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

http://www.worldpoliticsreview.com/article.aspx?id=1815

http://newscentralasia.net/moreNews.php?nID=588

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....

“History is littered with wars which everyone knew would never happen.”

Why is Iran seen as a threat to the USA? Wouldn't facilitating peace in the Middle East be a better way of making USA safe than ratcheting up conflict and taking sides with Israel all the time?

US Joint Forces Command's Joint Operating Environment 2010
http://www.peakoil.net/files/JOE2010.pdf

refer to page 29....

[RED BOX]

UNITED STATES JOINT FORCES COMMAND
US JOINT OPERATING ENVIRONMENT REPORT 2010

Joint Forces Command is a useless organization that was given the job of writing crap like this by Rumsfeld. because he liked an admiral who was then commander there. the main purpose of the command seem to be to hand out consulting contracts to unemployed retired general officers and beltway bandit consulting companies. Having consulted there several times I know all about it. This paper has no effect on the government at all. I doubt if very many people have ever read it. think of it as science fiction written for a big fee. Now, if this were a National Intelligence Estimate (NIE) that would be a different matter but it is not....

Here's the link to the German study

Google number of oil futures versus actual oil on American soil, when that collapses hope there is something in the pipeline...lol

http://www.guardian.co.uk/business/2010/apr/11/peak-oil-production-supply

http://www.energybulletin.net/node/52334

http://www.peakoil.net/headline-news/us-military-warns-oil-output-may-dip-causing-massive-shortages-by-2015

German report information:

https://www.youtube.com/watch?v=_9uF_qaGS5I&feature=related

http://www.theoildrum.com/node/6912

http://www.godlikeproductions.com/forum1/message1655110/pg1

I know peak oil is a huge concern , and there's no doubt we'll eventually run out, but don't stake too much on this. And remember the whole concept was created by Royal Dutch Shell in the 1950s as a marketing scheme to shift both public and private funds towards their then recently acquired uranium interests so they could profit off of the nuclear industry....

http://www.theoildrum.com/story/2005/8/23/183954/741

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