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Wednesday, December 23, 2009
The New Crusade: Imperial U.S. vs Political Islam

Wednesday, November 25, 2009
A Real Revolution in the Making in the U.S. Health Care Industry

Friday, October 30, 2009
President Barack H. Obama, One Year Later: 'C' for Effort

Friday, September 25, 2009
The Great Fed-Financed Dollar Decline and Stock Market Rally of 2009

Thursday, September 3, 2009

The Afghanistan-Pakistan War: Obama's Vietnam?

Saturday, August 1, 2009
Nothing in Sight to Replace the US Dollar as an International Reserve Currency

Friday, July 10, 2009
We are in the Midst of the Great Baby-Boomers Economic Stagnation of 2007-2017

Sunday, June 14, 2009
The Obama Enigma: Imperial Interventionism and Militarism

Friday, May 29, 2009

Trade Protectionism and Worldwide Economic Contraction

Wednesday, April 29, 2009
The Mixed Economic Report Card on Obama's First 100 Days

Thursday, March 26, 2009
The Dance of the Trillions to Shore up Banks, Bankers, and Gamblers

Friday, March 6, 2009
How Tinkering with Inflation Measurements May Have Led to the Current Financial Crisis

Friday, February 13, 2009
Obama, like Bush, is Throwing Public Money into a Black Hole

Thursday, January 1, 2009
Another Massacre in the On-going Israeli-Palestinian Conflict


Wednesday, December 23, 2009
The New Crusade: Imperial U.S. vs Political Islam

"I am as intolerant of imperialistic designs on the part of other nations as I was of such designs on the part of Germany. The choice is between two ideals; on the one hand, the ideal of democracy, which represents the rights of free peoples everywhere to govern themselves, and, the ideal of imperialism which seeks to dominate by force and unjust power, an ideal which is by no means dead and which is earnestly [sought] in many quarters still."

U.S. President Woodrow Wilson, July 1919

"Fight and kill the disbelievers wherever you find them, take them captive, harass them, lie in wait and ambush them using every stratagem of war."

The Qur'an (9:5), Islam's holy book

"We are fighting them (the terrorists) over there so that we won't have to fight them here at home."

Former U.S. President George W. Bush's political slogan

“I, like any head of state, reserve the right to act unilaterally if necessary to defend my nation.”
U.S. President Barack Obama, December 10, 2009

“When the tyrant has disposed of foreign enemies by conquest...and there is nothing to fear from them, then he is always stirring up some war.”
Plato, ancient Greek philosopher (428/427-348/347 B.C.)

In the political movie “Charlie Wilson's War” about the Soviet-Afghanistan war, the hero states “America does not fight religious wars.” Is this possibly wrong, dead wrong?

In fact, is it not possible that since September 11, 2001, a new type of “holy war” may have begun? This time, the new crusade with strong religious overtones pits fundamentalist Christian America and its allies, against political Islam and the Islamist al Qaeda terrorist organization. On September 16, 2001, then President George W. Bush set the tone when he said: “This crusade, this war on terrorism, is gonna take awhile.”

On December 1, 2009 Nobel “Peace” laureate Barack Obama, president of the United States since January 20, 2009, decided to follow in the footsteps of his predecessor, President George W. Bush. He announced a policy of stepping up the U.S.-led war in Afghanistan-Pashtunistan. He announced an escalation in the military occupation of Afghanistan by sending extra American troops in that Muslim country, putting the number of American soldiers in Afghanistan at more than 100,000. Not satisfied in using the same vocabulary as George W. Bush, Barack Obama pushed the symbolism by adopting Bush's practice of announcing policies surrounded by more than 4,000 students dressed as soldiers at the West Point Academy. This was all too reminiscent of President Lyndon B. Johnson's fatal decision in 1965 to acquiesce to the request from U.S. commanders to enlarge the Vietnam war by sending scores of additional U.S. soldiers to that Asiatic country.

America seems to be in a constant need of a foreign enemy. First, it was the British. Then it was the Indians. Then it was the Mexicans. Then it was the Spanish. Then it was the Philippinos. Then it was the Japanese. Then it was the Germans. Then it was the Italians. Then it was the Koreans. Then it was the Cubans. Then it was the Vietnamese. Then it was the Soviets. Then it was the Iraqis. Then it was the Islamists. Then it was the Talibans. And, once the current conflict in Pashtunistan-Afghanistan-Pakistan is over, it will possibly be the Iranians, the Chinese, the Russians...etc.!

The reason for such a permanent-war mentality is most likely related to the U.S. military-industrial complex, an enormous beast that must be fed regularly hundreds and hundreds of billions of dollars, if not trillions of dollars, to sustain itself.

In the months following the collapse of the Soviet Union in December 1991, the high echelons at the Pentagon were busy designing a new post-cold-war strategy designed to keep the U.S. war machine humming. Paul Wolfowitz, then Undersecretary of Defense for Policy under Secretary of Defense Dick Cheney in the George H. Bush administration, wrote a memorandum titled “The Defense Policy Guidance 1992-1994”, which was dated February 18, 1992. The new so-called Wolfowitz Doctrine was a blueprint to "set the nation’s [military] direction for the next century." This new neocon military doctrine called for the replacement of the policy of "containment" with one of military "preemption" and international "unilateralism", in effect, discarding the United Nations Charter that forbids such international behavior.

The Pentagon's overall goal was to establish, through military force, a “one-Superpower World”. The more immediate objectives of the new U.S. neocon doctrine was to "...preserve U.S. and Western access to the [Middle East and Southwest Asia] region's oil", and, as stated in an April 16, 1992 addendum, to contribute “to the security of Israel and to maintaining the qualitative edge that is critical to Israel's security”.

Because of some opposition within the U.S. Government, the new policy did not become immediately effective. But the objective remained.
For instance, in September 2000, under the auspices of “The Project for the New American Century”, a new strategic document was issued and was entitled "Rebuilding America's Defenses, Strategy: Forces and Resources For a New Century". The same goals expressed in the 1992 document were reiterated.

The belief was expressed that the kind of military transformation the (neocon) planners were considering required "some catastrophic and catalyzing event — like a new Pearl Harbor”, to make it possible to sell the plan to the American public.

They were either very prescient or very lucky, because exactly one year later, they were served with the "New Pearl Harbor" they had been openly hoping for. Indeed, the Islamist terrorist attacks of Sept. 11, 2001, turned out to have been a bonanza for the American military-industrial complex. The military planners' wish for a  "New Pearl Harbor", was fulfilled at the right time. It is important to remember that from 2001 to 2005, Paul Wolfowitz served as U.S. Deputy Secretary of Defense in the George W. Bush administration, reporting to U.S. Secretary of Defense Donald Rumsfeld. In this capacity, he was well positioned to implement his own Wolfowitz doctrine that later morphed into the George W. Bush Doctrine. For the time being, this is the “doctrine” that newly-elected President Barack Obama continues to implement in the Pashtunistan-Afghanistan-Pakistan corridor. As a politician, Barack Obama may be new at the job, but the policy he is being asked to implement was crafted long before he even set foot in Washington D.C.

Another possible reason why the United States is so often involved in foreign wars, besides its obvious aim of imposing a New American Empire on the world, may be due to the strong influence of religion in the United States. Just as for some aggressive Islamic countries, the U.S. is also the most religious of all first world countries. Researchers have found strong positive correlations between a nation's religious belief and high levels of domestic stress and anxiety, and other indicators of social dysfunction such as homicides, the proportion of people incarcerated, infant mortality, drug  abuse, sexually transmitted diseases, teenage births and abortions, corruption, large income inequalities, economic and social insecurity...etc.

It is possible that wars serve as an emotional outlet that allows some Americans to forget about their nation's domestic problems. I suppose more research would be necessary on this issue. Indeed, is it possible that foreign wars, including wars of aggression, are a way for the American elites to deflect attention from domestic social problems and, as such, are a convenient pretext to direct tax money to defense expenditures rather than to social programs? The issue deserves at least to be raised. This could explain why U.S. foreign policy is so devoid of fundamental morality.

U. S. politicians who become president understand this American proclivity for war. They know that the best way to popularity is to be seen as a “war president”. A president who does not start a war abroad or who does not enlarge one already in progress is open to criticism and is likely to suffer politically. He must be seen less as a president than as “commander-in-chief”, in effect, as an emperor. How could this be, when the framers of the U.S. Constitution attempted precisely to avoid that?

Indeed, Article One (the War Powers Clause) of the U.S. Constitution gives Congress, and not the President, the authority to declare war.

Since World War II, however, this central article of the U.S. Constitution has been circumvented by having Congress give the President a blanket authorization to deploy troops abroad for euphemistically called "police actions", without an explicit or formal congressional declaration of war. The term was first used by President Harry S. Truman to describe the Korean War.

This artifice has done a lot to trivialize the act of war. It also contributed much in the transfer of the powers of war and peace from the legislative branch to the executive branch. In doing so, it has reinforced the role of the U.S. president as a commander-in-chief or as a de facto emperor. Only a formal constitutional amendment could restore, in practice, the framers' initial intent.

All said, it is easy to understand why when political faces change in Washington D.C., policies do not necessarily change. This push toward empire on the part of the United States can also explain why there is resentment and an anti-Americanism movement abroad.


Wednesday, November 25, 2009
A Real Revolution in the Making in the U.S. Health Care Industry

“The conservative goal has been the "Third Worldization" of the United States: an increasingly underemployed, lower-wage work-force; a small but growing moneyed class that pays almost no taxes; the privatization or elimination of human services; the elimination of public education for low-income people; the easing of restrictions against child labor; the exporting of industries and jobs to low-wage, free-trade countries; the breaking of labor unions; and the elimination of occupational safety and environmental controls and regulations.”
Michael Parenti, progressive author and lecturer

“As to diseases, make a habit of two things – to help, or at least, to do no harm.”
Hippocrates (460-277 BC), ancient Greek physician

“In a country well governed, povery is something to be ashamed of. In a country badly governed, wealth is something to be ashamed of.”
Confucius (551-479 BC), Chinese philosopher

The U.S. Congress is presently debating a most important piece of legislation that would profoundly reform the U.S. healthcare system. This is without a doubt the most important domestic proposal advanced by the Obama administration.

To understand what is at stake here, one should know that in the U.S., there are three industries that operate in a political and economic environment such that they can literally write their own ticket: the tentacular defense industry, the large financial and banking industry and the pivotal health industry. Together, these industries account for more than forty percent of the U.S. economy. Their common characteristic is that suppliers can more or less create their own demand and fix prices accordingly. The potential for gouging is enormous. Needless to say, these industries are among the most profitable ones... for those who can enter them.

The health industry is particularly insulated from normal market competition and from critical assessment by the consumer. The products and services that the consumer requires are “prescribed” to him or to her. If sick or requiring treatment, the consumer is in no position to argue and to contest costs and prices. He is not even considered a consumer but a “patient”! In a medical establishment, he is admitted, then “discharged”! Economists call such a situation a price-inelastic demand. The supplier of the service is the one who calls the shots. He decides the quantities to be administered and the price to be charged. This is a cost-plus situation fraught with mostly unregulated monopoly pricing practices.

This may partially explain why since 1970, American health costshave grown at an average annual rate of 9.6 percent per year. That is close to twice the pace of the increase of the overall economy. For example in 2010, health costs in the U.S. are expected to increase four times faster than the annual increase in the average hourly wage of American workers. This is clearly unsustainable, less it bankrupts the entire U.S. economy.

Since medical treatment is in many cases not a choice but a necessity, people have very little leeway in economizing on such consumption within their normal budget constraints. If one requires urgent treatment, one must willy-nilly enter the medical system and pay to the hilt. An example observed recently would illustrate the fundamentals. A friend visiting Florida recently had a case of severe indigestion during the night. He was driven to the emergency room of a local hospital, where he spent two hours. The total cost was in excess of $3,000, half of it for simply crossing the door of the ER room and the rest for two simple blood and urine tests. Maybe Walmart should take over the administration of U.S. hospitals!

To protect against unforeseen medical outlays that can seriously perturb their financial position, most people rely on one form or another of health insurance. This could be private insurancegroup coverage insurance, cooperative insurance or collective or public insurance.

For example, members of Congress are covered by a public health insurance plan. Military personnel and military veterans are insured through a public plan, either through the U.S. Department of Defense Military Health System or through the Veterans Health Administration (VHA).

Americans who are over 65 years old are covered by a public single-payer health care system, called Medicare. Such a public American health program has been in existence since 1965. This is a large public health plan that presently covers more than 43 million Americans. It now provides comprehensive hospital, medical and drug coverage for those lucky enough to qualify because of age and residency.

For the population at large, individuals or families can be privately insured, underinsured or less than fully insured for medical costs they might incur, or, for some fifteen percent of Americans, not insured at all (45.7 million people in 2007). Private health insurance companies routinely deny insurance coverage for people who have pre-existing health conditions. It has been estimated that the total number of people in the United States who die because of lack of medical care is about 100,000 per year.

One can therefore understand why the issue of comprehensive health care insurance is so politically contentious in the United States. Those who are already covered by a generous public health care program—by such public programs such as Medicare, i.e. the insiders, possibly a third of the U.S. population—do not see an urgent need to change a situation that benefits them. Those who rake in tremendous profits in the private health industry are also fighting to maintain their privileged position. Being already covered, they are less persuaded that there is such a thing as a fundamental right to health care.

The victims, the outsiders whose health insurance is tied to their job or who are not covered at all, do not have the same political clout nor the same access that the insiders have to the media or to members of Congress. Generally speaking, the Republican party and its allies in the far right media side with the insiders, and vigorously oppose most attempts for health care reform and an extension of their privileged position to others. Generally speaking again, the Democratic party and its progressive allies tend to side with the outsiders and have been pushing for reform for many years.

Ethically speaking, it is generally accepted that those who benefit the most from random natural endowments or from the working of the social and economic system have a moral obligation and an inescapable responsibility to share their good fortune with the less lucky or the less fortunate among us. Naked egoism is the anti-thesis of modern humanist morality.

As to the political tug-of-war being played in the U.S. around health care reform, it is too early to know the final result, but it surely will have major consequences.


Friday, October 30, 2009
President Barack H. Obama, One Year Later: 'C' for Effort

"I don't want to just end the [Iraq] war, but I want to end the mind-set that got us into war in the first place."
Presidential candidate Barack Obama, January 31, 2008

“Behind the ostensible government sits enthroned an invisible government owing no allegiance and acknowledging no responsibility to the people.”
Theodore Roosevelt (1882-1945), 26th US president

 “If we are strong, our character will speak for itself. If we are weak, words will be of no help.”
John F. Kennedy (1917-1963), 35th US President

“If the Nuremberg laws were applied, then every post-war American president would have been hanged.”
Noam Chomsky, linguist and political expert

Barack H. Obama was a good presidential candidate but, so far, in crucial areas, he has been a somewhat disappointing president.

In November 2008, Democratic presidential candidate Barack H. Obama, and the first black American to have that chance, got to the U.S. presidency on the coattails of a despised Bush-Cheney administration. Indeed, it was a relief for a majority of Americans to have Senator Obama replace “facts-do-not-matter” George W. Bush as president of the United States. His Republican opponent, Sen. John McCain was little more than a Bush-retread. It was therefore unavoidable that such an election would generate big expectations that things would change for the better. As a matter of fact, candidate Obama's electoral slogans were “Yes we can” and change we can believe in”.

Because President Obama is America’s first black President, he is symbolically the culmination of Martin Luther King's Civil Rights movement. Because of that, many have hesitated to criticize him or his administration. But his record, so far, speaks for itself. In two central areas, defense and the economy, his performance has been, at best, lackluster. In fact, Obama's performance in these areas has betrayed a lot of highly held expectations.

He seems to have been ill prepared for such a big time job. It is true that the function of president of the United States, as the country becomes more and more a militaristic empire and less and less a democratic republic, is most demanding. Possibly, nobody can be qualified and prepared enough for such a challenge.

In Obama's case, he was promoted from being a junior senator with a limited staff (one secretary and a few assistants), and no real administrative experience, to running the huge U.S. government with its three trillion dollar budget. And, moreover, he had not had the time or the wisdom to build around him a strong enough “brain-trust” to intellectually control the agenda. Rather the agenda seems to have been imposed upon him. It can be said that he asked for it when, after moving into office, his first move was to keep at their job key Bush appointees to implement the all-too-important defense and economic policies. As it is said in French “Plus ça change, plus c'est pareil” (The more things change, the more they remain the same!)

In Obama's case, the disappointment is not only a question of poor performance due to a lack of depth, formation or experience. It is a question of promises not kept and of vision betrayed. The disappointment is palpable in polls. His job approval rating hovers around 50 percent (only 45 percent of adults), while only 43 percent of Americans say they would vote to reelect him, and 48 percent say they would vote for someone else. Obama's performance has reinforced the cynicism and disillusion felt by many voters and their uneasy feeling that most politicians are either corrupt, incompetent, deceitful or hypocrites, or all of the above. In such an environment, it appears to many that voting has become a waste of time. Voter turnoutin the U.S., already one of the lowest in the world, may take a turn for the worse if confidence is not restored soon. On that score, the 2010 turnout should be watched closely, especially among young disillusioned voters.

As far as foreign wars are concerned, Obama's record is less than positive. Although there has been a timid beginning of troop withdrawals in Iraq—notwithstanding the promises—in Afghanistan, things have taken a turn for the worse. Indeed, President Obama has only made things worse in that remote part of the world, by accelerating the killing and by illegally upgrading the killing in Pakistan with the Pentagon's drones. This is dangerous politics because this open-ended military adventure is all too reminiscent of the Vietnam quagmire that destroyed President Johnson, mired the last days of President Nixon's term, and tarnished America's reputation in the world.

Similarly in financial matters. Under Obama, the causes of the 2007-2009 financial crisis have not been clearly identified, let alone corrected or eradicated. Instead, they have been swept under the rug and covered with tax money bailouts and an orgy of newly created money. In fact, just as for defense, President Obama has delegated his economic and financial policies to the troika of Bernanke-Geithner-Summers, just as President Clinton had delegated the same responsibility to the troika of Greenspan-Rubin-Summers, and just as President G. W. Bush had done with the troika of Bernanke-Paulson-Geithner. We cannot help but detecting a pattern here.

It must be recorded that the Bernanke-Geithner-Summers team was deeply involved in the financial deregulation that led to the securization banking crisis and to the subprime mortgage crisis. When one considers the trillions of dollars in public money that have been used to camouflage the large N. Y. banks' bad debts, it is obvious that the Obama administration has adopted the old political technique of pandering to the rich with the blind support of the poor. (N.B.: The top 23 Wall Street banks and financial firms are expected to hand out a record $140 billion in bonus compensation during this year of 2009—$10 billion more than the previous record year of 2007. It has since been announced that the seven largest bailed out banks may see their bonus plans scaled down, and the Obama admistration should get the benefit of the doubt for this small and possibly symbolic step toward public morality.)

Such practically unconditional bailouts of “too-big-to-fail” banks can be seen as some plush state socialism for the rich, coupled with harsh and unregulated market capitalism for the poor, saddled as they are with unlimited home foreclosures and personal bankruptcies.

The epicenter of the unprecedented banking salvage operation has been the Federal Reserve System, sort of a parallel government with the power to impose hidden taxes. Even more than the Treasury's generous Troubled Asset Relief Program(TARP) of purchasing preferred equity in troubled banks, and other similar Treasury plans, the bulk of the banking bailouts came from the Federal Reserve system. The list of the Fed's bailout programs is very long and very complicated and remains mostly off screen, because it is mostly camouflaged within a super-easy monetary policy.

The U.S. Fed is a sort of semi-private central bank that often caters to private banking interests at the expense of the public good. Many Americans realize that the Fed is as much a creator of financial crises as it is an instrument to fight them. In fact, the Fed is presently busy preparing the next big financial crisis, i.e. the collapse of the bond market two or three years from now. —That could explain why the remote and mysterious semi-private Fed is the least popular of all American federal institutions, and why grass roots efforts to submit it to a public audit are gaining momentum.

In fact, the U.S. Fed is an institution that has gone much further than the U.S. Treasury in socializing the large N.Y. banks' losses and in privatizing their huge profits in the hands of profiteers, at a time, especially after the Sept. 15 (2008) demise of Lehman Brothers, when many of them were technically insolvent.

Thus, by buying large amounts of toxic and unmarketable assets from the large N.Y. banks and from large insurers, such as the huge American International Group (AIG), at close to zero cost to them, and by creating new deposits in exchange, and by paying interest on such bank deposits, the Fed has in effect transferred all or most of the seigniorage of money creationfrom the public to the private sector. Everybody holding U.S. dollars has paid a huge hidden tax imposed by the Fed to salvage the large “too-big-to-fail” N.Y. banks. Sooner or later, somebody will have to calculate that hidden tax and make it public. Most likely, this could only be done if the Fed were to be thoroughly audited, which it has so far staunchly refused.

All and all, and where it counts the most, in matters of wars and peace and in economic matters, things have hardly changed under the new Obama administration. It is likely that an even more pugnacious McCain administration would have been worse, considering Sen. McCain's public declarations and pronouncements. Nevertheless, this is poor consolation to those who had high expectations and who were led to believe that President Obama's election would really bring fundamental change.


Friday, September 25, 2009
The Great Fed-Financed Dollar Decline and Stock Market Rally of 2009

"The liberty of a democracy is not safe if the people tolerate the growth of private power to the point where it becomes stronger than the democratic state itself. That in its essence is fascism — ownership of government by an individual, by a group or any controlling private power."
Franklin D. Roosevelt (1882-1945), 32nd and longest-serving US president

“This great and powerful force—the accumulated wealth of the United States—has taken over all the functions of Government, Congress, the issue of money, and banking and the army and navy in order to have a band of mercenaries to do their bidding and protect their stolen property.”
Senator Richard Pettigrew, Triumphant Plutocracy, 1922

'I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.'
Thomas Jefferson, (1743-1826), 3rd US President, 1802

The U.S. national debt clock is clicking and it is fast approaching the $12 trillion mark, all the while the Fed (less a central bank than the banks' Bank) is printing new money like crazy and lending it to its client banks at close to zero interest rates (i.e. at negative interest rates). What is wrong with this picture? It simply means that most Americans are losing big at this game, but a handful of mega-banks and their affiliates are raking in tremendous amounts of money in easily made profits.

Indeed, the Federal Reserve’s balance sheet has more than doubled since August 2007, going from $870 billion to more than $2 trillion. It is expected to keep growing as banks avail themselves of the cheap funds the Fed made available to them. The Fed, indeed, has the unique ability to create new dollars (paper currency) for the accounts of assets (good or bad) that it buys from banks, the Treasury, or other entities. This increases the monetary base (the sum of currency plus total banking reserves), and banks through their lending can expand this money supply even further.

And the Fed has been extraordinarily generous to the banks, the largest of them are in fact owners of the twelve regional Fed banks. In fact, the Fed has broken practically every central banking rule in order to provide cheap funds to the banks. First, it has pushed the fed funds rate to close to zero so banks could have credit at close to zero cost to them. Second, it has expanded the range and quality of assets it stood ready to accept as collateral for its loans to the banks, so much so that it can be said that the U.S. Fed is presently creating new money backed by the shakiest of assets, some being called “toxic waste”. This is reminiscent of the eighteenth century (beginning in 1789) practice of the French revolutionary government of creating new money (the assignats)backed by the seized properties of the Catholic Church.

Let's summarize quickly the numerous ways the Fed (and to a certain extent, the U.S. Treasury) have found to channel cheap funds to the banks and to brokers. In September 2008, some investment banks, such as Goldman Sachs and J.P. Morgan, officially became commercial banks in order to profit from the Fed's new generosity.

• The Term Auction Facility (TAF);
• The Primary Dealer Credit Facility (PDCF);
• The Foreign Exchange Swap programs (the currency swap lines);
• The Commercial Paper Funding Facility (CPFF);
• The Term Asset-Backed Securities Loan Facility (TALF);
• The Agency debt, Agency mortgage-backed securities (MBS) and Treasury purchase programs;
• The payment of interest on the banks' excess reserves at the Fed.

The last disposition is worthy of attention. Because of the easy and cheap lending to the banks, the latter piled up tremendous amounts of excess reserves at the Fed, reaching more than $700 billion. Normally, banks would quickly lend these non-interest paying excess reserves to the economy. But, in October 2008, the Fed got imaginative and obtained the authority to pay interest on the banks' reserves, including excess reserves, at a risk-free rate (the IOER rate). Since then, the banks have been earning interest on their excess reserve holdings, and therefore had little inclination to lend those reserves out to creditworthy but nevertheless risky borrowers in the rest of the economy. With this practice, the circle has been closed, and the Fed was able to provide needed funds to the banks, at close to zero cost, and enable them to rid themselves of their bad investments, without risking creating inflation. That's quite a banking salvage operation that will be studied by economists in detail in the future.

Indeed, it was well understood after the onset of the financial crisis in August 2007, that public capital would be needed to refinance the American banking system. Private capital was too risk adverse to do that. What was less understood was the fact that the Bush administration, and now the Obama administration that continues this policy, intended to provide this capital at close to no cost to the banks and with very scant conditions.

But who really paid and has continued to pay for this imaginative recapitalization of American banks, and who profits the most?
First of all, of course, bank profits, specially those profits by big international banks, have exploded. Bank stocks have followed suit with tremendous gains. That's why I say the stock market rally since March 5 (2009) has been a liquidity-driven rally, engineered by the Fed.

And it is easy to see why banks raked in so much money: They have been borrowing funds at close to zero cost to themselves and either were paid by the Fed to leave these funds unused or they have used them, with leverage through their hedge fund like activities, to buy interest-paying assets in the U.S. or abroad. In essence, the large “too big to fail” have been allowed to make various trading bets with the cheap public capital provided by the Fed. They gorged themselves with near free public money and used it to enrich themselves, and very little to finance the real economy.

One profitable trade, among others, that large international banks and other operators are found to embrace is a form of arbitrage: They borrow and sell the currency of the country that has the lowest possible short-term funding costs and invest the proceeds in countries whose currency and asset markets yield the most. This has the consequence of depreciating further the currency with low interest rates and of appreciating the other currencies.


During the 1990s, the Japanese economy was in the doldrums. Its short-term interest rates, just as in the U.S. today, were close to zero. International banks and hedge funds would then borrow yens in Japan, sell them for dollars or euros and invest the proceeds in high-yielding financial assets in the U.S. or in Europe. Provided the interest rate environment does not change suddenly, this sort of “carry trade” is an easy way to make money. The result, however, is a more depressed currency than necessary for the low interest rate country and more imported inflation as the price of imported goods (oil, food, commodities...) increases.

The U.S. is presently in that predicament. The U.S. Fed and Treasury have abandoned the U.S. dollar and the large international banks have depressed it further at the same time they fill their coffers. That is why we can say that, besides the profitable carry currency trade that banks and other operators employ to dump the U.S. dollar on foreign exchange markets, this currency will remain under pressure for as long as the spread of short-term interest rates favors other currencies and as long as the spread of expected inflation rates and of expected economic growth remain stable. Paradoxically, longer-term interest rates have only increased marginally. This is because banks and other Fed borrowers, when they do not leave their low interest-paying excess reserves dormant at the Fed, can buy risk-free Treasury bonds. This has the consequence of depressing longer-term interest rates and of boosting stock market prices, even as inflation expectations are on the rise.

What is to be understood is that the weak dollar is the direct consequence of the Fed's extraordinary cheap money policy. To summarize, the average American household is being hit from all sides with this policy. First, if it is a net creditor (as most retirees are), its savings are earning paltry returns (most likely negative after inflation and taxes). Second, the U.S. dollar keeps falling in value, raising the cost of traveling abroad and of everything that is imported. Third, real incomes fall with rising prices as the purchasing power of stable or declining money incomes contracts. Fourth, the exploding public debt will translate sooner or later into higher taxes, thus reducing private disposable incomes. All in all, the standard of living of most people falls.

Don't get me wrong. I do not question the need to inject liquidity into the banking system after the onset of the financial crisis in August 2007. What I question is the way this was done and how the public interest was sacrificed in favor of narrow private interests. Indeed it was done in the worst possible social way, with private gains and social costs. They (the Bush and Obama administrations) recapitalized the banks to the benefit of a small class of bankers, while taxing the entire population in a multitude of ways to finance the public subsidy.

There were other ways to attain the same end without taxing the many for the benefit of a few. The U.S. Treasury and the U.S. Fed, both under the Bush administration and the Obama administration discarded these solutions. That's where the scandal lies. But since it is likely that only a handful of senators and congressmen understand what has happened, I would not be too confident in expecting that there would ever be a public investigation of the scandal, beginning with Congress auditing the Federal Reserve's subsidized banking loans to large banks and its lack of needed regulatory activities. Kudos, however, to the Manhattan Chief U.S. District Court Judge who has ordered the Fed to make public its lending records. Similarly, at least, some timid steps are being taken in the U.S. and in Europe to impose some limits or restrictions on the discretionary and exorbitant bankers' bonuses. This comes a bit late, and we shall see if this is merely some political window-dressing to deflect criticism or if it is a structural step to curb oligopolistic and abusive banking practices.


Thursday, September 3, 2009

The Afghanistan-Pakistan War: Obama's Vietnam?

"Our interest in Afghanistan is to prevent it from becoming a haven for terrorists bent on attacking us. That does not require the scale of military operations that the incoming administration is contemplating. It does not require wholesale occupation. It does not require the endless funneling of human treasure and countless billions of taxpayer dollars to the Afghan government."
Bob Herbert, The New York Times, January 6, 2009

"I don't want to just end the [Iraq] war, but I want to end the mind-set that got us into war in the first place."
Presidential candidate Barack Obama, January 31, 2008

“If we are strong, our character will speak for itself. If we are weak, words will be of no help.”
John F. Kennedy (1917-1963) 35th U.S. President

“No nation ever profited from a long war.”
Sun Tzu, author of “The Art of War”

A solid majority of Americans (54 percent) now oppose President Obama's Afghanistan-Pakistan War. In fact, among Democrats, only twenty-six (26) percent support such a foreign war. In other words, by enlarging this conflict, President Obama is governing as if the opinion of a majority of Americans and of his own political base did not matter. In a democracy, a politician can do that for a while, but not for very long.

This undeclared war, just like LBJ's Vietnam War (1959–1975)and George W. Bush's Iraq War, is an adventure with no clear objective and no clear exit strategy, but with tremendous costs in lives and money. Nobody can tell if the U.S. and NATO are killing people in Afghanistan and in Pakistan because this is an operation to stop al-Qaeda terrorists from mounting future Sept. 11-type attacks, or because it is part of a larger plan to counter a Taliban insurgency and prevent this Pashtun Islamist party to regain power. But also, it has been said that it is a war waged to protect a pipeline crossing Afghanistan. Such a pipeline would move oil from the Caspian Basin to the coast of Pakistan through Afghanistan. Nevertheless, since this is not clearly explained, the war remains a blur for most people. The reason why such a war brings fewer open protests than the Vietnam War is essentially because it is waged with mercenaries.

That may be a reason why such open-ended wars fought with mercenaries can last for so long. For its part, Great Britain, a country used to colonial occupations, says through its incoming military Chief of Staff, General Sir David Richards, that it could stay in Afghanistan for 40 years. Even Germany seems to have regained its taste for military adventures, as its Defense Minister says it could occupy Afghanistan for ten years.

With this frame of mind, the world could be back in the nineteenth century, a century characterized by the anarchy of lawless armed conflicts, with militarized empires involved in prolonged wars, if not perpetual wars, with colonial and imperial military occupations. If the collapse of the Soviet empire in 1991 has simply ended the restraining its presence imposed on other empires from being lawless and imperialistic, then the world may be on a very dangerous course. It will be back to the future. All the democratic ideals of the second part of the twentieth century would be gone.

One has the feeling that such badly designed military adventures as the Afghanistan war, with no clear objectives in sight, are primarily launched and expanded to keep the military establishment busy and the military-industrial complexprosperous.

Mired in financial scandals and plunged into a deep economic recession, many Americans suffer from war exhaustion. There seems to be too many of these endless and costly wars, even though the professional warmongers relish them. For his part, Secretary of Defense Robert Gates declares that the American public is “pretty tired” of the seemingly endless war in Afghanistan, and he believes that the situation has to be turned around in a year.

Indeed. Only a few months ago, a substantial majority of Americans thought they had kicked the Bush-Cheney neocon warmongering crowd out of power. Those who favor American-led wars of aggression had a choice in voting for Republican candidate John McCain. But, to no avail. The Obama-Biden soft-neocon crowd seems to be in the same camp as Bush and McCain. Nothing of substance has changed, or hardly.

At least in terms of foreign policy, the question can be asked if the Obama-Biden administration is anything more than a third termof the Bush-Cheney administration? The Obama-Biden administration did not arrive in power determined to take control of the government apparatus and to change its direction. In fact, the reverse seems to have happened: It was pre-empted and subdued by the entrenched governing nomenklatura. This reflects a lack of preparedness, dedication and vision.

As soon as it was sworn in, the Obama-Biden administration began planning to enlarge the Afghan conflict with more troops and more mercenaries, and, to make its intentions crystal-clear, kept in his post Bush's Secretary of Defense (Robert Gates) while asking Congress for $109 billion more funds to finance the adventure. Then President Obama fired Gen. David McKiernan, who had been in charge in Afghanistan, and replaced him with Lt. Gen. Stanley McChrystal, a former Green Beret who lead the secretive Joint Special Operations Command, an outfit of commando teams that was involved in widespread murder and carnage in Iraq. And, what is strange, Lt. Gen. Stanley McChrystal proposed to President Obama the adoption of a Soviet Strategy of building bases and troop build-up for Afghanistan. With friends like this, Barack Obama needs no enemies.

As a matter of fact, Obama's political enemies, beginning withRupert Murdoch's Wall Street Journal, but also other right-wing corporate media, are salivating at the thought. I wonder how many editorials the WSJ will write supporting candidate Obama in 2012!

But the die is cast: President Barack Obama now “owns” the Afghanistan-Pakistan (AfPak) war and he will have to live with the consequences. If the British and Soviet examples of foreign occupations in that part of the world are good indications of things to come, Commander-in-Chief Obama is going to be bogged down in this devastated mountainous land for years to come, and this may very well cost him his presidency in 2012. For a while, the Republicans and some neocon Democrats are going to cheer him. But later on, most Americans are going to turn against him.

Let's place things in perspective here. Just as in Vietnam, the U.S. is intervening in a civil war involving Pashtuns (40% of the Afghan population), Uzbeks, Tajiks, and Hazara Shiites, among over ten minority groups sharing a traditional and often repressive and barbaric Islamic culture, in a country called Afghanistan. And it is waging guerrilla warfare in Afghan villages and towns in order to support a corrupt and illegitimate Islamist government.

The foreign soldiers are trying to “flush out the Taliban from villages” just as they were trying to flush out the Vietcong from villages. Since such wars cause many civilian deaths, sooner or later, the entire population will turn against the foreign military invaders and they are likely to be kicked out. That was the story in Vietnam and there is little doubt that this will be the story in Afghanistan-Pakistan. Sending more troops to this Asiatic region will only make matters worse. The advantage for the military establishment, besides generals getting a few stars on the shoulder, is that a prolonged conflict will keep the money flowing in their coffers and in those of their suppliers.

But wait. Now Obama is enlarging the Afghan conflict, not only by waging a drone war against tribesmen in Pakistan, but he also wants to turn the Afghanistan war into a war against Afghan drug lords. The logic here, I gather, it to multiply your enemies: the Taliban, al-Qaeda, Pakistan tribesmen, Afghan drug lords, etc. The more you have, the more likely the conflict will endure.

When you forget that the initial objective in Afghanistan, after the 9/11 attacks, was a narrow one, i.e. to prevent that country from becoming again a haven for terrorists, it is easy to widen a conflict ad nauseam. As a matter of fact, this was tried before in Afghanistan. The Soviets tried it for nine years, from December 1979 to February 1989, and despite sending in hundreds of thousand troops, they did not succeed. It was the Soviet Union's Vietnam War, to paraphrase Zbigniew Brzezinski, President Jimmy Carter's Security advisor.

Similarly, Obama's war in Afghanistan-Pakistan would require hundreds of thousands of troops on the ground. Like the Soviet Union, the U.S. is building large military bases in Afghanistan and its commanders think there are never enough troops. Presently, the U.S. has some 60,000 troops in Afghanistan. Next year, it is easy to predict it will have more than 100,000 troops in that remote country, if the current policy is followed.

And under what legal basis? It is stretching quite a bit the terms of the U.N. Security Council's resolution 1368 of September 12, 2001, to justify an open-ended war in Afghanistan and in Pakistan. That resolution was adopted under Article 51 of the U.N. Charter that affirms the inherent right of individual or collective self-defense. Since the 9/11 terrorists had trained in Afghanistan under Taliban control, such training camps had to be dismantled, either by the Afghan government or by external forces. Since the Taliban government refused to comply, the U.S. was in its right to intervene. Thus the overthrow of the Taliban government and the destruction of al-Qaeda training camps in that country. This was done in the fall of 2001.

On December 20, 2001, the U.N. Security Council (Resolution 1386) authorized the creation of a NATO-led military international force to assist the newly established Afghan Transitional Authority in creating a secure environment in and around the capital Kabul and to support the reconstruction of Afghanistan. That's the legal reason why there are foreign soldiers in Afghanistan. They operate under the umbrella of the so-called International Security Assistance Force (ISAF), whose mission has been expanded, year after year, to cover most of Afghanistan (see U.N. Security Council Resolution 1510).

Later, the U.N. Security Council also authorized a mission of assistance in Afghanistan. In March 2002, the U.N. Security Council organized an Assistance Mission in Afghanistan's (UNAMA) with the adoption of Resolution 1401. UNAMA's primary mandate is “to manage all humanitarian, relief, recovery and reconstruction activities.” That mandate has been renewed in March of each year, the last time on March 23, 2009, extending it until March 23, 2010.

But now we are in 2009, eight years after 2001. Is there really a legal basis for the U.S. to drop bombs over villages in Pakistan and to occupy Afghanistan indefinitely with foreign troops? There is some play with words here. For example, the European countries participating in the NATO-U.S.-led mission in Afghanistan talk about a “police mission” to justify the presence of their soldiers in Afghanistan. In fact, this so-called police mission has turned into a permanent military occupation of Afghanistan and into a guerilla war against local militants and insurgents, in both Afghanistan and Pakistan.

Let's keep in mind that many of the so-called "militants" or “insurgents” in Afghanistan, the Mujahideen and to a certain extent the Taliban, used to be called “Freedom fighters” by President Ronald Reagan (see the Reagan Doctrine) when they were fighting the Soviet invaders, with the help of the American C.I.A., Saudi Arabia and the Pakistani secret police (ISI). This shows how such “freedom fighters” conveniently change names when they switch camp! They have gone from being called “heroic” to being called “insurgents”. Such is the propaganda of war. —An historical fact remains: The unintended consequence of the Reagan Doctrine is the current Afghanistan-Pakistan war, and it may have played an important role in preparing the ground for the 9/11 catastrophe.

Nevertheless, let us say that this is stretching the U.N. Charter to the limit to say that it now permits the permanent military occupation of a sovereign country by foreign troops. It is true that the U.N. Charter, under Chapter VII (Action with Respect to Threats to the Peace, Breaches of the Peace and Acts of Aggression), can authorize collective action against a country for good reasons. But the intent of such a military intervention is to be short-term and not to be turned into a permanent colonial occupation.

In conclusion, let us say that since the Obama administration is clearly enlarging the Afghan conflict and has authorized drone bombings in Pakistan, it would seem that the U.N. Security Council should be called to authorize or condemn such an enlargement of the conflict. It should also indicate that it favors a compromise solution to the conflict.


Saturday, August 1, 2009
Nothing in Sight to Replace the US Dollar as an International Reserve Currency

"The empire of the dollar is crashing."
Hugo Chavez, Venezuelan President

"The U.S. dollar is a worthless piece of paper."
Mahmoud Ahmadinejad, Iranian President

[The U.S. dollar is] "losing its status as the world currency."
Xu Jian, vice director, People's Bank of China,

"It is the policy of the United States and it will remain the policy of the United States to remain committed to a strong dollar."
Timothy Geithner, U.S. Treasury Secretary, (July 15, 2009)

 [The dollar will remain the world’s dominant currency for] “many years to come.”
He Yafei, China’s vice foreign minister, (July 5, 2009)

Presently, there is a vacuum in international affairs coming from the decline in the moral and economic stature of the United States. It is a vacuum because no other country or organization has the credibility, legitimacy and capability to fill the gap. This is particularly true in monetary and financial affairs. By default, the U.S. dollar is de facto the main supranational key currency used to finance international trade and investment.

Many countries deplore this quasi monopoly of the dollar, the more so since the financial crisis that originated in the U. S. has spread around the world, and it has profoundly damaged the reputation of the United States and severely undermined the confidence that this country inspired in the past. Add to that the illegal war of aggression that the Bush-Cheney administration launched against Iraq, a country that had not attacked the United States, and the lack of financial confidence in the USA is reinforced by a lack of political confidence.

The table is therefore set for revisiting the international monetary arrangements that were created in the aftermath of World War II. What were they?

In June 1944, during a monetary conference held in Bretton Woods, New Hampshire, an attempt was made to create a new world currency, above and beyond the national currencies of particular countries. Let's keep in mind that many decades before, the British pound had been used as the main international currency. A first proposal for reform came from British economist John Maynard Keynes, who advanced the idea of creating a supranational currency, the bancor, to which other currencies would have been pegged and in which countries would have held their foreign exchange reserves. An alternative plan was proposed by U.S. Treasury economist Harry D. White, in view of establishing a “Gold Exchange Standard” whose main characteristics was to use the U.S. dollar as the main key currency, the only currency then that was fully convertible and which had an official value in gold, initially at a rate of one dollar for 1/35 ounce of gold, and later, at a rate of 1/38 ounce of gold. As we all know, this was the plan that was adopted. Nevertheless, Keynes' idea was partially adopted when the International Monetary Fund (IMF) created “Special Drawing Rights” (SDRs) in 1969, to supplement the member countries' stocks of international reserves.

On August 15 1971, however, the U.S. Government unilaterally ended its obligations to convert U.S. dollars into gold. A few years later, in the aftermath of the first oil crisis, the rates of exchange of currencies of most of the industrial world were allowed to fluctuate with the state of their balances of payments, thus reducing considerably the need to hold foreign exchange reserves, most of which were still denominated in U.S. dollars. —This is the system that has prevailed until now, that is to say a flexible exchange rate system with the U.S. dollar as the main key currency.

It seems nowadays that most everybody who holds dollar-denominated assets is calling for a new international monetary system.  The largest creditorsthe Chinese, have initiated the debate, because they have the most to lose from the collapse of the U.S. dollar. Even the Catholic Pope has thrown in his piece of advice.

What are the chances that there could be agreement on a new supranational key currency? —Close to none. Essentially, this is because there is no viable alternative to the U.S. dollar as an international currency.

It is true that the United States, as a sovereign country, has abused and is still abusing its privileged position derived from the fact that its national currency is being used as the world key currency. So much so that there is presently an oversupply of U.S. dollars around the world. Over the years, the USA has built up huge external debts without having to suffer the full economic consequences of its profligacy. Moreover, it has used itseigniorage gains to deploy troops and military equipment around the world, a move that has created much resentment.

Politically, thus, but also financially, the rest of the world finds it increasing difficult to have to rely mainly on the U.S. dollar to finance international trade and international capital movements. It is therefore understandable that many countries would like to free the world from the obligation to use the U.S. dollar.

The most natural complement or substitute to the U.S. dollar as an international key currency would be the euro. After all, this a currency backed by sixteen strong European countries; a currency that is fully convertible into other currencies and a currency that is supported by large money and capital markets.

The euro's major weakness comes from its political base. If the entire 27-country strong European Union (EU) were backing the euro, its long-term international standing would be considerably enhanced. With only half of the E.U countries backing it, the euro zone is vulnerable in the future to a possible dissolution under the pressures of economic hardships. This is more so since the statutes of the European Central Bank are unduly rigid, not only freezing exchange rates between member states, which is OK, but also de facto freezing their fiscal policies, while the central bank itself has the goal of fighting inflation as its only objective. It seems that the objective of supporting economic growth was left out of its statutes, with the consequence that it may be unable to ride successfully future serious economic disturbances. For example, how long do you think countries like Spain are going to tolerate 17.9 percent levels of unemployment? —Nevertheless, already one quarter of the world's official reserves are in euros, as compare to a bit less than two-thirds in U.S. dollars. Baring any mishap, the dollar and the euro should share a more equal proportion of international finance in the future.

It is also said that the Chinese renminbi (its main unit is the yuan ) could be called to play the role of a global currency. Since 2005, China has adopted a managed floated exchange rate system for its currency, allowing the yuan to slowly appreciate vis-à-vis other currencies, as a partial reflection of its large foreign trade surpluses. It is pointed out that by 2020, China intends to designate the city of Shanghai as an international financial center, and that would mean that the renminbi could become fully convertible into other currencies. Already, some transactions between Hong Kong and Macau, and Mainland China, are being settled in renminbis.

Realistically, however, it is most unlikely that a Chinese currency could play a large international role, at least not for decades to come. Indeed, even though the Chinese government has some $2 trillion in official foreign reserves, Chinaitself as a country, has a very limited moral international stance. It is still a totalitarian,authoritarian and repressive state regime that does not recognize basic human rights, such as freedom of expression and freedom of religion, and which crushes its linguistic and religious “minority nationalities”. It is a country that imposes the death penalty, even for economic or political crimes. —This is not an example to the world. Only a fundamental political revolution in China could raise this country to a world political and monetary status. This is most unlikely to happen in the foreseeable future and, therefore, no Chinese currency is likely to play a central role in financing international trade and investment.

It is one thing to wish to replace an international key currency, it is quite another to implement such a wish. It's not that a series of bad policies has weakened the U.S. economy and the U.S. dollar, possibly for many years to come. But the requirements for a national or international currency to be used as an investment vehicle are such that there is currently no credible successor to the U.S. dollar as a key currency. There are three fundamental characteristics that a reserve currency must have: it must inspire confidence, it must be fully convertible into other currencies, and it must have a high degree of liquidity. With the possible exception of the euro, no other currency meets these criteria, although creditor countries will likely increase the share of goldin their official reserves, pushing the price of gold way up in the coming years.

Therefore, for better or for worse, the world economy needs the U.S. dollar and will keep using the U.S. dollar for the foreseeable future, before a new international monetary system can be designed many years down the road. —Therefore, you may ask where do I think the U.S. dollar is heading? With $2 trillion fiscal deficits under Treasury Secretary Geithner' watch, a zero interest rate (negative real interest rate) and an open bar printing monetary policy by the Bernanke Fed, there is currently an oversupply of U.S. dollars. This should herald a period of continued weakness for the U.S. dollar, possibly for a year or two. Then, the U.S. dollar should reach an important and secular climax low vis-a-vis the other fiat currencies, but not vis-a-vis gold whose future looks brighter by the day.


Friday, July 10, 2009
We are in the Midst of the Great Baby-Boomers Economic Stagnation of 2007-2017

"Banking Establishments Are More Dangerous Than Standing Armies."
Thomas Jefferson (1743-1826), 3rd US President

"... a serious depression seems improbable; [we expect] recovery of business next spring, with further improvement in the fall."
Harvard Economic Society (HES), November 10, 1929

"While the crash only took place six months ago, I am convinced we have now passed through the worst -- and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. That danger, too, is safely behind us."

President Herbert Hoover, May 1, 1930

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

Many observers think that “prosperity is around the corner” and that this recession, like others since World War II, will end as soon as the stock market, as a leading indicator, recovers and people start spending again. This is a myopic view of the current economic big picture.

In fact, since the peak of the housing bubble (in the U.S.) in 2005, the onslaught of the subprime financial crisis in August 2007 and the beginning of the recession in December 2007, the U. S. economy, and to a certain extent, the world economy, have entered a period of protracted adjustments. For sure, there will be some quarters of positive economic growth ahead and the recession may be declared officially over in the coming months, but the radical economic reorganization that is taking place will go on for years to come.

Why is this so?

Essentially, because we are at the very end of the 60-year inflation-disinflation-deflation Kondratieff cycle that began in 1949 when war-frozen prices were liberalized; and that powerful long cycle is ending now. The post 1980s era, i.e. the Reagan era, is over, but the excesses and bubbles of the last few decades have to be corrected, at a time when large population shifts are about to take place. Such adjustments will take years to unfold and this will entail a lot of efforts and a lot of changes.

Indeed, the era of excessive spending and of excessive debt is over. The era of excessive government economic disengagement and of financial deregulation is over. The era of irresponsible Ponzi-scheme finance is over. The era of unregulated derivatives is over. The era of greed as an ideology is over. The era of wild and predatory capitalism is over. The era of cheap oil, of cheap transportation, of cheap commodities and of cheap food is over. The era of excessive concentration of wealth and income is also over. However, the age of political corruption, of incompetent politicians and of destructive wars of aggression is not over. What has arrived is the age of hyperstagflation.

The central driving force behind most of these developments, besides the collapse of the financial sector, the debt pyramid and the derivative products structure, and irresponsible talk of larger warsby loose cannon politicians (as if there were not enough problems!) is going to be demographic. Indeed, we have entered a period during which the largest demographic cohort in the history of mankind, the post Word War II baby-boomer generation, has passed its spending peak. This is not something that can be reversed overnight. This is going to be a decade-long process of adjustment, of less spending, of more saving, and above all, of paying off excessive debt loads. Let's keep in mind that consumer spending represents 70 percent of GDP.

The economic consequences are going to be profound and will affect all sectors of the economy. We only have to consider how the automobile industry, once a major engine of economic growth, is presently going through a fundamental reorganization and downsizing. Even computer-based industries have matured and cannot anymore be considered fast growing industries. The only growth sectors left in the U.S. seem to be the health services industry, as the population is aging, and the war-related industries, as the U.S. military-industrial complex keeps on expanding. But even those sectors will have to slow down; lest they bankrupt the entire economy.

That's why I think these industrial and demographic trends herald a period of slower economic growth that could last many years. Governments better wake up to the challenges that such a slow growth environment entails. Very few people are prepared for such a prolonged period of economic stagnation that will be accompanied by forced debt liquidation, in a deflationary environment. This is particularly true of private pension plans that will have trouble paying pensions to recipients in the coming years. This is also true for employment that will expand at a slower pace than the working population, at least for a while, resulting in a rise in the level of unemployment.

Baby-boomers are those individuals who were born between 1946 and 1966. Because of its sheer size (more than 70 million people in the U.S.), this generation has been dominant in all spheres of life for the last fifty years. But now, it has passed its spending peak. This occurred in 2005-06, at the very top of the housing bubble. The average age of the baby-boomer demographic cohort was then 50, which is the age of top spending. At that time, the U.S. personal savings rate fell to a whopping minus 2.5 percent per year. As a comparison, it was 12.5 percent during the 1981-82 recession and it has now rebounded a phenomenal 5.7 percent in April 2009, and it's climbing fast.

Indeed, the end of the housing bubble, the financial crisis, and the economic recession altogether have sent a clear signal to Baby Boomers. You'd better begin saving soon, or your retirement will have to be postponed. And saving means consuming and spending less, while paying up debts, in order to boost net current personal assets to a level that could sustain retirement needs. But if the largest cohort of consumers cuts down on its spending and borrowing, what does it mean for aggregate spending and economic growth? It can only mean slower overall economic growth and some painful economic adjustments. Therefore, there is a high probability that this recession will be a super one that may linger on for years, being interrupted by short-run upside bursts, but soon being followed by a return of stagnant conditions. In Japan, in the nineteen-nineties, a similar financially and demographically induced recession lingered on for an entire decade. And even after twenty years, it cannot be said that Japan is out of the woods yet.

In the short run, in order to counteract the effects of the financial crisis and to fight the current recession that began officially in December 2007 (according to the National Bureau of Economic Research- NBER), the Obama administration has devised a three-quarter billion dollar stimulus plan and has let the fiscal deficit explode to more than two trillion dollars a year because of its bail-out of the troubled banks. Similarly, the Fed has lowered short-term rates to zero and has purchased billions of dollars in long-term Treasury securities, in government agency securities, and even in mortgage-backed securities, in a desperate effort to save large financial institutions such as AIG, Fannie and Freddie, and other American financial institutions from imploding. But now bond investors, especially international investors, are selling Treasury bonds and are pushing long-term interest rates up and the U.S. dollar down as inflation fears increase, even though paradoxically the collapse of the pyramid of debts creates a deflationary environment for the entire economy.

The danger here is that bond investors will be selling Treasury bonds faster than the Fed can buy them. In which case, there will be a downward spiral in bond prices as inflation and solvency fears are exacerbated. In a word, if the Fed does not tone down its current policy of excessive monetizing of public and private debts and its obvious 'benign neglect' policy toward the dollar, high inflation and possibly even hyperinflation become a possibility down the road. This has happened elsewhere in the past and there is no reason why it could not happen again, especially if the U.S. keeps getting involved in costly wars abroad, paying those adventures with money it does not have.

For now, a quick resurgence of inflation is only a remote possibility. This is nevertheless a possibility, considering that central banks have a tendency to overdo the printing of fiat money. In fact, if governements attempt to print their way out of the coming structural demographic problem, they will end up generating an hyperstagflation. In a nutshell, this is what the huge international dollar-denominated bond market sees and fears, at a time when it has to absorb a huge supply of new bond issues. In reality, the bond market will always win against any central bank, any time. The solvency woes and the likely default of the state of California on its outstanding debt will only add to the anxiety.

A few weeks ago, I warned against the risk of future long term interest rates hikes and future U.S. dollar depreciation following the decisions by the U.S. Treasury and by the Fed to flood the markets with trillions of dollars of new Treasury bond issues and with newly printed money. The undertow is coming even faster than I thought. Only when the markets expect relative economic stagnation and a lasting deflationary environment will long term interest rates taper off.

Brace yourself and hold on to your britches. There is a rough economic decade ahead.


Sunday, June 14, 2009
The Obama Enigma: Imperial Interventionism and Militarism

"We do not want a PAX Americana enforced on the world by American weapons of war. Not the peace of the grave or the security of the slave. I am talking about genuine peace, the kind of peace that makes life on earth worth living, the kind that enables men and nations to grow and to hope and to build a better life for their children — not merely peace for Americans but peace for all men and women — not merely peace in our time but peace for all time."
President John F. Kennedy, 1963

"I will not hesitate to use force unilaterally, if necessary, to protect the American people or our vital interests wherever we are attacked or imminently threatened. ...
We must also consider using military force in circumstances beyond self-defense, in order to provide for the common security that underpins global stability — to support friends, participate in stability and reconstruction operations, or confront mass atrocities."
Sen. Barack Obama, Foreign Affairs (July/August 2007)

"Our interest in Afghanistan is to prevent it from becoming a haven for terrorists bent on attacking us. That does not require the scale of military operations that the incoming administration is contemplating. It does not require wholesale occupation. It does not require the endless funneling of human treasure and countless billions of taxpayer dollars to the Afghan government."
 Bob Herbert, The New York Times, January 6, 2009

Those who thought that the election of Barack Obama as American President would mean a fundamental shift in U.S. foreign policy should have lost their illusions by now. Faces change but the system remains. When you want change, it's necessary to look beyond a single individual and evaluate the team he is working with ...or for. And the Obama team is what can be called a soft neoconservative team, all devoted to maintaining the military-industrial complex, and all sold out with the ideology of permanent wars rather than permanent human progress.

The truth is that during the last election, both candidate McCainand candidate Obama were favorable to the policy of permanent wars under the cover of fighting terrorism. That is the reason I had concluded then that candidate Obama was only marginally superior to candidate McCain, but not fundamentally different. In fact, I believe that as far as character goes, McCain was probably more his own man than Obama, who has demonstrated a tendency to align himself with powerful interests in order to bolster his political career.

There seems to have been a deal here: Obama will be kept busy shaking hands, traveling and delivering grand speeches or sermons, while Chief of cabinet Rahm Emanuel would run the White House. Everything then felt into place: Marine Corps General James Jones was named National Security Advisor(N.B.: The national security adviser heads the National Security Council, which is the part of the White House structure that deals with foreign policy)and Bush's Defense Secretary Robert Gateswas asked to remain at his post. This alone should have persuaded most everyone that U.S. foreign policy would only change in tone, not in substance.

By enlarging and expanding the Afghanistan-Pakistan war just as U.S. troops reduce their unwelcomed presence in Iraq, Obama has de facto endorsed interventionism and militarism as the cornerstone of his foreign policy. This is a failed policy, besides being immoral, because it requires the pursuit of a contradiction, i.e. killing civilians and supporting authoritarian regimes while attempting to obtain the support of a foreign population in favor of democracy.

What is more, Obama is enlarging a war that has no clear rationale behind it and no clear objectives. If the main rationale is to build his political image as “commander-in-chief”, then Obama is falling into the same trap as George W. Bush. The Afghanistan-Pakistan war will be his war and it will be a quagmire. When he signed an order increasing U.S. troops by 17,000 combat and support personnel in Afghanistan, then newly sworn in President Barack Obama said the war in Afghanistan was “still winnable”. What did he mean? Does it mean that the U.S. will have troops over there for decades?

It seems that nothing is learned from history and that everything has to be relearned. —Such a policy failed miserably in Vietnam,and it is most likely to fail again in Afghanistan-Pakistan, two countries whose borders are highly artificial, having been imposed by imperial Great Britain in the nineteen century. It also failed for the Soviets who had to withdraw from Afghanistan after eight-and-a-half disastrous years. Soon after, the entire Soviet regime collapsed.

Indeed, by enlarging the Afghanistan-Pakistan War, President Obama is embarking on a course of action that could eventually destroy his presidency. It will be a repeat of President Lyndon B. Johnson who was destroyed politically with his Vietnam War, even though this was a war he had not started. As in Vietnam, the ill-conceived Afghanistan war will become a war of attrition that will drain public support and finances as the war becomes more and more americanized. This will be another tragedy.

If Obama listens to the military, as he obviously seems to do, he will be fed the deadly pablum that every problem in the world is a military problem. But this is false and counterproductive. In fact, bombing civilian populations will only enrage them against the invaders, just as bombing the United States would naturally enrage Americans. On that, Obama and his team are on the same wavelength and on the same path to disaster as Bush-Cheney and their neocon sycophants.
 –This is too bad. President Barack Obama is quickly wasting his political capital and his political credibility. And once lost, it will be difficult to regain them.

Friday, May 29, 2009

Trade Protectionism and Worldwide Economic Contraction

 “I almost went down on my knees to beg [President] Herbert Hoover to veto the asinine Hawley-Smoot Tariff.”...“That Act intensified nationalism all over the world.”
Thomas Lamont, banker and economic adviser, June 1930

"Now is a time where we have to be very careful about any signals of protectionism."

President Barack Obama,  February 19, 2009

“From the purely economic point of view nothing speaks against free trade and everything against protectionism.”
Ludwig von Mises (1881-1973), Austrian economist

When the economy is booming, foreign borrowings and imports of goods and services from other countries are most welcome. They allow for more spending without inflation and they raise living standards. It is a version of having your cake and eating it too. In an economic downturn, however, the political reflex of populist politicians is to turn protectionist and to become economic isolationists by raising trade barriers. In such an environment, foreign competition becomes a convenient scapegoat for the crisis, even though the causes of such crisis are most often purely domestic in nature.

Regarding trade, the Obama administration seems to have adopted the “good cop, bad cop” routine, extolling the virtues of free trade in presidential speeches while letting Congress pass protectionist measures in series. The fear here is a repetition of the 1930s when American politicians rushed to pass the infamous Smoot-Hawley Tariff act of 1930 that triggered an international trade war and which accelerated the worldwide economic downturn. World trade plummeted into a spiral downward and domestic production for exports contracted everywhere. Normal trade links were disrupted and intricate inter-country production arrangements were dismantled.

Indeed, in a misguided attempt to fight the economic downturn, governments all over the world rushed to adopt self-destructive “beggar-thy-neighbor” policies, in a futile attempt to devalue each other's currencies and to reduce their imports in retaliation, forgetting that one country's imports are the other country's exports. The consequence was that from 1929 to 1933, the value of world trade contracted by two-thirds, going from $5.3 billion to $1.8 billion.

The world economy went down with world trade and every country was worst off as a consequence. A severe recession was then turned into a worldwide economic depression. This is because trade protectionism in the modern world is the equivalent of “cutting off your nose to spite your face” and its main consequences are to spread poverty and economic dislocations.

Some seventy years later, the same mistakes risk being repeated. Most modern economies are interrelated and if politicians begin to unravel such an economic integration, the consequences may be even worst than in the 1930s, because economic integration is much more advanced and prevalent than it was then.

World trade is already contracting due to the current global financial crisis, a decline in commercial bank trade credits and a drop in private investments. According to the World Bank's projections, total world trade in goods and services this year is expected to fall 6.1 percent. The decline will particularly hurt large export-led economies such as Mexico, Germany and Japan.

The issue of protectionism is also particularly important for Canada, the U.S.'s most important trade partner. The United States and Canada not only share this continent, but they also have a mutually beneficial trading relationship that has been enhanced with the signing of the Canada-U.S. Free Trade Agreement on October 12, 1987. This treaty was enlarged in 1994 to include Mexico with the implementation of the North American Free Trade Agreement (NAFTA). As a consequence, there are no tariffs on most goods that pass between Canada and the United States.

In 2008, Canada's trade with the United States accounted for about 76 percent of its total international exports and 63 percent of its imports, while U.S. exports to Canada represented about 20 percent of total American exports. A lot of American jobs are tied to American exports to Canada. In fact, Canada is the leading export market for 36 of the 50 U.S. States and Canada is a larger market for U.S. goods than all 27 countries of the European Community combined.

Moreover, Canada is the single largest exporter of total petroleum to the United States, supplying the U.S. with more than 2.5 million barrels per day. What is more, this oil supply is guaranteed under Nafta. There is also an important and growing cross-border trade of electricity between Canada and the United States that links the two economies.

This does not mean, however, that trade frictions between Canada and the United States do not exist. Sometimes politicians behave as if the trade agreement between the two countries did not exist. A case in point is the routine inclusion of “buy American” provisions in spending bills voted by the U.S. Congress, which can be considered overt protectionist trade-distorting measures and contrary to the spirit and the letter of the free trade agreement.

If the lessons of the past have been learned, governments should resist the temptation to export their economic problems abroad and should work instead to stimulate their economies without resorting to protectionist measures. What is needed now is to avoid sending the world economy into a self-reinforcing contraction that would hurt everyone.


Wednesday, April 29, 2009
The Mixed Economic Report Card on Obama's First 100 Days

"An election cannot give a country a firm sense of direction if it has two or more national parties which merely have different names but are as alike in their principles and aims as two peas in the same pod."
Franklin D. Roosevelt, 32nd US President (1933-45)

“Behind the ostensible government sits enthroned an invisible government owing no allegiance and acknowledging no responsibility to the people.”
Theodore Roosevelt, 26th US president (1901-1909)

"I don't remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world."
Paul Volcker, former U. S. Fed Chairman

"Prosperity is just around the corner."
President Herbert Hoover, 1932
“This recession was not caused by a normal downturn in the business cycle. It was caused by a perfect storm of irresponsibility and poor decision-making that stretched from Wall Street to Washington to Main Street.”
President Barack Obama, April 14, 2009

On April 29, 2009, President Barack Obama completed his first 100 days in office, a symbolic milestone. In somewhat of a parallel to Franklin Delano Roosevelt, who succeeded the beleagueredadministration of Herbert HooverBarack Obama took over from a most clumsy predecessor, George W. Bush.

And, just as for Roosevelt, Obama had a window of opportunity in his first 100 days in office to initiate new ways of doing things and new policies. He had all the incentive, mandate and leeway necessary to distance himself from the previous administration and profoundly change things for the future.

On the economic front, for example, facing a most urgent challenge then as of now, President Roosevelt immediately embarked upon a comprehensive program of fundamental reforms and of public works. For instance, he did not hesitate to close American banks, going as far as to declare a "bank holiday" from March 6, 1933 to March 14, 1933, in order to reorganize the banking system and to clean up the banks' books. The purpose, of course, was to renew public confidence in financial institutions and to reestablish the flow of credit and the level of spending in the economy.

Some seventy-six years later, it is fair to say that President Barack Obama was much less determined in dealing with a similar, serious banking crisis, firstly by reappointing or keeping officials close to the previous Bush administration (Timothy Geithner, Ben Bernanke, etc.) and secondly, by prolonging Bush's policies of subsidizing “too big-to-fail” and “too big-to-manage” mega-banks with a minimum of conditions, instead of restructuring them and changing their business model.

This applies to Fannie Mae, Freddie Mac, American International Group (AIG), and a host of large international investment banks (J.P. Morgan Chase, Goldman Sachs, Citibank, Wells Fargo, Sun Trust Bank, HSBC Bank USA, etc.) that have indulged in casino finance rather than concentrating on channeling stable capital into the economy. In so doing, and in contrast to what Franklin D. Roosevelt did, Obama did not confront and reverse the unhealthy and corrupt symbiosis between big business and big government, which most everybody knows to be the main cause of the current financial crisis; he prolonged it.

For example, no thorough investigation on the basic causes of the financial crisis has been launched, and no structural changes in the financial system have been advanced, above and beyond throwing trillions of public dollars to camouflage the problem. Consequently, mega-banks can still rely on casino finance through the derivative market, still package and collaterize long-term loans into risky short-term financial instruments. Similarly, gamblers can still buy Credit Default Swaps (CDS), even though they have no owned securities to protect, while simultaneously engaging in naked short selling of the stocks of companies, in the hope of depressing the price of their collaterized debt obligations (CDO). The derivative market is the greatest grand casino of all, and if left unregulated, it will come again to haunt the real economy in the future.

Another issue that the new administration failed to tackle is the practice of vulture or predatory capitalism, where financial operators are allowed to raid profitable companies and to saddle them with the debt incurred to take them over. Through such a process, prudently managed companies become the prey of unscrupulous financial operators who raid them while resorting to the practice of leveraged finance.

Most amazing of all, maybe, is the lack of concern about the repeal of the 1933 Glass-Steagall Act, and its replacement, in late 1999, by the pro-banks Gramm-Leach-Bliley Act (GLBA) that, in effect, removed most regulations of risk-taking investment banking. A similar issue is the lack of concern about the way the Securities and Exchange Commission (SEC) abandoned its role of protector of the public interest and became a cheerleader of the mega-banks.

All this leads to the observation that the structural financial problems of the American banking system have not been aggressively tackled and corrected, and that future financial crises and their attendant economic dislocations can be expected. The record will show that President Obama, in his first 100 days in office, has given the impression of being co-opted by Wall Street and its laissez-faire ideology, at a time when a clean break was necessary.

When there are flaws in the policies of a new administration, the responsibility may not rest with the President alone, but one must look at his entourage. For better or for worse, President Barack Obama has surrounded himself with close advisors who are cut from the same cloth: Rahm Emanuel as his Chief of Staff, David Axelrod, as his senior political adviser, and Lawrence Summers, director of the National Economic Council and his top economic adviser. Since these advisors have been known in the past to be opposed to the regulation of exotic financial instruments, this could explain why President Obama chose someone to head the strategic Commodity Futures Trading Commission (CFTC) who is also opposed to such regulation, Mr. Gary Gensler. Keep in mind that the CFTC is one of the outfits that regulate the trading in futures contracts on a host of derivative products that have magnified the subprime mortgage meltdown.

Sometimes the real influence of close advisors on policies and decisions can be stronger than that of the President himself, the latter being busy making speeches, appearing on TV shows and traveling around the world. The image that comes to mind is the boxer who is taking it on the chin in the ring, while the backroom managers run the shop. Obviously, President Obama's entourage seems to be most influential... for better or for worse. And they have a bias towards Wall Street rather than Main Street.

Thursday, March 26, 2009
The Dance of the Trillions to Shore up Banks, Bankers, and Gamblers

"Deficits in the, let's say, 5 percent of GDP range would lead to rising debt-to-GDP ratios that would ultimately not be sustainable."
Peter Orszag, Obama White House budget chief

The [US] financial system is facing possible total losses of $7 trillion. ...With the banks 'effectively insolvent', we've concluded that the only viable solution is nationalization.”
Matthew Richardson and Nouriel Roubini, American economists

“China is worried that the U.S. may solve its problems by printing money, which will stoke inflation.”
Zhao Qingming, Chinese financial analyst

"Whoever controls the volume of money in any country is absolute master of all industry and commerce."
James A. Garfield,  (1831-1881) 20th President of the United States

After ten years of wholesale financial deregulation, bad policies and unsound banking practices, and facing a worsening recession, over the last year and a half the U.S. government has been pumping trillions of dollars in order to deleverage and recapitalize banks that were on the brink of insolvency. But the banking crisis is of such a magnitude, and the damage done to the financial system so widespread, that each pumping of money into the system has never seemed to be enough. This is because numerous American financial institutions, and among the largest, have suffered multibillion-dollar losses, not only with subprime mortgages, but especially with large amounts of derivative products that have turned sour. Not the least of these are the famous gambling products called credit default swaps, (CDS), [which the Bank of International Settlements is reporting to be worth some $57 trillion.

For its part, ever since the collapse of the investment bank Bear Stearns on March 15, 2008, the Fed has pumped trillions of dollars, under various forms, into sick financial institutions in order to keep them afloat, or in order to merge them with other entities.

In the case of Bear Stearns, for example, the Fed guaranteed $29 billion so that the new owner of Bear Stearns (JP Morgan Chase) would not suffer losses on the most risky assets on the books of the acquired bank. The Fed has also been buying loads of financial assets from troubled institutions, thus issuing new “high-powered” money against such assets. On November 25, 2008, for example, the Federal Reserve Board launched its up-to-one-$ trillion Term Asset-Backed Securities Loan Facility(TALF) to support the issuance of asset-backed securities (ABS) collateralized by student loansauto loanscredit card loans, and loans guaranteed by the Small Business Administration (SBA).

As recently as March 17, 2009, the Fed has also announced that its purchases of Fannie Mae and Freddie Mac Mortgage Backed Securities (MBS) would be expanded from $500 billion to $1.25 trillion, and that it intends to double its purchases of Fannie Mae, Freddie Mac, and Federal Home Loan Bank bonds to $200 billion from the $100 billion intended initially.

Because the Fed stands ready to buy large amounts of the newly issued Treasury bonds to cover the large U.S. government's fiscal deficit, it can be said that the Fed is actively and effectively busy monetizing both the public debt and private financial debts. As a consequence, the Fed's balance sheet has ballooned to over $2 trillion now from less than $900 billion only one year ago. And it is likely to continue to expand in the coming months. Some of these loans will be repaid in the future and some of the new money will be retrieved, but if the Fed were to sell its portfolio of Treasury bonds to prevent an onset of inflation or to prevent the U.S. dollar from depreciating too fast, bond prices would drop significantly and interest rates would also rise quickly.

Similarly, the U.S. Treasury has been “investing”, guaranteeing and loaning hundreds of billions of dollars of public money to large American banks. It began on earnest last September, after the large investment bank Lehman Brothers($691 billion of assets at the end of 2007) failed and the large world insurance company American International Group (AIG) followed thereafter and became insolvent. Then, the U.S. Congress passed in a hurry the $700 billion Troubled Assets Relief Program(TARP), under the threat of a financial Armageddon.

It has been evaluated that all these public bailouts of the financial system amount together to a staggering $12.9 trillion, nearly as large as the U.S. economy (GDP) at some $14 trillion, and larger than the current U.S. national debt of $11 trillion. This includes, of course, the close to $800 billion Obama Economic Stimulus package that the new administration sent to Congress in February and that Congress passed with a minimum of Republican support (none in the House and three in the Senate).

That is where we stand.

On Monday, March 23, Treasury Secretary Timothy Geithner announced that the Obama administration had decided to create aPublic-Private Investment Program, and to pour $75 to $100 billion into it, the money coming from remnants of the old TARP program. The purpose, this time, is to rid American banks of the bad financial assets that are destroying their balance sheets, to the point of insolvency. What the new “Program” calls for is the purchase of as much as a half-trillion dollars of the American banks' so-called toxic assets, with the government providing 85 percent of the funds to willing private investors at low interest rates, and guaranteeing (through FDIC) any loss on the financial assets that banks will unload through public auctions. The political attractiveness of this measure is that it provides a public subsidy to the banks and other financial institutions without Congress having to debate and vote new funds. It can be done administratively.

What can be said is that finally the Obama administration is doing, through the back door, what I myself recommended last April 12, 2008. The Obama administration, in effect, has decided to create the equivalent of the old Resolution Trust Corp. to liquidate bad mortgage-backed assets and other bad financial bets made by the banks and large insurance companies, such as AIG. The way that it is being done, however, is questionable, because this may turn out to be very costly to the U.S. taxpayers and is less than transparent.

Indeed, the new entity to be created would be tailored somewhat along the lines of the 1980s' Resolution Trust Corp., which was established to dispose of the bad real estate assets of savings and loan institutions. However, and this may be a sign of the times, the new public-private program would be a mixed venture and would be far from having the same powers that the RTC had in managing the current troubled banks. Nevertheless, the new PPIP will fill essentially the same basic function as the RTC, i.e. selling bonds and borrowing in order to finance the purchase of bad “toxic” assets from insolvent or near insolvent institutions, in partnership with private investors and managers.

Financially, this is an operation that could be very profitable to the private firms that join the government in the operation, because the profit potential for them is high and the risks of losses are at a minimum, since such losses will be underwritten by the government. Therefore, most everybody in the private financial industry stands to win with the new policy: 1- the banks will rid themselves of bad assets at enhanced market prices (compared to what they are worth today); 2- banks' shareholders will see an appreciation in the value of their common shares; and, 3- private investment firms and hedged funds will buy some of these assets at prices lower than par, using low cost non-recourse government loans, and all the while being fully protected by government guarantees of no loss to themselves. The only losers in the operation could be the American taxpayers who are guaranteeing that there would be no loss to private investors. That is the reason Wall Street rallied 500 points after the announcement of the new banks' bailout. Cynics could say that this is American-styled capitalism at its best: no loser except possibly the government and the taxpayers who support it. How it is going to play politically is anybody's guess. It may be a good thing for the Obama administration that such a plan is not going to be debated in Congress.

When all is said and done, the Obama administration is essentially pursuing a policy similar to the one followed by the Bush administration, i.e. supplying public money to private banks and to private investors with a minimum of strings attached. Remember that last September, the Bush administration committed $400 billion to obtain a near 80 percent control in the world's two largest mortgage companies, Fannie Mae (Federal National Mortgage Association: FNM) and Freddie Mac, (Federal Home Loan Mortgage Corporation: FRE) which were close to insolvency. Instead of taking them over and placing them into administrative receivership, in order to change their business model and their lending practices, since the government was guaranteeing these two institutions' outstanding debts, (more than $ 5 trillion US), the Bush administration chose instead to keep up the appearance that these were still two privately run banks and only appointed a legal conservator for Fannie Mae and Freddie Mac. The rest was business as usual, including the payments of huge bonuses to the entrenched management.

Similarly, with the new Public-Private Investment Program, the Obama administration would have the authority to place a failed bank deemed 'too big to fail' in the equivalent of a conservatorship, while keeping its management more or less intact. One thing is different this time, however. Indeed, contrary to what happened after the U.S. government poured $185 billion into the large insurance company AIG, this time around the Treasury Secretary would have the power to limit payments to creditors and to break contracts governing executive compensation. The fact remains that there is still no intention of placing the most insolvent firms into administrative receivership and to change their business model or practices.

In conclusion, let us say that there will be consequences following from all this bailout money. In particular, what foreign lenders, especially the Chinese, do with their holdings of U.S. dollar-denominated debt, considering the risk of future interest rates hikes and future dollar depreciation. Already, China's Premier Wen Jiabao has publicly raised his government's concern about the safe value of the U.S. Treasury bonds and other dollar-denominated assets that they hold in huge quantities. —But, I guess, this is something for another day.


Friday, March 6, 2009
How Tinkering with Inflation Measurements May Have Led to the Current Financial Crisis

"There are three kinds of lies: lies, damned lies, and statistics."

Mark Twain, (1835 - 1910)

 “The Cost of Living [has been] replaced by the Cost of Survival. The old system told you how much you had to increase your income in order to keep buying steak. The new system promised you hamburger, and then dog food, perhaps, after that.”
John Williams, private economist

“The consumer price index is being understated by at least 1 percent per year.”
Bill Gross, professional investor

"... The development of credit derivatives has contributed to the stability of the banking system by allowing banks, especially the largest, systemically important banks, to measure and manage their credit risks more effectively. In particular, the largest banks have found single-name credit default swaps a highly attractive mechanism for reducing exposure concentrations in their loan books...."
Alan Greenspan, Fed Chairman, May 5, 2005

Last February 20th, the U.S. Department Of Labor Bureau of Labor Statistics announced that, on a seasonally adjusted basis, the U. S. Consumer Price Index (CPI) increased by 0.3 percent during the month of January (on a yearly basis). Some independent economists, however, think that the real inflation rate is much higher, possibly as high as 7.52 percent (on a yearly basis). Why is that so?

The CPI is a measure of how much the price level of a basket of representative consumer goods and services, adjusted for predictable seasonal shifts, is supposed to have varied during a month or a year. Such a measure has been provided by the Bureau of Labor Statistics since 1919, covering the period between 1913 and today.

For many people, the CPI is less a measure of inflation than an imperfect measure for adjusting cost of living allowances. It is a technique that plays a central role in computing increases in theCost Of Living Allowances (COLAs) of various money disbursements, incomes and wages. Some incomes, for example, such as Social Security payments and other entitlements, are statutarily adjusted upwards when the CPI goes up, and such adjustments have a direct influence on one's standard of living.

Economists have long debated the best methods of measuring inflation, especially as it affects the cost of living of various categories of consumers. This is a complex issue that involves statistical methods in calculating price indices, economic principles and notions of social justice. Moreover, not everyone is impacted equally by a rise in the overall level of consumer prices, depending on one's economic and financial situation. For example, for people living in a city and who are renters, a rise in the price of cars or of houses would not have the same predictable effect on them as it would on folks living in a rural area and who own their own homes. And it is not everyone who can deflect the negative impact of a rise in the price of consumer goods on their standard of living by substituting less costly items.

For the period between 1913 and 1982, the formula for measuring consumer inflation in the U. S. was pretty much straightforward. Government statisticians would periodically collect prices in certain identified areas with which the Bureau of Labor Statistics would then construct price indexes. Over time, surveys of consumer expenditures were conducted and the weight of different goods in the index would be adjusted accordingly to reflect people's new buying habits.

In the early 1980s, the Reagan administration feared that the standard CPI index overstated the impact of overall inflation on the cost of living of many recipients of government payments, the most important ones being Social Security outlays. The decision was then made to move away from the objective of having a general consumer price index measuring overall consumer inflation and adopt instead the policy of constructing a cost-of-living index that more closely reflected the true impact of inflation on different categories of consumers. That is why, since 1982, the CPI measurements that the Bureau of Labor Statistics publishes relates more to the cost of living, as defined and periodically revised, than to providing accurate information about the level of general inflation. [As a matter of fact, another government agency, the Bureau of Economic Analysis (BEA), has the responsibility to calculate a price deflator for consumption expenditures and other expenditures as part of the National Income and Product Accounts (NIPA).]

Indeed, in the mid-1990s, substantial changes were made to the CPI index which had the net result of lowering the official measure of consumer inflation. First, increases in asset prices, such as in housing, were only indirectly taken into account. For example, the 2002-2006 real estate bubble hardly registered at all in the CPI because only ‘imputed’ home rents for home owners were used in the index. At that time, rents were virtually stagnant in many cities due to overbuilding. Secondly, arbitrary downward adjustments were made in the prices of certain goods to reflect their enhanced quality. It is true that cars, TV sets or cellular phones are more performing today than their alternatives in the past, and this raises people's standard of living. However, such goods cost more, and the higher prices are not fully recorded in the CPI. Thirdly, and maybe more debatably, in order to concentrate on the impact of price increases on the true cost of living, it was assumed that consumers adjust to higher prices of certain items by substituting relatively less costly goods when relative prices change. For instance, buyers would be assumed to switch from steaks to hamburgers or from beef to chicken when the price of steaks or beef increases. Similarly, people would tend to switch from high-priced stores to discount stores when their incomes do not follow inflation. It can also be assumed that such forced substitutions are not without inconveniences or hardships for the consumers, and thus could indicate a lowering in their standard of living. Nevertheless, these modifications that lowered the official measure of the CPI were incorporated into new statistics from 1982 on.

Consequently, it has become somewhat risky to rely on official CPI figures to obtain a true assessment of inflation. Because of all the changes made in the CPI index since 1982, the CPI has become less and less a true measure of consumer inflation, even though it may or may not more closely reflect the true impact of inflation on people's cost of living. For the overall economy, it is fair to assume that the true inflation rate is substantially higher than what is reflected in official CPI announcements, and this has a compounding effect overtime.

For its part, since February 17, 2000, the Fed uses a “core” chain-type price index for personal consumption expenditures (CTPIPCE), i.e. a price measure for all items less price increases in food and energy. What is at stake here is the danger that government officials may begin to believe their own official inflation figures which are understated, maybe for good reasons as far as cost of living issues are concerned, but nevertheless severely understated as far as the true inflation rate is concerned. This has the potential for disastrous consequences, not only for the public in correctly judging inflation pressures for investment purposes, but also for public officials in framing policy, especially monetary policy. 

The most recent example is provided by the pronouncements that Fed officials made during the crucial 2003-2005 period, when a dangerous housing bubble was building up speed and when financial firms were embarking upon riskier and riskier financial schemes. To a man, Fed officials denied there was any risk of inflation and, contrary to what everybody could see, declared that there was no housing bubble going on. 

For instance, on March 1, 2003, the No. 2 man at the Federal Reserve, Fed Gov. Donald Kohn insisted that the extremely low short-term interest rates that the Fed was keeping down had not created a speculative bubble in real estate.

In 2004 and in 2005, Fed Chairman Alan Greenspan himself echoed Mr. Kohn and repeated many times that there was no inflation and that he was in no hurry to raise short-term interest rates from their 46-year low level of 1 percent. In April 2004, for example, in remarks on the economic outlook to the Joint Economic Committee, Greenspan remained unconcerned about inflation, declaring that "as yet, the protracted period of monetary accommodation has not fostered an environment in which broad-based inflation pressures appear to be building", just at a time when the housing bubble was but one year from its final top.

At that time, the old pre-1982 CPI formula, as calculated by private economists, indicated that U.S. consumer inflation was above 8 percent and that a housing bubble and a concomitant stock market bubble were in full swing. Future Fed Chairman Ben Bernanke, then a Fed Board member, echoed his mentor in late 2005 by saying that there was no housing bubble to go bust and that the fact that U.S. house prices were rising four times faster than the economy was "largely [a reflection of] strong economic fundamentals."

But, it is now generally agreed that from 2002 to 2004, the American central bank pursued a monetary policy that was too expansionary and that—plus the lack of government regulation of the credit derivative market—contributed greatly to create the conditions for a major financial crisis. Let us keep in mind that in 2004, the Fed Chairman was publicly recommending that people buy adjustable rate mortgages (ARMs), especially interest-only adjustable-rate mortgages, and other subprime loans instead of safer fixed rate loans.

As a matter of fact, most economists agree that interest rates should have been raised as early as 2002. But Mr. Greenspan implied later that he was forced to play politics with his monetary policy, when he declared on September 17, 2007, in an interview with the Financial Times, that “raising interest rates sooner and faster would not have been acceptable to the political establishment given the very low [official] rate of inflation”.

There you have it. What is suggested here is that the push to reelect President George W. Bush, in the fall of 2004, may have played an important role in letting the housing bubble become bigger, thus paving the way for a housing bubble burst in 2005-2006. This is, by the way, on top of the confession that Mr. Greenspan made in interviews promoting his Memoirs (The Age of Turbulence) that he had personally lobbied the Bush-Cheney administration in favor of the unprovoked 2003 U.S. war against Iraq, and that consequently, he was personally tied to the overall political agenda of the Bush-Cheney administration.

When the history of this financial and economic crisis is written, it shall be recorded that the Fed and other government agencies, such as the Securities and Exchange Commission (SEC), did little or nothing to prevent the debt pyramid from reaching the dangerous levels it attained and which is now crashing down, dragging down with it the entire U.S economy and most of the world economies.


Friday, February 13, 2009
Obama, like Bush, is Throwing Public Money into a Black Hole

“The [financial] crisis was not a failure of the free market system and the answer is not to try to reinvent that system. ...Government intervention is not a cure-all."
President George W. Bush, Thursday November 13, 2008

"There is no cause to worry. The high tide of prosperity will continue."
Andrew W. Mellon, Hoover's Secretary of the Treasury. September 1929

"While the crash only took place six months ago, I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover. There is one certainty of the future of a people of the resources, intelligence and character of the people of the United States - that is, prosperity."
President Herbert Hoover, May 1, 1930

Tuesday, February 10, may be the date when the U.S. economy officially entered into an economic depression. This was when President Obama's Treasury Secretary, Timothy Geithner, announced that the Obama administration was about to expand Bush's Secretary Paulson's $700-billion plan to rescue large U.S. banks from insolvency, euphemistically called the Troubled Assets Relief Program (TARP). The purpose now, as it was previously, is to use public capital, loans and guarantees to remove toxic financial assets from private banks' balance sheets and to transfer them to the Government and/or to willing private investors (hedge funds, private equity firms and other investors). One must keep in mind that Mr. Paulson and Mr. Geithner were the principal architects of last October's original plan. This was then, and it is now, a plan designed primarily to use hundreds of billions of taxpayer dollars to prevent banks from declaring bankruptcy, while in fact doing little to accomplish its presumed primary objective of getting banks to resume normal lending. Such a cure has failed in the past and is likely to fail now. Saving insolvent banks is not the same as fixing them and making them viable.
Indeed, when Mr. Geithner announced on Tuesday, February 10, that he was expanding the Paulson plan to make it a $1.5 trillion bailout plan, financial markets saw it as simply rearranging the chairs on the deck of the Titanic, and they sold off. I believe the markets are right and the Obama-Geithner plan only makes the Bush-Paulsen plan worse. Both are misguided and do little to address the root cause of the financial crisis, which is a mountain of unsustainable bad debts that was allowed to expand recklessly over the last ten years, and which is now crumbling down, dragging the entire economy down with it.

With more public money thrown at the problem with little strings attached, large U.S. banks will only use the new cash to de-leverage themselves and pay off their debts, buyout smaller banks and find a way to reward their incompetent executives with large bonuses, but little will trickle down to the real economy. We are back to the discredited Reagan era's economic trickle-down theory, the rich helping themselves first and the poor getting the crumbs.

Let's look coldly at the situation. The ratio of total debt to the U.S. Gross Domestic Product (GDP) is now higher than it was in 1933, when it reached the lofty and unsustainable level of 299.8 percent. It took nearly twenty years to bring down the debt/GDP ratio to below 140 in 1952. In the second quarter of 2008, all debt records were broken when the total debt ratio in the U.S. registered at 356,7 percent of GDP. If the same process of unwinding of excessive debt level plays itself out this time, this could translate into a debt deflation process lasting possibly until 2027!

It all depends on the problem being recognized for what it is, that is to say a mountain of unsustainable and insolvable debts and bets that have to be cancelled and erased from the books. Transferring such bad debts from the banks and other entities to the government will not solve the problem. It will only displace the it from one place to another and potentially create new and even more serious problems, such as horrendous future tax increases or an onset of hyperinflation down the road.

There exists a state of denial in Washington D.C. regarding the excessive debt problem, essentially because the same people who are responsible for creating the mess are in power. It doesn't matter whether a Republican or a Democratic administration is in place, they remain in charge and they rely on the same failed economic policies. The Geithner plan is the son of the Paulson plan. Both are destined to fail because they are based on a flawed diagnosis.

To deflate the mountain of bad debts and unclog the credit system in an orderly fashion, and to prevent a deflationary spiral from taking hold, the Obama administration should take the advice of L. William Seidman, chairman of the S&L Resolution Trust Corp. (RTC), the agency created in the 1990s to manage hundreds of insolvent thrifts. At that time, the RTC seized the assets of troubled savings and loans and resold them to bargain-seeking investors. The Obama administration should bite the bullet and create a similar Banking Restructuring Trust to temporarily take over the large insolvent American banks, streamline their operations, liquidate their bad debts and bets, and reorganize them on a firmer financial basis. I myself proposed such a restructuring trust last September. This would be more efficient and less costly than throwing trillions of dollars down a black hole without even solving the structural problem at hand.

The creation of such a Trust to unify government intervention has also been proposed by former Federal Reserve Chairman Paul A. Volcker and by former Treasury Secretary Nicholas F. Brady.  This would entail, of course, that many of the banks' illiquid assets in CDOs ("Collateralized Debt Obligations") and in CDS (“Credit Default Swaps”) and other shaky assets, would have to be written off or cancelled in a chapter 11-like process. Such a process would cleanse the banks from the excesses accumulated in previous years and prepare them to meet credit demand as the economy recovers. But, above all, it would mark an end to incremental, complicated and improvised 'ad hoc' government interventions to solve the banking crisis. I would bet that there would be a powerful rally of financial markets if such a take-charge and decisive approach were to be adopted.

The Geithner bank bailout plan must not be confused with the close to $800 billion fiscal stimulus plan for the entire economy that Congress has adopted. The latter, contrary to the former, is designed to cushion the fall of real spending in the economy and is likely to have a net positive impact. Indeed, as households increase their savings rate and curtail their discretionary spending to compensate for the loss of housing and financial wealth, government spending has to take up the slack.

However, it should be realized that the multiplier effect on aggregate spending of each dollar of fresh public spending is not very high because national economies nowadays are globalized. Indeed, as domestic spending is being sustained, imports increase but exports may decline as world demand contracts. It is only if all governments adopt expansionary fiscal policies that all economic boats can be lifted. With European and Chinese economies weakening, this may take some time before world demand stops contracting.

All this is to say that while the Geithner bank rescue plan is misguided and should be reengineered, Obama's fiscal stimulus package is most likely too timid and should be enlarged, considering the scope of the problem at hand. All in all, let us hope that a prolonged economic depression can be avoided.

Thursday, January 1, 2009
Another Massacre in the On-going Israeli-Palestinian Conflict

“The liberty we prize is not America's gift to the world, it is God's gift to humanity.”
George W. Bush, State of the Union speech, January 28, 2003 (N.B.: Bush's primary speechwriter at the time was a theologian: Michael Gerson.)

“When it comes to the Israeli-Arab conflict, the terms of debate are so influenced by organized Jewish groups like AIPAC that to be critical of Israel is to deny oneself the ability to succeed in American politics.”
Henry Siegman, former head of the American Jewish Congress

“I don't think there is such a thing as an independent Israel doing anything, because I think no matter what they do its our [American] money, its our weapons, and they're not going to do it without us approving it and if they get into trouble we're going to bail them out, so there is no separation between the two.”
Congressman Ron Paul (R-TX), Dec. 28, 2008

“The world is a dangerous place, not because of those who do evil, but because of those who look on and do nothing.”
Albert Einstein (1879-1955) Physicist and Professor, Nobel Prize 1921

The year 2008 was not a very good year by any account, either financially or politically. Chaos and immorality have prevailed.

Indeed, this was a year when fools and criminals in power proved again that we live in a very immoral world. First case in point: the insane Georgia-Russia war in which hundreds of people died because of the decisions of a few hotheads.  Second case in point: the savage bombing of the Gaza Strip by Israeli warplanes, after the government of Israel had imposed a military blockade of the Palestinian territory. Here again, the world more or less stood still as foolscriminals and accomplices allowed for the  killing of people  on both sides.

The Israeli attacks that began on Saturday December 27, 2008, are most reminiscent of what the government of Israel did toLebanon during the summer of 2006. Both are examples of disproportionate retaliation to thoughtless provocations.

Indeed, the use by the government of Israel of sophisticated American-made F-16 jets, AH-64 Apache helicopters and devastating US-supplied GBU-39 smart bombs to targetnumerous dwellings in Gaza Strip sites—with civilians making up an overwhelming majority of the more than 300 victims—is an immoral act. Bombing a city can only create a humanitarian catastrophe and it should not be allowed in any circumstance.

With these planned-in-advance Christmas-New Year period attacks, when the world's political attention is the weakest, Israel is punishing the entire population of the Gaza Strip (1.5 million people) for the irresponsible behavior of a small group of fanatical Hamas leaders.

But, no matter how this is phrased, nothing justifies collective punishment, an illegal doctrine used by the Israeli government time and again against the Palestinians while the world stands still.

We understand the rationale: Such attacks are designed to coerce the Islamist Hamas government, (which seized power in Gaza less than two years ago in replacement of the Fatah government of the Palestinian Authority), to stop firing rockets in the direction of Israeli border cities and refrain from launching suicide attacks inside Israel.

Since Hamas doesn't have one percent of the military capability that Israel has, its  attacks on Israeli cities would appear to be most foolish and irresponsible. Indeed, there is no doubt that bombing Israeli cities is a terrorist act. But sadly, in this action-reaction drama, one has to keep in mind that Hamas' attacks on Israeli cities came after an Israeli military cross-border raid in Gaza in early November and after years of an illegal blockade of Gaza by Israel. That is the reason why both sides pretend they are attacking the other side in self-defense in this on-going drama.

Nevertheless, even though the Hamas government seems to be run by defiant leaders who have launched rocket attacks against Israeli cities and targeted Israeli civilians, this does not excuse the Israeli government's disproportionate reaction in indiscriminately bombing a heavily populated territory with warplanes and attack helicopters. All this demonstrates how the world is lacking a moral compass and institutions capable of implementing rules of law and justice. Meanwhile, the law of the jungle continues to reign and the Israeli-Palestinian conflictpersists.

The neocon-controlled U.S. government of George W. Bush, contrary to most other governments, has refused to ask for an immediate stop to the Israeli attacks. It is therefore an active accomplice in the carnage and it cannot escape its responsibility and involvement.

As a matter of fact, anybody who remains silent while these barbarian acts are being committed becomes ipso facto an accomplice. This applies to most everyone at different degrees, the most responsible being those in authority.