a contraction in the future availability of petroleum any time soon. "[We] expect conventional oil to peak closer to the middle than to the beginning of the 21st century," the 2004 IEO report stated emphatically.

Consistent with this view, the EIA reported one year later that global production would reach a staggering 122.2 million barrels per day in 2025, more than 50 percent above the 2002 level of 80.0 million barrels per day. This was about as close to an explicit rejection of peak oil that you could get from the EIA's experts.

Where Did All the Oil Go?

Now, let's turn back to the 2009 edition. In 2025, according to this new report, world liquids output, conventional and unconventional, will reach only a relatively dismal 101.1 million barrels per day. Worse yet, conventional oil output will be just 89.6 million barrels per day. In EIA terms, this is pure gloom and doom, about as deeply pessimistic when it comes to the world's future oil output capacity as you're likely to get.

The agency's experts claim, however, that this will not prove quite the challenge it might seem, because they have also revised downward their projections of future energy demand. Back in 2005, they were projecting world oil consumption in 2025 at 119.2 million barrels per day, just below anticipated output at that time. This year--and we should all theoretically breathe a deep sigh of relief--the report projects that 2025 figure at only 101.1 million barrels per day, conveniently just what the world is expected to produce at that time. If this actually proves the case, then oil prices will presumably remain within a manageable range.

In fact, however, the consumption part of this equation seems like the less reliable calculation, especially if economic growth continues at anything like its recent pace in China and India. Indeed, all evidence suggests that growth in these countries will resume its pre-crisis pace by the end of 2009 or early 2010. Under those circumstances, global oil demand will eventually outpace supply, driving up prices again and threatening recurring and potentially disastrous economic disorders--possibly on the scale of the present global economic meltdown.

To have the slightest chance of averting such disasters means seeing a sharp rise in unconventional fuel output. Such fuels include Canadian oil sands, Venezuelan extra-heavy oil, deep-offshore oil, Arctic oil, shale oil, liquids derived from coal (coal-to-liquids or CTL) and biofuels. At present, these cumulatively constitute only about 4 percent of the world's liquid fuel supply but are expected to reach nearly 13 percent by 2030. All told, according to estimates in the new IEO report, unconventional liquid production will reach an estimated 13.4 million barrels per day in 2030, up from a projected 9.7 million barrels in the 2008 edition.

But for an expansion on this scale to occur, whole new industries will have to be created to manufacture such fuels at a cost of several trillion dollars. This undertaking, in turn, is provoking a wide-ranging debate over the environmental consequences of producing such fuels.

For example, any significant increase in biofuels use--assuming such fuels were produced by chemical means rather than, as now, by cooking-- could substantially reduce emissions of carbon dioxide and other greenhouse gases, actually slowing the tempo of future climate change. On the other hand, any increase in the production of Canadian oil sands, Venezuelan extra-heavy oil, and Rocky Mountain shale oil will entail energy-intensive activities at staggering levels, sure to emit vast amounts of CO2, which might more than cancel out any gains from the biofuels.

In addition, increased biofuels production risks the diversion of vast tracts of arable land from the crucial cultivation of basic food staples to the manufacture of transportation fuel. If, as is likely, oil prices continue to rise, expect it to be ever more attractive for farmers to grow more corn and other crops for eventual conversion to transportation fuels, which means rises in food costs that could price basics out of the range of the very poor, while stretching working families to the limit. As in May and June of 2008, when food riots spread across the planet in response to high food prices--caused, in part, by the diversion of vast amounts of corn acreage to biofuel production--this could well lead to mass unrest and mass starvation.

A Heavy Energy Footprint on the Planet

The geopolitical implications of this transformation could well be striking. Among other developments, the global clout of Canada, Venezuela and Brazil--all key producers of unconventional fuels--is bound to be strengthened.

Canada is becoming increasingly important as the world's leading producer of oil sands, or bitumen--a thick, gooey, viscous material that must be dug out of the ground and treated in various energy-intensive ways before it can be converted into synthetic petroleum fuel (synfuel). According to the IEO report, oil sands production, now at 1.3 million barrels a day and barely profitable, could hit the 4.4 million barrel mark (or even, according to the most optimistic scenarios, 6.5 million barrels) by 2030.

Given the IEA's new projections, this would represent an extraordinary addition to global energy supplies just when key sources of conventional oil in places like Mexico and the North Sea are expected to suffer severe declines. The extraction of oil sands, however, could prove a pollution disaster of the first order. For one thing, remarkable infusions of old-style energy are needed to extract this new energy, huge forest tracts would have to be cleared, and vast quantities of water used for the steam necessary to dislodge the buried goo (just as the equivalent of "peak water" may be arriving).

What this means is that the accelerated production of oil sands is sure to be linked to environmental despoliation, pollution and global warming. There is considerable doubt that Canadian officials and the general public will, in the end, be willing to pay the economic and environmental price involved. In other words, whatever the IEA may project now, no one can know whether synfuels will really be available in the necessary quantities fifteen or twenty years down the road.

Venezuela has long been an important source of crude oil for the United States, generating much of the revenue used by President Hugo Chávez to sustain his social experiments at home and an ambitious anti-American political agenda abroad. In the coming years, however, its production of conventional petroleum is expected to fall, leaving the country increasingly reliant on the exploitation of large deposits of bitumen in the eastern Orinoco River basin. Just to develop these "extra-heavy oil" deposits will require significant financial and energy investments and, as with Canadian oil sands, the environmental impact could be devastating. Nevertheless, successful development of these deposits could prove an economic bonanza for Venezuela.

The big winner in these grim energy sweepstakes, however, is likely to be Brazil. Already a major producer of ethanol, it is expected to see a huge increase in unconventional oil output once its new ultra-deep fields in the "subsalt" Campos and Santos basins come on line. These are massive offshore oil deposits buried beneath thick layers of salt some 100 miles off the coast of Rio de Janeiro and several miles beneath the ocean's surface.

When the substantial technical challenges to exploiting these undersea fields are overcome, Brazil's output could soar by as much as 3 million barrels per day. By 2030, Brazil should be a major player in the world energy equation, having succeeded Venezuela as South America's leading petroleum producer.

New Powers, New Problems

The IEO report hints at other geopolitical changes occurring in the global energy landscape, especially an expected stunning increase in the share of the global energy supply consumed in Asia and a corresponding decline by the United States, Japan and other "First World" powers. In 1990, the developing nations of Asia and the Middle East accounted for only 17 percent of world energy consumption; by 2030, that number, the report suggests, should reach 41 percent, matching that of the major First World powers.

All recent editions of the report have predicted that China would eventually overtake the United States as number-one energy consumer. What's notable is how quickly the 2009 edition expects that to happen. The 2006 report had China assuming the leadership position in a 2026-2030 timeframe; in 2007, it was 2021-2024; in 2008, it was 2016-2020. This year, the EIA is projecting that China will overtake the United States between 2010 and 2014.

It's easy enough to overlook these shifting estimates, since the reports don't emphasize how they have changed from year to year. What they suggest, however, is that the United States will face ever-fiercer competition from China in the global struggle to secure adequate supplies of energy to meet national needs.

Given what we have learned about the dwindling prospects for adequate future oil supplies, we are sure to face increased geopolitical competition and strife between the two countries in those few areas that are capable of producing additional quantities of oil (and undoubtedly genuine desperation among many other countries with far less resources and power).

And much else follows: as the world's leading energy consumer, Beijing will undoubtedly play a far more critical role in setting international energy policies and prices, undercutting the pivotal role long played by Washington. It is not hard to imagine, then, that major oil producers in the Middle East and Africa will see it as in their interest to deepen political and economic ties with China at the expense of the United States. China can also be expected to maintain close ties with oil providers like Iran and Sudan, no matter how this clashes with American foreign policy objectives.

At first glance, the International Energy Outlook for 2009 hardly looks different from previous editions: a tedious compendium of tables and text on global energy trends. Looked at another way, however, it trumpets the headlines of the future--and their news is not comforting.

The global energy equation is changing rapidly, and with it is likely to come great power competition, economic peril, rising starvation, growing unrest, environmental disaster and shrinking energy supplies, no matter what steps are taken. No doubt the 2010 edition of the report and those that follow will reveal far more, but the new trends in energy on the planet are already increasingly evident--and unsettling.

Washington Sleeps for creeps.... As Oil Prices Stir

Washington Sleeps As Oil Prices Stir...

Energy: Will oil hit $250 a barrel? The Russians think so, as crude prices climb to an eight-month high. Meantime, House Republicans advance a plan to help the administration keep a domestic energy promise....

The cost of July deliveries of crude bounced over $73 Thursday as the American Petroleum Institute reported shrinking U.S. inventories as the dollar weakens against the euro.

Alexei Miller, chairman of the Russian energy giant Gazprom, is repeating his prediction of a year ago that oil may eventually reach the $250 mark. That may be wishful thinking on his part, seeing how the Russian economy and military are dependent on oil revenues.

But one thing is certain — a recovering global economy is going to need ever more energy, and it can't wait for switch grass. A wobbly U.S. economy overburdened by current and future debt is likely to face ever-rising energy prices.

House Republicans hope to lower those prices and make a change in our listless domestic energy policy with the American Energy Act. The measure provides incentives for increased oil and gas production on public and private lands and authorizes drilling in a tiny portion of the frozen tundra of the Arctic National Wildlife Refuge.

Rather than planting trees in a Third World backwater, the plan's "carbon offsets" involve building 100 new nuclear power plants over the next 20 years.

With 31 announced reactor applications already in the pipeline, this is a doable goal. It will lower domestic energy prices and clean the air more effectively than an administration cap-and-tax plan that would cause electricity prices to "necessarily skyrocket."

Reprocessing of spent fuel rods, already done by France and other countries, makes nuclear power a renewable resource, one that emits no greenhouse gases. The administration gives nuclear energy lip service while stopping a storage depository for these rods in Yucca Mountain, Nev.

The House GOP is actually trying to help President Obama keep a promise. "In the short term," he said in April, "as we transition to renewable energy we can and should increase our domestic production of oil . . . We still need more oil, and we still need more gas." The House GOP wants to help him do just that.

But in a classic case of the doubletalk we've all become familiar with, the administration is moving in exactly the opposite direction. Its cap-and-trade plan punishes those who produce and use domestic energy. It has proposed eliminating all tax incentives to produce oil and gas, and has slapped a 13% excise tax on all energy coming from the Gulf of Mexico.

Interior Secretary Ken Salazar has canceled 77 oil and gas leases that were assigned to Utah. He stopped plans to lease oil shale rights in five Western states estimated to hold between 1 trillion and 2 trillion (with a "t") barrels of recoverable oil. The Obama administration has decided not to issue leases for gas well drilling on the Roan Plateau in Colorado.

Exploration in the Chukchi Sea off Alaska has been impeded by such developments as the listing of the yellow-billed loon as an endangered species.

Science magazine reports that the U.S. Geological Survey now finds it holds more than anyone thought — 1.6 trillion cubic feet of undiscovered gas, or 30% of the world's supply and 83 billion barrels of undiscovered oil, 4% of the global conventional resources.

We are being denied this by a bunch of loons.

"It's a very nonsensical position we're in right now," Alaska Gov. Sarah Palin told IBD in an interview. "(We) ask the Saudis to ramp up production of crude oil so that hungry markets in America can be fed, (and) your sister state in Alaska has those resources."

The really sad part is that in a nation starved for energy and jobs, we continue to keep our heads in the sand and our energy in the ground....

Mulling Over Why Oil Prices Have More Than Doubled

We return to the matter of oil prices, the questions being: Why have they more than doubled over the last four months; and are they headed still higher in the short term?

Oil today closed above $70 a barrel for the first time in seven months. As a memory-jogger, they were at $33 just in February. But unlike the last explosion in prices -- to $147 a barrel 11 months ago -- no one seems to be ruling out a role on the part of speculation.

Indeed, as the Wall Street Journal’s Ben Casselman has noted, there appears to be a broad consensus that billions of dollars in speculative money has settled in oil, thus driving up the price. The reason is that traders and investors are buying crude, among other commodities like copper, as protection because they don’t want to hold dollars whose value has been weak and volatile.

There is much said about “fundamentals.” That is, more than 2.6 billion barrels of oil is in storage around the world – including some 130 million barrels just on ships that are trolling global waters until prices go up -- and demand shows no sign of recovering. This thinking goes that the speculators have canceled out these fundamental truths.

But, isn’t it possible that the collapse in oil prices to $32 was in itself an overshoot, and that oil is at a truer balance in the $60- to $70-a-barrel range?

That seems as rational a view as any I have heard. Yet, at Alaron Energy, Phil Flynn attributes much of the price runup to Ben Bernanke over at the Federal Reserve. Flynn, normally among the clearest communicators among observers of the market, has been resorting to economic gobbledy gook for weeks about an obscure economic practice called quantitative easing.

we are talking simply about the Fed buying federal assets like treasury bonds. By taking the Fed’s money, the sellers of these assets now have oodles of cash burning a hole in their collective pockets, Flynn argues. And what are they doing with it? Among other things, according to Flynn, buying oil.

John Authers at the Financial Times argues – probably rightly -- that the Fed may keep its current policy in place for some time. But Flynn says that the futures market suggests that the Fed may move quicker than some expect.

Of course, the longer-term trend is clear. Oil prices seem likely to spike again sooner or later because oil companies have halted so many exploration and drilling projects that, when the global economy recovers, there is probably going to be an oil shortage. And we all know what happens in oil shortages....

Don't leave it to the bank executives who will naturally take care of themselves first, maybe the country later.

Obama rejected that option. He was most reluctant to nationalize banks or to assert full control of those zombies that government has had to keep on life support. His political logic was obvious--maintain the appearance of temporary interventions to assist private enterprise and avoid any accusations of left-wing activism. The right called him a socialist anyway.

What are the odds Obama will win his bet? Not so hot right now, despite frequent pep talks from his economic advisers. If you think back to where this crisis began last year and what the authorities described then as their emergency response, big pieces are still missing in action.

Bush's treasury secretary, Hank Paulson, stampeded the Democratic Congress into providing $750 billion to soak up the rotten assets burdening the balance sheets of the largest banks. That plan was not pursued. The rotten assets are still largely there.

Obama's treasury secretary, Timothy Geithner, came up with an alternative approach--a complicated Monopoly game in which government would underwrite private investors to buy up the bad financial paper. That didn't happen either. The bankers let it be known they would not sell the stuff--not at discounted prices, not if it meant admitting the depths of their true losses.

Meanwhile, the government has also ducked the explosive question of derivatives--the casino-like "credit default swaps" that were very, very profitable for banks like JP Morgan Chase but became the time bomb threatening to blow up the entire system. The time bomb is still ticking. The bankers don't want give up that lucrative business. The Obama officials have not yet found the nerve to go against the bankers' desires....because the Siamese twins CIA/MOSSAD still rule the day and have much different agendas.... for the world..... together with the FED.....

Finally, there is the real economy where most Americans dwell. Obama's team is counting on a recovery in the second half of this year and his advisors keep predicting it with increasing confidence. The president is betting on that too. If his optimism is not confirmed by events, his problems multiply. The stock-market restoration celebrated by the bankers will begin to look like another financial bubble, driven by false hopes. Banking problems will worsen and they will he back for still more bailouts. And President Obama will have to take a second look at his happy assumptions. He might start by replacing some of the cheerleaders....

Is Deflation the real enemy...?

Is Deflation the real enemy...then why is OIL spiking up fast again?

http://blog.populistamerica.com/2009/06/bernanke-speak-translated/

The Republicans are convinced that hyperinflation is just around the corner, but don’t bet on it. The real enemy is deflation, which is why Fed chief Bernanke has taken such extraordinary steps to pump liquidity into the system.

The economy is flat on its back and hemorrhaging a half a million jobs per month. The housing market is crashing, retail sales are in a funk, manufacturing is down, exports are falling, and consumers have started saving for the first time in decades. There’s excess capacity everywhere and aggregate demand has dropped off a cliff. If it wasn’t for the Fed’s monetary stimulus and myriad lending facilities, the economy would be stretched out on a marble slab right now. So, where’s the inflation?

Here’s Paul Krugman with part of the answer: “It’s important to realize that there’s no hint of inflationary pressures in the economy right now. Consumer prices are lower now than they were a year ago, and wage increases have stalled in the face of high unemployment. Deflation, not inflation, is the clear and present danger . . .

“Is there a risk that we’ll have inflation after the economy recovers? That’s the claim of those who look at projections that federal debt may rise to more than 100 percent of G.D.P. and say that America will eventually have to inflate away that debt - that is, drive up prices so that the real value of the debt is reduced . . . Such things have happened in the past . . .

“Some economists have argued for moderate inflation as a deliberate policy, as a way to encourage lending and reduce private debt burdens (but) . . . there’s no sign it’s getting traction with U.S. policy makers now.” (“The Big Inflation Scare” Paul Krugman New York Times)

Krugman believes that conservatives have conjured up the inflation hobgoblin for political purposes to knock Obama’s recovery plan off-course. But even he’s mistaken, there’s little chance that inflation will flare up anytime soon because the economy is still contracting, albeit at a slower pace than before. A good chunk of the Fed’s liquidity is sitting idle in bank vaults instead of churning through the system where it could do some good. According to Econbrowser, excess bank reserves have bolted from $96.5 billion in August 2008 to $949.6 billion by April 2009. Bernanke hoped the extra reserves would help jump-start the economy, but he was wrong. The people who need credit, can’t get it, while the people who qualify, don’t want it. It’s just more proof that the slowdown is spreading.

That doesn’t mean that the dollar won’t tumble in the next year or so when the trillion dollar deficits begin to pile up. It probably will. Foreign investors have already scaled back on their dollar-based investments, and central banks are limiting themselves to short-term notes, mostly three-month Treasuries. If Bernanke steps up his quantitative easing (QE) and continues to monetize the debt, there’s a good chance that central bankers will jettison their T-Bills and head for the exits. That means that if he keeps printing money like he has been, there’s going to be a run on the dollar.

Now that the stock market is showing signs of life again, investors are moving out of risk-free Treasuries and into equities. That’s pushing up yields on long-term notes which could potentially short-circuit Bernanke’s plans for reviving the economy. Mortgage rates are set off the 10-year Treasury, which shot up to 3.90 percent by market’s close on Friday. The bottom line is that if rates keep rising, housing prices will plummet and the economy will tank. This week’s auctions will be a good test of how much interest there really is in US debt.

At some point in the next year, the dollar will lose ground and commodities will surge, causing uneven inflation. But for how long? That depends on the state of the economy. Dollar weakness and speculation can drive up the price of oil, (oil is up 100 percent in the last two and a half months, from $34. to $68.) but falling demand will eventually bring prices back to earth. Presently, there’s a bigger glut of oil sitting in tankers offshore than any time in the last 15 years. Which brings us back to the original question; how bad is the economy?

The answer is, really bad! Here’s a short blurb from economist Dean Baker in an article in the UK Guardian: “The decline in house prices since the peak in 2006 has cost homeowners close to $6 trillion in lost housing equity. In 2009 alone, falling house prices have destroyed almost $2 trillion in equity. People were spending at an incredible rate in 2004-2007 based on the wealth they had in their homes. This wealth has now vanished.

“Housing is weak and falling, consumption is weak and falling, new orders for capital goods in April, the main measure for investment demand, is down 35.6 percent from its year ago level. And, state and local governments across the country, led by California, are laying off workers and cutting back services.

“If there is evidence of a recovery in this story, it is very hard to find. The more obvious story is one of a downward spiral as more layoffs and further cuts in hours continue to reduce workers’ purchasing power. Furthermore, the weakness in the labor market is putting downward pressure on wages, reducing workers’ purchasing power through a second channel.” (Dean Baker “Cheerleading the Economy,” UK Guardian)

Don’t be fooled by the cheery news in the media. The economy is hanging by a thread and recovery is still a long way off. The only way to dig out of this mess is to address the underlying problems head-on. That means removing the toxic assets from the banks, revamping the credit system, and rebuilding battered household balance sheets. If these issues aren’t resolved, the problems will drag on for years to come. And even if they are fixed, the economy is still facing a long period of deleveraging and retrenching followed by an anemic recovery. Obama’s fiscal stimulus might give the GDP a jolt in the third quarter, but without help from the government checkbook, economic activity will stay in the doldrums.

Last month, personal savings increased to nearly 6 percent while consumer credit fell by $15.7 billion, the second largest decline in debt on record. According to Brad Setser of the Council on Foreign Relations, “Total borrowing by households and firms fell from over 15 percent of GDP in late 2007 to a negative 1 percent of GDP in q4 2008.” How can these losses to the GDP be made up when private borrowing has vanished without a trace? Consumers have shut their wallets, locked their purses and are refusing to take on any more debt. Despite government efforts to restart the credit markets by backing up loans for 0 percent financing on auto sales and an $8,000 tax credit on the purchase of a new home, (which is tantamount to subprime lending) consumers are digging in their heels. All the hype about inflation hasn’t sent them racing back to the shopping malls or the auto showrooms. Consumers have reached their saturation point and they are not budging. It’s the end of an era.

The unemployment picture is getting bleaker and bleaker. Last week’s report from the Bureau of Labor Statistics concealed the real magnitude of the job losses by using the discredited “Birth-Death” model which exaggerates the number of people reentering the workforce.

Here’s what former Merrill Lynch chief economist David Rosenberg had to say about last Friday’s BLS report: “The headline nonfarm payroll figure came in above expectations at -345,000 in May -- the consensus was looking for something closer to -525,000. The markets are treating this as yet another in the line-up of ‘green shoots’ because the decline was less severe than it was in April (-504,000), March (-652,000), February (-681,000) and January (-741,000). However, let’s not forget that the fairy tale Birth-Death model from the Bureau of Labour Statistics (BLS) added 220,000 to the headline -- so adjusting for that, we would have actually seen a 565,000 headline job decline.”

The BLS figures have been denounced by every econo-blogger on the Internet. The figures are another example of the government’s determination to airbrush any unpleasant news about the recession.

Here’s a better summary of the unemployment numbers from Edward Harrison at Credit Writedowns: “The Business Birth-Death Model added 220,000 jobs to the headline seasonally-adjusted number. Without this number, we are looking at a loss of 565,000 jobs. . . . The number of jobs lost in the last 12 months increased from 5.34 million in April to 5.51 million in May. . . . Other indicators suggest that the shadow supply of discouraged workers not counted in the numbers will now return to the labor force, pushing up the unemployment number. For example, the U-6 unemployment number was a gargantuan 16.4 percent, the highest ever.”(Edward Harrison, Credit Writedowns)

Unemployment now stands at 9.4 percent (16.4 percent?) and will continue to rise whether there’s an uptick in economic activity or not. Businesses are shedding jobs at a record pace, and slashing hours at the same time. The average workweek slipped to 33.1 hours (down two hours from April) a new low. It goes without saying that unemployment is highly deflationary because jobless people have to cut out all unnecessary spending. Beyond the 500,000 layoffs per month, wages and benefits are also under pressure, making a rebound in consumer spending even less probable.

This is from Brian Pretti’s article “Place Your Wagers”: “The year over year change in the Employment Cost Index (ECI) is the lowest number in the history of the data. . . . in the absence of household credit acceleration . . . aggregate demand [will fall].

The year over year change in wages has never been this low in the records of the data . . . Wages and salaries. . . . are all in negative rate of change territory. They are ALL contracting year over year.

“Absent household balance sheet reacceleration in leverage, it sure seems a good bet forward corporate earnings are now as dependent on household wages, salaries and broader personal income as at any time in recent memory. And corporations to protect margins and nominal profits are pressuring wages and salaries downward.” (“Place Your Wagers” Brian Pretti, Financial Sense Observations)

From a workers point of view, things have never been worse. Demand is falling, employers are slashing inventory and handing out pink slips, and entire industries are being boarded up and shut down or shipped overseas.

Economists Barry Eichengreen and Kevin O’Rourke make the case that, in many respects, conditions are deteriorating faster now than they did in the 1930s. Here’s what they found:

1. World industrial production continues to track closely the 1930s fall, with no clear signs of ‘green shoots.’
2. World stock markets have rebounded a bit since March, and world trade has stabilized, but these are still following paths far below the ones they followed in the Great Depression.
3. The North Americans (US & Canada) continue to see their industrial output fall approximately in line with what happened in the 1929 crisis, with no clear signs of a turn around. (“A Tale of Two Depressions,” Barry Eichengreen and Kevin O’Rourke, VOX)

Their conclusion: “Today’s crisis is at least as bad as the Great Depression.”

Yeah, times are tough, but what happens when housing prices stabilize and the jobs market begins to pick up; won’t that put the Fed’s trillions of dollars into circulation and create Wiemar-type hyperinflation?

Many people think so, but Edward Harrison anticipates a completely different scenario. The author takes into account the psychological effects of a deep recession and shows how trauma can have a lasting effect on consumer habits, thus, minimizing the chance of inflation. It’s a persuasive thesis.

‘Here’s what he says, “Richard Koo goes further in his book “The Holy Grail of Macro Economics.’ Here, he argues that the unwind of great bubbles suffers from what he labels a ‘balance sheet recession.’ In essence, companies go from maximizing profits, as they had done in normal times, to a post-bubble concern of reducing debt. Regardless of how much priming of the pump monetary authorities do, the psychology of debt reduction will limit the effectiveness of monetary policy as a policy tool.

“In my view, the catalyst for this change of psychology is the ‘debt revulsion’ that ushers in the panic phase of an asset bubble collapse. (Charles Kindleberger highlights the various stages of a bubble and its implosion in his seminal book ‘Manias, Panics and Crashes.’ In this particular bubble, debt revulsion began post-Lehman Brothers. What we have seen, therefore, is a reduction in leverage and debt as the most leveraged players have gone to the wall. But, more than that, the household sector has gotten religion about debt reduction as the savings rate has increased dramatically since Lehman. In fact, I would argue that companies learned their lesson about debt from the aftermath of the tech bubble. It is the household sector in the U.S. (and the U.K.) which is heavily indebted. Therefore, if the psychology of a balance sheet recession does take form, it will be the household sector leading the charge.

“In sum, the psychology after a major bubble is very different than the psychology before its collapse. The post-bubble emphasis becomes debt reduction and savings, making monetary policy ineffective, not because financial institutions are unwilling lenders but because companies and individuals are unwilling borrowers. These are forces to be reckoned with for some to come.” (Edward Harrison, “Central banks will face a Scylla and Charybdis flation challenge for years” Credit Writedowns)

Seductive interest rates, lax lending standards and nonstop public relations campaigns, persuaded millions of people that they could live beyond their means by simply filling out a credit application or fudging a few numbers on a mortgage loan. These are the real victims of Wall Street’s speculative bubble-scam. For many of them, the agony of losing their home, or their job, or filing for personal bankruptcy will be felt for years to come. At the same time, the experience will keep many of them from getting in over their heads again. The same phenomenon occurred during the Great Depression. The pain of losing everything shapes behavior for a lifetime, which is why the savings rate has spiked so dramatically in the last few months. There’s been a tectonic shift in attitudes towards consumption and there’s no going back to the pre-bubble era.

If Harrison is right, our decades-long spending-spree is over and people will be looking for ways to live more modestly, pay-as-they-go and avoid red ink. This is good news for the economy’s long-term strength, but bad for short-term recovery. Deflation will persist even while savings grow and consumption comes more into line with personal income. The dollar will fall hard if Bernanke continues to load up on Treasuries, but with a few slight adjustments, he should be able to avoid a full-blown currency crisis. Thus, Zimbabwe-type hyperinflation is unlikely; the ongoing slowdown should keep inflation in check.

When the ‘magic moment’ turned to nightmare for BRAZIL...

When the ‘magic moment’ turned to nightmare....


President Lula fancied his country’s economy was ‘decoupled’ from the rest of the world’s. But when the economic crisis reached Brazil this March, it came on a tidal wave. Half a million people are now in poverty or extreme poverty

In May 2008 the US economy had begun its decline, but in Brazil things still looked fine. President Luiz Inácio Lula da Silva reckoned that his country was experiencing a “magic moment” (1): after a 5.67% rise in GDP in 2007, government morale was high. What was going on elsewhere didn’t matter; growth would continue “at its present rate for the next 15 to 20 years” (2).

By October 2008 the international financial system was collapsing. But Brazil still wasn’t worried. “Up there [in the US] the crisis is a veritable tsunami. If it arrives here it will only be a little wave, not even big enough to surf on,” the president said reassuringly in a speech on 4 October. A few months later, Luciano Coutinho, head of Brazil’s national development bank (BNDES), added: “Decoupling has, yes, taken place,” (3), alluding to the theory that the growth of countries on the periphery of the world capitalist system had become independent of the shocks felt at its centre.

Then came March 2009. When the wave did arrive, it brought a storm with it. The Bradesco bank’s estimates of GDP growth plummeted from more than 4% in June 2008 to 2.5% in December – and then to -0.3% this April. The rating agency Morgan Stanley has even predicted a 1.5% contraction in the Brazilian economy, which would be its biggest setback since 1948 (4).

In the last quarter of 2008, Brazil’s industrial output dropped by 19%. Eight hundred thousand workers lost their jobs between October and January (nearly 1% of the workforce), and that doesn’t even begin to take account of job losses in the informal economy, which employs around 40% of Brazilian workers. Half a million Brazilians have found themselves back in poverty or extreme poverty. The “magical moment” has turned into a nightmare from which Brazil will not emerge, according to its president in a speech on 6 April, until “we ask God for the crisis to disappear from Europe, the US and Japan”. More soberly, the Financial Times concluded on 11 March that Brazil’s economic results meant an end to the debate about its immunity from global contagion. The myth of decoupling was over.

None of this is surprising, though, given how much has been done in the past 15 years to increase the country’s dependence on foreign capital. One of the most significant developments has been the acceleration of foreign access to Brazil’s financial markets. This is all the more remarkable as it was made possible by sociologist-turned-president Fernando Henrique Cardoso, whose work aimed to “build a path to socialism” (5) and the former trade unionist, President Lula.

Something Marx never imagined

In the late 1960s, Cardoso, who studied at the EHESS (Ecole des hautes études en sciences sociales) in Paris, rejected the idea that a country on the periphery could develop by means of foreign capital without increasing its dependence: “The system of domination reappears as an ‘internal’ force through the social practices of local groups and classes which try to promote foreign interests” (6). Twenty years later, first as finance minister (1993-4) and then president (1995-2002), he discovered that the world had changed. He told Mais! magazine in 1996: “We have something that Marx never imagined… Capital has very quickly become internationalised and today it has become abundant. Some countries are able to derive profit from this situation. Brazil is one of them”.

Influenced by what he considered the successful economic stabilisation of Mexico and Argentina achieved through neoliberal policies, Cardoso made opening up Brazil to foreign capital the centrepiece of his own plans. The aim was no longer to promote autonomous development by substituting local production for imports. It was to facilitate imports so that they reinvigorated competition and gave a spur to productivity. Cardoso set about changing Brazil in order to woo investors. Tariff barriers came down, exchange controls were freed up and the constitution revised to enable an ambitious programme of privatisations to go through.

Imports leapt by 52.7% between the first and second half of 1994. As a result, many Brazilian businesses closed or had to go into partnership with foreign companies, which accounted for 70% of Brazilian mergers and acquisitions between 1995 and 1999. Somewhat amazed by the brazenness of this denationalisation programme, the staunchly pro-liberalisation Veja magazine observed that “the history of capitalism has rarely seen the transfer of control on such a scale in such a short period” (7).

In 2000 Rubens Ricupero, secretary general of the United Nations Conference on Trade and Development, assessed the effects of economies opening up to foreign capital: “The commercial objectives of the multinationals and the objectives of the host economies do not necessarily coincide” (8). “Not necessarily” is something of an understatement.

Under Cardoso, Brazil deindustrialised and the official unemployment rate almost doubled to reach 9%. Meanwhile headline GDP didn’t get above 1%. Opening up his country’s borders and relaxing exchange controls came at a price: Brazil’s balance of payments (value of exports minus the value of imports) fell from $10.5bn in 1994 to -$3.5bn just one year later. It had been in the black since 1980 but it was to remain in the red until 2000.

Brazil became a dependent nation since, as Cardoso himself put it, “to overcome our deficits we need a constant influx of foreign capital” (9). Efforts to attract that capital redoubled in spite of its harmful effect on the economy. And yet deficits weren’t brought under control.

Investors in Brazil are like investors everywhere: they want as significant a return on their investment as possible and they want to be able to repatriate those profits. Where foreign investment is insufficient to staunch the outflow of capital, foreign debt goes up; in Brazil’s case it rose from $150bn in 1994 to $250bn in 2002.

In a manner reminiscent of the US financier Bernie Madoff, who recently showed that the old pyramid fraud was alive and well, Brazil came up with a “Ponzi scheme”, by which yesterday’s debts are paid off today with borrowing which fuels tomorrow’s debts. The difference was that while Madoff only swindled the rich, the Brazilian government got a whole nation to cough up, in particular through stratospheric interest rates and a raft of austerity measures.

Perhaps this is unsurprising; when an economy is organised for the benefit of speculators, they tend to get preferential treatment. Brazil’s many high net-worth individuals quickly cottoned on to the fact that, with the interest rate so high, buying up debt securities was an enticing prospect. Many businesses have given up on productive investment. Development Cardoso-style became a synonym for financial development. Domestic debt rose by 900% during his presidency, while investment stagnated and became more and more dependent on foreign money, especially in the field of technology.

Cardoso was not the first to want to modernise Brazil, but he had the greatest impact. In 1998, The Economist reported approvingly that Cardoso had achieved in a little less than four years nearly as much as Margaret Thatcher had done in 12. His main opponent in Brazil, Lula da Silva, was less impressed; to him Cardoso was the “executioner of the Brazilian economy”.

Idol of investors

The election of Lula da Silva, a former “red” trade unionist, to the presidency in 2002 caused alarm. “Foreign investors had always wondered how Brazil would behave under a president from the left,” remembers Emilio Odebrecht, heir to the eponymous industrial empire. Lula had, after all, insisted during the 1998 presidential campaign (which he lost): “If it comes to paying interest or filling the stomachs of the people, I’m on the side of the people” (10). In the end though, according to Odebrecht, Silva’s election was “the best thing that could have happened to this country” (11). To the surprise of activists in his own party, once he was president, Lula soon became the idol of the investors and the financial markets.

At the time of his election, the Brazilian economy was dependent on a further loan from the IMF. As the Wall Street Journal explained on 14 August 2002, “The IMF loan is structured to induce the leftwing presidential frontrunners, Luis Inácio Lula da Silva and Ciro Gomes, to continue the conservative economic policies of the outgoing president, Fernando Henrique Cardoso.”

Was Lula already convinced that it was “impossible to govern without the support of the oligarchs” (12)? Perhaps. It’s certainly the case that he readily accepted governing on their behalf. Javier Santiso, an economist at the OECD, was delighted: “The transfer of power between Cardoso and Lula was a lesson in political elegance” (13). Those voters who had been hoping for a break with the past were doubtless less impressed by this display of refinement.

In his speeches, Lula continued to defend the idea of economic sovereignty. (What did it matter that it was precisely due to his country’s economic dependence that it was able to take such advantage of a favourable international economic situation?) If capital was pouring in, it showed Brazil was “becoming its 
own boss”.

But you can’t change a system and at the same time keep milking it. Brazilian exports grew at an average annual rate of 20% in 2003-6, temporarily resolving the balance of payments problem. But those exports were stimulated by a new wave of direct foreign investments, which went from $10bn in 2003 (about 2% of GDP) to the record level of $45bn in 2008 (or 3.5% of GDP). In other words, these exports came at the cost of even deeper penetration of the Brazilian economy by foreign capital.

You need to govern for all and not just for the poor, was Lula’s advice to his Bolivian counterpart Evo Morales on 16 January this year. It’s a recommendation he has taken to heart himself. And if the whiff of prosperity that the country has enjoyed has brought some relief for the working classes – thanks to social programmes that are mainly based on handouts – it has transformed into a veritable avalanche of opulence for the speculators.

In 2007, for example, the inflow of foreign currency linked to the export boom inflated the value of the Brazilian real by around 20% relative to the dollar, while at the same time domestic debt securities enjoyed an annual interest rate of 13%. Foreign investors (or Brazilians who had borrowed dollars abroad at relatively low interest rates) therefore benefited from a return on investment of more than 30% at the end of the year. It’s hardly surprising that internal debt reached 160bn reais in January 2009 (over $680bn) or three times the country’s currency reserves, which the president boasts of as a sign of Brazil’s economic independence. In this arena all that has been achieved is further lining the pockets of the 20,000 Brazilian families who hold 80% of debt securities. Servicing those debts eats up 30% of the federal budget. Less than 5% of that budget meanwhile goes on health and 2.5% on education.

When Lula accepted the status quo on coming to power, he also accepted its vulnerability. As Cardoso himself admitted: “If billions of dollars can enter Brazil, then they can also leave it” (14). In fact, in times of crisis, the periphery goes from a situation of dependence with regard to the centre to a state of total subjugation in view of its need of liquidity. And if currency movements can’t be depended upon to deliver in terms of development, then massive outflows can be relied on to weaken a country’s economy. Therein lies the paradox of dependence: you lose when the dollars come in and you lose again when they go out.

Balance of payments sieve

In the space of a few months, the collapse of the international financial system transformed the Brazilian balance of payments into a sieve through which money poured. Take the commercial balance: it has been declining since 2006 – the value of the real has meant that imports have been growing at a faster rate than exports – and this January it recorded its first deficit in 93 months. There’s no real sign of recovery in sight since the IMF predicts an 11% fall in world trade in 2009. In conditions such as these, it becomes more difficult for Brazil to import the equipment on which its own output depends.

Repatriation of profits and dividends abroad rose to nearly $34bn in 2008 (nearly 3% of GDP), an increase of 50% over the previous year, and of 500% compared to 2003. The current account balance also recorded its biggest deficit in 10 years in 2008: $28.3bn or 2.5% of GDP.

Today, Brazil stresses that it has international reserves of around $200bn to reassure investors worried about the risk of a balance of payments crisis. It was negative in the last quarter of 2008 for the first time since the end of 2005, but with a deficit that was seven times greater, at $21bn, or 1.85% of annual GDP. For the moment, Brazil believes it has a significant room for manoeuvre; its intervention rate was close to 11% this March. However, according to the economist Paulo Henrique Costa Mattos, current liabilities could reach $600bn (15).

With the majority of the world’s countries rushing to get themselves deeper into debt, there’s strong competition on the government bond market; rates will go up and the weight of debts will further press down on the balance of payments and on the shoulders of Brazilians.

There’s nothing new about the phenomenon of dependence. In 1969, the Chilean foreign minister Gabriel Valdés told President Nixon: “Private investment has meant and does mean for Latin America that the sums taken out of our continent are several times higher than those that are invested… In one word, we know that Latin America gives more than it receives.”

In the past, some governments (not only those on the left) defended autonomous development programmes based on import substitution. Such projects were criticised by those who thought that, as they would be run by national bourgeoisies, they were doomed to failure. For those critics there was only one course: social revolution. The sociologist Cardoso was one of them. So, too, was the unionist Lula da Silva.

If Silva had truly wanted to decouple the Brazilian economy when he came to power, he should perhaps have opted for something other than embracing his predecessor’s economic programme. By failing to do so, he exemplified the transformation of a party of the Latin American left, which the OECD economist Javier Santiso described approvingly in these terms: “Expressions such as ‘class struggle’, ‘planned economy’ and ‘strategies of import substitutions’ have been replaced by others such as ‘democratic consensus’, ‘institutional consolidation’, ‘economic deregulation’ and ‘openness to the free market’.”

And so that is Lula da Silva’s box of tricks for tackling Brazil’s current economic difficulties. The US is asked for more trade, and the Brazilians are asked to tighten their belts. And God is asked for a return to the economics of the centre.

What about the foreign investors and the creditors at home? Nothing or very little is being demanded of them. When asked recently about who bore responsibility for the present crisis, the Brazil’s president replied: “We didn’t create the problem but we are part of the solution” (16). One has to wonder....

Silicon Valley, Japan and US Diplomacy

PALO ALTO,, Calif. — The announcement of Silicon Valley attorney and Barack Obama fundraiser John V. Roos as U.S. ambassador- designate to Japan has sparked questions about what this appointment means for the U.S.-Japan relationship. Is the choice of a Washington outsider with no obvious Japan experience a sign of "Japan passing"?

The personal qualifications and interests of the ambassador-designate will become clearer in the coming months under the scrutiny of the press and Senate confirmation. But one can already argue that Roos' experience as a key player in the creation and growth of some of Silicon Valley's greatest companies instead may be just right for the relationship of the U.S. with an emerging New Japan.

As CEO of Wilson Sonsini Goodrich & Rosati (WSGR), Roos leads an institution that is more than just a large law firm in the San Francisco area. WSGR changed the legal services industry by establishing a new type of specialized practice, namely full service legal solutions for new high-tech companies and related industries.

Until John Arnot Wilson established the direct predecessor of WSGR in Palo Alto in 1961, entrepreneurs in what would later become Silicon Valley had little alternative but to go to San Francisco law firms whose expertise and worldview focused on large corporate clients and traditional financial institutions.

Wilson and his team developed a culture as well as a suite of legal services that was responsive to, and aligned with, the needs of high-tech entrepreneurs and venture investors. In 1969, they even took the pioneering step of creating an investment company to manage the stock options that some startup clients were using instead of cash to pay their legal fees.

With a history that includes assisting in the formation of the first Silicon Valley venture capital firms and seeing companies like Apple Computer and Google through initial public offerings, WSGR has played a direct role in shaping the Silicon Valley of the present.

Roos came to WSGR in 1985 as part of an aggressive expansion of the firm from 32 lawyers in 1981 to 97 lawyers in 1986. Promoted to partner in 1988, he became a player in the subsequent exponential growth both of the firm and of Silicon Valley. WSGR now includes around 600 attorneys, and its client base numbers over 300 public and 3,000 private companies. Moreover, Roos, who became CEO in 2005, achieved his professional success during a time of major seismic shifts in the Silicon Valley business environment: several boom-and-bust economic cycles, the emergence of new technology paradigms, and intense globalization.

According to the "2008 Index of Silicon Valley," a language other than English is now spoken in 48 percent of the homes of Silicon Valley, more than double the U.S. national average.

His experience puts Roos at the center of a dense network of personal and business relationships with key players in every aspect of the Silicon Valley new venture ecosystem: serial entrepreneurs, venture capitalists, angel investors, top university innovators and successful venture accelerators, as well as the large firms, opinion makers, journalists and others with whom they interact.

Accordingly, Roos has direct personal insights into the full range of conditions that face the high-tech industries that have come to the forefront of business relationships between the U.S. and Japan. His work as an attorney has required him to recognize and adapt quickly to the corporate cultures and concerns of new clients on a case-by-case basis. His success, achieved in the volatile atmosphere of Silicon Valley, bodes well for his ability to grasp quickly the new patterns of institutional change that are beginning to emerge in what has been termed the New Japan.

The scale and breadth of change already under way in Japan extends to all sectors: economy, government and politics and social structure and culture itself. It has been clear for some time that Japan is in the process of making a major shift toward a more innovation-based knowledge economy.

Japanese government programs and private sector emphasis on increasing the capacity for entrepreneurship, open innovation and global integration all point to some new model of economic competitiveness for Japan. Government itself has been the object of numerous efforts at reform, and the future impact of current demographic trends (low birth rate, aging population) has become a top concern among Japanese citizens as well as policymakers.

Nevertheless, exactly which new patterns will become the stable, dominant characteristics of New Japan is still an open question. This topic is the focus of several recent and ongoing research programs in U.S. universities and research institutions, including some that are being conducted jointly with Japanese counterparts.

The U.S. Foreign Service likewise includes many professional career diplomats with a wealth of experience who have been following all aspects of the evolution of U.S.-Japan relations. Ambassadors are encouraged by the State Department to develop their own signature, country-specific programs.

For example, former U.S. Ambassador to Italy Ron Spogli launched the Partnership for Growth, a comprehensive program to grow a new venture ecosystem, which resulted in a measurable increase in new venture formation and angel and venture investing in Italy.

Any ambassador will have many resources at his disposal to deal with the full range of issues that may appear in the U.S.-Japan relationship. It is his personal experience as a driver of the Silicon Valley innovation machine under conditions of rapid, dramatic change that makes John Roos a very promising choice for ambassador to Japan at the present time....or an expansion of conflicts into South East ASIA....?

Global military expenditure in 2008 is estimated to have totaled $1,464 billion, an increase of 4% in real terms compared to 2007, and of 45% since 1999. Military expenditure comprised approximately 2.4% of global gross domestic product (GDP) in 2008, the Stockholm International Peace Research Institute (SIPRI) writes in its Yearbook 2009.

The Swedish analysts write that the driving forces behind the increase were the wars in Iraq and Afghanistan, Russia's return to the global scene, as well as the growth of China. This may be so, but it appears that growing world tensions were the root cause of these and other factors.

According to SIPRI, the United States' military expenditure was the largest in the world in 2008, $607 billion (41.5% of the world's total). Other large military spenders were China ($84.9 billion), France ($65.7 billion), Britain ($65.3 billion), and Russia ($58.6 billion).

Twenty-five years ago, the world was divided into two warring camps. But the Cold War they were waging, although it cost them much money and effort, actually had a stabilizing effect on the world. The two superpowers controlled their satellite countries, and although the global arms stockpiles were sky-high and mutual rhetoric was very harsh, the number of local conflicts taking place simultaneously was relatively stable.

The disintegration of the socialist bloc and subsequently the Soviet Union disrupted the balance, and the probability of conflicts grew dramatically. New players tried to fill the military vacuum, which resulted in new local wars, including in the former Soviet Union. The number of simultaneous conflicts grew from 25-30 in 1972-1974 to 30-35 in 1985-1986, and peaked at 45-50 in 1992-1993.

After that, their number plummeted, only to start growing again in the 21st century, when the Soviet Union's adversaries in the Cold War increased their military activity.

Many analysts believe that the conflicts in the Persian Gulf and the Balkans would have been unimaginable when the Soviet Union was strong, because its influence alone could prevent Iraq's invasion of Kuwait and the subsequent U.S. Operation Desert Storm to liberate it, and also the interference of foreign powers in the internal Yugoslav conflict.

By the end of the 1990s, NATO and above all the United States unambiguously demonstrated their intention to use military force to solve domestic and global problems. After the terrorist attack against the United States on September 11, 2001, Washington ordered the invasion of Afghanistan and Iraq to liquidate terrorist organizations and lower the terrorist threat. However, these goals have not been attained to this day.

The civil wars in Iraq and Afghanistan were provoked by foreign interference, which local people view as occupation. As a result, more and more innocent civilians are dying in terrorist attacks there and in other countries.

The growing threat of military conflicts has encouraged many countries to increase spending on the acquisition of modern weapons and training of their armed forces. The trend has spread worldwide, from Southeast Asia to Latin America.

Another factor spurring military expenditure is the growing prices of weapons and military equipment. This explains why military expenses are growing although the number of military systems each particular country has is decreasing. A modern fighter plane now costs $30-$100 million compared to $8-$10 million 25-30 years ago, even though the dollar has become considerably weaker.

The Untied States, although it spends over $600 billion on its armed forces, has to gradually cut the number of the main types of armaments, from aircraft carriers to armored personnel carriers. The same is true of other countries, including Russia.

The number of weapon systems is decreasing, but the world is not becoming a safer place....

China desperate to diversify and hedge against US Dollars holdings

http://money.cnn.com/2009/06/05/retirement/next_crisis_americas_debt.fortune/index.htm?postversion=2009060912

China desperate to diversify and hedge against US Dollars holdings

China's fraught relations with the International Monetary Fund are driven by two conflicting agendas - the country's effort to gain unimpeded access to resources in the developing world on bilateral terms, and its interest in using the IMF's facilities as a international organization to issue Special Drawing Rights (SDR) assets to help Beijing diversify away from the US dollar.

At the same time, the West is trying to incorporate China, Brazil, Russia and India, the "BRIC" countries, into the IMF system and thereby assert the continued relevance of Western financial institutions and leadership in the midst of the worst crisis since the modern international regime was created after World War II.

There is a growing sense of urgency behind China's engagement with the IMF as America's enormous recession-fighting budget deficit causes US bond yields to creep up.

The world is starting to share Beijing's publicized anxiety about inflation eroding the value of the dollar and is beginning to think about the unthinkable - a future in which the US dollar is gradually stripped of its historical role as the international currency and something else, maybe the SDR, replaces it.

The potential exists for an important evolution in the function of the IMF - if the Barack Obama administration can keep its eye on the ball and overcome Republican opposition.

The International Monetary Fund and the People's Republic of China do not make for an easy fit. In fact, it's hard to think of two institutions further apart in philosophy and practice than the IMF and the PRC.

In Asia, China's continued economic success during and after the Asian financial crisis of 1997-98 is an open rebuke to the monetary and exchange rate policies promoted by the IMF as the solution to the region's ills.

In the southern hemisphere, China has sold itself as anti-IMF, providing needed investment to ostracized regimes without onerous calls for reform. Now, the global financial system has experienced a major failure triggered by abuses in the developed countries that once used the IMF as their monetary and financial lawgiver to the developing world, and the BRIC countries are being called upon to help save the IMF's bacon.

China cares enough about the world financial system not to let it go down the tubes and is willing to support the IMF in its role as bailout provider of last resort to the hapless European economies like Latvia and Iceland that followed the Wall Street pied piper to financial oblivion.

At the Group of 20 summit in London this spring, China pledged to pony up US$40 billion to do its part in a joint international effort to boost the IMF's lending capacity by $500 billion. But China's engagement with this fading relic of American financial dominance is cautious, equivocal and, it appears, somewhat self-serving.

The IMF and China have been going head-to-head in the developing world. The IMF and its sister project lending organization, the World Bank, have historically demanded conformity to Western requirements for transparency, deregulation, and denationalization - structural reforms - as a precondition for financial assistance. As long as the West was able to maintain a de facto monopoly on foreign assistance this approach won the acquiescence of the targeted states - if not happy economic results.

However, when the Chinese government offered an alternative - one that took the form of a bilateral negotiations between equal sovereign states - developing nations were eager to take it.

Bush misses Africa play

The story of how the George W Bush administration took its eye off the geopolitical ball and allowed the Chinese to steal an economic and diplomatic march in Africa is now the stuff of legend. The case of Angola - where China blew an Italian bidder for an oil concession out of the water with a pre-emptive $2 billion infrastructure credit - is cited as the world's wake-up call. Now Angola has eclipsed Saudi Arabia as China's largest supplier of oil.

China's success in Africa has compelled the IMF to do a little soul searching. Case in point: the revealingly named Exogenous Shocks Facility, intended to provide rapid assistance to developing countries crushed by the collapse in the international economy through no fault of their own.

The IMF also excited a flurry of enthusiasm when it announced that it would abandon the structural reform requirements that are the hallmark of its detested and counterproductive interference in local economies. However, it turned out that the structural reform requirements have only been waived for a select group of countries already meeting the IMF criteria, so that a round of paperwork can be eliminated.

It appears that the IMF is trying to work through the crisis as an isolated anomaly, not a sea change in the structure of the international economy and a power shift away from the United States and Europe model of open-market globalization to the rise of a network of Chinese-style, managed, bilateral and multilateral trading arrangements in goods and services.

The IMF has not endeared itself to Beijing as it has championed the interests of Western creditors, the US government, and American and European mining firms to pressure the government of the Democratic Republic of the Congo to renegotiate one of China's biggest overseas resources deals - a $9 billion infrastructure project for copper and cobalt transaction.

China's ambassador to the DRC angrily characterized the IMF's stance as "blackmail". Yu Yongding of the Chinese Academy of Sciences was undoubtedly reflecting internal official attitudes to the IMF when he spoke to China Daily in the run-up to the G-20 conference: "They [developed countries and pressure groups] have already targeted our wallets but we have many reasons to object," said Yu, a formal central bank advisor. "If we do so, it will seem like the poor is rescuing the rich, wouldn't it?"

He added that China's friends in the developing world have cautioned against giving loans to the IMF. "Even if you do decide to do so, the sum should not be big," Yu quoted them as saying.

Reuters also picked up on the story, describing a white paper critical of the IMF's coddling of rich states that the Chinese government circulated prior to the summit:

[The] section on the IMF touches a raw nerve because of China's belief that the Fund spends too much time lecturing developing countries on how to run their economies.

According to this line of thought, the Washington-based fund could have tempered the present crisis by sounding the alarm earlier and louder about the economic imbalances building up in rich countries, notably the United States, whose voting share gives it the power to veto the most important IMF decisions.

"The IMF should strengthen oversight over macroeconomic policies of all parties, particularly the major reserve currency economies, and provide oversight information and improvement recommendations to its members on a regular basis ... " the paper says.

Diplomats say China has still not forgiven the fund for introducing new currency surveillance rules in June 2007, at Washington's behest, that make it easier for it to determine whether a country is keeping its exchange rate fundamentally misaligned to boost exports. Beijing objected to the rulebook, regarding it as a US ploy to enlist the fund in its campaign for a stronger yuan.

Insurmountable bias

The Chinese consensus appears to be that the IMF's pro-Western bias is institutionalized and, for the time being, insurmountable. The key advantage of the developed countries resides in the fact that important decisions require an 85% vote.

The United States holds a 17% voting share, giving it a veto. Even if the US vote share dropped below 17%, the change would be more symbolic than real unless there was also a massive shift in voting rights away from US allies in Europe and Japan to the BRIC countries and the developing world.

Not surprisingly, China is already looking beyond the IMF to a new regional grouping to provide financial support to Asian economies.

On May 29, 2009, Forbes reported:

A key breakthrough came early this month when ASEAN plus three, [the Association of Southeast Asian Nations plus China, Japan and South Korea] ... finally agreed in Bali to create a US$120 billion regional reserve fund. The deal came after China and Japan, the two largest contributors to the fund, buried their hatchets and agreed to each fork out an equal sum, or 32% of the total needed to create the fund.

If the regional reserve fund succeeds, it would represent the first regional institution in Asia that is blessed with real financial power and with teeth to enforce discipline among members. But the hard part is only beginning, with negotiations to set up a multilateral surveillance institution now under way. The success, or the lack of it, will determine how far Asia will move towards regional integration. Hadi Soesastro, senior fellow of Jakarta-based Centre for Strategic And International Studies, said the new institution wasn't designed "to replace the IMF, but to supplement it."

Given this context, it is not surprising that China's engagement with the IMF is a matter of situational advantage, not enthusiastic endorsement. Nevertheless, Beijing's pursuit of its priorities might bring revolutionary changes to the IMF.

Beijing appears most interested in exploiting the IMF's desire for increased cash and continued relevance as a means of reducing China's exposure on the inflation-threatened US dollar.

US inflation is a major concern of the Chinese government. The US budget deficit in 2009 will reach an eye-popping 12.9% of gross domestic product. The IMF (irony alert) endorses a 3% cap for states with their financial house in order.

During US Treasury Secretary Geithner's recent visit to China, Yu Yongding took him to task, as Bloomberg tells us:

The US should take China's interests into consideration "so that your own interest can be protected," Yu said. "You should not try to inflate away your debt burden." China could still diversify some of its Treasury holdings into euros or commodities, Yu added.
"Yes, some people say the euro is very weak," Yu said. "Okay, weak is good, we'll buy very cheap."
The best outcome for China would still be to negotiate with the US and reach agreement on its Treasury holdings, Yu said. "The borrower should keep their promises," he added. "The US should be a responsible country."

China is, one would imagine, guardedly hopeful that the Barack Obama administration will be able to fix the US economy, cut the deficit down to reasonable size, and get international trade (and Chinese exports) humming again.

But it also doesn't want to be under the US gun and be forced to buy Treasury bills to finance a yawning deficit simply because Beijing has no place else to put its money. So China is looking for options, and not just the euro threat that Yu wielded.

A roundtable of Chinese economists convened on the occasion of Treasury Secretary Geithner's visit this month expressed the majority view that holding US bonds was risky, and advised the careful, long-term diversification of dollar holdings into "tangible and strategic commodities," equities and bonds, and through overseas mergers and acquisitions.

In addition, China is pursuing several avenues for decreasing dollar exposure that involve utilizing and repurposing the primary supranational financial institution - the IMF. Somewhat opportunistically, China proposed that the IMF sell off 400 tons of gold in order to finance its operations. One of the main likely purchasers of that much gold would, of course, be China, which recently surpassed Switzerland as the world's fifth-largest holder of gold reserves.

Nudging IMF away from dollar

In a development of considerably more long-term significance, China is also trying to nudge the IMF into creating large-volume and liquid internationally tradable financial instruments that are not dollar-based.

China's stated interest in funding the IMF's emergency fund through a $40 billion bond purchase is bound up in the suddenly not-so-arcane issue of Special Drawing Rights. In March, the president of the People's Bank of China, Zhou Xiaochuan, proposed that the world should look at transitioning from the US dollar to the SDR as a reserve currency.

The SDR is a little-used fiat currency that the IMF is authorized to issue. It is based on a basket of currencies: at present, the US dollar accounts for 44%, the euro 34%, the British pound 11% and the Japanese yen 11%.

Since the SDR is a universally accepted international financial instrument whose value does not rely on solely on the dollar, the Chinese are interested in it as a chance to hedge, albeit partially, against a potentially tanking dollar.

Zhou invoked John Maynard Keynes, who proposed a supranational currency at the time of the Bretton Woods conference in 1944 as the most logical, multi-polar solution to international settlement of accounts. However, Mr Zhou probably derives his enthusiasm for the SDR from philanthropist George Soros and economist Joseph Stiglitz, enthusiastic cheerleaders for the SDR, rather than from a close reading of Mr Keynes.

Both Soros and Stiglitz consider the US dollar an inappropriate currency for the international settlement of accounts because of the vast deficits the US has been running.

Foreign governments with a surplus of dollars find that the only safe haven of any size is the US Treasury market, so that the world economy is, in effect, doing business in order to subsidize US deficit spending. Shifting toward a new international currency, such as the IMF's SDR, would tie currency creation to actual terms of trade instead of to the US deficit; the US government would be forced to live within its means; developing countries would invest their SDRs in development projects instead of Treasuries; and nirvana would ensue shortly.

China's floating of the SDR issue provoked a spasm of terror on America's far-right wing, which raised the specter of a new world currency supplanting the dollar inside the United States. Among mainstream economists, the general response has been that replacement of the dollar by the SDR in international settlements is "not gonna happen".

Despite professions of bafflement and scorn from Western economists, the prospect of SDR bonds has elicited strong interest from all the BRIC countries, especially Russia - an indication that people who actually run economies rather than simply talk about them find the SDRs a potentially valuable and significant development.

Indeed, the evolving relationship between the IMF, the SDR, and China offers some interesting wrinkles. The potential creation of SDRs is connected to the "New Arrangements to Borrow" (NAB) - the initiative announced at the Group of 20 summit to increase the IMF's ability to lend by $500 billion.

The NAB is designed to be pain- and cost-free: a pre-emptive show of financial force modeled on the guarantees the US government is providing to American financial institutions, in this case demonstrating that the IMF was backed by an additional $500 billion in commitments.

The purpose is to convince the financial markets that banks and markets in target countries are backed by ample resources from the IMF and are viable, so that credit will ease and lending resume - without the IMF (or its backers) having to actually disburse the cash.

The philosophy was recently put on display in Poland, which received a $20 billion commitment - not $20 billion - from the IMF as an expression of confidence in its reasonably healthy economy and financial sector.

The proposed $100 billion contribution to the NAB proposed by President Obama at the Group of 20 meeting isn't cash either - it's a credit line, to be drawn if and when the IMF needs it. Japan has already provided a similar $100 billion facility.

Cash - not credit

Interestingly, the BRIC countries aren't interested in offering a credit line, despite the seemingly attractive possibility that it might never be called on. They want to expend hard cash to lend money to the IMF today - by buying bonds - and get some of those diversified SDRs in return.

Surprisingly, the dominant force in the IMF - the Obama administration - does not appear hostile to the SDR.

Obama's economic brain, Office of Management and Budget director Peter Orszag, is a follower of Stiglitz. There are signs that the Obama administration accepts the idea that being able to fund US deficits through creation of international fiat currency creates a moral hazard, and that China's desire to move away from the dollar is understandable and, from a macroeconomic point of view, perhaps even desirable.

Whether the NAB facility and the coveted SDRS ever materialize will be decided by running the gauntlet of the US Congress. Unfortunately, the Obama administration seems to be recapitulating, rather disastrously, its missteps on the closing of Guantanamo.

The remaining $400 billion in support is contingent on the US coming up with its $100 Billion - just as, in the case of the Guantanamo closure, Europe was going to take Uyghur detainees if the US took a few....

The White House has not been able to frame or sell the IMF credit line very effectively. Domestic consensus building has largely been limited to the release of a letter from the Bretton Woods Association - albeit with an impressive bipartisan list of signatories including Henry Kissinger, Condoleezza Rice, Paul Volker, Brent Scowcroft, Colin Powell, and Robert Rubin - urging arrangement of the credit. [1]

Instead of simply defining the $100 billion as a credit, Orszag awkwardly characterized it for budget purposes as a low-risk swap of assets whose risk, if it took place, had a 5% risk of default, that is a budgetary cost of $5 billion. [2]

In order to speed approval of the credit line, the IMF credit line was tacked on to the Supplemental Appropriation for the Iraq and Afghan wars. The Senate passed the appropriation but House Republicans have seized on the issue - as they did the case of Guantanamo prisoners - as a way to defeat Obama both domestically and in the eyes of the international community.

It looks like the NAB issue will be misleadingly painted as a $100 billion giveaway to bail out Old Europe and a profanation of the sacred cause of funneling $98 billion to deserving troops and contractors without distracting amendments.

The White House's efforts to whip the bill through the House of Representatives are complicated by liberal anti-war and anti-IMF activists' attempt to add about 40 Democratic "no votes" to the Republicans' and defeat the Supplemental.

The Obama administration will have to decide if it is worth expending its political capital to fight for the rather remote and abstract imperative of a contingency fund for the IMF. If it doesn't, the entire refinancing of the IMF may go down the tubes.

For the purposes of China, the NAB will offer an interesting possibility if it goes ahead. If the credit was drawn down, the US would be holding IMF securities denominated in SDRs - which it could sell to China. Likewise for the Japanese $100 billion and, presumably, the other credit lines. And those proposed bonds will be denominated in SDRs also.

Half a Trillion dollars in SDR-denominated securities is not going to topple the US dollar from its throne as the world's reserve currency. But it would provide a significant haven for a chunk of China's US dollar reserves - now north of $1.5 trillion - if and when Beijing decides that it wants to decrease its exposure to the dollar.

And it would give China a compelling reason to support the survival of the IMF - and the continued creation of SDRs.....

This is a tale of two very powerful nations. One, called the world’s only Superpower, has a very aggressive foreign policy with a massive network of military installations around this planet. The other, the world’s skyrocketing economic power, has a low-key foreign policy and no real military presence except within its borders. America and China, with two distinctly different philosophies and agendas are on a collision course that will determine which of them will lead the world in the decades to follow.

China is ruled by a Communist government, but it also has a capitalistic economic system. Among major industrial nations, China has the most dynamic, fastest growing economy. Its projected growth for 2009 is 6 percent while America and the rest of the world are just trying to survive. Its military budget is minuscule, less than 10 percent of America’s. It is involved in no foreign wars. Because its economy depends a great deal on petroleum imports, it has been very active in setting up contracts and agreements for oil all around the world, including South America, with very aggressive business and diplomatic efforts.

America is a democratic republic, governed by an elected president and Congress with a capitalistic economic system. Its economy has been in a steady decline for some time as U.S. corporations have aggressively outsourced millions of manufacturing jobs. Its military budget is larger than all other major industrialized nations in the world combined. The U.S. maintains a military presence in more than 750 installations around the world and is involved in conflicts and occupation in both Iraq and Afghanistan. It imports most of its petroleum needs from foreign sources and its military is actively engaged in securing and protecting its oil interests in various parts of the world.

Yes, these are two very powerful nations whose agendas in world affairs, economic strategies, and use of military resources could hardly be more different. And, yet, these two nations are locked together in the world’s largest economic arrangement -- at least for the time being.

How did America ever get to the point where it is so dependent on Chinese manufacturing and the need to continually borrow from it to finance those purchases? How did America go from once being the premier creditor nation in the world to the premier debtor nation?

Since the 1980s, America has transformed itself from the world’s premier manufacturing juggernaut into a nation that has concentrated on outsourcing manufacturing to nations all over the world while morphing into a service economy. The long-time tenuous and adversarial relationship between unions and managements finally caused a total rupture that saw corporations put outsourcing into high gear. That enriched CEOs, increased profits and stock values, enriched investors and, thereby, initiated the demise of the American working class.

At that point, manufacturing, the cornerstone of America, began a rapidly escalating decline. This was the defining moment for an economy that relies on consumers for 70 percent of GDP. When that turn away from manufacturing and embrace of rampant outsourcing took place, it guaranteed an ongoing decline in its economy as the purchasing power of the working class Americans began to erode.

During this period, Japan was the rising economic star and began accelerating its manufacturing engine. China was not much of a real factor as a top economic player but it was beginning to show real potential power. So Japan’s presence on the American stage underwent a stage of rapid growth as it entered into US automobile and electronics markets as a major force that could provide quality products at extremely competitive prices.

How did the U.S. corporations react to this potential threat to their supremacy? They continued their process of outsourcing every type of manufacturing that they could to whatever overseas sources with cheap labor they could find. Of course, the U.S. auto industry years before had set up manufacturing plants in Europe and other nations overseas. Now they would watch as various foreign auto manufacturers, Japanese, German, and others returned the favor and set up plants in America.

So here we are, but what does the future hold? Well, China holds the trump cards and most of the aces. It patiently watches and waits as America continues to spend itself into economic oblivion with a never-ending war on so-called Islamic terrorists and the continued massive importing of products once produced in America.

China, at least for the time being, is continuing to loan us billions of dollars while watching our trade and national deficits rise to astronomical heights. Out of the nearly $2 trillion that China holds in foreign exchange reserves, about $1 trillion is in U.S. government securities. This massive transfer of wealth from the U.S. to China cannot continue unabated for it is eroding the economic foundation of our nation. What must we do?

One of the answers to this dilemma is that America simply cannot and must not allow this situation to continue to deteriorate. It must rebuild its manufacturing base and reverse the destructive outsourcing of jobs or we will never restore our economic foundation.

Robert Reich, former Labor Secretary under President Clinton and a noted economist, in a recent article indicated that we are losing routine jobs, including traditional manufacturing jobs but not to worry because they will be replaced in the future by “symbolic-analytic work” by “people who analyze, manipulate, innovate and create. These people are responsible for research and development, design and engineering or for high-level sales, marketing and advertising. They’re composers, writers and producers. They’re lawyers, journalists, doctors and management consultants.”

Well, Mr. Reich is the economist and I am not, but I don’t buy into his reasoning at all. This appears to be the same old theory, slightly repackaged, that we heard in the 1980s about how the service economy was the way of the future for America. My point is this: you can create all the symbolic-analytic jobs you want but, if we do not have a sizable portion of the American workforce performing work that takes some form of raw materials, together with labor, to create products that are purchased by Americans and exported to foreign nations, the majority of Americans will not have the purchasing power to fuel our consumer-driven economy.

We can rebuild our manufacturing base if we can change the poisoned philosophy of corporate outsourcing that has led to enormous corporate profits and the destruction of the American workforce. Mr. Obama and the Congress must enact appropriate legislation, and they most certainly have the power, that provides tax credits to corporations that do not outsource or to those that bring jobs back. Secondly, those corporations that continue to outsource must be assessed tax penalties.

In addition to returning outsourced basic manufacturing jobs to America, a great potential lies with developing a massive new green industrial sector where government stimulus dollars and private funds create new jobs to manufacture solar panels, windmills, rapid transit systems and various new energy sources to replace fossil fuels. Besides reversing the outsourcing of American jobs, there is no better way to solve our economic problems than by the aggressive promotion of programs to develop new sources of energy.

It’s time for the American people to say “enough is enough” and demand that President Obama begin the very necessary process of reversing our extremely aggressive and expensive military presence around the world that is causing a terrible hemorrhaging of our economic base. Our national debt is increasing so rapidly that it is becoming unsustainable. Our foreign wars, occupations and the maintenance of that huge complex of military installations around the world are bleeding America dry. Our government must understand that it is now time to scale back this entire military machine before it is too late and we find ourselves entering national bankruptcy. The question is how in the world do Obama and our leaders in Congress not understand that our military actions and policies are bringing America to the edge of bankruptcy?

What will happen if we do not have the wisdom and the courage to change? First of all, our debtor position with China will reach such massive proportions that China, at some point, will announce that it can no longer continue lending America the many billions of dollars as in the past; and that, in fact, it will put a moratorium on any more loans until America puts its economic and monetary systems in order. At this point, the value of the dollar would be in distinct danger and could unravel so quickly that it would no longer be used as the world’s reserve currency.

The funding for the entire military complex around the entire world would rapidly begin to dry up. The U.S. would have to close the majority of these bases. And when that happened, what in the world would we do with the thousands upon thousands of our military that, when discharged, would have no job opportunities in a failing economy?

Signs of great concern are beginning to emerge from China. A report coming out of China states that the chairman of the state-controlled China Construction Bank, Guo Shuqing, is looking into the possibility of issuing loans to Chinese import/export companies in yuan, the base Chinese currency. This would allow domestic Chinese and foreign trading companies to use the yuan to settle their debts instead of the U.S. dollar. Also, China has been switching their U.S. treasury securities from longer to shorter terms recently.

I am not saying that China wants the American economy to collapse -- not at all, for China knows that America is its cash cow, for now, and it would be happy to continue to feed at this financial trough. However, realists that they are, the Chinese clearly see that America is headed on a dangerous course that threatens to collapse its economic foundation and they may be positioning themselves for that eventuality.

Another scenario, not a pretty one, would involve foreign creditor nations, most notably China, buying up all sorts of American corporations. In fact, this scenario is already underway with Chrysler and General Motors both going into bankruptcy proceedings. Chrysler will survive, at least for a while, with Fiat of Italy owning most of the assets and managing the operations. General Motors is shedding several auto divisions, with a Chinese industrial conglomerate buying the Hummer line of GMC. This scenario may be the model for the future, as more and more U.S. corporations fail because of bad management and greed and various foreign nations, with China at the forefront, acquiring American corporate resources for pennies, nickels or dimes on the dollar.

America has now painted itself into a corner economically. There are few signs that the Obama administration and the Congress understand the urgent need to aggressively promote a rebirth of manufacturing and rapidly reduce our military presence across the planet. If they do not have the vision and the courage and cannot dedicate themselves to the best interest of the American people, then this is what will happen: China will become the preeminent economic power in the world. The American dollar will no longer have any significant effect on world commerce and will be replaced. Our vast military establishment around the world will rapidly disintegrate, as there will be no funds to further fuel its existence. At that point, America will have forfeited its position as the world’s leading economic power and as the lone Superpower.

Message to President Obama and the U.S. Congress: If ever there was a time for real change in America, that time is now! .

Notes
1. To view the document, click here.
2. See http://cboblog.cbo.gov/?p=270
3. http://seekingalpha.com/article/138388-more-on-china-s-efforts-to-hedge-against-its-usd-holdings

Iran Signs Major Gas Deal With China; Is Europe Next?

Iran has found its long-sought-after partner to help develop part of the world's largest natural-gas field, even as the possibility of linking it to a future pipeline to Europe seemed to rise.

China came out the big winner on June 3 when representatives from the China National Petroleum Corporation (CNPC) and the National Iranian Oil Company (NIOC) met in the Chinese capital and signed a $4.7 billion contract for developing Phase 11 of the South Pars gas field.

South Pars, shared between Iran and Qatar, has estimated gas reserves of some 14 trillion cubic meters, enough to supply Europe's gas needs for about a quarter of a century.

The CNPC's gain is the French energy company Total's loss. In 2004, Total signed a memorandum of understanding with NIOC to develop Phase 11, one of 24 sections that make up the Iranian part of South Pars, and among those with the highest potential.

However, according to Iranian officials, the French company delayed signing the final agreements for too long, despite warnings from Tehran that time was running out. Total said just a few months ago it would not be ready to sign such a contract for some time yet.

Total, in an official statement released on June 3, said it still wants to be part of the deal, but that does not appear to be an option. However, the Iranian government is offering the French company an opportunity to participate in the development of other sections of South Pars and in the production of liquefied natural gas.

NIOC managing director Seifollah Jashnsaz, who was in Beijing for the signing, told reporters he hoped daily production at the site would reach some 50 million cubic meters (some 18 billion cubic meters annually).

The deal is a boon for China because the country's continued economic growth hinges on access to energy resources. Iran profits not only from the Chinese investment but also from a high-profile agreement that demonstrates Tehran can attract partners to major projects, despite international sanctions.

Nabucco Hopes

Meanwhile, in comments that highlight Iran's potential as an energy exporter, U.S. special energy envoy Richard Morningstar on June 4 left the door open for Iran to participate in the Nabucco pipeline project if relations between Washington and Tehran were normalized.

Nabucco is set to extend from Austria to Turkey's eastern borders.

However, Morningstar explained clearly that including Iran in the project -- an EU-led initiative that Brussels hopes can pipe Caspian and/or Middle East gas from the South Caucasus, across Turkey, and into Europe -- without first resolving the issue of Iran's nuclear-development program could "have a negative effect."

This comes at a time when the new U.S. administration is calling for renewed dialogue with Iran.

Morningstar was speaking in Turkey, which plays a key role in the Nabucco project. Technically, the project description on Nabucco's website describes the pipeline as "starting at the Georgian/Turkish and/or Iranian/Turkish border."

While Nabucco's route is fairly certain, its sources of gas are not. Nabucco plans to bring some 31 billion cubic meters (bcm) of gas annually and hopes to include gas from the Caspian Basin and Middle East in the pipeline.

But so far, Azerbaijan and Egypt seem to be the only committed suppliers -- providing only enough gas for the first phase of the project (8 bcm annually).

None of the Central Asian states have made any specific pledges to supply gas for Nabucco. Iraq appears to be interested but that gas is in Iraq's Kurdish region and the regional government there and central government in Baghdad are not in agreement on all the details of gas sales.

Iran, with the second-largest gas reserves in the world, could fill Nabucco by itself. Nabucco's website indicates the pipeline's shareholders envision a day such as the one Morningstar spoke of, when better relations between Iran and the United States remove the obstacles to Iran's participation in energy-resource development and exports.

The Big Collapse Could Be Very Near

The Federal Reserve appears to be increasingly nervous about the long term bond market. This is serious. How panicked are they? After leaking a story on Friday, they are back at it on Sunday.

The Federal Reserve leaked to CNBC’s Steve Liesman on Friday that they weren’t targeting long rates. Why such a leak? Probably because the Fed did not want to appear impotent in controlling the long rate. So they put out the word through Liesman that they weren’t targetting the long rate. Can you imagine what would happen to the markets if it sensed long rates were beyond the control of the Fed?

The Fed can of course print money to buy up every Treasury bond in existence, but the inflationary ramifications would be Zimbabwe like, and crush the dollar on international currency markets. Are we near the phase where all hell breaks loose? I have never even answered, maybe, to this question before. It’s always been, “no.” Now it’s maybe.

What really has me spooked is another article out this afternoon (on a Sunday) that Drudge has even picked up. It’s a Reuters story by Alister Bull. The headline: Federal Reserve puzzled by yield curve steepening.

Translation, the Fed doesn’t know what is going on, but they are really scared.

Here’s more from Bull:

The Federal Reserve is studying significant moves in the U.S. government bond market last week that could have big implications for the central bank’s strategy to combat the country’s recession.

But the Fed is not really sure what is driving the sharp rise in long-dated bond yields, and especially a widening gap between short and long term yields.

Do rising U.S. Treasury yields and a steepening yield curve suggest an economic recovery is more certain, meaning less need for safe haven government bonds and a healthy demand for credit? If so, there might be less need for the Fed to expand the money supply by buying more U.S. Treasuries.

Or does the steepening yield curve mean investors are worried about the deterioration in the U.S. fiscal outlook, or the potential for a collapse in the U.S. dollar as the Fed floods the world with newly minted currency as part of its quantitative easing program. This might be an argument to augment to step up asset purchases.

Another possibility is that China, the largest foreign holder of U.S. Treasury debt, has decided to refocus its portfolio by leaning more heavily on shorter-term maturities…

An obvious culprit for the move in bond yields is the country’s record fiscal deficit, which will generate a massive amount of new government issuance.

The U.S. Treasury must sell a record net $2 trillion in new debt in 2009 to fund a $1.8 trillion projected fiscal deficit, resulting from falling tax revenues, an economic stimulus package and sundry bank bailouts.

It’s the Chinese, and any other Treasury bond buyer who follows the markets, that have pulled away, to varying degrees from buying Treasury long securities. No one wants to be the last one holding bonds, where the new debt about to be issued is in the trillions.

Bull continues with the part of the message the Fed really wanted to get out: With officials still grappling to divine the factors steepening the yield curve, a speedy decision on whether to ramp up the Treasury debt purchase program or the related plan to snap up mortgage-related debt seems unlikely.

“I’m in wait-and-see mode,” said one Fed official who spoke on the condition of anonymity. “We laid out the asset purchase plan and we’re following it. That is going to have some affect on various interest rates, but together with a hundred other things. So I don’t think we should be chasing a long-term interest rate,” the official said. It’s the same message as Friday. The Fed does not want to spook the world into thinking that it can’t push long term rates down, so it says it is not trying. But if rates continue to climb, a panic out of Treasury securities is a very likely scenario. And Bernanke has only one play to force long rates back down, buy every long bond in sight, which of course is highly inflationary and puts upward pressure on rates. How’s that for a dilemma?

The end of the current financial system, as we know it, may be imminent. If you would have asked me even two weeks ago if collapse was imminent, I would have said it was highly unlikely, now I am saying it is possible. Bernanke may be able to patch things up short-term, if he is lucky, but in the long term the U.S. financial structure is in serious trouble. There is just too much Treasury debt that needs to be raised. An international panic out of Treasury securities, even a slow controlled panic, means the Fed will be the major buyer. This will ultimately mean record inflation.

And keep this in mind, we have never seen a collapse of a currency like the dollar. Even the hyperinflation during Germany’s Wiemar Period can not serve as an example. Since the dollar is the reserve currency of most of the world, a panic out of the dollar means more dollars will return to the U.S. shores than any country has ever experienced.

Other countries have had collapsed currencies, but never in the history of world of finance has so much currency been held outside a country of issue that could come flying back, almost on a moments notice. If the panic out of the dollar starts, even if Bernanke stops printing money (unlikely), all the dollars flying back into the U.S. could cause a huge price inflation all on its own....

Stolen US Government Gold Reserves.....

Could the theft and economic destruction of America go even deeper than we are led to believe? The Federal Reserve does whatever it wants without audit or oversight, we certainly know that. Are the U.S. gold reserves being quietly 'redistributed'?

Criminal syndicates do what they best know.......steal.

No credible audit of the Sovereign U.S. Gold Reserve will EVER be allowed – because the gold is simply not there.

Did U.S. Export Over 175 Million Ounces of Gold?

The United States Geological Survey (USGS) publishes monthly Mineral Industry Surveys with one series that focuses on gold production, imports and exports. These reports include information from the U.S. Census Bureau on the quantities of refined gold bullion and gold compounds exported from the US.

The latest monthly report is from February 2009, which includes data for 2008 and early 2009. The February 2008 report is the oldest of these reports available at the USGS Web site (www.usgs.gov), which includes data for all of 2007. For prior years, there are annual reports that do not lay out the data in the same format.

In 2008, domestic U.S. gold mine production was reported at between 228 and 230 metric tons. Since a metric ton contains 32,151 troy ounces of gold, that means U.S. mine output was somewhere between 7.33 million and 7.395 million troy ounces last year. In 2007, gold mine output was about 244 tons, or 7.845 million troy ounces.

U.S. net exports (gross exports minus imports) of refined gold were about 10.8 million ounces in 2008 and 11.2 million ounces in 2007.

The intriguing statistics contained in these two annual totals is the net exports of gold compounds. For 2008, there were net exports of 2,818 tons (90.6 million ounces) of gold compounds. In 2007, the net exports were 1,988 tons (63.9 million ounces).

Rob Kirby of Kirbyanalytics in Toronto contacted a USGS employee knowledgeable in the preparation of these reports. This employee told Kirby that the USGS had contacted the U.S. Census Bureau to confirm the accuracy and details of gold compounds exported.

According to the Census Bureau, gold compounds include industrial type products containing low percentages or amounts of actual gold content, with gold paint being given as one example. Kirby mentioned to the USGS employee that the increase in net exports from 2007 to 2008 did not make sense given the global economic downturn. The USGS employee acknowledged that the figures did not make sense, which was one reason that the Census Bureau had been contacted to confirm the data.

Kirby then observed that the high value of such exports did not make sense if it could include only industrial goods, given the decline in global commercial activity. Rather, Kirby speculated the amount of gold exported indicated that it was more likely to be gold bullion or equivalent forms. To this, the USGS employee responded, "That would be correct."

So, for 2007 and 2008 combined, the U.S. exported 22 million ounces of refined gold and over 154 million ounces of "compound gold." This is more than 11 times U.S. gold mine production during those two years. In fact, this is higher than global gold mine output. Where did all this gold come from?

This amount of gold exceeds what is held by all private parties in the U.S. combined. When the U.S. government called in gold in 1933, it then melted down the coins without refining. As a result, such bars from the coin melt would have a purity of around 90 percent gold. These would not qualify for description as refined gold, but could fit the definition of compound gold.

In the past few years, several gold traders have commented that a surprising number of coin melt gold bars were being delivered in London and Zurich markets, bars which almost certainly came from the U.S. Treasury vaults.

It is possible that some of these gold exports could be the repatriation of foreign central bank gold that had been stored with the New York Federal Reserve. Such transfers would be classified as "exports" for purposes of this report. The other possibility is that it could be gold formerly held by the only central bank in the world that had that much gold - the United States.

Wherever this gold came from, it is bad news for the U.S. government. If foreign central banks are pulling their gold reserves out of storage in the U.S., that signals lost faith in U.S. financial strength, which the U.S. government would not want the general public to learn about. If the U.S. government has actually been exporting its own gold, while still trying to pretend that the quantity in its vaults is unchanged, confirmation of such exports would clobber faith in both the U.S. government and the dollar.

The U.S. government has not had a genuine audit of its gold holdings in decades. In recent years, it has changed the description of gold holdings in reports so that now it is only described as "custodial gold" rather than gold reserves.

The so-called experts such as the World Gold Council, GFMS, and CPM Group do not include the appearance of all these gold supplies in their reports on global gold supplies and demand, which makes their analyses grossly inaccurate.

The U.S. government has a huge interest in hoping that the general public will not notice or care where all this gold came from. On the other side, for their personal financial protection, Americans urgently need to know the source of all this gold.

Kirby released his report last Friday. I expect that it will foster a clamor for disclosure. If the U.S. government resists providing the information, people will assume the worst - that the U.S. government has a lot less gold than it claims. It would be difficult for the government to lie about the source of this gold and get away with it - too many analysts will be double checking the information. Alternatively, the U.S. government could honestly admit where the gold came from, which I am confident will show much lower gold holdings than reported. No matter how the U.S. government responds, I anticipate that this matter will spark a sharp increase in the price of gold. {source}

The Surveyor said

The Fed was created by congress in 1913 and exists at the discretion of the American people. The people foolishly surrendered USE and ONLY USE of their gold currency through the 1930s in exchange for fiat. It is invalid to assume that any agency of government has ownership other than as custodian for the American People. The private banks are provided a gold facility via government entities created by our representatives.

If needed, we can reverse the current condition and move for the Fed's elimination and determine what happens to the gold then. It may indeed be time to rein in this separate government psychology, either by electoral means or the second amendment.
{more comments}

Gold To Withstand Big Devaluations - Bob Chapman

The US and European Illuminists are also in a cat fight, because the European enclave controls more gold than the US elitists, so naturally they do not believe that the system of dollar hegemony, and all the privileges that go with it, should be continued any longer

You might be tempted to think that, in reality, the US gold reserves and, for that matter, central bank gold reserves around the world, are not what the central banks claim them to be, due to leasing and outright sales, so the US and European Illuminists are in no better position than the Chinese and Russians with respect to the debate about a new world reserve currency. You would be dead wrong if you thought that. Why, you might ask? Let’s discuss that.

Never mind that the roughly eight thousand tons of US gold is stolen or hypothecated, because the US and European Illuminists stole a large portion of it, or they bought it at fire-sale prices and still have it in their secret vaults in Switzerland and off-shore in safe-haven countries. Who do you think was doing all the buying during the London Gold Pool of the late 1960’s, just for starters, which was fueled by Fort Knox gold provided courtesy of President Johnson, who was an elitist bootlicker and one of the most evil men of the 20th century? Why do you think US coin melt from the Depression is showing up in London gold vaults? Rumors still abound that the Rockefellers, with President Johnson’s help, stole a large portion of the Fort Knox gold during the London Gold Pool days, and those rumors could well be true based on what we have heard from some of our subscribers who used to work at Fort Knox. Could that explain why one of Rockefeller’s secretaries, who blabbed about them acquiring some of the US gold, “accidentally” fell out of a high rise building? Could it be that President Johnson was grateful for Rockefeller’s help in eliminating the pesky President Kennedy when he tried to put their precious Fed out of business via Executive order 11110? We’ll let our subscribers decide!

The same is true for the European gold holdings and the holdings of other central banks around the world, which are a fraction of what they claim, perhaps with as little as five thousand tons remaining out of some thirty thousand tons officially claimed by all central banks, including the privately owned US central bank, the Fed, via its so-called gold certificates, which are claims on the US Treasury gold. Rest assured that much of this gold was leased out and sold not just to jewelers, but to the US and European Illuminists as well. In addition, much of this central bank gold was either pilfered outright, or was virtually given away by people like Gordon Brown of England, the King of Fire-Sale Gold, who sold half of the UK national gold reserves to the Rothschilds and other Illuminists at the bottom of the gold market. The remainder of the UK gold reserves is probably leased out and gone to oblivion like the US gold. The people in the UK are minus eight billion and counting on that one, while the Rothschilds are on the plus side of that equation.

And who do you think were buying a large portion of the gold sold under the Washington Agreement and its various renewals? We’ll give you three guesses.
And who owns all the secret gold that has been stolen in various wars, conquests, pogroms, genocides and religious inquisitions over the many centuries, that don’t show up in the World Gold Council’s figures? And who owns all the scrap gold that was melted down in the last gold craze of the late 1970’s and early 1980’s for which no records were kept? And who owns all the old investment gold held by families of old wealth that was secretly moved from the US to Europe after the Great Depression on a tip-off from FDR that he was going to render gold ownership illegal in the US. They got a nice profit when FDR bumped the gold price from $20 an ounce to $35 dollars an ounce, didn’t they? Who owns all this unaccounted for gold. Again, we’ll give you three guesses. We can assure you that it is more than the 2% unaccounted for by the World Gold Council.

Then there is the 26,500 tons of gold which the World Gold council allocates to private investment. Just who do you think most of those private investors are anyway? They are US and European Illuminists, that’s who. They own tens of thousands of tons. Either they own it, or their central banks own it. The US and European Illuminists can shuffle their gold back and forth between themselves and their central banks as they see fit, since none of them are ever meaningfully audited. So if the Chinese and Russians want to play in this high stakes game, they need to buy lots of gold, and very quickly. The window of opportunity to buy gold on the cheap has already closed. Hyperinflation is on its way. They are too late to the cheap gold party. Buy gold now, before China and Russia try to accrue the amount of the gold required to ante up in “The Big Game” so they can have a say on the new world economy that will emerge in the aftermath of the current catastrophe. {more}.....

Uganda: Oil Reserves Rival Saudi Arabia’s, Says U.S. Expert

[The discovery of this enormous petroleum deposit, like the recent discovery off Brazil's coast..., could deflate the peak oil theory and the incentive behind Asia's pipeline wars, but it won't..... Tell Brzezinski to throw away the "Grand Chessboard....."]

Uganda: Oil Reserves Rival Saudi Arabia’s, Says U.S. Expert

Kampala – Uganda’s oil reserves could be as much as that of the Gulf countries, a senior official at the US Department of Energy has said.

Based on the test flow results encountered at the wells so far drilled and other oil numbers, Ms. Sally Kornfeld, a senior analyst in the office of fossil energy went ahead to talk about Uganda’s oil reservoirs in the same sentence as Saudi Arabia.

“You are blessed with amazing reservoirs. Your reservoirs are incredible. I am amazed by what I have seen, you might rival Saudi Arabia,” Kornfeld told a visiting delegation from Uganda in Washington DC.

The group of Ugandans was in Washington on an international visitor programme and looked at the efficient use of natural energy resources.

The group comprised Ministry of Energy officials, a Member of Parliament, members from the civil society and one journalist.

At present, Uganda has four oil prospectors on the ground including Heritage Oil, Tullow Oil, Tower Oil and Dominion Oil.

Of the four prospectors, Tullow and Heritage have registered success at wells in two blocks in the Albertine basin, which lies in the upper-most part of the western arm of the Great Rift Valley.

According to data so far aggregated since the first discovery was made by Australian prospector Hardman Resources (now taken over by Tullow) in June 2006, Uganda has established reserves at 3.5 million barrels of oil per day.

Experts in oil exploration say this could be just a tip of the iceberg.

The sites are still building pressure and production might well exceed the current figures if what has happened elsewhere like Angola is anything to go by.

Flow tests at various wells have indicated flow rates ranging from as low as 1,500 to highs of 14,000 barrels per day. According to earlier releases, the prospectors are now certain that the commercial threshold for development has been exceeded.

Mr. Aidan Heavy, Tullow Oil’s chief executive officer revealed early in the year that they assigned a dedicated team of experts to deliver a commercial development plan for the entire basin.

In April last year, Tullow embarked on what it termed as a major drilling campaign in the Butiaba area around Lake Albert targeting an overall reserve potential in excess of a billion barrels.

The Butiaba campaign was preceded by successes in two drilling campaigns in the Kaiso-Tonya area and the Kingfisher field and all these have been 100% successes so far.

The Butiaba campaign has thrown up successes but the two biggest so far have been the Buffalo-Giraffe wells – described as “one of the largest recent onshore oil discoveries in Africa”.

“Combined with our other finds in the region, we have now clearly exceeded the thresholds for basin development,” the chief executive of Tullow commented then.

The Giraffe-1 exploration well, which is located in the Butiaba region, came up with over 38 metres of net oil pay within an 89-metre gross oil bearing interval.

The data from the Giraffe discovery indicate a net reservoir thickness of 38 metres, the largest encountered in the area to date.

The Buffalo-1 exploration well in Block 1 encountered 15 metres of net gas pay and over 28 metres of net oil pay.

The gas and oil columns encountered are 48 metres and 75 metres respectively with the potential to be even larger.

As Kornfeld marveled at Uganda’s oil finds, she was quick to add that for the country to benefit from the oil and gas resources but also avoid the pitfalls of oil producing countries like Nigeria, it is extremely important to set up strong governance structures.

Kornfeld and the other United States officials said they are ready to help Uganda’s nascent oil and gas sector with anything including the key environmental issues that are crucial to the efficient management of oil and gas.

“Anything you might want us to help you with we will and we have a lot of expertise in environmental issues relating to oil and gas,” Kornfeld said....

Financial road-blocks in Saudi Arabia and the GCC....

Financial road-blocks in Saudi Arabia and the GCC....

The Saudi government’s decision to freeze assets belonging to billionaire businessman Maan al-Sanea, along with several of his family members’ assets, appears to be part of an attempt to bolster Saudi Arabia’s financial standing and clamp down on a wealthy Saudi family conglomerate that has become a financial liability for the Saudi royals.

KSA Finance Minister Ibrahim al-Assaf (R)

The Saudi government’s decision to freeze the assets of billionaire businessman Maan al-Sanea (and the assets belonging to his wife and four other family members), while unusual, does not appear to be the result of significant political destabilization in the Saudi kingdom. Rather, it appears to be part of a government attempt to clamp down on wealthy Saudi family businesses that have overextended themselves in undertaking questionable investments.

Al-Sanea, who ranked 62nd in Forbes’ 2009 World’s Billionaires list, has a reported net worth of $7 billion and is the chairman and chief executive of Saad Group. Al-Sanea is of Kuwaiti origin and was a fighter pilot in the Kuwaiti air force before returning in the 1970s to his birthplace, Saudi Arabia, where he started a construction and contracting business that became a massive Saudi business conglomerate comprising 37 firms in construction and engineering, real estate development and financial services, and investments spread across five continents.

Al-Sanea boosted his financial standing with the help of his Saudi wife, Sana al-Gosaibi, who owns 10 percent of her husband’s business empire and hails from the powerful al-Gosaibi family, a highly influential business clan in the kingdom. Al-Sanea owns Bahrain-based Awal Bank, is a shareholder in Bahrain’s The International Banking Corporation (TIBC) and holds a 3.1 percent stake in HSBC, Europe’s largest bank, which took a major beating in the global financial crisis but is now well on its way to recovery thanks to early private recapitalization efforts.

Sources have indicated that the Saudi political elite have long been wary of al-Sanea’s business dealings, in part because of his Kuwaiti origins, but mostly because of his “unconventional financial transactions.” Though Saudi Arabia has not been immune to the negative effects of the global financial crisis, the kingdom’s banking sector is still believed to be relatively sound and largely shielded from toxic assets, such as U.S. subprime-backed securities. In addition, Saudi Arabia put much of its record-high oil export revenues in savings, allowing the government to issue its largest-ever budget of $126.7 billion for 2009. Wealthy billionaire families like al-Sanea’s, however, are getting hammered for overleveraging themselves with financial sector and real estate investments, which have borne the brunt of the financial crisis.

Trouble surfaced May 12 when Bahrain-based TIBC — wholly owned by Ahmad Hamad Algosaibi & Brothers Co. (AHAB), of which al-Sanea is a managing director — defaulted on some of its bank debt, fueling rumors that the bank would start a group-wide debt restructuring and taking the company’s debt from investment-grade to default almost overnight. Standard & Poor’s lowered the company’s rating to “selective default,” alleging that the company made a “conscious decision not to honor debt payments,” even though it had a $400 million equity portfolio it could use to honor them. In other words, it appears that AHAB, the parent company of TIBC that is formally affiliated with al-Sanea, did not want to liquidate its assets to take responsibility for these debt obligations.

By May 22, it was revealed that TIBC had defaulted on $1 billion in foreign exchange transactions, trade finance loans and swap agreements. Al-Sanea then attempted to distance himself from TIBC and its defaults when his spokesman in London alleged that even though “al Sanea was at one time named managing director of AHAB, he has not acted in such capacity for years and is not involved in the operations of AHAB in any way.” AHAB also tried to defend itself, stating on May 28 that the company was financially solid and was capable of meeting its debt obligations.

These claims did little to assuage the Bahraini, Saudi and Emirati governments, whose banking sectors are all heavily exposed to TIBC’s bad debt. The situation turned even more dire for al-Sanea on May 22, when Standard & Poor’s revised its outlook for Saad Group from stable to negative because of the group’s high concentration of securities holdings in the global financial services sector, the volatility of its portfolio, the active use of debt to expand Saad Group’s asset base and the company’s high level of exposure in the real estate industry, which has suffered immensely in the Persian Gulf region.

While banks in Bahrain and the United Arab Emirates started calling in loans from al-Sanea and other wealthy Saudi family conglomerates believed to be engaged in risky business, the Saudi government decided to make a much more drastic move against al-Sanea to shield the Saudi financial sector. On May 28 and 30, the Saudi Arabian Monetary Agency sent internal memos to the legal departments of Saudi-based banks telling the lenders to freeze the accounts, including credit cards, of al-Sanea, his wife and four other family members. The development quickly leaked, raising questions about why the Saudi government would have made such a public and unprecedented move against one of its most powerful business conglomerates.

As in the TIBC default case, al-Sanea quickly tried to deflect blame with a statement issued by Saad Group that read: “Recent external events have caused a liquidity crisis locally, regionally and internationally. More recent events, specifically affecting the Bahraini banking sector, have led to a short-term liquidity squeeze affecting Saad Group companies in the Middle East.” Saad Group went on to say that the situation it is in stemmed from the “confluence of, among other things, the failure of companies owned by a prominent Saudi family business and the unexpected and unprecedented regional reaction to that failure,” as well as tightening credit markets. For these reasons, Saad Group said it would be engaging in an “orderly restructuring” of its companies’ debt.

In this statement, Saad Group not only is blaming deficiencies in the Bahraini banking sector for its troubles, but also appears to be pointing the finger at AHAB (the “prominent Saudi family business” that al-Sanea strangely claims he now has nothing to do with). The Bahraini banking sector, however, appears to be quite healthy in spite of lower oil prices and financial stress from the global recession. In fact, Fitch Ratings published a report June 1 reaffirming Bahrain’s A rating and stable outlook, saying that Bahrain would be able to address its economic challenges in the coming year without causing undue strain on its debt ratios.

Fitch also said it was unlikely that Bahrain would need capital infusions from sovereign to domestic retail banks. Bahrain was especially displeased to see al-Sanea try to besmirch its banking sector’s reputation and quickly had the central bank issue a statement the same day saying, “The issues connected with Awal Bank (the Bahrain-based bank owned by al-Sanea and Saad Group) are a consequence of events in the wider Al-Saad group and are unrelated to the wider Bahraini banking sector, which has otherwise continued to function normally.”

Al-Sanea took another blow June 2 when Moody’s decided to downgrade ratings for major Saad Group companies — Saad Trading Contracting and Financial Services Co. (STCFSC), Saad Investments Co. Ltd. and Saad Group Ltd. — by six levels, from investment grade Baa1 to B1, or junk status. The Moody’s report said that Saad Group’s rating could be downgraded even further because it was at heightened risk of default. The agency specified that STCFSC could default on up to $2.75 billion, while Saad Investments could default on up to $2.8 billion as Saad Group’s liquidity crunch intensifies.

Essentially, all of this means that al-Sanea is not winning in his blame game. Moreover, it is still unclear whether or not AHAB or al-Sanea actually realized the financial contagion that would result from the initial TIBC default. Nonetheless, al-Sanea’s business empire is now sinking rapidly.

Though al-Sanea is a powerful figure among the Saudi business elite, the unusually public clampdown on his assets does not appear to be related to political discontent with King Abdullah’s reformist agenda for the kingdom — especially considering that a person of Kuwaiti origin would play a marginal role at best in the al-Saud family’s major political decisions. Instead, this appears to be an attempt to restore investor confidence in Saudi Arabia by demonstrating Riyadh’s rule of law over its financial system to rein in potential hazards to its economic system.

Al-Sanea was a highly leveraged liability for the Saudis. When the financial crisis was just starting to surface in mid-2007, Saad Investments received a $2.82 billion loan from 26 European, U.S., Asian and Arab banks. Earlier in 2007, STCFSC got a $5 billion loan for a 20-year plan to diversify investments inside and outside Saudi Arabia. Though it is still unclear whether al-Sanea has fallen completely out of favor with the Saudi royal family, his financial dealings are now exposed enough to compel the Saudis to take drastic action.

An asset freeze targeting someone with large global stature like al-Sanea would be difficult to keep quiet in the first place. But the apparently public manner in which the Saudi kingdom has chosen to clamp down on al-Sanea indicates Riyadh’s primary interest in bolstering its financial standing while also sending a warning shot to other wealthy Saudi families who might be engaged in similar financial malfeasance.

CIA now actively recruiting failed Investment Bankers.....

CIA now actively recruiting failed Investment Bankers.....

It’s been several months now since Dennis Blair announced that “the primary near-term security concern of the United States is the global economic crisis and its geopolitical implications”. Barack Obama’s Director of National Intelligence even hired James Rickards, a self-described “threat finance” expert, to advise him on “[c]ountries [that] might [...] be tempted to engage in financial warfare” against the United States. It now appears that the rapid rise of microeconomic concerns to the top of the US intelligence community’s threat list has also affected the CIA. The Agency has announced a new recruitment program targeting fired investment bankers to work in its Directorate of Intelligence. Speaking on National Public Radio’s Marketplace, CIA official Jimmy Gurule said the new recruitment drive is part of creating “a national strategy […] to deal with these types of financial issues”. Unfortunately, Marketplace’s piece is extremely superficial. A more in-depth analysis of what “these types of financial issues” may mean, is available here.

US debt issuance will find no takers soon..... and AIG is a CIA front ....

AIG is a CIA front.... has been a CIA front for Decades... and cannot be undone.....

The New American