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Obama’s Geopolitical China ‘Pivot’: The Pentagon Targets China

Obama’s Geopolitical China ‘Pivot’: The Pentagon Targets China

Since the collapse of the Soviet Union and the nominal end of the Cold War some twenty years back, rather than reducing the size of its mammoth defense spending, the US Congress and all US Presidents have enormously expanded spending for new weapons systems, increased permanent military bases around the world and expansion of NATO not only to former Warsaw Pact countries on Russia’s immediate periphery; it also has expanded NATO and US military presence deep into Asia on the perimeters of China through its conduct of the Afghan war and related campaigns.

Part I The Pentagon Targets China

On the basis of simple dollar outlays for military spending, the US Pentagon combined budget, leaving aside the huge budgets for such national security and defense-related agencies of US Government as the Department of Energy and US Treasury and other agencies, the US Department of Defense spent some $739 billion in 2011 on its military requirements. Were all other spending that is tied to US defense and national security included, the London-based International Institute for Strategic Studies estimates an annual military spending of over $1 trillion by the United States. That is an amount greater than the total defense-related spending of the next 42 nations combined, and more than the Gross Domestic Product of most nations.

China officially spent barely 10% of the US outlay on its defense, some $90 billions, or, if certain defense-related arms import and other costs are included, perhaps $111 billion a year. Even if the Chinese authorities do not publish complete data on such sensitive areas, it is clear China spends a mere fraction of the USA and is starting from a military-technology base far behind the USA.

China today, because of its dynamic economic growth and its determination to pursue sovereign Chinese national interests, merely because China exists, is becoming the Pentagon new “enemy image,” now replacing the earlier “enemy image” of Islam used after September 2001 by the Bush-Cheney Administration to justify the Pentagon’s global power pursuit, or that of Soviet Communism during the Cold War. The new US military posture against China has nothing to do with any aggressive threat from the side of China. The Pentagon has decided to escalate its aggressive military posture to China merely because China has become a strong vibrant independent pole in world economics and geopolitics. Only vassal states need apply to Washington’s globalized world.

Obama Doctrine: China is the new ‘enemy image’

After almost two decades of neglect of its interests in East Asia, in 2011, the Obama Administration announced that the US would make “a strategic pivot” in its foreign policy to focus its military and political attention on the Asia-Pacific, particularly Southeast Asia, that is, China. The term “strategic pivot” is a page out of the classic textbook from the father of British geopolitics, Sir Halford Mackinder, who spoke at various times of Russia and later China as “pivot powers” whose geographical and geopolitical position posed unique challenges toAnglo-Saxon and after 1945, to American hegemony.

During the final months of 2011 the Obama Administration clearly defined a new public military threat doctrine for US military readiness in the wake of the US military failures in Iraq and Afghanistan. During a Presidential trip to the Far East, while in Australia, the US President unveiled what is being termed the Obama Doctrine.[1]

Obama told the Australians then:

With most of the world’s nuclear power and some half of humanity, Asia will largely define whether the century ahead will be marked by conflict or cooperation…As President, I have, therefore, made a deliberate and strategic decision — as a Pacific nation, the United States will play a larger and long-term role in shaping this region and its future…I have directed my national security team to make our presence and mission in the Asia Pacific a top priority…As we plan and budget for the future, we will allocate the resources necessary to maintain our strong military presence in this region. We will preserve our unique ability to project power and deter threats to peace…Our enduring interests in the region demand our enduring presence in the region.

The United States is a Pacific power, and we are here to stay. Indeed, we are already modernizing America’s defense posture across the Asia Pacific. It will be more broadly distributed — maintaining our strong presence in Japan and the Korean Peninsula, while enhancing our presence in Southeast Asia. Our posture will be more flexible — with new capabilities to ensure that our forces can operate freely .. I believe we can address shared challenges, such as proliferation and maritime security, including cooperation in the South China Sea.[2]

The centerpiece of Obama’s visit was the announcement that at least 2,500 elite US Marines will be stationed in Darwin in Australia’s Northern Territory. In addition, in a series of significant parallel agreements, discussions with Washington were underway to fly long-range American surveillance drones from the remote Cocos Islands — an Australian territory in the Indian Ocean. Also the US will gain greater use of Australian Air Force bases for American aircraft and increased ship and submarine visits to the Indian Ocean through a naval base outside Perth, on the country’s west coast.

The Pentagon’s target is China.

To make the point clear to European members of NATO, in remarks to fellow NATO members in Washington in July 2012, Phillip Hammond, the UK Secretary of State for Defense declared explicitly that the new US defense shift to the Asia-Pacific region was aimed squarely at China. Hammond said that, “the rising strategic importance of the Asia-Pacific region requires all countries, but particularly the United States, to reflect in their strategic posture the emergence of China as a global power. Far from being concerned about the tilt to Asia-Pacific, the European NATO powers should welcome the fact that the US is willing to engage in this new strategic challenge on behalf of the alliance.” [3]

As with many of its operations, the Pentagon deployment is far deeper than the relatively small number of 2,500 new US soldiers might suggest.

In August 2011 the Pentagon presented its annual report on China’s military. It stated that China had closed key technological gaps. Deputy Assistant Secretary of Defence for East Asia, Michael Schiffer, said that the pace and scope of China’s military investments had “allowed China to pursue capabilities that we believe are potentially destabilizing to regional military balances, increase the risk of misunderstanding and miscalculation and may contribute to regional tensions and anxieties.” [4] He cited Chinese refurbishing of a Soviet-era aircraft carrier and China’s development of its J20 Stealth Fighter as indications of the new capability requiring a more active US military response. Schiffer also cited China’s space and cyber operations, saying it was “developing a multi-dimensional program to improve its capabilities to limit or prevent the use of space-based assets by adversaries during times of crisis or conflict.” [5]

Part II: Pentagon’s ‘Air-Sea Battle’

The Pentagon strategy to defeat China in a coming war, details of which have filtered into the US press, is called “Air-Sea Battle.” This calls for an aggressive coordinated US attack. US stealth bombers and submarines would knock out China’s long-range surveillance radar and precision missile systems deep inside the country. This initial “blinding campaign” would be followed by a larger air and naval assault on China itself.[6] Crucial to the advanced pentagon strategy, deployment of which has already quietly begun, is US military navy and air presence in Japan, Taiwan, Philippines, Vietnam and across the South China Sea and Indian Ocean. Australian troop and naval deployment is aimed at accessing the strategic Chinese South China Sea as well as the Indian Ocean. The stated motive is to “protect freedom of navigation” in the Malacca Straits and the South China Sea. In reality it is to be positioned to cut China’s strategic oil routes in event of full conflict.

Air-Sea Battle’s goal is to help US forces withstand an initial Chinese assault and counterattack to destroy sophisticated Chinese radar and missile systems built to keep US ships away from China’s coastline.[7]

US ‘Air-Sea Battle’ against China

In addition to the stationing of the US Marines in the north of Australia, Washington plans to fly long-range American surveillance drones from the remote Cocos Islands — an Australian territory in the strategically vital Indian Ocean. Also it will have use of Australian Air Force bases for American military aircraft and increased ship and submarine visits to the Indian Ocean through a naval base outside Perth, on Australia’s west coast.[8]

The architect of the Pentagon anti-China strategy of Air-Sea battle is Andrew Marshall, the man who has shaped Pentagon advanced warfare strategy for more than 40 years and among whose pupils were Dick Cheney and Donald Rumsfeld. [9] Since the 1980s Marshall has been a promoter of an idea first posited in 1982 by Marshal Nikolai Ogarkov, then chief of the Soviet general staff, called RMA, or ‘Revolution in Military Affairs.’ Marshall, today at the ripe age of 91, still holds his desk and evidently very much influence inside the Pentagon.

The best definition of RMA was the one provided by Marshall himself: “A Revolution in Military Affairs (RMA) is a major change in the nature of warfare brought about by the innovative application of new technologies which, combined with dramatic changes in military doctrine and operational and organizational concepts, fundamentally alters the character and conduct of military operations.” [10]

It was also Andrew Marshall who convinced US Defense Secretary Donald Rumsfeld and his successor Robert Gates to deploy the Ballistic Missile “defense” Shield in Poland, the Czech Republic, Turkey and Japan as a strategy to minimize any potential nuclear threat from Russia and, in the case of Japan’s BMD, any potential nuclear threat from China.

PART III: ‘String of Pearls’ Strategy of Pentagon

In January 2005, Andrew Marshall issued a classified internal report to Defense Secretary Donald Rumsfeld titled “Energy Futures in Asia.” The Marshall report, which was leaked in full to a Washington newspaper, invented the term “string of pearls” strategy to describe what it called the growing Chinese military threat to “US strategic interests” in the Asian space.[11]

The internal Pentagon report claimed that “China is building strategic relationships along the sea lanes from the Middle East to the South China Sea in ways that suggest defensive and offensive positioning to protect China’s energy interests, but also to serve broad security objectives.”

In the Pentagon Andrew Marshall report, the term China’s “String of Pearls” Strategy was used for the first time. It is a Pentagon term and not a Chinese term.

The report stated that China was adopting a “string of pearls” strategy of bases and diplomatic ties stretching from the Middle East to southern China that includes a new naval base under construction at the Pakistani port of Gwadar. It claimed that “Beijing already has set up electronic eavesdropping posts at Gwadar in the country’s southwest corner, the part nearest the Persian Gulf. The post is monitoring ship traffic through the Strait of Hormuz and the Arabian Sea.” [12]

The Marshall internal report went on to warn of other “pearls” in the sea-lane strategy of China:

• Bangladesh: China is strengthening its ties to the government and building a container port facility at Chittagong. The Chinese are “seeking much more extensive naval and commercial access” in Bangladesh.

• Burma: China has developed close ties to the military regime in Rangoon and turned a nation wary of China into a “satellite” of Beijing close to the Strait of Malacca, through which 80 percent of China’s imported oil passes. China is building naval bases in Burma and has electronic intelligence gathering facilities on islands in the Bay of Bengal and near the Strait of Malacca. Beijing also supplied Burma with “billions of dollars in military assistance to support a de facto military alliance,” the report said.

• Cambodia: China signed a military agreement in November 2003 to provide training and equipment. Cambodia is helping Beijing build a railway line from southern China to the sea.

• South China Sea: Chinese activities in the region are less about territorial claims than “protecting or denying the transit of tankers through the South China Sea,” the report said. China also is building up its military forces in the region to be able to “project air and sea power” from the mainland and Hainan Island. China recently upgraded a military airstrip on Woody Island and increased its presence through oil drilling platforms and ocean survey ships.

• Thailand: China is considering funding construction of a $20 billion canal across the Kra Isthmus that would allow ships to bypass the Strait of Malacca. The canal project would give China port facilities, warehouses and other infrastructure in Thailand aimed at enhancing Chinese influence in the region, the report said… The U.S. military’s Southern Command produced a similar classified report in the late 1990s that warned that China was seeking to use commercial port facilities around the world to control strategic “chokepoints.” [13]

Breaking the String of Pearls

Significant Pentagon and US actions since that 2005 report have been aimed to counter China’s attempts to defend its energy security via that “String of Pearls.” The US interventions since 2007 into Burma/Myanmar have had two phases.

The first was the so-called Saffron Revolution, a US State Department and CIA-backed destabilization in 2007 aimed at putting the international spotlight on the Myanmar military dictatorship’s human rights practices. The aim was to further isolate the strategically located country internationally from all economic relations, aside from China. The background to the US actions was China’s construction of oil and gas pipelines from Kunming in China’s southwest Yunnan Province, across the old Burma Road across Myanmar to the Bay of Bengal across from India and Bangladesh in the northern Indian Ocean.

Forcing Burma’s military leaders into tighter dependency on China was one of the factors triggering the decision of the Myanmar military to open up economically to the West. They declared that the tightening of US economic sanctions had done the country great harm and President Thein Sein made his major liberalization opening, as well as allowing US-backed dissident, Aung San Suu Kyi, to be free and to run for elective office with her party, in return for promises from US Secretary of State Hillary Clinton of US investment in the country and possible easing of US economic sanctions. [14]

The US corporations approaching Burma are hand-picked by Washington to introduce the most destructive “free market” reforms that will open Myanmar to instability. The United States will not allow investment in entities owned by Myanmar’s armed forces or its Ministry of Defense. It also is able to place sanctions on “those who undermine the reform process, engage in human rights abuses, contribute to ethnic conflict or participate in military trade with North Korea.” The United States will block businesses or individuals from making transactions with any “specially designated nationals” or businesses that they control — allowing Washington, for example, to stop money from flowing to groups “disrupting the reform process.” It’s the classic “carrot and stick” approach, dangling the carrot of untold riches if Burma opens its economy to US corporations and punishing those who try to resist the takeover of the country’s prize assets. Oil and gas, vital to China, will be a special target of US intervention. American companies and people will be allowed to invest in the state-owned Myanma Oil and Gas Enterprise.[15]

Obama also created a new power for the government to impose “blocking sanctions” on any individual threatening peace in Myanmar. Businesses with more than $500,000 in investment in the country will need to file an annual report with the State Department, with details on workers’ rights, land acquisitions and any payments of more than $10,000 to government entities, including Myanmar’s state-owned enterprises.

American companies and people will be allowed to invest in the state-owned Myanma Oil and Gas Enterprise, but any investors will need to notify the State Department within 60 days.

As well, US “human rights” NGOs, many closely associated with or believed to be associated with US State Department geopolitical designs, including Freedom House, Human Rights Watch, Institute for Asian Democracy, Open Society Foundations, Physicians for Human Rights, U.S. Campaign for Burma, United to End Genocide— will now be allowed to operate inside Myanmar according to a decision by State Secretary Clinton in April 2012.[16]

Thailand, another key in China’s defensive String of Pearl Strategy has also been subject of intense destabilization over the past several years. Now with the sister of a corrupt former Prime Minister in office, US-Thai relations have significantly improved.

After months of bloody clashes, the US-backed billionaire, Former Thai Prime Minister Thaksin Shinawatra , managed to buy the way to put his sister, Yingluck Shinawatra in as Prime Minister, with him reportedly pulling the policy strings from abroad. Thaksin himself was enjoying comfortable status in the US as of this writing, in summer 2012.

US relations with Thaksin’s sister, Yingluck Shinawatra, are moving in direct fulfillment of the Obama “strategic pivot” to focus on the “China threat.” In June 2012, General Martin E. Dempsey, chairman of the US Joint Chiefs of Staff, after returning from a visit this month to Thailand, the Philippines and Singapore stated: “We want to be out there partnered with nations and have a rotational presence that would allow us to build up common capabilities for common interests.” This is precisely key beads in what the Pentagon calls the String of Pearls.

The Pentagon is now quietly negotiating to return to bases abandoned after the Vietnam War. It is negotiating with the Thai government to create a new “disaster relief” hub at the Royal Thai Navy Air Field at U-Tapao, 90 miles south of Bangkok.

The US military built the two mile long runway there, one of Asia’s longest, in the 1960s as a major staging and refueling base during the Vietnam War.

The Pentagon is also working to secure more rights to US Navy visits to Thai ports and joint surveillance flights to monitor trade routes and military movements. The US Navy will soon base four of its newest warships — Littoral Combat Ships — in Singapore and would rotate them periodically to Thailand and other southeast Asian countries. The Navy is pursuing options to conduct joint airborne surveillance missions from Thailand.[17]

In addition, Deputy Defense Secretary Ashton Carter went to Thailand in July 2012 and the Thai government has invited Defense Secretary Leon Panetta, who met with the Thai minister of defense at a conference in Singapore in June.[18]

In 2014, the US Navy is scheduled to begin deploying new P-8A Poseidon reconnaissance and anti-submarine aircraft to the Pacific, replacing the P-3C Orion surveillance planes. The Navy is also preparing to deploy new high-altitude surveillance drones to the Asia-Pacific region around the same time. [19]

PART IV: India-US Defense ‘Look East Policy’

US Secretary of Defense Leon Panetta was in India in June of this year where he proclaimed that defence cooperation with India is the lynchpin of US security strategy in Asia. He pledged to help develop India’s military capabilities and to engage with India in joint production of defence “articles” of high technology. Panetta was thr fifth Obama Cabinet secretary to visit India this year. The message that they have all brought is that, for the US, India will be the major relationship of the 21st century. The reason is China’s emergence. [20]

Several years ago during the Bush Administration, Washington made a major move to lock India in as a military ally of the US against the emerging Chinese presence in Asia. India calls it India’s “Look East Policy.” In reality, despite all claims to the contrary, it is a “look at China” military policy.

In comments in August 2012, Deputy Secretary of defense Ashton Carter stated, “India is also key part of our rebalance to the Asia-Pacific, and, we believe, to the broader security and prosperity of the 21st century. The US-India relationship is global in scope, like the reach and influence of both countries.” [21] In 2011, the US military conducted more than 50 significant military activities with India.

Carter continued in remarks following a trip to New Delhi, “Our security interests converge: on maritime security, across the Indian Ocean region; in Afghanistan, where India has done so much for economic development and the Afghan security forces; and on broader regional issues, where we share long-term interests. I went to India at the request of Secretary Panetta and with a high-level delegation of U S technical and policy experts.” [22]

Indian Ocean

The Pentagon “String of pearls” strategy against China in effect is not one of beautiful pearls, but a hangman’s noose around the perimeter of China, designed in the event of major conflict to completely cut China off from its access to vital raw materials, most especially oil from the Persian Gulf and Africa.

Former Pentagon adviser Robert D. Kaplan, now with Stratfor, has noted that the Indian Ocean is becoming the world’s “strategic center of gravity” and who controls that center, controls Eurasia, including China. The Ocean is the vital waterway passage for energy and trade flows between the Middle East and China and Far Eastern countries. More strategically, it is the heart of a developing south-south economic axis between China and Africa and Latin America.

Since 1997 trade between China and Africa has risen more than twenty-fold and trade with Latin America, including Brazil, has risen fourteen fold in only ten years. This dynamic, if allowed to continue, will eclipse the economic size of the European Union as well as the declining North American industrial economies in less than a decade. That is a development that Washington circles and Wall Street are determined to prevent at all costs.

Straddled by the Islamic Arch–which stretches from Somalia to Indonesia, passing through the countries of the Gulf and Central Asia– the region surrounding the Indian Ocean has certainly become the world’s new strategic center of gravity.[23]

No rival economic bloc can be allowed to challenge American hegemony. Former Obama geopolitical adviser Zbigniew Brzezinski, a student of Mackinder geopolitics and still today along with Henry Kissinger one of the most influential persons in the US power establishment, summed up the position as seen from Washington in his 1997 book, The Grand Chessboard: American Primacy and It’s Geostrategic Imperatives:

It is imperative that no Eurasian challenger emerges, capable of dominating Eurasia and thus of also challenging America. The formulation of a comprehensive and integrated Eurasian geo-strategy is therefore the purpose of this book. [24]

For America, the chief geopolitical prize is Eurasia…. America’s global primacy is directly dependent on how long and how effectively its preponderance on the Eurasian continent is sustained. [25]

In that context, how America ‘manages’ Eurasia is critical. Eurasia is the globe’s largest continent and is geopolitically axial. A power that dominates Eurasia would control two of the world’s three most advanced and economically productive regions. A mere glance at the map also suggests that control over Eurasia would almost automatically entail Africa’s subordination, rendering the Western Hemisphere and Oceania geopolitically peripheral to the world’s central continent. About 75 per cent of the world’s people live in Eurasia, and most of the world’s physical wealth is there as well, both in its enterprises and underneath its soil. Eurasia accounts for 60 per cent of the world’s GNP and about three-fourths of the world’s known energy resources. [26]

The Indian Ocean is crowned by what some call an Islamic Arch of countries stretching from East Africa to Indonesia by way of the Persian Gulf countries and Central Asia. The emergence of China and other much smaller Asian powers over the past two decades since the end of the Cold war has challenged US hegemony over the Indian Ocean for the first time since the beginning of the Cold War. Especially in the past years as American economic influence has precipitously declined globally and that of China has risen spectacularly, the Pentagon has begun to rethink its strategic presence in the Indian Ocean. The Obama ‘Asian Pivot’ is centered on asserting decisive Pentagon control over the sea lanes of the Indian Ocean and the waters of the South China Sea.

The US military base at Okinawa, Japan is being rebuilt as a major center to project US military power towards China. As of 2010 there were over 35,000 US military personnel stationed in Japan and another 5,500 American civilians employed there by the United States Department of Defense. The United States Seventh Fleet is based in Yokosuka. The 3rd Marine Expeditionary Force in Okinawa. 130 USAF fighters are stationed in the Misawa Air Base and Kadena Air Base.

The Japanese government in 2011 began an armament program designed to counter the perceived growing Chinese threat. The Japanese command has urged their leaders to petition the United States to allow the sale of F-22A Raptor fighter jets, currently illegal under U.S law. South Korean and American military have deepened their strategic alliance and over 45,000 American soldiers are now stationed in South Korea. The South Koreans and Americans claim this is due to the North Korean military’s modernization. China and North Korea denounce it as needlessly provocative.[27]

Under the cover of the US war on Terrorism, the US has developed major military agreements with the Philippines as well as with Indonesia’s army.

The military base on Diego Garcia is the lynchpin of US control over the Indian Ocean. In 1971 the US military depopulated the citizens of Diego Garcia to build a major military installation there to carry out missions against Iraq and Afghanistan.

China has two Achilles heels—the Straits of Hormuz at the mouth of the Persian Gulf and the Strait of Malacca near Singapore. Some 20% of China oil passes through the Straits of Hormuz. And some 80% of Chinese oil imports pass through the Strait of Malacca as well as major freight trade.

To prevent China from emerging successfully as the major economic competitor of the United States in the world, Washington launched the so-called Arab Spring in late 2010. While the aspirations of millions of ordinary Arab citizens in Tunisia, Libya, Egypt and elsewhere for freedom and democracy was real, they were in effect used as unwitting cannon fodder to unleash a US strategy of chaos and intra-islamic wars and conflicts across the entire oil-rich Islamic world from Libya in North Africa across to Syria and ultimately Iran in the Middle East. [28]

The US strategy within the Islamic Arch countries straddling the Indian Ocean is, as Mohamed Hassan, a strategic analyst put it thus:

The US is…seeking to control these resources to prevent them reaching China. This was a major objective of the wars in Iraq and Afghanistan, but these have turned into a fiasco. The US destroyed these countries in order to set up governments there which would be docile, but they have failed. The icing on the cake is that the new Iraqi and Afghan government trade with China! Beijing has therefore not needed to spend billions of dollars on an illegal war in order to get its hands on Iraq’s black gold: Chinese companies simply bought up oil concessions at auction totally within the rules.

[T]he USA’s…strategy has failed all along the line. There is nevertheless one option still open to the US: maintaining chaos in order to prevent these countries from attaining stability for the benefit of China. This means continuing the war in Iraq and Afghanistan and extending it to countries such as Iran, Yemen or Somalia.[29]

PART V: South China Sea

The completion of the Pentagon “String of Pearls” hangman’s noose around China to cut off vital energy and other imports in event of war by 2012 was centered around the increased US manipulation of events in the South China Sea. The Ministry of Geological Resources and Mining of the People’s Republic of China estimated that the South China Sea may contain 18 billion tons of crude oil (compared to Kuwait with 13 billion tons). The most optimistic estimate suggested that potential oil resources (not proved reserves) of the Spratly and Paracel Islands in the South China Sea could be as high as 105 billion barrels of oil, and that the total for the South China Sea could be as high as 213 billion barrels. [30]

The presence of such vast energy reserves has not surprisingly become a major energy security issue for China. Washington has made a calculated intervention in the past several years to sabotage those Chinese interests, using especially Vietnam as a wedge against Chinese oil exploration there. In July 2012 the National Assembly of Vietnam passed a law demarcating Vietnamese sea borders to include the Spratly and Paracel islands. US influence in Vietnam since the country opened to economic liberalization has become decisive.

In 2011 the US military began cooperation with Vietnam, including joint “peaceful” military exercises. Washington has backed both The Philippines and Vietnam in their territorial claims over Chinese-claimed territories in the South China Sea, emboldening those small countries not to seek a diplomatic resolution.[31]

In 2010 US and UK oil majors entered the bidding for exploration in the South China Sea. The bid by Chevron and BP added to the presence of US-based Anadarko Petroleum Corporation in the region. That move is essential to give Washington the pretext to “defend us oil interests” in the area. [32]

In April 2012, the Philippine warship Gregorio del Pilar was involved in a standoff with two Chinese surveillance vessels in the Scarborough Shoal, an area claimed by both nations. The Philippine navy had been trying to arrest Chinese fishermen who were allegedly taking government-protected marine species from the area, but the surveillance boats prevented them. On April 14, 2012, U.S. and the Philippines held their yearly exercises in Palawan, Philippines. On May 7, 2012, Chinese Vice Foreign Minister Fu Ying called a meeting with Alex Chua, Charge D’affaires of the Philippine Embassy in China, to make a serious representation over the incident at the Scarborough Shoal.

From South Korea to Philippines to Vietnam, the Pentagon and US State Department is fanning the clash over rights to the South China Sea to stealthily insert US military presence there to “defend” Vietnamese, Japanese, Korean or Philippine interests. The military hangman’s noose around China is being slowly drawn tighter.

While China’s access to vast resources of offshore conventional oil and gas were being restricted, Washington was actively trying to lure China into massive pursuit of exploitation of shale gas inside China. The reasons had nothing to do with US goodwill towards China. It was in fact another major weapon in the destruction of China, now through a form of environmental warfare.

F. William Engdahl author of, Es klebt Blut an Euren Händen  (FinanzBuchVerlag)

Notes:

[1] President Barack Obama, Remarks By President Obama to the Australian Parliament, November 17, 2011, accessed in
http://www.whitehouse.gov/the-press-office/2011/11/17/remarks-president-obama-australian-parliament.

[2] Ibid.

[3] Otto Kreisher, UK Defense Chief to NATO: Pull Your Weight in Europe While US Handles China, July 22, 2012, accessed in
http://defense.aol.com/2012/07/19/uk-defense-chief-to-nato-pull-your-weight-in-europe-while-us-ha/?icid=related4 .

[4] BBC, China military ‘closing key gaps’, says Pentagon, 25 August 2011, accessed in http://www.bbc.co.uk/news/world-asia-pacific-14661027 .

[5] Ibid.

[6] Greg Jaffe , US Model for a Future War Fans Tensions with China and inside Pentagon, Washington Post, August 2, 2012, accessed in
http://www.turkishweekly.net/news/139681/us-model-for-a-future-war-fans-tensions-with-china-and-inside-pentagon.html.

[7] Ibid.

[8] Matt Siegel, As Part of Pact, U.S. Marines Arrive in Australia, in China’s Strategic Backyard, The New York Times,

April 4, 2012, accessed in http://www.nytimes.com/2012/04/05/world/asia/us-marines-arrive-darwin-australia.html.

[9] Greg Jaffe, op. cit.

[10] F. William Engdahl, Full Spectrum Dominance: Totallitarian democracy in the New World Order, Wiesbaden, 2009, edition.engdahl, p. 190.

[11] The Washington Times, China Builds up Strategic Sea Lanes, January 17, 2005, accessed in http://www.washingtontimes.com/news/2005/jan/17/20050117-115550-1929r/?page=all#pagebreak

[12] Ibid.

[13] Ibid.

[14] Wall Street Journal, An Opening in Burma: The regime’s tentative liberalization is worth testing for sincerity,

Wall Street Journal, November 22, 2011, accessed in
http://online.wsj.com/article/SB10001424052970204443404577049964259425018.html

[15] Radio Free Asia, US to Invest in Burma’s Oil, 7 November, 2011, accessed in
http://www.rfa.org/english/news/burma/sanctions-07112012185817.html

[16] Shaun Tandon, US eases Myanmar restrictions for NGOs, AFP, April 17, 2012, accessed in
http://www.google.com/hostednews/afp/article/ALeqM5jmwmJ3e0yIjyD-7N52GAFISnweAA?docId=CNG.a8c1c3e2edf92a30cc1b3c9bd5ed11c1.131

[17] Craig Whitlock, U.S. eyes return to some Southeast Asia military bases, Washington Post, June 23, 2012, accessed in
http://www.washingtonpost.com/world/national-security/us-seeks-return-to-se-asian-bases/2012/06/22/gJQAKP83vV_story.html

[18] Ibid.

[19] Ibid.

[20] Premvir Das, Taking US-India defence links to the next level, June 18, 2012, accessed in http://www.rediff.com/news/slide-show/slide-show-1-taking-us-india-defence-links-to-the-next-level/20120618.htm

[21] Zeenews, US-India ties are global in scope: Pentagon, August 02, 2012, accessed in
http://zeenews.india.com/news/world/us-india-ties-are-global-in-scope-pentagon_791212.html

[22] Ibid.

[23] Gregoire Lalieu, Michael Collon, Is the Fate of the World Being Decided Today in the Indian Ocean?, November 3, 2010, accessed in
http://www.michelcollon.info/Is-the-fate-of-the-world-being.html?lang=fr

[24] Zbigniew Brzezinski, The Grand Chessboard: American Primacy And It’s Geostrategic Imperatives, 1997, Basic Books, p. xiv.

[25] Ibid., p. 30.

[26] Ibid., p. 31.

[27] Cas Group, Background on the South China Sea Crisis, accessed in
http://casgroup.fiu.edu/pages/docs/3907/1326143354_South_China_Sea_Guide.pdf

[28] Gregoire Lalieu,, et al, op. cit.

[29] Ibid.

[30] GlobalSecurity.org, South China Sea Oil and Natural Gas, accessed in
http://www.globalsecurity.org/military/world/war/spratly-oil.htm

[31] Agence France Presse, US, Vietnam Start Military Relationship, August 1, 2011, accessed in
http://www.defensenews.com/article/20110801/DEFSECT03/108010307/U-S-Vietnam-Start-Military-Relationship

[32] Zacks Equity Research, Oil Majors Eye South China Sea, June 24, 2010, accessed in www.zacks.com/stock/news/36056/Oil+Majors+Eye+South

The US Economy in Crisis: Recovery is an Illusion

economy

Headlines flashed warning signs. Commentaries downplayed them. A Wall Street Journal editorial headlined “As Contractions Go….”

US Q IV GDP shrank, “but not to worry. The report is better than it sounds, the stock market is rocking, and (the Fed will) keep both feet pressed firmly on the monetary accelerator.”

The Financial Times headlined “US outlook still clear despite shower,” saying:

Predicting recession “based on (-0.1% GDP decline) “is a bit like expecting rain because somebody threw a bucket of water out the window.”

The wildcard is “if Congress decides to dump water out the window every month, via across-the-board ‘sequester’ cuts” expected soon.

According to Bloomberg, “R-Word For US Economy in 2013 is Rebound Not Recession.”

According to JP Morgan Chase, Bank of America, and Morgan Stanley economists, America’s economy “will bounce back in (Q I) after plunging defense spending and dwindling inventory growth” hurt Q IV.

Not according to economist John Williams. Recovery is illusory, he says. It’s fake. Phony government numbers conceal weakness. Growth hasn’t occurred since 2006/2007.

Earlier Williams said:

“Indeed, the ‘recovery’ is an illusion that has been created as a direct result of methodological changes in government inflation reporting of recent decades.”

They “resulted in an artificial lowering of official rates of inflation.  The faux growth problem is in the use of understated inflation estimates in deflating a number of economic series.”

“Major economic series that have no underlying pricing base – such as housing starts, payroll employment and consumer confidence – correspondingly do not require inflation adjustment to put them on a consistent theoretical basis with the concept of real (inflation-adjusted) GDP.”

“Those series confirm a history of business activity in recent years that shows a plunge in the economy from 2006/2007 into late-2008/mid-2009, followed by a period of protracted, low-level stagnation, or bottom-bouncing, instead of ‘recovery.’ ”

Williams expects double-dip recession in 2013. It likely began in 2012 Q II or III, he believes.

Last August, market analyst Marc Faber rated odds for global recession at 100%. Little or nothing ahead looks promising. Corporate profits will disappoint.

The Fed can do so much and no more. Money printing has limits. It’s not magic. On January 31, Faber repeated earlier warnings.

“When you print money,” he said, it “doesn’t flow evenly into an economy. It flows to some people or to sectors first, and in this case, it flowed into equities, and until about five months ago into bonds.”

“I believe that markets will punish central banks at some state through an accident.”

Stocks could hit bubble levels and pop. Rising interest rates could collapse bonds.

“For the first time in four years, since the lows in March 2009, I love this market because the higher it goes, the more likely we will have a nice crash, a big time crash.”

He thinks weak global growth and disappointing corporate profits will trigger trouble.

Fed governors are cautious. On January 3, FOMC minutes said:

“With regard to the possible costs and risks of purchases, a number of participants expressed the concern that additional purchases could complicate the Committee’s efforts to eventually withdraw monetary policy accommodation, for example, by potentially causing inflation expectations to rise or by impairing the future implementation of monetary policy.”

“Participants also discussed the implications of continued asset purchases for the size of the Federal Reserve’s balance sheet. Depending on the path for the balance sheet and interest rates, the Federal Reserve’s net income and its remittances to the Treasury could be significantly affected during the period of policy normalization.”

“Participants noted that the Committee would need to continue to assess whether large purchases were having adverse effects on market functioning and financial stability.” ”

“They expressed a range of views on the appropriate pace of purchases, both now and as the outlook evolved. It was agreed that both the efficacy and the costs would need to be carefully monitored and taken into account in determining the size, pace, and composition of asset purchases.”

Governors are conflicted. They have reason to worry. They’re questioning excessive longterm money printing benefits. Artificial schemes don’t work. They cause more harm than good.

Eventually they end. What can’t go on forever won’t. They’ll have to decide when. Economic and market consequences will follow.

Newly released Q IV GDP data showed growth contracted 0.1%. Sequestered deficit cutting suggests further declines. Consumer confidence is low for good reason. Europe, China, Japan, and other major world economies show weakness.

Is America on track for double dip trouble? In Q IV, government and business inventory spending declined. Auto sales alone drove consumer spending gains. Deep discounts, near zero interest rates, and Hurricane Sandy affected purchases stimulated sales.

Exports were down. Weak global manufacturing and trade affected them. Healthcare spending slowed noticeably. US economic growth ground to a halt. Doing so suggests weakness going forward.

Artificial stimulus works only so long. Q III included record defense spending. It accounted for over a third of GDP growth. It followed two years of reduced government spending.

Q III data were released days before November elections. Good news benefited Obama.

True Q III GDP growth was misreported. It wasn’t 3%. When accurately adjusted, it was 1 – 1.5%. It’s been that way for two years. Day of reckoning signs appeared in Q IV.

Multiple quantitative easing rounds barely held economic growth above water. Money printing madness substituted for stimulative growth. Central bank intervention repeated what hasn’t before worked.

European economies are troubled. America shows weakness. Force-fed austerity doesn’t work. Decline replaces prosperity. Living standards deteriorate. Households have less to spend.

Production and consumption suffer. So does the real economy. Financial war helps speculators alone benefit. Eventually expect systemic crisis. It could take months or years to arrive.

Market manipulation delays day of reckoning time. It can’t prevent it. Q IV GDP suggests 2013 weakness. Headwinds may be stiffer than expected.

Payroll tax increases cuts $100 billion from GDP. It does so when stimulus is needed. Consumer sentiment and spending are weak.

Expect sequestered/largely discretionary $1.2 trillion cuts by end of March. Stiff 10 – 20% health insurance premium hikes impact healthcare spending.

Business spending spiked in Q IV. It did so ahead of expected tax law changes. Expect it to slow in Q I. Manufacturing is weak. Housing remains troubled. So is America’s economy. Odds favor double-dip trouble.

Five years after economic collapse, virtually zero growth was achieved. Wall Street was bailed out. Main Street was sold out. Ellen Brown does some of the best financial writing.

Last September, she said America’s economy needs “a good dose of ‘aggregate demand.’ ” It needs money put in people’s pockets.

QE for Wall Street won’t jumpstart the economy. It won’t “reduce unemployment.” It’s stuck at 23%. It’s the highest since Great Depression levels.

QE puts no “money in the pockets of consumers.” It doesn’t “reflate the money supply.”

“(S)ignificantly lower interest rates for homeowners” aren’t achieved. Other consumer purchases don’t benefit.

QE helps bankers, other speculators and investors. Ordinary people are harmed. Economic growth is taxed. It’s monetary poison. It’s harming the dollar.

Finance is a new form of warfare. Money printing madness is based on the wrong-headed notion that Fed-supplied liquidity encourages bank lending to stimulate growth.

Despite multi-trillions of dollars in free zero interest rate money, bank lending to small/medium sized businesses and households is too little to help.

No loans mean no investment, no hiring, and no money in people’s pockets. At the same time, US corporate giants hoard enormous amounts of cash. Estimates range up to $5 trillion.

Fed reports downplay what’s held. Their data include only domestic cash reserves, Treasuries, other bonds, and bank accounts.

Foreign holdings aren’t included. Global trillions aren’t invested. They’re used for salaries, huge bonuses, dividends, stock buybacks, and speculation.

At the same time, inflation-adjusted consumer disposable income declined for decades. Post-9/11, it’s been especially hard hit.

Spending growth is largely credit driven. Insufficient income retards it. Households are debt-entrapped. Eventually they’ll be unable to assume more.

Progressive Radio News Hour regular Jack Rasmus discusses America’s “epic recession.” For five years, its economy “bumped along the bottom.” Conditions ahead look worse, not better.

Fed gamesmanship puts international finance at risk. Economies haven’t been healed. They’ve been wrecked. QE is a zero sum game. It’s financial terrorism.

It sacrifices growth for Wall Street. It hangs ordinary people out to dry. It promises protracted hard times. It leaves growing millions on their own sink or swim.

Let-eat-cake economics doesn’t work. It never did. It doesn’t now. It sparks decline and revolutions, not growth and prosperity.

Stephen Lendman lives in Chicago and can be reached at lendmanstephen@sbcglobal.net. 

His new book is titled “Banker Occupation: Waging Financial War on Humanity.”

http://www.claritypress.com/LendmanII.html

Visit his blog site at sjlendman.blogspot.com and listen to cutting-edge discussions with distinguished guests on the Progressive Radio News Hour on the Progressive Radio Network Thursdays at 10AM US Central time and Saturdays and Sundays at noon. All programs are archived for easy listening.

http://www.progressiveradionetwork.com/the-progressive-news-hour

http://www.dailycensored.com/us-economy-troubled-or-alls-well/

Unemployment Edges Up to 7.9 Percent as Economy Adds 157,000 Jobs

Help Wanted.(Photo: Jason Taellious / Flickr)Fiscal cliff concerns appear to have no impact whatsoever on hiring.

The unemployment rate edged up slightly to 7.9 percent in January as the economy added 157,000 jobs in the month. The unemployment rate has essentially been unchanged the last five months. The January job growth was pretty much in line with expectations, but growth for the prior two months was revised up by 127,000. This brings the average rate of job growth over the last three months to 200,000, considerably better than the average of 168,000 over the last year.

There were few noteworthy changes in the household data. There was a 0.4 percentage point rise in the unemployment rate for white men to 6.6 percent due to an influx of people looking for work. This could be a sign of the unemployed being more optimistic about their job prospects, but it may also just be an erratic fluctuation in the data. The participation rate for white men had fallen by 0.2 percentage points from October to December. The employment-population ratio for workers with just a high school degree fell by 0.3 percentage points to 54.0 percent, a new low for the downturn.

All the duration measures of unemployment fell sharply in January. The average duration of unemployment spells fell by 2.8 weeks, the largest drop ever. The median duration fell by 2 weeks and the share of long-term unemployed fell by 1.0 percentage points. This decline undoubtedly reflects the shortening of the period of extended benefits after the fiscal cliff deal. Since workers are required to look for jobs to get benefits, it appears that many of the unemployed stopped looking for work when their benefits expired and therefore are no longer counted as unemployed.

With the upward revisions to the November and December data, the picture in the establishment survey looks somewhat brighter. However, it is likely that these numbers are at least somewhat inflated due to unusually warm weather. There was a similar story last year with the winter months showing relatively good job growth. The result was that hiring was moved forward and the spring months then looked exceptionally weak. We may see the same story this year.  

Retail trade, construction, and health care were the big job gainers in December, adding 32,000, 28,000, and 22,000 jobs, respectively. Retail has added an average of 37,000 jobs a month over the last three months. Health care has added an average of 31,000 jobs over this period.

Construction has added an average of 27,000 jobs a months since October. This rise is also in part attributable to unusually warm weather as well as repairs after Hurricane Sandy. However it may also be partly attributable to the bounce back in housing construction.

020113-5 chart

It is worth noting the divergence in construction employment as measured in the household survey and jobs as measured in the establishment survey. The former rose considerably more during the boom in the last decade and fell somewhat more in the downturn. This likely reflects undocumented workers in the industry who are likely working off the books.

Other sectors generally showed weak growth in January. Manufacturing added just 4,000 jobs. With downward revisions to the prior month’s data (the December report showed manufacturing adding 25,000 jobs), job growth in the sector has averaged just 6,000 since October. Temp sector employment fell by 8,000, almost completely reversing the gain in December. Restaurant employment rose by 17,000, roughly in line with its growth over the prior two months.

Government employment edged down by 9,000, roughly the same as its pace over the last year. Average weekly hours were unchanged in January, while average hours for production workers were down by 0.1 hours. Compared with year-ago levels, average hours for production workers are down by 0.2 hours, while average hours for all workers are down by 0.1 hour. Average hourly wage growth has picked up somewhat recently, rising at a 2.7 percent annual rate over the last three months. However, the data are sufficiently erratic, so this could be an aberration.

This report shows a picture of an economy that is growing slightly more rapidly than its potential. While this growth pace is consistent with modest declines in unemployment, that may not be true when the effects of deficit reduction are felt.

FCC Chairman’s Legacy: Ignoring Diversity

Federal Communications Commission Chairman Julius Genachowski's plan to allow greater media consolidation in local markets could wipe out many of the remaining TV station owners of color left in the country.

According to the latest data, people of color own just over 3 percent of all full-power TV stations — just 43 of the nation's 1,348 stations — despite making up close to 40 percent of the U.S. population. African Americans own just five stations. That's only 0.4 percent of all commercial TV stations. And Latinos own 1.6 percent of all TV stations, despite making up close to 17 percent of the U.S. population.

But the FCC chairman doesn't plan to deal with this media inequality. Instead, he wants to adopt rules that will make things worse.

This situation didn't arise by accident. Decades ago, the FCC distributed our nation's first radio and TV licenses predominantly to white men or big corporations. And the agency has resisted efforts through the years to democratize our nation's media system or address its inequalities in any meaningful way. This has prevented people of color from being able to tell their own stories; instead, they've been marginalized in both news and entertainment programming.

Genachowski, a friend of President Obama from their days in law school, has shown no interest in ownership diversity. Indeed, Genachowski plans to adopt many of the same rules then-Sen. Obama and other Democratic congressional leaders voted to throw out when the Bush-era FCC tried to push them through in 2007.

For example, Genachowski wants to relax the TV-newspaper cross-ownership ban in the top 20 media markets. This would allow one company to own both the leading daily newspaper and a TV station ranked outside the top four in the same market. It's a change that would allow News Corp.'s Rupert Murdoch to buy the Los Angeles Times and the Chicago Tribune in cities where he already owns Fox stations.

Nearly half of the 43 stations currently owned by people of color nationwide are located in the top 20 markets, and all of those are rated outside the top four. The rule change would make these stations prime targets for acquisition — meaning that the percentage of TV station owners of color could decline even further.

We're already moving in the wrong direction. According to Free Press' latest analysis:

• African Americans own three fewer TV stations than they did in October 2011. Overall there are now six fewer stations owned by people of color than there were in 2011.

• The percentage of African-American-owned TV stations has declined by 74 percent in just six years.

• The number of TV stations owned by people of color has declined by 20 percent since 2006.

• In the last six years, 26 full-power TV stations owned by people of color were sold to "non-minority" owners. All but one was sold under "financial distress."

This last point is critical. Media consolidation places tremendous financial pressure on broadcast owners of color in local markets because they have a hard time competing with larger corporations for advertising and programming.

The federal court that has twice in the past decade rejected the FCC's attempts to loosen ownership rules ordered the agency to study the impact of any rule changes on ownership diversity before adopting new rules.

But Genachowski has resisted such an effort, even as the abysmally low levels of broadcast ownership for women and people of color have gotten even worse during his tenure.

The chairman has also ignored calls from more than 60 members of Congress and all of the leading civil rights, public interest and media justice groups to shelve his plan until the FCC conducts such a study.

His refusal to deal with diversity is all the more inexplicable given that just a couple of months ago voters of color played a primary role in President Obama's re-election — an election that allowed Genachowski to keep his job.

Though perhaps the chairman is more concerned about his next job, as numerous press reports indicate Genachowski plans to leave the FCC soon.

But Genachowski does seem to care about his legacy: In recent interviews, the chairman has tried to convince reporters that his tenure was historic because he guided our nation through a transformative time in our communications industry.

But the FCC's broken policies and Genachowski's closed-door approach should really be relics of the past. And if Genachowski is remembered at all, it will be for consistently placing corporate interests ahead of the public interest and for failing to address the growing racial and ethnic disparities that deepen our nation's media inequality.

No matter how hard Genachowski tries to convince us that he's a transformative figure, he seems stuck on the wrong side of history.

How Today’s “Strong” Jobs Report Led To 115,000 Job Losses

While it is enticing to fall for the same old trick of reading the "quantitative", or headline, jobs data, driven entirely by the Establishment Survey, which as the BLS itself showed today, is nothing but mere noise based on seasonal adjustments and p...

US Economy: Troubled or All’s Well?

Is America on track for double dip trouble? In Q IV, government and business inventory spending declined. Auto sales alone drove consumer spending gains. Deep discounts, near zero interest rates, and Hurricane Sandy affected purchases stimulated sales.

Frontrunning: February 1

  • 'London Whale' Sounded an Alarm on Risky Bets (WSJ)
  • Deadly Blast Strikes U.S. Embassy in Turkey (WSJ)
  • Abe Shortens List for BOJ Chief as Japan Faces Monetary Overhaul (BBG)
  • Endowment Returns Fail to Keep Pace with College Spending (BBG) - More student loans
  • Mexico rescue workers search for survivors after Pemex blast kills 25 (Reuters)
  • Lingering Bad Debts Stifle Europe Recovery (WSJ)
  • Peregrine Founder Hit With 50 Years (WSJ) - there is hope Corzine will get pardoned yet
  • Deutsche Bank to Limit Immediate Bonuses to 300,000 Euros
  • France's Hollande to visit Mali Saturday (Reuters)
  • France, Africa face tough Sahara phase of Mali war (Reuters)
  • Barclays CEO refuses bonus (Barclays)
  • Edward Koch, Brash New York Mayor During 1980s Boom, Dies at 88 (BBG)
  • Samsung Doubles Tablet PC Market Share Amid Apple’s Lead (BBG)
  • Hagel Endures Republican Criticism as Levin Sees Approval (BBG)
  • U.S. sues to stop beer deal to unite Bud and Corona (Reuters)

Overnight Media Digest

WSJ

* The JP Morgan Chase & Co trader known as the "London whale" tried to alert others at the bank to mounting risks months before his bets ballooned into more than $6 billion in losses, according to people familiar with emails reviewed by J.P. Morgan and a U.S. Senate panel.

* The U.S. government filed suit to block Anheuser-Busch InBev's $20.1 billion deal to buy the rest of Grupo Modelo, saying it would reduce competition.

* Chinese hackers believed to have government links have been conducting wide-ranging electronic surveillance of media companies including The Wall Street Journal, apparently to spy on reporters covering China and other issues, people familiar with incidents said.

* President Barack Obama let his jobs council disband Thursday as its two-year charter expired, sparking criticism among Republicans and conservative economists that the group had provided more show than substantive policy.

* Morgan Stanley said it would increase the salaries of Chairman and Chief Executive James Gorman and other top executives to make their pay more competitive.

* AirAsia Bhd's chief executive hopes to list the group's Indonesia arm on the Jakarta stock exchange in the third quarter as the budget carrier seeks to expand its foothold in Southeast Asia's largest air travel market.

* Roomy Khan, one of the first cooperating witnesses who helped build the U.S. government's case against convicted hedge-fund manager Raj Rajaratnam, was sentenced to one year in prison Thursday.

* Animal-medicine maker Zoetis Inc, which is being carved into a standalone company by drug maker Pfizer Inc, raised about $2.2 billion in an initial public offering, a strong showing for the largest IPO deal from a U.S. company since Facebook Inc debuted last May.

* Best Buy Co is closing 15 of its 75 big-box stores in Canada as its new chief executive tries to stem slumping sales and profits at the consumer electronics chain.

FT

BARCLAYS IN QATAR LOAN PROBE - UK authorities are looking into an allegation that Barclays lent Qatar money to invest in the bank during the height of the 2008 financial crisis, allowing it to avoid a government bailout, according to unnamed sources cited by the newspaper.

SEYMOUR PIERCE'S FUTURE UP IN THE AIR - The board of Seymour Pierce held talks on Thursday night over the future of the stockbroker, with an unnamed source saying this has come about due to the FSA previously blocking funding from Ukrainian backers.

AB INBEV'S 20 BILLION DOLLAR DEAL THREATENED BY US SUIT - The United States moved to block Anheuser-Busch InBev in its 20 billion dollar acquisition of Grupo Modelo , the Mexican brewer, saying it would lead to an increase in prices and deter competition.

BERTELSMANN SEEKS BUYER FOR TWO BILLION EURO RTL STAKE - German media group Bertelsmann said it intends to sell a stake in broadcasting subsidiary RTL, aiming to raise up to 2 billion euros

LAWSON URGES FULL NATIONALISATION OF RBS - Former Conservative finance minister, Nigel Lawson said the UK government should nationalise RBS and there was a case for no bonuses to paid this year.

DEUTSCHE BANK RISES ON CAPITAL STRENGTH - The bank offered good news to investors reporting a capital base above expectations, bolstering its share price.

CHINA'S WORKERS ENDURE UNHAPPY NEW YEAR - An austerity drive by the new Chinese leadership of Xi Jinping has led government departments and state-owned enterprises to cut back or cancel new year festivities.

US BANKS SQUEEZED AS MORTGAGE PROFITS HIT - Bonanza profits at US banks from mortgages are being squeezed, raising doubts about earnings at lenders such as Wells Fargo, Bank of America and others.

WASENDORF GETS 50 YEARS JAIL FOR FRAUD - A federal court in the United States sentenced the ex head of collapsed future broker Peregrine Financial Group, Russell Wasendorf Sr., to 50 years in prison.

NYT

* The Justice Department has sued to block Anheuser-Busch InBev's proposed $20.1 billion deal to buy control of Grupo Modelo, the first major roadblock in a decade of consolidation by brewers around the world.

* A bankruptcy court judge approved a broad settlement deal on Thursday that paves the way for MF Global customers to recover much of the $1.6 billion that disappeared when the brokerage firm blew up in 2011.

* European antitrust officials on Thursday accused drug giants Johnson & Johnson and Novartis of colluding to delay the availability of a less expensive generic version of a powerful medication often used to ease severe pain in cancer patients.

* James Gorman, chief executive of Morgan Stanley, will receive a huge raise in his base salary this year, but his overall pay package for 2012 was down from 2011, according to a regulatory filing.

* Pfizer Inc's animal health unit, known as Zoetis, raised $2.2 billion in its initial public offering on Thursday, exceeding expectations by pricing its stock at $26 a share, above the expected range of $22 to $25 a share. The sale values the company at about $13 billion.

* Roomy Khan, a central figure in the investigation that led to the conviction of hedge fund manager Raj Rajaratnam, was sentenced to one year in prison on Thursday for illegally passing inside information and obstructing justice.

* Fabrice Tourre, the Goldman Sachs trader accused of misleading clients over a controversial mortgage deal, is no longer working at the firm.

Canada

THE GLOBE AND MAIL

* Canada will begin a two-year stint at the helm of the eight-nation Arctic Council amid a clamor of competing calls for leadership, as the ice recedes and the race heats up to extract resource riches while protecting a fragile and now-exposed environment.

* Toronto Mayor Rob Ford is publicly at odds with a key member of his team again, this time in a he-said, she-said spat with the Toronto Transit Commission chair.

The verbal tussle over the approval last week by the transit commission of a 15-year sole-source contract is the latest example of Ford's difficulty seeing eye to eye with even fiscal conservatives on council.

Reports in the business section:

* The Canadian economy expanded at its fastest pace in more than half a year, but the bigger picture is still one of slow growth. The country's gross domestic product rose 0.3 percent in November, Statistics Canada said Thursday, its strongest showing in seven months as auto makers and oil firms ramped up activity.

NATIONAL POST

* Prime Minister Stephen Harper says while some of his Conservative Members of Parliament may not agree, abortion is legal in Canada. Harper made the comments while under questioning in the House of Commons over a letter written by three Tory MPs who want the Royal Canadian Mounted Police to investigate hundreds of abortions as possible homicides.

FINANCIAL POST

* Two of Canada's biggest retailers, Best Buy Canada and Sears Canada Inc, announced layoffs Thursday in what is shaping up to be a turbulent and competitive year for the country's retail sector.

China

PEOPLE'S DAILY

-- Premier Wen Jiabao pledged that China would continue its opening up policy during a meeting with foreign experts on Monday.

SHANGHAI SECURITIES NEWS

-- The People's Bank of China (PBOC) drained a net 300 billion yuan ($48 billion) via reverse bond repurchase agreements in its open market operations in January as the country's interbank market was flooded with cash.

-- The recent serious pollution in Beijing has given rise to suspicion of the quality of China's fuel and gasoline.

CHINA SECURITIES JOURNAL

-- Sources say Chinese authorities have suspended a plan to expand an experimental property tax now levied in a few cities including Shanghai and Chongqing.

-- A monthly index issued by China's national fund for protecting stock investors shows that in January, investor confidence in the domestic equity market reached its highest since April 2011 as the main Shanghai Composite Index began a sharp rebound since early December.

CHINA BUSINESS NEWS

-- High costs and bureaucracy have made 78 percent of Chinese firms feel it is difficult to operate in the European Union, according to a survey by the European Union Chamber of Commerce in China.

CHINA DAILY (www.chinadaily.com.cn)

-- In a move aimed at strengthening personal data protection, companies will be instructed to delete customer information after use, according to new guidelines implemented on Friday.

Fly On The Wall 7:00 AM Market Snapshot

ANALYST RESEARCH

Upgrades

AB InBev (BUD) upgraded to Outperform from Market Perform at Bernstein
Arthur J. Gallagher (AJG) upgraded to Outperform from Market Perform at William Blair
Audience (ADNC) upgraded to Hold from Sell at Deutsche Bank
Chubb (CB) upgraded to Buy from Hold at Deutsche Bank
Deutsche Bank (DB) upgraded to Buy from Neutral at Citigroup
Ericsson (ERIC) upgraded to Neutral from Underperform at Credit Suisse
GameStop (GME) upgraded to Overweight from Neutral at Piper Jaffray
Greenway Medical (GWAY) upgraded to Strong Buy from Market Perform at Raymond James
Neutral Tandem (IQNT) upgraded to Market Perform from Underperform at Raymond James
Oracle (ORCL) upgraded to Outperform from Market Perform at BMO Capital
PACCAR (PCAR) upgraded to Outperform from Market Perform at Wells Fargo
Verizon (VZ) upgraded to Overweight from Neutral at Piper Jaffray
W. R. Berkley (WRB) upgraded to Hold from Sell at Deutsche Bank
WMS Industries (WMS) upgraded to Neutral from Sell at Goldman
Wynn Resorts (WYNN) upgraded to Buy from Neutral at Janney Capital

Downgrades

AB InBev (BUD) downgraded to Hold from Buy at Societe Generale
ARMOUR Residential (ARR) downgraded to Neutral from Buy at BofA/Merrill
Alkermes (ALKS) downgraded to Neutral from Buy at BofA/Merrill
Amerseco (AMRC) downgraded to Perform from Outperform at Oppenheimer
Bob Evans (BOBE) downgraded to Hold from Buy at KeyBanc
Brightcove (BCOV) downgraded to Outperform from Top Pick at RBC Capital
Colfax (CFX) downgraded to Hold from Buy at KeyBanc
Constellation Brands (STZ) downgraded to Neutral from Buy at BofA/Merrill
Constellation Brands (STZ) downgraded to Neutral from Buy at Goldman
Copart (CPRT) downgraded to Hold from Buy at BB&T
Edison International (EIX) downgraded to Neutral from Buy at SunTrust
HSBC (HBC) downgraded to Neutral from Buy at Citigroup
Harris Teeter (HTSI) downgraded to Hold from Buy at BB&T
Harris Teeter (HTSI) downgraded to Market Perform from Outperform at BMO Capital
HealthSouth (HLS) downgraded to Hold from Buy at Deutsche Bank
Hologic (HOLX) downgraded to Reduce from Neutral at SunTrust
Life Time Fitness (LTM) downgraded to Market Perform from Outperform at William Blair
MasterCard (MA) downgraded to Market Perform from Outperform at Wells Fargo
Quiksilver (ZQK) downgraded to Neutral from Outperform at RW Baird
Royal Dutch Shell (RDS.A) downgraded to Underperform from Neutral at BofA/Merrill
Time Warner Cable (TWC) downgraded to Hold from Buy at Deutsche Bank
Time Warner Cable (TWC) downgraded to Market Perform from Outperform at Wells Fargo
UPS (UPS) downgraded to Neutral from Buy at Citigroup
Viacom (VIAB) downgraded to Neutral from Overweight at Piper Jaffray
Whirlpool (WHR) downgraded to Outperform from Strong Buy at Raymond James

Initiations

Blue Nile (NILE) initiated with an Outperform at Wells Fargo
Edwards Lifesciences (EW) initiated with a Buy at Janney Capital
Helmerich & Payne (HP) initiated with a Neutral at Credit Suisse
NCI Building Systems (NCS) initiated with a Buy at BB&T
Nabors Industries (NBR) initiated with an Underperform at Credit Suisse
National Oilwell (NOV) initiated with a Neutral at Credit Suisse
Oceaneering (OII) initiated with a Neutral at Credit Suisse
Oil States (OIS) initiated with an Outperform at Credit Suisse
Patterson-UTI Energy (PTEN) initiated with a Neutral at Credit Suisse
Precision Drilling (PDS) initiated with a Neutral at Credit Suisse
Shutterfly (SFLY) initiated with a Market Perform at Wells Fargo
Sunshine Heart (SSH) initiated with an Overweight at Piper Jaffray
Zoetis (ZTS) initiated with a Buy at ISI Group

HOT STOCKS

Sprint (S): DISH (DISH) proposal for Clearwire (CLWR) is “illusory”
Moody's said DOJ suit is credit negative for AB InBev (BUD) but doesn’t change rating
Barrick (ABX) considering sale of Barrick Energy unit, other assets, Bloomberg reports
Chubb (CB) announced new $1.3B share repurchase plan
Sees FY13 net written premiums up 2% to 4%
Goodyear Tire (GT) to exit farm tire business in Europe, Middle East and Africa region
OCZ Technology (OCZ) sees 20%-30% company growth year-over-year
Brink's (BCO) to divest cash-in-transit operations in Germany
Said will be “very difficult” to match 2012 earnings
Viad (VVI) sees FY13 revenue decreasing “at a low to mid single-digit rate”
Newell Rubbermaid (NWL) sees FY13 net sales up 1% to 3%

EARNINGS

Companies that beat consensus earnings expectations last night and today include:
Viad (VVI), Chubb (CB), C.R. Bard (BCR), Fortune Brands (FBHS), Bally Technologies (BYI), Affymetrix (AFFX), Principal Financial (PFG)

Companies that missed consensus earnings expectations include:
Brink's (BCO), Consolidated Edison (ED), McKesson (MCK), Wynn Resorts (WYNN), bebe stores (BEBE)

Companies that matched consensus earnings expectations include:
Eastman Chemical (EMN), Reinsurance Group (RGA), PerkinElmer (PKI)

NEWSPAPERS/WEBSITES

The JPMorgan Chase (JPM) trader known as the "London whale"--Bruno Iksil--tried to alert others at the bank to mounting risks months before his bets ballooned into more than $6B in losses, sources say, the Wall Street Journal reports
Asian manufacturing data today suggested the region's economic recovery is continuing. HSBC's China PMI reached a two-year high of 52.3 from December's 51.5, while the official PFLP number fell to 50.4 from December's 50.6, the Wall Street Journal reports
Dell (DELL) is close to an agreement to sell itself to a buyout consortium led by its founder and CEO Michael Dell and private equity firm Silver Lake Partners, with a deal coming as soon as Monday, sources say, Reuters reports
Airbus (EADSY) studied alternatives to lithium-ion batteries for its next jet, the A350, and has time to adapt to any rule changes prompted by the problems that have grounded Boeing’s (BA) 787 Dreamliner, says CEO Fabrice Bregier, Reuters reports
Anheuser-Bush InBev (BUD) may have to give up more control of U.S. beer distribution or sell a brewery to settle an antitrust lawsuit by the U.S. to block its $20.1B takeover of the rest of Grupo Modelo SAB (GPMCF), Bloomberg reports
Equity funds attracted six times the money that went into bonds in the week ended January 30, according to a Citigroup (C) report that cited EPFR Global data. Stock funds drew $18.8B, exceeding the $3B that went into bonds, as 58% of the equity inflows went into North American funds, with exchange-traded funds being the largest beneficiaries, the analysts wrote, Bloomberg reports

SYNDICATE

Bonanza Creek (BCEI) 11.5M share Secondary priced at $29.50
Chesapeake Lodging (CHSP) files to sell 6.25M shares of common stock
Echo Therapeutics (ECTE) 13.33M share Spot Secondary priced at 75c
Navios Maritime Partners (NMM) files to sell 4.25M shares of common stock
Penn National (PENN) files to sell convertible preferreds and stock for REIT structure
United Insurance (UIHC) files to sell 717K shares of common stock for holders
Zoetis (ZTS) 86.1M share IPO priced at $26.00

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Key Acronyms Of The Overnight Session: PMI, LTRO, USDJPY And EURUSD

After two consecutive down days in the market, it was time to get real, and like clockwork the dollar and yen devastation started right out of the gate in overnight trading, when first the USDJPY exploded higher, followed promptly by the EURUSD, both of which hit new period highs, of over 92, and just why of 1.37 respectively. And with not one funding currency around to push risk higher, but two, futures have ramped enough to undo all of yesterday's losses and then some. Bad news was either promptly ignored, such as China's official PMI coming in at 50.4, below expectations of the 50.6 print, or offset by conflicting data, with the HSBC China PMI print moments after at 52.3, higher than the 52.0 expected, taking us back to early 2012 when the Chinese PMI was contracting and expending at the same time.

Speaking of PMIs, it was Europe's turn to release its final PMIs, which came in line with expectations, with Spain and Italy posting yet another modest increase, Germany rising from 48.8 to 49.8, and above the expectations of an unchanged number, and the consolidated Eurozone Manufacturing PMI printing at 47.9, up from the previous and expected 47.5: an 11 month high. Then again all these gains took place under a weak Euro regime - it now remains to be seen how European manufacturing operates when the EURUSD is on its way to 1.40, and when both Germany and France are now warning about the inevitable hit to their exports. Concluding the economic picture in Europe was the unemployment print which remained flat at 11.7%, the same as the revised prior number.

And then, under an hour ago, we had the star event of the day, the second 3 Year LTRO repayment announcement, which was a dud. With expectations soaring, and some expecting as much as €200 billion to be repaid following last week's €137 billion repayment, the ECB shocked the market when it reported that just €3.484 billion would be repaid by 27 banks on February 6, which in turn means a far less than expected contraction in the ECB balance sheet, and a dip in the EURUSD from overnight highs. This has immediately prompted questions of just how healthy are the European banks if they are now repaying less on a total blended basis than had been expected previously.

On the other hand, how one can talk about ECB balance sheet "contraction" when Draghi has pledged unlimited balance sheet support should Europe need it, still boggles the mind, and is precisely that it is unquantifiable that the algos tracking the relative sizes of the European and US balance sheets are unable to parse this in terms of the EURUSD pair. Of course, sooner or later even the ECB will have to enter the global currency war and grow its own balance sheet. At that point the unlimited off-balance sheet support will have to shit to very limited on-balance sheet, and the cycle will repeat anew as the two biggest currency pairs resume their dance, only this time with the USD getting stronger for an indefinite amount of time.

Finally, in the "not all is great news" category, and confirming the LTRO perspective that European banks are far from out of the woods, Dutch bank SNS Reaal NV was nationalized overnight, the country’s second banking nationalization since 2008, as real-estate losses brought the bank to the brink of collapse.

“I scrutinized all alternative solutions involving market parties,” Finance Minister Jeroen Dijsselbloem said. “Yesterday night I found myself compelled to conclude no acceptable total solution was offered. I therefore had to use the instrument of last resort, which is nationalization.”

The lender, which acquired ABN Amro Holding NV’s property- finance unit in 2006, has been hurt by losses on real estate loans that have left it struggling to repay a government bailout before next year’s deadline and bolster capital buffers. The nationalization includes all issued shares, core tier 1 capital securities and subordinated bonds, the ministry said.

SNS shares were suspended in Amsterdam. They last traded yesterday at 84 cents, valuing the company at 242 million euros, and have declined 57 percent in the past year.

And with Europe largely out of the way, it is now the US' turn, where all eyes turn to the non-farm payrolls number to be released at 8:30 am, which will be great if it is bad, as it means much more unlimited QE, and greater if it is good, as it means the "recovery" is sustainable, and the manufacturing ISM just after.

Some more on the overnight action from DB

The first payrolls report of 2012 is expected to deliver a modestly better headline number than the one in December. Indeed the market consensus is for a headline of +165k versus +155k previously. Private payrolls and the unemployment rate are expected to remain broadly steady at +168k and 7.8% though. One interesting theme to watch in 2013 is if the seasonals again dominate the data and indeed payrolls. Joe LaVorgna pointed out that in each of the last two years, employment started the year on a strong note only to weaken noticeably by the third quarter.

There has been talk of the financial crisis distorting seasonal adjustments. Payroll reports are obviously now going to be watched even more closely in 2013 given the current Fed’s policy in linking QE to labour market conditions. This does leave the rates market vulnerable to strong prints. Volatility on payrolls Friday could be significant this year.

Employment data aside the US ISM manufacturing is expected (Bloomberg) to remain largely steady in January versus last month (50.6 v 50.7) but the stronger than-expected Chicago PMI yesterday (55.6 v 50.5) might raise some hopes. In Europe, Italy’s PMI manufacturing is expected (Bloomberg) to rise modestly to 47.4 from 46.7 last month while Spain’s is expected to also improve a smidgen to 45.5 from 45.3. Steady improvements in these two countries is needed. The problems will arise if we start to plateau before we get close to 50.

In terms of markets, the highest Chicago PMI print since April with solid improvement in the underlying details did little to enthuse month end trading. The S&P 500 traded down to close -0.26% lower on the day. A fairly downbeat outlook from UPS and a higher-than-expected initial jobless claims data (368k v 350k) probably didn’t help although it was a mixed day for data watchers. Personal income rose more than expected (+2.6% v +0.8%) in December largely driven by dividend income ahead of scheduled tax increases although Personal Spending stats were a little below expectations (+0.2% v +0.3%). UPS’s shares fell 2.4% on the day despite announcing a larger share buyback programme this year which was viewed as a credit negative by the rating agencies. In other markets the CDX IG pulled back from its recent wides to outperform equities for the first time in many days. The index closed 1.5bp tighter while HY credit also saw some support yesterday.

Asian equities are mixed overnight. Gains are being led by the Shanghai Composite (+0.5%) and the ASX200 (+0.87%), while the Hang Seng (-0.3%) and KOSPI (-0.2%) lag. The official Chinese manufacturing PMI for January fell short of market consensus (50.4 v 51.0) and also down from the 50.6 print seen in both December and November. Meanwhile, the final HSBC version (52.3 v 52.0
expected) came in stronger...

The Nikkei (+0.3%) is also outperforming helped by further JPY weakness (92.2). The US Treasury 10-year yield added 2bp and is currently trading a shade over 2.00%.So all eyes will be on Payrolls and the ISM/PMI numbers and crucially the reaction in the rates market.

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Fox Suggests Welfare Queens Responsible For Obama’s High Popularity

You'd think that since the “47%” meme hasn't worked out so well, Fox would have dropped it by now. But, like that old definition of insanity, they keep doing the same thing and expecting new results. Only now it's the 60% of Americans who approve of President Obama's job performance, despite the “dismal” economy, who are the “takers.”

On Fox & Friends this morning, the Curvy Couch Crew gnashed their teeth over the the fact that President Obama is riding high in popularity even as the economy shrank in the last quarter for the first time since 2009.

Steve Doocy said about the economic news:

How could it be unexpected? All you've gotta do is look at what's about to happen. We're about to decimate the national security. There's a possibility the 1.2 million security jobs could be lost in this country, plus all the regulations placed on businesses with the Affordable Care Act. It's shocking that the number isn't worse.

Then with his clown face, Doocy sneered that White House spokesman Jay Carney isn't blaming George Bush now. “He just blames the Republicans in general.”

Brian Kilmeade, noting that the stock market is up, but consumer confidence down, cried out, “But the president's approval rating is 60%! It's like he's impervious to numbers!"

Doocy made sure to throw cold water on the stock market rise. He said the market is up because “the Fed is pumping all this dough every month, billions and billions of dollars into the economy. And the unemployment number – you know, it's just under 8% but it would be much higher if you factored in all the people who simply said, 'I can't find a job. We give up!'”

Having established the economic gloom and doom, they then turned to the question of why President Obama is so popular. Of course, they could have done a teensy bit of research and discovered that the country received his second inaugural address very favorably. Despite Fox News' best efforts. Or that, as Nate Silver recently pointed out, Obama “has at least a slim majority of Americans in his corner” on most of the issues he raised, including guns, climate change and immigration. Also despite Fox's best efforts.

Instead of facts, Doocy opined that the “mainstream media” is responsible for Obama's popularity because it has not reported enough about how “dismal” the economy is. He added, “It's the same thing in the run up to the election. The number one story affecting the most Americans: the economy. But instead, what do we get? We got the 47%, war on women. We got the binders, we got everything except what really matters.”

You mean like Benghazi? Or birtherism? You didn't build that? Or how the polling was not accurately predicting Romney's victory?

Gretchen Carlson wasn't convinced. She said, “People will write books about this for years on end how the popularity of this president remained so high and yet the economy remains relatively dismal.”

So, without bothering to lift a finger to come up with any actual data, they turned to their audience for “answers.” Previously Carlson had said they had received “different thoughts” from viewers as to why the president is still so popular. First, Carlson summarized by saying, “Some people said that it's because, you know, a lot of people now are in situations where they're receiving government handouts and so they like to see a president in power who believes in continuing to do those types of programs.”

Then they posted some individual emails and/or tweets reinforcing that view:

  • Ever heard the saying, 'Don't shoot Santa Clause?” If you do not work, you had no increase in payroll deductions. If you're here illegally, you have the same rights as legal citizens and now everyone is going to be granted legal status.” (from “Charley”)
  • That's easy, It is because he hands out welfare like we hand out candy to kids at Halloween. Groceries, cell phone, gas, house, TV and any other thing you can think of... without having to put an effort to get off the couch and get a job. Why not like that person? (from “Scott”)

However, Carlson did dig up a tweet from Republican Senator John Thune responding to Jay Carney's remarks and asking, “What planet do these guys live on?"

Um, maybe the one where S&P downgraded the U.S. credit rating because of Republican "brinksmanship." But you probably won't hear much about that on Planet Fox News.

Don’t Be Fooled, Real 4Q12 GDP Was Even Worse Than 0.14%

A few weeks ago we commented that the Great Global Rig of 2012 was ending. Yesterday’s GDP print confirms this.

We noted in the second half of 2012 that the US Federal Government was engaging in a massive rig to make the economy look better than it really was in order to help the Obama re-election campaign. This showed up in the jobs data as well as the 3Q12 GDP print.

Now the election is over and we’re stuck with the hangover. The mainstream media likes to claim that the fourth quarter GDP number is the result of the Government cutting spending, but the truth is that Government outlays increased 12% in 4Q12. 

Indeed, the sad truth is that the US economy is actually in far worse shape than the official data indicates. As we’ve noted before, the Feds dramatically understate inflation to make GDP growth look better.

Case in point, the GDP deflator today is a mere 0.6% when real inflation is closer to 8%. So even the -0.14% print is in fact overstating real growth dramatically. If you account for the real increases in the cost of living in the US, GDP shrank well over 1% in 4Q12.

The impact of this will be huge. Remember that the Fed only just announced QE 3 and QE 4 in the second half of 2012. The fact that we’ve got this terrible GDP print in spite of this doesn’t do much for the Fed’s claim that QE will stimulate growth.

As we noted in yesterday’s article, the Fed is already splintering on the benefits of QE. For the US to print such an ugly GDP number right after QE 3 and QE 4 were announced doesn’t bode well for more aggressive policy from the Fed. But then again, we are talking about the Fed here, so they could very easily claim that the bad GDP print is because QE 3 and QE 4 are not big enough.

Regardless of this, it’s clear the market is peaking out. The Russell 2000 has begun to diverge from the Dow and S&P 500. Former leaders like Apple and RIMM are tanking, while companies that are losing business rapidly (Amazon) continue to rally.

This is precisely the sort of action we saw going into the Tech top and the 2007 top. The Fed has managed to create a bubble in stocks and housing again… right as the US economy collapses (just like in 2000 and 2007).  We all know what came next.

For more market commentary and investment insight as well as several FREE Special Reports outlining some of the biggest risks in the financial system today, visit us at www.gainspainscapital.com

Best Regards

Phoenix Capital Research

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Men Doing Housework: Hot or Not?

Photo Credit: Shutterstock.com

Sociologists have just served up an egalitarian nightmare. Husbands across America are tittering right now over a new report which shows that the more housework men do, the less they get it on with their wives. The study, published in the American Sociological Review, divided tasks into what has traditionally been considered "women's work" and stuff thought of as "men's work." The evidence demonstrated that men who perform traditionally female tasks have sex three times a month comparied to about five times a month for those who don't. The researchers assumed that women were the traditional toilet scrubbers, dish washers, meal preppers, and kiddie caretakers, whereas men were the lawn mowers and the fixers-of-stuff-that-gets-broken.

Like me, your first thought might be: How the hell did they measure this? Over at Boston.com, Deborah Kotz had the same thought and raised questions about two-decades-old data used by the researchers, who hailed from the Juan March Institute in Spain and the University of Washington. The study authors admitted that this was a problem their report.

The researchers also found that in married couples where women did the bulk of "men’s work," there was a little bit less sex, but not a big difference. There wasn't much in the way of explicit conclusions drawn, but the gist is that women are turned off by seeing men do "women's work" while men don't really mind much about seeing a woman mow the lawn.

Personally, I find a man who knows his way around the kitchen to be very sexy, but I also know that divisions of household labor are deeply embedded in culture, even at the level of language. The word "maid" is gendered, and as soon as we imagine a male with official household duties, we're picturing a butler, whose role seems much more elevated. My father was a liberated man in many ways, but he was not going to be seen messing around with pots and pans in the kitchen. I once suggested that he ease his hunger by preparing a sandwich, and he looked at me and said, "I've never prepared a meal for myself, and God willing, I never will." He considered himself a feminist.

I also know that like it or not, there's something deeply ingrained about the connection between libido and certain kinds of traditionally male behavior. I was raised in the South, where dating rituals are a bit more old school, and I found it difficult to adjust to dating in New York City, where men didn't do the things I was used to, like picking up a check on the first few dates or making sure I got home safely. The rational part of my brain could consider all kinds of reasons why my expectations ought to be adjusted, but you couldn't tell it to my libido. Men who didn't do the traditionally male thing just seemed...not hot. Not fair, I know. But my reaction was not exactly in my control.

Marriage does seem to be getting more egalitarian and flexible, but perhaps not as quickly as we think. The institution comes burdened with centuries of baggage in which gender expectations have been linked to sexual behavior. We're only a few decades past the sexual revolution and women's liberation (men's contribution to childcare has doubled since the '60s), and you're not going to unload the baggage of the ages overnight. We're probably at a transition period in which our rational expectations and our libidos haven't gotten quite adjusted to one another. In the mean-time, maybe you want to invest in a self-cleaning toilet.

You Don’t Watch HBO’s ‘Enlightened’ Religiously? Where Have You Been?

America is being treated to a brilliant satire of the links between the New Age self-actualization movement and the worker hell of corporate America.

January 31, 2013  |  

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The second season of "Enlightened" started recently, and if you haven’t yet discovered this show, it’s a real pleasure to fast-watch the first-season episodes and get up to speed. As a “comedy of alienation,” according to show writer Mike White, " is remarkably good, an insightful satire of the symbiotic relationship between the New Age self-actualization movement and the worker hell of corporate America.

The basic premise of "Enlightened" is an inspired one. A 40-something woman named Amy Jellicoe (Laura Dern) has a sobbing, shrieking breakdown at her workplace, Abaddon Industries. The first shot of the pilot episode is of Amy’s tear- and mascara-streaked face, clownishly distorted by anguish. Betrayed by the married executive she’s been sleeping with and facing a demotion from the Health and Beauty Department to Cleaning Supplies, Amy stages a hysterical confrontation in the sleek corporate hallways. She chases her betrayer to the elevators and pries the elevator doors open with superhuman strength, wailing, “Health and Beauty was mine, Damon! Health and Beauty was mine.…”

Amy recovers at an idyllic and expensive treatment center in Hawaii called Open Air. There she has a spiritual experience while deep-sea diving and swimming with a sea turtle, which is admittedly so beautiful it ought to count as the religious epiphany Amy takes it for. “I felt its presence all around me,” Amy exults to her skeptical ex-husband Levi (Luke Wilson). “It was God, or it was better than God. It was saying, ‘This is all for you.’” That’s Amy all over, exemplifying the worst of New Age tendencies with her belief that the whole wide world is just doing an elaborately choreographed dance before her in order to help her get her shit together.

Yet the show manages to preserve an admirably nuanced view of Amy; for all her foolishness, she’s trying to learn something, do something, be something better. Though "Enlightened" takes a harsh view of the hellscape we’ve made of America, it also acknowledges that we haven’t managed to ruin absolutely everything—there are still real, live sea turtles swimming in our oceans, after all—and the show periodically indicates the slivers of loveliness and grace that remain and beckon to us and torture us with the better lives we ought to be leading, if we knew how. Amy Jellicoe is the queen of not knowing how to lead this better life she’s glimpsed. Of course, she’s a swift convert to the trite New Age philosophy pitched at Open Air. (Later on, Amy gets a bill for $25,000 from Open Air, demonstrating, as Amy’s implacable mother says, that you CAN put a price on enlightenment.)

On the other hand, what else could Amy do but shift gears and merge into a standard Phase 2 of contemporary American experience? After you’re burnt out down to the socket trying to be a tireless, ruthless, profit-generating American achiever—that’s Phase 1— you attempt to recover by doing yoga, meditation, good works and vague spirituality. Amy already gave the other obvious alternative a shot—drinking, drugging, and having degrading sex while her marriage was falling apart (call that Phase 1.5 because it so often overlaps with Phase 1).

So what else should she do at this crisis point of her life? What does anybody do but grab the life preserver that‘s in front of them? And if you’re a woman living in California anywhere near the coast—Amy’s trapped in Riverside, CA, a sun-parched, flatland Inland Empire city an hour east of Los Angeles—the life preserver is deep breathing in lotus position, and dreams of a meaningful job, helping people and saving the environment. All excellent things, but when you’re in debt and have to work for a living, it’s amazing how sharply curtailed your soulful ambitions can be.

The rest of the episodes are about Amy’s mostly clumsy and futile attempts to “be the change” back at work, and back home living with her mother Helen. Helen is played by Diane Ladd, Dern’s actual mother, doing uncomfortably accurate work as an older woman who lives in a state of impassive endurance, devoted to her garden, her dog Ginger, and endless reruns of "The Rockford Files."

Amy’s efforts generally culminate in dashed hopes and a frenzy of curses (“Fuck! Fuck! Fuck!” while stalking to the car in a rage and backing out with a screech of tires). Or in horrors of embarrassment (shunning at work, awkward silences and frozen expressions following all of Amy’s New Age platitudes and naïve attempts at inspiring collective action for the common good). Or in the inadvertent wounding of all the wrong people. Each show begins and ends with Amy’s voice-over “meditations,” solemn and thoughtful, her projection of her best self, everything she isn’t and can’t be when she’s out in the daily scrum of human infighting: “I will not run away from my life all my life. I will try to really live. I will be mindful, I will be wise. I will change, I will be an agent of change.”

Amy isn’t the sharpest knife in the drawer, and the show may repulse viewers who can’t endure this clear-sighted portrait of female loserdom. All of Amy’s attempts to enlarge the scope of her life, some of them annoyingly self-dramatizing but others quite straightforward and touching, are crushed. Her mother stands stiffly inside Amy’s overlong homecoming embrace, warning her, “You’re going to spill my coffee.” Abaddon management is equally guarded, ready to fend off all of Amy’s new eco-conscious ideas for the Cleaning Supplies department with a simple plan to ease her out of the company altogether.

Amy’s boardroom meeting with two mid-level Human Resources women tasked with getting rid of her is a wonderfully handled scene. The production designers have the insidious “kinder, gentler” corporate image nailed down precisely. No glass and steel cage interiors anymore; now it’s all soft colors and pale woods and giant photocollages of green leaves on the walls. Corporations have long since found ways to disguise themselves in New Age camouflage and train the Human Resources women to sigh in empathetic faux-regret while telling Amy that unfortunately there’s just no position open to her at this time. But Amy hasn’t forgotten all of her Phase 1 training. She knows how to sigh in return and earnestly say that she’s confused, because she, like, talked to a lawyer? And the lawyer said Abaddon would have to keep her on or face some kind of big lawsuit, so…?

So Amy, briefly triumphant, returns to Abaddon the next day “being the change” in a sun-yellow dress that matches her hair and stands out beautifully against the drab suits and dismal skirt-and-blouse, polo-shirt-and-khaki-pants office wear. In her typically self-deluding fantasy she imagines herself cheered on by grateful co-workers as she leads the green revolution at Abaddon. Then, in grim reality, she’s led down a series of prison-like back hallways to her new position in a dismal sub-basement where her sun-yellow dress looks ludicrous among the gray-faced drones doing data entry at a row of crappy computers. This job among the “circus freaks” working on top-secret project “Cogentiva” in the sub-basement is only the first of many hard hits Amy will absorb while continuing on and on in her quixotic quest to “make a difference” somewhere in her godforsaken world.

Amy’s only awesome quality is sheer persistence—she keeps coming back like a canting New Age Terminator. She won’t stop, long past the point that cold stares, scornful smiles and impatient sighs would stop the rest of us. That serves as the show’s fascination as we round into Season 2—you can’t help but feel that such mad perseverance will have some extraordinary result, probably disastrous, but just possibly not.

More determined than ever “not to feel small anymore,” Amy decides to become a whistleblower and expose Abaddon’s appalling record of corporate malfeasance by enlisting the aid of her computer-geek co-worker Tyler (Mike White), who has a desperate crush on her. Amy, in turn, is smitten by the big-time investigative reporter Jeff Flender (Dermot Mulroney), who utters casually macho lines into his cellphone like, “Can’t do it in November, I’m in Dubai,” and takes a condescending interest in what Amy might be able to turn up in hacked Abaddon executive e-mail accounts.

None of this bodes well for anybody, but there’s a certain exhilaration in considering what might happen to someone like Amy. Picture the most blandly terrible place you ever worked, and an Amy in it, an Amy who hangs on like a limpet, a true believer who keeps saying the most “inappropriate” and unacceptable and discomfiting, and sometimes, appallingly true things over and over and louder and louder, and wondering why you don’t want to go to lunch with her so you can talk more about that really informative book she lent you called Flow Through Your Rage, or that photocopied packet she put together on environmental renewability, or that pamphlet she put in your inbox for the Open Air Treatment Center which would really help you work through a lot of serious shit!

And apparently, she can’t ever be slapped down so hard that she doesn’t get up and start doing it again. Every episode, something is bound to pop. You can see why co-creators Mike White and Laura Dern decided to gamble on this painful but revelatory premise. Unleash Amy and watch the endless repercussions in unsparing detail and laugh sardonically at your own stumbling way through the poisoned world. That’s post-millennial entertainment!

Meet the Contractors Turning America’s Police Into a Paramilitary Force

The national security state has an annual budget of around $1 trillion. Of that huge pile of money, large amounts go to private companies the federal government awards contracts to. Some, like Lockheed Martin or Boeing, are household names, but many of the contractors fly just under the public's radar. What follows are three companies you should know about (because some of them can learn a lot about you with their spy technologies).

L3 Communications

L3 is everywhere. Those night-vision goggles the JSOC team in Zero Dark Thirty uses? That's L3. The new machines that are replacing the naked scanners at the airport? That's L3. Torture at Abu Ghraib? A former subsidiary of L3 was recently ordered to pay $5.28 million to 71 Iraqis who had been held in the awful prison.

Oh, and drones? L3 is on it. Reprieve, a UK-based human rights organization, earlier this month wrote on its Web site:

“L-3 Communications is one of the main subcontractors involved with production of the US’s lethal Predator since the inception of the programme. Predators are used by the CIA to kill ‘suspected militants’ and terrorise entire populations in Pakistan and Yemen. Drone strikes have escalated under the Obama administration and 2013 has already seen six strikes in the two countries.”

Unsurprisingly, L3 Communications is well connected beyond the national security community. Its chief financial officer recently spoke at Goldman Sachs, at what the financial titan hilariously refers to as a “fireside chat.”

L3 also supplies local law enforcement with its night-vision products and makes a license-plate recognition (LPR) device, a machine with disturbing implications. LPR can be mounted on cop cruisers or statically positioned at busy intersections and can run potentially thousands of license plates through law enforcement databases in a matter of hours. In some parts of the country LPR readers can track your location for miles. As the Wall Street Journal noted, surveillance of even “mundane” activities of people not accused of any crime is now “the default rather than the exception.”

L3 Communications embodies the totality of the national security and surveillance state. There is only minimal distinction between its military products and police products. Its night-vision line is sold to both military and law enforcement. Its participation in the drone program is now, as far as we know, limited to countries in the Middle East and North Africa. But in the words of the New York Times editorial board, “[i]t is not a question of whether drones will appear in the skies above the United States but how soon.” The NYT estimates the domestic drone market at $5 billion, likely a conservative estimate, and contractors will vie for that money in the public and private sphere. L3's venture into airports, the border of where domestic policy meets foreign policy in the name of national security, is therefore significant both symbolically and materially.

In many ways, that is the most important story of the post-9/11 United States: the complete evaporation of the separation of foreign and domestic polices. Whether we're talking about paramilitarized police, warrantless wiretapping, inhumane prison conditions, or drone surveillance, there exist few differences between a United States perpetually at war and a United States determined to police and imprison its people in unacceptable ways and at unacceptable rates.

Harris Corporation: Stingray “IMSI catcher”

Harris Corp. is a huge provider of national security and communications technology to federal and local law enforcement agencies. Though many people have never heard of it, Harris is a major player in the beltway National Security community. President and CEO William M. Brown was recently appointed to the National Security Telecommunications Advisory Committee, and in 2009 the Secret Service offered Harris a contract to train its agents in the use of Harris' Stingray line. The Secret Service awarded the company additional contracts in 2012.

If you've heard of Harris at all, it's likely been because its controversial Stingray product has been getting attention as an information-gathering tool with major privacy implications. The Stingray allows law enforcement to cast a kilometers' wide digital net over an area to determine the location of a single cell phone signal – and in the process collect cell data on potentially hundreds of people who aren't suspected of any crimes. EFF claims the device is a modern version of British soldiers canvassing the pre-Revolutionary colonies, searching people's homes without probable cause – exactly what the Fourth Amendment was created to prevent. EFF describes the process this way:

“A Stingray works by masquerading as a cell phone tower—to which your mobile phone sends signals to every 7 to 15 seconds whether you are on a call or not— and tricks your phone into connecting to it. As a result, the government can figure out who, when and to where you are calling, the precise location of every device within the range, and with some devices, even capture the content of your conversations.”

According to the Electronic Privacy Information Center (EPIC),the FBI has been using similar technology since 1995. But a recent federal case, United States v. Rigmaiden, has raised Fourth Amendment questions regarding whether law enforcement officials need to obtain a warrant before employing a Stingray. The judge in that case determined that the government hadn't provided enough information about how the devices work, and ordered that the information collected in Rigmaiden couldn't be used in court.

What's especially troubling about Stingrays is that the government either won't say, or doesn't understand, how the technology works. The WSJ reported that the US Attorney making the requests “seemed to have trouble explaining the technology.”

And it's not just the federal government that uses Stingrays. As Slate notes,referencing FOIA documents recently obtained by EPIC, “the feds have procedures in place for loaning electronic surveillance devices (like the Stingray) to state police. This suggests the technology may have been used in cases across the United States, in line with a stellar investigation by LA Weekly last year, which reported that state cops in California, Florida, Texas, and Arizona had obtained Stingrays.”

Harris has been tightlipped about the Rigmaiden case, but expect to be hearing a lot about Stingrays in the future.

BI2 Technologies

BI2 makes a fine pitch. Its iris-scanning technology can be made to sound very appealing. Iris scans are relatively non-invasive, there's no touching involved so the likelihood of spreading disease is reduced, and as B12 states on its Web site, "there are no lasers, strong lights or any kind of harmful beams.” It also claims that iris scanning is "strictly opt-in," and that a “user" (who in most cases would be better described as an “arrestee”) “must consciously elect to participate” in the scanning. (When I was arrested by the NYPD while covering a protest, the scan was voluntary -- though the NYPD didn't tell me that, a protester did. But if I refused to submit to it I could have been punished with an extra night in jail.)

Reuters reported that BI2's iPhone-based iris scanner -- called MORIS -- is capable of taking an accurate scan from four feet away, “potentially without the person being aware of it.” MORIS has drawn harsh condemnation from the ACLU. The primary concern from privacy advocates is that law enforcement will deploy this technology in an overly broad way. ACLU senior policy analyst Jay Stanley told Reuters that he didn't want the police “using them routinely on the general public, collecting biometric information on innocent people.”

MORIS isn't just for irises; it also scans faces. In 2011, the Wall Street Journal reported that the sheriff's office in Pinellas County, Florida, “uses digital cameras to take pictures of people, download the pictures to laptops, then use facial-recognition technologies to search for matching faces.” New database technology like Trapwire, a data mining system that analyzes “suspicious behavior” in purported attempts to predict terrorist behavior, makes face scanning potentially more worrisome. Trapwire uses at least “CCTV, license-plate readers, and open-source databases” as input sources, and although it doesn't employ facial-recognition software, the incentives to combine these types of technology is clear.

Beginning in 2014, BI2 will manage a national iris-scan database for the FBI, called Next-Generation Identification (NGI).Lockheed Martin is also involved in building the database.Much of BI2's iris data comes from inmates in 47 states, and despite BI2's claims that iris scanning can't be gamed, that is not the case. Experts showed last summer that the iris can be “reverse-engineered” to fool the scanners, which are generally thought to be more accurate than fingerprinting.

The usual suspects lamented in 2011 that iris scanning isn't used at airports or borders, but security creep is difficult to combat, especially once “national security” is invoked. Just days ago it was reported that the FBI is teaming with the Department of Homeland Security to ramp up iris scanning at US borders. AlterNet has previously reported that the Department of Defense scans the irises of people arriving at and departing from Afghanistan.

The story of BI2 is important because the initial technology is superficially appealing. The company's first projects were called the Child Project, designed to help locate missing children; and Senior Safety Net, developed to identify missing seniors suffering from Alzheimer's. According to B12's Web site, sheriffs' departments in 47 states use the BI2 iris-scanning device and database, which makes it easy to mobilize support to facilitate the safe return of children and seniors.

While the desire to find missing children and seniors is perfectly legitimate, the collection of biometric data is a pandora's box. Once it's opened, it's proven difficult if not impossible to limit.

9/11 Military Trial Judge Frustrated by Government Censorship … Like the 9/11 Commissioners

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Kangaroo Court Show Trials

Huffington Post reports:

A judge expressed frustration on Monday that an unknown U.S. government entity censored his courtroom audiovisual feed, cutting public access to pretrial hearings for five accused Sept. 11 plotters.

“If some external body is turning the commission on or off based on their own views of what things ought to be, with no reasonable explanation … then we’re going to have a little meeting about who turns that light on and off,” said the judge, Col. James Pohl.

Pohl’s comments came after an unknown censor cut off a live media feed to the court proceedings as David Nevin, a lawyer defending Khalid Sheikh Mohammed, began discussing his request for information on his client’s case.

***

A court security officer positioned next to the judge has the ability to dump the feed if anything secret arises. That officer didn’t activate the censorship button on Monday.

***

“I would like to know who has the permission to turn that light on and off, who is listening to this, who is controlling these proceedings, or controlling that aspect of these proceedings,” Nevin said.

This is just one of a series of outrages regarding investigation and trial of alleged 9/11 terrorists.

In 2008, the former chief prosecutor for Guantánamo’s military commissions disclosed that the trials have been rigged to prevent the possibility of acquittal. Specifically, the head of the Guantanamo tribunal — who is actually in charge of both prosecuting and defending the suspects — told the former chief prosecutor:

Wait a minute, we can’t have acquittals. If we’ve been holding these guys for so long, how can we explain letting them get off? We can’t have acquittals, we’ve got to have convictions.

In addition, three other Guantanamo prosecutors — Maj. Robert Preston, Capt. John Carr and Capt. Carrie Wolf — “asked to be relieved of duties after saying they were concerned that the process was rigged. One said he had been assured he didn’t need to worry about building a proper case; convictions were assured.”

Another former Guantanamo prosecutor resigned, saying in a sworn declaration that the government pulled all sorts of shenanigans in one case.

The head of the tribunal also said that — even if the defendants are somehow acquitted — they may not be released from Guantanamo.

No wonder the American Bar Association, “which the Pentagon had said would help arrange such representation, has refused to participate because it objects to the trial procedures.” And no wonder the defense attorneys who have agreed to represent the defendants say that the process is completely unfair. See also this interview.

MSNBC speculated that the U.S. put a “stun belt” on alleged terrorist Moussaoui during his trial to keep him in line:

9/11 Commissioners Slam Blatant Obstruction of Justice

The 9/11 Commissioners publicly expressed anger at cover ups and obstructions of justice by the government into a real 9/11 investigation:

  • The Commission’s co-chairs said that the CIA (and likely the White House) “obstructed our investigation”
  • The Senior Counsel to the 9/11 Commission (John Farmer) – who led the 9/11 staff’s inquiry – said “At some level of the government, at some point in time…there was an agreement not to tell the truth about what happened“. He also said “I was shocked at how different the truth was from the way it was described …. The tapes told a radically different story from what had been told to us and the public for two years…. This is not spin. This is not true.”

And the Co-Chair of the official Congressional Inquiry Into 9/11 – and former head of the Senate Intelligence Committee – has called for a new 9/11 investigation.

Some examples of obstruction of justice into the 9/11 investigation include:

  • An FBI informant hosted and rented a room to two hijackers in 2000. Specifically, investigators for the Congressional Joint Inquiry discovered that an FBI informant had hosted and even rented a room to two hijackers in 2000 and that, when the Inquiry sought to interview the informant, the FBI refused outright, and then hid him in an unknown location, and that a high-level FBI official stated these blocking maneuvers were undertaken under orders from the White House. As the New York Times notes:

    Senator Bob Graham, the Florida Democrat who is a former chairman of the Senate Intelligence Committee, accused the White House on Tuesday of covering up evidence ….The accusation stems from the Federal Bureau of Investigation’s refusal to allow investigators for a Congressional inquiry and the independent Sept. 11 commission to interview an informant, Abdussattar Shaikh, who had been the landlord in San Diego of two Sept. 11 hijackers.

  • The chairs of both the 9/11 Commission and the Official Congressional Inquiry into 9/11 said that Soviet-style government “minders” obstructed the investigation into 9/11 by intimidating witnesses
  • The 9/11 Commissioners concluded that officials from the Pentagon lied to the Commission, and considered recommending criminal charges for such false statements
  • As reported by ACLU, FireDogLake, RawStory and many others, declassified documents shows that Senior Bush administration officials sternly cautioned the 9/11 Commission against probing too deeply into the terrorist attacks of September 11, 2001

Both the 9/11 Trials and the 9/11 Commission Investigation Were Based on Unreliable Evidence Produced by Torture

The CIA videotaped the interrogation of 9/11 suspects, falsely told the 9/11 Commission that there were no videotapes or other records of the interrogations, and then illegally destroyed all of the tapes and transcripts of the interrogations.

9/11 Commission co-chairs Thomas Keane and Lee Hamilton wrote:

Those who knew about those videotapes — and did not tell us about them — obstructed our investigation.

The chief lawyer for Guantanamo litigation – Vijay Padmanabhan – said that torture of 9/11 suspects was widespread. And Susan J. Crawford, the senior Pentagon official overseeing the military commissions at Guantánamo — the novel system of trials for terror suspects that was conceived in the wake of the 9/11 attacks — told Bob Woodward:

We tortured Qahtani. His treatment met the legal definition of torture.

Moreover, the type of torture used by the U.S. on the Guantanamo suspects is of a special type. Senator Levin revealed that the the U.S. used Communist torture techniques specifically aimed at creating false confessions. (and see this, this, this and this).  And according to NBC News:

  • Much of the 9/11 Commission Report was based upon the testimony of people who were tortured
  • At least four of the people whose interrogation figured in the 9/11 Commission Report have claimed that they told interrogators information as a way to stop being “tortured.”
  • One of the Commission’s main sources of information was tortured until he agreed to sign a confession that he was NOT EVEN ALLOWED TO READ
  • The 9/11 Commission itself doubted the accuracy of the torture confessions, and yet kept their doubts to themselves

Three States Pushing ALEC Bill To Require Teaching Climate Change Denial In Schools

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The American Legislative Exchange Council (ALEC) - known by its critics as a "corporate bill mill" - has hit the ground running in 2013, pushing "models bills" mandating the teaching of climate change denial in public school systems. 

January hasn't even ended, yet ALEC has already planted its "Environmental Literacy Improvement Act" - which mandates a "balanced" teaching of climate science in K-12 classrooms - in the state legislatures of Oklahoma, Colorado, and Arizona so far this year. 

In the past five years since 2008, among the hottest years in U.S. history, ALEC has introduced its "Environmental Literacy Improvement Act" in 11 states, or over one-fifth of the statehouses nationwide. The bill has passed in four states, an undeniable form of "big government" this "free market" organization decries in its own literature.

ALEC's "model bills" are written by and for corporate lobbyists alongside conservative legislators at its annual meetings. ALEC raises much of its corporate funding from the fossil fuel industry, which in turn utilizes ALEC as a key - though far from the only - vehicle to ram through its legislative agenda through in the states. 

A Frankenstein Co-Created with Heartland Institute

A DeSmogBlog investigation last year found that the Environmental Literacy Improvement Act's orgins date back to 2000.

The Act's creation is directly connected to the ongoing efforts of another corporate-funded group, the Heartland Institute - of "Heartland Institute Exposed" fame - a group well plugged into the climate change denial machine. 

ALEC's Natural Resources Task Force, now known as its Energy, Environment and Agriculture Task Force, adopted this model at a time when the Task Force was headed by Sandy Liddy Bourne. Bourne, who served in this capacity from 1999-2004, would eventually ascend to the role of Director of Legislation and Policy for ALEC in 2004. 

Upon leaving ALEC in 2006, Bourne become Heartland's Vice President for Policy Strategy. Today she serves as Exectutive Director of the American Energy Freedom Center, an outfit she co-heads withArthur G. Randol. Randol is a longtime lobbyist and PR flack for ExxonMobil, a corporation which endowed the climate change denial machine for years.

Heartland's website still lists Bourne as one of its "experts," stating that "Under her leadership, 20 percent of ALEC model bills were enacted by one state or more, up from 11 percent." 

Importantly, Heartland is still a member of ALEC's Energy, Environment and Agriculture Task Force that originally passed the Environmental Literacy Improvement Act.

According to internal documents leaked to and published by DeSmogBlog in Feb. 2012, Heartland obtained funding for a "Global Warming Curriculum for K-12 Classrooms" project beginning in 2012. This cirruculum aims to teach that there "is a major controversy over whether or not humans are changing the weather."

If this sounds similar to ALEC's model bill, it should, given the fact that the two outfits share funding from the same honey pot. In fact, Heartland actively promotes the ALEC model on its website. 

Model Bill Introduced in OK, CO, and AZ

Oklahoma and Colorado came first and within just over a week, Arizona followed suit in proposing the ALEC climate science "mis-education" bill.

Oklahoma: Sooner Rather than Later

On Jan. 18, the Sooner State's legislature took the lead for 2013 in pushing the ALEC climate change education model in the form of HB 1674, the "Scientific Education and Academic Freedom Act." 

HB 1674 calls for the teaching of "scientific strengths and scientific weaknesses of existing scientific theories," including of global warming, saying it's a theory steeped in "controversy" - not that the actual scientific record thinks so.

This is necessary, the bill states, "to help students develop critical thinking skills they need in order to become intelligent, productive, and scientifically informed citizens," going on to explain that it's important to explore "differences of opinion on scientific issues." 

The ALEC model similarly calls for the teaching of "critical thinking so that students will be able to fairly and objectively evaluate scientific...controversies." The model also mandates creation of "an atmosphere of respect for different opinions and open-mindedness to new ideas" in the scientific sphere. 

The OK bill is sponsored by Rep. Gus Blackwell (R-61), unsurprisngly a dues-paying member of ALEC. According to a Dec. 2012 report published by the Center for Media and Democracy (CMD) titled, "Buying Influence," Blackwell has paid for his attendance at least one ALEC meeting with taxpayer money.

National Institute on Money in State Politics' data demonstrates that Blackwell's largest pool of campaign funding for his 2012 electoral victory came from the oil and gas industry, which gave him $28,800. This includes taking $7,500 from shale gas industry giant Chesapeake Energy, $2,350 from ConocoPhillips, and $1,000 each from Koch Industries and coal industry giant Duke Energy, among others. All of thesecorporations also fund ALEC.

Colorado's Same Day Affair

One sure sign of a coordinated, ALEC-lead effort is the fact that Colorado's state legislature introduced the ALEC model on the same day as did Oklahoma's. The two states, it's worth noting, share a border on Oklahoma's panhandle. 

On Jan. 18, 2013, eight representatives and four senators introduced HB 13-1089, coining the bills the "Academic Freedom Acts."

Paralleling the language in the ALEC model and the Oklahoma bill, the HB 13-1089 aims to "Inform students about scientific evidence and to help students develop critical thinking skills," also recognizing that the teaching of the concept global warming "can cause controversy."

One of the senators co-sponsoring the bill, Rep. Scott Renfroe (R-13) is an ALEC dues-paying member. He's also attended at least one ALEC meeting paid for by Colorado taxpayers, according to the CMD's "Buying Influence" report

Of the $91,000 dollars he raised for the 2012 election, over $5,000 of it came from the oil, gas and electric utilities industry, according to the National Institute on Money in State Politics. This includes taking money from Chesapeake Energy, Anadarko Petroleum, Williams Companies, and the Colorado Oil and Gas Association.

The Arizona (Sun) Devils are in the Details 

Eight days later, ALEC's model bill made its way to Arizona, a state sharing a "corner border" with Colorado. 

Arizona's SB 1213 was introduced on Jan. 26, 2013 by six senators that, as it turns out, are all dues-paying ALEC members. Five of the six have attended conferences totally on the taxpayer dime,according to CMD's report.

SB 1213 incorporates the "critical thinking skills" operative language, the "scientific controversies" operative language and the  "teaching...global warming" can "cause controversy" operative language.

In short, SB 1213 is the same exact copycat ALEC model bill that's been proposed in both Oklahoma and Colorado.  

ALEC Celebrates Groundhog Day 2013

Groundhog Day is on Feb. 2 and fittingly, ALEC and its corporate patrons continue to sing the same tune, simultaneously promoting frackingblockading a transition to renewable energy and pushing bills mandating teaching climate change denial on par with actual science.

"It's the same old schtick every year, the guy comes out with a big old stick, raps on the door," actor Bill Murray said in the classic film "Groundhog Day." "They pull the little rat out, they talk to him, the rat talks back, then they tell us what's gonna happen."

Replace "guy" with "corporate lobbyist" and "legislators" with "rats" and that's ALEC in a nutshell, serving as a mere microcosm of the current American political system at-large.

Facts Are For ‘Sissies’: Schwarzenegger Calls to ‘Sex’ Up Environmentalism

Speaking Thursday at a largely-boycotted 'greenwashing' climate summit in Vienna, Austria, big-talking, Hummer-driving, enemy-terminating, former California Governor Arnold Schwarzenegger said that he thinks climate facts are all "doom and gloom" and is calling on leaders to "sex" up the environmental debate.

Clearly encouraging environmentalism, Schwarzenegger strikes a 'sexy' pose next to his Hummer. (Photo via LA Times) "There is a new way, a more sexy, a more hip way. Instead of using doom and gloom and telling people what they can't do, we should make them part of our movement and tell them what they can do," he said.

Schwarzenegger was speaking at the first conference of his new green movement, R20 Regions of Climate Action, which calls on local governments to "follow California's lead" and implement environmental legislation ahead of federal governments. However, largely absent from the conference are environmental organizations including Greenpeace and the World Wildlife Fund, who criticized the event for being "elitist" and "greenwashing."

"I mean I still drive my Hummers but now they are all on hydrogen and biofuel ... We need to send a message that we can live the same life, just with cleaner technology," he added, illustrating his unfamiliarity with the criticism that biofuels threaten international food security and encourage corporate land grabs.

“If we want to inspire the world, it is time for us to forget about the old way of talking about climate change, where we crush people, where we overwhelm people with data.”

Gold Market: What determines the Price of Gold

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In this interview for Matterhorn Asset Management, Robert Blumen discusses some important but widely misunderstood elements acting on the gold price. He explains that frequently cited gold demand statistics have no relationship to the gold price. In addition, he explains that the annual gold mine production is of very little influence, as gold is hoarded, not consumed like other commodities.

Robert_Blumen

Lars Schall: Mr. Blumen, how did you become interested in the subject of gold in general?

Robert Blumen: There were two main influences when I was growing up in the 1970s and 80s. We went through a period of very high inflation in the United States. President Nixon imposed wage and price controls in a misguided, or perhaps very cynical, attempt to fight inflation. And Nixon’s successor, President Ford, handed out these silly little lapel buttons that said “Whip Inflation Now”. I remember seeing a young man on the TV news who had reported a chain store for the economic crime of raising the price of one of their products. He was being given some kind of award for this.

The second historical event was the gold bull market of the late 70s. Then Reagan came in along with Paul Volker who he inherited from the former president, Carter. I wasn’t paying much attention at the time but it stuck with me that gold had made this huge move.

Those two things came together and had a life-long influence on me. From that time I took away a curiosity about inflation. And that led me eventually to be curious about the whole field of economics. I was lucky that I came upon the Austrian School of Economics. I started reading Austrian economics in high school. The Austrian School emphasized gold as the basis of the monetary system and how well that has worked out over the course of human history.

L.S.: The growing interest in gold was underlined recently in a report that was published by the Official Monetary and Financial Institutions Forum (OMFIF), which has the title “Gold, the renminbi and the multi-currency reserve system“. (1) I think that this report is quite remarkable for various reasons. Do you agree?

R.B.: The report suggests that the international monetary system will accept gold in a more recognized way as a reserve asset. I think that this is already true, informally. There are many signs of this. Central banks have gone from selling to buying in recent years.

On the intellectual plane, I think there the consensus of many decades, namely that gold had been permanently removed from its monetary role, is changing. There is increasing discussion gold as a monetary metal among the elites. Several years ago, Benn Steil, a CFR economist wrote an opinion piece for the Financial Times (excerpted here) suggesting that the global gold standard worked better than the current system of floating rates. Robert Zoellick, who was president of the World Bank at the time, wrote a gold-friendly op-ed also in the FT a couple of years ago.

L.S.: What is your overall view on China?

R.B.: The popular perception of China an economic juggernaut on a path to eclipse the economies of the developed world. And how did that happen? Because their wise central planners chose an export-driven growth strategy. Many people now think that this strategy has gotten them to a point where they are deficient in domestic consumption, so they need to switch to a consumption-driven mode of economic growth; and that this also will be accomplished by the same wise central planners through a series of carefully designed five-year plans.

I think almost everything about this view is wrong; it is still largely a centrally planned economy and we know from the economics of the Austrian economist Ludwig von Mises, central planners cannot allocate resources.

L.S.: Why not?

R.B.: Mises wrote a paper in 1920, which became quite a famous and very controversial thesis in economics that was debated for decades. His paper was called Economic Calculation in the Socialist Commonwealth and you can find it for free at the Mises site.
economicCalculation

If you have a very simple economy where people make consumption goods with their bare hands, this can be done with central planning. But Mises was trying to explain the economic growth that has occurred in the world from small villages to vast modern economies with millions of goods and a complex division of labor. How could this type of growth occur? The process requires the development of a complex inter-relationship of capital goods, natural resources, and division of labor.

In a modern economy, the number of things that could be produced is nearly unimaginably large. And the number of different production methods for even a single good is incalculable. Take gold for example – finding a deposit is quite complex. There are many ways to look for it. Magnetic fields, chemistry, electrical, drilling. How much drilling and where? And then, when you have the deposit, should it be open pit or underground? Should a resource estimate be established first or start mining and follow the vein? And what about the metallurgy, the chemistry? What type of electrical power? What types of labor? Refine the ore on site, or partially refine? Build roads, rail, or ship the ore? There are millions of decisions and each one needs to be fully answered down to the hire or purchase of specific pieces of capital and individual workers.

Mises’ point was that all of these production decisions, not only what gets produced and what does not, but how it’s done, can only be decided on the basis of prices. In particular Mises noted that the prices of capital goods are crucial to production decisions. Contrary to what you read endlessly in the financial news about consumption driving the economy, spending on capital goods is the major part of total spending.

Only with prices can you have accounting, which is the ability to calculate profit and loss. In a market economic system, the important decisions are made on the basis of an anticipated profit and loss, which is the difference between the expected prices received on sales and the costs.

Mises had the insight that prices of capital goods are only a meaningful tool for resource allocation if they are established by a competitive bidding process among entrepreneurs. Entrepreneurs must choose how much they are willing to pay to acquire a specific capital asset and hire the skilled workers they need. Entrepreneurs are people who put at risk their own capital, and will either earn a profit or suffer a loss.

The diversity of entrepreneurs is a key part of this. Each business firm or company founder has a unique view of their own market, which may be highly detailed and based on years of experience. Mises also noted that each entrepreneur has his idea about what the customer will want. The market is a decentralized process in which the entrepreneur who has the best plan for each particular asset, along with some cash, will end up in a position to choose how that asset gets used.

In my own former job, I worked for a company that was in a small sub-sector of a sub-sector. There are perhaps half a dozen people in the world who truly understood our industry, maybe fewer. The entire world is full of experts like this, people who understand a particular industry or product really well.

Can you imagine, for example, that we would have iPhones or Kindles if the technology industry was planned by a central committee? Before the iPhone, competition in the mobile industry was primarily over how many minutes per month you got on weekdays or weekends. When Steve Jobs decided to develop the iPhone, he risked $150 million of his shareholder’s money and took on the US mobile industry, who did not want a disruptive phone taking away the spotlight from their monthly plans.

Central planning means the abolition of this type of competition. And that is the problem that Mises identified. There is no way to replace this competitive bidding process with a single planner or a planning committee. The central committee cannot bid against itself for the opportunity to acquire specific capital goods and labor. That would be nothing more than the left hand bidding against the right hand. They could assign fake prices to resources and pretend to calculate the best projects, but the numbers that would come out of this process would not be prices, they would be arbitrary numbers that did not reflect the best possible use of scarce productive resources. Mises showed that a central planner has no basis for making economic decisions, even if the process did not become entirely politicized, as it always does.

L.S.: So how does that apply to China’s growth prospects?

R.B: The China bull story as far as I can tell is based on the growth rate of GDP. Their economy is allegedly growing at 9%, if you believe the number. But the GDP number is more of a measure of spending. You can go along spending money for quite a while, but that doesn’t mean that it’s a useful allocation of resources in the face of scarcity. In the end if you have nothing that people want to show for it, it was wasted. And GDP does not capture that distinction.

chinagdpgrowth

The idea of export driven growth, it’s a contradictory concept. Economic growth means the ability of an economic system to produce more goods and services that people want and are willing to pay for, at a higher price than it cost to produce them. What they call export-driven growth is really a policy of holding their own currency exchange rate below the market rate in order to reduce the domestic monetary costs of their export industries. This creates a misallocation of labor and capital and a relative over-productive of export goods at the cost of fewer imports and fewer goods for domestic consumption.

If the cost of China’s policy were properly accounted for, it would be evident that the marginal export goods that is apparently produced at a profit (under the phony accounting of depreciating money) is in reality produced at a loss. But this loss is hidden because it is distributed over the entire population by reducing the purchasing power of their currency. And that impacts their ability to buy imported goods, or, as many domestically produced goods that have an import component.

They have a huge infrastructure bubble. They are building far more roads, bridges, power plants in relation to the rest of their capital structure. Bridges and roads to nowhere show up as GDP because spending is required to create them. But not all spending is created equal. Spending on thinks you don’t need or things that cost too much to produce is waste and it moves resources away from where they are needed to create real growth.

A lot of the writers in the West are in awe of China’s centrally planned economic system. A friend of mine, the American investment writer Chris Meyer, sent me news story a few years about the highly reputed UK fund manager Antony Bolton who had come out of retirement to manage a new China fund. Bolton cited the advantages of central planning compared to a market economy as one of his reasons for his enthusiasm. Things didn’t work out so well for Bolton. The fund has under-performed, which can happen for a lot of reasons besides believing in an incorrect political-economic theory. But I think that he came in right near the top of China’s planning bubble.

Economist Brad Setser wrote a paper around 2006 about the Chinese banking system. In his paper, he went back a number of years into the history of their banking system. Setser found that during this time, interest rates had been set at below-market levels by the central planners. This of course meant more demand for loans than banks could supply. Rather than rationing by price, resource allocation had been largely driven by political favoritism. Not surprisingly, most of the loans from this period went bad. The entire banking system eventually became nothing but a sea of bad loans. Then there was a bail-out, putting all of the bad loans in a bad bank. And then, they started over from zero and rebooted the whole system. But by the end of the time that Setser covered in his research, they had gotten right back where they started, full of bad loans again. More recently Edward Chancellor and Mike Monelly of the respected value investing firm GMO have produced a research piece saying more or less the same thing.

Overall they have a completely dysfunctional capital allocation process. That’s why I’m a bit of a skeptic on China.

L.S.: Last year the Austrian gold analyst Ronald Stöferle mentioned you in an interview with me for GoldSwitzerland. (2) Mr. Stöferle, in my opinion one of Europe’s best men in this field, said that you belong to the crème de la crème when it comes to the issue of price formation, and that you have something original and unique to say in your writings. So I am curious about this. But let’s begin the discussion with a more general question: In your opinion, where do you think that many analysts go wrong in their understanding of the gold market?

R.B.: I see four problems but in a way they are all different versions of one problem.

The first is a focus on the annual statistics. Whatever happened in the last year is not that significant because most of the gold that exists at the end of one year was there at the beginning of that year.

The second problem, which you could argue is a subset of the first one, is the emphasis mine supply. While a lot of ink or electrons are spilt on mine production, it has very little impact on the gold price.

The third is the vast amount of brainpower that goes into quantifying gold flows into market segments, such as industry, jewelry, coins, and funds. These quantities may be interesting for some purposes, but they’re not really that relevant if what you’re trying to do is understand the gold price, because there is not a connection between quantities and price in the way that most people think there is.

The last problem is the idea in some circles that there is a gold supply deficit. If you really look at the market, the concept doesn’t make sense. It’s based on a strange way of lining up the numbers to produce something like an optical illusion. The gold market, structurally, cannot be in a deficit in the way that any other commodity market could be in a deficit.

L.S.: We will discuss the last point in detail later. — As already mentioned, in the past you have written several pieces about the price formation mechanism in the gold market. Why have you chosen to focus on this area?

R.B.: I think the reason I have chosen to focus on this is that I see a lot of misunderstanding about this topic, and since very few people are active in this area, I have decided to take it on. I am hoping that through my writing and through interviews such as this one, I can play some part in shifting the thinking of the gold community.

There are a few others who get it. Stöferle who you mentioned has covered this in his gold report. Paul Mylchreest wrote about this exact issue when he was at Chevreux/Credit Agricole. Acting-man, a site that covers the Euro market, has some excellent content looking at gold and the price system from the correct perspective. James Turk and the people at GoldMoney are quite friendly to this concept. And I recall reading something by the fund manager John Hathaway in which he seemed to be saying approximately the same thing. I hope that I haven’t left anyone out.

I believe that the tide is slowly turning on this issue. While the incorrect view still predominates, increasingly the correct understanding is beginning to be expressed more frequently. A report such as Stöferle’s from a prominent research firm is a good sign.

L.S.: How does your view of gold price formation differ from the views of most analysts of the gold sector?

R.B.: I think I need to start out by giving a little background, and then proceed to directly answer your question. I am going to start by talking about where the wrong thinking comes from so you can see that it might make sense to someone to think that way. Then I will show where they go wrong and then, the correct way to think about it.

There are two different kinds of commodities and we need to understand the price formation process differently for each one. The first one I’m going to call, a consumption commodity and the other type I’m going to call an asset.

A consumption commodity is something that in order to derive the economic value from it, it must be destroyed. This is a case not only for industrial commodities, but also for consumer products. Wheat and cattle, you eat; coal, you burn; and so on. Metals are not destroyed but they’re buried or chemically bonded with other elements making it more difficult to bring them back to the market. Once you turn copper into a pipe and you incorporate it hull of a ship, it’s very costly to bring it back to the market.

People produce these things in order to consume them. For consumption goods, stockpiles are not large. There are, I know, some stockpiles copper and oil, but measured in terms of consumption rates, they consist of days, weeks or a few months.

Now for one moment I ask you to forget about the stockpiles. Then, the only supply that could come to the market would be recent production. And that would be sold to buyers who want to destroy it. Without stockpiles, supply is exactly production and demand is exactly consumption. Under those conditions, the market price regulates the flow of production into consumption.

Now, let’s add the stockpiles back to the picture. With stockpiles, it is possible for consumption to exceed production, for a short time, by drawing down stock piles. Due to the small size of the stocks, this situation is necessarily temporary because stocks will be depleted, or, before that happens, people will see that the stocks are being drawn down and would start to bid the price back up to bring consumption back in line with production.

Now let’s look at assets. An asset is a good that people buy it in order to hold on to it. The value from an asset comes from holding it, not from destroying it. The simplest asset market is one in which there is a fixed quantity that never changes. But it can still be an asset even when there is some production and some consumption. They key to differentiating between consumption and asset is to look at the stock to production ratio. If stocks are quite large in relation to production, then that shows that most of the supply is held. If stocks are small, then supply is consumed.

Let me give you some examples: corporate shares, land, real property. Gold is primarily an asset. It is true that a small amount of gold is produced and a very small amount of gold is destroyed in industrial uses. But the stock to annual production ratio is in the 50 to 100:1 range. Nearly all the gold in the world that has ever been produced since the beginning of time is held in some form.

indiagoldjewelry

Even in the case of jewelry, which people purchase for ornamental reasons, gold is still held. It could come back to the market. Every year people sell jewelry off and it gets melted and turned into a different piece of jewelry or coins or bars, depending on where the demand is. James Turk has also pointed out that a lot of what is called jewelry is an investment because in some parts of the world there’s a cultural preference for people to hold savings in coins or bars but in other areas by custom people prefer to hold their portable wealth as bracelets or necklaces. Investment grade jewelry differs from ornamental jewelry in that it has a very small artistic value-added on top of the bullion value of the item.

So, now that I’ve laid out this background, the price of a good in a consumption market goes where it needs to go in order to bring consumption in line with production. In an asset market, consumption and production do not constrain the price. The bidding process is about who has the greatest economic motivation to hold each unit of the good. The pricing process is primarily an auction over the existing stocks of the asset. Whoever values the asset the most will end up owning it, and those who value it less will own something else instead. And that, in in my view, is the way to understand gold price formation.

Many of the people who follow and write about this market look at it as if it were a consumption market and they look at mine supply and industrial fabrication as the drivers of the price as if it were tin, or coal, or wheat. People who look at gold as if it were a consumption market are looking at it the wrong way. But now you can see where the error comes from. In many financial firms gold is in the commodities department, so a commodities analyst gets assigned to write the gold report. If the same guy wrote the report about tin and copper, he might think that gold is just the same as tin and copper. And he starts by looking at mine supply and industrial off-take.

I wonder if more equity analysts or bond analysts were active in the gold area, if they would be more likely to look at it the same way they look at those assets.

L.S.: In your writings, you mention quite often the marginal price theory. Where does this theory originate and what is it all about?

R.B.: Marginal price theory has been part of economic theory for well over a hundred years. Most historians of the field of economics itself see the so-called marginal revolution as the boundary between the classical school of economics and modern economics. I learnt marginal price theory from Murray Rothbard‘s book, Man, Economy and State, but it’s something you could learn in any course on economics.

Marginal price theory was developed to answer a question a lot like what we are discussing today. It was known as the diamond-water paradox. The question that classically economists could not answer is, “Why do diamonds cost so much more than bread when bread is necessary for human life and diamonds are a luxury?” The problem was that classical economists did not think in terms of individual units. The breakthrough was the realization that we need to think about economic action in terms of individual units. A marginal theory says that human action acts on individual units of a good. The last unit that you buy or sell is always the marginal unit. As an economic actor you’re thinking, “What do I want to do with this next dollar? Do I want one more unit, one more dollars’ worth of diamonds or one more dollars’ worth of bread?

L.S.: How does that apply to the gold market?

R.B.: Gold is an asset. People buy it in order to hold it. The price of gold is set as people balance, at the margin, the amount of additional units of gold they want to hold against additional units of other assets or cash they want to hold, or consumption.

If you think of the possible gold buyer as the guy who is saying, “Do I want to hold one more ounce of gold or this $1,800 that I have?” The answer to his question is going to be different for each person and for each additional ounce. You might say “yes, I want one more ounce of gold instead of $1,800”. Now, you have an ounce of gold and if I ask you the question again you might say, “No, now that I have bought that additional ounce, I’ve got enough gold”.

On the supply side, are the people who own gold. From their point of view they have to answer the question, “Do I want to keep holding this ounce of gold or do I want to sell it on the market and have $1,800?” That $1,800 might stay in cash or maybe they have another use in mind for it. The supply side is everyone who has any gold and the buy-side of the market is anyone who has any money that they might want to put into gold.

Now, we can eliminate people who don’t know what gold is, the ones don’t know where to buy it or how to buy it, and those don’t want any because they don’t understand it, or maybe they do understand it but they don’t like it. But that still leaves a large number of people who might add to their position some quantity of gold at the right price. The people who already own gold, they could be active on either side of the market as a buyer or a seller. I want to emphasize that everyone who owns any gold at all is part of the supply-side of the market, not all at the current price, but at some price.

In micro-economics there’s a nice formalism where they use supply and demand curves. If you took a micro course you would have seen those. Many people might feel more familiar with these concepts if they can see the curves. You can do a lot with these curves but you can’t forget that they supply and demand curves are a way of aggregating of the preferences of all the individuals in the market. Murray Rothbard does a great job of explaining this.

In the market, people rebalance between gold and dollars until they’re happy with what they own. At that point there will be no more trading if no one ever changed their mind. But now and again people do change their mind; they realize they want more of one thing and less of another thing. Then you have more trading to bring the market back into balance.

In finance there is a similar concept called, optimal portfolio theory in which they see portfolio management in terms where people are trying to hold the ideal amount of each different form of savings. The portfolio manager rebalances based on the expected properties of each asset until they have the right mix.

L.S: Is it realistic to assume that everyone is willing to sell their gold? The gold buyers are perceived as very strong hands with long time horizon, people who hoard for a crisis.

R.B.: Many of the people who have bought gold in the last few years are not remotely interested in selling at the current price or even double the current price, but there is always a price or some combination of price and circumstances where somebody would put some of their gold on sale — maybe not all of it but some of it. And people on the money side of the market are asking the same question in relation to gold. The market balances all of those choices out and you have a price that brings out the quantities on both sides of the market into balance.

Maybe that’s not totally true, maybe some gold is held by people who wouldn’t sell it for any reason. But I think that the concept of the gold bug who plans to take it all to the grave is over-stated. I asked a person the gold business whether gold retail trade is all selling and no buying. He told me, “No of course not, there are always buyers and sellers”. After all, what is the point of having a store of value if you never use the value? That is John Maynard Keynes and his parable of the cake that is never eaten. But Keynes was really painting a caricature of the capitalist system which encourages saving for the future. The future does arrives at some point, whether it is old age or emergency, and at that time, the value of additional saving is diminished relative to spending.

And it is important to understand the cost of owning gold is not necessarily the amount of money you could get by selling it. Prices are only a way of quantifying true costs. The cost of owning an ounce of gold is whatever other sort of economic opportunity that you are sacrificing by owning the gold instead. People who own gold are every day looking at “what other economic opportunities am I giving up by holding this ounce of gold?” and then “Do I want to shift the next ounce of gold somewhere else that will give me a better return or a better consumption experience?”. If you could swap an ounce of gold for one unit of the American Dow Stock Average that was at the time yielding 12% then the cost of owning an ounce of gold is not owning a unit of the DJIA. The cost of owning gold is the opportunity cost, of which holding cash instead is only one possible choice.

Let me give you another example; if the price of a new car that you like is twenty ounces of gold, you might prefer the gold. The cost of owning the gold is 1/20th of a car. But if the price of that car in gold ounces dropped to one ounce, you might say, “Nineteen ounces of gold is enough and I’d like to have that new car”. And at that point it makes sense to swap a single ounce of gold for a car. You still have nineteen ounces of gold, so you haven’t sold all of your gold, but at the margin, you have sold the least valued ounce for something that became more attractive.

L.S.: So your view is basically that of portfolio balancing. Do you see the price mechanism in the gold market as similar to the share market?

R.B.: Yes, in terms of the formal model of how pricing works it is similar. You see you have a relatively fixed quantity of a good and people are bidding the price up or down, based on who is the most motivated to hold that good, who is most willing to sacrifice the opportunity to hold a different asset or to increase their consumption.

Now, gold is different than shares in that gold is more of a cash-like asset whereas with shares you are buying an actual business that has a management team, products, and a financial statement. So, in that way it’s different. But in terms of the pricing process it’s quite similar.

L.S.: You use in your writings also the concept of “reservation demand”. Can you explain this further, please?

R.B.: There are two different expressions of demand for a good. If I trade with you, I supply one apple and I demand one banana and you do the opposite. We each demand something by offering something in supply. When there’s a buyer and a seller, the buyer demands and the seller supplies. That is exchange demand.

The concept of reservation demand is where you demand something by holding onto it rather than selling it. This concept might sound unfamiliar but it is very relevant to everyone’s life. We all have reservation demand for many goods. I have reservation demand at the moment for an auto, a dining room table, a couch, a mobile phone, and so forth. My reservation demand for cash in my pocket is $20. Any good that you’re any holding onto rather than selling, you are exercising reservation demand.

Most of the market research about gold deals with exchange demand, which has the advantage that you can measure it. But reservation demand is far more relevant to the price. The profile of reservation demand among people who own gold is the main determinant of the gold price from the supply side.

A very closely-related concept is reservation price. This is the price where you would be willing to sell a good that you currently hold. In the gold market, you can think of every ounce with a price tag on it. Or maybe today, it would be a QR code instead of a tag. That price depends on who owns that ounce of gold and their reason for holding it. Short-term traders might take a position for five minutes looking for a small move. If they got their $10 move they would sell and lock in a profit. You have other people who have a much longer time horizon, years or even decades, and a much higher expectation of where they’re going to sell. And even the same person will have a different price tag on each ounce. The first ounce you might be more willing to sell than your last ounce. It is important to understand that reservation prices are not necessarily money prices; they may be construed more broadly in terms of economic opportunities as I described just a moment ago.

You also might object that a lot of people may not know exactly what their reservation price is in money terms because it is impossible to know accurately what the purchasing price of money will be at a time when you might want to sell. And this is true. Many gold buyers are envisioning that we are going to experience hyper-inflation in some countries and their plan might be to look for distressed assets that go on sale during a hyperinflation. That would be the time to sell their gold, or more accurately, to swap their gold for assets. This type of person may conceive of the reservation price as, “When I can buy a small business, like a cleaners, for five ounces of gold” or “when I can buy a rental apartment for 10 ounces of gold”. People conceive of the reservation price more broadly in terms of what is going on in the world around them.

There is reservation demand on the money side of the market as well. Why does everyone not spend all of their money? Because we have reservation demand for money. The reason that you have any money at all and you haven’t spent it is you see some potential use for that money, possibly when you see something you need or want at a low enough price, that the good comes in ahead of your reservation price in so you buy the good.

The bid and ask that you see in the gold market at any point in time is the price offered by the marginal non-buyer and the price asked by the marginal non-seller. The marginal non-buyer is the person whose reservation price for their money is just below the ask and the marginal non-seller is the person whose reservation price for that ounce of gold is just above the bid. The equilibrium of the market is that you have the bid and the ask which are the best reservation prices are on each side.

L.S. Why do you object to the emphasis on annual statistics in looking at this market?

R.B: What I want people to take away from this interview is that the gold price is not primarily a way of rationing gold that was mined during the last year, it’s a way of rationing all of the gold in the world because all of the gold is held and everyone who holds it cares about the price one way or the other.

The gold market is not segregated into one market for the gold that was mined this year and another market for gold that was mined in past years. The buyer doesn’t care whether he’s buying a newly mined ounce of gold or buying from somebody who had purchased gold that was mined 100 years ago. All of the buyers are competing to buy and all of the sellers are competing to sell.

I think that the focus on annual numbers is another residual of the domination of this space by commodities-type thinking.

L.S. You have stated that mine supply is not a key factor driving the gold price. Most gold analysts would not agree with you. Please explain your view on this.

If you pick up a typical research report on a gold market from a research firm or a bank, you will find that the main portion of the report is about annual quantities. Annual mine production is the most important followed by the jewelry melted, jewelry bought, coin and bar sales, dental, industrial, and central bank. And these quantities are thought by most analysts to be critically important in determining the gold price but that is just not the case.

Gold is always owned by whoever has puts greatest value on it. The ask price is the value placed on gold by the individual who values their last ounce the least of anyone who owns gold, compared to the last buyer who got rationed out of the market, the guy who values gold the most of anyone who does not own that last ounce.

Mining add about 1% to the total supply each year. If the total amount of gold is 5.05 billion ounces rather than 5.0 billion, that allows a few more of what were the marginal non-buyers to become buyers.

I think of the miners and the gold destroyers – such as dentists and the electronics industry, as a small delta on top of the price formation process that is mainly about who is willing to bid the most to hold all of the gold. Mine supply is only a small share of all gold.

The only difference between a miner and someone else who owns the same amount of gold is that the miners pretty much have to sell because they are businesses and they have to cover costs. The investor who owns some gold doesn’t necessarily have to sell, they can hold as long as they want to or until they have a better place for their savings than gold. You can say that they are price takers.

You can think of the miner as coming in to that market and selling down into the bid side of the market a little bit. Of course the miner is going to enable some people to get into the market at a lower price than without the miner because those buyers are not forced to go up higher into the ask side of the market in order to buy their gold.

A lot of analysts go even further down the road to absurdity by looking at the growth rate of gold mining. If you start out from year 1 where mine supply is, let’s say 2000 tonnes, and in year 2 mine supply is 2,500 tonnes, that is an increase of 20%. So the thinking goes, if supply is up by 20%, then demand also has to go up by 20% and that looks like a lot. If buyers bought 2000 tons last year and this year you are asking them to buy the same and then 20% more, how is that going to happen? It’s really not a big influence. In math terms, mine supply is the first derivative and now we are talking about second derivatives.

L.S.: You have given your reasons for thinking that the impact of mining on the gold price is small. Do you have any way of quantifying that?

R.B.: I can’t say for sure but there are some ways to make an educated guess.

One is that mine supply only adds around 1% or 2% to the total stockpile of gold. You can think of mining as a form of gold inflation with a rate of around 1-2%. If we were looking at the supply of money in a country or shares of a stock we would expect the value to be diluted by something close to the growth rate. Miners are diluting the value of the existing gold stock by 1%. If this is correct, and if everyone who owned gold was trying to maintain a constant amount of gold in purchasing power terms, then all other things being equal, a 1% dilution would have a 1% impact on price.

Another way of looking at it is when the supply of gold is 5 billion ounces there is a price quotation, which is the best ask. Now one year later mining has brought us up to 5.05 billion ounces. A group of buyers was able to come in and buy the additional 50 million ounces. Where do those new buyers value gold? If we assume static preferences, maybe slightly above their buy price. Not a lot above their buy price or they would have become buyers the year before. So that would suggest a slightly lower price, depending on how deep you have to go down into the bids to fill the additional ounces.

I looked at some figures from geologist Brent Cook showing that all of the gold mined in any one year is about equal to a few days volume on the LBMA. And the LBMA is not the only market where gold is traded in the world. I’m not saying that the difference due to mining is equal to the ratio of trading days to volume. But the point is, selling the mined gold onto the market is a very small part of the market activity. It’s easily absorbed into a liquid market.

L.S.: In your most recent article you argue that many analysts are incorrectly bullish or bearish, because their data does not support their price outlook. Is that so?

R.B.: You see every day in the media statements like “Gold investment demand is up by 20 percent this year” and that’s supposed to be very bullish. Or “investment demand was down by 15 percent” and that is supposed to be bearish.

There is also I remember a wave of stories in the early 90s as the gold industry was increasing up exploration and bringing new properties on line, where it was popular to say, “Gold mine supply was 2000 tons this year and it’s going to be 2500 tons next year”. That is an increase of 25 percent in supply, and wow, that sounds like a big, big increase in supply. To keep up, the demand side of the market has to step up by 500 tons this year otherwise the price is going to be much-much lower. That would be a huge increase in demand. Where is all that demand going to come from to keep up with supply?

When you see statement like that, what does that mean, exactly? It means something like this. If investors as a sector had a net addition to their portfolio of 50 million ounces one year and the next year they added 60 million ounces they’re calling that a 20 percent increase in demand. And that’s supposed to be very bullish.

This way of thinking about the market is not logical. What they call “supply” and “demand” is the amount of gold that got moved around the market. And that is fine as far as it goes. The problem is when they go from the number to the price. Those numbers do not characterize the forces of supply and demand that do set the price.

L.S.: Then what do they mean by supply and demand? And why do you dislike their definitions?

R.B.: Let me explain how they come up with these numbers and what they’re supposed to mean and then, where they go wrong.

What analysts typically do is divide the market up into sectors such as mines, investment, jewelry, industrial and central banks and maybe funds or ETFs get their own sector. Often a country like China is considered a sector. They want to measure the amount of gold that was bought and sold that year by individuals or actors within each sector. Those are gross amounts. From grosses you can compute net amounts. The net is the difference between the gross bought and sold quantity for that sector. There’s always a net outflow from the mine sector because they’re in business to sell. For any other sector, the net might be a positive or a negative number during a year because people may have bought more jewelry than they sold, or the opposite. During any given year investors might on net have added to their positions or diminished their holdings.

When you read “supply” or “demand” in the financial media, the definition is not consistent from one place to the next. There are a lot of ways people slice and dice all of the numbers. Everyone does not do it the say way. However you do it, you have a number made by adding up some gross and net quantities. For example, one report might say that supply is mine supply plus gross jewelry scrap. Someone else might include gross investment purchases, and someone else might count only net investment as part of the demand number. When you read that demand is up, what they mean is that one of these contrived Rube Goldberg definitions that has the misleading name “demand” has changed from one year to the next.

Let me give you one example. The CPM Group (a research consultancy that produces in-depth reports on the gold and silver markets) does it like this: they define supply as the all of following: mine supply, the gross industrial sales, and gross jewelry sold. CPM defines demand as the sum of all of these: gross industrial purchases, gross jewelry purchases, net central bank activity and net investor activity.

CPM uses a mix of gross quantities and net quantities. This definition by itself strikes me as quite eccentric because of the mixture grosses and nets into the same aggregate. Gross quantities measure a flow, while nets are the change in magnitude of a stock. What happens when you add grosses and nets together? I have no idea. This reminds me of breaking the rules of dimensional consistency, something that the physics faculty at my university prohibited.

Now let’s delve into these net quantities a bit more. To simplify the situation, suppose there are only two sectors in the market. Let’s call those two sectors “mines” and “everyone else”. Then the relationship between the quantities is very simple. Whatever the miner sold somebody bought. There’s always a market for gold at some price. An ounce of gold is worth more than zero. Any quantity of gold that someone offers on the market will find a buyer at some price and that gold will end up in someone’s portfolio or maybe consumed. Mine supply gross (or net) sold is equal to everyone else net purchased. That is a simplified understanding of a two-sector market.

Now let’s complicate the model a bit more to get it closer to reality. If you have three sectors, mines, jewelry and investment, then you can have a net outflow from jewelry one year and that would have to show up as a net inflow into investment because all the quantities have to balance out. Everything still has to net out to zero across all sectors. The gold miners are always sellers but any other sector could be a net buyer or a net seller in any one year period.

You can keep making the model more complex by adding more and more sectors. Each time you add another sector to your model, that sector has inflows and outflows. But this doesn’t change the fundamental logic which is that every ounce that is sold in one place is purchased in another place. All of the flows have to balance out to the net change in the world’s total position, which is mine supply less destruction. And that is always a positive number as long as anyone has been counting.

Now, I’ve been saying that this is at best, not very useful, and at worst, misleading. By now you probably want to know, “what is the problem?” The problem is that these quantities and these flows have no causal relationship with the gold price. All we have done is to add up some of the volume in the market and shifts in aggregate holdings. But we are still no closer to the price because neither the volume of trading, nor position changes as are causes of the price. Quantities are not the cause of the gold price. Gross quantities are not the cause of the gold price. Net quantities are not the cause of the gold price. And so it must also be true that any Frankenstein monster number you invent, even if you give it a familiar name, like “supply” and “demand” also does not cause the gold price.

Suppose I tell you that there was a net flow of gold from sector A to sector B last year, then what is the impact on the gold price? There is no way to say. The gold price could be higher, lower or unchanged when gold moved from A to B. If the gold moved from A to B because the buyers on the A side were more aggressive and raised their bid prices, then you would see a higher price. If gold flowed because the people in B valued it less, so they were willing to let it go for less in return, then you would see a lower price. If both of those things happened, there would be a lot of trading but the price might end up about the same.

A price is a quantity of money that is exchanged for a quantity of gold. In these voluminous reports about mine supply and jewelry and everything, they’re only looking at quantities of gold. There is no way that looking at quantities alone can tell you anything about price because there is no money involved. It’s sort of like the is-ought problem in philosophy, which says that you cannot derive a sentence containing “ought” from any number of propositions that contain only “is”. You cannot make any conclusions about money if you do not have money in your premises. No matter how hard you study these quantities it won’t tell you anything about the price. Whatever the driver is of the price, it has to involve both gold and money.

L.S.: If not cause and effect, is there any relationship between these quantities and the gold price?

R.B. : Yes, it’s almost the opposite of what most people think. The gold price is formed by a balancing process, as investors shift different assets in order to hold the amount of gold, cash, and other assets they want. These quantities come about because of discrepancies between what people own, what they want, and the collective preferences of the rest of the market. These discrepancies are resolved by exchanging and that gets counted as a quantity. But these quantities do not drive the price. The more preference changes among the buyers and sellers, the greater the volume of trading required to get back to an equilibrium.

I recall Warren Buffet describing a cartoon of a financial news anchor with the caption, “There was no volume on the market today because everyone was happy with what they own”. This is quite funny but the serious point is that buying and selling comes about because there are people who wish to change their position in a way that is complementary to what someone else wants, so they are both able to change their positions to something that they like better. The one side wants more cash, less god; the other wants the opposite.

The volume of buying and selling shows how far out of adjustment people are between their own positions and the preferences of other people in the market which is what creates the opportunity to trade. Buying and selling as such do not cause the price, buying and selling come about because of a preference disequilibrium. That disequilibrium requires trading to equilibrate but it does not tell us at what price the trading occurs.

There might be a statistical correlation between, for example, a net inflow into one sector and higher (or lower) prices. If someone has a statistical model that works, that is great. But it’s not causal.

But it seems to me that even if someone has discovered correlations like that, they will be coincident with the price, rather than predictive. In order to forecast the price, you need an indicator that moves in advance of the price. You read all the time how bullish it is that people bought so many coins, or bars or whatever, but buying that was the cause of the price going up, then it would have already gone up due to the buying. That would not help you forecast at all.

L.S.: You say that the way supply and demand are reported in the financial media is confusing. Please explain to our readers your thought process in more detail.

demandsupplycurve

R.B.: When the average reader, or even the quite sophisticated reader sees the word “supply” and “demand” they don’t think to ask, “what is definition of that word” because we already have a good intuitive feeling about what those words mean. And we all know that an increase in demand drives the price higher, while an increase in supply sets us up for a lower price. And that is true if you use the terms “supply” and “demand” correctly to mean as the intensity of investor preferences on each side of the market.

If the author got all their numbers right – and some of these firms go to a lot of trouble to count up every microgram of gold dust in the entire world – then these statements are accurate in a very limited sense. But it is not true that a quantity made out of the sum of various flows and position shifts has any relationship to the forces that set the market price.

Everyone will agree: “The price of gold is set by supply and demand”. But what does did we all just agree on? Correctly understood, this statement means that the price balances out the overall the set of choices people make to offer on their desired terms from each side of the market. The price results from balancing those two sides.

Suppose that instead of “supply” and “demand” these aggregates were called X and Y, if you like algebra. Now if I change my statement to say “The price of gold is set by X and Y” you are immediately going to ask “what do you mean by X and Y?” And when you find that X = A + B + (C – D) + (E – F), etc. and Y is something similar it starts to make a lot less sense. At that point your head will probably start exploding. When you use X and Y in place of “supply” and “demand”, you no longer have a true statement.

The problem happens by starting out from truth and then changing the definitions of terms so the statement looks the same but it is no longer means the same thing and the thing that it now means is not true. By using words that have a clear meaning in our minds, but using them to mean something else this creates immense confusion. And hardly anyone realizes this when they are reading an innocent-looking statement.

L.S.: If not by quantities, then can the gold price otherwise be analyzed quantitatively?

R.B.: The gold price is set by investor preferences, which cannot be measured directly. But I think that we understand the main factors in the world that influence investor preferences in relation to gold. These factors are the growth rate of money supply, the volume and quality of debt, political uncertainty, confiscation risk, and the attractiveness (or lack thereof) of other possible assets. As individuals filter these events through their own thoughts they form their preferences. But that’s not something that’s measurable.

I suspect that the reason for the emphasis on quantities is that they that can be measured. Measurement is the basis of all science. And if we want our analysis to be rigorous and objective, so the thinking goes, we had better start with numbers and do a very fine job at measuring those numbers accurately. If you are an analyst you have to write a report for your clients, after all they have paid for it, so they have to come up with things that can be measured and the quantity is the only thing that can be measured so they write about quantities.

And in the end this is the problem for gold price analysts, you’re talking about a market in which it’s difficult to really quantify what’s going on. I think that looking at some broad statistical relationships over a period of history, like gold price to money supply, to debt, things like that, might give some idea about where the price is going. Or maybe not, maybe you run into the problem I mentioned about synchronous correlations that are not predictive.

Part of the problem is that statistics work better the more data you have. But we really don’t have a lot of data about how the gold price behaves in relation to other things.

Europe “Fixed” Facade Crumbling As German Retail Sales Implode

Remember all those soaring German confidence indices that said ignore the negative GDP print and focus on a future so bright, ze Germans've got to wear Zeiss? Appears the confidence may have been a tad massaged upwards because following a spate of weak corporate results out of Europe's growth dynamo, the German HDE retail association said Christmas sales for November and December were down some 0.7% from the prior year. Specifically German retail sales plunged -1.7% from November on expectations of a modest -0.1% decline, while on a year over year basis December imploded a whopping -4.7% vs expectations of -1.5%. Did the Germans blame the weather of lack of government spending, or maybe say to only focus on the positive aspects of the report (if any)? No. They were not girlie men about it.

Elsewhere in Spain, inflation rose less than expected, as consumer prices rose 2.8% Y/Y - the slowest pace since August and less than the 3.1 percent increase economists predicted. This was somewhat surprising as the country posted a boost in its current account with the November surplus amounted to €1.8 billion compared with €865 million in October and a deficit of €3.9 billion a year earlier, the Bank of Spain said. That narrowed the cumulative shortfall for the first 11 months of 2012 to €13.1 billion from €33.6 billion in 2011. A big reason for this is that central banks and other banks rotated into Spanish bonds on the false assumption that Spain is fixed. Ironically, even the SNB said that it had boosted its AA rated bonds holdings, while trimming their AAA holdings in Q4.

In now traditional news, Greek retail sales in November followed suit and plunged just a tad more than in Germany imploding by some -16.8% in November. Remember: once they hit 0 they can only go up.

But the biggest news certainly was Germany, whose economy continues to deteriorate and is probably what spurred Buba president Jens Weidmann to say that ongoing bailouts could threaten the strongest members.

“If things stay the way they are, the consequences of unsound policies will be too easily passed on to others,” Weidmann said in Berlin late yesterday. “Sooner or later the economically solid countries will be weakened. Liability and control have to be brought into balance.”

Germany, Europe’s largest economy, has pledged more than 300 billion euros ($407 billion) in loans and guarantees to help shore up the finances of euro member states such as Greece, Ireland and Portugal. Weidmann, who’s also a member of the European Central Bank’s Governing Council, has argued that policies including the OMT bond-purchase program come too close to the banned practice of financing states by printing money.

Risks that have been shared via bailouts and ECB emergency measures have already reached a “substantial level,” Weidmann said. “If these risks rise, the culture of stability could be eroded as if we had explicit joint liability.”

Germany shouldn’t allow wages to rise too quickly in order to rebalance competitiveness within the euro area, Weidmann said. An increase in wages of even 5 percent would have no impact on the output of crisis-ridden countries, and would instead damage Germany.

But why would he say that if Europe was so very much was fixed?

In European market news, the picture is as follows:

  • Spanish 10Y yield up 2bps to 5.25%
  • Italian 10Y yield up 2bps to 4.33%
  • U.K. 10Y yield down 4bps to 2.08%
  • German 10Y yield down 4bps to 1.67%
  • Bund future up 0.37% to 141.95
  • BTP future down 0.39% to 112.51
  • EUR/USD down 0.03% to $1.3563
  • Dollar Index down 0.03% to 79.26
  • Sterling spot up 0.15% to $1.5824
  • 1Y euro cross currency basis swap down 1bp to -18bps
  • Stoxx 600 down 0.29% to 287.78

Keep an eye on Italy where things are going from bad to worse, and where we will likely see even more catastrophic bank sector revalations as the local election approaches.

More from DB:

Credit markets extended their relative underperformance yesterday in what is becoming an increasingly monitored theme by other asset classes. The CDX IG 19 index widened by a sharp 4.5bp overnight to 90.25bp bringing the series to the widest since the fiscal-cliff agreement reached at the beginning of the year. We highlighted this theme yesterday but to again give some context to the relative underperformance in credit, when CDX IG was last at these levels the S&P 500 was at around 1460. We are now about 2.8% above those levels.

We’ve also heard some comments about an increasing outflow from corporate bond ETFs lately and also more chatter about the ‘great rotation trade’ from FI to equities for a variety of possible reasons (eg. low yields, a growth rebound, relative tight spreads to yields, event risk concerns and credit supply indigestion).

It does feel that the strong technicals in fixed income are now being tested. While the technical picture may change at some point we are not sure it will be a 2013 story. The fact there is huge reliance on keeping over indebted entities funded and the fixed income market generally solvent will ensure that authorities and Central Banks keep yields artificially low for some time yet. So our feeling is that despite the recent wobbles, flows will still come into FI in 2013 which will limit the sell-off.

Away from the US it was similarly a weak day for markets in Europe. We saw major bourses finish the day lower with Italian equities being the notable underperformer. Indeed the FTSE MIB (-3.36%) suffered its biggest decline in about 6 months driven by a 34% fall in Saipem after announcing a big profit warning. The company said it expects a very significant reduction of about 80% in EBIT this year from its onshore business leading to a wave of broker downgrades. A regulatory investigation on a share sale transaction the day before the profit warning has also been launched. Peripheral bond yields also spiked higher overnight with Italian and Spanish 10-year bonds closing +15bp and +6bp higher at 4.317% and 5.225%.

In other news flow, Moody’s has placed Monte Paschi’s Ba2 rating on review for possible downgrade reflecting the considerably uncertainty over the impact of legacy structured trades entered into by prior management. Italian prosecutors are investigating the  bank’s former management for bribery over a series of structured finance trades. Monte Paschi’s shares fell -9.5% yesterday which also didn’t help the moves in Italian equities.

Asian markets are trading weaker overnight with most bourses trading lower across the region. The Nikkei, Hang Seng and the KOSPI are down -0.23%, -0.35% and -0.25%, respectively. Asian credit spreads are also trading wider although the Asia iTraxx index is now off the wides at 115bp , still +3bp on the day. The 10-year UST yield is steady at around 1.98%.

In terms of today we can expect initial jobless claims, the Chicago PMI and Personal Income/Spending in the US. We have a fairly packed data day in Europe featuring retail sales, unemployment and inflation numbers from Germany. We also have PPI and retail sales from France, CPI in Spain and PPI from Italy.

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Obama’s Flip-Flops on Money in Politics: A Brief History

When President Obama told supporters that he would morph his campaign into a new nonprofit that would accept unlimited corporate donations, the announcement set off a familiar round of griping from campaign finance reformers.

President Obama at the Inaugural Ball on Jan. 21. In a reversal this year, the inaugural committee accepted corporate donations. (Photo: Alex Wong/Getty Images) The creation this month of Organizing for Action, which will promote the president’s second-term agenda, appears to be the fourth reversal by Obama on major money-in-politics issues since 2008.

“No big bank or corporation will donate million-dollar checks to OFA without the expectation that it will impact which issues they engage on, and that’s very troubling,” said Adam Green of the Progressive Change Campaign Committee.

The Washington Post noted that in reorganizing his campaign as a tax-exempt social welfare group, the president is embracing a structure that has been criticized for allowing anonymous money into politics.

Conservatives who’ve been attacked by the Obama camp for their reliance on such “dark money” groups called out the president’s “brazen hypocrisy.” Neither the White House nor Organizing for America responded to requests for comment.

Here’s a brief history of Obama’s other shifts on money-in-politics issues going back to 2008:

Public financing

In November 2007, then-Sen. Barack Obama pledged to take part in the presidential public financing system for the general election, calling himself “a longtime advocate for public financing of campaigns.” Under the system, created in the wake of Watergate, a candidate receives taxpayer money ($84 million in 2008) and cannot accept most private donations or spend beyond the amount of the government grant.

Less than a year later, in June 2008, Obama reversed himself and announced he was opting out of the system. He maintained he still supported the system in principle but said it should be reformed.

Obama became the first candidate to decline general election public financing since the creation of the system and went on to raise a then-record $745 million for the cycle. He outspent John McCain, who did accept public money, by four-to-one. Obama’s 2008 decision generally takes at least some of the blame from campaign finance observers for killing the system.

Neither Obama nor Mitt Romney accepted public financing in the 2012 race. The Obama campaign raised $782 million for the cycle.

Super PACs

When the U.S. Supreme Court issued its 2010 Citizens United decision, opening the way for the creation of super PACs financed with unlimited corporate or individual money, Obama became the ruling’s biggest critic.

“Last week the Supreme Court reversed a century of law that I believe will open the floodgates for special interests — including foreign corporations — to spend without limit in our elections,” Obama said in his State of the Union address a few days after the decision. “I don't think American elections should be bankrolled by America's most powerful interests, or worse, by foreign entities.”

That criticism turned into a pledge not to use the new funding vehicles. In July 2011, Obama campaign spokesman Ben LaBolt told the Washington Post: “Neither the president nor his campaign staff or aides will fundraise for super PACs. Our campaign will continue to lead the way when it comes to transparency and reform.”

Seven months later, the campaign reversed itself and embraced a super PAC founded by former White House aides called Priorities USA Action. “[O]ur campaign has to face the reality of the law as it currently stands,” wrote campaign manager Jim Messina in a blog post.

With the blessing of the campaign, top Obama aides, such as then-Chief of Staff Jack Lew and confidantes like Rahm Emanuel, were dispatched to solicit super PAC donations from Democratic millionaires and billionaires. Priorities USA ultimately spent more than $60 million to help re-elect the president.

Inaugural festivities funding

After Obama’s victory in 2008, his inaugural committee abided by what it called “an unprecedented set of limitations on fundraising as part of President-elect Obama’s pledge to put the country on a new path.” That meant taking no corporate money and no individual contributions in excess of $50,000 to pay for the myriad parties and balls that end up costing tens of millions of dollars.

The second time around, Obama reversed the policy. The inaugural committee organizing this month’s inaugural festivities accepted corporate money and imposed no limits on giving. A spokesperson cited the need to “meet the fund-raising requirements for this civic event after the most expensive presidential campaign in history.”

Unlimited special interest spending

Just a few months ago, the Obama campaign sent me a memo on the president’s campaign finance record, highlighting his repeated denunciations of special interest money in politics.

“That’s one of the reasons I ran for President: because I believe so strongly that the voices of ordinary Americans were being drowned out by the clamor of a privileged few in Washington,” he said in May 2010, decrying the way Citizens United “gives corporations and other special interests the power to spend unlimited amounts of money — literally millions of dollars — to affect elections throughout our country.”

In 2012, the Obama campaign specifically called out social welfare, or 501(c)(4),  groups that spent hundreds of millions of dollars of anonymous money on political ads.

That’s why campaign finance reformers are so angry: Organizing for Action is a 501(c)(4) that will advocate for the president’s second-term agenda.

The group has said that despite its status, it will voluntarily disclose donors. But it’s not clear whether that will involve full, prompt disclosure of who is giving and how much, or simply providing a list of names at some point.

A spokeswoman for the new group told NBC this week the disclosure issue is “still being worked out.”

Unnamed Democratic officials have told media outlets that the group will take corporate money (though not donations from registered lobbyists). Indeed, at a meeting this month at the Newseum in Washington, Obama campaign aides pitched top Democratic donors, reported Politico, which obtained a ticket to the event.

The meeting was sponsored by a trade association founded by Fortune 100 companies, including UnitedHealthcare, Microsoft, Wal-Mart, and Duke Energy.

Social welfare groups are formed to promote the common good and may be involved in politics. Under IRS rules, they are not supposed to be primarily engaged in campaigns.

It’s unclear whether Organizing for Action will get involved in electoral politics as other such nonprofits have in recent years. The group’s spokeswoman told NBC it will run “issue” ads to support Obama’s agenda — but that’s a category of political advocacy that has been open to wide interpretation.

Don’t Put a Fork in It: On the Perils of Genetically Engineered Salmon

While most Americans were enjoying the holiday season or stressing out over the nation’s imminent leap off the so-called fiscal cliff, the Food and Drug Administration delivered some big news as quietly as possible.Fishy Genes. (OtherWords cartoon by Khalil Bendib)

On December 21, the agency announced that AquaBounty’s genetically engineered salmon had cleared the final hurdle before clinching FDA approval.

Despite insufficient testing and widespread consumer opposition, AquaBounty’s food experiment is dangerously close to becoming the first genetically engineered animal produced for human consumption. Yes, a newfangled fish may soon land on a dinner plate near you.

For those who have been following this news for the past several years, the timing of the FDA’s release of its draft environmental assessment — the Friday before Christmas — was no surprise. But the news was still frightening: The FDA may give this transgenic animal the green light under a new approval process that treats the fish as an “animal drug.”

Prefer your salmon without those eel genes spliced into its DNA? Pay close attention because this frankenfish may hit the market without any sort of label.

It seems that AquaBounty and the FDA don’t believe consumers deserve the right to know whether the fish we eat is genetically engineered. Those who have demanded labeling for genetically engineered food will be unable to identify this transgenic salmon from standard farm-raised varieties.

Not only does this ignore our fundamental right to know what we are putting on our plates, it’s also a bad business decision. It’s entirely possible that many Americans will avoid purchasing any salmon for fear it is genetically engineered.

AquaBounty, the biotech company responsible for bringing us this fishy salmon, used its own data to convince the FDA that it is safe to eat. But AquaBounty’s profits are inextricably linked to approval of this salmon. It’s outrageous that the FDA would take AquaBounty’s word over that of dozens of lawmakers and scientists, including experts at the National Oceanic and Atmospheric Administration and the Fish and Wildlife Service, not to mention thousands of concerned consumers.

The FDA has the difficult task of protecting consumer safety, but it’s hard to take it seriously when it comes to genetically engineered salmon. So far, they’ve failed to conduct the appropriate studies to determine if the fish is safe to eat. Independent scientists have skewered the FDA’s process, noting that serious environmental concerns have not been examined while food safety issues related to hormone levels and allergies have been glossed over.

Even AquaBounty’s claim of faster growth rates is suspect. The company hasn’t yet demonstrated that its transgenic salmon can grow faster than salmon without its new traits. And that’s the whole reason they say it should be approved. SalmoBreed AS, a Norwegian company specializing in the selective breeding of Atlantic salmon, has directly challenged AquaBounty on this point.

By releasing an environmental assessment instead of a more thorough environmental impact statement, the FDA has failed to fully consider the threat this controversial new fish could pose to wild fish populations.

While the FDA is close to approving genetically engineered salmon for consumers, Congress can still keep them from unleashing this dangerous experiment. Consumers don’t have million-dollar accounts with K Street lobbyists, but we do have a powerful voice of opposition, one that has effectively put the brakes on this untested laboratory experiment for more than two years. Members of Congress are speaking out against this controversial fish. Let your elected officials know you don’t want this frankenfish on your plate. Visit Foodandwaterwatch.org to find out how.

This work is licensed under a Creative Commons License

Wenonah Hauter

Wenonah Hauter is the executive director of the consumer advocacy group Food & Water Watch. She has worked extensively on energy, food, water and environmental issues at the national, state and local level. Experienced in developing policy positions and legislative strategies, she is also a skilled and accomplished organizer, having lobbied and developed grassroots field strategy and action plans.

Seattle’s Teacher Uprising: High School Faculty Faces Censure for Boycotting Standardized MAP Tests

Earlier this month, teachers at Garfield High School in Seattle, Washington, voted unanimously to stop administering a widely used standardized test, calling them wasteful and unfairly used to grade their performance. They are now facing threats of 10-day suspension without pay if they continue their boycott. We go to Seattle to speak with two guests: Jesse Hagopian, a high school history teacher and union representative at Garfield High School who has refused to administer the MAP standardized test, and Wayne Au, a former high school teacher, assistant professor at the University of Washington, and author of "Unequal By Design: High-Stakes Testing and the Standardization of Inequality."

AMY GOODMAN: Jimi Hendrix. Yes, Jimi Hendrix attended Garfield High School in Seattle. This is Democracy Now!, democracynow.org, The War and Peace Report. I’m Amy Goodman, with Aaron Maté.

AARON MATÉ: Well, teachers at a Seattle-area high school are winning support locally and nationwide for their boycott of a standardized test used in teacher evaluations. Earlier this month, teachers at Garfield High School voted to stop administering MAP tests, calling them wasteful and unfairly used to grade their performance. Teachers at several other Seattle schools have pledged their support for the boycott, and both the National Education Association and the American Federation of Teachers have also given their endorsement.

AMY GOODMAN: Last week, Seattle school officials sent a letter asking principals to inform all their teachers that they could face a 10-day unpaid suspension for refusing to administer the test. However, at a rally held that same afternoon at Seattle Public Schools headquarters, teachers said they will not back down. This is Mallory Clarke, who teaches reading at Garfield High.

MALLORY CLARKE: I don’t want to be away from my students for that length of time. I don’t want to lose that kind of money on a teacher’s salary. But I’m willing to do it because that’s the right thing to do. And it’s also educational for my students to see me standing up for things that are right.

AMY GOODMAN: For more, we go now to Seattle, Washington, where we’re joined by two guests.

Jesse Hagopian is a high school history teacher, union rep at Garfield High School, who has refused to administer the MAP standardized test. He’s a founding member of Social Equality Educators.

We’re also joined by Wayne Au. He’s a former high school teacher, editor of Rethinking Schools, went to Garfield and is now assistant professor at the University of Washington, Bothell Campus. He is the author of Unequal By Design: High-Stakes Testing and the Standardization of Inequality and co-editor of Pencils Down: Rethinking High Stakes Testing and Accountability in Public Schools.

Jesse Hagopian and Professor Wayne Au, we welcome you both to Democracy Now! Jesse, if you could start off by explaining what is happening. This protest of teachers, unanimous, is unprecedented.

JESSE HAGOPIAN: Well, thank you, Amy, so much for having me on the show today.

And it’s really an incredible moment at Garfield High School. But Garfield High School has a proud tradition of teaching the arts. We have one of the greatest jazz bands in the country. As you said, Jimi Hendrix went to Garfield, and Quincy Jones went to Garfield. We have a long tradition of teaching our kids to think creatively. And, you know, Quincy Jones ended up producing the album Thriller, so I’m so glad that he didn’t have to be subjected to this MAP test and have his confidence killed and not produce one of the greatest albums of all time.

And I think it’s that tradition of creativity and teaching kids to think critically that has led our school to take his bold stand. The teachers at Garfield High School voted unanimously, with only three abstentions, to refuse to give this district-required test, because we feel this is a civil rights issue.

This is a test that was brought to Seattle under complete scandal. The former superintendent, Maria Goodloe-Johnson, sat on the board of the company that produced the test and didn’t disclose that when the Seattle Public Schools purchased the MAP test for over $4 million. Now, it’s not me who has a problem with that; it is the state auditor of Washington state that came and found that that was, quote, "an ethics violation" and, quote, "a conflict of interest." But really, that’s the best part of the MAP test.

This test is a test that is not aligned to our curriculum. So our kids in ninth grade algebra are getting geometry questions that are not being taught to them in that grade. And so, what that means is it’s setting them up for failure. And we didn’t get into this job as teachers to set our kids up for failure. And what’s worse, this evaluation is tied to our evaluation. The MAP test is part of rating teachers. And so, when you have kids taking a test that isn’t tied to what we’re teaching in the classroom and then they can tie that to our evaluations, it’s terribly unfair.

And finally, I think one of the main reasons why this was a unanimous vote of teachers was really an equity issue. One, you have special education students don’t have their IEPs, or Individual Education Plans, respected, so that there aren’t proper accommodations for our special ed students on this test. And then, me, as a history teacher, when I assign research projects, we often find that the computer labs are booked for weeks, because the MAP test is administered on a computer. And so, our children aren’t allowed to use the library and the computer labs for research for way too long because of this MAP test that’s administered three times a year. And so, the students that have computers at home can still continue the research, but those primarily low-income and students of color who don’t have as much Internet connectivity at home, they lose out. And so, this was a civil rights issue. And we’ve learned from the past that when you’re dealing with a civil rights issue, a boycott can be a very powerful tool. And that’s what we’ve done at Garfield High School is boycotted the MAP test.

AARON MATÉ: Well, Jesse, Superintendent José Banda told King5 News that he’s received emails from teachers who support the MAP test and see value in it, that it helps identify areas of weakness and strength among students. He insists that canceling the test is not in the interests of students.

SUPERINTENDENT JOSÉ BANDA: I don’t think it’s fair to students. You know, what we’re forgetting about in this whole equation is that this really is about students. Not everyone has or shares the same sentiment that some of these teachers do, meaning the teachers from Garfield and some of these other schools.

AARON MATÉ: Let’s bring in Professor Wayne Au. If you could respond to Superintendent José Banda?

WAYNE AU: Yeah, you know, to me, it’s ironic. You know, I respect Superintendent Banda. I know he came into the Seattle Public Schools recently, and he sort of inherited the MAP test from the former superintendent. So, I sort of feel for his position of being sort of forced into having to deal with something that he didn’t bring in. So I want to say that up front. But it’s ironic to me that he’s saying this is about students, when, you know, several of the concerns that Jesse just raised—for instance, you know, access to resources, testing being a civil rights issue—are also about students. And so, you know, it just strikes me as odd that he would frame it that way, when a lot of the concerns that the teachers are raising clearly are about students and student learning. You know, they want their instructional time back for students.

They want a test—they want a test—they want an assessment that is going to be useful for them. And particularly at the high school level, we’re seeing that the MAP test is not—is not useful for their instruction. It’s not clear that it’s a valid and sort of reliable measure for high school-level teaching. There’s also been recent studies coming—that have come out that have said, for instance, that at the fourth- and fifth-grade level even, the MAP is not accurately—is not accurately—is not showing any improvement—the MAP test isn’t showing an improvement for reading instruction at the fourth- and fifth-grade level. So, you know, I think the test boycott is actually about students and doing what’s best for students and taking an ethical stance, you know, that shows that teachers are professionals and caring and they want to do what’s best for their students. And so, you know, I’m disappointed.

AMY GOODMAN: Well, I want to turn then to school principal, author and TV host, Steve Perry, who’s the founder of Capital Preparatory Magnet School. Perry says teachers who object to standardized tests are trying to avoid accountability.

STEVE PERRY: What they are trying to do is they’re trying to skirt the responsibility of accountability. This examination, like so many others, probably has some flaws, as most examinations do, as the examinations that they give in their own classrooms do. In fact, if we look at some of the real data, we find that American students are at the bottom third in virtually every international comparison. Why? Because all we do is depend on the opinion of one teacher, as opposed to a standardized examination which tells us what children can do.

AMY GOODMAN: Professor Wayne Au, your response?

WAYNE AU: Yeah, it makes me laugh. For one, the international comparison, he actually doesn’t understand or isn’t actually portraying that correctly. There was a very recent study by Carnoy and Rothstein that showed that if you compare international test scores and you account for poverty, you can actually find that U.S. students compare quite well to the highest-performing countries around the world. And so, making that—like, his perspective on that actually doesn’t read that test data correctly.

AMY GOODMAN: Well, let me—

JESSE HAGOPIAN: And if I could add one thing, I—

AMY GOODMAN: Before we end, yeah, Jesse Hagopian, let me just say something. Let me ask you. You’re threatened with 10-day pay suspension. What are your and the other teachers’ plans at Garfield right now? Really, the whole nation is watching this unanimous protest.

JESSE HAGOPIAN: Yeah. The teachers at Garfield High School are not worried at all about this 10-day suspension. They’ve told me that they are willing to take this 10-day suspension without pay because this is a civil rights issue. They’ll just go into the classroom and volunteer their time, if they need be.

And this really has touched something around the nation. You know, at Garfield High School, we received pizza from a school in Florida during lunch, flowers from a school in New Jersey. You know, I received thousands of emails from people all over the country. And one of them was from a teacher in a Native American reservation who said, "I am supposed to give 14 standardized tests a year, and education is becoming far more about testing than actually learning."

And we face big problems in the world today. We face climate change threatening humanity. We face endless wars, and we’re facing economic stagnation. And these types of problems cannot be solved by bubbling in A, B, C or D. We need to teach our kids critical thinking skills. We need to teach them civic courage and leadership skills to solve these big types of problems that we face in our society. And that is the direction that Garfield High School teachers are pointing.

Now, some Garfield High School teachers—

AMY GOODMAN: We have 10 seconds.

JESSE HAGOPIAN: —may want to replace the MAP test with a better test, but many of us think we need far more accurate forms of assessment. We’re not against accountability. We want to show student growth, but we can’t do it with a flawed test. We want to move towards things like portfolios. And I think Seattle could be at the forefront—

AMY GOODMAN: Jesse Hagopian, we’re going to have to leave it there. We want to thank you, high school history teacher, and Professor Wayne Au, editor of Rethinking Schools, for joining us.

Dutch Court Delivers Blow to Nigerians with Shell Acquittals

In a blow to environmental and human rights campaigners in Nigeria, a Dutch court has thrown most of a lawsuit brought by local farmers and residents against oil giant Royal Dutch Shell for vast pollution related to the company's extraction and refinery processes in the Niger Delta.

Plaintiff Nigerian farmer Eric Dooh showing his hand covered with oil from a creek near Goi, Ogoniland, Nigeria. (Photograph: Marten Van Dijl/EPA) As The Guardian explains,

The case involved five allegations of spills in Nigeria, and four of these were quashed by the court. On the fifth count, Shell was ordered to pay compensation, of an amount yet to be decided.

Shell said it was "studying the verdict".

The case was brought in the Netherlands because of Shell's dual headquartership, being both Dutch and British, and was brought by four Nigerian farmers co-sponsored by the international green campaigning group Friends of the Earth.

Friends of the Earth International spokesperson Geert Ritsema told Reuters the group would appeal the court's ruling "because there is still a lot of oil lying around. These sites need to be cleaned."

Prior to the decision, head of FOEI Nnimmo Bassey, in an essay titled "Why Shell must be held accountable for its Niger Delta ecocide," wrote: "When it is said that the region is probably the most polluted place on earth the blame must be placed on the doorsteps of the oil companies operating there."

Bassey continued:

We should state here that as the clear sector leader in Nigeria, Shell’s  behaviour leads the way for others.

In the case before the Dutch court, the plaintiffs are demanding that Shell cleans up oil pollution in their communities, compensates those affected and ensures that new leaks do not occur from its pipelines.

These have been the cardinal demands of the communities of the Niger Delta because they depend primarily on the environment for their livelihood endeavours including farming and fishing.

The streams and creeks they depend on for portable water are serially hit by oil spills while forests have been set ablaze in inept efforts to clean up environmental damage or to cover up evidence of such spills.

And Reuters adds:

There were 198 oil spills at Shell facilities in the Niger Delta last year, releasing around 26,000 barrels of oil, according to data from the company. The firm says 161 of these spills were caused by sabotage or theft, while 37 incidents were caused by operational failure. Local communities say Shell under reports the amount of barrels spilled.

People who live in the Niger Delta region say their land, water and fisheries have been blighted for years by oil pollution and activists have called for oil companies in Nigeria to be held to the same standard as elsewhere in the world.

A United Nations report in 2011 on the Ogoniland region in the Niger Delta criticized Shell and other multinationals, and the Nigerian government, for 50 years of oil pollution.

It said the area, where Shell no longer operates, needed the world's biggest-ever oil clean-up, which would take 25 years and cost an initial $1 billion.

_________________________

Towards a World War III Scenario? The Role of Israel in Triggering an Attack...

Towards a World War III Scenario? The Role of Israel in Triggering an Attack on Iran

This article was first published in August 2010.

For further details consult Michel Chossudovsky’s book, 

Towards a World War III Scenario: The Dangers of Nuclear War 

available in hardcover or pdf from Global Research.

The stockpiling and deployment of advanced weapons systems directed against Iran started in the immediate wake of the 2003 bombing and invasion of Iraq. From the outset, these war plans were led by the US, in liaison with NATO and Israel.

Following the 2003 invasion of Iraq, the Bush administration identified Iran and Syria as the next stage of “the road map to war”. US military sources intimated that an aerial attack on Iran could involve a large scale deployment comparable to the US “shock and awe” bombing raids on Iraq in March 2003:

“American air strikes on Iran would vastly exceed the scope of the 1981 Israeli attack on the Osiraq nuclear center in Iraq, and would more resemble the opening days of the 2003 air campaign against Iraq.(See Globalsecurity )

“Theater Iran Near Term”

Code named by US military planners as TIRANNT, “Theater Iran Near Term”, simulations of an attack on Iran were initiated in May 2003 “when modelers and intelligence specialists pulled together the data needed for theater-level (meaning large-scale) scenario analysis for Iran.” ( (William Arkin, Washington Post, 16 April 2006).

The scenarios identified several thousand targets inside Iran as part of a “Shock and Awe” Blitzkrieg:

“The analysis, called TIRANNT, for “Theater Iran Near Term,” was coupled with a mock scenario for a Marine Corps invasion and a simulation of the Iranian missile force. U.S. and British planners conducted a Caspian Sea war game around the same time. And Bush directed the U.S. Strategic Command to draw up a global strike war plan for an attack against Iranian weapons of mass destruction. All of this will ultimately feed into a new war plan for “major combat operations” against Iran that military sources confirm now [April 2006] exists in draft form.

… Under TIRANNT, Army and U.S. Central Command planners have been examining both near-term and out-year scenarios for war with Iran, including all aspects of a major combat operation, from mobilization and deployment of forces through postwar stability operations after regime change.” (William Arkin, Washington Post, 16 April 2006)

Different “theater scenarios” for an all out attack on Iran had been contemplated:  “The US army, navy, air force and marines have all prepared battle plans and spent four years building bases and training for “Operation Iranian Freedom”. Admiral Fallon, the new head of US Central Command, has inherited computerized plans under the name TIRANNT (Theatre Iran Near Term).” (New Statesman, February 19, 2007)

In 2004, drawing upon the initial war scenarios under TIRANNT,  Vice President Dick Cheney instructed USSTRATCOM to draw up a “contingency plan” of a large scale military operation directed against Iran “to be employed in response to another 9/11-type terrorist attack on the United States” on the presumption that the government in Tehran would be behind the terrorist plot. The plan included the pre-emptive use of nuclear weapons against a non-nuclear state:

“The plan includes a large-scale air assault on Iran employing both conventional and tactical nuclear weapons. Within Iran there are more than 450 major strategic targets, including numerous suspected nuclear-weapons-program development sites. Many of the targets are hardened or are deep underground and could not be taken out by conventional weapons, hence the nuclear option. As in the case of Iraq, the response is not conditional on Iran actually being involved in the act of terrorism directed against the United States. Several senior Air Force officers involved in the planning are reportedly appalled at the implications of what they are doing—that Iran is being set up for an unprovoked nuclear attack—but no one is prepared to damage his career by posing any objections.” (Philip Giraldi, Deep Background,The American Conservative  August 2005)

The Military Road Map: “First Iraq, then Iran”

The decision to target Iran under TIRANNT was part of the broader process of military planning and sequencing of military operations. Already under the Clinton administration, US Central Command (USCENTCOM) had formulated  “in war theater plans” to invade first Iraq and then Iran. Access to Middle East oil was the stated strategic objective:

“The broad national security interests and objectives expressed in the President’s National Security Strategy (NSS) and the Chairman’s National Military Strategy (NMS) form the foundation of the United States Central Command’s theater strategy. The NSS directs implementation of a strategy of dual containment of the rogue states of Iraq and Iran as long as those states pose a threat to U.S. interests, to other states in the region, and to their own citizens. Dual containment is designed to maintain the balance of power in the region without depending on either Iraq or Iran. USCENTCOM’s theater strategy is interest-based and threat-focused. The purpose of U.S. engagement, as espoused in the NSS, is to protect the United States’ vital interest in the region – uninterrupted, secure U.S./Allied access to Gulf oil.” (USCENTCOM, http://www.milnet.com/milnet/pentagon/centcom/chap1/stratgic.htm#USPolicy, link no longer active, archived at http://tinyurl.com/37gafu9)

The war on Iran was viewed as part of a succession of military operations.  According to (former) NATO Commander General Wesley Clark, the Pentagon’s military road-map consisted of a sequence of countries: “[The] Five-year campaign plan [includes]… a total of seven countries, beginning with Iraq, then Syria, Lebanon, Libya, Iran, Somalia and Sudan.”  In “Winning Modern Wars” (page 130) General Clark states the following:

“As I went back through the Pentagon in November 2001, one of the senior military staff officers had time for a chat. Yes, we were still on track for going against Iraq, he said. But there was more. This was being discussed as part of a five-year campaign plan, he said, and there were a total of seven countries, beginning with Iraq, then Syria, Lebanon, Libya, Iran, Somalia and Sudan. (See Secret 2001 Pentagon Plan to Attack Lebanon, Global Research, July 23, 2006)

The Role of Israel

There has been much debate regarding the role of Israel in initiating an attack against Iran.

Israel is part of a military alliance. Tel Aviv is not a prime mover. It does not have a separate and distinct military agenda.

Israel is integrated into the “war plan for major combat operations” against Iran formulated in 2006 by US Strategic Command (USSTRATCOM). In the context of large scale military operations, an uncoordinated unilateral military action by one coalition partner, namely Israel, is from a military and strategic point almost an impossibility. Israel is a de facto member of NATO. Any action by Israel would require a “green light” from Washington.

An attack by Israel could, however, be used as “the trigger mechanism” which would unleash an all out war against Iran, as well retaliation by Iran directed against Israel.

In this regard, there are indications that Washington might envisage the option of an initial (US backed) attack by Israel  rather than an outright US-led military operation directed against Iran. The Israeli attack –although led in close liaison with the Pentagon and NATO– would be presented to public opinion as a unilateral decision by Tel Aviv. It would then be used by Washington to justify, in the eyes of World opinion, a military intervention of the US and NATO with a view to “defending Israel”, rather than attacking Iran. Under existing military cooperation agreements, both the US and NATO would be “obligated” to “defend Israel” against Iran and Syria.

It is worth noting, in this regard, that at the outset of Bush’s second term, (former) Vice President Dick Cheney hinted, in no uncertain terms, that Iran was “right at the top of the list” of the “rogue enemies” of America, and that Israel would, so to speak, “be doing the bombing for us”, without US military involvement and without us putting pressure on them “to do it” (See Michel Chossudovsky, Planned US-Israeli Attack on Iran, Global Research, May 1, 2005): According to Cheney:

“One of the concerns people have is that Israel might do it without being asked… Given the fact that Iran has a stated policy that their objective is the destruction of Israel, the Israelis might well decide to act first, and let the rest of the world worry about cleaning up the diplomatic mess afterwards,” (Dick Cheney, quoted from an MSNBC Interview, January 2005)

Commenting the Vice President’s assertion, former National Security adviser Zbigniew Brzezinski in an interview on PBS, confirmed with some apprehension, yes: Cheney wants Prime Minister Ariel Sharon to act on America’s behalf and “do it” for us:

“Iran I think is more ambiguous. And there the issue is certainly not tyranny; it’s nuclear weapons. And the vice president today in a kind of a strange parallel statement to this declaration of freedom hinted that the Israelis may do it and in fact used language which sounds like a justification or even an encouragement for the Israelis to do it.”

What we are dealing with is a joint US-NATO-Israel  military operation to bomb Iran, which has been in the active planning stage since 2004. Officials in the Defense Department, under Bush and Obama, have been working assiduously with their Israeli military and intelligence counterparts, carefully identifying targets inside Iran. In practical military terms, any action by Israel would have to be planned and coordinated at the highest levels of the US led coalition.

An attack by Israel would also require coordinated US-NATO logistical support, particularly with regard to Israel’s air defense system, which since January 2009 is fully integrated into that of the US and NATO. (See Michel Chossudovsky,  Unusually Large U.S. Weapons Shipment to Israel: Are the US and Israel Planning a Broader Middle East War?  Global Research, January 11,2009)

Israel’s X band radar system established in early 2009 with US technical support has “integrate[d] Israel’s missile defenses with the U.S. global missile [Space-based] detection network, which includes satellites, Aegis ships on the Mediterranean, Persian Gulf and Red Sea, and land-based Patriot radars and interceptors.” (Defense Talk.com, January 6, 2009,)

What this means is that Washington ultimately calls the shots. The US rather than Israel controls the air defense system: ”’This is and will remain a U.S. radar system,’ Pentagon spokesman Geoff Morrell said. ‘So this is not something we are giving or selling to the Israelis and it is something that will likely require U.S. personnel on-site to operate.’” (Quoted in Israel National News, January 9, 2009).

The US military oversees Israel’s Air Defense system, which is integrated into the Pentagon’s global system. In other words, Israel cannot launch a war against Iran without Washington’s consent. Hence the importance of the so-called “Green Light” legislation in the US Congress sponsored by the Republican party under House Resolution 1553, which explicitly supports an Israeli attakc on Iran:

“The measure, introduced by Texas Republican Louie Gohmert and 46 of his colleagues, endorses Israel’s use of “all means necessary” against Iran “including the use of military force.” … “We’ve got to get this done. We need to show our support for Israel. We need to quit playing games with this critical ally in such a difficult area.”’ (See Webster Tarpley, Fidel Castro Warns of Imminent Nuclear War; Admiral Mullen Threatens Iran; US-Israel Vs. Iran-Hezbollah Confrontation Builds On, Global Research, August 10, 2010)

In practice, the proposed legislation is a “Green Light” to the White House and the Pentagon rather than to Israel. It constitutes a rubber stamp to a US sponsored war on Iran which uses Israel as a convenient military launch pad. It also serves as a justification to wage war with a view to defending Israel.

In this context, Israel could indeed provide the pretext to wage war, in response to alleged Hamas or Hezbollah attacks and/or the triggering of hostilities on the border of Israel with Lebanon. What is crucial to understand is that a minor ”incident” could be used as a pretext to spark off a major military operation against Iran.

Known to US military planners, Israel (rather than the USA) would be the first target of military retaliation by Iran. Broadly speaking, Israelis would be the victims of the machinations of both Washington and their own government. It is, in this regard, absolutely crucial that Israelis forcefully oppose any action by the Netanyahu government to attack Iran.

Global Warfare: The Role of US Strategic Command (USSTRATCOM)

Global military operations are coordinated out of US Strategic Command Headquarters (USSTRATCOM) at the Offutt Air Force base in Nebraska, in liaison with the regional commands of the unified combatant commands (e.g.. US Central Command  in Florida, which is responsible for the Middle East-Central Asian region, See map below)  as well as coalition command units in Israel, Turkey, the Persian Gulf and the Diego Garcia military base in the Indian Ocean.  Military planning and decision making at a country level by individual allies of US-NATO as well as “partner nations” is integrated into a global military design including the weaponization of space.

Under its new mandate, USSTRATCOM has a responsibility for “overseeing a global strike plan” consisting of both conventional and nuclear weapons. In military jargon, it is slated to play the role of “a global integrator charged with the missions of Space Operations; Information Operations; Integrated Missile Defense; Global Command & Control; Intelligence, Surveillance and Reconnaissance; Global Strike; and Strategic Deterrence…. ”

USSTRATCOM’s responsibilities include: “leading, planning, & executing strategic deterrence operations” at a global level, “synchronizing global missile defense plans and operations”, “synchronizing regional combat plans”, etc. USSTRATCOM is the lead agency in the coordination of modern warfare.

In January 2005, at the outset of the military deployment and build-up directed against Iran, USSTRATCOM was identified as “the lead Combatant Command for integration and synchronization of DoD-wide efforts in combating weapons of mass destruction.” (Michel Chossudovsky, Nuclear War against Iran, Global Research, January 3, 2006).

What this means is that the coordination of a large scale attack on Iran, including the various scenarios of escalation in and beyond the broader Middle East Central Asian region would be coordinated by USSTRATCOM.

Map: US Central Command’s Area of Jurisdiction

Tactical Nuclear Weapons directed against Iran

Confirmed by military documents as well as official statements, both the US and Israel contemplate the use of nuclear weapons directed against Iran. In 2006, U.S. Strategic Command (USSTRATCOM) announced it had achieved an operational capability for rapidly striking targets around the globe using nuclear or conventional weapons. This announcement was made after the conduct of military simulations pertaining to a US led nuclear attack against a fictional country. (David Ruppe, Preemptive Nuclear War in a State of Readiness: U.S. Command Declares Global Strike Capability, Global Security Newswire, December 2, 2005)

Continuity in relation to the Bush-Cheney era:  President Obama has largely endorsed the doctrine of pre-emptive use of nuclear weapons formulated by the previous administration. Under the 2010 Nuclear Posture Review, the Obama administration confirmed  “that it is reserving the right to use nuclear weapons against Iran” for its non-compliance with US demands regarding its alleged (nonexistent) nuclear weapons program. (U.S. Nuclear Option on Iran Linked to Israeli Attack Threat – IPS ipsnews.net, April 23, 2010). The Obama administration has also intimated that it would use nukes in the case of an Iranian response to an Israeli attack on Iran. (Ibid). Israel  has also drawn up its own “secret plans” to bomb Iran with tactical nuclear weapons:

“Israeli military commanders believe conventional strikes may no longer be enough to annihilate increasingly well-defended enrichment facilities. Several have been built beneath at least 70ft of concrete and rock. However, the nuclear-tipped bunker-busters would be used only if a conventional attack was ruled out and if the United States declined to intervene, senior sources said.”(Revealed: Israel plans nuclear strike on Iran – Times Online, January 7, 2007)

Obama’s statements on the use of nuclear weapons against Iran and North Korea are consistent with post 9/11 US nuclear weapons doctrine, which allows for the use of tactical nuclear weapons in the conventional war theater.

Through a propaganda campaign which has enlisted the support of “authoritative” nuclear scientists, mini-nukes are upheld as an instrument of peace, namely a means to combating “Islamic terrorism” and instating Western style “democracy” in Iran. The low-yield nukes have been cleared for “battlefield use”. They are slated to be used against Iran and Syria in the next stage of America’s “war on Terrorism” alongside conventional weapons.

“Administration officials argue that low-yield nuclear weapons are needed as a credible deterrent against rogue states. [Iran, Syria, North Korea] Their logic is that existing nuclear weapons are too destructive to be used except in a full-scale nuclear war. Potential enemies realize this, thus they do not consider the threat of nuclear retaliation to be credible. However, low-yield nuclear weapons are less destructive, thus might conceivably be used. That would make them more effective as a deterrent.” (Opponents Surprised By Elimination of Nuke Research Funds Defense News November 29, 2004)

The preferred nuclear weapon to be used against Iran are tactical nuclear weapons (Made in America), namely bunker buster bombs with nuclear warheads (e.g. B61.11), with an explosive capacity between one third to six times a Hiroshima bomb. The B61-11 is the “nuclear version” of the “conventional”  BLU 113. or Guided Bomb Unit GBU-28. It can be delivered in much same way as the conventional bunker buster bomb. (See Michel Chossudovsky, http://www.globalresearch.ca/articles/CHO112C.html, see also http://www.thebulletin.org/article_nn.php?art_ofn=jf03norris) . While the US does not contemplate the use of strategic thermonuclear weapons against Iran, Israel’s nuclear arsenal is largely composed of thermonuclear bombs which are deployed and could be used in a war with Iran. Under Israel’s Jericho‐III missile system with a range between 4,800 km to 6,500 km, all Iran would be within reach.


Conventional bunker buster Guided Bomb Unit GBU-27


B61 bunker buster bomb

Radiactive Fallout

The issue of radioactive fallout and contamination, while casually dismissed  by US-NATO military analysts, would be devastating, potentially affecting a large area of  the broader Middle East (including Israel) and Central Asian region.

In an utterly twisted logic, nuclear weapons are presented as a means to building peace and preventing “collateral damage”.  Iran’s nonexistent nuclear weapons are a threat to global security, whereas those of the US  and Israel are instruments of peace” harmless to the surrounding civilian population“.

“The Mother of All Bombs” (MOAB) Slated to be Used against Iran

Of military significance within the US conventional weapons arsenal is the 21,500-pound “monster weapon” nicknamed the “mother of all bombs” The GBU-43/B or Massive Ordnance Air Blast bomb (MOAB) was categorized “as the most powerful non-nuclear weapon ever designed” with the the largest yield in the US conventional arsenal. The MOAB was tested in early March 2003 before being deployed to the Iraq war theater. According to US military sources, The Joint Chiefs of Staff  had advised the government of  Saddam Hussein prior to launching the 2003 that the “mother of all bombs” was to be used against Iraq. (There were unconfirmed reports that it had been used in Iraq).

The US Department of Defence has confirmed in October 2009 that it intends to use the “Mother of All Bombs” (MOAB) against Iran. The MOAB is said to be  ”ideally suited to hit deeply buried nuclear facilities such as Natanz or Qom in Iran” (Jonathan Karl, Is the U.S. Preparing to Bomb Iran? ABC News, October 9, 2009). The truth of the matter is that the MOAB, given its explosive capacity, would result in extremely large civilian casualties. It is a conventional “killing machine” with a nuclear type mushroom cloud.

The procurement of four MOABs was commissioned in October 2009 at the hefty cost of $58.4 million, ($14.6 million for each bomb). This amount  includes the costs of development and testing as well as integration of the MOAB bombs onto B-2 stealth bombers.(Ibid). This procurement is directly linked to war preparations in relation to Iran. The notification was contained in a 93-page “reprogramming memo” which included the following instructions:

“The Department has an Urgent Operational Need (UON) for the capability to strike hard and deeply buried targets in high threat environments. The MOP [Mother of All Bombs] is the weapon of choice to meet the requirements of the UON [Urgent Operational Need].” It further states that the request is endorsed by Pacific Command (which has responsibility over North Korea) and Central Command (which has responsibility over Iran).” (ABC News,  op cit, emphasis added). To consult the reprogramming request (pdf) click here

The Pentagon is planning on a process of extensive destruction of Iran’s infrastructure and mass civilian casualties through the combined use of tactical nukes and monster conventional mushroom cloud bombs, including the MOAB and the larger GBU-57A/B or Massive Ordnance Penetrator (MOP), which surpasses the MOAB in terms of explosive capacity.

The MOP is described as “a powerful new bomb aimed squarely at the underground nuclear facilities of Iran and North Korea. The gargantuan bomb—longer than 11 persons standing shoulder-to-shoulder [see image below] or more than 20 feet base to nose” (See Edwin Black, “Super Bunker-Buster Bombs Fast-Tracked for Possible Use Against Iran and North Korea Nuclear Programs”, Cutting Edge, September 21 2009)

These are WMDs in the true sense of the word. The not so hidden objective of the MOAB and MOP, including the American nickname used to casually describe the MOAB (“mother of all bombs’), is “mass destruction” and mass civilian casualties with a view to instilling fear and despair.


“Mother of All Bombs” (MOAB)

GBU-57A/B Mass Ordnance Penetrator (MOP)


MOAB: screen shots of test: explosion and mushroom cloud

State of the Art Weaponry: “War Made Possible Through New Technologies”

The process of US military decision making in relation to Iran is supported by Star Wars, the militarization of outer space and the revolution in communications and information systems. Given the advances in military technology and the development of new weapons systems, an attack on Iran could be significantly different in terms of the mix of weapons systems, when compared to the March 2003 Blitzkrieg launched against Iraq. The Iran operation is slated to use the most advanced weapons systems in support of its aerial attacks. In all likelihood, new weapons systems will be tested.

The 2000 Project of the New American Century (PNAC) document entitled Rebuilding American Defenses, outlined the mandate of the US military in terms of large scale theater wars, to be waged simultaneously in different regions of the World:

“Fight and decisively win multiple, simultaneous major theater wars”. 

This formulation is tantamount to a global war of conquest by a single imperial superpower. The PNAC document also called for the transformation of  U.S. forces to exploit the “revolution in military affairs”, namely the implementation of  “war made possible through new technologies”. (See Project for a New American Century, Rebuilding Americas Defenses  Washington DC, September 2000, pdf).  The latter consists in developing and perfecting a state of the art global killing machine based on an arsenal of sophisticated new weaponry, which would eventually replace the existing paradigms.

“Thus, it can be foreseen that the process of transformation will in fact be a two-stage process: first of transition, then of more thoroughgoing transformation. The breakpoint will come when a preponderance of new weapons systems begins to enter service, perhaps when, for example, unmanned aerial vehicles begin to be as numerous as manned aircraft. In this regard, the Pentagon should be very wary of making large investments in new programs – tanks, planes, aircraft carriers, for example – that would commit U.S. forces to current paradigms of warfare for many decades to come. (Ibid, emphasis added)

The war on Iran could indeed mark this crucial breakpoint, with new space-based weapons systems being applied with a view to disabling an enemy which has significant conventional military capabilities including more than half a million ground forces.

Electromagnetic Weapons

Electromagnetic weapons could be used to destabilize Iran’s communications systems, disable electric power generation, undermine and destabilize command and control, government infrastructure, transportation, energy, etc.  Within the same family of weapons, environmental modifications techniques (ENMOD) (weather warfare) developed under the HAARP programme could also be applied. (See Michel Chossudovsky, “Owning the Weather” for Military Use, Global Research, September 27, 2004). These weapons systems are fully operational. In this context, te US Air Force document AF 2025 explicitly acknowledgedthe military applications of weather modification technologies:

“Weather modification will become a part of domestic and international security and could be done unilaterally… It could have offensive and defensive applications and even be used for deterrence purposes. The ability to generate precipitation, fog, and storms on earth or to modify space weather, improve communications through ionospheric modification (the use of ionospheric mirrors), and the production of artificial weather all are a part of an integrated set of technologies which can provide substantial increase in US, or degraded capability in an adversary, to achieve global awareness, reach, and power.” (Air Force 2025 Final Report, See also US Air Force: Weather as a Force Multiplier: Owning the Weather in 2025, AF2025 v3c15-1 | Weather as a Force Multiplier: Owning… | (Ch 1) at www.fas.org).

Electromagnetic radiation enabling “remote health impairment” might also be envisaged in the war theater. (See Mojmir Babacek, Electromagnetic and Informational Weapons:, Global Research, August 6, 2004). In turn, new uses of biological weapons by the US military might also be envisaged as suggested by the PNAC: “[A]dvanced forms of biological warfare that can “target” specific genotypes may transform biological warfare from the realm of terror to a politically useful tool.” (PNAC, op cit., p. 60).

Iran’s Military Capabilities: Medium and Long Range Missiles

Iran has advanced military capabilities, including medium and long range missiles capable of reaching targets in Israel and the Gulf States. Hence the emphasis by the US-NATO Israel alliance on the use of nuclear weapons, which are slated to be used either pr-emptively or in response to an Iranian retaliatory missile attack.


Range of Iran’s Shahab Missiles. Copyright Washington Post

In November 2006, Iran tests of surface missiles 2 were marked by precise planning in a carefully staged operation. According to a senior American missile expert (quoted by Debka),  “the Iranians demonstrated up-to-date missile-launching technology which the West had not known them to possess.” (See Michel Chossudovsky, Iran’s “Power of Deterrence”  Global Research, November 5, 2006) Israel acknowledged that “the Shehab-3, whose 2,000-km range brings Israel, the Middle East and Europe within reach” (Debka, November 5, 2006)

According to Uzi Rubin, former head of Israel’s anti-ballistic missile program, “the intensity of the military exercise was unprecedented… It was meant to make an impression — and it made an impression.” (www.cnsnews.com 3 November 2006)

The 2006 exercises, while  creating a political stir in the US and Israel, did not in any way modify US-NATO-Israeli resolve to wage on Iran.

Tehran has confirmed in several statements that it will respond if it is attacked. Israel would be the immediate object of Iranian missile attacks as confirmed by the Iranian government. The issue of Israel’s air defense system is therefore crucial. US and allied military facilities in the Gulf states, Turkey, Saudi Arabia, Afghanistan and Iraq could also be targeted by Iran.

Iran’s Ground Forces

While Iran is encircled by US and allied military bases, the Islamic Republic has significant military capabilities. (See maps below) What is important to acknowledge is the sheer size of Iranian forces in terms of personnel (army, navy, air force) when compared to US and NATO forces serving in Afghanistan and Iraq.

Confronted with a well organized insurgency, coalition forces are already overstretched in both Afghanistan and Iraq. Would these forces be able to cope if Iranian ground forces were to enter the existing battlefield in Iraq and Afghanistan? The potential of the Resistance movement to US and allied occupation would inevitably be affected.

Iranian ground forces are of the order of 700,000 of which 130,000 are professional soldiers, 220,000 are conscripts and 350,000 are reservists. (See  Islamic Republic of Iran Army – Wikipedia). There are 18,000 personnel in Iran’s Navy and 52,000 in the air force. According to the International Institute for Strategic Studies, “the Revolutionary Guards has an estimated 125,000 personnel in five branches: Its own Navy, Air Force, and Ground Forces; and the Quds Force (Special Forces).” According to the CISS, Iran’s Basij paramilitary volunteer force controlled by the Revolutionary Guards “has an estimated 90,000 active-duty full-time uniformed members, 300,000 reservists, and a total of 11 million men that can be mobilized if need be” (Armed Forces of the Islamic Republic of Iran – Wikipedia), In other words, Iran can mobilize up to half a million regular troops and several million militia. Its Quds special forces are already operating inside Iraq.


US Military and Allied Facilties Surrounding Iran

For several years now Iran has been conducting its own war drills and exercises. While its Air force has weaknesses, its intermediate and long-range missiles are fully operational. Iran’s military is in a state of readiness. Iranian troop concentrations are currently within a few kilometers of the Iraqi and Afghan borders, and within proximity of Kuwait. The Iranian Navy is deployed in the Persian Gulf within proximity of US and allied military facilities in the United Arab Emirates.

It is worth noting that in response to Iran’s military build-up, the US has been transferring large amounts of weapons to its non-NATO allies in the Persian Gulf including Kuwait and Saudi Arabia.

While Iran’s advanced weapons do not measure up to those of the US and NATO, Iranian forces would be in a position to inflict substantial losses to coalition forces in  a conventional war theater, on the ground in Iraq or Afghanistan. Iranian ground troops and tanks in December 2009 crossed the border into Iraq without being confronted or challenged by allied forces and occupied a disputed territory in the East Maysan oil field.

Even in the event of an effective Blitzkrieg, which targets Iran’s military facilities, its communications systems, etc. through massive aerial bombing, using cruise missiles, conventional bunker buster bombs and tactical nuclear weapons, a war with Iran, once initiated, could eventually lead into a ground war. This is something which US military planners have no doubt contemplated in their simulated war scenarios.

An operation of this nature would result in significant military and civilian casualties, particularly if nuclear weapons are used.

The expanded budget for the war in Afghanistan currently debated in the US Congress is also intended to be used in the eventuality of an attack on Iran.

Within a scenario of escalation, Iranian troops could cross the border into Iraq and Afghanistan.

In turn, military escalation using nuclear weapons could lead us into a World War III scenario, extending beyond the Middle East Central Asian region.

In a very real sense, this military project, which has been on the Pentagon’s drawing board for more than five years, threatens the future of humanity.

Our focus in this essay has been on war preparations. The fact that war preparations are in an advanced state of readiness does not imply that these war plans will be carried out.

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The US-NATO-Israel alliance realizes that the enemy has significant capabilities to respond and retaliate. This factor in itself has been crucial over the last five years in the decision by the US and its allies to postpone an attack on Iran.

Another crucial factor is the structure of military alliances. Whereas NATO has become a formidable force, the Shanghai Cooperation Organization (SCO), which constitutes an alliance between Russia and China and a number of former Soviet republics has been significantly weakened.

The ongoing US military threats directed  against China and Russia are intended to weaken the SCO and discourage any form of military action on the part of Iran’s allies in the case of a US NATO Israeli attack.

What are the countervailing forces which might prevent this war from occurring? There are numerous ongoing forces at work within the US State apparatus, the US Congress, the Pentagon and NATO.

The central force in preventing a war from occurring ultimately comes from the base of society, requiring forceful antiwar action by hundred of millions of people across the land, nationally and internationally.

People must mobilize not only against this diabolical military agenda, the authority of the State and its officials must be also be challenged.

This war can be prevented if people forcefully confront their governments, pressure their elected representatives, organize at the local level in towns, villages and municipalities, spread the word, inform their fellow citizens as to the implications of a nuclear war, initiate debate and discussion within the armed forces. 

The holding of mass demonstrations and antiwar protests is not enough. What is required is the development of a broad and well organized grassroots antiwar network which challenges the structures of power and authority. 

What is required is a mass movement of people which forcefully challenges the legitimacy of war, a global people’s movement which criminalizes war.

Michel Chossudovsky is an award-winning author, Professor of Economics (Emeritus) at the University of Ottawa and Director of the Centre for Research on Globalization (CRG), Montreal. He is the author of The Globalization of Poverty and The New World Order (2003) and America’s “War on Terrorism” (2005). He is also a contributor to the Encyclopaedia Britannica. His writings have been published in more than twenty languages. he can be reached at the globalresearch.ca website


Author’s note:
Dear Global Research Readers, kindly forward this text far and wide to friends and family, on internet forums, within the workplace, in your neighborhood, nationally and internationally, with a view to reversing the tide of war.  Spread the Word!  

To consult Part I of this essay click below

Preparing for World War III, Targeting Iran
Part I: Global Warfare 

- by Michel Chossudovsky – 2010-08-01


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On the News With Thom Hartmann: Obama Administration Considers Next Move on NLRB Appointment

In today's On the News segment: The Obama administration is considering its next move, after a panel of three Republican-appointed judges on a DC Circuit Court ruled last week, that President Obama’s recess appointments to the National Labor Relations Board and the Consumer Financial Protection Bureau were unconstitutional; Women are still struggling to find equality in the workplace; a senior Obama administration official tasked with closing the detention facility at Guantanamo Bay, has been reassigned from his position – and will not be replaced; and more.

Jim Javinsky in for Thom Hartmann here – on the news…

You need to know this. The Obama administration is considering its next move, after a panel of three Republican-appointed judges on a DC Circuit Court ruled last week, that President Obama’s recess appointments to the National Labor Relations Board and the Consumer Financial Protection Bureau were unconstitutional. The court ruled that the president can only make a recess appointment when the Senate is officially in recess – which only happens once a year – after the Senate finishes the first half of its session. That decision directly contradicted a 2004 federal appeals court ruling – and 190 years of recess appointments by both Republican, and Democratic, presidents. But Corporate America is applauding the decision – and arguing that decisions made by the National Labor Relations Board, and the Consumer Financial Protection Bureau, since the recess appointments, should be null and void. According to court rules, the Obama Justice Department still has 45 days to appeal the ruling to a larger court of appeals – plus another 90 days to appeal to the Supreme Court. Of course – none of this would have been an issue had Senate Republicans not filibustered the President’s nominees – forcing him to make recess appointments in the first place.

In screwed news…when hundreds of billions of taxpayer dollars were used to bailout the big banks on Wall Street – the Treasury Department took special precautions to make sure that money wouldn’t be funneled into lavish executive bonuses. But a new report by the Inspector General for TARP, shows that Treasury didn’t do its job. Rather than following rules to limit executive compensation, the Treasury’s “pay czar” let the bailed out banks pay their executives whatever they wanted. Altogether, the Treasury Department approved of all 18 pay raises requested by the banks – totaling more than $6 million. The so-called “pay czar” also approved of $1 million salary packages for 68, of 69 employees, at bailed out banks. As the report says, “While taxpayers struggle to overcome the recent financial crisis, and look to the U.S. government to put a lid on compensation for executives of firms, whose missteps nearly crippled the U.S. financial system, the U.S. Department of the Treasury continues to allow excessive executive pay."

In the best of the rest of the news…

Women are still struggling to find equality in the workplace. Despite President Obama signing into law the Lily Ledbetter Fair Pay Act four years ago, which gives women more power to sue for wage discrimination, the pay gap between men and women still persists. As ThinkProgress blog notes – women still make 77-cents for every dollar a man makes, which works out to women earning nearly a half-million dollars less than men, over the course of their life. And this pay gap gets worse as women get older. For women in their 20’s – it’s $1,700 a year. But for a women nearing retirement – that annual gap is more than $14,000, which suggests there is indeed a glass ceiling that women eventually hit in the workplace. And in higher paying jobs, female doctors earn $350,000 less over their careers, than male doctors. And female CEO’s earn 69 cents for every dollar a male CEO earns. President Obama devoted part of his second inaugural address to equal pay for equal work for women – but it’s clearly going to take a lot more work to achieve this goal.

So much for closing Gitmo. The New York Times reported yesterday, that a senior Obama administration official tasked with closing the detention facility at Guantanamo Bay, has been reassigned from his position – and will not be replaced. That move sends a very clear message, that the Obama administration is no longer as eager to close Gitmo, as he may have suggested he was in his first term. Of course, the main reason Gitmo remains open is because of Congress. Several times in President Obama’s first administration – Republicans in Congress passed legislation that bar any Gitmo detainees from being transferred anywhere else – therefore making it impossible for the administration to shut down the facility. But despite all of this, a spokesman for the administration told the New York Times that they, “remain committed to closing Guantanamo, and doing so in a responsible fashion.”

With the gun control debate focused on assault weapons and high capacity magazines – no one seems eager to talk about the real weapons behind most gun deaths in America: handguns. More than 6,000 people are killed by handguns every single year – and as data from the FBI shows – 72% of all firearm related homicides, were a result of a handgun. But neither President Obama, nor Congressional Democrats, have proposed limiting the purchases of handguns – or banning their sale outright. So even though mass shootings with military style assault weapons could be curbed by gun control – the epidemic in American from handgun violence isn’t likely to slow anytime soon.

Revolution is a messy process. After five days of riots across Egypt, that have killed more than 50 people and injured more than 1,000 – that nation’s military chief issued a dire warning that the nation may soon collapse. These recent riots come two years after the revolution in Egypt began in 2011 – and are directed at the new Muslim Brotherhood government, headed up by President Mohamed Morsi. There are fears across Egypt today, that the military may again intervene in government, and reclaim the reins of power should unrest continue.

And that’s the way it is today – Tuesday, January 29, 2013. I’m Jim Javinsky in for Thom Hartmann – on the news.

Can the Rising Progressive Tide Lift All Ships?

The growing progressive coalition that helped elect President Obama has emerged at the end of a failed and exhausted (Photo: xtine burrough)conservative era. The media now chronicle the flailings of Republican leaders slowly awakening to the weaknesses of a stale, pale and predominantly male party in today’s America.

But the central challenge to this progressive coalition is not dispatching the old but rather defining what comes next. Will it be able to address the central challenge facing America at this time and reclaim the American Dream from an extreme and corrosive economic inequality?

In his inaugural address, President Obama spoke powerfully to this rising American electorate — single women, minorities, the young — by summarizing the progressive contribution to building a more perfect union from “Seneca Falls to Selma to Stonewall.” He reminded all that greater social equality in America has been driven by independent movements, willing to confront the lies and limits of the conventional consensus.

Over decades, those civilizing movements have helped to free the slaves and extend greater opportunity to minorities, to women, to immigrants and now to gays and lesbians. But today, the progressive coalition must address the challenge faced by the original progressive movement, at the dawn of the last century — of extreme economic inequality, which is turning the American dream into a bygone memory.

Who can fail to see that this rising American electorate is sinking economically? More than 20 million people are in need of full-time work — and single women, minorities and the young have fared the worst. Wages are sinking. The top 1 percent captured fully 93 percent of the nation’s income growth coming out of the Great Recession in 2010. The young find good jobs scarce, even as they carry record student loan debts, now higher than credit card debt.

U.S. politics seems impervious to this reality. Republicans in Congress are intent on holding the economy hostage repeatedly through May to dismantle ever more public capacity. Right-wing governors in the states continue to rig the rules to crush unions and “fix” elections. Even liberal reformers like New York Gov. Andrew Cuomo (D) are comfortable espousing socially liberal but economically centrist politics that assume an economic recovery is underway.

In reality, the old economy is coming back. Corporate profits are up; wages are falling. Good jobs are being shipped abroad, with trade deficits back over $1 billion a day. The big banks, more concentrated than ever, are reopening the casino. Making this economy work once more for working people will require a new strategy for growth — and a confrontation with the current complacency and its entrenched interests and exhausted ideas.

The president was right when he said this is the defining moment for the middle class, and for those who aspire to join it. But it will take bold citizen mobilization to challenge the current limits of the debate. This is the test of democracy.

We have witnessed extreme inequality and political corruption before, in the Gilded Age at the dawn of industrial America at the turn of the last century. But hundreds of thousands of farmers created a people’s movement for a new monetary policy. Workers organized unions in the face of police billyclubs. Muckrakers exposed the tentacles of the trusts, the miseries inflicted on working people. It took years — and a Great Depression and a world war — but we built the first broad middle class the world had known.

A 21st-century movement for economic justice will find Americans receptive. It is striking how far ahead of Washington the majority of people is. Majorities support raising taxes on the wealthy while protecting Medicare, Medicaid and programs for the poor. They want to invest in America, not wage war in the far corners of the earth. They want to close corporate loopholes and shut down overseas tax dodges. They want the minimum wage lifted, and big banks broken up. They worry about deficits in part because they want Social Security protected, not put at risk. They want a trade strategy that ships goods, not jobs abroad.

But just as at Seneca Falls and Selma and Stonewall, it will take people’s movements to spark the change. We’ve already seen the potential when the Occupy movement challenged Wall Street and transformed the national debate. That independent mobilization contributed directly to Obama’s victory, helping him to find his own voice to fend off the challenge of Mitt Romney, a champion of the 1 percent. As history has shown, the central question is whether citizens of conscience will mobilize and march and make business as usual impossible. Will the rising American electorate continue to sink together? Or will its members help fuel the movement that revives the American dream? We shall see.

© 2013 The Washington Post

Katrina vanden Heuvel

Katrina vanden Heuvel is editor of The Nation.

Harry Reid Picking Winners In Fiscal Cliff Deal

Buried deep in the bowels of the much-heralded last-minute fiscal-cliff deal, that saved us from a fate worse than death and raised taxes on 77% of Americans, was a quiet little provision, inserted at the last minute, that sharply slashed Medicare pay...

Case-Shiller Home Price Index Posts Second Consecutive Monthly Decline, Average Home Prices Back To...

The Case-Shiller Home Price Index is unique among other economic data indicators for recommending that analysts focus solely on its Non-seasonal adjusted data series, as this is what the report uses in its own headline figures. It adds that "for analytical purposes, S&P Dow Jones Indices publishes a seasonally adjusted data set covered in the headline indices" - a far cry from the BLS, whose Arima X 12 models are the basis of the data "moves" on a monthly basis: moves which are based not so much in the underlying data but on the seasonal adjustment and fudging the government employees apply to it. And it is the unadjusted Case Shiller data that showed that in November, the 20 City Composite index posted its second consecutive monthly price decline in a row. Yes: on a year over year basis home prices did rise some 5.5%, but on the other hand, "average home prices across the United States are back to their autumn 2003 levels for both the 10-City and 20-City Composites." And while the price decline into the year end is somewhat seasonal, it certainly does not fit with all the other economic data released by the government showing a housing picture so bright not even the tiniest drops in prices were allowed.

And in what is the biggest paradox for homebuyers in New York, Case Shiller reported that of the 20 cities tracked, home prices rose everywhere... except New York, yet oddly enough it is in NY that the uber-wealthy from China and Russia come to park their money and buy any $50 million + available duplex, triplex and quadruplex regardless of price, and where the bubble at the ultra expensive end of the market is raging like never before (not to mention the record December Hamptons real estate prices).

Perhaps just as importantly, the bubble is back in the west:

In the 12 months ended in November, prices rose in 19 of the 20 cities and fell in New York. In 19 cities prices rose faster in the 12 months to November than in the 12 months to October; Cleveland prices rose at the same pace in both time periods. Phoenix led with the fastest price rise – up 22.8% in 12 months as it posted its seventh consecutive month of double-digit annual returns.

Keeping it real, Vegas - the biggest housing bubble pop in history, saw home prices rise 10% Y/Y, while Detroit was up 11.9%. One word (Un)sustainable.

But maybe this time it is different.

Source

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Stocks And Bonds Reconnect As Endangered Rising VIX Posts A Rare Appearance

Once again equity markets disconnected (positively) from their risk-related cousins at around the European close and while broad equity markets closed around unchanged, the weakness in HY credit, and rise in VIX and Treasury bond prices as the day wor...

On the News With Thom Hartmann: Senators Reach Across the Aisle to Promote Immigration...

Jim Javinsky in for Thom Hartmann here – on the news...

You need to know this. A rare word is coming out of the Senate today: "compromise." With President Obama set to tackle immigration reform on Tuesday, a bipartisan group of Senators came out today with their own compromised deal. The team of four Democrats and four Republicans introduced a plan that will put the more than 11 million undocumented immigrants, currently in the United States, on a path to citizenship. But first, they will have to register with the government, pass background checks, pay back taxes and penalties, and then move to the back of the line for full citizenship status. The proposal also puts in place new border security measures – and young people – or "DREAMers" who were brought to the country illegally when they were a child, but have gone to school here and kept their nose clean, will be put on a faster track toward citizenship. This is a good sign that a deal on comprehensive immigration reform can be struck this year. Stay tuned.

In screwed news..the banking sector is ruled by monopolies. New data from the Dallas Federal Reserve shows that a small group of "mega banks" control upwards of 70% of all banking assets. Just twelve banks, out of the total 56-hundred commercial banks in operation across the nation – have assets between $250 billion and $2.3 trillion dollars. They represent only point- 2% of all banks in operation, yet they account for 69% of the industry's total assets. This is the definition of "Too Big to Fail." In fact, as Senator Sherrod Brown has pointed out, these banks aren't just too big to fail, "they're too big to manage."

In the best of the rest of the news...

As state senators in Virginia contemplate taking up legislation, to rig the Electoral College for the benefit of Republicans, lawmakers in Michigan are considering doing the same exact thing. Last Friday, Michigan's Republican House Speaker, Jase Bolger, was quoted as saying, "I hear more and more from our citizens in various parts of the state of Michigan, that they don't feel like their vote for president counts because another area of the state may dominate that, or could sway their vote...They feel closer to voting for their congressman or their congresswoman, and if that vote coincided with their vote for president they would feel better about that." Michigan is one of the bluer states taken over by Republicans in 2010 – and if Republicans succeed in rigging the Electoral College there, then that would seriously hurt Democrats' chances of taking the White House in the future. In fact, if all states took up this election rigging scheme last year – then Mitt Romney would be our president today.

Last Friday, the so-called pro-life movement marched in Washington, DC, to take away a woman's right to make a choice about her body. And while they got all the media attention, a different kind of pro-life movement arrived in Washington, DC over the weekend. Thousands of protestors flocked to the nation's capital, calling for national gun control legislation. The march was organized after the Newtown massacre – and more than 100 residents of the Connecticut town joined in, to demand a ban on military style assault weapons and high capacity ammo magazines. Senator Dianne Feinstein, who introduced an assault weapons ban last week, appeared on CNN on Sunday claiming that she does have the support for such a ban – and that she's been promised by Senate Majority Leader Harry Reid, that it will receive an up-or-down vote on the floor of the Senate.

The NYPD's controversial stop-and-frisk policy may have recently been ruled unconstitutional, but that doesn't bother New York police, who are set to unveil a new type of technology that makes stop-and-frisk unnecessary. NYPD Commissioner Ray Kelly announced over the weekend, that within the year, his police force will begin using what are called Tera-Hertz scanners – or T-Ray machines – that can see through people's clothing, to determine if they are carrying any weapons. As Raw Story reports, "The new device utilizes T-rays, which pass through fabric and paper, but cannot pass through metals." The NYPD plans to deploy the machines in police cruisers at first, but eventually hope they can get the technology into a small enough machine, that it can fit on an officer's belt. Privacy activists cheered the decision by the TSA, to get rid of the porno scanners in our airports, but now the fight for privacy continues on the streets of the Big Apple.

Don't touch our libraries! That's what the American people are saying amid the age of austerity and privatization, as they watch their community libraries lose funding, and close their doors. A new survey by the Pew Research center, found that 91% of Americans felt that libraries are important to their community. Another 76% said that libraries are important to them personally – and to their family. Unfortunately, public libraries are often the victim of budget cuts on a local, state, and federal level. In fact, the coming sequestration included a $19 million cut to a federal program that provides extra funding for public libraries around the nation.

And finally...Sarah Palin is out at Fox so-called News. Last Friday, Real Clear Politics reported that Fox News has decided to part ways with the gubernatorial quitter turned political celebrity. Over the last three years, she was a paid contributor, earning roughly a million bucks a year. A study out of the University of Minnesota analyzed Palin's appearances on the network, and concluded that between 2010 and 2012 – Palin spoke nearly 190,000 words on the network – meaning she was paid roughly $15.85 per word. And that includes some of the words that none of us have ever heard before, and don't even appear in any English language dictionary.

And that's the way it is today – Monday, January 28, 2013. I'm Jim Javinsky in for Thom Hartmann – on the news.

To End Extreme Poverty, Let’s Try Ending Extreme Wealth

Apologists for inequality have a standard retort to anyone who calls for a more equal distribution of the world’s treasure. If you took all the wealth of the wealthy and divvied it up equally among all the poor, the retort goes, no one would gain nearly enough to accomplish much of anything.

IMF chief Christine Lagarde told the world’s business elites in Davos last week that “the economics profession and the policy community have downplayed inequality for too long.”Oxfam International, one of the world’s premiere anti-poverty charitable organizations, would beg to differ. The world’s top 100 billionaires now hold so much wealth, says a new Oxfam report, that just the increase in their net worth last year would be “enough to make extreme poverty history four times over.”

“Oxfam’s mission is to work with others to end poverty,” Oxfam analyst Emma Seery noted last week. “But in a world with limited resources, this is no longer possible without an end to extreme wealth.”

Oxfam timed its new analysis, The cost of inequality: how wealth and income extremes hurt us all, to appear right on the eve of last week’s World Economic Forum in Davos, Switzerland. This earnest “issues” confab annually brings together a glittering array of global business and political leaders.

The world’s corporate and financial elites began this January trek into the Alps back in 1971. But the Davos sessions really didn’t start grabbing big-time global media attention until the go-go 1990s.

“Throughout the boom years,” as a UK Guardian profile last week noted, “chief executives would gather every winter high up in the Swiss Alps to discuss in a lordly fashion the world economy and how it could be revised to suit their objectives and views.”

But in these days of deep global economic uncertainty, the power suits that frequent Davos have lost their mojo — and even feel pressured to address the global economic inequality they’ve so long tried to sweep under the rug.

That pressure last week came from figures like Christine Lagarde, the former French finance minister who now directs the International Monetary Fund. Lagarde blasted outsized executive pay in high finance, attacked bankers for lobbying against new regulation, and called for more “robust social safety nets.”

Oxfam, for its part, is calling for much bolder steps to narrow the stunning gap between the global uber rich and everyone else. The group is urging world leaders to “commit to reducing inequality to at least 1990 levels.”

Meeting that goal, the new Oxfam report relates, would require a wide range of measures, everything from far more steeply graduated income tax rates to actual pay caps that limit how much corporate executives can take home to a multiple of what the lowest-paid workers in the firms they run are making.

Oxfam is also emphasizing the importance of cracking down on offshore tax havens. As much as a quarter of global wealth now sits shielded offshore.

But don’t hold your breath waiting for the Davos crowd to buy into any of this bolder agenda. Even the modest reforms that the IMF’s Lagarde urged last week found no wide support among the corporate and banking movers and shakers who ambled up to the Alps for this year’s Davos gathering.

One American on hand for the 2013 Davos festivities, JPMorgan Chase chief exec Jamie Dimon, made no move to hide his distaste for reformers. Bank regulators, he charged, were “trying to do too much, too fast” — and spreading “huge misinformation” about the noble work underway at banks like his.

“We’re doing the right thing,” Dimon assured his fellow Davos notables.

Other global corporate notables at Davos sang a similar tune. Azim Premji, the chairman of the Bangalore-based Indian high-tech giant Wipro, admitted that the new Oxfam data — on how the richest 100 people in the world are earning much more than enough to end the world’s worst poverty — do “sadden” him.

But Premji declined in an interview to term the incredible concentration of the world’s wealth in any way “unethical.” We need not waste time, he suggested, worrying about “redistribution.” We need instead to help the rich grasp their “obligation,” their “trusteeship responsibility,” to wield their wealth for good.

Trust the rich, in other words, to solve our problems.

Not on your life, says Oxfam.

In a world where even basic resources such as land and water are increasingly scarce,” Oxfam’s Jeremy Hobbs sums up, “we cannot afford to concentrate assets in the hands of a few and leave the many to struggle over what’s left.”

This work is licensed under a Creative Commons License

Sam Pizzigati

Sam Pizzigati edits Too Much, the Institute for Policy Study's online weekly newsletter on excess and inequality.

The Benghazi Affair: Uncovering the Mystery of the Benghazi CIA Annex

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“The U.S. effort in Benghazi was at its heart a CIA operation, according to the officials who briefed on intelligence.” WSJ, Nov 1, 2012

Hillary Clinton, the US Secretary of State, finally appeared before the US Senate and House Foreign Relations Committees on Wednesday, January 23, after a long delay. She was asked many questions by the Congress about what had happened in Benghazi on September 11 and how this could happen. The problem with the responses she gave to these questions was that she focused on the narrative presented in the State Department Report that had been released a month earlier, and which is deeply flawed.

In order to understand the nature of what happened on September 11, 2012 in Benghazi, and how the State Department under Hillary Clinton has been an important part of the cover up of what this second September 11 is actually a part of, it is important to understand the problem with the State Department Report being used to carry out the US government cover up of what I call the Benghazi Affair.

On December 18, the US State Department released its report on the September 11, 2012 attacks on two US facilities in Benghazi, Libya. These attacks had resulted in the deaths of the US Ambassador to Libya, Chris Stevens, and three other Americans working for the US government in Libya. The US government had claimed that its report would shed light on what had become a contentious Congressional and media debate over the cause and details of the attack on these two US government compounds in Benghazi.

Soon, however, it became clear that the State Department Report issued by the Accountability Review Board (hereafter ARB Report), offered the public little information to add to what had already been made available by the State Department or the media. Instead, the public version of the ARB Report, referred to as the “unclassified” version, actually functions as part of the cover-up of what happened on September 11, 2012 in Benghazi. Most of this public document carefully refrains from any discussion of the role or activities of the CIA and what bearing this had on the events of September 11-12 2012 in Benghazi. But the role of the CIA in Benghazi and its bearing on what happened there on September 11 is the crucial question that any legitimate investigation into the situation must explore.

The trick of the Accountability Review Board (ARB) was that it issued two different versions of its Report. One version was an “unclassified” report that was available to the press, the public and the US Congress to discuss in public.(1) The other version was a “classified” report that was to be hidden from public or press scrutiny and was only to be available to Congress in a closed Congressional process. The unclassified version of the ARB Report could not mention the CIA activities. It could only discuss the role of the State Department in what happened.

The problem with such a restriction is that one of the US government sites in Benghazi that was attacked was a CIA facility referred to as the ‘Annex’ (hereafter CIA annex compound). The other site was allegedly a State Department administered facility referred to as the ‘Special Mission Benghazi Compound’ (hereafter special mission compound). This second compound, according to the WSJ, was actually created to provide diplomatic cover for the CIA facility.(2)

While some US Congressional Committees have been conducting investigations into what happened in Benghazi, they have agreed to discuss only the activities of the State Department in their open, public sessions, and to reserve any consideration or questions about the activities of the CIA for closed sessions of their committees, away from public view.(3)

Not only is the US Congress restricted from discussing the role of the CIA in Benghazi in open session, some of the mainstream US media have agreed to a request by the US government to withhold details about the CIA operations in Benghazi. The New York Times (NYT) is one such publication. (4) In an article briefly referring to the CIA annex compound, which the NYT says “encompassed four buildings inside a low-walled compound….” The NYT acknowledges that, “From among these buildings, the C.I.A. personnel carried out their secret missions.” But then the article explains that, “The New York Times agreed to withhold locations and details of these operations at the request of Obama administration officials….”

To declare an investigation into or discussion of the activities regarding the role of the CIA and its Annex compound as a forbidden subject during an open committee meeting of Congress, is to prevent the US Congress from fulfilling its oversight obligations over the US Executive branch of government. For the US government to require the US media to restrict coverage is to shroud the needed public discussion and investigation in darkness.

The effort to cover up the role of the CIA in the events resulting in the attack on the two US government facilities in Benghazi, however, demonstrates that something important is at stake and worth investigating.

Despite the US government effort to impose such restrictions, there are media accounts and some Congressional documents that provide a glimpse into the details of hidden CIA activity that the attacks on the US facilities in Benghazi help to reveal.

To understand the nature of this hidden activity, requires a willingness not only to critique the official explanations, but also to examine the events that can help to uncover the actual forces at work in Benghazi and the role they played in CIA activities in Libya.

One Wall Street Journal (WSJ) article is particularly helpful. The article, is titled “CIA Takes Heat for Role in Libya.” It provides a rare window into details of the murky world of the CIA operation in Benghazi and how it came about.(5)

The article notes that former CIA Director David Petraeus did not greet the bodies of the four Americans killed in Benghazi when they were returned to the US, even though two of those killed are acknowledged to have worked for the CIA. “Officials close to Mr. Petraeus,” the WSJ explains, “say he stayed away in an effort to conceal the agency’s role in collecting intelligence and providing security in Benghazi.”

Of the 30 or more American officials evacuated from Benghazi, only seven worked for the State Department. According to the WSJ, “Nearly all the rest worked for the CIA, under diplomatic cover, which was a principle purpose” of the special mission compound.

Soon after the struggle against the government of Libya began in February 2011, the CIA set up a compound in Benghazi for its spy operations. Eventually, the CIA gave its compound a State Department office name, the Annex, to disguise its purpose, the WSJ reveals. According to the US government, the role of the CIA in Benghazi was “focused on countering proliferation and terrorist threats….A main concern was the spread of weapons….”

“At the annex,” the WSJ explains, “many of the analysts and officers had what is referred to in intelligence circles as ‘light cover’ carrying U.S. diplomatic passports.”

Providing a cover for the secret operation of the CIA, however, created problems for State Department officials who felt the CIA was not “forthcoming with information,” even in the midst of the attack on the US facilities. As the WSJ notes, on September 11, 2012, “At 5:41 p.m. Eastern time, Mrs. Clinton called Mr. Petraeus. She wanted to make sure the two agencies were on the same page.”

Even after the attack was over and the analysts and officers had been evacuated, the accounts in the WSJ and McClatchy Newspapers, describe how quickly the CIA acted to clean out documents and equipment from the Annex. By contrast, the US government left the premises of the special mission compound unguarded and open to looters for weeks after the attack.

“The significance of the annex was a well-kept secret in Benghazi,” the WSJ reporters conclude. A McClatchy article documents how a well guarded secret was even the location of the CIA Annex compound. (6)

The implication is that the attackers at the special mission compound intended to flush out the covert location and presence of the CIA Annex compound so as to end its ability to continue its secret activities.(7)

An opinion piece, “The Fog of Benghazi”, appeared in the WSJ on November 3. It discusses what was at stake for the US government as a result of the September 11 attack in Benghazi(8): “America has since closed the Libya diplomatic outpost and pulled a critical intelligence unit out of a hotbed of Islamism, conceding a defeat. U.S. standing in the region and the ability to fight terrorist groups were undermined, with worrying repercussions for a turbulent Middle East and America’s security. This is why it’s so important to learn what happened in Benghazi.”

The effort to learn what happened in the Benghazi Affair, is similarly the subject of a 10 page letter dated October 19 sent by two US Congressmen to President Obama. (9) One of the Congressmen, Darrell Issa, is Chairman of the House Committee on Oversight and Government Reform. The other, Jason Chaffetz, is Chairman of the House Subcommittee on National Security, Homeland Defense and Foreign Operations.

Their letter raises ten questions for President Obama, the answers to which they explain are needed for the US Congressional investigation to determine the significance of the Benghazi affair. Also in their letter they include an attachment of 160 pages of data and photos which document the lawless environment in Libya, and particularly in Benghazi in the months before the Benghazi attack. This data was obtained by the US Congress from the State Department. (10) Though the data is labeled as sensitive, it is not classified material.

This data documents in a way that is now public, the perilous environment existing in Libya, providing a graphic description of the armed militias who carry out bombings, murders and kidnappings of government officials and others who try to challenge the lawlessness.

The data demonstrates the details of what the ARB Report acknowledges as “a general backdrop of political violence, assassinations, targeting former regime officials, lawlessness, and an overarching absence of central government authority in eastern Libya.” (11)

The Internet has made possible the publication of a number of investigative accounts of various aspects of the Benghazi Affair. Several of these propose that the CIA and even Chris Stevens were part of a gun running operation, gathering up weapons from Libya and facilitating their shipment to the insurgents fighting against the government in Syria. Some of the articles also propose that the CIA operation in Benghazi helped to send mercenaries from other countries to fight against the government of Syria. (12)

Fox News and a number of associated websites have featured articles which offer such accounts. Often, however, the articles rely on anonymous sources to support their claims.

Rarely are media offering accounts that portray this reality able to present direct evidence to support the narratives they develop.

An important exception is an article that appeared in the Times of London on September 14, 2012. This was three days after Chris Stevens and three other Americans were killed.

The article documents that a ship, the Al Entisar (also written as Intisaar or The Victory in English), sailing under a Libyan flag with a 400 ton cargo, which included SAM-7 surface-to-air anti-aircraft missiles and rocket-propelled grenades (RPGs) and some humanitarian supplies, is said to have arrived September 6 at the Turkish Port of Iskenderun.(13)

The captain of the ship, Omar Mousaeeb, a Libyan from Benghazi, was accompanied by 26 Libyans who were on board to help smuggle the shipment from the Turkish Port across the border into Syria. The plan was then to distribute the weapons to insurgents in Syria who were allied with the Muslim Brotherhood.

This account by the Times of London provides specific details about the mechanisms and problems of this Libyan weapons pipeline to the insurgency in Syria. The article describes the conflict between the Muslim Brotherhood and other groups of the Free Syrian Army (FSA) over who would get the weapons from the Al Entisar shipment.

“The scale of the shipment and how it should be disbursed, has sparked a row between the FSA and the Muslim Brotherhood, who took control of the shipment when it arrived in Turkey,” writes Sheera Frenkel, the author of the Times of London article.

Though the ship arrived at the port in Turkey on September 6, not all of the cargo had been transported into Syria by September 14, the article notes, though this is over a week after the ship arrived at the port in Turkey. While “more than 80 percent of the ship’s cargo,” the Times of London explains, “had been moved into Syria, Mr. Mousaeeb and a group of Libyans who had arrived with the ship said they were preparing to travel with the final load into Syria to ensure it was being distributed.” Actually their concern appeared to be to whom it was distributed, not how.

The Times of London refers to two Syrian activists with the FSA who complained that infighting within the insurgent ranks had delayed the arrival of the weapons in Syria, “There was widespread talk of Syrian groups who allied themselves with the Islamist Muslim Brotherhood movement being given a larger share of the ship’s cargo.” One activist quoted objects that, “The Muslim Brotherhood, through its ties with Turkey, was seizing control of this ship and its cargo.”

While the Times of London does not directly link Chris Stevens or the CIA annex compound to the Al Entisar arms shipment to Turkey, the article does provide an important context for how the conflict over which insurgent group would get weapons from the shipment created a source of significant tension at the very time the attack on the two US compounds in Benghazi took place.

Given the question, “Why Chris Stevens would have traveled to Benghazi to be in this perilous environment on September 11,” an answer which points to some urgent matter which needed his attention, would help to provide the rationale for him to ignore the security considerations against his making such a trip.

Keeping in mind the importance of this shipment of weapons from Benghazi to Turkey, the need to work out the details of the weapons distribution process could very well have provided the motive for Stevens to plan a visit in Benghazi during such a perilous period as the 11th anniversary of the September 11, 2001 attack on the US.

By September 11, infighting among the Muslim Brotherhood and other insurgent groups, over who would be given the weapons from the Al Entisar shipment, suggests the likelihood that Turkey’s Consul General in Benghazi and the US Ambassador needed to discuss the conflict over the weapons and the problem of how they should be moved into Syria and distributed among the insurgent groups.

In line with this reasoning, it is not surprising that Chris Stevens had a meeting with Turkey’s Consul General to Benghazi, Ali Sait Akin on September 11 at the Benghazi special mission compound.

The description of the infighting over the Al Entisar shipment to a port in Turkey of weapons for the Syrian insurgency, raises the possibility that the Turkish Consul General to Benghazi and Stevens discussed the conflict over the weapons. As of September 11, there were weapons that had yet to be distributed and smuggled into Syria from the Al Entisar shipment.

On September 10, when Stevens arrived in Benghazi, the shipment of arms had only recently been received at the Turkish port of Iskenderun, and the conflict among the insurgent groups who were to receive the weapons was not yet resolved.

According to documents that Congress received from the State Department, soon after Stevens arrived in Benghazi on September 10, he visited the CIA annex compound for a briefing.

On September 11 he stayed at the special mission compound but had meetings scheduled with someone from the Arabian Gulf Oil Co. (AGOCO), and later in the afternoon with someone from the Al Marfa Shipping and Maritime Services Co. (The names of the individuals were blacked out.) Then he had dinner and discussion with Ali Sait Akin, Turkey’s Consul General to Benghazi.(14)

While there has been no specific information made available by the State Department about the content of the meetings Stevens had on September 10 and 11, Turkey’s role in the shipping of weapons and foreign fighters into Syria to assist the fight against the Syrian government is the subject of numerous articles. The Times of London article describes previous difficulty experienced in trying to ship a cargo of weapons to where they could be safely unloaded and moved to insurgents in Syria. Given this previous experience it is not surprising that it was necessary to have the Turkish government intervene to settle problems that arose with the Al Entisar weapons shipment. It had taken several weeks “to arrange the paperwork for the Turkish port authorities to release the cargo.”(15) The Times of London quoted Suleiman Haari, who worked with Captain Mousaeeb. Haari explained that “Everyone wanted a piece of the ship. Certain groups wanted to get involved and claim the cargo for themselves. It took a long time to work through the logistics.”

This could account for the surprise visit by the then head of the CIA, David Petraeus on September 2 to Ankara. (16) Petraeus arrived in Ankara for what appeared to be talks with the President of Turkey and other Turkish government officials. Were Petraeus’s meetings with Turkish government officials needed to help make the arrangements for the Libyan ship to dock at the port in Turkey and unload the weapons that were to be smuggled across the border into Syria? This is a question Petraeus could answer if he were to testify at a US Congressional hearing again.

In light of the WSJ claim that the special mission compound had been set up to provide diplomatic cover for the CIA operation run out of the Annex, the question is raised as to whether the special mission compound was actually a State Department facility or a CIA facility acting under cover as a State Department operation.

According to the unclassified version of the ARB Report, Chris Stevens had arrived in Benghazi on April 5, 2011, “via a Greek cargo ship at the rebel-held city of Benghazi to re-establish a U.S. presence in Libya.” He had been appointed the US government’s “Special Envoy to the Libyan Transitional National Council” (TNC), acting as an official contact between the insurgents fighting to overthrow the government of Libya and the US government that was aiding them to bring about regime change in Libya. (17) Such an activity is contrary to international law and provisions of the UN charter (Article 2 Sections 1, 4, 7) which prohibit interference in the internal affairs of sovereign states. (18)

Stevens’ mission, the Report states, “was to serve as the liaison with the TNC” for a post-Qaddafi government in Libya. The US embassy had been closed in February 2011, and was only reopened on September 22, 2011 with Gene Cretz as the Ambassador.

The ARB Report notes, however, that the CIA had set up the CIA compound in Benghazi in February 2011 soon after the insurgency arose against the Libyan government. This is a confirmation that the US government had put intelligence operatives on the ground in Benghazi just as the insurgency against the Libyan government was getting underway. This is also at least one month before Chris Stevens arrived in Benghazi.

The ARB Report also reveals that Chris Stevens stayed at the CIA Annex from the beginning of June, 2011 until June 21, 2011. Not until June 21 did “he and his security contingent move into what would become the Special Mission Benghazi compound….” According to the ARB Report the special mission compound in Benghazi was set up a few months after the CIA compound. (19)

This puts in perspective why the WSJ article on November 1 says that the special mission compound was established to provide diplomatic cover for the CIA facility, subsequently referred to as “the Annex”. Stevens remained as Special Envoy to the TNC and stayed in Benghazi until November 17, 2011. On May 26, 2012 Stevens arrived in Tripoli to replace Cretz as US Ambassador to Libya.

What was the State Department responsibility for the special mission compound? If its purpose was to provide diplomatic cover for the CIA, then what was the CIA responsibility? These are significant questions. But it is unlikely that such questions will be asked at the public Congressional oversight investigations because questions about the role of the CIA Annex in Benghazi have been declared to be a classified matter.

Though the NYT article, ”U.S. Approved Weapons for Libya Rebels Fell into Jihadis’ Hands,” about the Benghazi affair doesn’t go into detail about what the CIA was doing in Benghazi, it raises a significant issue that is likely to be at the root of why there was an attack on both the special mission compound and the CIA Annex compound.(20) The NYT refers to the concern US government officials involved in the program raise about the problems created by the US government helping to provide weapons to insurgents fighting in Libya and Syria. According to the NYT, what these Islamic militants will do with these weapons worries high level US government national security officials.

While officially, the US government claims it is not providing weapons, the Times of London article about the shipment of weapons from Benghazi to Turkey, provides a striking example of how the US and Turkish governments, both overtly, and covertly, appear to be involved in collecting weapons in Libya and helping to ship them to be used against the Syrian government and people.(21)

The NYT claims that the US government has little control over where these weapons go and the harm they do when used in Libya, Syria, or other conflicts in the region. The NYT reports, “Concerns in Washington soon rose about the groups Qatar was supporting, officials said. A debate over what to do about the weapons shipments dominated at least one meeting of the so-called Deputies Committee, the interagency panel consisting of the second-ranking officials in major agencies involved in national security. ‘There was a lot of concern that Qatar weapons were going to Islamist groups,’ one official recalled.” (22)

These supposed ‘Qatar’ weapons, however, did not originate with Qatar alone. By way of an example, the NYT quotes one US weapons dealer who wanted to sell weapons to the insurgency in Libya during the war against Libya. The NYT describes how he applied to the State Department for a license. “He also sent an e-mail to J. Christopher Stevens, then the special representative to the Libyan rebel Alliance, ” reports the NYT. According to e-mails provided to the NYT by the arms dealer, Marc Turi, Stevens wrote back to Turi that he would “share Mr. Turi’s proposal with colleagues in Washington.” Eventually the weapons dealer was encouraged to communicate with contacts in Qatar.(23)

Such examples help to demonstrate both that there is concern among US government officials in Washington about the US government arming militant Islamists, the very people the US government condemns as “terrorists” in other situations. Also though the weapons pipeline may have on the surface been made to appear unconnected to the US actually supplying the arms that are being distributed by Qatar or Saudi Arabia, in the case of Marc Turi, as one example, the weapons pipeline was arranged for by a license provided by the US government to ship the weapons to Qatar.

Such examples provide the context for how the US government has covertly and overtly been helping to provide the weapons that are then used by those hostile to the US to inflict harm on the Libyan and Syrian people and even on Americans, as those killed in Benghazi on September 11, 2012. This situation, several commentators have noted, is reminiscent to the Iran Contra Affair where the US government entities covertly acted in a way that jeopardized the interests and even the physical well being of US officials and civilians. And it is likely that the actions being taken by US government officials to arm and provide other forms of support for the Libyan and Syrian insurgencies, are contrary to US laws and constitutional obligations.(24)

Such considerations reflect some of the salient concerns raised by a number of online commentators about the Benghazi Affair. One example of many that have been published online in the last few months is the article “Benghazigate: The Cover-up continues” by Bill Shanefeld published at the American Thinker website. The article raises two important questions (25): “(1) The pre-”event” purpose of the compound and its Annex (since these operations probably motivated the perpetrators of the “event”); and (2) Team Obama’s failed policies in North Africa, the Middle East, and Afghanistan.”

The article also refers to some of the many contributions made by other online commentators. These various commentaries help to clarify that the Benghazi affair offers a relatively rare window into the on the ground actions of the US government’s clandestine operations. These actions are the partner to the role the US government is playing in the UN Security Council and the UN in general in its efforts to turn the UN into a partner in its CIA and NATO activities. The Benghazi Affair is an important situation and the question remains as to whether the illegal activities of the US government acting contrary to the obligations of the UN Charter in Libya and more recently Syria will come to light.
Notes

1. U.S. State Department Public Accountability Board Report

http://www.state.gov/documents/organization/202446.pdf

2.Margaret Coker, Adam Entous, Siobhan Gorman, Margaret Coker, ”CIA
Takes Heat for Role in Libya,” WSJ, November 1, 2012.

http://online.wsj.com/article/SB10001424052970204712904578092853621061838.html

3. Dana Milbanks, “Letting Us in on a Secret,” Washington Post,
October 10, 2012,

http://www.washingtonpost.com/opinions/dana-milbank-letting-us-in-on-a-secret/2012/10/10/ba3136ca-132b-11e2-ba83-a7a396e6b2a7_print.html

4.Helene and Eric Schmidt, Michael S Schmidt, “Deadly Attack In Libya
was Major Blow to CIA Efforts,” New York Times, September 23, 2012.

http://www.nytimes.com/2012/09/24/world/africa/attack-in-libya-was-major-blow-to-cia-efforts.html?pagewanted=all&_r=0

5. Margaret Coker, Adam Entous, Siobhan Gorman, Margaret Coker, ”CIA
Takes Heat for Role in Libya,” WSJ, November 1, 2012.

http://online.wsj.com/article/SB10001424052970204712904578092853621061838.html

6.Nancy A. Youssef, “Libyans, diplomats: CIA’s Benghazi station a
secret – and quickly repaired,” McClatchy Newspapers, November 12,
2012.

http://www.mcclatchydc.com/2012/11/12/174455/libyans-diplomats-cias-benghazi.html

7. Catherine Herridge, “CIA moved swiftly to scrub, abandon Libya
facility after attack, source says,” Fox News, December 5, 2012.

http://www.foxnews.com/politics/2012/12/05/cia-moved-swiftly-scrub-abandon-libya-facility-after-attack-source-says/#ixzz2IE8icKIQ

8. “The Fog of Benghazi,” Opinion Piece, WSJ, Nov. 3, 2012

http://online.wsj.com/article/SB10001424052970204712904578090612465153472.html

9. Letter from Representative Issa and Representative Chaffetz to
President Obama, October 19, 2012

http://oversight.house.gov/wp-content/uploads/2012/10/10.19.12-Issa-and-Chaffetz-to-President.pdf

10. The Oversight Committee’s letter was accompanied by 166 pages of
documents and photos.

http://oversight.house.gov/release/oversight-committee-asks-president-about-white-house-role-in-misguided-libya-normalization-effort/

documents

http://1.usa.gov/S89qG7

11. U.S. State Department Public Accountability Board Report

http://www.state.gov/documents/organization/202446.pdf

12. See for example, ”Interview with Clare M. Lopez”

http://goldandguns.wordpress.com/2012/10/31/former-cia-clare-lopez-on-the-benghazi-gun-running/

13. Sheera Frenkel, “Syrian rebels squabble over weapons as biggest
shipload arrives from Libya; Turkey,” Times (London), September 14,
2012, p. 23

14. Schedule of Chris Stevens activities on September 10 and September 14.

Included in data sent to President Obama by Issa and Chaffetz

15. Sheeran Frenkel, “Syrian rebels squabble over weapons as biggest
shipload arrives from Libya; Turkey,” Times (London), September 14,
2012, p. 23

16. “CIA chief Petraeus pays surprise visit to Turkey,” Hurriyet Daily
News, September 2, 2012

http://www.hurriyetdailynews.com/cia-chief-petraeus-pays-surprise-visit-to-turkey.aspx?pageID=238&nid=29175

J. Millard Burr, “The Benghazi Attack: Some Thoughts,” Economic
Warfare Institute Blog, Oct 24, 2012.

http://econwarfare.org/viewarticle.cfm?id=5109

17. U.S. State Department Public Accountability Board Report

http://www.state.gov/documents/organization/202446.pdf

18. Dr. Curtis Doebbler, “It is illegal to support rebels fighting a
legitimate government,” Note from Sibialiria.org,
http://syria360.wordpress.com/2012/11/20/supporting-the-doha-coalition-violates-international-law/

19. U.S. State Department Public Accountability Board Report

http://www.state.gov/documents/organization/202446.pdf

Margaret Coker, Adam Entous, Siobhan Gorman, Margaret Coker, ”CIA
Takes Heat for Role in Libya,” WSJ, November 1, 2012.

http://online.wsj.com/article/SB10001424052970204712904578092853621061838.html

20. Mark Mazzetti, James Risen, Michael S Schmidt, ”U.S. Approved Arms
for Libya Rebels Fell into Jihadis’ Hands,” NYT, December 5, 2012.

http://www.nytimes.com/2012/12/06/world/africa/weapons-sent-to-libyan-rebels-with-us-approval-fell-into-islamist-hands.html?pagewanted=all&_r=0

21. Sheera Frenkel, “Syrian rebels squabble over weapons as biggest
shipload arrives from Libya; Turkey,” Times ( London), September 14,
2012, p. 23

Also see other relevant articles such as:

Christina Lamb, “Covert US Plan to Arm Rebels,” The Sunday Times
(London), December 9, 2012, p. 1,2

Franklin Lamb, “Flooding Syria with Foreign Arms: A View from
Damascus”, Foreign Policy Journal, Nov. 5, 2012.

http://www.foreignpolicyjournal.com/2012/11/05/flooding-syria-with-foreign-arms-a-view-from-damascus/

J. Millard Burr, “You Can Kiss Petraeus Goodbye,” End Time News, Nov. 5, 2012

http://endtimesnews.wordpress.com/2012/11/07/benghazi-attack-reveals-split-in-gun-running-factions/

22. Mark Mazzetti, James Risen, Michael S Schmidt, ”U.S. Approved Arms
for Libya Rebels Fell into Jihadis’ Hands,” NYT, December 5, 2012.

http://www.nytimes.com/2012/12/06/world/africa/weapons-sent-to-libyan-rebels-with-us-approval-fell-into-islamist-hands.html?pagewanted=all&_r=0

23. Mark Mazzetti, James Risen, Michael S Schmidt, ”U.S. Approved Arms
for Libya Rebels Fell into Jihadis’ Hands,” NYT, December 5, 2012.

http://www.nytimes.com/2012/12/06/world/africa/weapons-sent-to-libyan-rebels-with-us-approval-fell-into-islamist-hands.html?pagewanted=all&_r=0

24. Michael Kelley, “The CIA’s Benghazi Operation May Have Violated
International Law,” Nov. 5, 2012

http://endtimesnews.wordpress.com/2012/11/07/benghazi-attack-reveals-split-in-gun-running-factions/

Oona A. Hathaway, Elizabeth Nielsen, Chelsea Purvis, Saurabh Sanghvi,
and Sara Solow, “ARMS TRAFFICKING: THE INTERNATIONAL AND DOMESTIC
LEGAL FRAMEWORK.,” Yale Law School Report. Posted Nov. 15, 2011.

http://www.law.yale.edu/documents/pdf/cglc/YLSreport_armsTrafficking.pdf

25. Bill Shanefeld, “Benghazigate the cover-up continues.” American
Thinker, January 9, 2013.

http://www.americanthinker.com/2013/01/benghazigate_the_cover-up_continues.html

A version of this article appears on my netizenblog at
http://blogs.taz.de/netizenblog/2013/01/24/benghazi-affair-cia-annex/

Counting Down to 2014 in Afghanistan: Three Lousy Options, Pick One

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Compromise, conflict, or collapse: ask an Afghan what to expect in 2014 and you’re likely to get a scenario that falls under one of those three headings. 2014, of course, is the year of the double whammy in Afghanistan: the next presidential election coupled with the departure of most American and other foreign forces. Many Afghans fear a turn for the worse, while others are no less afraid that everything will stay the same.  Some even think things will get better when the occupying forces leave.  Most predict a more conservative climate, but everyone is quick to say that it’s anybody’s guess.

Only one thing is certain in 2014: it will be a year of American military defeat.  For more than a decade, U.S. forces have fought many types of wars in Afghanistan, from a low-footprint invasion, to multiple surges, to a flirtation with Vietnam-style counterinsurgency, to a ramped-up, gloves-off air war.  And yet, despite all the experiments in styles of war-making, the American military and its coalition partners have ended up in the same place: stalemate, which in a battle with guerrillas means defeat.  For years, a modest-sized, generally unpopular, ragtag set of insurgents has fought the planet’s most heavily armed, technologically advanced military to a standstill, leaving the country shaken and its citizens anxiously imagining the outcome of unpalatable scenarios.

The first, compromise, suggests the possibility of reaching some sort of almost inconceivable power-sharing agreement with multiple insurgent militias.  While Washington presses for negotiations with its designated enemy, “the Taliban,” representatives of President Hamid Karzai’s High Peace Council, which includes12 members of the former Taliban government and many sympathizers, are making the rounds to talk disarmament and reconciliation with all the armed insurgent groups that the Afghan intelligence service has identified across the country. There are 1,500 of them.

One member of the Council told me, “It will take a long time before we get to Mullah Omar [the Taliban’s titular leader].  Some of these militias can’t even remember what they’ve been fighting about.”

The second scenario, open conflict, would mean another dreaded round of civil war like the one in the 1990s, after the Soviet Union withdrew in defeat -- the one that destroyed the Afghan capital, Kabul, devastated parts of the country, and gave rise to the Taliban.

The third scenario, collapse, sounds so apocalyptic that it’s seldom brought up by Afghans, but it’s implied in the exodus already underway of those citizens who can afford to leave the country.  The departures aren’t dramatic.  There are no helicopters lifting off the roof of the U.S. Embassy with desperate Afghans clamoring to get on board; just a record number of asylum applications in 2011, a year in which, according to official figures, almost 36,000 Afghans were openly looking for a safe place to land, preferably in Europe.  That figure is likely to be at least matched, if not exceeded, when the U.N. releases the complete data for 2012.

In January, I went to Kabul to learn what old friends and current officials are thinking about the critical months ahead.  At the same time, Afghan President Karzai flew to Washington to confer with President Obama.  Their talks seem to have differed radically from the conversations I had with ordinary Afghans. In Kabul, where strange rumors fly, an official reassured me that the future looked bright for the country because Karzai was expected to return from Washington with the promise of American radar systems, presumably for the Afghan Air Force, which is not yet “operational.” (He actually returned with the promise of helicopters, cargo planes, fighter jets, and drones.) Who knew that the fate of the nation and its suffering citizens hinged on that?  In my conversations with ordinary Afghans, one thing that never came up was radar.

Another term that never seems to enter ordinary Afghan conversation, much as it obsesses Americans, is “al-Qaeda.” President Obama, for instance, announced at a joint press conference with President Karzai: “Our core objective -- the reason we went to war in the first place -- is now within reach: ensuring that al-Qaeda can never again use Afghanistan to launch attacks against America.”  An Afghan journalist asked me, “Why does he worry so much about al-Qaeda in Afghanistan? Doesn’t he know they are everywhere else?”

At the same Washington press conference, Obama said, “The nation we need to rebuild is our own.” Afghans long ago gave up waiting for the U.S. to make good on its promises to rebuild theirs. What’s now striking, however, is the vast gulf between the pronouncements of American officialdom and the hopes of ordinary Afghans.  It’s a gap so wide you would hardly think -- as Afghans once did -- that we are fighting for them.

To take just one example: the official American view of events in Afghanistan is wonderfully black and white.  The president, for instance, speaks of the way U.S. forces heroically “pushed the Taliban out of their strongholds.” Like other top U.S. officials over the years, he forgets whom we pushed into the Afghan government, our “stronghold” in the years after the 2001 invasion: ex-Taliban and Taliban-like fundamentalists, the most brutal civil warriors, and serial human rights violators.

Afghans, however, haven’t forgotten just whom the U.S. put in place to govern them -- exactly the men they feared and hated most in exactly the place where few Afghans wanted them to be.  Early on, between 2002 and 2004, 90% of Afghans surveyed nationwide told the Afghan Independent Human Rights Commission that such men should not be allowed to hold public office; 76% wanted them tried as war criminals.


In my recent conversations, many Afghans still cited the first loya jirga, an assembly convened in 2003 to ratify the newly drafted constitution, or the first presidential election in 2004, or the parliamentary election of 2005, all held under international auspices, as the moments when the aspirations of Afghans and the “international community” parted company. In that first parliament, as in the earlier gatherings, most of the men were affiliated with armed militias; every other member was a formerjihadi, and nearly half were affiliated with fundamentalist Islamist parties, including the Taliban.

In this way, Afghans were consigned to live under a government of bloodstained warlords and fundamentalists, who turned out to be Washington’s guys.  Many had once battled the Soviets using American money and weapons, and quite a few, like the former warlord, druglord, minister of defense, and current vice-president Muhammad Qasim Fahim, had been very chummy with the CIA.

In the U.S., such details of our Afghan War, now in its 12th year, are long forgotten, but to Afghans who live under the rule of the same old suspects, the memory remains painfully raw.  Worse, Afghans know that it is these very men, rearmed and ready, who will once again compete for power in 2014.

How to Vote Early in Afghanistan

President Karzai is barred by term limits from standing for reelection in 2014, but many Kabulis believe he reached a private agreement with the usual suspects at a meeting late last year. In early January, he seemed to seal the deal by announcing that, for the sake of frugality, the voter cards issued for past elections will be reusedin 2014.  Far too many of those cards were issued for the 2004 election, suspiciously more than the number of eligible voters.  During the 2009 campaign, anyone could buy fistfuls of them at bargain basement prices.  So this decision seemed to kill off the last faint hope of an election in which Afghans might actually have a say about the leadership of the country.

Fewer than 35% of voters cast ballots in the last presidential contest, when Karzai’s men were caught on video stuffing ballot boxes.  (Afterward, President Obama phoned to congratulate Karzai on his “victory.”) Only dedicated or paid henchmen are likely to show up for the next “good enough for Afghans” exercise in democracy. Once again, an “election” may be just the elaborate stage set for announcing to a disillusioned public the names of those who will run the show in Kabul for the next few years.

Kabulis might live with that, as they’ve lived with Karzai all these years, but they fear power-hungry Afghan politicians could “compromise” as well with insurgent leaders like that old American favorite from the war against the Soviets, Gulbuddin Hekmatyar, who recently told a TV audience that he intends to claim his rightful place in government. Such compromises could stick the Afghan people with a shaky power-sharing deal among the most ultra-conservative, self-interested, sociopathic, and corrupt men in the country.  If that deal, in turn, were to fall apart, as most power-sharing agreements worldwide do within a year or two, the big men might well plunge the country back into a 1990s-style civil war, with no regard for the civilians caught in their path.

These worst-case scenarios are everyday Kabuli nightmares.  After all, during decades of war, the savvy citizens of the capital have learned to expect the worst from the men currently characterized in a popular local graffiti this way: “Mujahideen=Criminals. Taliban=Dumbheads.”

Ordinary Kabulis express reasonable fears for the future of the country, but impatient free-marketeering businessmen are voting with their feet right now, or laying plans to leave soon. They’ve made Kabul hum (often with foreign aid funds, which are equivalent to about 90% of the country’s economic activity), but they aren’t about to wait around for the results of election 2014.  Carpe diem has become their version of financial advice.  As a result, they are snatching what they can and packing their bags.

Millions of dollars reportedly take flight from Kabul International Airport every day: officially about $4.6 billion in 2011, or just about the size of Afghanistan’s annual budget. Hordes of businessmen and bankers (like those who, in 2004, set up the Ponzi scheme called the Kabul Bank, from which about a billion dollars went missing) are heading for cushy spots like Dubai, where they have already established residence on prime real estate.

As they take their investments elsewhere and the American effort winds down, the Afghan economy contracts ever more grimly, opportunities dwindle, and jobs disappear.  Housing prices in Kabul are falling for the first time since the start of the occupation as rich Afghans and profiteering private American contractors, who guzzled the money that Washington and the “international community” poured into the country, move on.

At the same time, a money-laundering building boom in Kabul appears to have stalled, leaving tall, half-built office blocks like so many skeletons amid the scalloped Pakistani palaces, vertical malls, and grand madrassas erected in the past four or five years by political and business insiders and well-connected conservative clerics.

Most of the Afghan tycoons seeking asylum elsewhere don’t fear for their lives, just their pocketbooks: they’re not political refugees, but free-market rats abandoning the sinking ship of state.  Joining in the exodus (but not included in the statistics) are countless illegal émigrés seeking jobs or fleeing for their lives, paying human smugglers money they can’t afford as they head for Europe by circuitous and dangerous routes.

Threatened Afghans have fled from every abrupt change of government in the last century, making them the largest population of refugees from a single country on the planet.  Once again, those who can are voting with their feet (or their pocketbooks) -- and voting early.

Afghanistan’s historic tragedy is that its violent political shifts -- from king to communists to warlords to religious fundamentalists to the Americans -- have meant the flight of the very people most capable of rebuilding the country along peaceful and prosperous lines.  And their departure only contributes to the economic and political collapse they themselves seek to avoid.  Left behind are ordinary Afghans -- the illiterate and unskilled, but also a tough core of educated, ambitious citizens, including women’s rights activists, unwilling to surrender their dream of living once again in a free and peaceful Afghanistan.

The Military Monster

These days Kabul resounds with the blasts of suicide bombers, IEDs, and sporadic gunfire.  Armed men are everywhere in anonymous uniforms that defy identification.  Any man with money can buy a squad of bodyguards, clad in classy camouflage and wraparound shades, and armed with assault weapons.  Yet Kabulis, trying to carry on normal lives in the relative safety of the capital, seem to maintain a distance from the war going on in the provinces.

Asked that crucial question -- do you think American forces should stay or go? -- the Kabulis I talked with tended to answer in a theoretical way, very unlike the visceral response one gets in the countryside, where villages are bombed andcivilians killed, or in the makeshift camps for internally displaced people that now crowd the outer fringes of Kabul. (By the time U.S. Marines surged into Taliban-controlled Helmand Province in the south in 2010 to bring counterinsurgency-style protection to the residents there, tens of thousands of them had already moved to those camps in Kabul.)  Afghans in the countryside want to be rid of armed men.  All of them.  Kabulis just want to be secure, and if that means keeping some U.S. troops at Bagram Air Base near the capital, as Afghan and American officials are currently discussing, well, it’s nothing to them.

In fact, most Kabulis I spoke to think that’s what’s going to happen.  After all, American officials have been talking for years about keeping permanent bases in Afghanistan (though they avoid the term “permanent” when speaking to the American press), and American military officers now regularly appear on Afghan TV to say, “The United States will never abandon Afghanistan.”  Afghans reason: Americans would not have spent nearly 12 years fighting in this country if it were not the most strategic place on the planet and absolutely essential to their plans to “push on” Iran and China next.  Everybody knows that pushing on other countries is an American specialty.

Besides, Afghans can see with their own eyes that U.S. command centers, including multiple bases in Kabul, and Bagram Air Base, only 30 miles away, are still being expanded and upgraded.  Beyond the high walls of the American Embassy compound, they can also see the tall new apartment blocks going up for an expanding staff, even if Washington now claims that staff will be reduced in the years to come.

Why, then, would President Obama announce the drawdown of U.S. troops to perhaps a few thousand special operations forces and advisors, if Washington didn’t mean to leave?  Afghans have a theory about that, too.  It’s a ruse, many claim, to encourage all other foreign forces to depart so that the Americans can have everything to themselves.  Afghanistan, as they imagine it, is so important that the U.S., which has fought the longest war in its history there, will be satisfied with nothing less.

I was there to listen, but at times I did mention to Afghans that America’s post-9/11 wars and occupations were threatening to break the country.  “We just can’t afford this war anymore,” I said.

Afghans only laugh at that.  They’ve seen the way Americans throw money around.  They’ve seen the way American money corrupted the Afghan government, and many reminded me that American politicians like Afghan ones are bought and sold, and its elections won by money. Americans, they know, are as rich as Croesus and very friendly, though on the whole not very well mannered or honest or smart.

Operation Enduring Presence      

More than 11 years later, the tragedy of the American war in Afghanistan is simple enough: it has proven remarkably irrelevant to the lives of the Afghan people -- and to American troops as well.  Washington has long appeared to be fighting its own war in defense of a form of government and a set of long-discredited government officials that ordinary Afghans would never have chosen for themselves and have no power to replace.

In the early years of the war (2001-2005), George W. Bush’s administration was far too distracted planning and launching another war in Iraq to maintain anything but a minimal military presence in Afghanistan -- and that mainly outside the capital.  Many journalists (including me) criticized Bush for not finishing the war he started there when he had the chance, but today Kabulis look back on that soldierless period of peace and hope with a certain nostalgia.  In some quarters, the Bush years have even acquired something like the sheen of a lost Golden Age -- compared, that is, to the thoroughgoing militarization of American policy that followed.

So commanding did the U.S. military become in Kabul and Washington that, over the years, it ate the State Department, gobbled up the incompetent bureaucracy of the U.S. Agency for International Development, and established Provincial Reconstruction Teams (PRTs) in the countryside to carry out maniacal “development” projects and throw bales of cash at all the wrong “leaders.”

Of course, the military also killed a great many people, both “enemies” and civilians.  As in Vietnam, it won the battles, but lost the war.  When I asked Afghans from Mazar-e-Sharif in the north how they accounted for the relative peacefulness and stability of their area, the answer seemed self-evident: “Americans didn’t come here.”

Other consequences, all deleterious, flowed from the militarization of foreign policy.  In Afghanistan and the United States, so intimately ensnarled over all these years, the income gap between the rich and everyone else has grown exponentially, in large part because in both countries the rich have made money off war-making, while ordinary citizens have slipped into poverty for lack of jobs and basic services.

Relying on the military, the U.S. neglected the crucial elements of civil life in Afghanistan that make things bearable -- like education and health care.  Yes, I’ve heard the repeated claims that, thanks to us, millions of children are now attending school.  But for how long?   According to UNICEF, in the years 2005-2010, in the whole of Afghanistan only 18% of boys attended high school, and 6% of girls.  What kind of report card is that?  After 11 years of underfunded work on health care in a country the size of Texas, infant mortality still remains the highest in the world.

By 2014, the defense of Afghanistan will have been handed over to the woefulAfghan National Security Force, also known in military-speak as the “Enduring Presence Force.”  In that year, for Washington, the American war will be officially over, whether it’s actually at an end or not, and it will be up to Afghans to do the enduring.

Here’s where that final scenario -- collapse -- haunts the Kabuli imagination.  Economic collapse means joblessness, poverty, hunger, and a great swelling of the ranks of children cadging a living in the streets.  Already street children are said to number a million strong in Kabul, and 4 million across the country.  Only blocks from the Presidential Palace, they are there in startling numbers selling newspapers, phone cards, toilet paper, or simply begging for small change. Are they the county’s future?

And if the state collapses, too?  Afghans of a certain age remember well the last time the country was left on its own, after the Soviets departed in 1989, and the U.S. also terminated its covert aid.  The mujahideen parties -- Islamists all -- agreed to take turns ruling the country, but things soon fell apart and they took turns instead lobbing rockets into Kabul, killing tens of thousands of civilians, reducing entire districts to rubble, raiding and raping -- until the Taliban came up from the south and put a stop to everything.

Afghan civilians who remember that era hope that this time Karzai will step down as he promises, and that the usual suspects will find ways to maintain traditional power balances, however undemocratic, in something that passes for peace.  Afghan civilians are, however, betting that if a collision comes, one-third of those Afghan Security Forces trained at fabulous expense to protect them will fight for the government (whoever that may be), one-third will fight for the opposition, and one-third will simply desert and go home.  That sounds almost like a plan.

Counting Down to 2014 in Afghanistan: Three Lousy Options, Pick One

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Compromise, conflict, or collapse: ask an Afghan what to expect in 2014 and you’re likely to get a scenario that falls under one of those three headings. 2014, of course, is the year of the double whammy in Afghanistan: the next presidential election coupled with the departure of most American and other foreign forces. Many Afghans fear a turn for the worse, while others are no less afraid that everything will stay the same.  Some even think things will get better when the occupying forces leave.  Most predict a more conservative climate, but everyone is quick to say that it’s anybody’s guess.

Only one thing is certain in 2014: it will be a year of American military defeat.  For more than a decade, U.S. forces have fought many types of wars in Afghanistan, from a low-footprint invasion, to multiple surges, to a flirtation with Vietnam-style counterinsurgency, to a ramped-up, gloves-off air war.  And yet, despite all the experiments in styles of war-making, the American military and its coalition partners have ended up in the same place: stalemate, which in a battle with guerrillas means defeat.  For years, a modest-sized, generally unpopular, ragtag set of insurgents has fought the planet’s most heavily armed, technologically advanced military to a standstill, leaving the country shaken and its citizens anxiously imagining the outcome of unpalatable scenarios.

The first, compromise, suggests the possibility of reaching some sort of almost inconceivable power-sharing agreement with multiple insurgent militias.  While Washington presses for negotiations with its designated enemy, “the Taliban,” representatives of President Hamid Karzai’s High Peace Council, which includes12 members of the former Taliban government and many sympathizers, are making the rounds to talk disarmament and reconciliation with all the armed insurgent groups that the Afghan intelligence service has identified across the country. There are 1,500 of them.

One member of the Council told me, “It will take a long time before we get to Mullah Omar [the Taliban’s titular leader].  Some of these militias can’t even remember what they’ve been fighting about.”

The second scenario, open conflict, would mean another dreaded round of civil war like the one in the 1990s, after the Soviet Union withdrew in defeat -- the one that destroyed the Afghan capital, Kabul, devastated parts of the country, and gave rise to the Taliban.

The third scenario, collapse, sounds so apocalyptic that it’s seldom brought up by Afghans, but it’s implied in the exodus already underway of those citizens who can afford to leave the country.  The departures aren’t dramatic.  There are no helicopters lifting off the roof of the U.S. Embassy with desperate Afghans clamoring to get on board; just a record number of asylum applications in 2011, a year in which, according to official figures, almost 36,000 Afghans were openly looking for a safe place to land, preferably in Europe.  That figure is likely to be at least matched, if not exceeded, when the U.N. releases the complete data for 2012.

In January, I went to Kabul to learn what old friends and current officials are thinking about the critical months ahead.  At the same time, Afghan President Karzai flew to Washington to confer with President Obama.  Their talks seem to have differed radically from the conversations I had with ordinary Afghans. In Kabul, where strange rumors fly, an official reassured me that the future looked bright for the country because Karzai was expected to return from Washington with the promise of American radar systems, presumably for the Afghan Air Force, which is not yet “operational.” (He actually returned with the promise of helicopters, cargo planes, fighter jets, and drones.) Who knew that the fate of the nation and its suffering citizens hinged on that?  In my conversations with ordinary Afghans, one thing that never came up was radar.

Another term that never seems to enter ordinary Afghan conversation, much as it obsesses Americans, is “al-Qaeda.” President Obama, for instance, announced at a joint press conference with President Karzai: “Our core objective -- the reason we went to war in the first place -- is now within reach: ensuring that al-Qaeda can never again use Afghanistan to launch attacks against America.”  An Afghan journalist asked me, “Why does he worry so much about al-Qaeda in Afghanistan? Doesn’t he know they are everywhere else?”

At the same Washington press conference, Obama said, “The nation we need to rebuild is our own.” Afghans long ago gave up waiting for the U.S. to make good on its promises to rebuild theirs. What’s now striking, however, is the vast gulf between the pronouncements of American officialdom and the hopes of ordinary Afghans.  It’s a gap so wide you would hardly think -- as Afghans once did -- that we are fighting for them.

To take just one example: the official American view of events in Afghanistan is wonderfully black and white.  The president, for instance, speaks of the way U.S. forces heroically “pushed the Taliban out of their strongholds.” Like other top U.S. officials over the years, he forgets whom we pushed into the Afghan government, our “stronghold” in the years after the 2001 invasion: ex-Taliban and Taliban-like fundamentalists, the most brutal civil warriors, and serial human rights violators.

Afghans, however, haven’t forgotten just whom the U.S. put in place to govern them -- exactly the men they feared and hated most in exactly the place where few Afghans wanted them to be.  Early on, between 2002 and 2004, 90% of Afghans surveyed nationwide told the Afghan Independent Human Rights Commission that such men should not be allowed to hold public office; 76% wanted them tried as war criminals.


In my recent conversations, many Afghans still cited the first loya jirga, an assembly convened in 2003 to ratify the newly drafted constitution, or the first presidential election in 2004, or the parliamentary election of 2005, all held under international auspices, as the moments when the aspirations of Afghans and the “international community” parted company. In that first parliament, as in the earlier gatherings, most of the men were affiliated with armed militias; every other member was a formerjihadi, and nearly half were affiliated with fundamentalist Islamist parties, including the Taliban.

In this way, Afghans were consigned to live under a government of bloodstained warlords and fundamentalists, who turned out to be Washington’s guys.  Many had once battled the Soviets using American money and weapons, and quite a few, like the former warlord, druglord, minister of defense, and current vice-president Muhammad Qasim Fahim, had been very chummy with the CIA.

In the U.S., such details of our Afghan War, now in its 12th year, are long forgotten, but to Afghans who live under the rule of the same old suspects, the memory remains painfully raw.  Worse, Afghans know that it is these very men, rearmed and ready, who will once again compete for power in 2014.

How to Vote Early in Afghanistan

President Karzai is barred by term limits from standing for reelection in 2014, but many Kabulis believe he reached a private agreement with the usual suspects at a meeting late last year. In early January, he seemed to seal the deal by announcing that, for the sake of frugality, the voter cards issued for past elections will be reusedin 2014.  Far too many of those cards were issued for the 2004 election, suspiciously more than the number of eligible voters.  During the 2009 campaign, anyone could buy fistfuls of them at bargain basement prices.  So this decision seemed to kill off the last faint hope of an election in which Afghans might actually have a say about the leadership of the country.

Fewer than 35% of voters cast ballots in the last presidential contest, when Karzai’s men were caught on video stuffing ballot boxes.  (Afterward, President Obama phoned to congratulate Karzai on his “victory.”) Only dedicated or paid henchmen are likely to show up for the next “good enough for Afghans” exercise in democracy. Once again, an “election” may be just the elaborate stage set for announcing to a disillusioned public the names of those who will run the show in Kabul for the next few years.

Kabulis might live with that, as they’ve lived with Karzai all these years, but they fear power-hungry Afghan politicians could “compromise” as well with insurgent leaders like that old American favorite from the war against the Soviets, Gulbuddin Hekmatyar, who recently told a TV audience that he intends to claim his rightful place in government. Such compromises could stick the Afghan people with a shaky power-sharing deal among the most ultra-conservative, self-interested, sociopathic, and corrupt men in the country.  If that deal, in turn, were to fall apart, as most power-sharing agreements worldwide do within a year or two, the big men might well plunge the country back into a 1990s-style civil war, with no regard for the civilians caught in their path.

These worst-case scenarios are everyday Kabuli nightmares.  After all, during decades of war, the savvy citizens of the capital have learned to expect the worst from the men currently characterized in a popular local graffiti this way: “Mujahideen=Criminals. Taliban=Dumbheads.”

Ordinary Kabulis express reasonable fears for the future of the country, but impatient free-marketeering businessmen are voting with their feet right now, or laying plans to leave soon. They’ve made Kabul hum (often with foreign aid funds, which are equivalent to about 90% of the country’s economic activity), but they aren’t about to wait around for the results of election 2014.  Carpe diem has become their version of financial advice.  As a result, they are snatching what they can and packing their bags.

Millions of dollars reportedly take flight from Kabul International Airport every day: officially about $4.6 billion in 2011, or just about the size of Afghanistan’s annual budget. Hordes of businessmen and bankers (like those who, in 2004, set up the Ponzi scheme called the Kabul Bank, from which about a billion dollars went missing) are heading for cushy spots like Dubai, where they have already established residence on prime real estate.

As they take their investments elsewhere and the American effort winds down, the Afghan economy contracts ever more grimly, opportunities dwindle, and jobs disappear.  Housing prices in Kabul are falling for the first time since the start of the occupation as rich Afghans and profiteering private American contractors, who guzzled the money that Washington and the “international community” poured into the country, move on.

At the same time, a money-laundering building boom in Kabul appears to have stalled, leaving tall, half-built office blocks like so many skeletons amid the scalloped Pakistani palaces, vertical malls, and grand madrassas erected in the past four or five years by political and business insiders and well-connected conservative clerics.

Most of the Afghan tycoons seeking asylum elsewhere don’t fear for their lives, just their pocketbooks: they’re not political refugees, but free-market rats abandoning the sinking ship of state.  Joining in the exodus (but not included in the statistics) are countless illegal émigrés seeking jobs or fleeing for their lives, paying human smugglers money they can’t afford as they head for Europe by circuitous and dangerous routes.

Threatened Afghans have fled from every abrupt change of government in the last century, making them the largest population of refugees from a single country on the planet.  Once again, those who can are voting with their feet (or their pocketbooks) -- and voting early.

Afghanistan’s historic tragedy is that its violent political shifts -- from king to communists to warlords to religious fundamentalists to the Americans -- have meant the flight of the very people most capable of rebuilding the country along peaceful and prosperous lines.  And their departure only contributes to the economic and political collapse they themselves seek to avoid.  Left behind are ordinary Afghans -- the illiterate and unskilled, but also a tough core of educated, ambitious citizens, including women’s rights activists, unwilling to surrender their dream of living once again in a free and peaceful Afghanistan.

The Military Monster

These days Kabul resounds with the blasts of suicide bombers, IEDs, and sporadic gunfire.  Armed men are everywhere in anonymous uniforms that defy identification.  Any man with money can buy a squad of bodyguards, clad in classy camouflage and wraparound shades, and armed with assault weapons.  Yet Kabulis, trying to carry on normal lives in the relative safety of the capital, seem to maintain a distance from the war going on in the provinces.

Asked that crucial question -- do you think American forces should stay or go? -- the Kabulis I talked with tended to answer in a theoretical way, very unlike the visceral response one gets in the countryside, where villages are bombed andcivilians killed, or in the makeshift camps for internally displaced people that now crowd the outer fringes of Kabul. (By the time U.S. Marines surged into Taliban-controlled Helmand Province in the south in 2010 to bring counterinsurgency-style protection to the residents there, tens of thousands of them had already moved to those camps in Kabul.)  Afghans in the countryside want to be rid of armed men.  All of them.  Kabulis just want to be secure, and if that means keeping some U.S. troops at Bagram Air Base near the capital, as Afghan and American officials are currently discussing, well, it’s nothing to them.

In fact, most Kabulis I spoke to think that’s what’s going to happen.  After all, American officials have been talking for years about keeping permanent bases in Afghanistan (though they avoid the term “permanent” when speaking to the American press), and American military officers now regularly appear on Afghan TV to say, “The United States will never abandon Afghanistan.”  Afghans reason: Americans would not have spent nearly 12 years fighting in this country if it were not the most strategic place on the planet and absolutely essential to their plans to “push on” Iran and China next.  Everybody knows that pushing on other countries is an American specialty.

Besides, Afghans can see with their own eyes that U.S. command centers, including multiple bases in Kabul, and Bagram Air Base, only 30 miles away, are still being expanded and upgraded.  Beyond the high walls of the American Embassy compound, they can also see the tall new apartment blocks going up for an expanding staff, even if Washington now claims that staff will be reduced in the years to come.

Why, then, would President Obama announce the drawdown of U.S. troops to perhaps a few thousand special operations forces and advisors, if Washington didn’t mean to leave?  Afghans have a theory about that, too.  It’s a ruse, many claim, to encourage all other foreign forces to depart so that the Americans can have everything to themselves.  Afghanistan, as they imagine it, is so important that the U.S., which has fought the longest war in its history there, will be satisfied with nothing less.

I was there to listen, but at times I did mention to Afghans that America’s post-9/11 wars and occupations were threatening to break the country.  “We just can’t afford this war anymore,” I said.

Afghans only laugh at that.  They’ve seen the way Americans throw money around.  They’ve seen the way American money corrupted the Afghan government, and many reminded me that American politicians like Afghan ones are bought and sold, and its elections won by money. Americans, they know, are as rich as Croesus and very friendly, though on the whole not very well mannered or honest or smart.

Operation Enduring Presence      

More than 11 years later, the tragedy of the American war in Afghanistan is simple enough: it has proven remarkably irrelevant to the lives of the Afghan people -- and to American troops as well.  Washington has long appeared to be fighting its own war in defense of a form of government and a set of long-discredited government officials that ordinary Afghans would never have chosen for themselves and have no power to replace.

In the early years of the war (2001-2005), George W. Bush’s administration was far too distracted planning and launching another war in Iraq to maintain anything but a minimal military presence in Afghanistan -- and that mainly outside the capital.  Many journalists (including me) criticized Bush for not finishing the war he started there when he had the chance, but today Kabulis look back on that soldierless period of peace and hope with a certain nostalgia.  In some quarters, the Bush years have even acquired something like the sheen of a lost Golden Age -- compared, that is, to the thoroughgoing militarization of American policy that followed.

So commanding did the U.S. military become in Kabul and Washington that, over the years, it ate the State Department, gobbled up the incompetent bureaucracy of the U.S. Agency for International Development, and established Provincial Reconstruction Teams (PRTs) in the countryside to carry out maniacal “development” projects and throw bales of cash at all the wrong “leaders.”

Of course, the military also killed a great many people, both “enemies” and civilians.  As in Vietnam, it won the battles, but lost the war.  When I asked Afghans from Mazar-e-Sharif in the north how they accounted for the relative peacefulness and stability of their area, the answer seemed self-evident: “Americans didn’t come here.”

Other consequences, all deleterious, flowed from the militarization of foreign policy.  In Afghanistan and the United States, so intimately ensnarled over all these years, the income gap between the rich and everyone else has grown exponentially, in large part because in both countries the rich have made money off war-making, while ordinary citizens have slipped into poverty for lack of jobs and basic services.

Relying on the military, the U.S. neglected the crucial elements of civil life in Afghanistan that make things bearable -- like education and health care.  Yes, I’ve heard the repeated claims that, thanks to us, millions of children are now attending school.  But for how long?   According to UNICEF, in the years 2005-2010, in the whole of Afghanistan only 18% of boys attended high school, and 6% of girls.  What kind of report card is that?  After 11 years of underfunded work on health care in a country the size of Texas, infant mortality still remains the highest in the world.

By 2014, the defense of Afghanistan will have been handed over to the woefulAfghan National Security Force, also known in military-speak as the “Enduring Presence Force.”  In that year, for Washington, the American war will be officially over, whether it’s actually at an end or not, and it will be up to Afghans to do the enduring.

Here’s where that final scenario -- collapse -- haunts the Kabuli imagination.  Economic collapse means joblessness, poverty, hunger, and a great swelling of the ranks of children cadging a living in the streets.  Already street children are said to number a million strong in Kabul, and 4 million across the country.  Only blocks from the Presidential Palace, they are there in startling numbers selling newspapers, phone cards, toilet paper, or simply begging for small change. Are they the county’s future?

And if the state collapses, too?  Afghans of a certain age remember well the last time the country was left on its own, after the Soviets departed in 1989, and the U.S. also terminated its covert aid.  The mujahideen parties -- Islamists all -- agreed to take turns ruling the country, but things soon fell apart and they took turns instead lobbing rockets into Kabul, killing tens of thousands of civilians, reducing entire districts to rubble, raiding and raping -- until the Taliban came up from the south and put a stop to everything.

Afghan civilians who remember that era hope that this time Karzai will step down as he promises, and that the usual suspects will find ways to maintain traditional power balances, however undemocratic, in something that passes for peace.  Afghan civilians are, however, betting that if a collision comes, one-third of those Afghan Security Forces trained at fabulous expense to protect them will fight for the government (whoever that may be), one-third will fight for the opposition, and one-third will simply desert and go home.  That sounds almost like a plan.

Timothy Geithner Saved Wall Street, Not the Economy

The accolades for Timothy Geithner came on so thick and heavy in the last week that it’s necessary for those of us in the reality-based community to bring the discussion back to earth. The basic facts of the matter are very straightforward. Timothy Geithner and the bailout he helped engineer saved the Wall Street banks. He did not save the economy.

We can’t know exactly what would have happened if we did not have the TARP in October of 2008. We do know there was a major effort at the time to exaggerate the dangers to the financial system in order to pressure Congress to pass the TARP.
For example, Federal Reserve Board Chairman Ben Bernacke highlighted the claim that the commercial paper market was shutting down. Since most major companies finance their ongoing operations by issuing commercial paper, this raised the threat of a full-fledged economic collapse because even healthy companies would not be able to get the cash needed to pay their bills.

What Bernanke neglected to mention was that he personally had the ability to sustain the commercial paper market through direct lending from the Fed. He opted to go this route by announcing the creation of a Fed special lending facility to support the commercial paper market the weekend after Congress voted to approve the TARP.

It is quite likely that Bernanke could have taken whatever steps were necessary himself to keep the financial system from collapsing even without the TARP. The amount of money dispersed through the Fed was many times larger than the TARP, much of which was never even lent out. The TARP was primarily about providing political cover and saying that the government stood behind the big banks.

Of course we can never know the right counterfactual had the TARP and related Treasury efforts not been put in place, but even if we assume the worst, the idea that we would have seen a second Great Depression was always absurd on its face.  The example of Argentina proves otherwise.

In December of 2001 Argentina did have a full-fledged financial collapse. In other words, all the horrible things that we feared could happen in the United States in 2008 actually did happen in Argentina. Banks shut down. People could not use their ATMs or get access to their bank accounts.

This led to a 3-month period in which the economy was in free fall. It stabilized over the next 3 months. Then it began growing rapidly in the second half of 2002. By the middle of 2003 it had made up all the ground lost in financial crisis. Its economy continued to grow strongly until the world economic crisis brought it to a standstill in 2009.

Even if Obama’s economic team may not have been quite as competent as the folks in Argentina, they would have to be an awful lot worse to leave us with a decade of double-digit unemployment, the sort of story that would be associated with a second Great Depression. In short, the second Great Depression line was just a bogeyman used to justify the government bailout of the Wall Street banks.

As it is, the economy has already lost more than $7 trillion in output ($20,000 per person) compared to what the Congressional Budget Office projected in January of 2008. We will probably lose at least another $4 trillion before the economy gets back to anything resembling full employment. And, millions of people have seen their lives turned upside down by their inability to get jobs, being thrown out of their homes, or their parents’ inability to get a job. And this is all because of the folks in Washington’s inability to manage the economy.

But the Wall Street banks are bigger and fatter than ever. As a result of the crisis, many mergers were rushed through that might have otherwise been subject to serious regulatory scrutiny. For example, J.P. Morgan was allowed to take over Bear Stearns and Washington Mutual, two huge banks that both faced collapse in the crisis. Bank of America took over Merrill Lynch and Countrywide. By contrast, there can be little doubt that without the helping hand of Timothy Geithner, most or all of the Wall Street banks would have been sunk by their own recklessness.

There is one other hoary myth that needs to be put to rest as Timothy Geithner heads off to greener pastures. The claim that we made money on the bailout is one of those lines that should immediately discredit the teller. We made money on the loans in the same way that if the government issued mortgages at 1 percent interest it would make money, since the vast majority of the mortgages would be repaid.

The TARP money and other bailout loans were given to banks at way below market interest rates at a time when liquidity carried an enormous premium. Serious people know this, and the people who don’t are not worth listening to. It was a massive giveaway as the Congressional Oversight Panel determined at the time.   

It’s impossible to know whether the economy would have bounced back more quickly and we would be closer to full employment now without the bailouts, since none of us know what other policies would have been pursued. We do know that we would have been freed of the albatross of a horribly bloated financial sector that sucks the life out of the economy and redistributes income upward to the very rich. For that fact, Timothy Geithner bears considerable responsibility.  

December Core Capital Goods Plunge 4.3% Y/Y As Durables Headline Boosted By Boeing Orders

Yet another government data release, yet another epic case of baffle with BS. As expected (and as pretweeted by us) The headline Durable goods orders was a massive 4.6% increase M/M, rising to $230.7 billion from $220.7 billion, the biggest beat to ex...

Only Three Choices for Afghan Endgame: Compromise, Conflict, or Collapse

KABUL, Afghanistan – Compromise, conflict, or collapse: ask an Afghan what to expect in 2014 and you’re likely to get a scenario that falls under one of those three headings. 2014, of course, is the year of the double whammy in Afghanistan: the next presidential election coupled with the departure of most American and other foreign forces. Many Afghans fear a turn for the worse, while others are no less afraid that everything will stay the same.  Some even think things will get better when the occupying forces leave.  Most predict a more conservative climate, but everyone is quick to say that it’s anybody’s guess.

Only one thing is certain in 2014: it will be a year of American military defeat.  For more than a decade, U.S. forces have fought many types of wars in Afghanistan, from a low-footprint invasion, to multiple surges, to a flirtation with Vietnam-style counterinsurgency, to a ramped-up, gloves-off air war.  And yet, despite all the experiments in styles of war-making, the American military and its coalition partners have ended up in the same place: stalemate, which in a battle with guerrillas means defeat.  For years, a modest-sized, generally unpopular, ragtag set of insurgents has fought the planet’s most heavily armed, technologically advanced military to a standstill, leaving the country shaken and its citizens anxiously imagining the outcome of unpalatable scenarios.

The first, compromise, suggests the possibility of reaching some sort of almost inconceivable power-sharing agreement with multiple insurgent militias.  While Washington presses for negotiations with its designated enemy, “the Taliban,” representatives of President Hamid Karzai’s High Peace Council, which includes 12 members of the former Taliban government and many sympathizers, are making the rounds to talk disarmament and reconciliation with all the armed insurgent groups that the Afghan intelligence service has identified across the country. There are 1,500 of them.

One member of the Council told me, “It will take a long time before we get to Mullah Omar [the Taliban’s titular leader].  Some of these militias can’t even remember what they’ve been fighting about.”

The second scenario, open conflict, would mean another dreaded round of civil war like the one in the 1990s, after the Soviet Union withdrew in defeat -- the one that destroyed the Afghan capital, Kabul, devastated parts of the country, and gave rise to the Taliban.

The third scenario, collapse, sounds so apocalyptic that it’s seldom brought up by Afghans, but it’s implied in the exodus already underway of those citizens who can afford to leave the country.  The departures aren’t dramatic.  There are no helicopters lifting off the roof of the U.S. Embassy with desperate Afghans clamoring to get on board; just a record number of asylum applications in 2011, a year in which, according to official figures, almost 36,000 Afghans were openly looking for a safe place to land, preferably in Europe.  That figure is likely to be at least matched, if not exceeded, when the U.N. releases the complete data for 2012.

In January, I went to Kabul to learn what old friends and current officials are thinking about the critical months ahead.  At the same time, Afghan President Karzai flew to Washington to confer with President Obama.  Their talks seem to have differed radically from the conversations I had with ordinary Afghans. In Kabul, where strange rumors fly, an official reassured me that the future looked bright for the country because Karzai was expected to return from Washington with the promise of American radar systems, presumably for the Afghan Air Force, which is not yet “operational.” (He actually returned with the promise of helicopters, cargo planes, fighter jets, and drones.) Who knew that the fate of the nation and its suffering citizens hinged on that?  In my conversations with ordinary Afghans, one thing that never came up was radar.

Another term that never seems to enter ordinary Afghan conversation, much as it obsesses Americans, is “al-Qaeda.” President Obama, for instance, announced at a joint press conference with President Karzai: “Our core objective -- the reason we went to war in the first place -- is now within reach: ensuring that al-Qaeda can never again use Afghanistan to launch attacks against America.”  An Afghan journalist asked me, “Why does he worry so much about al-Qaeda in Afghanistan? Doesn’t he know they are everywhere else?”

At the same Washington press conference, Obama said, “The nation we need to rebuild is our own.” Afghans long ago gave up waiting for the U.S. to make good on its promises to rebuild theirs. What’s now striking, however, is the vast gulf between the pronouncements of American officialdom and the hopes of ordinary Afghans.  It’s a gap so wide you would hardly think -- as Afghans once did -- that we are fighting for them.

To take just one example: the official American view of events in Afghanistan is wonderfully black and white.  The president, for instance, speaks of the way U.S. forces heroically “pushed the Taliban out of their strongholds.” Like other top U.S. officials over the years, he forgets whom we pushed into the Afghan government, our “stronghold” in the years after the 2001 invasion: ex-Taliban and Taliban-like fundamentalists, the most brutal civil warriors, and serial human rights violators.

Afghans, however, haven’t forgotten just whom the U.S. put in place to govern them -- exactly the men they feared and hated most in exactly the place where few Afghans wanted them to be.  Early on, between 2002 and 2004, 90% of Afghans surveyed nationwide told the Afghan Independent Human Rights Commission that such men should not be allowed to hold public office; 76% wanted them tried as war criminals.

In my recent conversations, many Afghans still cited the first loya jirga, an assembly convened in 2003 to ratify the newly drafted constitution, or the first presidential election in 2004, or the parliamentary election of 2005, all held under international auspices, as the moments when the aspirations of Afghans and the “international community” parted company. In that first parliament, as in the earlier gatherings, most of the men were affiliated with armed militias; every other member was a former jihadi, and nearly half were affiliated with fundamentalist Islamist parties, including the Taliban.

In this way, Afghans were consigned to live under a government of bloodstained warlords and fundamentalists, who turned out to be Washington’s guys.  Many had once battled the Soviets using American money and weapons, and quite a few, like the former warlord, druglord, minister of defense, and current vice-president Muhammad Qasim Fahim, had been very chummy with the CIA.

In the U.S., such details of our Afghan War, now in its 12th year, are long forgotten, but to Afghans who live under the rule of the same old suspects, the memory remains painfully raw.  Worse, Afghans know that it is these very men, rearmed and ready, who will once again compete for power in 2014.

How to Vote Early in Afghanistan

President Karzai is barred by term limits from standing for reelection in 2014, but many Kabulis believe he reached a private agreement with the usual suspects at a meeting late last year. In early January, he seemed to seal the deal by announcing that, for the sake of frugality, the voter cards issued for past elections will be reused in 2014.  Far too many of those cards were issued for the 2004 election, suspiciously more than the number of eligible voters.  During the 2009 campaign, anyone could buy fistfuls of them at bargain basement prices.  So this decision seemed to kill off the last faint hope of an election in which Afghans might actually have a say about the leadership of the country.

Fewer than 35% of voters cast ballots in the last presidential contest, when Karzai’s men were caught on video stuffing ballot boxes.  (Afterward, President Obama phoned to congratulate Karzai on his “victory.”) Only dedicated or paid henchmen are likely to show up for the next “good enough for Afghans” exercise in democracy. Once again, an “election” may be just the elaborate stage set for announcing to a disillusioned public the names of those who will run the show in Kabul for the next few years.

Kabulis might live with that, as they’ve lived with Karzai all these years, but they fear power-hungry Afghan politicians could “compromise” as well with insurgent leaders like that old American favorite from the war against the Soviets, Gulbuddin Hekmatyar, who recently told a TV audience that he intends to claim his rightful place in government. Such compromises could stick the Afghan people with a shaky power-sharing deal among the most ultra-conservative, self-interested, sociopathic, and corrupt men in the country.  If that deal, in turn, were to fall apart, as most power-sharing agreements worldwide do within a year or two, the big men might well plunge the country back into a 1990s-style civil war, with no regard for the civilians caught in their path.

These worst-case scenarios are everyday Kabuli nightmares.  After all, during decades of war, the savvy citizens of the capital have learned to expect the worst from the men currently characterized in a popular local graffiti this way: “Mujahideen=Criminals. Taliban=Dumbheads.”

Ordinary Kabulis express reasonable fears for the future of the country, but impatient free-marketeering businessmen are voting with their feet right now, or laying plans to leave soon. They’ve made Kabul hum (often with foreign aid funds, which are equivalent to about 90% of the country’s economic activity), but they aren’t about to wait around for the results of election 2014.  Carpe diem has become their version of financial advice.  As a result, they are snatching what they can and packing their bags.

Millions of dollars reportedly take flight from Kabul International Airport every day: officially about $4.6 billion in 2011, or just about the size of Afghanistan’s annual budget. Hordes of businessmen and bankers (like those who, in 2004, set up the Ponzi scheme called the Kabul Bank, from which about a billion dollars went missing) are heading for cushy spots like Dubai, where they have already established residence on prime real estate.

As they take their investments elsewhere and the American effort winds down, the Afghan economy contracts ever more grimly, opportunities dwindle, and jobs disappear.  Housing prices in Kabul are falling for the first time since the start of the occupation as rich Afghans and profiteering private American contractors, who guzzled the money that Washington and the “international community” poured into the country, move on.

At the same time, a money-laundering building boom in Kabul appears to have stalled, leaving tall, half-built office blocks like so many skeletons amid the scalloped Pakistani palaces, vertical malls, and grand madrassas erected in the past four or five years by political and business insiders and well-connected conservative clerics.

Most of the Afghan tycoons seeking asylum elsewhere don’t fear for their lives, just their pocketbooks: they’re not political refugees, but free-market rats abandoning the sinking ship of state.  Joining in the exodus (but not included in the statistics) are countless illegal émigrés seeking jobs or fleeing for their lives, paying human smugglers money they can’t afford as they head for Europe by circuitous and dangerous routes.

Threatened Afghans have fled from every abrupt change of government in the last century, making them the largest population of refugees from a single country on the planet.  Once again, those who can are voting with their feet (or their pocketbooks) -- and voting early.

Afghanistan’s historic tragedy is that its violent political shifts -- from king to communists to warlords to religious fundamentalists to the Americans -- have meant the flight of the very people most capable of rebuilding the country along peaceful and prosperous lines.  And their departure only contributes to the economic and political collapse they themselves seek to avoid.  Left behind are ordinary Afghans -- the illiterate and unskilled, but also a tough core of educated, ambitious citizens, including women’s rights activists, unwilling to surrender their dream of living once again in a free and peaceful Afghanistan.

The Military Monster

These days Kabul resounds with the blasts of suicide bombers, IEDs, and sporadic gunfire.  Armed men are everywhere in anonymous uniforms that defy identification.  Any man with money can buy a squad of bodyguards, clad in classy camouflage and wraparound shades, and armed with assault weapons.  Yet Kabulis, trying to carry on normal lives in the relative safety of the capital, seem to maintain a distance from the war going on in the provinces.

Asked that crucial question -- do you think American forces should stay or go? -- the Kabulis I talked with tended to answer in a theoretical way, very unlike the visceral response one gets in the countryside, where villages are bombed and civilians killed, or in the makeshift camps for internally displaced people that now crowd the outer fringes of Kabul. (By the time U.S. Marines surged into Taliban-controlled Helmand Province in the south in 2010 to bring counterinsurgency-style protection to the residents there, tens of thousands of them had already moved to those camps in Kabul.)  Afghans in the countryside want to be rid of armed men.  All of them.  Kabulis just want to be secure, and if that means keeping some U.S. troops at Bagram Air Base near the capital, as Afghan and American officials are currently discussing, well, it’s nothing to them.

In fact, most Kabulis I spoke to think that’s what’s going to happen.  After all, American officials have been talking for years about keeping permanent bases in Afghanistan (though they avoid the term “permanent” when speaking to the American press), and American military officers now regularly appear on Afghan TV to say, “The United States will never abandon Afghanistan.”  Afghans reason: Americans would not have spent nearly 12 years fighting in this country if it were not the most strategic place on the planet and absolutely essential to their plans to “push on” Iran and China next.  Everybody knows that pushing on other countries is an American specialty.

Besides, Afghans can see with their own eyes that U.S. command centers, including multiple bases in Kabul, and Bagram Air Base, only 30 miles away, are still being expanded and upgraded.  Beyond the high walls of the American Embassy compound, they can also see the tall new apartment blocks going up for an expanding staff, even if Washington now claims that staff will be reduced in the years to come.

Why, then, would President Obama announce the drawdown of U.S. troops to perhaps a few thousand special operations forces and advisors, if Washington didn’t mean to leave?  Afghans have a theory about that, too.  It’s a ruse, many claim, to encourage all other foreign forces to depart so that the Americans can have everything to themselves.  Afghanistan, as they imagine it, is so important that the U.S., which has fought the longest war in its history there, will be satisfied with nothing less.

I was there to listen, but at times I did mention to Afghans that America’s post-9/11 wars and occupations were threatening to break the country.  “We just can’t afford this war anymore,” I said.

Afghans only laugh at that.  They’ve seen the way Americans throw money around.  They’ve seen the way American money corrupted the Afghan government, and many reminded me that American politicians like Afghan ones are bought and sold, and its elections won by money. Americans, they know, are as rich as Croesus and very friendly, though on the whole not very well mannered or honest or smart.

Operation Enduring Presence      

More than 11 years later, the tragedy of the American war in Afghanistan is simple enough: it has proven remarkably irrelevant to the lives of the Afghan people -- and to American troops as well.  Washington has long appeared to be fighting its own war in defense of a form of government and a set of long-discredited government officials that ordinary Afghans would never have chosen for themselves and have no power to replace.

In the early years of the war (2001-2005), George W. Bush’s administration was far too distracted planning and launching another war in Iraq to maintain anything but a minimal military presence in Afghanistan -- and that mainly outside the capital.  Many journalists (including me) criticized Bush for not finishing the war he started there when he had the chance, but today Kabulis look back on that soldierless period of peace and hope with a certain nostalgia.  In some quarters, the Bush years have even acquired something like the sheen of a lost Golden Age -- compared, that is, to the thoroughgoing militarization of American policy that followed.

So commanding did the U.S. military become in Kabul and Washington that, over the years, it ate the State Department, gobbled up the incompetent bureaucracy of the U.S. Agency for International Development, and established Provincial Reconstruction Teams (PRTs) in the countryside to carry out maniacal “development” projects and throw bales of cash at all the wrong “leaders.”

Of course, the military also killed a great many people, both “enemies” and civilians.  As in Vietnam, it won the battles, but lost the war.  When I asked Afghans from Mazar-e-Sharif in the north how they accounted for the relative peacefulness and stability of their area, the answer seemed self-evident: “Americans didn’t come here.”

Other consequences, all deleterious, flowed from the militarization of foreign policy.  In Afghanistan and the United States, so intimately ensnarled over all these years, the income gap between the rich and everyone else has grown exponentially, in large part because in both countries the rich have made money off war-making, while ordinary citizens have slipped into poverty for lack of jobs and basic services.

Relying on the military, the U.S. neglected the crucial elements of civil life in Afghanistan that make things bearable -- like education and health care.  Yes, I’ve heard the repeated claims that, thanks to us, millions of children are now attending school.  But for how long?   According to UNICEF, in the years 2005-2010, in the whole of Afghanistan only 18% of boys attended high school, and 6% of girls.  What kind of report card is that?  After 11 years of underfunded work on health care in a country the size of Texas, infant mortality still remains the highest in the world.

By 2014, the defense of Afghanistan will have been handed over to the woeful Afghan National Security Force, also known in military-speak as the “Enduring Presence Force.”  In that year, for Washington, the American war will be officially over, whether it’s actually at an end or not, and it will be up to Afghans to do the enduring.

Here’s where that final scenario -- collapse -- haunts the Kabuli imagination.  Economic collapse means joblessness, poverty, hunger, and a great swelling of the ranks of children cadging a living in the streets.  Already street children are said to number a million strong in Kabul, and 4 million across the country.  Only blocks from the Presidential Palace, they are there in startling numbers selling newspapers, phone cards, toilet paper, or simply begging for small change. Are they the county’s future?

And if the state collapses, too?  Afghans of a certain age remember well the last time the country was left on its own, after the Soviets departed in 1989, and the U.S. also terminated its covert aid.  The mujahideen parties -- Islamists all -- agreed to take turns ruling the country, but things soon fell apart and they took turns instead lobbing rockets into Kabul, killing tens of thousands of civilians, reducing entire districts to rubble, raiding and raping -- until the Taliban came up from the south and put a stop to everything.

Afghan civilians who remember that era hope that this time Karzai will step down as he promises, and that the usual suspects will find ways to maintain traditional power balances, however undemocratic, in something that passes for peace.  Afghan civilians are, however, betting that if a collision comes, one-third of those Afghan Security Forces trained at fabulous expense to protect them will fight for the government (whoever that may be), one-third will fight for the opposition, and one-third will simply desert and go home.  That sounds almost like a plan.

© 2013 Ann Jones

Ann Jones

Ann Jones, writer and photographer, is the author of seven previous books, including War Is Not Over When It's Over, Kabul in Winter, Women Who Kill, and Next Time She'll Be Dead. Since 2001, Jones has worked with women in conflict and post-conflict zones, principally Afghanistan, and reported on their concerns. An authority on violence against women, she has served as a gender adviser to the United Nations. Her work has appeared in numerous publications, including The New York Times and The Nation. For more information, visit her website.

Only Three Choices for Afghan Endgame: Compromise, Conflict, or Collapse

KABUL, Afghanistan – Compromise, conflict, or collapse: ask an Afghan what to expect in 2014 and you’re likely to get a scenario that falls under one of those three headings. 2014, of course, is the year of the double whammy in Afghanistan: the next presidential election coupled with the departure of most American and other foreign forces. Many Afghans fear a turn for the worse, while others are no less afraid that everything will stay the same.  Some even think things will get better when the occupying forces leave.  Most predict a more conservative climate, but everyone is quick to say that it’s anybody’s guess.

Only one thing is certain in 2014: it will be a year of American military defeat.  For more than a decade, U.S. forces have fought many types of wars in Afghanistan, from a low-footprint invasion, to multiple surges, to a flirtation with Vietnam-style counterinsurgency, to a ramped-up, gloves-off air war.  And yet, despite all the experiments in styles of war-making, the American military and its coalition partners have ended up in the same place: stalemate, which in a battle with guerrillas means defeat.  For years, a modest-sized, generally unpopular, ragtag set of insurgents has fought the planet’s most heavily armed, technologically advanced military to a standstill, leaving the country shaken and its citizens anxiously imagining the outcome of unpalatable scenarios.

The first, compromise, suggests the possibility of reaching some sort of almost inconceivable power-sharing agreement with multiple insurgent militias.  While Washington presses for negotiations with its designated enemy, “the Taliban,” representatives of President Hamid Karzai’s High Peace Council, which includes 12 members of the former Taliban government and many sympathizers, are making the rounds to talk disarmament and reconciliation with all the armed insurgent groups that the Afghan intelligence service has identified across the country. There are 1,500 of them.

One member of the Council told me, “It will take a long time before we get to Mullah Omar [the Taliban’s titular leader].  Some of these militias can’t even remember what they’ve been fighting about.”

The second scenario, open conflict, would mean another dreaded round of civil war like the one in the 1990s, after the Soviet Union withdrew in defeat -- the one that destroyed the Afghan capital, Kabul, devastated parts of the country, and gave rise to the Taliban.

The third scenario, collapse, sounds so apocalyptic that it’s seldom brought up by Afghans, but it’s implied in the exodus already underway of those citizens who can afford to leave the country.  The departures aren’t dramatic.  There are no helicopters lifting off the roof of the U.S. Embassy with desperate Afghans clamoring to get on board; just a record number of asylum applications in 2011, a year in which, according to official figures, almost 36,000 Afghans were openly looking for a safe place to land, preferably in Europe.  That figure is likely to be at least matched, if not exceeded, when the U.N. releases the complete data for 2012.

In January, I went to Kabul to learn what old friends and current officials are thinking about the critical months ahead.  At the same time, Afghan President Karzai flew to Washington to confer with President Obama.  Their talks seem to have differed radically from the conversations I had with ordinary Afghans. In Kabul, where strange rumors fly, an official reassured me that the future looked bright for the country because Karzai was expected to return from Washington with the promise of American radar systems, presumably for the Afghan Air Force, which is not yet “operational.” (He actually returned with the promise of helicopters, cargo planes, fighter jets, and drones.) Who knew that the fate of the nation and its suffering citizens hinged on that?  In my conversations with ordinary Afghans, one thing that never came up was radar.

Another term that never seems to enter ordinary Afghan conversation, much as it obsesses Americans, is “al-Qaeda.” President Obama, for instance, announced at a joint press conference with President Karzai: “Our core objective -- the reason we went to war in the first place -- is now within reach: ensuring that al-Qaeda can never again use Afghanistan to launch attacks against America.”  An Afghan journalist asked me, “Why does he worry so much about al-Qaeda in Afghanistan? Doesn’t he know they are everywhere else?”

At the same Washington press conference, Obama said, “The nation we need to rebuild is our own.” Afghans long ago gave up waiting for the U.S. to make good on its promises to rebuild theirs. What’s now striking, however, is the vast gulf between the pronouncements of American officialdom and the hopes of ordinary Afghans.  It’s a gap so wide you would hardly think -- as Afghans once did -- that we are fighting for them.

To take just one example: the official American view of events in Afghanistan is wonderfully black and white.  The president, for instance, speaks of the way U.S. forces heroically “pushed the Taliban out of their strongholds.” Like other top U.S. officials over the years, he forgets whom we pushed into the Afghan government, our “stronghold” in the years after the 2001 invasion: ex-Taliban and Taliban-like fundamentalists, the most brutal civil warriors, and serial human rights violators.

Afghans, however, haven’t forgotten just whom the U.S. put in place to govern them -- exactly the men they feared and hated most in exactly the place where few Afghans wanted them to be.  Early on, between 2002 and 2004, 90% of Afghans surveyed nationwide told the Afghan Independent Human Rights Commission that such men should not be allowed to hold public office; 76% wanted them tried as war criminals.

In my recent conversations, many Afghans still cited the first loya jirga, an assembly convened in 2003 to ratify the newly drafted constitution, or the first presidential election in 2004, or the parliamentary election of 2005, all held under international auspices, as the moments when the aspirations of Afghans and the “international community” parted company. In that first parliament, as in the earlier gatherings, most of the men were affiliated with armed militias; every other member was a former jihadi, and nearly half were affiliated with fundamentalist Islamist parties, including the Taliban.

In this way, Afghans were consigned to live under a government of bloodstained warlords and fundamentalists, who turned out to be Washington’s guys.  Many had once battled the Soviets using American money and weapons, and quite a few, like the former warlord, druglord, minister of defense, and current vice-president Muhammad Qasim Fahim, had been very chummy with the CIA.

In the U.S., such details of our Afghan War, now in its 12th year, are long forgotten, but to Afghans who live under the rule of the same old suspects, the memory remains painfully raw.  Worse, Afghans know that it is these very men, rearmed and ready, who will once again compete for power in 2014.

How to Vote Early in Afghanistan

President Karzai is barred by term limits from standing for reelection in 2014, but many Kabulis believe he reached a private agreement with the usual suspects at a meeting late last year. In early January, he seemed to seal the deal by announcing that, for the sake of frugality, the voter cards issued for past elections will be reused in 2014.  Far too many of those cards were issued for the 2004 election, suspiciously more than the number of eligible voters.  During the 2009 campaign, anyone could buy fistfuls of them at bargain basement prices.  So this decision seemed to kill off the last faint hope of an election in which Afghans might actually have a say about the leadership of the country.

Fewer than 35% of voters cast ballots in the last presidential contest, when Karzai’s men were caught on video stuffing ballot boxes.  (Afterward, President Obama phoned to congratulate Karzai on his “victory.”) Only dedicated or paid henchmen are likely to show up for the next “good enough for Afghans” exercise in democracy. Once again, an “election” may be just the elaborate stage set for announcing to a disillusioned public the names of those who will run the show in Kabul for the next few years.

Kabulis might live with that, as they’ve lived with Karzai all these years, but they fear power-hungry Afghan politicians could “compromise” as well with insurgent leaders like that old American favorite from the war against the Soviets, Gulbuddin Hekmatyar, who recently told a TV audience that he intends to claim his rightful place in government. Such compromises could stick the Afghan people with a shaky power-sharing deal among the most ultra-conservative, self-interested, sociopathic, and corrupt men in the country.  If that deal, in turn, were to fall apart, as most power-sharing agreements worldwide do within a year or two, the big men might well plunge the country back into a 1990s-style civil war, with no regard for the civilians caught in their path.

These worst-case scenarios are everyday Kabuli nightmares.  After all, during decades of war, the savvy citizens of the capital have learned to expect the worst from the men currently characterized in a popular local graffiti this way: “Mujahideen=Criminals. Taliban=Dumbheads.”

Ordinary Kabulis express reasonable fears for the future of the country, but impatient free-marketeering businessmen are voting with their feet right now, or laying plans to leave soon. They’ve made Kabul hum (often with foreign aid funds, which are equivalent to about 90% of the country’s economic activity), but they aren’t about to wait around for the results of election 2014.  Carpe diem has become their version of financial advice.  As a result, they are snatching what they can and packing their bags.

Millions of dollars reportedly take flight from Kabul International Airport every day: officially about $4.6 billion in 2011, or just about the size of Afghanistan’s annual budget. Hordes of businessmen and bankers (like those who, in 2004, set up the Ponzi scheme called the Kabul Bank, from which about a billion dollars went missing) are heading for cushy spots like Dubai, where they have already established residence on prime real estate.

As they take their investments elsewhere and the American effort winds down, the Afghan economy contracts ever more grimly, opportunities dwindle, and jobs disappear.  Housing prices in Kabul are falling for the first time since the start of the occupation as rich Afghans and profiteering private American contractors, who guzzled the money that Washington and the “international community” poured into the country, move on.

At the same time, a money-laundering building boom in Kabul appears to have stalled, leaving tall, half-built office blocks like so many skeletons amid the scalloped Pakistani palaces, vertical malls, and grand madrassas erected in the past four or five years by political and business insiders and well-connected conservative clerics.

Most of the Afghan tycoons seeking asylum elsewhere don’t fear for their lives, just their pocketbooks: they’re not political refugees, but free-market rats abandoning the sinking ship of state.  Joining in the exodus (but not included in the statistics) are countless illegal émigrés seeking jobs or fleeing for their lives, paying human smugglers money they can’t afford as they head for Europe by circuitous and dangerous routes.

Threatened Afghans have fled from every abrupt change of government in the last century, making them the largest population of refugees from a single country on the planet.  Once again, those who can are voting with their feet (or their pocketbooks) -- and voting early.

Afghanistan’s historic tragedy is that its violent political shifts -- from king to communists to warlords to religious fundamentalists to the Americans -- have meant the flight of the very people most capable of rebuilding the country along peaceful and prosperous lines.  And their departure only contributes to the economic and political collapse they themselves seek to avoid.  Left behind are ordinary Afghans -- the illiterate and unskilled, but also a tough core of educated, ambitious citizens, including women’s rights activists, unwilling to surrender their dream of living once again in a free and peaceful Afghanistan.

The Military Monster

These days Kabul resounds with the blasts of suicide bombers, IEDs, and sporadic gunfire.  Armed men are everywhere in anonymous uniforms that defy identification.  Any man with money can buy a squad of bodyguards, clad in classy camouflage and wraparound shades, and armed with assault weapons.  Yet Kabulis, trying to carry on normal lives in the relative safety of the capital, seem to maintain a distance from the war going on in the provinces.

Asked that crucial question -- do you think American forces should stay or go? -- the Kabulis I talked with tended to answer in a theoretical way, very unlike the visceral response one gets in the countryside, where villages are bombed and civilians killed, or in the makeshift camps for internally displaced people that now crowd the outer fringes of Kabul. (By the time U.S. Marines surged into Taliban-controlled Helmand Province in the south in 2010 to bring counterinsurgency-style protection to the residents there, tens of thousands of them had already moved to those camps in Kabul.)  Afghans in the countryside want to be rid of armed men.  All of them.  Kabulis just want to be secure, and if that means keeping some U.S. troops at Bagram Air Base near the capital, as Afghan and American officials are currently discussing, well, it’s nothing to them.

In fact, most Kabulis I spoke to think that’s what’s going to happen.  After all, American officials have been talking for years about keeping permanent bases in Afghanistan (though they avoid the term “permanent” when speaking to the American press), and American military officers now regularly appear on Afghan TV to say, “The United States will never abandon Afghanistan.”  Afghans reason: Americans would not have spent nearly 12 years fighting in this country if it were not the most strategic place on the planet and absolutely essential to their plans to “push on” Iran and China next.  Everybody knows that pushing on other countries is an American specialty.

Besides, Afghans can see with their own eyes that U.S. command centers, including multiple bases in Kabul, and Bagram Air Base, only 30 miles away, are still being expanded and upgraded.  Beyond the high walls of the American Embassy compound, they can also see the tall new apartment blocks going up for an expanding staff, even if Washington now claims that staff will be reduced in the years to come.

Why, then, would President Obama announce the drawdown of U.S. troops to perhaps a few thousand special operations forces and advisors, if Washington didn’t mean to leave?  Afghans have a theory about that, too.  It’s a ruse, many claim, to encourage all other foreign forces to depart so that the Americans can have everything to themselves.  Afghanistan, as they imagine it, is so important that the U.S., which has fought the longest war in its history there, will be satisfied with nothing less.

I was there to listen, but at times I did mention to Afghans that America’s post-9/11 wars and occupations were threatening to break the country.  “We just can’t afford this war anymore,” I said.

Afghans only laugh at that.  They’ve seen the way Americans throw money around.  They’ve seen the way American money corrupted the Afghan government, and many reminded me that American politicians like Afghan ones are bought and sold, and its elections won by money. Americans, they know, are as rich as Croesus and very friendly, though on the whole not very well mannered or honest or smart.

Operation Enduring Presence      

More than 11 years later, the tragedy of the American war in Afghanistan is simple enough: it has proven remarkably irrelevant to the lives of the Afghan people -- and to American troops as well.  Washington has long appeared to be fighting its own war in defense of a form of government and a set of long-discredited government officials that ordinary Afghans would never have chosen for themselves and have no power to replace.

In the early years of the war (2001-2005), George W. Bush’s administration was far too distracted planning and launching another war in Iraq to maintain anything but a minimal military presence in Afghanistan -- and that mainly outside the capital.  Many journalists (including me) criticized Bush for not finishing the war he started there when he had the chance, but today Kabulis look back on that soldierless period of peace and hope with a certain nostalgia.  In some quarters, the Bush years have even acquired something like the sheen of a lost Golden Age -- compared, that is, to the thoroughgoing militarization of American policy that followed.

So commanding did the U.S. military become in Kabul and Washington that, over the years, it ate the State Department, gobbled up the incompetent bureaucracy of the U.S. Agency for International Development, and established Provincial Reconstruction Teams (PRTs) in the countryside to carry out maniacal “development” projects and throw bales of cash at all the wrong “leaders.”

Of course, the military also killed a great many people, both “enemies” and civilians.  As in Vietnam, it won the battles, but lost the war.  When I asked Afghans from Mazar-e-Sharif in the north how they accounted for the relative peacefulness and stability of their area, the answer seemed self-evident: “Americans didn’t come here.”

Other consequences, all deleterious, flowed from the militarization of foreign policy.  In Afghanistan and the United States, so intimately ensnarled over all these years, the income gap between the rich and everyone else has grown exponentially, in large part because in both countries the rich have made money off war-making, while ordinary citizens have slipped into poverty for lack of jobs and basic services.

Relying on the military, the U.S. neglected the crucial elements of civil life in Afghanistan that make things bearable -- like education and health care.  Yes, I’ve heard the repeated claims that, thanks to us, millions of children are now attending school.  But for how long?   According to UNICEF, in the years 2005-2010, in the whole of Afghanistan only 18% of boys attended high school, and 6% of girls.  What kind of report card is that?  After 11 years of underfunded work on health care in a country the size of Texas, infant mortality still remains the highest in the world.

By 2014, the defense of Afghanistan will have been handed over to the woeful Afghan National Security Force, also known in military-speak as the “Enduring Presence Force.”  In that year, for Washington, the American war will be officially over, whether it’s actually at an end or not, and it will be up to Afghans to do the enduring.

Here’s where that final scenario -- collapse -- haunts the Kabuli imagination.  Economic collapse means joblessness, poverty, hunger, and a great swelling of the ranks of children cadging a living in the streets.  Already street children are said to number a million strong in Kabul, and 4 million across the country.  Only blocks from the Presidential Palace, they are there in startling numbers selling newspapers, phone cards, toilet paper, or simply begging for small change. Are they the county’s future?

And if the state collapses, too?  Afghans of a certain age remember well the last time the country was left on its own, after the Soviets departed in 1989, and the U.S. also terminated its covert aid.  The mujahideen parties -- Islamists all -- agreed to take turns ruling the country, but things soon fell apart and they took turns instead lobbing rockets into Kabul, killing tens of thousands of civilians, reducing entire districts to rubble, raiding and raping -- until the Taliban came up from the south and put a stop to everything.

Afghan civilians who remember that era hope that this time Karzai will step down as he promises, and that the usual suspects will find ways to maintain traditional power balances, however undemocratic, in something that passes for peace.  Afghan civilians are, however, betting that if a collision comes, one-third of those Afghan Security Forces trained at fabulous expense to protect them will fight for the government (whoever that may be), one-third will fight for the opposition, and one-third will simply desert and go home.  That sounds almost like a plan.

© 2013 Ann Jones

Ann Jones

Ann Jones, writer and photographer, is the author of seven previous books, including War Is Not Over When It's Over, Kabul in Winter, Women Who Kill, and Next Time She'll Be Dead. Since 2001, Jones has worked with women in conflict and post-conflict zones, principally Afghanistan, and reported on their concerns. An authority on violence against women, she has served as a gender adviser to the United Nations. Her work has appeared in numerous publications, including The New York Times and The Nation. For more information, visit her website.

FDR’s Four Freedoms: Diminished and Defiled

If asked why we live in a great country, an American is likely to respond: "Because we are free." Fortunately for the respondent, explanation is rarely required. Freedom is difficult to define, and today it seems to exist more in our minds than in rea...

Market Buzz: US ‘stats of the nation’ drive bourses

Russian investors are expected to be looking overseas, where the US stats are set to be a major newsmaker during the entire week. On Monday the world’s biggest economy will release its December durables figures.

“During the day Russian floors will be mostly focusing on an overall news environment and the way foreign investors behave,” according to Yulia Voitovich, an analyst at Investcafe.

As for the US durable report, analysts expect a 1.8% month-to-month increase of the December figure. “Excess of the actual reading above the expected could support the world stock indicators,” she added.

And given positive closure of Friday trading in the US and mostly in Asia, Russian stocks may also open higher on Monday, Voitovich said.

Domestic markets were positive on Friday. The RTS added 0.01% to 1, 618.84 and the MICEX was up 0.88% to 1,618.84.

Asian stocks are mostly up in early Monday trading, with Shanghai Composite going up 1.5%, Hang Seng rising 0.51% and just Nikkei going down 0.08%.

In Wall Street news, the most anticipated block of unemployment data is set to be released on Friday. The Labor Department releases its first monthly employment report for 2013.

Overall, unemployment is now one of the key economic issues the US authorities target. So far the unemployment rate has remained above and beyond a desirable figure. Last year it held steady at about 7.8%, while 6.5% serves is the target.

Stocks in the US ended last week on a positive note, with the Dow Jones adding 1.8%, the S&P rising 1.1% and Nasdaq going up 0.5%.

European markets finished broadly higher on Friday, where Germany leads the region. The DAX was up 1.42% while France's CAC 40 added 0.69% and London's FTSE 100 rose 0.31%.

$600 Billion In Trades In Four Years: How Apple Puts Even The Most Aggressive...

Everyone knows that for the better part of the past year Apple, Inc. ("AAPL", or "The Company") was the world's biggest company by market cap, with Exxon finally regaining that title on Friday, following AAPL's latest price drop in the aftermath of its disappointing earnings. Most know that AAPL aggressively uses all legal tax loopholes to pay as little State and Federal tax as possible, despite being one of the world's most profitable companies.

Many also know, courtesy of our exclusive from September, that Apple also is the holding company for Braeburn Capital: a firm which with a few exceptions (Bridgewater; JPM's CIO prop trading desk) also happens to be one of the world's largest hedge funds, whose function is to manage Apple's massive cash hoard, with virtually zero requirements, and whose obligation is to make sure that AAPL's cash gets laundered legally and efficiently in a way that complies with prerogative #1: avoid paying taxes.

What few if any know, is that as part of its cash management obligations, Braeburn, and AAPL by extension, has conducted a mindboggling $600 billion worth of gross notional trades in just the past four years, consisting of buying and selling assorted unknown securities, or some $250 billion in 2012 alone: a grand total which represents some $1 billion per working day on average, and which puts the net turnover of some 99% of all hedge funds to shame!

Finally, what nobody knows, except for the recipients of course, is just how much in trade commissions AAPL has paid over the past four years on these hundreds of billions in trades to the brokering banks, many (or maybe all) of which may have found this commission revenue facilitating AAPL having a "Buy" recommendation: a rating shared by 52, or 83% of the raters, despite the company's wiping out of one year in capital gains in a few short months.

The Perfectly Legal Tax Evasion Scheme

Apple's massive cash hoard is something that gets its 15 minutes of fame each and every quarter, because for now at least, it keeps growing and growing and growing. However, that is not exactly correct. In fact, the company's cash and cash equivalents at December 31, 2012 is just $16.2 billion: barely $9 billion more than it was 4 years ago, on December 31, 2008. Where the bulk of AAPL's profits are kept, however, is not in cash and equivalents, but in various undisclosed short- and long-term securities.

It is these, and particularly the latter, that have soared in a near parabolic fashion in the past 4 years. As the chart below shows, while cash and short-term marketable securities have been virtually flat for the better part of the past 16 quarters, it is the long-term marketable securities that have exploded from just $2.5 billion to a whopping $97.3 billion.

So why does AAPL funnel its profits in a fashion that redirects it to investments instead of domestically hoarded cash? Simple: to take advantage of offshore venues which allow it to avoid paying any tax on the cash that gets redirected for trading purposes. As per the company's filings, of the massive $137.1 billion in cash and investments AAPL has access to, a near record 68.7%, or $94.2 billion, is held offshore.

The chart above means that contrary to popular disinformation, AAPL "only" has ready access to some $43 billion in domestically held cash for corporate purposes such as dividends, stock buybacks and local M&A. The rest of the cash is essentially in offshore lockboxes, which are non-recourse for domestic corporate purposes, absent repatriation. And herein lies the rub. From the latst 10-Q:

As of December 29, 2012 and September 29, 2012, $94.2 billion and $82.6 billion, respectively, of the Company’s cash, cash equivalents and marketable securities were held by foreign subsidiaries and are generally based in U.S. dollar-denominated holdings. Amounts held by foreign subsidiaries are generally subject to U.S. income taxation on repatriation to the U.S.

Apply a 30% tax to the offshore holdings and suddenly one can see why broad statements that AAPL has some $130/share in cash are largely meaningless: if AAPL wishes to have full access to dispose with this cash as it saw fit, it would first have to pay Uncle Sam some $30/share in cash before it had full recourse.

So why does AAPL chose to have cash stock up offshore instead of being able to dispose of it? Simple, and logical. Taxes, or rather the lack thereof.

The chart below shows that while AAPL has generated some $136 billion in operating profits in the past four years, the amount of cash taxes it has paid, as per the company's cash flow statements, has been a grand total of $18.6 billion: a 13.6% effective tax rate. And this $18.6 billion also includes taxes paid in offshore venues, so realistically the cash taxes paid in the US are likely well under 10% of profits.

The same on a quarter by quarter basis: operating income grows, cash taxes paid stay the same:

But far form us making an ethical claim here: AAPL is merely following the same legal loopholes that are available to all, yet made a mockery of the tax shelters used by recent presidential candidates. Perhaps one should ask Congress why these laws are there in the first place to allow the same companies that spend millions on lobbying members of Congress to retain billions in unpaid taxes via various tax shelters: a rather amazing IRR, if only for the corporations involved.

None of the above is news, and AAPL's aggressive use of tax loopholes has been known for years.

What has not been known is just how the cash from the company's seemingly endless profits gets moved from the Income Statement to the Balance Sheet: profits, which until recently were assumed would grow in perpetuity, until something strange happened: Samsung became cooler and faddier than AAPL, which coupled with accelerated margin erosion at AAPL grappling with an end-consumer who has increasingly less disposable cash flow, has led to a drubbing of the stock to new 52 week lows.

A Hedge Fund On Stroids

The conventional wisdom of Apple, and by implication of Braeburn, is of a boring old shop which invests its money prudently and cautiously in ultra-safe securities.

This is what AAPL itself has to say about its allocation of capital. From the just released 10-Q:

The Company’s marketable securities investment portfolio is invested primarily in highly-rated securities and its investment policy generally limits the amount of credit exposure to any one issuer. The policy requires investments generally to be investment grade with the objective of minimizing the potential risk of principal loss.

Good but... "primarily" and "generally"? One doesn't have to be an MF Global and JPM London Whale fallout expert to know that Jon Corzine's or Jamie Dimon's (or any other prop trading institution for that matter), was "primarily and "generally" supposed to be invested in highly-rated securities whose objective was avoiding risk and loss. Until it was uncovered they aren't. And as we explained previously, when we dissected AAPL's arm's length asset manager Braeburn, there is little more out there:

Braeburn has no reporting obligations: there is no Investment Advisor Public Disclosure (IAPD) entry on Braeburn for the logical reason that it is not an investment advisor: it merely manages an ungodly amount of cash for AAPL's millions of shareholders. There is also no SEC filing 13-F filing on Braeburn's holdings. As such, not confined by the limitations of being a "long-only", it is in its full right to hold any assets it feels like, up to and including CDS on housing, puts on Samsung, or Constant Maturity Swaps that pay if the 10 Year collapses. It just doesn't have to report any of them.

Nobody knows: and that's the beauty of Braeburn. It is the world's largest hedge fund that is not really a hedge fund, nobody has heard of, and nobody knows just what assets it holds.

Indeed nobody does know just what goes on behind the door of Suite 225 at 730 Sandhill Road in Reno, Nevada where Braeburn in situated. However, one can extrapolate some rather curious things.

Such as that starting December 2008, and through December 2012, according to its own filings, AAPL has bought and sold a grand total of $600 billion in "marketable securities", of which the sales alone amount to a whopping 205 billion!

What is not shown above is that over the same period, maturities on AAPL's ever-growing portfolio amount to some $82 billion. In other words, between maturities and sales, AAPL has generated nearly $300 billion in cash for investment and reinvestment purposes.

Shortening the time frame somewhat, just in 2012 AAPL's gross trading on its securities holdings amounts to a whopping $250 billion, or nearly $1 billion for every working day of the year: an amount that would put the turnover of some 99% of the most active daytrading hedge funds in the US to shame!

What is very curious is that even as AAPL's overall portfolio rose and rose, with purchases "primarily" of supposedly safe investment grade securities, an amount which has peaked at $121 billion as of December 31, 2012, the actual quarterly maturity of AAPL's portfolio, or the natural roll off, has decline to a near record low, or just 2.9% of total. How it is possible that the quarterly maturing notional continues to decline even as the portfolio, of both short- and long-term securities grows, is frankly, beyond our meager comprehension skills.

What is even more curious is that AAPL can't even make the excuse that it is merely churning its short-term marketable securitie. As the chart below shows, beginning in March 2011, the total amount of sales and maturities exceeds the quarterly total holdings of short-term securities, which naturally implies that a substantial portion of the long-term securities is also being sold.

So why would AAPL engage in what increasingly appears to be not only active portfolio management, but extremely aggressive and overzealous portfolio management, one which includes massive trades - buys but more importlanly sales - on a day to day basis?

Said otherwise: why is the world's premier maker of gizmos also one of the biggest under-the-radar day traders of unknown securities nobody has ever heard of?

* * *

We don't know the answer to these questions. We do know however, that if one is indeed engaged in plain vanilla money management, such as investing in ultra safe investments, there would be no need of such aggressive purchases and dispositions of securities.

In fact, adding the simple average of the short- and long-term marketable securities holdings of AAPL over the past 4 years amounts to some $59 billion. Yet, as noted above, the total amount of gross trades -buys and sales - over the same period is $600 billion, or a total portfolio turnover of some ten mindboggling times!

This is hardly what one would call boring investing in safe securities, and certainly something one would call aggressive to quite aggressive money management, one that not even some of the world's most successful hedge fund managers are equipped or willing to do.

Yet Braeburn Capital, a/k/a AAPL, has been doing it for the past 4 years, and does so to the tune of $1 billion per day.

* * *

Finally, there is the minor question of who exactly is it that executes these trades, or, in other words, which are the banks that have pocketed billions in commissions on AAPL's furiously traded portfolio?

We don't know, but we wonder: could it be the same banks that come rain or shine, gave AAPL a Buy rating, one which is still held by some 52 of the 63 banks covering the company, among which naturally are the most prominent brokers of "investment grade" securities:

Perhaps it would be very informative one day, years after the AAPL craze is long gone, to inquire just how much money AAPL paid out to any/all of the banks listed above in the form of trade commissions and other forms of "soft dollar" compensation. After all, any client which has conducted some $600 billion in trades in the past 16 quarters is known by one word at every single bank: "dream."

And parallel to that, one wonders what AAPL's total profits would have been and thus total marketable securities holdings, how much less the total trading churn and commissions to the sell side would have been had the downgrade battery started long ago, and thus broken the hypnotic and very much reflexive relationship between the world's most profitable company and its "coolness" factor, which in a feedback loop made it sell more products, making its market cap bigger, making its securities holdings larger, and making sellside profits greater, and so on ad inf... until one day it all snapped.

* * *
The point of the above analysis is not to take away from the operational side of the business: the fact that AAPL created and dominated the smartphone and tablet sector for years is undisputable. Yet now that many challengers are emerging, both new and old, both premium and commoditized, more and more attention is shifting to AAPL's balance sheet, and the main asset thereon: the company's cash and marketable securities.

The point of the above analysis is to show that when it comes to said cash and marketable securities there is much more than meet the superficial eye, and certainly much, much more than just a summary assessment that "AAPL has nearly $140 billion in cash so it has to hand this cash out to investors."

If there is one thing that the above should have made quite clear, it is that just as the AAPL product ecosystem is supposed to ensnare customers into always and only buying AAPL products, so the AAPL's portfolio management "ecosystem" may have made it impossible for AAPL to break away from what is now 4 years of uber-aggressive asset management in the vein of some of the world's most aggressive investors.

And that any hopes for a quick and easy disposal of cash to the benefit of shareholders may well not be coming any time soon.

* * *

Finally, a tangent: if indeed AAPL is invested in plain vanilla fixed income securities, as it reports, amounting to well over $120 billion which have a DV01 in the tens if not hundreds of millions, and if indeed, the great rotation from bonds into stocks has begun, AAPL, which many have jokingly called Fed-lite will suddenly develop a very, very big headache: how to dump over a hundred billion in debt in a market that suddenly has gone if not bidless, the bidweak.

Because while the Fed can print its own liquidity, AAPL, well, can't...

Source: AAPL public filings

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This Time Is Different

Authored by Dr. Tim Morgan, Tullet Prebon,

The 2008 crash resulted from the bursting of the biggest bubble in financial history, a ‘credit super-cycle’ that spanned more than three decades. How did this happen?

As Carmen Reinhart and Kenneth Rogoff have demonstrated in their magisterial book This Time Is Different, asset bubbles are almost as old as money itself. The Reinhart and Rogoff book tracks financial excess over eight centuries, but it would be no surprise at all if the Hittites, the Medes, the Persians and the Romans, too, had bubbles of their own. All you need for a bubble is ready credit and collective gullibility.

Some might draw comfort from the observation that bubbles are a long established aberration, arguing that the boom-and-bust cycle of recent years is nothing abnormal. Any such comfort would be misplaced, for two main reasons: first, the excesses of recent years have reached a scale which exceeds anything that has been experienced before; and second, and more disturbing still, the developments which led to the financial crisis of 2008 amounted to a process of sequential bubbles, a process in which the bursting of each bubble was followed by the immediate creation of another.

Though the sequential nature of the pre-2008 process marks this as something that really is different, we can, nevertheless, learn important lessons from the bubbles of the past.

  • First, bubbles follow an approximately symmetrical track, in which the spike in asset values is followed by a collapse of roughly similar scale and duration. If this holds true now, we are in for a very long and nasty period of retreat.
  • Second, easy access to leverage is critical, as bubbles cannot happen if investors are limited to equity.
  • Third, most bubbles look idiotic when seen with hindsight.
  • Fourth – and although institutional arrangements are critical – the real driving dynamic of bubbles is a psychological process which combines greed, the willing suspension of disbelief and the development of a herd mentality.

“tulips from Amsterdam”

One of the most famous historical bubbles is the tulip mania which gripped the United Provinces (the Netherlands) during the winter of 1636-37. Tulip bulbs had been introduced to Europe from the Ottoman Empire by Obier de Busbeq in 1554, and found particular favour in the United Provinces after 1593, when Carolus Closius proved that these exotic plants could thrive in the harsher Dutch climate.

The tulip was a plant whose beauty and novelty had a particular appeal, but tulip mania would not have occurred without favourable social and economic conditions. The Dutch had been engaged in a long war for independence from Spain since 1568 and, though final victory was still some years away, the original Republic of the Seven Provinces of the Netherlands declared independence from Spain in 1581. This was the beginning of the great Dutch Golden Age. In this remarkable period, the Netherlands underwent some fundamental and pioneering changes which included the establishment of trading dominance, great progress in science and invention, and the creation of corporate finance, as well as the accumulation of vast wealth, the accession of the Netherlands to global power status, and great expansion of industry.

This was a period in which huge economic, business, scientific, trading and naval progress was partnered by remarkable achievements in art (Rembrandt and Vermeer), architecture and literature. The prosperity of this period created a wealthy bourgeoisie which displayed its affluence in grand houses with exquisite gardens. Enter the tulip.

For the newly-emergent Dutch bourgeoisie, the tulip was the “must have” consumer symbol of the 1630s, particularly since selective breeding had produced some remarkably exotic new plants. Tulips cannot be grown overnight, but take between seven and twelve years to reach maturity. Moreover, tulips bloom for barely a week during the spring, meaning that bulbs can be uprooted and sold during the autumn and winter months. A thriving market in bulbs developed in the Netherlands even though short-selling was outlawed in 1610. Speculators seem to have entered the tulip market in 1634, setting the scene for tulip mania.

The tulip bubble did not revolve around a physical trade in bulbs but, rather, involved a paper market in which people could participate with no margin at all. Indeed, the tulip bubble followed immediately upon the heels of the creation by the Dutch of the first futures market. Bulbs could change hands as often as ten times each day but, because of the abrupt collapse of the paper market, no physical deliveries were ever made.

Price escalation was remarkable, with single bulbs reaching values that exceeded the price of a large house. A Viceroy bulb was sold for 2,500 florins at a time when a skilled worker might earn 150 florins a year. Putting these absurd values into modern terms is almost impossible because of scant data, but the comparison with skilled earnings suggests values of around £500,0003, which also makes some sense in relation to property prices. In any event, a bubble which began in mid-November 1636 was over by the end of February 1637.

Though tulip mania was extremely brief, and available data is very limited, we can learn some pertinent lessons from this strange event.

For a start, this bubble looks idiotic from any rational perspective – how on earth could a humble bulb become as valuable as a mansion, or equivalent to 17 years of skilled wages? Second, trading in these ludicrously overvalued items took place in then novel forms (such as futures), and were conducted on unregulated fringe markets rather than in the recognised exchanges.

Third, participants in the mania lost the use of their critical faculties. Many people – not just speculators and the wealthy, but individuals as diverse as farmers, mechanics, shopkeepers, maidservants and chimney-sweeps – saw bulb investment as a one-way street to overnight prosperity. Huge paper fortunes were made by people whose euphoria turned to despair as they were wiped out financially.

The story that a sailor ate a hugely valuable bulb, which he mistook for an onion, is probably apocryphal (because it would have poisoned him), but there can be little doubt that this was a period of a bizarre mass psychology verging on collective insanity.

all at sea

The South Sea Bubble of 1720 commands a special place in the litany of lunacy that is the history of bubbles.

The South Sea Company was established in 1711 as a joint government and private entity created to manage the national debt. Britain’s involvement in the War of the Spanish Succession was imposing heavy costs on the exchequer, and the Bank of England’s attempt to finance this through two successive lotteries had not been a success. The government therefore asked an unlicensed bank, the Hollow Sword Blade Company, to organise what became the first successful national lottery to be floated in Britain. The twist to this lottery was that prizes were paid out as annuities, thus leaving the bulk of the capital in government hands.

After this, government set up the South Sea Company, which took over £9m of national debt and issued shares to the same amount, receiving an annual payment from government equivalent to 6% of the outstanding debt (£540,000) plus operating costs of £28,000. As an added incentive, government granted the company a monopoly of trade with South America, a monopoly which would be without value unless Britain could break the Spanish hegemony in the Americas, an event which, at that time, was wildly implausible.

The potentially-huge profits from this monopoly grabbed speculator attention even though the real likelihood of any returns ever actually accruing was extremely remote. Despite very limited concessions secured in 1713 at the end of the war, the trading monopoly remained all but worthless, and company shares remained below their issue price, a situation not helped by the resumption of war with Spain in 1718.

Even so, shares in the company, effectively backed by the national debt, began to rise in price, a process characterised by insider dealing and boosted by the spreading of rumours.

Between January and May 1720, the share price rose from £128 to £550 as rumours of lucrative returns from the monopoly spread amongst speculators. What, many argued, could be better than a government-backed company with enormous leverage to monopolistic profits in the fabled Americas? Legislation, passed under the auspices of Company insiders and banning the creation of unlicensed joint stock enterprises, spurred the share price to a peak of £890 in early June. This was bolstered by Company directors, who bought stock at inflated prices to protect the value of investments acquired at much lower levels. The share price peaked at £1,000 in August 1720, but the shares then lost 85% of their inflated market value in a matter of weeks.

Like the Dutch tulip mania, the South Sea Bubble was an example which fused greed and crowd psychology with novel market practices, albeit compounded by rampant corruption in high places. Even Sir Isaac Newton, presumably a man of common sense, lost £20,000 (equivalent to perhaps £2.5m today) in the pursuit of the chimera of vast, but nebulous, unearned riches.

Any rational observer, even if unaware of the insider dealing and other forms of corruption in which the shares were mired, should surely have realised that an eight-fold escalation in the stock price based entirely on implausible speculation was, quite literally, ‘too good to be true’.

In his Extraordinary Popular Delusions and the Madness of Crowds, Charles Mackay ranked the South Sea Company and other bubbles with alchemy, witch-hunts and fortune-telling as instances of collective insanity. Whilst other such foibles have tended to retreat in the face of science, financial credulity remains alive and well, which means that we need to know how and why these instances of collective insanity seem to be hard-wired into human financial behaviour.

made in Japan

In some respects, the Japanese asset bubble of the 1980s provided a ‘dry run’ for the compounded bubbles of the super-cycle. Japan’s post-war economic miracle was founded on comparatively straightforward policies. Saving was encouraged, and was channelled into domestic rather than foreign capital markets, which meant that investment capital was available very cheaply indeed. Exports were encouraged, imports were deterred by tariff barriers, and consumption at home was discouraged. The economic transformation of Japan in the four decades after 1945 was thus export-driven, and led by firms which had access to abundant, low-cost capital.

By the early 1980s, Japan’s economic success was beginning to lead to unrealistic expectations about future prosperity. Many commentators, abroad as well as at home, used the ‘fool’s guideline’ of extrapolation to contend that Japan would, in the foreseeable future, oust America as the world’s biggest economy. The international expansion of Japanese banks and securities houses was reflected in the proliferation of sushi bars in New York and London. Boosted by the diversion of still-cheap capital from industry into real estate, property values in Japan soared, peaking at $215,000 per square metre in the prized Ginza district of Tokyo.

Comforted by inflated property values, banks made loans which the borrowers were in no position to repay. The theoretical value of the grounds of the Imperial Palace came to exceed the paper value of the entire state of California. Meanwhile, a soaring yen was pricing Japanese exports out of world markets.

Though comparatively gradual – mirroring, in true bubble fashion, the relatively slow build-up of asset values – the bursting of the bubble was devastating. Properties lost more than 90% of their peak values, and the government’s policy of propping up insolvent banks and corporations created “zombie companies” of the type that exist today in many countries. Having peaked at almost 39,000 at the end of 1989, the Nikkei 225 index of leading industrial stocks deteriorated relentlessly, bottoming at 7,055 in March 2009.

The Japanese economy was plunged into the “lost decade” which, in reality, could now be called the ‘lost two decades’. In 2011, Japanese government debt stood at 208% of GDP, a number regarded as sustainable only because of the country’s historic high savings ratio (though this ratio is, in fact, subject to ongoing deterioration as the population ages).

2008 – the biggest bust

With hindsight, we now know that the Japanese asset bust was an early manifestation of the ‘credit supercycle’, which can be regarded as ‘the biggest bubble in history’. The general outlines of the super-cycle bubble are reasonably well understood, even if the underlying dynamic is not. To understand this enormous boom-bust event, we need to distinguish between the tangible components of the bubble and its underlying psychological and cultural dimensions.

Conventional analysis argues that tangible problems began with the proliferation of subprime lending in the United States. Perhaps the single biggest contributory factor to the subprime fiasco was the breaking of the link between borrower and lender. Whereas, traditionally, banks assessed the viability of the borrower in terms of long-term repayment, the creation of bundled MBSs (mortgage-backed securities) severed this link.

Astute operators could now strip risk from return, pocketing high returns whilst unloading the associated high risk. The securitisation of mortgages was a major innovative failing in the system, as was the reliance mistakenly placed on credit-rating agencies which, of course, were paid by the issuers of the bundled securities. Another contributory innovation was the use of ARM (adjustable rate mortgage) products, designed to keep the borrower solvent just long enough for the originators of the mortgages to divest the packaged loans.

The authorities (and, in particular, the Federal Reserve) must bear a big share of culpability for failing to spot the mispricing of risk which resulted from the on-sale of mortgage debt. The way in which banks were keeping the true scale of potential liabilities off their balance sheets completely eluded regulators, and Alan Greenspan’s belief that banks would always act in the best interests of shareholders was breathtakingly naive. In America, as for that matter in Britain and elsewhere, central banks’ monetary policies were concentrated on retail inflation (which had for some years been depressed both by benign commodity markets and by the influx of ever-cheaper goods from Asia), and ignored asset price escalation.

Meanwhile, banks’ capital ratios had expanded, in part because of ever-looser definitions of capital and assets and in part because of sheer regulatory negligence. Just as Greenspan’s Fed believed that bankers were the best people to determine their shareholders’ interests, British chancellor Gordon Brown took pride in a “light touch” regulatory system which saw British banks’ total risk assets surge to more than £3,900bn on the back of just £120bn of pure loss-absorbing capital or TCE (tangible common equity).

It does not seem to have occurred to anyone – least of all to the American, British and other regulatory authorities – that a genuine capital reserve of less than 2% of assets could be overwhelmed by even a relatively modest correction in asset prices.

Both sides of the reserves ratio equation were distorted by regulatory negligence. On the assets side, banks were allowed to risk-weight their assets, which turned out to be a disastrous mistake. Triple-A rated government bonds were, not unnaturally, regarded as AFS (‘available for sale’) and accorded a zero-risk rating, but so, too, in practice, were the AAA portions that banks, with the assistance of the rating agencies, managed to slice out of MBSs (mortgage-backed securities) and CDOs (collateralised debt obligations).

Mortgages of all types were allowed to be risk-weighted downwards to 50% of their book value which, at best, reflected a nostalgic, pre-subprime understanding of mortgage risk on the part of the regulators. In the US, banks were allowed to net-off their derivatives exposures, such that J.P. Morgan Chase, for example, carried derivatives of $80bn on its balance sheet even though the gross value of securities and derivatives was close to $1.5 trillion. The widespread assumption that potential losses on debt instruments were covered by insurance overlooked the fact that all such insurances were placed with a small group of insurers (most notably AIG) which were not remotely capable of bearing system-wide risk.

Meanwhile, innovative definitions allowed banks’ reported capital to expand from genuine TCE to include book gains on equities, and provisions for deferred tax and impairment. Even some forms of loan capital were allowed to be included in banks’ reported equity.

Together, the risk-weighting of assets, and the use of ever-looser definitions of capital, combined to produce seemingly-reassuring reserves ratios which turned out to be wildly misleading. Lehman Brothers, for example, reported a capital adequacy ratio of 16.1% shortly before it collapsed, whilst the reported pre-crash ratios for Northern Rock and Kaupthing were 17.5% and 11.2% respectively.

Well before 2007, the escalation in the scale of indebtedness had rendered a crash inevitable. Moreover, the two triggers that would bring the edifice crashing down could hardly have been more obvious. First, the resetting of ARM mortgage interest rates made huge subprime default losses inevitable unless property prices rose indefinitely, which was a logical impossibility. Subprime defaults would in turn undermine the asset bases of banks holding the toxic assets that the sliced-and-diced mortgage-based instruments were bound to become as soon as property price escalation ceased.

The second obvious trigger was a seizure in liquidity. The escalation in the scale of debt had far exceeded domestic depositor funds, not least because savings ratios had plunged as borrowing and consumption had displaced saving and prudence in the Western public psyche. Unlike depositors – a stable source of funding, in the absence of bank runs – the wholesale funding markets which had provided the bulk of escalating leverage were perfectly capable of seizing up virtually overnight. For this reason, a liquidity seizure crystallised what was essentially a leverage problem.

At this point, three compounding problems kicked in.

  • The first was the termination of a long-standing ‘monetary ratchet’ process – low rates created bubbles, and the authorities countered each ensuing downturn by cutting rates still further, but, this time around, prior rate reductions left little scope for further relaxation.
  • Second, economies had become dependent upon debt-fuelled consumption, and any reversal in debt availability was bound to unwind the earlier (and largely illusory) ‘growth’ created by debt-fuelled consumer spending. As figs. 2.2 and 2.3 show, the relationship between borrowing and associated growth had been worsening for some years, such that the $4.1 trillion expansion in nominal US economic output between 2001 and 2007 had been far exceeded by an increase of $6.7 trillion in consumer debt, and the growth/borrowing equation had slumped.
  • Third, some countries – most notably the United Kingdom – had compounded consumer debt dependency by mistaking illusory (debt-fuelled) economic expansion for ‘real’ growth, and had expanded public spending accordingly, a process which created huge fiscal deficits as soon as leverage expansion ceased. Ultimately, the leverage-driven ‘great bubble’ in pan-Western property values had created the conditions for a deleveraging downturn, something for which governments’ previous experience of destocking recessions had provided no realistic appreciation.

familiar features

Though, as we shall see, the bursting of the super-cycle in 2008 had some novel aspects, the process nevertheless embraced many features of past bubbles.

A number of points are common to these past bubbles, factors which include easy credit, low borrowing costs, financial innovation (in the form of activities which take place outside established markets, and/or are unregulated, and/or are outright illegal), weak institutional structures, opportunism by some market participants, and the emergence of some form of mass psychology in which fear is wholly ousted by greed.

Often, the objects of speculation are items which can seem wholly irrational with the benefit of hindsight (how on earth could tulip bulbs, for instance, have become so absurdly over-valued?) A further important point about bubbles is that they can inflate apparent prosperity, but the post-burst effects include the destruction of value and the impairment of economic output for an extended period. In reality, though, the bursting of a bubble does not destroy capital, but simply exposes the extent to which value has already been destroyed by rash investment.

Of course, the characteristics of earlier excesses have not been absent in contemporary events. As with tulip bulbs, South Sea stock and Victorian railways, recent years have witnessed the operation of mass psychologies in which rational judgement has been suspended as greed has triumphed over fear. Innovative practices, often lying outside established markets, have abounded. Examples of such innovations have included subprime and adjustable-rate mortgages, and the proliferation of an ‘alphabet soup’ of the derivatives that Warren Buffett famously described as “financial weapons of mass destruction”. Credit became available in excessive amounts, and the price of credit was far too low (a factor which, we believe, may have been exacerbated by a widespread under-reporting of inflation).

why this time is different

Whilst it shared many of the characteristics of previous such events, the credit super-cycle bubble which burst in 2008 differed from them in at least two respects, and arguably differed in a third dimension as well.

The first big difference was that the scale and scope of the 2008 crash far exceeded anything that had gone before. Though it began in America (with parallel events taking place in a number of other Western countries), globalisation ensured that the crash was transmitted around the world. The total losses resulting from the crash are almost impossible to estimate, not least because of notional losses created by falling asset prices, but even a minimal estimate of $4 trillion equates to about 5.7% of global GDP, with every possibility that eventual losses will turn out to have been far greater than this.

The second big difference between the super-cycle and previous bubbles lay in timing. A gap of more than 80 years elapsed between the tulip mania of 1636-37 and the South Sea bubble of 1720, though the latter had an overseas corollary in the Mississippi bubble of the same year. The next major bubble, the British railway mania of the 1840s, followed an even longer time-gap, and a further interval of about seven decades separated the dethroning of the crooked “railway king” (George Hudson) in 1846 from the onset of the ‘roaring twenties’ bubble which culminated in the Wall Street Crash. Though smaller bubbles (such as Poseidon) occurred in between, the next really big bubble did not occur until the 1980s, when Japanese asset values lost contact with reality.

In recent years, however, intervals between bubbles have virtually disappeared, such that the decade prior to the 2008 crash was characterised by a series of events which overlapped in time. Property price bubbles were the greatest single cause of the financial crisis, but there were complementary bubbles in a variety of other asset categories.

The dot-com bubble (1995-2000) reflected a willing suspension of critical faculties where the potential for supposedly ‘high tech’ equities were concerned, and historians of the future are likely to marvel at the idiocy which attached huge values to companies which lacked earnings, cash flow or a proven track record, and were often measured by the bizarre metric of “cash-burn”. Other bubbles occurred in property markets in the United States, Britain, Ireland, Spain, China, Romania and other countries, as well as in commodities such as uranium and rhodium. Economy-wide bubbles developed in countries such as Iceland, Ireland and Dubai. Perhaps the most significant bubble of the lot – for reasons which will become apparent later – was that which carried the price of oil from an average of $25/b in 2002 to a peak of almost $150/b in 2008.

This rash of bubbles suggests that recent years have witnessed the emergence of a distinctive new trend, which is described here as a credit super-cycle, a mechanism which compounds individual bubbles into a broader pattern.

This report argues that a third big difference may be that the super-cycle bubble coincided with a weakening in the fundamental growth dynamic. What we need to establish is the ‘underlying narrative’ that has compressed the well-spaced bubble-forming processes of the past into the single, compounded-bubble dynamic of the credit super-cycle.

It is suggested here that this narrative must include:

  • A mass psychological change which has elevated the importance of immediate consumption whilst weakening perceptions both of risks and of longer-term consequences.
  • Institutional weaknesses which have undermined regulatory oversight whilst simultaneously facilitating the provision of excessive credit through the creation of high-risk instruments.
  • Mispricing of risk, compounded by false appreciation of economic prospects and by the distortion of essential data.
  • A political, business and consumer mind-set which elevates the importance of the immediate whilst under-emphasising the longer term.
  • A distortion of the capitalist model which has created a widening chasm between ‘capitalism in principle’ and ‘capitalism in practice’.

Before we can put the credit super-cycle into its proper context, however, we need to appreciate three critical issues, each of which is grossly misunderstood.

  1. The first of these is the vast folly of globalisation. This has impoverished and weakened the West whilst ensuring that few countries are immune from the consequences of the unwinding of a world economy which has become a hostage to future growth assumptions at precisely the same time that the scope for generating real growth is deteriorating.
  2. The second critical issue is the undermining of official economic and fiscal data, a process which has disguised many of the most alarming features of the super-cycle.
  3. Third, there has been a fundamental misunderstanding of the dynamic which really drives the economy. Often regarded as a monetary construct, the economy is, in the final analysis, an energy system, and the critical supply of surplus energy has been in seemingly-inexorable decline for at least three decades.

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IceCap Asset Management: “The Queen”

From IceCap Asset Management, January 2013

The Queen

She adores hats. She is always very polite and respectful of others. She waves to everyone, and consistently avoids conflict. She is a lady; she is The Queen.

Without a doubt, Queen Elizabeth lives a life quite unlike everyone else in the World – after all, royalty does have its privileges. Yet, when it comes to investing, the Queen is swimming in the same pool of stock market sharks as us common people.

Like everyone else, she pours through her quarterly statements to see how she’s fared. And like everyone else, she loves to make money and simply deplores negative returns.

It was rumored that the 2008 crisis hit her particularly hard – over USD 40 million in stock market losses. This experience must have jilted something, as when The Queen was visiting the esteemed London School of Economics she asked the professor a rather “un-queen” like question – why did economists fail to predict the biggest global recession since the Great Depression?

Speaking on behalf of economists, investment managers and mutual fund sales people everywhere, the professor responded that “at every stage, someone was relying on somebody else and everyone thought they were doing the right thing.“ In short, no one could have predicted the 2008 crash.

Meanwhile, in the parallel universe called America, Ben Bernanke was selling everyone the exact same story.

February 15, 2006. “Our expectation is that the decline in activity or the slowing in activity will be moderate; that house prices will probably continue to rise but not at the same pace that they had been rising.”

– America housing prices would eventually decline by up to 50%.

March 28, 2007. “At this juncture, however,” he testified, “the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.”

- The subprime housing market wasn’t contained, in fact it collapsed. January 10, 2008. “The Federal Reserve is not currently forecasting a recession,” - The 2008-09 recession was so severe, it was called the Great Recession.

If the famed London School of Economics and the Chairman and full committee of the US Federal Reserve were unable to predict the crisis, what hope does the World have with predicting future crisis's?

In actual truth, and despite claims by the US Federal Reserve and the London School of Economics, many people accurately predicted the collapse of the US housing market and the subsequent collapse of the stock market.

In fact, using the exact same data points as the US Federal Reserve, these brave people concluded that nothing good would come out of the misguided policies at the time and actually put their money where their mouth was.

One such famed investor was Michael Burry of Scion Capital. Featured by author Michael Lewis in his book “The Big Short,” Mr. Burry spoke how despite being 100% correct about the market crash and making millions in profits for his clients – they actually despised him.

Now, we’ve never met Mr. Burry, but he seems like a nice enough fella. His educational achievements are certainly top notch, and his penchant for removing subjectiveness from his analysis should be the goal for every investment manager. Yet, just as Shakespeare burdened his protagonists as tragic heroes, so too had Mr. Burry’s clients.

His crime: he wasn’t an optimist. This lack of bullish thinking certainly had no place in the investment World. After all, from 1982 to 1999 the stock market always increased by double-digits. Yes, stock markets did experience a mild case of an upset stomach from 2000 to 2002, but this was merely an exception.

Bullish thinking was so prevalent during that time that the once-mighty Merrill Lynch splashed the airwaves with their ever un-prescient “be bullish” mantra every chance they could.

Today of course, the mighty Merrill Lynch is no longer mighty – yet the inherent bullish bias still lives in the investment industry.

Big banks are once again hypnotizing their clients to buy the dip, while universities continue to shape their student’s heads to nicely fit the round holes offered by the industry at graduation time.

Fortunately, it doesn’t have to be that way. Accepting, understanding, and embracing the fact that today there are plenty of investment professionals who are willing to view the World objectively should be comforting.

At the same time, those dark days of 2008 seem like a lifetime ago. Perhaps it was a bad dream. Perhaps it never did happen. And perhaps the fuss about Europe’s debt, Britain’s triple dip recession, America’s debt ceiling and Japan’s 20 year recession is just that – a fuss.

Most investors today do not realize that many investment firms are simply not structured to:

a) anticipate a significant market decline, and

b) position client portfolios in anticipation of a significant stock market decline.

One would think that both options would be an integral component of any investment management process – yet it isn’t. Instead, most firms are built to do two entirely different things:

a) gather new assets ie. new clients

b) remain invested at all times ie. never anticipate anything

There are many things you are not told about the investment business. For starters, it is a billion dollar fee bonanza – it is well known that stock brokers and advisors routinely pay more attention to their compensation grid and trailer fees than client performance.

Next, there are many untruths bouncing around – all with the sole objective to sell you more investments. One such untruth, is that if you miss the 10 best days of the year, your return will be significantly less – therefore do not try to time the market and stay invested at all times.

Well, the corollary is also true – if you miss out on the worst 10 days of the year, you’ll be considerably better off as well. When was the last time your advisor mentioned this?

Our favourite axiom is that according to the nice fellas at Ibbotson Research, since 1926, the long-term stock market return is about 10%. Therefore stay invested long-term and the bounces will flatten out – enjoy the ride.

What the Ibbotson folks didn’t mention, was that if their little calculation started a few years earlier or later – the average return is reduced to about 7%.

At first glance, the relative difference between 7% and 10% may not appear to be that significant. However, to see the real difference, just ask your financial planner to show you the hypothetical growth of your investments with these two different returns. The difference is significant.

How can such a difference in long-term return expectations exist? We’re still viewing 80-100 years of stock market returns which is easily long enough to meet anyone’s definition of long-term. Yet the difference is startling and the difference likely hasn’t been explained in your quarterly mutual fund statement.

The answer? It just so happens that the key driver of stock market returns is the PE ratio. Yes, IceCap has droned on about stock market returns and PE ratios before. The reason we mention it again is due to the message falling on deaf ears. This is important stuff here. Investment professionals, media and the investing public all want to desperately believe that all you need for stocks to rise is earnings growth. We tell you that is simply not true.

Dividends, interest rates and inflation combined are way more important than precious earnings growth. In general, a rising stock market has declining dividend yields, declining interest rates, and a steady improvement in inflation.

Today, dividend yields can’t go much lower, interest rates can’t go any lower, and inflation is in a nirvana-like state. All of these factors directly influence the oft-misunderstood PE ratio. Ignoring the mathematical computations, all one needs to know is that when the PE ratio is increasing – stocks are sure to follow. And, as one would expect, the opposite is true as well.

* * *

More in the full report (pdf):

Ice Cap The Queen by zerohedge

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Pension Panic Fueled by Anti-Worker Politics?

It’s a common refrain in local papers: State faces pension funding crisis! Retiree benefits out of control! Public pensions bog down taxpayers! Pension costs seem to loom over so many state and local budget battles like a sinister sword of Damocles, a dark reminder of Big Government’s tyrannical profligacy.New Jersey Gov. Chris Christie led the conservative charge to wiggle out of pension promises. (Bob Jagendorf/Flickr/Creative Commons)

Should we panic? Well, according to a new report by the Pew Center on the States, 61 cities face a collective fiscal retirement burden of more than $210 billion, in part because consistent underfunding of benefits leaves yawning gaps in long-term cost projections. The report surveyed all U.S. cities with populations over 500,000, along with the most populous city in each state. Some cities are doing better than others in maintaining funds, but gaps persist, according to Pew’s estimates for fiscal years 2007-2010, especially in municipalities where local governments have lacked the “fiscal discipline” to keep up pension fund contributionsa situation exacerbated by the Great Recession.

But different political actors have different motives for expressing alarm over pension gaps. In some cases, dubiously calculated figures have inflated public concern. 

Sometimes, politicians frame cost-cutting proposals as if “generous” benefits themselves are the problem, as opposed to officials failing to uphold the commitments they've made to civil servants.

In New Jersey, brazenly conservative Governor Chris Christie has pushed through short-term austerity measures that ostensibly shore up pensions by shifting costs onto beneficiaries, increasing employee contributions and freezing vital cost-of-living adjustments. But the long-term liabilities remained unresolved. Shortly after Christie trumpeted his pension fix, the New Jersey Star Ledger noted that liabilities would spike again after the stopgap measures petered out, warning, “because the state won’t be making full pension payments, the gap will swell again to $58 billion by 2019, according to the state’s estimates.”

While such fixes may be temporary, they threaten to bring lasting pain for labor. After lawmakers approved benefit reform legislation in 2011, the Communications Workers of America blasted the plan as “anti-worker and anti-union” because it not only attacked benefits, but contained provisions that eroded unions' collective bargaining rights, potentially undermining their leverage in future contract talks.

Proposals by far-right groups such as Americans for Tax Reform, however, make Christie's scheme look modest. Some pension alarmists have put a nuclear option on the table. Delicately ignoring the global chaos unleashed by financial markets in recent years, conservative groups have seized precisely this moment of crisis to push for more dependence on the “free market” as a fix for troubled public benefits systems.

In Louisiana, pension troubles have prompted Governor Bobby Jindal to move toward dismantling altogether defined-benefit pensions (which provide stable long-term income in retirement) in favor of a more unstable, market-oriented system of 401(k)-type benefits. According to one actuarial analysis by the Louisiana State Employees Retirement System, this reform could backfire on both public workers and the state, because eligibility restrictions would make the plan fail to meet a “Social Security equivalency test.” Since the current system of benefits effectively serves as a replacement for Social Security, a new scheme that falls short of that could ultimately heap extra costs on the state.

Other states, including California, along with some cities, have explored or implemented 401(k)-style restructuring schemes to replace traditional pensions.

The Pew report does not explicitly endorse 401(k)-type plans as a blanket solution but flags it as one potential reform idea. At the same time, Pew researchers point out that healthcare costs, not pensions, could pose an even larger fiscal burden. That healthcare funding “cliff” raises a broader debate about the role of the state and employers (which are one and the same in the case of civil servants) in providing for workers’ and retirees’ health.

The bottom line is that pension reform can be a political Trojan horse. The reaction to pension crunches reflects political priorities that are often hostile to workers. Across the country, governments have opted to protect their financial commitments to bondholders on at the expense of their commitments to future retirees and unions, who have seen benefits frozen or sharply cut.

More reasonable analyses by progressive economists show that public-sector benefits tend to offset relatively low wages, so the overall compensation package is fair and by no means lavish, as right-wingers like Christie suggest.

Monique Morrissey, an economist at the labor-oriented Economic Policy Institute, takes a different approach than anti-government politicians. In some cases, she acknowledges, state budget problems may require cuts or force renegotiations in benefit plans. But in her opinion, completely abandoning defined-benefit pensions (which are, on balance, a good value for workers) is pennywise and pound foolish. "With very few exceptions, all of the cities and states where there are severe problems, it's because the politicians for many years have neglected to make the pension payments. And this really doesn't have much to do with the pensions or the public sector workers,” she tells Working In These Times. “It doesn't reflect the pensions being too lavish or being expensive or being unaffordable or anything to do with that. What it reflects is simply that this is one way of getting around balanced budget rules. And certainly some of these cities that are flagged as having problems are chronic offenders."

Meanwhile, pensions are going the way of the dinosaur in the private sector and politicians are whipping disgruntled citizens into a bitter rage toward civil servants who have managed to hold onto a modicum of hard-earned retirement security.

Instead of dismantling public sector benefits, local governments might address budget deficits by, say, making the tax system more progressive. As with many of the cries of “crisis” coming from the right, the obsession over public pension “unsustainability” too often takes a real problem of governments failing to uphold public promises and spins it into a false problem of workers supposedly demanding too much.

© 2012 In These Times

Michelle Chen

Michelle Chen is a contributing editor at In These Times. She is a regular contributor to the labor rights blog Working In These Times, Colorlines.com, and Pacifica's WBAI. Her work has also appeared in Common Dreams, Alternet, Ms. Magazine, Newsday, and her old zine, cain.

The End Of An Era

Authored by Dr. Tim Morgan, Tullet Prebon,

The economy as we know it is facing a lethal confluence of four critical factors – the fall-out from the biggest debt bubble in history; a disastrous experiment with globalisation; the massaging of data to the point where economic trends are obscured; and, most important of all, the approach of an energy-returns cliff-edge.

Through technology, through culture and through economic and political change, society is more short-term in nature now than at any time in recorded history. Financial market participants can carry out transactions in milliseconds. With 24-hour news coverage, the media focus has shifted inexorably from the analytical to the immediate. The basis of politicians’ calculations has shortened to the point where it can seem that all that matters is the next sound-bite, the next headline and the next snapshot of public opinion. The corporate focus has moved all too often from strategic planning to immediate profitability as represented by the next quarter’s earnings.

This report explains that this acceleration towards ever-greater immediacy has blinded society to a series of fundamental economic trends which, if not anticipated and tackled well in advance, could have devastating effects. The relentless shortening of media, social and political horizons has resulted in the establishment of self-destructive economic patterns which now threaten to undermine economic viability. We date the acceleration in short-termism to the early 1980s.

Since then, there has been a relentless shift to immediate consumption as part of something that has been called a “cult of self-worship”. The pursuit of instant gratification has resulted in the accumulation of debt on an unprecedented scale. The financial crisis, which began in 2008 and has since segued into the deepest and most protracted economic slump for at least eighty years, did not result entirely from a short period of malfeasance by a tiny minority, comforting though this illusion may be. Rather, what began in 2008 was the denouement of a broadly-based process which had lasted for thirty years, and is described here as “the great credit super-cycle”.

The credit super-cycle process is exemplified by the relationship between GDP and aggregate credit market debt in the United States (see fig. 1.1). In 1945, and despite the huge costs involved in winning the Second World War, the aggregate indebtedness of American businesses, individuals and government equated to 159% of GDP. More than three decades later, in 1981, this ratio was little changed, at 168%. In real terms, total debt had increased by 214% since 1945, but the economy had grown by 197%, keeping the debt ratio remarkably static over an extended period which, incidentally, was far from shock-free (since it included two major oil crises).

From the early 1980s, as figs. 1.1 and 1.2 show, an unmistakeable and seemingly relentless upwards trend in indebtedness became established. Between 1981 and 2009, debt grew by 390% in real terms, far out-pacing the growth (of 120%) in the American economy. By 2009, the debt ratio had reached 381%, a level unprecedented in history. Even in 1930, when GDP collapsed, the ratio barely topped 300%, and thereafter declined very rapidly indeed.

This report is not, primarily, about debt, and neither does it suggest that the problems identified here are unique to the United States. Rather, the massive escalation in American indebtedness is one amongst a host of indicators of a state of mind which has elevated immediate consumption over prudence throughout much of the world.

This report explains that we need only look beyond the predominant short-termism of contemporary thinking to perceive that we are at the confluence of four extremely dangerous developments which, individually or collectively, have already started to throw more than two centuries of economic expansion into reverse.

Before the financial crisis of 2008, this analysis might have seemed purely theoretical, but the banking catastrophe, and the ensuing slump, should demonstrate that the dangerous confluence described here is already underway. Indeed, more than two centuries of near-perpetual growth probably went into reverse as much as ten years ago.

Lacking longer-term insights, today’s policymakers seem bewildered about many issues. Why, for instance, has there been little or no recovery from the post-2008 economic slump? Why have traditional, tried-and-tested fiscal and monetary tools ceased to function? Why have both austerity and stimulus failed us?

The missing piece of the economic equation is an appreciation of four underlying trends, each of which renders many of the lessons of the past irrelevant.

trend #1 – the madness of crowds

The first of the four highly dangerous trends identified here is the creation, over three decades, of the worst financial bubble in history. In his 1841 work Extraordinary Popular Delusions and the Madness of Crowds, Charles Mackay (1814-89) identified a common thread of individual and collective idiocy running through such follies of the past as alchemy, witchhunts, prophecies, fortune-telling, magnetizers, phrenology, poisoning, the admiration of thieves, duels, the imputation of mystic powers to relics, haunted houses, crusades – and financial bubbles.

A clear implication of Mackay’s work was that all of these follies had been consigned to the past by intelligence, experience and enlightenment. For the most part, he has been right. Intelligent people today do not put faith in alchemy, fortune-telling, witchcraft or haunting, and – with the arguable exception of the invasion of Iraq – crusades have faded into the history books.

But one folly remains alive and well. Far from confining financial bubbles to historical tales of Dutch tulips and British South Sea stock, the last three decades have witnessed the creation and the bursting of the biggest bubble in financial history.

Described here as ‘the credit supercycle’, this bubble confirmed that one aspect, at least, of the idiocy identified by Mackay continues to wreak havoc. Insane though historic obsessions with tulip bulbs and south seas riches may appear, they are dwarfed by the latterday, ‘money for nothing’ lunacy that, through the credit super-cycle, has mired much of the world in debts from which no escape (save perhaps hyperinflation) exists.

Perhaps the most truly remarkable feature of the super-cycle was that it endured for so long in defiance of all logic or common sense. Individuals in their millions believed that property prices could only ever increase, such that either borrowing against equity (by taking on invariably-expensive credit) or spending it (through equity release) was a safe, rational and even normal way to behave.

Regulators, meanwhile, believed that there was nothing wrong with loosening banking reserve criteria (both by risk-weighting assets in ways that masked leverage, and by broadening definitions of bank capital to the point where even some forms of debt counted as shock-absorbing equity).

Former Federal Reserve boss Alan Greenspan has been ridiculed for believing that banks would always act in the best interests of their shareholders, and that the market would sort everything out in a benign way. But regulators more generally bent over backwards to ignore the most obvious warning signs, such as escalating property price-to-incomes ratios, soaring levels of debt-to-GDP, and such obviously-abusive practices as sub-prime mortgages, NINJA loans and the proliferation of unsafe financial instruments.

Where idiocy and naïveté were concerned, however, regulators and the general public were trumped by policymakers and their advisors. Gordon Brown, for example, proclaimed an end to “boom and bust” and gloried in Britain’s “growth” despite the way in which debt escalation was making it self-evident that the apparent expansion in the economy was neither more nor less than the simple spending of borrowed money.

Between 2001-02 and 2009-10, Britain added £5.40 of private and public debt for each £1 of ‘growth’ in GDP (fig. 1.3). Between 1998 and 2012, real GDP increased by just £338bn (30%) whilst debt soared by £1,133bn (95%) (fig. 1.4).

Asset managers have a very simple term to describe what happened to Britain under Brown – it was a collapse in returns on capital employed.

No other major economy got it quite as wrong as Britain under Brown, but much the same was happening across the Western world, most notably in those countries which followed the disastrous Anglo-American philosophy of “light-touch” financial regulation.

trend #2 – the globalisation disaster

The compounding mistake, where the Western countries were concerned, was a wide-eyed belief that ‘globalisation’ would make everyone richer, when the reality was that the out-sourcing of production to emerging economies was a self-inflicted disaster with few parallels in economic history. One would have to look back to a Spanish empire awash with bullion from the New World to find a combination of economic idiocy and minority self-interest equal to the folly of globalization.

The big problem with globalisation was that Western countries reduced their production without making corresponding reductions in their consumption. Corporations’ outsourcing of production to emerging economies boosted their earnings (and, consequently, the incomes of the minority at the very top) whilst hollowing out their domestic economies through the export of skilled jobs.

This report uses a measure called ‘globally-marketable output’ (GMO) as a metric for domestic production, a measure which combines manufacturing, agriculture, construction and mining with net exports of services. By definition, activities falling outside this category consist of services provided to each other.

At constant (2011) values, consumption by Americans increased by $6,500bn between 1981 and 2011, whilst consumption on their behalf by the government rose by a further $1,700bn, but the combined output of the manufacturing, construction, agricultural and extractive industries grew by barely $600bn. At less than $200bn in 2011, net exports of services did almost nothing to bridge the chasm between consumption and production.

This left two residuals – domestically consumed services, and debt – with debt the clincher. Between 1981 and 2011, and again expressed at constant values, American indebtedness soared from $11 trillion to almost $54 trillion.

Fundamentally, what had happened here was that skilled, well-paid jobs had been exported, consumption had increased, and ever-greater quantities of debt had been used to fill the gap. This was, by any definition, unsustainable. Talk of Western economies modernising themselves by moving from production into services contained far more waffle than logic – Western consumers sold each other ever greater numbers of hair-cuts, ever greater quantities of fast food and ever more zero-sum financial services whilst depending more and more on imported goods and, critically, on the debts used to buy them. Corporate executives prospered, as did the gateholders of the debt economy, whilst the vast majority saw their real wages decline and their indebtedness spiral. For our purposes, what matters here is that reducing production, increasing consumption and taking on escalating debt to fill the gap was never a remotely sustainable course of action. What this in turn means is that no return to the pre-2008 world is either possible or desirable.

trend #3 – an exercise in self-delusion

One explanation for widespread public (and policymaker) ignorance of the truly parlous state of the Western economies lies in the delusory nature of economic and fiscal statistics, many of which have been massaged out of all relation to reality.

There seems to have been no ‘grand conspiracy’ here, but the overall effect of accretive changes has been much the same. In America, for example, the benchmark measure of inflation (CPI-U) has been modified by ‘substitution’, ‘hedonics’ and ‘geometric weighting’ to the point where reported numbers seem to be at least six percentage points lower than they would have been under the ‘pre-tinkering’ basis of calculation used until the early 1980s. US unemployment, reported at 7.8%, excludes so many categories of people (such as “discouraged workers”) that it hides very much higher levels of inactivity.

The critical distortion here is clearly inflation, which feeds through into computations showing “growth” even when it is intuitively apparent (and evident on many other benchmarks) that, for a decade or more, the economy has, at best, stagnated, not just in the United States but across much of the Western world. Distorted inflation also tells wage-earners that they have become better off even though such statistics do not accord with their own perceptions. It is arguable, too, that real (inflation-free) interest rates were negative from as long ago as the mid-1990s, a trend which undoubtedly exacerbated an escalating tendency to live on debt.

Fiscal figures, too, are heavily distorted, most noticeably in the way in which quasi-debt obligations are kept off the official balance sheet. As we explain in this report, the official public debts of countries such as the United States and the United Kingdom exclude truly enormous commitments such as pensions.

trend #4 – the growth dynamo winds down

One of the problems with economics is that its practitioners preach a concentration on money, whereas money is the language rather than the substance of the real economy. Ultimately, the economy is – and always has been – a surplus energy equation, governed by the laws of thermodynamics, not those of the market.

Society and the economy began when agriculture created an energy surplus which, though tiny by later standards, liberated part of the population to engage in non-subsistence activities.

A vastly larger liberation of surplus energy occurred with the discovery of the heat engine, meaning that the energy delivered by human labour could be leveraged massively by exogenous sources of energy such as coal, oil and natural gas. A single US gallon of gasoline delivers work equivalent to between 360 and 490 hours of strenuous human labour, labour which would cost perhaps $6,500 if it were paid for at prevailing rates. Of the energy – a term coterminous with ‘work’ – consumed in Western societies, well over 99% comes from exogenous sources, and probably less than 0.7% from human effort. Energy does far more than provide us with transport and warmth. In modern societies, manufacturing, services, minerals, food and even water are functions of the availability of energy. The critical equation here is not the absolute quantity of energy available but, rather, the difference between energy extracted and energy consumed in the extraction process. This is measured by the mathematical equation EROEI (energy return on energy invested).

For much of the period since the Industrial Revolution, EROEIs have been extremely high. The oil fields discovered in the 1930s, for example, provided at least 100 units of extracted energy for every unit consumed in extraction (an EROEI of 100:1). For some decades now, though, global average EROEIs have been falling, as energy discoveries have become both smaller and more difficult (meaning energy-costly) to extract.

The killer factor is the non-linear nature of EROEIs. As fig. 1.5 shows, the effects of a fall-off in EROEI from, say, 80:1 to 20:1 do not seem particularly disruptive but, once returns ratios have fallen below about 15:1, there is a dramatic, ‘cliff-edge’ slump in surplus energy, combined with a sharp escalation in its cost.

Research suggests that the global average EROEI, having fallen from about 40:1 in 1990 to 17:1 in 2010, may decline to just 11:1 by 2020, at which point energy will be about 50% more expensive, in real terms, than it is today, a metric which will carry through directly into the cost of almost everything else – including food.

crisis, culpability and consequences

If the analysis set out in this report is right, we are nearing the end of a period of more than 250 years in which growth has been ‘the assumed normal’. There have been setbacks, of course, but the near-universal assumption has been that economic growth is the usual state of affairs, a rule to which downturns (even on the scale of the 1930s) are the exceptions. That comfortable assumption is now in the process of being over-turned.

The views set out here must provoke a host of questions. For a start, if we really are nearing a cliff-edge economic crisis, why isn’t this visible already? Second, who is to blame for this? Third, how bad could it get? Last, but surely most important, can anything be done about it?

Where visibility is concerned, our belief is that, if the economy does tip over in the coming few years, retrospect – which always enjoys the 20-20 vision of hindsight – will say that the signs of the impending crash were visible well before 2013.

For a start, anyone who believed that a globalisation model (in which the West unloaded production but expected to consume as much, or even more, than ever) was sustainable was surely guilty of wilful blindness. Such a state of affairs was only ever viable on the insane assumption that debt could go on increasing indefinitely. Charles Mackay chronicled many delusions, but none – not even the faith placed in witchcraft – was ever quite as irrational as the belief (seldom stated, but always implicit in Western economic policy) that there need never be an end to a way of life which was wholly dependent on ever-greater debt.

Even to those who were happy to swallow the nonsense of perpetually expanding indebtedness, the sheer scale of debt – and, relevantly in this context, of quasi-debt commitments as well – surely should have sounded  warning bells. From Liverpool to Los Angeles, from Madrid to Matsuyama, the developed world is mired in debts that can never be repaid. In addition to formal debt, governments have entered into pension and welfare commitments which are only affordable if truly heroic assumptions are made about future prosperity.

At the same time, there is no real evidence that the economy is recovering from what is already a more prolonged slump than the Great Depression of the 1930s. We are now more than four years on from the banking crisis and, under anything approaching normal conditions, there should have been a return to economic expansion by now. Governments have tried almost everything, from prolonged near-zero interest rates and stimulus expenditures to the creation of money on a gigantic scale. These tools have worked in the past, and the fact that, this time, they manifestly are not working should tell us that something profoundly different is going on.

The question of culpability has been the equivalent of Sherlock Holmes’ “dog that did not bark in the night”, in that very few individuals have been held to account for what is unarguably the worst economic disaster in at least eighty years. A small number of obviously-criminal miscreants have been prosecuted, but this is something that happens on a routine basis in normal times, so does not amount to an attribution of blame for the crisis. There has been widespread public vilification of bankers, the vast majority of whom were, in any case, only acting within the parameters of the ‘debtfuelled, immediate gratification’ ethos established across Western societies as a whole.

Governments have been ejected by their electorates, but their replacements have tended to look very similar indeed to their predecessors. The real reason for the seeming lack of retribution is that culpability is far too dispersed across society as a whole. If, say, society was to punish senior bankers, what about the thousands of salesmen who knowingly pushed millions of customers into mortgages that were not remotely affordable? The suspicion lingers that there has been a ‘grand conspiracy of culpability’, but even the radical left has failed to tie this down to specifics in a convincing way.

The real causes of the economic crash are the cultural norms of a society that has come to believe that immediate material gratification, fuelled if necessary by debt, can ever be a sustainable way of life. We can, if we wish, choose to blame the advertising industry (which spends perhaps $470bn annually pushing the consumerist message), or the cadre of corporate executives who have outsourced skilled jobs in pursuit of personal gain. We can blame a generation of policymakers whose short-termism has blinded them to underlying trends, or regulators and central bankers who failed to “take away the punch-bowl” long after the party was self-evidently out of control.

But blaming any of these really means blaming ourselves – for falling for the consumerist message of instant gratification, for buying imported goods, for borrowing far more than was healthy, and for electing glib and vacuous political leaders.

Beyond visibility and culpability, the two big questions which need to be addressed are ‘how bad can it get?’ and ‘is there anything that we can do about it?’

Of these, the first question hardly needs an answer, since the implications seem self-evident – economies will lurch into hyper-inflation in a forlorn attempt to escape from debt, whilst social strains will increase as the vice of resource (including food) shortages tightens. In terms of solutions, the first imperative is surely a cultural change away from instant gratification, a change which, if it is not adopted willingly, will be enforced upon society anyway by the reversal of economic growth.

The magic bullet, of course, would be the discovery of a new source of energy which can reverse the winding-down of the critical energy returns equation. Some pin their faith in nuclear fusion (along lines being pioneered by ITER) but this, even if it works, lies decades in the future – that is, long after the global EROEI has fallen below levels which will support society as we know it. Solutions such as biofuels and shales are rendered non-workable by their intrinsically-low EROEIs.

Likewise, expecting a technological solution to occur would be extremely unwise, because technology uses energy – it does not create it. To expect technology to provide an answer would be equivalent to locking the finest scientific minds in a bankvault, providing them with enormous computing power and vast amounts of money, and expecting them to create a ham sandwich.

In the absence of such a breakthrough, really promising energy sources (such as concentrated solar power) need to be pursued together, above all, with social, political and cultural adaptation to “life after growth”.

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James Turk: Central Banks Are Losing The War to Suppress Gold & Silver Prices

Submitted by Adam Taggart of PeakProsperity

James Turk: Central Banks Are Losing The War to Suppress Gold & Silver Prices

My guess is that 2013 and 2014 are going to be big up year for the precious metals, but we still have to contend with the central planners and the various government policies, which have been actively trying to keep the gold and silver prices from reaching fair value. The central planners are losing the war. They may win an occasional battle or two, but they’re losing the war, and eventually gold and silver are going to go higher.

So predicts James Turk, founder and Chairman of GoldMoney.com.

From James’ perspective, gold is not an investment. It’s a sterile asset, meaning it does not generate income. What it is, is money. Its function is to store wealth.

But money, like investments, can be overvalued or undervalued. And what we’re witnessing on the world stage is a gross mispricing of money as central banks engage in depreciation of their fiat currencies via inflation (i.e. money printing).

The process causes a transfer of wealth from those holding overvalued money to those who hold undervalued money. That’s what’s been going on for the past decade as the price of gold has steadily marched upwards versus fiat currencies.

But this process is not efficient. Mass awareness of this wealth transfer is low, so confidence in paper currencies is still high, supporting their perceived value. Market intervention by central banks and other parties conspires to keep the prices of precious metals artificially low and suspect.

This maintains an arbitrage for individuals to buy gold and silver at a discount to true value, which James believes will be slowly realized in full over the next several years as the bull market in precious metals approaches its third and final phase.

A factor in this rise will be the increasing fragmentation of coordination among the central banks. Increasingly, central banks outside the influence of the US’ Federal Reserve are treating the precious metals as true money, and becoming net buyers of bullion for their reserves.

Ultimately, Turk predicts the price of gold will move to somewhere between $8,000-10,000/oz, and that we'll see even higher price appreciation in silver.

The way markets normally work is, after you do have a big move, you get a correction. Even over the past 12 years, if you look at gold, you had big moves in 2005, 2006, and 2007 where you were in some years generating over 20% appreciation in gold. Then you had the correction in 2008. Even though that was a correction, gold was still up that year. Then, in 2009 and 2010 and the earlier part of 2011, you had again big moves. Then you had the correction where basically they moved sideways. My guess is that 2013 and 2014 are going to be big moves on the upside, because what’s important here is not so much the price of gold, but whether it’s a good value.

The proper way to manage a portfolio is, you move assets that are overvalued out of your portfolio and you concentrate on assets that are undervalued. That’s true regardless of whether you’re talking about investments or money. You want undervalued forms of money. You want undervalued investments. I use a couple of mathematical formulas which I’ve written a lot about, one being the Fear index and the other being the Gold money index; by both of those measures, gold is still very, very undervalued, as is silver, for that matter. Silver is even more undervalued than gold. My expectation is that these undervalued assets will continue to rise in price, because the market doesn’t like levels of overvaluation or undervaluation. The market is always constantly changing, moving money out of overvalued assets and moving into undervalued ones. And that’s what we’re basically seeing in the precious metals: people are moving out of overvalued fiat currencies and moving into undervalued gold and silver.

My guess is that 2013 and 2014 are going to be big up years, but we still have to contend with the central planners and the various government policies, which have been actively trying to keep the gold and silver prices from reaching fair value. The central planners are losing the war. They may win an occasional battle or two, but they’re losing the war, and eventually gold and silver are going to go higher – assuming that governments and central planners and central banks still continue to follow these same policies that they’ve been doing, which is defacing fiat currencies.

An interesting thing is that when we saw the price drop in gold and silver at the end of 2012, the demand for physical metal rose tremendously because people recognized that these assets are undervalued, and if they’re going to be sold down to such cheap prices, they may as well just pick them up and continue to accumulate them. So it certainly has a perverse affect when the central banks intervene. In fact, as we’ve noted, gold has risen 12 years in a row against the U.S. dollar – double-digit rates of appreciation. But I guess the best way is using an analogy. If you've got a pot of water boiling on the stove and it’s bubbling away, every once in a while you have to release or pull off the lid to let a little bit of steam out, and then you put the lid back on.

That’s sort of what the central planners are doing. Every year they release the lid, and gold on average has risen over the last 12 years by 16.8%. Then they put the lid back on. One of these days they're not going to be able to put the lid back on, and you're going to go into the third stage of a bull market where gold just keeps rising and rising and rising because confidence will be lost in the currency. I think that’s what we have to be focusing on.

I can’t say that trust between central banks is waning, but you have to recognize that there are two categories of central banks: There are central banks that are in the U.S. circle of control and dominance, and then there are central banks outside the circle of U.S. control and dominance. The ones that are outside of the U.S. control and dominance are accumulating physical gold. The ones within the U.S. control tend not to do that, although it’s interesting that Germany, Netherlands, and now Austria, too, are talking about bringing their gold back.

It’s quite clear that a lot of promises have been made, particularly by politicians and most governments around the world, and those promises cannot possibly be fulfilled. A lot of those promises are going to be broken. Particularly when it comes to the area of gold, a lot of central banks are relying on the promises of other central banks. Oh, yeah, we’ll be good for the gold if you ever ask for it. Those promises are likely to be broken as well, as the demand for physical metal continues to grow. Whether it’s going to accelerate in 2013, 2014, I don't know. But, my guess is the demand for physical metal is indeed going to accelerate over the next couple of years, because I’m looking for serious financial problems to be hitting. 

Click the play button below to listen to Chris' interview with James Turk (34m:47s):

Click here to read the full transcript

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The Children Killed by America’s Drones. “Crimes Against Humanity” committed by Barack H. Obama.

DRONERQ-170_Sentinel_impression_3-view

This is a list of names of children killed by America’s drones.

But behind each name there is the face of child with a family history in a village in a far away country, with a mom and a dad, with brothers and sisters and friends.

Among the list, are infants of 1, 2, 3 and 4 years old.

In some cases brothers and sisters of an entire family are killed.

Four sisters of the Ali Mohammed Nasser family in Yemen were killed. Afrah was 9 years old when she and her three younger sisters Zayda (7 years old) , Hoda (5 years old) and Sheika (4 years old) were struck by an American drone.

Ibrahim, a 13 year old boy of the Abdullah Mokbel Salem Louqye family in Yemen was  struck by a US drone, together with his younger brother Asmaa (9 years old) and two younger sisters, Salma (4 years old) and Fatima (3 years old) 

These children are innocent.  They are not different from our own children.

Their lives were taken away at a very young age as part of a military agenda, which claims to be combating  “international terrorism”

 These drone attacks are extremely precise.  We are not dealing with “collateral damage”.

Drone operators have the ability of viewing from a computer screen their targets well in advance of a strike.

A family home is referred to as a “structure” or a “building” rather than a house. When they target a home with family members, they kill children. And they know that in advance of the drone strike.

These children were killed on the orders of the US President and Commander in Chief  Barack H. Obama.

The commander in chief sets the military agenda and authorizes these killings to proceed.

The killings were quite deliberate. They are categorized as “crimes against humanity” under international law.

Those who ordered these drone killings, including  the president of the United States, are war criminals under international law and must be indicted and prosecute.

It should be noted that the drone attacks on civilians have increased dramatically during the Obama presidency (see below).

Michel Chossudovsky, January 26, 2012

Pakistan strikes


The List of Names was compiled by The Bureau of Investigative Journalism

CIA Drone Strikes in Pakistan 2004–2013

Total US strikes: 362
Obama strikes: 310
Total reported killed: 2,629-3,461
Civilians reported killed: 475-891
Children reported killed: 176
Total reported injured: 1,267-1,431

US Covert Action in Yemen 2002–2013

Total confirmed US operations (all): 54-64
Total confirmed US drone strikes: 42-52
Possible extra US operations: 135-157
Possible extra US drone strikes: 77-93
Total reported killed (all): 374-1,112
Total civilians killed (all): 72-177
Children killed (all): 27-37

US Covert Action in Somalia 2007–2013

Total US strikes: 10-23
Total US drone strikes: 3-9
Total reported killed: 58-170
Civilians reported killed: 11-57
Children reported killed: 1-3

Drone Infographics

Interactive map
Globe - Flickr / joelthomas

This map details the locations of CIA drone strikes in the remote Pakistani tribal areas.

 Partial List of Children Killed

PAKISTAN

Name | Age | Gender

Noor Aziz | 8 | male
Abdul Wasit | 17 | male
Noor Syed | 8 | male
Wajid Noor | 9 | male
Syed Wali Shah | 7 | male
Ayeesha | 3 | female
Qari Alamzeb | 14| male
Shoaib | 8 | male
Hayatullah KhaMohammad | 16 | male
Tariq Aziz | 16 | male
Sanaullah Jan | 17 | male
Maezol Khan | 8 | female
Nasir Khan | male
Naeem Khan | male
Naeemullah | male
Mohammad Tahir | 16 | male
Azizul Wahab | 15 | male
Fazal Wahab | 16 | male
Ziauddin | 16 | male
Mohammad Yunus | 16 | male
Fazal Hakim | 19 | male
Ilyas | 13 | male
Sohail | 7 | male
Asadullah | 9 | male
khalilullah | 9 | male
Noor Mohammad | 8 | male
Khalid | 12 | male
Saifullah | 9 | male
Mashooq Jan | 15 | male
Nawab | 17 | male
Sultanat Khan | 16 | male
Ziaur Rahman | 13 | male
Noor Mohammad | 15 | male
Mohammad Yaas Khan | 16 | male
Qari Alamzeb | 14 | male
Ziaur Rahman | 17 | male
Abdullah | 18 | male
Ikramullah Zada | 17 | male
Inayatur Rehman | 16 | male
Shahbuddin | 15 | male
Yahya Khan | 16 |male
Rahatullah |17 | male
Mohammad Salim | 11 | male
Shahjehan | 15 | male
Gul Sher Khan | 15 | male
Bakht Muneer | 14 | male
Numair | 14 | male
Mashooq Khan | 16 | male
Ihsanullah | 16 | male
Luqman | 12 | male
Jannatullah | 13 | male
Ismail | 12 | male
Taseel Khan | 18 | male
Zaheeruddin | 16 | male
Qari Ishaq | 19 | male
Jamshed Khan | 14 | male
Alam Nabi | 11 | male
Qari Abdul Karim | 19 | male
Rahmatullah | 14 | male
Abdus Samad | 17 | male
Siraj | 16 | male
Saeedullah | 17 | male
Abdul Waris | 16 | male
Darvesh | 13 | male
Ameer Said | 15 | male
Shaukat | 14 | male
Inayatur Rahman | 17 | male
Salman | 12 | male
Fazal Wahab | 18 | male
Baacha Rahman | 13 | male
Wali-ur-Rahman | 17 | male
Iftikhar | 17 | male
Inayatullah | 15 | male
Mashooq Khan | 16 | male
Ihsanullah | 16 | male
Luqman | 12 | male
Jannatullah | 13 | male
Ismail | 12 | male
Abdul Waris | 16 | male
Darvesh | 13 | male
Ameer Said | 15 | male
Shaukat | 14 | male
Inayatur Rahman | 17 | male
Adnan | 16 | male
Najibullah | 13 | male
Naeemullah | 17 | male
Hizbullah | 10 | male
Kitab Gul | 12 | male
Wilayat Khan | 11 | male
Zabihullah | 16 | male
Shehzad Gul | 11 | male
Shabir | 15 | male
Qari Sharifullah | 17 | male
Shafiullah | 16 | male
Nimatullah | 14 | male
Shakirullah | 16 | male
Talha | 8 | male

YEMEN

Afrah Ali Mohammed Nasser | 9 | female
Zayda Ali Mohammed Nasser | 7 | female
Hoda Ali Mohammed Nasser | 5 | female
Sheikha Ali Mohammed Nasser | 4 | female
Ibrahim Abdullah Mokbel Salem Louqye | 13 | male
Asmaa Abdullah Mokbel Salem Louqye | 9 | male
Salma Abdullah Mokbel Salem Louqye | 4 | female
Fatima Abdullah Mokbel Salem Louqye | 3 | female
Khadije Ali Mokbel Louqye | 1 | female
Hanaa Ali Mokbel Louqye | 6 | female
Mohammed Ali Mokbel Salem Louqye | 4 | male
Jawass Mokbel Salem Louqye | 15 | female
Maryam Hussein Abdullah Awad | 2 | female
Shafiq Hussein Abdullah Awad | 1 | female
Sheikha Nasser Mahdi Ahmad Bouh | 3 | female
Maha Mohammed Saleh Mohammed | 12 | male
Soumaya Mohammed Saleh Mohammed | 9 | female
Shafika Mohammed Saleh Mohammed | 4 | female
Shafiq Mohammed Saleh Mohammed | 2 | male
Mabrook Mouqbal Al Qadari | 13 | male
Daolah Nasser 10 years | 10 | female
AbedalGhani Mohammed Mabkhout | 12 | male
Abdel- Rahman Anwar al Awlaki | 16 | male
Abdel-Rahman al-Awlaki | 17 | male
Nasser Salim | 19

Why Are Right-Wingers So Crazy in Love With Israel?

It's much more than evangelical Christians hoping for the rapture.

Ever since word leaked that Chuck Hagel would be nominated for Secretary of Defense, Senate Republicans have launched a non-stop attack against their former colleague from Nebraska. It’s not just neoconservatives. The assault comes from across the ranks of the GOP. The charge that first dominated the headlines and is still, in many quarters, the loudest: Hagel is “anti-Israel.”

To call the evidence for this charge thin is an understatement. In the Senate Hagel went on record with the same pro-Israel sentiments expected of every senator: “The United States will remain committed to defending Israel. Our relationship with Israel is a special and historic one,” he said.

The L.A. Times notes that he put American money where his mouth was, “voting repeatedly to provide [Israel] with military aid.” He supported an Israeli-Palestinian peace as long as it did not compromise Israel's security or its Jewish identity -- a crucial demand for most Israelis.

So what are his alleged “anti-Israel” crimes?

  1. He suggested that Israel should negotiate directly with Hamas -- which in fact Israel is already doing, since it’s obvious that no peace agreement can endure and keep Israel secure unless Hamas signs on to it.

  1. When Hagel affirmed America's enduring support for Israel, he added that “it need not and cannot be at the expense of our Arab and Muslim relationships.” In other words, he wants an even-handed policy that puts American interests first.

  1. In an interview Hagel once said that, as a senator, he did put U.S. interests first: "The Jewish lobby intimidates a lot of people [on Capitol Hill]. … I support Israel, but my first interest is I take an oath of office to the Constitution of the United States.” The interviewer, the State Department’s long-time (and Jewish) Mideast expert Aaron David Miller, saidthat Hagel was merely stating “a fact: the pro-Israeli community or lobby has a powerful voice. … To deny that is simply to be completely out of touch with reality." Miller called the attempts to paint Hagel as anti-Semitic "shameful and scurrilous."

To sum up the charge, Hagel has shown that when it comes to the Israel-Palestine issue he faces the facts, takes a reasonable view, and as Secretary of Defense would put his own country’s interest first.

To his critics, that’s simply unacceptable. Like most supporters of the Israeli government, they treat even the slightest hint of criticism as if it were a mortal attack on Israel itself. The slightest deviation from their “Israel can do no wrong” agenda evokes howls of condemnation.

Who are these American devotees of (right-wing) Israel? Here is the one place Hagel can be faulted. His widely cited comment about the power of “the Jewish lobby” suggests that Jews are to blame for keeping U.S. Mideast policy so blatantly one-sided all these years. Hagel later apologized, saying that he really meant the “pro-Israel lobby.” But the mistaken stereotype persists that Jews control U.S. Mideast policy.

In fact, what American Jews do is debate vigorously among themselves about Israel and U.S. policy. There are multiple Jewish “pro-Israel” lobbies promoting quite different views. A spokesman for one of those lobbies, J Street, rightly says that by now “the center of the community is exactly where Sen. Hagel is on issues relating to Israel.” And J Street has recent polling data to prove it.

Maybe that’s one big reason AIPAC (the American-Israel Public Affairs Committee), the Anti-Defamation League, and other old-guard Jewish groups that typically support Israel, right-wing and wrong, are so far remaining silent on the Hagel nomination. Maybe they’re finally recognizing the truth that Peter Beinart and so many others are revealing: Those big-name organizations are run by aging conservatives who are out of step with the rest of American Jewry. Few serious observers credit their claim to speak for the Jewish community as a whole. As their credibility fades, so does their political power.

Another sign of the changing times: Even the Senate’s most prominent Jewish “pro- (right-wing) Israel”  hawk, Charles Schumer, has announced his support for the Hagel nomination.

Recent polls from CNNthe Huffington Post, and Pew make it clear that, in the U.S., the strongest support for Israel’s right-wing policies now comes not from Jews but from Republicans. They’re roughly twice as likely as Democrats to take Israel’s side, while Democrats are about five times as likely as GOP’ers to sympathize with Palestinians. (About 70 percent of Jews vote Democratic.)

These polls, taken after Israel attacked Gaza in November 2012, showed that men, whites and older people (dare we say, “Romney voters”?) were most likely to support Israel unreservedly in the conflict.

Now we know that Republicans will attack an Obama nominee unreservedly, even when their charges on his Mideast views are irrational, to say the least. The Republican Party has become the strongest “pro- (right-wing) Israel” lobby, demanding 100% blind support for whatever Israel’s government does.

Why are Republicans so crazy in love with Israel?

One common explanation points to a love triangle: Republicans, Israel and evangelical Christianity. But after studying the interface of religion and politics in America for many years, I’m convinced that the power of religion to shape political life is usually overrated.

Some evangelical theologies do preach that Jews must control all of the Holy Land before the second coming of Christ. (The organized “Christian Zionist” movement is based on this concept, but as a political group they get little press and have relatively little clout in Washington.)

However, in the evangelical vision of the future, the powerful Jewish state is just a passing phase. In the next phase (to oversimplify a bit) all the Jews become Christians or go to hell. The New Testament image of Jews as “Christ-killers,” rejecting and therefore rejected by the true God, has never been totally erased either. So, although white evangelicals are more likely than other Americans to support Israel, their religion makes them rather ambivalent toward the Jewish religion, to say the least.

What’s more, conservative evangelicals were enthusiastic supporters of Israel in the state’s earliest years, when a large majority of Israelis were strictly secular and avoided anything that smacked of religion.

In fact many of those first Israelis were socialists. Yet American conservatives, evangelical or not, gave full support to the fledgling Jewish state.

The main reason was not religion, but politics. Israel was created in 1948, the very same year that the U.S. committed itself wholeheartedly to cold war against the "communists.” Israel soon agreed (under strong U.S. pressure, some historians say) to be the main U.S. ally in the Middle East, where, most Americans believed (inaccurately), the Arabs were all turning pro-communist.

Israel served U.S. military needs in various ways, especially as an intelligence-gathering outpost. When Richard Nixon and Henry Kissinger formulated their doctrine of appointing regional “policemen” to serve U.S. interests around the world, Israel and the Shah’s Iran got the job for the Middle East. With the fall of the Shah in 1979, Israel was left alone as our cop on the Mideast beat.

But Republican affection for Israel reflects much more than that nation’s military usefulness. The deepest root of the feeling is the symbolic meaning of Israel in the conservative worldview. The cold war reinforced the conservative penchant for seeing the world in moral absolutes. So Israel became the Middle East’s only “good guy,” surrounded by a sea of “bad guys.”

The Israeli government played on this simplistic dualism with a skillful PR campaign, depicting their nation as an outpost of civilized American values in a savage Arab wilderness. To most Americans, it looked like our own “Wild West” story all over again: Brave pioneers turning the desert into a fertile garden, with a plow in one hand and a gun in the other, using the gun only when they were forced to defend themselves.

In the Israeli narrative, Jews were always the victims, constantly on guard against unprovoked attacks -- just like the pioneers of the American Wild West. The fact that Jews had displaced Arabs, just as whites displaced Native Americans, often by violent means, simply wasn’t allowed into the story. Nor was the fact that Israel’s military strength made its existence quite secure. Few Americans questioned the myth of Israel’s constant insecurity.

Americans of the Cold War era empathized with Israel all the more because here in the U.S. we were immersed in our own myth of homeland insecurity, constantly on guard against the imagined threat of communist aggression. In this way as in so many others Israel seemed like a miniature America, a partner in the global battle of good against evil.

Though the Cold War is long gone, that sense of kinship remains just as strong among conservatives, who still see the U.S. and Israel as champions of absolute good in a war against the “evildoers.” Indeed Israel looks even better now because conservatives assume that the “evildoers” plotting to destroy us are the very same Arab “terrorists” who are supposedly trying to wipe out Israel.

Conservatives simply ignore the facts. West Bank Palestinians have shifted almost entirely to nonviolent tactics in their struggle against military occupation. Even in Gaza, Hamas has long observed a truce, firing rockets only when Israeli attacks provoke them. And for years Hamas leaders have been supporting a two-state peace agreement. But none of this fits the conservatives’ beloved Wild West stereotype or their narrative of endless insecurity. So they mistakenly go on assuming that Israel is constantly under attack by vicious savages.

The conservative love for Israel has been strengthened by another mistaken belief: that all Israeli Jews are white folks. In fact a sizeable number of Jewish Israelis came from Muslim lands; they and their descendants have brown skin. But few Americans know it. Yet all know that Arabs generally have brown skin. No one can say exactly how strong the racial (and sometimes, no doubt, racist) factor is in the Republican feeling for Israel. But no one can deny that it’s part of the picture.

Conservatives’ tenuous sense of security depends on the reassurance they get from believing that there’s a permanent structure in the world, based on permanent dividing lines -- between nations, races, religions, and most importantly, between good and evil, with their own kind carrying the banner of the good.

As long as they can see good battling evil, it doesn’t matter exactly who the “good guys” and “bad guys” are. It’s all essentially a matter of symbolism. So the roles can switch in surprising ways. (Osama bin Laden was once the darling of the right-wingers when he fought the communists in Afghanistan.)

Israelis are well aware of how easily American affections can change. Their press is full of discussions about the risk of losing their sole remaining ally.

For now, though, the Republican love for Israel is holding firm. It has been cemented by the recent shift to the right among Israeli Jews. Politically, the last few years in Israel have looked a lot like the Reagan years in the U.S., making it easier for the GOP to feel that sense of kinship.

Even if Israel moves back toward the center, it’s not likely to lose the fervent devotion of Republicans. They’ve been so convinced for so long that Israel can do no wrong, it hardly matters to them what Israel does. It’s Israel the symbol, not the reality, that the Republicans love.

Now they are demonstrating their ardor by acting out a symbolic drama in the Senate, attacking Chuck Hagel on the flimsiest grounds. The “pro- (right-wing) Israel” stance is “very much a litmus test for many in the Republican Party,” as Washington Post analyst Aaron Blake says, “and it will make it difficult for any Republican senator to vote for him.” Like all true lovers, they let their passion overrule reason.

So they’re taking a political gamble. In the latest polls, between 39% and 59% of Americans say they support Israel in its conflict with the Palestinians. (Between 9% and 13% support Palestine.) That imbalance might make the Republican position look safe enough. But it leaves a huge portion of the electorate holding no clear preference. How all those undecided voters respond to this latest display of Republican fanaticism is anyone’s guess.

And even among those who back Israel, many will agree with what Chuck Hagel has said: "I'm a supporter of Israel, always have been. It's in Israel's best interest to get a peace. …Peace comes through dealing with people. Peace doesn’t come at the end of a bayonet or the end of a gun."

The Hagel confirmation hearings should trigger a public debate, weighing the nominee’s view against the Republicans’ irrational love for Israel, which may serve their own needs in a perverse way but wreaks such terrible harm on Arabs, Israelis and the U.S. position in the Middle East. 

Weekly Bull/Bear Recap: Jan. 21-25, 2013

From Rodrigo Serrano of Rational Capitalist Speculator,

This objective report concisely summarizes important macro events over the past week.  It is not geared to push an agenda.  Impartiality is necessary to avoid costly psychological traps, which all investors are prone to, such as confirmation, conservatism, and endowment biases. 

Bull

+ Existing home sales may have underperformed the consensus forecast, but for good reason.  A lack of homes for sale (supply), particularly at the low-value end, was the culprit.  This development will help maintain upward momentum in home prices throughout 2013.  Moreover, New Home Sales may have printed a negative MoM growth-rate, but this was due to a huge upward revision in November and doesn’t deter the bigger picture of continued growth for the sector in 2013.  Overall, inventory levels remain very lean.  Higher home prices will result in a positive wealth effect for consumers and help support consumption.  Furthermore, low inventory levels will act as an incentive for homebuilders to hire, buttressing economic activity.

+ The U.S. job market is clearly on the mend from the looks of the jobless-claims data.  At roughly 352K, the 4-week average is now at its lowest level in almost 5 years.  This development is a harbinger for a solid January payrolls report, due in a week from today.  

+ The bears’ strongest point, a stalling manufacturing sector, isn’t confirmed at all by Markit’s latest preliminary PMI reading.  For January, the overall index rose from 54 to 56.1, a 10-month high.  Furthermore leading indicators in the report, such as New Orders, point to further expansion in the months ahead.  

+ The world’s largest economic bloc, the European Union, is clearly stabilizing.  Germany’s manufacturing PMI rises to the highest in almost a year, while consumer confidence in the European region expands for the second month in a row.  Both reports are for January.  Meanwhile, the ZEW Center for European Economic Research reports that investor confidence in Germany skyrocketed 24.6 pts, hitting a level not seen in more than 2.5 years (same story for Euro-area confidence).  Finally on the financial front, investors are giving the thumbs up at recent reforms in Spain and Portugal; both countries issue bonds to strong demand —- meanwhile, many banks that participated in the LTRO at the zenith of the crisis, are now repaying their loans quicker than expected, a sign of confidence that the worse is over.  

+ China continues to surprise to the upside.  The country’s manufacturing PMI, released by HSBC, hits a 2-year high in January.  Furthermore, Copper is about to break out of its multi-year triangle to the upside (see 3-yr view).  

+ The Conference Board’s U.S. leading indicator points to strengthening economic growth in the months ahead, rising 0.5% in December. “Housing, which has long been a drag, has turned into a positive for growth and will help improve consumer balance sheets and strengthen consumption,” says Conference Board economist Kenneth Goldstein.  

Bear

- Manufacturing has stalled and is looking to contract soon, as the Federal Reserve Bank of Richmond reports that its manufacturing index slumped to a 6-month low in January.  This report follows news of weakness in the sector from the New York and Philly Federal Reserve Banks.  Housing, which now only accounts for only 3% of U.S. GDP economy will not be able to pick up the slack (manufacturing accounts for 12% according to the National Association of Manufacturers)…  

- …furthermore consumption, which accounts for roughly 70% of the economy is set to shift down a gear as consumers hunker down as they face an expiring 2-year payroll tax holiday.  Bloomberg’s Consumer Comfort, which confirms recent falls in the University of Michigan and Conference Board consumer confidence surveys, falls to a 3-month low.   

- Complacency reigns in Euroland as Draghi states that the darkest times have passed.  Are we really out of the woods?  Investors are ignoring worrisome developments.  Spanish unemployment hits a record high while stories of corruption within the country’s government swirl about, creating political uncertainty at the flashpoint of the debt crisis.  Meanwhile in France, Europe’s second largest economy, recession is knocking on the door and could result in another flashpoint.

- From a technical perspective, stocks are very overbought at these levels.  Now is not the time to make risk-on bets as the S&P 500 also approaches multi-year resistance and many macro risks remain lurking in the background.

image  

—(Source Bespoke Investment Group)

- Common sense says that constant intervention and warping of financial markets by central banks will inevitably come back to haunt investors and the global economy.  Warnings grow of a credit bubble as rampant central bank intervention has masked the true cost of money.  The subsequent adjustment will undoubtably be painful.

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Britain’s economy flirts with “triple dip” recession

LONDON (Reuters) - Britain's economy shrank more than expected at the end of 2012 with a North Sea oil production slump, lower factory output and a hangover from London's Olympics pushing it perilously close to a "triple-dip" recession. The country's ...

Gold Backed Bonds – An Alternative To European Austerity?

From GoldCore

Gold Backed Bonds - An Alternative To European Austerity?

Today’s AM fix was USD 1,670.25, EUR 1,243.39, and GBP 1,058.93 per ounce.
Yesterday’s AM fix was USD 1,677.00, EUR 1,258.06, and GBP 1,059.18 per ounce.

Silver is trading at $31.55/oz, €23.54/oz and £20.04/oz. Platinum is trading at $1,689.00/oz, palladium at $723.00/oz and rhodium at $1,200/oz.


Cross Currency Table – Bloomberg

Gold dropped $17.90 or 1% in New York yesterday and closed at $1,667.70/oz. Silver slipped to a low of $31.60 and finished with a loss of 1.8%. Most traders were at a loss to explain the counter intuitive losses given the bullish backdrop.

Gold in Euros – 5 Years (Daily) - Bloomberg

Overnight gold bounced back from an almost 2 week low and was again especially strong in yen terms - strengthened by the Bank of Japan’s stance on aggressive monetary easing.

Russia’s Central Bank said it will continue to buy gold bullion as it seeks to diversify its foreign reserves away from paper assets, such as the euro, it views as more risky.

At Davos, George Soros, one of the largest buyers of gold in the world today, warned of currency wars and that “interest rates are going to take a big leap” - probably this year.

Bank of America warned of a “bond crash” comparable to 1994 that would trigger a string of upsets across the world. In 1994, the bond crash bankrupted Orange Country, California, and set off the Tequila Crisis in Mexico. 

Today, the world is much more fragile and the increasingly likely bond crash could lead to a Lehman style systemic crisis – but on an even greater scale.

These risks and the recent price drop has fuelled buying interest in physical metal and a minority of smart money gold buyers continue to diversify into allocated gold on the dip .

At 1500 GMT new U.S. new home sales data is released.

Across Europe, economic growth is faltering and in many Eurozone countries, sovereign debt yields are dangerously high and austerity measures are creating much hardship.

The World Gold Council has been exploring ways that Eurozone member states could use their gold reserves to help bring down the cost of borrowing.

The Eurozone is the largest sovereign holder of gold in the world and has over 10,000 tonnes of gold reserves. The Eurozone, including the ECB, has 10,787.4 tonnes of gold worth over a significant €450 billion.  Some of the countries worst affected by the crisis, including Portugal and Italy, own a significant proportion of these assets. Italy alone holds nearly 2,000 tonnes of gold. 

The Eurozone as a whole has 32.6% more gold reserves than the U.S. which has 8,133.5 tonnes of gold.

Due to the ongoing global debt crisis and significant systemic and monetary risk, it would be financial and monetary folly of the highest order to sell gold. Indeed, prudent creditor nation central banks are continuing to add to their gold reserves.

Most agree that outright sales of gold are not the answer. Aside from the obvious problem that the outstanding debt level of the struggling European countries far surpasses the value of their gold reserves, existing EU laws prohibit such a move to finance governments, as do the provisions of the Central Bank Gold Agreement, which limits gold sales.

To illustrate this point, the gold holdings of the crisis hit Eurozone countries (Portugal, Spain, Greece, Ireland and Italy) represent only 3.3% of the combined outstanding debt of their central governments.

A one-time sale of all of their gold reserves would probably not cover even one year’s worth of their debt service costs. This would be akin to an individual selling everything they owned in order to make one month’s mortgage payment.

However, there may be an alternative to selling gold for desperate cash strapped nations facing vicious austerity. The alternative is to use European gold reserves in a way that will buy time for growth to take hold. 

The World Gold Council and leading academics and international think tanks believe that using a portion of a nation's gold reserves to back sovereign debt would lower sovereign debt yields and give some of the Eurozone's most distressed countries time to work on economic reform and recovery.

According to research done by the World Gold Council using the European gold reserves as collateral for new sovereign debt issues would mean that without selling an ounce of gold, Eurozone countries could raise €413 billion. This is over 20% of Italy's and Portugal's two year borrowing requirements. 

The move to back sovereign bonds with gold would lower sovereign debt yields, without increasing inflation, which would help to calm markets. This should give European countries some vital breathing space to work on economic reform and recovery.

Some citizens would be concerned that there may be a risk that the sovereign nations who pledge their gold as collateral could ultimately end up losing their gold reserves to the ECB, or whoever the collateral of the gold reserves are pledged to, in the event of a default.

Unlike currency debasement and the printing and electronic creation of money to buy sovereign debt, under schemes such as Draghi's “outright monetary transactions” (OMT), the use of gold as collateral would not create fiscal transfers between Eurozone members, long term inflation or currency devaluation risk.

The proposal shows how gold is being increasingly seen as a safe haven asset and currency.

Indeed, it suggests that those who have suggested returning to some form of gold standard are not as deluded as they have often been portrayed.

Mobilising Europe's gold is a temporary move which the World Gold Council and leading academics believe will help to create a more permanent solution which in time would help the Eurozone extract itself from its debt crisis.

Europe and the world faces an exceptionally challenging period and unconventional policy responses are called for. 

A gold-backed bond may offer at least a partial solution to Europe’s woes. 

The video 'Leveraging Gold Reserves To Help Lower Eurozone Sovereign Debt Yields' explores why such a measure could offer an alternative to austerity for the Eurozone: 'Leveraging Gold Reserves To Help Lower Eurozone Sovereign Debt Yields' 

NEWS

Gold Seen by Morgan Stanley Extending Rally as QE3 Runs to 2014 - Bloomberg

Gold bounces from near 2-week low on euro, Japan policy - Bloomberg

Interest Rates Will Spike This Year: Soros - CNBC

Petrol Price Rise On Way As 'Floodgates Open' – Sky News

Russia central bank to keep buying gold: Ulyukayev - Brecorder

Ghana may repatriate Gold reserves from US, Europe – Bullion Street

COMMENTARY

Video: Gold Price To Rise In 2013 – The Telegraph

Bank of America issues `bond crash' alert on Fed tightening fears – The Telegraph

Video: Dalio's Perspective on Gold's Importance As Diversification - CNBC

Who Are the Whales Buying Gold? – Economic Policy Journal

For breaking news and commentary on financial markets and gold, follow us on Twitter.

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Second Consecutive Week Of Outflows From US Equities

It is funny what one finds when one actually looks at the data behind the headlines, such as in this case the trumpeted amazing return of investors to the US stock market. Because what one does find is that after that one blistering week after the new...

Frontrunning: January 25

  • Fed Pushes Into ‘Uncharted Territory’ With Record Assets (BBG)
  • Next up in the currency wars: Korea - Samsung Drops on $2.8 Billion Won Profit-Cut Prediction (BBG)
  • China Warns ‘Hot Money’ Inflows Possible on Easing From Abroad (Bloomberg)
  • BOJ Shirakawa affirms easy policy pledge but warns of costs (Reuters)
  • Merkel Takes a Swipe at Japan Over Yen (WSJ)
  • Wages in way of Abe’s war on deflation (FT)
  • Italian PM under fire over bank crisis (FT)
  • Senior officials urge calm over islands dispute (China Daily)
  • Spain tries to peel back business rules (FT)
  • Rifts Over Cyprus Bailout Feed Broader Fears (WSJ)
  • Soros Says the Euro Is Here to Stay as Currency War Looms (BBG)
  • Deutsche Bank Debt Salesmen Said to Go Amid Pay Overhaul (BBG)
  • Cameron pitches new deal as good for EU (FT)

Overnight Media Digest

WSJ

* U.S. President Barack Obama nominated a former prosecutor turned white-collar criminal defender, Mary Jo White, as his choice for top U.S. securities regulator.

* Microsoft's quarterly earnings slipped 3.7 percent as the software giant reported weaker sales in its business and entertainment divisions, though revenue in its core Windows business strengthened.

* Citigroup Inc's private bank has decided to pull its $187 million investment from SAC Capital Advisors LP, the latest in a string of client defections that have occurred amid scrutiny of the hedge-fund firm.

* JP Morgan will not be trying 'staple financing' in the potential Dell deal, a possible ramification of a court decision criticizing what was once a common practice on Wall Street.

* Samsung Electronics Co on Friday said its fourth-quarter profit rose 76 percent to a record high on strong smartphone sales and higher margins in its chip business.

* Morgan Stanley Chairman and Chief Executive James Gorman is expected to take a second straight annual pay cut for 2012, as the securities firm continues to struggle to get back on track.

* Casino operator Las Vegas Sands Corp has stopped executing international money transfers for its high-rolling customers and is overhauling its compliance procedures as it faces scrutiny from U.S. and international regulators, people familiar with the matter said.

* Bristol-Myers Squibb Co agreed to pay $80 million to settle cases involving 15 patients killed or hurt during company-sponsored testing of an experimental drug for hepatitis C.

FT

BARCLAYS EXECUTIVES FACE MOUNTING LIBOR PRESSURE Top executives at Barclays were aware the bank was manipulating its submissions to Libor rate-setting panel in November 2011, almost a year earlier than previously disclosed, emails suggested. (link.reuters.com/tud55t)

OSBORNE STICKS TO AUSTERITY PLAN Finance minister George Osborne will not be diverted from his austerity plan even if data on the strength of British economy disappoints. (link.reuters.com/xud55t)

GOVERNMENT TO DELIVER CHILDCARE BOOST Britain's coalition government is planning to spend 1.5 billion pounds on a package of measures to help families cope with nursery fees. (link.reuters.com/vud55t)

FEARS RAISED OVER ECB FUNDING SCHEME Senior bankers are becoming increasingly concerned about the European Central Bank's special longer-term funding scheme, saying that it could encourage the creation of a two-tier banking market. (link.reuters.com/dyd55t)

RETAILERS MAKE APPEAL ON TAX AVOIDANCE High street retailers said the government needed to take action to stop tax avoidance by multinational companies. (link.reuters.com/bed55t)

RIM BOOSTED BY LENOVO INTEREST Lenovo has signalled it could be interested in buying Research In Motion, lifting the shares in the troubled Canadian maker of BlackBerry smartphones

NYT

* U.S. President Barack Obama tapped Mary Jo White, a former United States attorney turned white-collar defense lawyer, to lead the Securities and Exchange Commission. He also renominated Richard Cordray as director of the Consumer Financial Protection Bureau.

* Jill Sommers, a Republican regulator overseeing the investigation into MF Global's collapse, has abruptly decided to depart the Commodity Futures Trading Commission, the agency said.

* After a year of mixed financial performance at Morgan Stanley, the firm's chief executive, James Gorman, is expected to take a second annual pay cut.

* AT&T sold a record number of smartphones over the holiday season, but its quarterly earnings took a hit from pension costs and Hurricane Sandy.

* Microsoft's biggest product in decades, Windows 8, helped lift sales of the company's flagship operating system business, but not enough to rejuvenate overall growth.

* Greenhill reported a 4 percent drop in advisory revenue last year, a week after larger rivals JPMorgan Chase & Co and Morgan Stanley posted much larger declines.

* HCA Holdings, the largest profit-making hospital chain in the United States, was ordered to pay $162 million after a judge ruled that it had failed to abide by an agreement to make improvements to dilapidated hospitals that it bought in the Kansas City area several years ago.

* A federal appeals court in the United States tossed out $172 million in damages that Mattel had been ordered to pay MGA Entertainment, the maker of Bratz dolls. It was the latest move in a bitter nine-year legal dis

Canada

THE GLOBE AND MAIL

* An executive from a Quebec engineering firm has testified that many of the province's top engineering companies, including the troubled giant SNC Lavalin Group Inc, colluded to pay political kickbacks and to win fixed construction contracts.

Michel Lalonde, the president of Genius Conseil, told Quebec's construction inquiry on Thursday that a list of top companies were complicit in the scheme to secure road and sewer design and construction surveillance contracts by sending bribes and kickbacks to the political party headed by the city's mayor.

* Shawn Atleo, national chief of Assembly of First Nations, said any divisions in the aboriginal community are trumped by shared objectives, including ending "the status quo", and that many of the community's goals are similar to those of the rest of Canadians.

Reports in the business section:

* Talisman Energy Inc plans to slash its general and administrative (G&A) costs by "at least 20 per cent over all", Helen Wesley, the company's executive vice president of corporate services, told the CIBC Whistler Institutional Investor Conference on Thursday.

* Agrium Inc raised its fourth-quarter earnings estimate based on robust grain and oilseed prices that are helping boost demand for its fertilizers and other products. The Calgary-based company said it expects fourth-quarter earnings to be slightly above C$2 per share, compared with its previous guidance of C$1.50 to C$1.90.

NATIONAL POST

* Facing drastically falling oil revenue, Alberta Premier Alison Redford set the stage for serious spending cuts and possible tax hikes during a televised fireside chat on Thursday.

Redford blamed a "bitumen bubble" and warned Albertans about austere times to come. The government has forecast a deficit in the current fiscal year of C$3 billion.

FINANCIAL POST

* At least one Calgary oil executive is appealing to Canadian pocket books as the U.S. state department decides the fate of TransCanada Corp's Alberta-to-Texas Keystone XL pipeline. Export constraints on Alberta heavy oil production are costing each Canadian C$1,200 per year, Cenovus Energy Inc CEO Brian Ferguson said on Thursday.

* Canadian wireless carriers must make changes to their networks and systems to support 911 emergency text messages from hearing and speech impaired persons, the federal telecom regulator said on Thursday. The service would only be provided to the hearing and speech impaired who have pre-registered for it with their wireless carrier, the Canadian Radio-television and Telecommunications Commission (CRTC) said.

China

CHINA SECURITIES JOURNAL

-- China will build six control standards, including PM2.5, in 113 cities and will release the monitoring data before the end of December this year, Environment Minister Zhou Shengxian said.

-- The number of Chinese mobile phone users reached 1.11 billion as of the end of 2012, according to Ministry of Industry and Information Technology data released on Thursday.

-- China Financial Futures Exchanges has approved the application of account opening from several QFII institutions.

CHINA DAILY (www.chinadaily.com.cn)

-- Alibaba Group Holdings, China's largest e-commerce company, plans to join hands with partners to build a logistics network across China that can support 100 billion yuan worth of transactions a year within the next decade.

-- China is expected to lead emerging economies in spending on consumable products, with an estimated average annual increase in total consumer spending of 15 percent every year to 2016, according to a report released by the Economist Intelligence Unit and U.K. research firm Mintel.

SHANGHAI DAILY

-- Shanghai expects to set up China's first free trade zone in Waigaoqiao in Pudong New Area as the city bids to become a global trade hub by 2020, a senior official said. Unlike a bonded area, a free trade zone offers businesses lower taxes, a more liberal currency exchange and better efficiency due to less supervision.

CHINA BUSINESS NEWS

-- New bank loans in January are expected to reach between 1 trillion yuan and 1.2 trillion yuan as the economy rebounds, according to market participants. Total new loans for 2013 are expected to reach 8.5 trillion yuan to 9 trillion yuan.

Fly On The Wall 7:00 Market Snapshot

ANALYST RESEARCH

Upgrades

AMC Networks (AMCX) upgraded to Equal Weight from Underweight at Morgan Stanley
Autodesk (ADSK) upgraded to Conviction Buy from Sell at Goldman
eBay (EBAY) upgraded to Outperform from Market Perform at Bernstein
EQT Midstream Partners (EQM) upgraded to Outperform from Neutral at Credit Suisse
Horizon Bancorp (HBNC) upgraded to Outperform from Market Perform at Raymond James
JPMorgan (JPM) upgraded to Buy from Hold at Deutsche Bank
KLA-Tencor (KLAC) upgraded to Hold from Sell at Deutsche Bank
NetEase.com (NTES) upgraded to Buy from Neutral at UBS
QLogic (QLGC) upgraded to Equal Weight from Underweight at Morgan Stanley
STMicroelectronics (STM) upgraded to Outperform from Neutral at Exane BNP Paribas
Sony (SNE) upgraded to Buy from Neutral at BofA/Merrill
Tiffany (TIF) upgraded to Overweight from Neutral at HSBC
Union First Market (UBSH) upgraded to Outperform from Neutral at RW Baird

Downgrades

Canadian Pacific (CP) downgraded to Sell from Hold at Canaccord
City National (CYN) downgraded to Neutral from Buy at SunTrust
Dime Community (DCOM) downgraded to Equal Weight from Overweight at Barclays
Flextronics (FLEX) downgraded to Neutral from Buy at UBS
Flowserve (FLS) downgraded to Buy from Strong Buy at CL King
Ford (F) downgraded to Equal Weight from Overweight at Barclays
Goldman Sachs (GS) downgraded to Hold from Buy at Deutsche Bank
Goldman Sachs (GS) downgraded to Neutral from Buy at Citigroup
Hanmi Financial (HAFC) downgraded to Market Perform from Outperform at FBR Capital
IAMGOLD (IAG) downgraded to Neutral from Buy at BofA/Merrill
Janus Capital (JNS) downgraded to Sell from Neutral at Citigroup
Janus Capital (JNS) downgraded to Underperform from Neutral at Credit Suisse
Medtronic (MDT) downgraded to Hold from Buy at Wunderlich
Noble Corp. (NE) downgraded to Hold from Buy at Jefferies
Scripps Networks (SNI) downgraded to Underweight from Equal Weight at Morgan Stanley
Select Comfort (SCSS) downgraded to Equal Weight from Overweight at Barclays
Skullcandy (SKUL) downgraded to Neutral from Overweight at Piper Jaffray
United Continental (UAL) downgraded to Underperform from Neutral at BofA/Merrill
Virginia Commerce (VCBI) downgraded to Market Perform from Outperform at FBR Capital

Initiations

Accenture (ACN) initiated with an Overweight at Evercore
Actavis (ACT) initiated with an Overweight at Morgan Stanley
Amazon.com (AMZN) initiated with a Buy at ISI Group
Aon Corp. (AON) initiated with a Market Perform at Wells Fargo
BioMed Realty (BMR) initiated with a Neutral at Goldman
BioScrip (BIOS) initiated with a Buy at SunTrust
Boston Properties (BXP) initiated with an Overweight at Evercore
Brown & Brown (BRO) initiated with a Market Perform at Wells Fargo
Forestar Group (FOR) initiated with a Buy at DA Davidson
Marsh & McLennan (MMC) initiated with an Outperform at Wells Fargo
Park-Ohio (PKOH) initiated with an Outperform at Imperial Capital
Red Hat (RHT) initiated with an Outperform at Northland Securities
Starz (STRZA) initiated with a Sell at Stifel Nicolaus
Starz (STRZA) initiated with an Underweight at Evercore

HOT STOCKS

AT&T (T) sees FY13 EPS growth to be upper-single digits or higher
Consensus for FY13 revenue is $128.3B
Sees FY13 consolidated margins to be stable
Starbucks (SBUX) targets opening of about 1,300 net new stores globally in FY13
Expects to open 1,500 new stores in U.S. over next five years
Said China a ”significant market opportunity,” expects to have 1,500 stores there by 2015
Court of Appeals agreed with Mattel (MAT), verdict, damages on MGA's claims reversed
Belkin to buy Cisco's (CSCO) home networking unit
Juniper (JNPR): Trends driving network investment in cloud/mobility intact
Sees improved momentum in routing in 2013 in Europe and U.S.
Expects to expand FY13 operating margins
City National (CYN) expects net income to grow 'very modestly' in 2013
US Airways (LCC) reached tentative agreement with flight attendants

EARNINGS

Companies that beat consensus earnings expectations last night and today include:
KLA-Tencor (KLAC), Synaptics (SYNA), QLogic (QLGC), ResMed (RMD), Rambus (RMBS), Tempur-Pedic (TPX), Juniper (JNPR), Microsoft (MSFT), Cirrus Logic (CRUS)

Companies that missed consensus earnings expectations include:
Key Technology (KTEC), E-Trade (ETFC), Sterling Financial (STSA), AT&T (T)

Companies that matched consensus earnings expectations include:
Western Alliance (WAL), IBERIABANK (IBKC), Starbucks (SBUX)

NEWSPAPERS/WEBSITES

U.S. electricity producers have increased their use of natural gas now that technological advances have unlocked vast amounts of the fuel in shale rock formations. But executives at some top utilities are wary of relying too heavily on natural gas to make electricity, concerned that its current low price may not last, the Wall Street Journal reports
As Samsung Electronics (SSNLF) and Apple (AAPL) attempt to defend their dominance in the smartphone market, the latest data show China’s Huawei Technologies Co. ranked third in terms of market share for the first time, an indication that a rapid increase of smartphone users in China and other emerging markets may be starting to alter the global landscape, the Wall Street Journal reports
Innovation Network Corp. of Japan, a Japanese state-backed fund, wants a Nissan Motor Co. (NSANY) and NEC Corp. JV to buy Sony’s (SNE) lithium-ion battery unit to prevent rivals in China and Taiwan from getting its technology as the TV maker looks to offload non-core businesses, the Daily Yomiuri said, Reuters reports
Lockheed Martin (LMT) is challenging the U.S. government in court over $13.6M in research tax credits in a case that tests the often unclear line between research and production, with future R&D claims by other companies possibly at stake, Reuters reports
Fed Chairman Bernanke’s unprecedented bond buying pushed the Fed’s balance sheet to a record $3T as he shows no sign of softening his effort to bring down 7.8% unemployment, Bloomberg reports
Over half of the $18T in national daily trading of energy swaps has moved to futures exchanges from the over-the-counter market in response to the U.S. regulatory overhaul aimed at increasing transparency--Dodd-Frank--following the 2008 financial crisis, Bloomberg reports

SYNDICATE

Adecogro (AGRO) files to sell 8.7M shares of common stock for holders
Anthera Pharmaceuticals (ANTH) files to sell common stock
ArrowHead Research (ARWR) files to sell common stock and warrants
BG Medicine (BGMD) enters $12M common stock purchase agreement with Aspire Capital
Bright Horizons (BFAM) 10.1M share IPO priced at $22.00
Chuy's (CHUY) 4.5M share Secondary priced at $25.00

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Overnight Futures Ramp Right On Schedule

At this point it has gotten painfully tedious, and the one phrase to describe trading is - Same Pattern Different Day. With equity futures closing decidedly weak on earnings reality after US market close, the slowly, steady overnight ramp seen every single day for the past month has returned as always, this time on yet another largely expected German confidence indicator beat (following the just as irrationally exuberant ZEW some time ago, and yesterday's far better than expected PMI), this time the IFO Business Climate, which printed at 104.2, on expectations of 103 and up from 102.4. This was driven by both the current assessment rising from 107.1 to 108 and the Expectations rising from 97.9 to 100.5. Naturally, all confidence indicators will be skewed in a way to prevent the market from doubting for a second that Germany may actually succumb to the same recession that has gripped all other European countries (which Germany is an inch away from after its negative Q4 GDP). In other words: there is hope. As for reality, UK Q4 GDP came in at -0.3% on expectations of a far lower drop to -0.1%, and down from the olympics-boosted 0.9% in Q3. The UK certainly can't wait for Mark Carney to come and show them how cable devaluation is really done, cause this time it will be different, if only it wasn't different for everyone else.

But the most anticipated news of the day was the previously reported LTRO repayment, which came in far "stronger" than expected. Initially this was taken as positive as it means the ECB's balance sheet will shrink at a time when everyone else is engaging in open balance sheet busting FX warfare, even if in reality this is a deflationary outcome leading to even more appreciation for the EURUSD, and even more pain for both the European trade and current account balance. As Deutsche Bank explained, "the market will likely continue to have some focus on the fact that the ECB balance sheet is likely to be steadily shrinking for a period at a time when the Fed is effectively increasing its by $85bn/month and where Japan is seen by many to be set to notably increase its interventions. So while the repayments are not a big deal in themselves the contrast between the ECB and many other central banks means that the Euro is probably biased to appreciate for the foreseeable future. This might provide an unwelcome headwind for growth in Europe later in the year." And, naturally, a few hours before the LTRO announcement, none other than Italy's Monti said that a strong EUR could harm exports, something we already showed for Spain.

More from Deutsche Bank:

Today is the day the ECB unofficially starts to exit from unconventional monetary policy as Euro-area banks now have the option to repay some of the 1 trillion Euros of LTRO money afforded to them last year. Banks can now hand back money with one week's notice, and today at 11am London time is the first announcement of what they have initially done. It’s likely that any repayment will be biased towards stronger banks and as such there's no real immediate systemic risk from this story. However the market will likely continue to have some focus on the fact that the ECB balance sheet is likely to be steadily shrinking for a period at a time when the Fed is effectively increasing its by $85bn/month and where Japan is seen by many to be set to notably increase its interventions. So  while the repayments are not a big deal in themselves the contrast between the ECB and many other central banks means that the Euro is probably biased to appreciate for the foreseeable future. This might provide an unwelcome headwind for growth in Europe later in the year. Despite the promise of the OMT, Europe is in danger as being seen as the least active in the near-term in the currency war skirmishes that are focusing investors minds at the moment. Maybe actions elsewhere and a higher Euro will eventually lead to the ECB balance sheet expanding again after some market stress but this is further down the road.

While on European matters, Draghi is expected to speak at Davos today at 930am London time so it'll be interesting to hear if he continues to give off an air of increased confidence and whether he discusses the currency at all. Data wise Europe had a mixed day yesterday but the US was strong. In terms of the flash PMIs, Germany (48.8 vs 47.0 expected for Manufacturing, and 55.3 vs 52.0 for Services) was strong but weakness in France (42.9 vs 44.9 expected for Manufacturing, and 43.6 vs 45.5 expected for Services) was notable. The overall European number beat expectations but Germany played a large part in this. Our European economists think that these numbers are consistent with a flat Italian and Spanish composite reading when the data comes out next Friday. The Flash Markit US PMI number was very strong (56.1 vs 53.0). This release is still in its infancy with little track record but if it’s close to being consistent with the official ISM then US markets are not mis-priced at current levels. Indeed in our ISM/S&P 500 simple regression model, at current levels US equities are broadly pricing in an ISM of 54.7. The last ISM was at 50.7 though so the flash PMI is well ahead for now and a bit of caution is required. In Europe the market is much more ahead of the economy as our simple model suggests that equities are broadly pricing in a French, German and Euro-area PMI of 54.5, 56 and 54, respectively (against yesterday’s flash manufacturing numbers of 42.9, 48.8 and 47.5). This is all quite sweeping but in general the US economy is showing signs that it might be living up to some of the faith the equity market has recently shown in it whereas Europe still has a long way to go.

As we said in the 2013 outlook, liquidity and the benefit of the doubt will likely dominate in Q1 and market should generally be in decent shape. However we do need to see Europe show more consistent and broad growth for European markets not to have a set-back in Q2. The jury is still out on this and a steadily increasing Euro won't help.

Moving on to the market, yesterday saw the S&P 500 breach the symbolic 1500 mark for the first time since 2007 before chatter of a Financial Transactions Tax helped reverse all of those earlier gains. US data flow was generally positive supported by a larger-than-expected drop in initial jobless claims (330k v 355k) and the stronger preliminary PMI as mentioned above. Although we should note that the regional manufacturing surveys from the Kansas Fed yesterday (-2 vs +1) and the Richmond Fed on Tuesday (-12 v +5) were both disappointing.

The S&P 500 finished the day virtually unchanged with the NASDAQ (-0.74%) being a standout underperformer amongst major  indices as sentiment for Tech stocks softened on the back of Apple’s results.

Turning to Asia and overnight markets are mixed. The Nikkei (+2.5%) is leading the pack as the continued fall in consumer prices probably added further easing optimism. Core CPI fell - 0.6% yoy in December which is a touch more than expected (-0.5% yoy).

The JPY fell to 90.5 against the Dollar and is now 2.7% off the intra-week highs. Elsewhere the Hang Seng (- 0.3%) and the KOSPI (-1.1%) are both lower with the latter particularly being impacted by the renewed weakness in JPY.

In other news EU’s Olli Rehn said that he is unsure that the Euro is overvalued now but would not want to see a currency war of competitive devaluations which would have a negative effect on the Euro. On the peripheral countries, Rehn said there are several options under consideration to help Dublin and Lisbon return to markets including possibly extending the maturity of bailout loans or providing a new precautionary credit line.

In terms of today, Germany’s IFO survey and UK GDP for the fourth quarter will be the data highlights in Europe. The New home sales report is the only major release in the US. So all eyes will be on the ECB’s LTRO prepayment announcement and Draghi’s speech at Davos today.

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How Can We Reconcile Freedom-Loving Libertarianism with Tough Prosecution of Fraud?

 

Liberty and Justice Are Not Irreconcilable

I voted for Gary Johnson (and am a huge fan of Ron Paul), and respect and fully-support the libertarian passions for freedom and free markets.

But I am also a tireless crusader for enforcing the rule of law.

You might assume that these are opposite philosophies.  For example, a reader asks:

Your work on the dangers of the American nuclear industry has been really comprehensive, and you have drawn attention to the deception, manipulation, neglect, and willful ignorance of the nuclear industry. For example, I just watched the Al Jazeera video you posted earlier this year (3/12), in which the NRC and the nuclear industry are (rightly) criticized for waiting for harm to happen, instead of preventing it. At the same time, you identify as libertarian, and I believe you supported Gary Johnson in the presidential election. He is opposed to public regulation of industry and has said that post-harm lawsuits -- for example, in medical contexts -- are sufficient to encourage businesses to self-regulate for public safety. Could you please explain how you reconcile the libertarian position against regulation with your clear recognition that too-loose self-regulation of the nuclear industry imperils the public?

Nuclear Power Would Not Exist In a Free Market

Initially, it is undisputed that nuclear power plants would not exist if operators had to obtain funding and insurance through the free market. Private insurers won’t touch nuclear energy. Investors run the other way, because the odds of losing all of their investment are so high.

No private company in the world would operate a nuclear plant unless the government put a very low cap on liability. In many parts of the world, governments cap liability at a mere $13 billion dollars.

This is a little insane, given that “the risk of a nuclear catastrophe … could total trillions of dollars and even bankrupt a country”.

Indeed:

If there was a free market in energy, nuclear power would be over … immediately.

AP notes:

Nuclear power is a viable source for cheap energy only if it goes uninsured.

***

Governments that use nuclear energy are torn between the benefit of low-cost electricity and the risk of a nuclear catastrophe, which could total trillions of dollars and even bankrupt a country.

***

The cost of a worst-case nuclear accident at a plant in Germany, for example, has been estimated to total as much as €7.6 trillion ($11 trillion), while the mandatory reactor insurance is only €2.5 billion.

“The €2.5 billion will be just enough to buy the stamps for the letters of condolence,” said Olav Hohmeyer, an economist at the University of Flensburg who is also a member of the German government’s environmental advisory body.

The situation in the U.S., Japan, China, France and other countries is similar.

***

“Around the globe, nuclear risks — be it damages to power plants or the liability risks resulting from radiation accidents — are covered by the state. The private insurance industry is barely liable,” said Torsten Jeworrek, a board member at Munich Re, one of the world’s biggest reinsurance companies.

***

In financial terms, nuclear incidents can be so devastating that the cost of full insurance would be so high as to make nuclear energy more expensive than fossil fuels.

***

Ultimately, the decision to keep insurance on nuclear plants to a minimum is a way of supporting the industry.

“Capping the insurance was a clear decision to provide a non-negligible subsidy to the technology,” Klaus Toepfer, a former German environment minister and longtime head of the United Nations Environment Programme (UNEP), said.

U.S. News and World Report reports:

The disaster insurance for nuclear power plants in the United States is currently underwritten by the federal government, Cooper says. Without that safeguard, “nuclear power is neither affordable nor worth the risk. If the owners and operators of nuclear reactors had to face the full liability of a Fukushima-style nuclear accident or go head-to-head with alternatives in a truly competitive marketplace, unfettered by subsidies, no one would have built a nuclear reactor in the past, no one would build one today, and anyone who owns a reactor would exit the nuclear business as quickly as possible.”

See this and this.

In other words, this is not a free market.  Instead, the public has funded the nuclear industry.  As such, we - the owners - should get some control over how nuclear plants operate.

Likewise, the government created the mega-banks, big oil and the other mega-corporations.

Free Market Champions Demand Prosecution of Fraud

A strong rule of law is the main determinant of prosperity.  On the other hand, failure to prosecute fraud is destroying our prosperity.

Nuclear meltdowns, the financial crisis and the Gulf oil spill all happened for the same reason:  fraud to make a few more pennies, and a subsequent cover-up to try to protect the wrongdoers and continue "business as usual". And see this.

This is not free market economics.

Indeed, the father of free market economics - Adam Smith  - leading Austrian economists, and other free market advocates are for the prosecution of fraud:

There is a widespread myth that free market supporters are against regulation or prosecuting fraud.

In fact, Adam Smith – the father of free market capitalism – was for regulation of banks, and believed that trust is vital for a healthy economy. Because strong enforcement of laws against fraud is a basic prerequisite for trust, Smith would be disgusted by the lack of prosecution of Wall Street fraudsters today.

Smith railed against monopolies and their corrupting influence. And Smith was pro-regulation, so long as the regulation benefited the little guy, as opposed to the wealthiest:

When the regulation, therefore, is in support of the workman, it is always just and equitable; but it is sometimes otherwise when in favour of the masters.

Richard Posner – one of the leading proponents over the course of many decades for removing the reach of the law from the economy – has now changed his mind.

So has another leading proponent of deregulation and turning a blind eye towards fraud: Alan Greenspan.

While some promoters of a fake version of Austrian economics are anti-regulation and against prosecuting fraud, the main Austrian economists were unambiguously for them.

William K. Black – professor of economics and law, and the senior regulator during the S&L crisis – notes that leading Austrian free market economists said that fraud must be prosecuted:

Real Austrian economists … hate elite frauds and want them prosecuted vigorously. Ludwig von Mises and Friederich Hayek are the two most famous Austrian economists.

Hayek, F.A. The Road to Serfdom

To create conditions in which competition will be as effective as possible, to prevent fraud and deception, to break up monopolies— these tasks provide a wide and unquestioned field for state activity.

The Constitution of Liberty

There remains, however, one other kind of harmful action that is generally thought desirable to prevent and which at first might seem distinct. This is fraud and deception. Yet, though it would be straining the meaning of words to call them ‘coercion,’ on examination it appears that the reasons why we want to prevent them are the same as those applying to coercion. Deception, like coercion, is a form of manipulating the data on which a person counts, in order to make him do what deceiver wants him to do. Where it is successful, the deceived becomes in the same manner the unwilling tool, serving another man’s ends without advancing his own. Though we have no single word to cover both, all we have said of coercion applies equally to fraud and deception.

With this correction, it seems that freedom demands no more than that coercion and violence, fraud and deception, be prevented, except for the use of coercion by government for the sole purpose of enforcing known rules intended to ensure the best conditions under which the individual may give his activities a coherent, rational pattern…..

Liberty not only means that the individual has both the opportunity and the burden of choice; it also means that he must bear the consequences of his actions…. Liberty and responsibility are inseparable.

Mises, L.

Government ought to protect the individuals within the country against the violent and fraudulent attacks of gangsters, and it should defend the country against foreign enemies.

Black also notes that fraud is a leading cause of financial bubbles and malinvestment – two of the greatest sins which Austrian economists rightly fight against.

Unless financial fraud is prosecuted, bubbles will be blown … and when they burst, the economy will tank. Fraud – along with bad Federal Reserve policy – is what causes bubbles in the first place.

The Proof Is In the Pudding: Fewer Prosecutions Equals a Worse Economy

Obama has prosecuted fewer financial crimes than any president in decades – less than Ronald Reagan, less than George H.W. Bush, less than Bill Clinton, and less than George W. Bush.

The economy is worse than it has been since the Great Depression, if not before.

See the connection? See this and this.

Everyone Supports Laws Protecting Contract and Private Property Rights

Even the most radical free market advocates support laws protecting contract and private property rights. In other words, they support the judicial branch of government and the basic laws Congress passes to support such rights.

There are obviously good, pro-competitive laws and bad, anti-competitive laws.

Paul Craig Roberts – a true conservative, who was a Wall Street Journal editor and Assistant Secretary of the Treasury under Ronald Reagan, and is widely credited with being the “father of supply-side economics” – points out:

Regulation can increase economic efficiency and … without regulation external costs can offset the value of production.

***

 

Thirty-three years ago in an article in the Journal of Monetary Economics (August 1978), “Idealism in Public Choice Theory,” I developed a model to assess the benefits and costs of regulation. I argued that well-thought-out regulation could be a factor of production that increases GNP. For example, regulation that contributed to the quality and safety of food and medicines contributed to specialization in production and lower costs, and regulations enforcing contracts and private property rights add to economic efficiency.

 

On the other hand, bureaucracies build their empires and extend their regulations into the realm of negative returns. Moreover, as regulations increase, economic managers spend more time in red tape and less in productive activity. As rules proliferate, they become contradictory and result in paralysis.

I had hopes that my analysis would result in a more thoughtful approach to regulation, but to no avail. Liberals continued to argue that more regulation was better, and libertarians maintained than none was best.

Do Anti-Law Advocates Really Want Anarchy?

All sports need a referee. Some players will be bigger or more talented than others, which is great. They have a better chance of outcompeting the other guy and winning.

But without basic rules and referees, ruthless players might use a knife or kick the other guy in the knee. Perhaps we could suspend all rules, and maybe everyone would whip out a knife break the other guy’s kneecap. That’s fine … but that’s not the game of football.

Radicals who believe that we should not have any laws against fraud are implicitly arguing for anarchy. They might not use that word, but that is what they’re arguing for.

But the same Founding Father who argued for periodic revolutions to keep the government honest also argued against tearing down something unless you have something better in mind to replace it? Thomas Jefferson, the most vocal advocate of the citizens’ right to revolt to ensure honest government also cautioned against tearing something down unless it was for the express purpose of replacing it with something better.

Real, deep-thinking anarchists (as opposed to those using fake anarchy philosophy in order to promote lawlessness by the super-elite) are not for destroying all organization.  Instead, they argue for self-organization and self-regulation. See this, this and this.

JP Morgan and Goldman Sachs aren’t reining in one another’s fraud.  Bank of America and MF Global didn’t police each other’s fraud.   Tepco and BP didn’t make sure the companies made accurate reports about their safety measures.  Solyndra and Koch Industries didn’t guard against abuse by the other company.

So if one wants to argue that the Federal government should not regulate financial players, fine (perhaps our country is too big and complex to manage, and the federal government has become too corrupt) … but who should?

The states? Cities? Communities? Neighbors?

Human beings have the ability to form social contracts. Our D.C. government has largely breached it social contract with the people.

But we shouldn’t tear down the federal government unless we replace it with something better.

No one wants to tear down the state of organization so completely that we go back to monkeys (without the ability to talk), or one-celled critters . . . so the question is how do we want to organize?

Do you want to live as a “savage”? In reality, the natives had survival skills, cultural traditions, and knowledge developed over many hundreds or thousands of years (including knowledge gained before the migration from Asia to America), stored in the database of oral traditions. The settlers had traditions and knowledge as well. If we tear away all of that organization, life is going to be pretty challenging.

It is easy for a teenager to criticize his parents, but a lot harder to actually create a better adult life for himself. A teenager looks silly and immature when he criticizes everything his parents do without understanding the challenges he’ll face as an adult. But a young person who rebels against his parents and then creates a better adult life is doing important and heroic work.

In other words, anarchy as an economic model could work if economic players organized in such a way as to police against fraud and criminal behavior (the equivalent of pulling out a knife or taking out someone’s kneecap in the middle of a football game).

This is a long-winded way of saying that we should not stop the government from enforcing fraud laws unless we come up with a more effective way to stop fraud.

The Real Problem ...

While liberals tend to distrust big corporations and conservatives tend to distrust the federal government, it is really the malignant, symbiotic relationship between the two is the root problem.

Too much government overreach? Giant unaccountable corporations?

Maybe ... but the root problem is that corrupt government officials and corrupt corporate fatcats have merged into a crime syndicate.

Do you get it?    Before we can have a real free market, we need to burst the bubble of fraud.

Before we can have a functioning government, we need to stand up to corrupt government officials.

We all need to step out of the left-right dichotomy which is distracting us and dumbing us down.

We need liberty and justice.

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Squatter Occupies Bank Of America-Owned $2.5 Million Boca Raton Mansion, Hilarity Ensues

The robosigning/fraudclosure fiasco came, saw, and eventually left following a comprehensive slap-on-the-wrist settlement with all mortgage originating banks. In the process, it gave an inadvertent hint to the banks how they can boost house property values: by keeping homes from exiting the foreclosure pipeline, and off the market due to a legal mandate forcing them to do just that, it created a shortage of homes available for sale and thus provided an explicit subsidy funded by the banks themselves. The resulting "foreclosure stuffing" remains with us to this day.

Yet while it did manage to artificially boost prices, the process succeeded in one thing: making a mockery out of property rights, as it became quite clear that nobody knows who owns what, hence demanding a global settlement release from the very top. But not even the 10th incarnation of Linda Green could possibly conceive of the following episode showing just how surreal U.S. housing reality can be, when one mixes combustible and outright idiotic property laws, with a real estate market that, when one pulls away the facade of "made for TV pundtiry", is in absolute shambles.

From the Orlando Sentinel:

Squatting in style: 23-year-old occupies empty $2.5 million Boca home 

The 23-year-old has moved into an empty $2.5 million mansion in a posh Boca Raton neighborhood, using an obscure Florida real estate law to stake his claim on the foreclosed waterside property.

The police can't move him. No one saw him breaking into the 5-bedroom house, so it's a civil matter. And representatives for the real owner, Bank of America, said they are aware of the situation and are following a legal process.

But the situation is driving his wealthy neighbors crazy.

"This is a very upsetting thing," said next door neighbor Lyn Houston. "Last week, I went to the Bank of America and asked to see the person in charge of mortgages. I told them, 'I am prepared to buy this house.' They haven't even called me back."

Barbosa, according to records, is a Brazilian national who refers to himself as "Loki Boy," presumably after the Norse god of mischief. He did not return calls.

Someone with his name has been boasting about his new home on Facebook, even calling it Templo de Kamisamar.

Barbosa also posted a notice in the front window naming him as a "living beneficiary to the Divine Estate being superior of commerce and usury."

A spokeswoman for Bank of America said her company has sent overnight a complaint and an eviction notice to a clerk in Palm Beach County.

"The bank is taking this situation seriously and we will work diligently to resolve this matter," said Jumana Bauwens for Bank of America.

Sunrise real estate lawyer Gary Singer said Barbosa is invoking a state law called "adverse possession," which allows someone to move into a property and claim the title — if they can stay there seven years.

A signed copy of that note is also posted in the home's front window.

It's the most valuable grab since the adverse possession law started being used in a handful of cases that have popped up in the Palm Beach County Property Appraiser's Office over the past three years. Soon after Bank of America foreclosed on the property in July, Barbosa notified the Palm Beach County Property Appraiser's Office that he was moving in.

Police were called the day after Christmas to the home at 580 Golden Harbour Drive, but did not remove him. He presented cops with the "adverse possession" paperwork, according to the police report.

Houston said that the home had been empty for about 18 months. Property records show it was sold to a family in 2005 for $3.1 million. The deed is currently valued at $2.5 million, according to county records. The county appraiser's office lists the total market value of the 7,522-square-foot house at $2.1 million.

Real estate websites show canal views from sumptuous interiors including pillars, a curved staircase, marbled bath, second-floor balconies and a pool.

Singer says the adverse possession rule stems from the days when most people lived on farms. He said whoever tries to use the rule has to occupy the property in an "open and notorious manner."

"They can't be boarding up the windows and hiding in there," he said.

After relatively few instances of the rule being invoked over the previous 10 years, 13 cases of adverse possession were filed in 2011, according to John Enck, a manager of ownership services at the appraiser's office. It spiked even more in 2012: 19 cases, but so far, since Oct. 1, only six cases have been filed, he said.

Officials in Broward County did not respond to several requests for similar data.

Meet the squatter: Loki Boy humself:

Andre Barbosa can safely say that he has one of the nicest homes on the block in Boca Raton, Florida.

But the 23-year-old Brazilian national does not own or even rent the palatial $2.5million estate legally - he is a squatter.

Barbosa, originally from the neighboring Pompano Beach, moved into 580 Golden Harbour Drive in July

...

Speaking to ABCNews.com Thursday, a homeowner who asked not to be identified said that he entered the house around the same time and found four people inside, Barbosa among them.

One of the people said that the group is 'establishing an embassy for their mission,' and that families would be moving in and out of the property.

The neighbor said he believes that the 23-year-old is a 'patsy' who got caught up in something bigger.

According to his Facebook page, the 23-year-old, who refers to himself as 'Loki Boy' after the Norse god of mischief, attended South Technical Education Center in Boynton Beach and South Tech Academy in West Palm Beach.

In a brazen move, he also created a page for the Boca Raton mansion where he has been living and entertaining friends, which he calls Templo de Kamisamar.

Meanwhile, neighbors around Golden Harbour Drive who spoke to the station WPEC had a clear message for the unwanted resident: Leave now!

'You're walking into a house, it's crazy. And the point of not being able to get him out is even crazier,' one unidentified neighbor said.

And finally:

HOW TO TAKE OVER SOMEONE'S PROPERTY AND GET AWAY WITH IT

Adverse possession is a principle of real estate law that gives anyone who possesses the land of another for an extended period of time in an 'actual, open, hostile and continuous' manner the right to claim legal title to that land.

The exact elements of an adverse possession claim may be different in each state. In Florida, the law prescribes continuous possession of at least seven years. In New Jersey, a squatter must be in possession of the property for 30 years, while in New York it's 10 years.

In some states, the trespasser must have paid taxes on the property during this time period. Other states don’t require payment of property taxes, but will apply a shorter time requirement for occupying the land if the trespasser has paid taxes.

* * *

Just like that lightbulbs went over the heads of millions of Americans, especially when one considers that for the vast majority of banks there is virtually no imperative to pursue squatters out of houses to which the banks themselves most likely don't have the original "wet title" to.

That, and all the other allergies the US seems to developing with respect to "private" property slowly but surely.

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Kim Dotcom wants to encrypt half of the Internet to end government surveillance (FULL...

In an in-depth interview, Megaupload founder Kim Dotcom discusses the investigation against his now-defunct file-storage site, his possible extradition to the US, the future of Internet freedoms and his latest project Mega with RT’s Andrew Blake.

Megaupload founder Kim Dotcom (C) launches his new file sharing site "Mega", surrounded by dancers, in Auckland January 20, 2013. (Reuters/Nigel Marple)
Megaupload founder Kim Dotcom (C) launches his new file sharing site "Mega", surrounded by dancers, in Auckland January 20, 2013. (Reuters/Nigel Marple)

The United States government says that Dotcom, a German millionaire formerly known as Kim Schmitz, masterminded a vast criminal conspiracy by operating the file-storage site Megaupload. Dotcom, on the other hand, begs to differ. One year after the high-profile raid of his home and the shut-down and seizure of one of the most popular sites on the Web, Dotcom hosted a launch party for his latest endeavor, simply called Mega. On the anniversary of the end of Megaupload, Dotcom discusses the year since his arrest and what the future holds in regards to both his court case and the Internet alike. Speaking with RT’s Andrew Blake from his Coatesville, New Zealand mansion, Dotcom weighs in on the US justice system, the death of Aaron Swartz, the growing surveillance state, his own cooperation with the feds and much more.

Megaupload founder Kim Dotcom (2nd R) poseswith actors dessed as police after the launch of his new website at a press conference held inside his home in Auckland on January 20, 2013. (AFP Photo/Michael Bradley)
Megaupload founder Kim Dotcom (2nd R) poseswith actors dessed as police after the launch of his new website at a press conference held inside his home in Auckland on January 20, 2013. (AFP Photo/Michael Bradley)

'­Hollywood is a very important contributor to Obama'

RT: You’ve blamed President Obama and the Obama administration for colluding with movie companies in order to orchestrate this giant arrest here in New Zealand. Is this kind of give-and-take relationship between Washington and Hollywood all that you say it is? Or are you just the exception? Does this really exist?

Kim Dotcom: You have to look at the players behind this case, okay? The driving force, of course, is Chris Dodd, the chairman of the MPAA [Motion Picture Association of America]. And he was senator for a long time and he is — according to [US Vice President] Joe Biden — Joe Biden’s best friend. And the state attorney that is in charge of this case has been Joe Biden’s personal counsel, Neil MacBride, and [he] also worked as an anti-piracy manager for the BSA, the Business Software Association, which is basically like the MPAA but for software companies.

And also, the timing is very interesting, you know? Election time. The fundraisers in Hollywood set for February, March [and] April. There had to have some sort of Plan B, an alternative for SOPA [the Stop Online Piracy Act], because the president certainly was aware — and his team at the White House was aware — that if they don’t have anything to give at those fundraisers, to those guys in Hollywood who are eager to have more control over the Internet, they wouldn’t have probably raised too much. And Hollywood is a very important contributor to Obama’s campaign. Not just with money, but also with media support. They control a lot of media: celebrity endorsements and all that.

So I’m sure the election plays an important role. The relationships of the people that are in charge of this case play an important role and, of course, we have facts that we want to present at our extradition hearing that will show some more detail about this and that this is not just some conspiracy theory but that this actually happened.

Local Maori arrive as Megaupload founder Kim Dotcom (unseen) launches his new file sharing site "Mega" in Auckland January 20, 2013. (Reuters/Nigel Marple)
Local Maori arrive as Megaupload founder Kim Dotcom (unseen) launches his new file sharing site "Mega" in Auckland January 20, 2013. (Reuters/Nigel Marple)

'Operation Takedown'

RT: The US Justice Department wants to extradite you, a German citizen living in New Zealand operating a business in Hong Kong. They want to extradite you to the US. Is that even possible?

KD: That is a very interesting question because the extradition law, the extradition treaty in New Zealand, doesn’t really allow extradition for copyright. So what they did, they threw some extra charges on top and one of them is racketeering, where they basically say we are a mafia organization and we set up our Internet business to basically be an organized crime network that was set up and structured the way it was just to do criminal copyright infringement. And anyone who has every used Megaupload and has any idea about how that website worked knows immediately that it was total nonsense. But they needed to chop that on in order to have even a chance for extradition. But in our opinion, you see, all of that was secondary. The primary goal was to take down Megaupload and destroy it completely. That was their mission and that’s why the whole thing in Hong Kong, for example, they called it Operation Takedown. And I think everything that’s happening now, they are trying on the fly to doctor it around, and found a way to find a case. They probably came here and thought, “We will find something; that these guys have done something wrong.” In the indictment, if you actually read that, it’s more like a press release. There’s nothing in there that has any merits.

Megaupload founder Kim Dotcom speaks during the launch of his new website at a press conference at his mansion in Auckland on January 20, 2013. (AFP Photo/Michael Bradley)
Megaupload founder Kim Dotcom speaks during the launch of his new website at a press conference at his mansion in Auckland on January 20, 2013. (AFP Photo/Michael Bradley)

RT: When the raid happened one year ago today, it got a lot of people talking both about the Internet and about this character, Kim Dotcom. But it was a lot of talking and not so much action, because here it is one year later and this case is still happening. Back up earlier this month, and we saw Aaron Swartz — an online information activist — pass away, and only in his mid-20s. And it got a lot of people talking, so much so that members of Congress have actually asked for changes to federal computer laws so that this doesn’t happen again. What is it actually going to take to get people to stop just talking and to actually start acting?

KD: Our case is going to be the one that will have much more attention down the road because it is a crucial case for Internet freedom. And I think more and more people realize that and the government is quite exposed here because they really went in with completely prosecutorial abuse and overreach and ignoring due process, ignoring our rights, spying on us, illegal search warrants, illegal restraining orders, illegal spying. The whole picture, when you look at it, shows that this was an urgent mission, done on a rush. “Take them down, I want them to go.” And it was a political decision to do that. And the execution was extremely poor, and the case is extremely poor, because that is something they thought that they could worry about later. It was all about the takedown. “Let’s send a strong message to Hollywood that we are on their side.”

RT:And now it’s been a year and nothing has progressed. At least for them. It seems like the case is falling apart day by day.

KD: Let me give you one example of how crazy this is. We have a judge here who said, “Please show us your evidence about your racketeering allegations. Show us that these guys were setting up some sort of organized crime network,” because that’s what the extradition will focus on primarily. They are using the organized crime treaty to get us extradited. So the US appealed that and said, “We don’t want to show you what we have.” And then they appealed to the high court and the high court then said, “We want to see it.” And they just keep appealing it, all the way to the court of appeals and to the Supreme Court. And what does that tell you? If you don’t even want to show us your cards — show us what you have! If you have such a strong case and are seriously interested about getting someone extradited, why waste all this time? Just show your hand. And they don’t have anything because we haven’t done anything wrong. We were law abiding. We were a good corporate citizen. And they knew that the time they came here to do this. They just wanted to take us down.

Megaupload founder Kim Dotcom (C) launches his new file sharing site "Mega", with dancers, in Auckland January 20, 2013. (Reuters/Nigel Marple)
Megaupload founder Kim Dotcom (C) launches his new file sharing site "Mega", with dancers, in Auckland January 20, 2013. (Reuters/Nigel Marple)

'I want to reestablish a balance between a person and the state'

RT :The new program, Mega, is fully encrypted, and you’re touting it as an encrypted program so that people will want to use it. Do you think this is even necessary, right now, that people need encryption on the Internet?

KD: I think it’s important for the Internet that there is more encryption. Because what I have learned since I got dragged into this case is a lot about privacy abuses, about the government spying on people. You know, the US government invests a lot of money in spy clouds: massive data centers with hundreds of thousands of hard drives storing data. And what they are storing is basically any communication that traverses through US networks. And what that means they are not spying on individuals based on a warrant anymore. They just spy on everybody, permanently, all the time. And what that means for you and for anybody is that if you are ever a target of any kind of investigation, or someone has a political agenda against you, or a prosecutor doesn’t like you, or the police wants to interpret something in a way to get you in trouble — they can use all that data, go through it with a comb and find things even though we think we have nothing to hide and have done nothing wrong. They will find something that they can nail you with and that’s why it’s wrong to have these kinds of privacy abuses, and I decided to create a solution that overtime will encrypt more and more of the internet. So we start with files, we will then move to emails, and then move to Voice-Over-IP communication. And our API [Application Programming Interface] is available to any third-party developer to also create their own tools. And my goal is, within the next five years, I want to encrypt half of the Internet. Just reestablish a balance between a person — an individual — and the state. Because right now, we are living very close to this vision of George Orwell and I think it’s not the right way. It’s the wrong path that the government is on, thinking that they can spy on everybody.

Actors in police costume mock-arrest Megaupload founder Kim Dotcom (C), as he launches his new file sharing site "Mega" in Auckland January 20, 2013. (Reuters/Nigel Marple)
Actors in police costume mock-arrest Megaupload founder Kim Dotcom (C), as he launches his new file sharing site "Mega" in Auckland January 20, 2013. (Reuters/Nigel Marple)

RT: Long before Megaupload was ever taken down, the Justice Department was looking into Ninja Video and you actually cooperated with them. People want to know: how is Kim Dotcom, this guy who is incredibly against Washington and hates everything that they’ve done to him, how is this same guy also helping out the Justice Department?

KD: Let me explain to you how this worked, okay? I was a good corporate citizen. My company was abiding to the laws. If we get a search warrant or we get a request by the government to assist in an investigation, we will comply and we have always complied. And that is the right thing to do, because if someone uploads child pornography or someone uploads terrorist stuff or anything that is a serious crime, of course we are there to help. This is our obligation. And I am not for copyright infringement. People need to understand that. I’m against copyright infringement. But I’m also against copyright extremism. And I’m against a business model: the one from Hollywood that encourages piracy. Megaupload is not responsible for the piracy problem, you see? It’s the Hollywood studios that release a movie in the US, and then six months later in other parts of the world. And everyone knows that the movie is out there and fans of a particular actress want to have it right now, but they are not giving them any opportunity to get access to that content even though they are willing to pay. And they are looking for alternatives on the Internet, and then they find them. They are trying to make me responsible for their lack of ability to adapt to a new reality, which is the Internet, where everything happens now. It doesn’t happen three months later. Imagine you go to Wikipedia. You want to find something, research an article, and they tell you to come back in three months, ‘We’ll give it to you then.’ If you find another site where you can get it right now, that’s where you go, right? So it’s really their business model that is responsible for this issue. And if they don’t adopt, they will be left behind on this side of the road of history like many others who haven’t adopted in the past.

Photo by Andrew Blake
Photo by Andrew Blake

'I’m not Aaron Swartz. Aaron Swartz is my hero. He was selfless'

RT: What about your skeptics who point out this big playboy lifestyle and this giant, elaborate house and say ‘He’s not worried about Internet freedoms, he’s just worried about protecting his profits’?

KD: Let me be clear: I am a businessman, okay? I started Megaupload as a business to make money. I wanted to list the company. I am an entrepreneur, alright? I’m not Aaron Swartz. Aaron Swartz is my hero. He was selfless. He is completely the opposite of me, but I’m a businessman. I’m driven by the success of achieving something in the business world. That’s not a crime. There is nothing wrong with that. And if you create something that is popular and that people want to use, you automatically make money. And I’ve always been an innovator. I’ve always created products that people like. And that’s why I’m successful. I’m not successful because people have used Megaupload for copyright infringement. And what everyone needs to understand [is] there have been massive amounts of legitimate users on Megaupload. We don’t believe that 50 million users a day are all just transferring piracy. That’s wrong. A lot of people have used it to back up their data, to send a file quickly to a friend. Young artists have used it to get traction, to get downloads, to get known. There was a lot of legitimate use on Megaupload. It’s a dual-use technology, just like the Internet. You can go to any ISP right now, anyone who connects customers to the Internet. And if they are honest to you and you ask them the question ‘How much of your traffic is peer-to-peer piracy?’ anyone who will tell you less than 50 percent is lying to your face. This is a problem of the Internet and not Megaupload.

RT: If you weren’t doing Mega, or Megaupload, what would you be doing? Here’s this businessman who strives to accomplish success. What would you be doing?

KD: I would probably build spaceships and we would probably already be on Mars.

Photo by Andrew Blake
Photo by Andrew Blake

RT: What happens next, though? What are the chances of Mega being shut down. We already saw that radio stations were pulling ads.

KD: The content industry is still very emotional about us.We bought radio ads with one of the major networks here for eight radio stations. Very funny, very cool ads, promoting our service as a privacy service. And the labels called up the radio station, and one advertiser who is in the movie business called up the radio station, and demanded those adds to be taken down or else they will not buy ads from them anymore. And they were forced because they rely, of course, on that advertisement. My campaign was comparably small to the amount that they are sending. So they used their power to interfere in our right to have a media campaign, an ad campaign. And that just shows you that attitude. It’s against the law. They can’t do that. That’s interfering in our business and they have done that many times in the past. Calling payment processors, calling advertisers, telling them, ‘I don’t want you to work with these guys.’ That’s just wrong. If you have an issue with us, go hire a lawyer, sue us, take us to court and then see if you have anything that will give you a judgment against us. But instead, they use that power and their money to get new laws made for them, to lobby politicians, to get the White House to come here and destroy our lives. Destroy 220 jobs. Hardworking innocent people and they don’t give a damn about that. They had an agenda that is about more control over the Internet. And they made a strategic decision to say ‘Who are we going to take out to send a strong message?’ And I was the one.

Photo by Andrew Blake
Photo by Andrew Blake

"If they come to attack us, it’s just going to backfire"

RT: But what happens if Mega is shut down? You are only on day one right now. How long is it going to take before the government steps up again and what are you going to do if that happens? Are you prepared to just start all over again? It’s been one year and here you are, doing this over again, what happens when Uncle Sam puts his foot down and grinds you into the dirt again? Do you get back up?

KD: Here is the thing. This startup is probably the most scrutinized when it comes to legal advice. Every single aspect of it has been under the looking glass by our legal team. So we are confident that it’s fully compliant with the law, and if they come to attack us it’s just going to backfire. Exactly like the Megaupload case did. The shutdown of our site backfired already, massively. And it’s just going to get worse for them. If they think they can pursue this and get away with this, they are dead wrong. Because the society is not on their side. Everyone who uses the Internet knows what’s going on here. They don’t like what’s going on here. They saw it with SOPA and you will see it with our case. People will come together and fight this kind of aggression against innovation and Internet freedom.

Photo by Andrew Blake
Photo by Andrew Blake

"We are all the little puppets that they think they can kick around"

RT: After Megaupload was shut down by the FBI last year, hacktivist with the movement Anonymous retaliated, so to speak. In response, they went and took down the websites for the FBI, the Motion Picture Association of America, the Department of Justice, the Recording Industry Association of America. All of these organizations were shut down by Anonymous in response to what they did to you. These were people who you never met but were so moved by what happened that they had to stand up and do something. Did you ever thank them, and how did you take it? How did you respond to their reaction?

KD: It’s a kind of virtual protest, you know? I think it’s not a good idea to shut down websites. I’ve been a hacker myself. I understand why they are doing it and how they are doing it, but I think there are better ways to protest. Where you organize yourself in a group and do petitions and actually email congressmen, email your local politicians, let them know about what you don’t like. Organize your movement rather than attacking. I had a sense of understanding for them because everyone had stored so much data on Megaupload, and then all of a sudden a site like that disappears and billions of files are taken offline, the majority of them perfectly legitimate. You need to understand one thing: 50 percent of all files that were ever uploaded to Megaupload have not even been downloaded once. That clearly shows the non-infringing use. People just wanted to store their stuff on our site. And of course they were outraged when that disappeared and the government said, ‘We don’t give a care and we don’t give a damn about you people. We don’t care that you have your personal documents there because we have our agenda and we are going to take over the Internet.’ And you know the White House was supporting SOPA, and only when the masses came together — and Aaron Swartz: he stopped SOPA. With his efforts, he stopped SOPA. And he became a target. A political target, okay? And that’s why all these things happened to him. There is no reasonable cause behind going after a young genius like that in the fashion they did. It’s political. Because the White House wanted SOPA. They promised it to Hollywood and they failed and they couldn’t go ahead because the White House was afraid if they keep pushing hard and they keep pushing it forward, that the people who oppose it are not going to vote for Obama in the reelection campaign. So it’s all a game to them really and we are all the little puppets that they think they can kick around. So we need to organize. There needs to be a movement that identifies these things and fights that. Not with shutting down websites but with real protests. Going out on the streets, writing to politicians and especially, most importantly, don’t vote for the guys that are against Internet freedom. Anyone who voted for SOPA, you should have a close look at that guy. Do I want to give him my vote next time around? Because that’s the only language politicians understand is your vote. And if you can bring all these votes together, somehow pooled for Internet freedom, you will see all these efforts disappear. Because at the end of the day, they represent the public. Politicians represent the public. And when they have enough pressure they can’t move forward. And SOPA was the best example for that.

San Francisco streetlights will spy on passersby

The Columbus Tower is shown at right as the Transamerica Building looms in the background in San Francisco.(Reuters / Robert Galbraith)

The Columbus Tower is shown at right as the Transamerica Building looms in the background in San Francisco.(Reuters / Robert Galbraith)

San Francisco, California is the second-most densely populated urban area in the US, but those nearly one million residents of the City by the Bay are about to lose what little amount of privacy they have.

The San Francisco Public Utilities Commission has started work on a program that will update a number of the city’s 18,000 streetlights during the next few years. Those new installations might do a whole lot more than just illuminate sidewalks and keep streets lit for cars, though. Through part of a pilot program, city officials can send data wirelessly between more than a dozen of those streetlights.

What kind of data can a lamppost collect, though? In San Francisco, the answer is a lot. According to a report in the SF Bay Guardian, Paradox Engineering of Switzerland has already started testing streetlamps in the city that have the ability to wirelessly transmit data from traffic signals and surveillance cameras from one device to another. Soon, though, there will be more than just 14 cameras with that kind of capability. Additionally, the city is currently searching five vendors to test even more advanced lampposts across the city.

During last year’s Living Labs Global Award in Rio de Janeiro, Brazil, the LLGA gave Paradox the go-ahead to start testing lights in San Francisco. In a just-issued Request for Proposals, the city calls on others to pitch similar products. In the request, the City writes that as they begin replacing the 18,000 streetlights, the SFPUC “also plans to install an integrated wireless communication monitoring and control system” in order to manage the devices.”

“Ideally, the wireless system will accommodate other wireless devices, unrelated to street lighting, in a common wireless system mesh network,” the request reads.

When the City goes more into detail, the kind of devices that will need to connect to the lamps are brought to light. “Future needs for the secure wireless transmission of data throughout the City,” reads the report, may include gunshot monitoring, electric meter reading, street surveillance, public information broadcasts and other types of monitoring.

"San Francisco thought they were upgrading their 18,000 lamps with LEDs and a wireless control system, when they realized that they were in fact laying the groundwork for the future intelligent public space," LLGA cofounder Sascha Haselmeyer tells Open Source Cities.

San Francisco isn’t the first city to bring this new form of surveillance to light — literally — but it might be the biggest. In 2011, Farmington Hills, Michigan became the first city in the US to rely on something called the Intellistreets project to watch over pedestrians. For $3,000 a piece, those high-tech luminaries don’t just provide light, but also record audio and video, all data that can be sent from device to device.

“This is not a system with spook technology,” Intellistreets founder Ron Harwood told WXYZ News when his small Michigan town first started trying out the devices. With 18,000 traffic lights in a city of 800,000 possibly embracing that same technology, though, it says a lot about the growing trend of secretive surveillance in the US.

“We've become somewhat accustomed to being visually monitored by the surveillance cameras that dot our urban landscapes, but audio monitoring and widespread, covert monitoring are not so common,” the PrivacySOS.org blog reports.

San Francisco first began installing public surveillance cameras in 2005, and four years later a report from the University of California Berkeley found that the devices failed to detersviolent crimes, including homicide, as well as rapes and drug dealing.

“Precious public safety dollars need to be spent on solutions that actually work to reduce violent crime, like community policing, intervention programs and improved lighting, not on more ineffective and intrusive cameras,” Nicole Ozer of the American Civil Liberties Union’s Northern California office said in 2009. Four years later, however, it seems as if the city is deadest on installing even more devices.

“In a few years, there may be no place to hide from San Francisco police surveillance – unless you drive to get around,” PrivacySOS adds. “The increasingly aggressive San Francisco surveillance regime appears to disproportionately affect low income people. In the privacy of your own car, you are probably free from city monitoring. But if you walk to work or take the bus, you better mind what you say.”

On The News With Thom Hartmann: Virginia Gerrymanders Presidential Votes, Robin Hood Tax Hits...

Thom Hartmann here – on the news...

You need to know this. Virginia is now poised to be the first state to move legislation forward, which will rig the Electoral College to benefit Republican presidential candidates in the future. On Wednesday, legislation to dole out Electoral College votes based on gerrymandered Congressional districts, instead of the current winner-take-all system, advanced out of a state Senate subcommittee. It now heads to full committee, where it will likely be approved, before heading to the full state Senate, which is controlled by Republicans. So, Republicans have actually taken rigging the next presidential election seriously, with efforts also underway in Pennsylvania, Michigan, and Ohio to do the same thing. Progressives must counter with an equally aggressive push for a national popular vote. Nine states have already passed National Popular Vote laws, which commit their electors to vote for whichever candidate wins the national popular vote, even if that candidate lost the state Electoral College vote. Those nine states that have passed national popular vote laws - including California, Maryland, and Illinois - account for 132 electoral votes among them, nearly half of the 270 needed in the Electoral College to win the White House. If this trend continues, and enough states sign up to bring their combined Electoral College votes to 270, then the Electoral College, which Republicans are currently trying to rig, dies just like that. Let's get active and fight fire with fire.

In screwed news...Welcome to America, where you have to go to jail to receive the healthcare you need. The Sun-Sentinel, out of Florida, is reporting on a man who threatened to kill President Obama just so he could be arrested, thrown in jail, and receive much-needed medical care. Fifty-seven year old Stephen Espalin told a judge last week that he, "would have no intent to hurt the president", but he knew federal agents would arrive and "take care of [him]." Espalin made the threat against the President after he was kicked out of a hospital for giving a false name, and lying about having health insurance. Florida's Governor Rick Scott is critical of Obamacare, and is unlikely to adopt the provision in the law that expands Medicaid coverage in his state, which would help people like Espalin. But now that Espalin is headed to jail, he will receive the care he needs. He's already receiving chemotherapy, and once he begins his four year prison sentence, he's scheduled to have heart surgery. This is a cautionary tale of what happens to a nation that doesn't provide basic medical care to its citizens. Either we make healthcare a basic human right in America, just like it is elsewhere in the developed world, or we commit ourselves to unrest, desperation, and a sick population.

In the best of the rest of the news...

Robin Hood is coming to Europe. On Tuesday, 11 European nations agreed to put in place a financial transaction tax – also known as a Robin Hood tax – on the banks. Such a tax could generate billions in much needed revenue for the cash-strapped continent. The tax, which will range between .1% and .01%, will be applied to all trading in stocks, bonds, and derivatives. According to a statement from the European Council, the purpose of this new tax is, "for the financial industry to make a fair contribution to tax revenues, whilst also creating a disincentive for transactions that do not enhance the efficiency of financial markets." The participating nations in this Robin Hood tax make up 90% of the EU – and it's estimated the tax will bring in roughly 37 billion euros annually. According to the European Commissioner in charge of tax policy, Tuesday's agreement was "a major milestone in tax history." Now let's kick start the movement here in the United States to create our own Robin Hood tax.

Well, there's at least one place now that women will soon see workplace equality: in the military. Today, the Pentagon officially announced that it's lifting its ban on women in combat, potentially opening up more than 200,000 new combat positions in the military to women. This decision will pave the way for women to serve on the front lines, for the first time in the history of our armed services. The military will have until May to come up with plans to implement these changes – and each branch of the military will have until 2016 to get official exemptions for certain combat roles, which will remain exclusive to men. From allowing gays to openly serve, to now allowing women in combat, President Obama has taken significant steps to bring equality to our military – and he should applauded for his efforts.

Beware of online surveillance. This week, Google released its Transparency Report, revealing a massive increase in government surveillance. According to the report, Google received over 21,000 requests for data from governments and courts worldwide, just in the second half of 2012. That's a 70% increase from 2009. During that same period, the United State government made the most requests – with more than 8,000 demands for online data. Protecting our online privacy from prying government, and corporate eyes, is the new frontier – and "we the people" are currently losing this struggle.

And finally...following reports that a drone stike in Yemen mistakenly killed two children, the United Nations is launching an official investigation into the legality and death toll of drone warfare. The investigation will focus on 25 different drones strikes carried out by US, UK, and Israeli forces in Afghanistan, Pakistan, Yemen, and Somalia. According to Benn Emmerson, the UN's special rapporteur on human rights and counter-terrorism, this investigation is, "a response to the fact that there's international concern rising exponentially, surrounding the issue of remote targeted killings through the use of unmanned vehicles." This will be President Obama's biggest foreign policy challenge in his second term – winding down our deadly covert drone warfare programs. And it's up to us to push him to do what' right.

And that's the way it is today – Thursday, January 24, 2013. I'm Thom Hartmann – on the news.

Frontrunning: January 24

  • When the cash runs out dividends go away: Nokia to Omit Dividend for First Time in 143 Years (BBG)
  • Passing Debt Bill, GOP Pledges End to Deficits (WSJ)
  • Japan logs record trade gap in 2012 as exports struggle (Reuters)
  • so naturally... Yen at 100 Per Dollar Endorsed by Japan Government’s Nishimura (BBG)
  • Japan rejects currency war fears (FT)
  • Investors grow cagey as Italy election nears (Reuters)
  • In Amenas attack brings global jihad home to Algeria (Reuters)
  • Mafia Victim’s Son Holds Key to Bersani Winning Key Region (BBG)
  • Bernanke Seen Pressing On With Stimulus Amid Debate on QE (BBG)
  • U.S. to lift ban on women in front-line combat jobs (Reuters)
  • Red flags revealed in filings of firm linked to Caterpillar fraud (Reuters)
  • Apple Sales Gain Slowest Since ’09 as Competition Climbs (BBG)
  • Spanish Jobless Rate Hits Record After Rajoy’s First Year (BBG)
  • North Korea Threatens Nuclear Test to Derail U.S. Policies (BBG)

Overnight Media Digest

WSJ

* Apple Inc recorded a flat profit despite selling 18 million more iPhones and iPads as it spent heavily to roll out new products to fend off intensifying competition.

* The U.S. House of Representatives defused one potential debt crisis Wednesday, while a top Republican set the stage for a far broader debate over whether it is possible to actually balance the U.S. budget in coming years.

* A government informant has implicated a prominent former trader at SAC Capital Advisors, telling federal investigators the two swapped confidential stock tips for years, according to people briefed on the matter.

* NYSE Euronext has no intention of selling its European unit to a rival following a planned takeover by IntercontinentalExchange Inc, according to NYSE Euronext's chief executive.

* The value of Goldman Sachs Group Inc's investment portfolio doubled last year. Bond underwriting hit a five-year high. The firm's workforce shrank and remaining employees were paid a smaller chunk of overall revenue.

* General Dynamics Corp swung to a fourth-quarter loss, posting a $2 billion write-down in its information-technology business that Chief Executive Phebe Novakovic called a "reset".

* McDonald's Corp's fourth-quarter earnings beat expectations, reversing two quarters of misses, but the world's largest restaurant chain said it expects tough times ahead.

* Netflix Inc capped a turbulent year by posting a surprise fourth-quarter profit and adding more Internet subscribers than expected, news that sent its stock rocketing about 35 percent in after-hours trading.

* As Novartis AG Chairman Daniel Vasella steps down from the company he helped build over 25 years, he leaves behind one of the health-care industry's most admired firms - but also some shareholder resentment and big questions about Novartis's future.

* Loretta Fredy Bush, the high-profile founder of China's Xinhua Finance Ltd who was later indicted over an alleged $50 million fraud, has agreed to a plea deal and appears poised to plead guilty to a reduced charge.

FT

FSA PROBES ICAP OVER LIBOR FIXING ICAP, the world's largest interdealer broker, has become a focus of the UK Libor rate-rigging investigation and is being investigated by the UK financial watchdog for possible breaches of market conduct rules. () CAMERON PUTS EU FUTURE ON THE LINE David Cameron put Britain's future in the EU on the line in an audacious gamble that united his Conservative party but could have profound implications for the country.

UK LABOUR MARKET DEFIES GLOOM The puzzle of Britain's productivity performance grew on Wednesday, with an unexpectedly buoyant set of employment figures ahead of Friday's output data for last year's fourth quarter, which many economists think will show a dip.

GMG ENDS TALKS TO SELL TRADER STAKE Guardian Media Group has called off talks with interested buyers over the sale of its half stake in the car classifieds company Trader Media Group following a failure to agree a price. Apax, its joint venture partner in Trader Media, had been interested in buying out the 50.1 per cent owned by GMG in a deal that would have netted the publisher of the Guardian and the Observer around 300 million pounds in cash.

CHINESE FUND AND SCHMIDT-BACKED BANK UNITE A boutique merchant bank backed by Google executive chairman Eric Schmidt has struck a deal with a Chinese state-owned fund to work together on media, sport and entertainment acquisitions. Raine's partnership with China Media Capital, which manages a Rmb5bn ($805m) fund, is the latest sign that China's nascent but fast-growing media sector is keen to borrow expertise and contacts from established western operators.

NYT

* Investors have come to expect nothing short of perfection from Apple Inc but with the company's stock sinking 11 percent, it is clear there are a range of challenges.

* Avoiding an economic showdown with President Obama, the House on Wednesday passed legislation to eliminate the nation's statutory borrowing limit until May, without including the dollar-for-dollar spending cuts that Republicans once insisted would have to be part of any debt limit bill.

* Prime Minister David Cameron of Britain has added to Europe's malaise, vowing to reduce British entanglement with the European Union - or allow his people to vote in a referendum to leave the bloc altogether.

* Daniel Vasella, the longtime chairman and former chief executive of Novartis, the Swiss drug maker, plans to step down next month, the company said on Wednesday, when it also reported a jump in fourth-quarter profit.

* The International Monetary Fund said on Wednesday that it continued to expect a modest upturn in global growth in 2013, with fewer risks of major policy mistakes and lower levels of financial stress.

* Netflix Inc reported $8 million in net income, surprising analysts who had expected a slight loss. It increased the number of subscribers for its streaming service to 27 million.

* The Boeing 787's difficulties have raised questions about how regulators certify new technology and how they balance advances in design and engineering with safety.

* Japan on Thursday reported a record annual trade deficit in 2012, the second straight year in the red for an exporting nation that has long built its wealth on its vast trading surpluses.

* A survey of manufacturing activity in China on Thursday provided more reassurance that the Chinese economy, buoyed by somewhat improved global trade and a string of government stimulus measures last year, has settled into a muted recovery.

* US Airways Group Inc reported on Wednesday that its net income doubled in the fourth quarter from a year earlier, and its executives said strong passenger demand for the airline could lead to higher fares.

* The long decline in the number of American workers belonging to labor unions accelerated sharply last year, according to data reported on Wednesday, sending the unionization rate to its lowest level in close to a century.

Canada

THE GLOBE AND MAIL

* Nigeria, the leading power in West Africa, wants Canada and other western nations to take on the conflict in Mali as an international problem and provide funding and heavy equipment like helicopters.

* As Canadian finance minister Jim Flaherty prepares the Conservative government's 2013 budget, his main target will be to balance the books by 2015. With that horizon in mind, economists see several reasons for him to be optimistic, including positive signs from the United States and European economies, as well as the country's housing market.

Reports in the business section:

* The Bank of Canada is setting aside worries over a housing bust to double down on a broader concern, the country's sputtering economy.

The central bank surprised Bay Street and Wall Street on Wednesday by dropping from its latest policy statement any hint that it would raise interest rates to deter Canadians from bidding up housing prices and adding to record levels of household debt.

* RBC Dominion Securities raised its price target for Research In Motion Ltd to C$19 from C$11 ahead of the crucial launch of the smartphone maker's BlackBerry 10 devices, but warned that it is "far too early" to call the company's turnaround a success.

NATIONAL POST

* Canadian Prime Minister Stephen Harper said he was searching for a "consensus" within Canada and the Parliament on how to contribute to stopping the spread of terrorism in Mali, but he would not allow a direct Canadian military mission into the African country.

* Manitoba chiefs are not poised to cede from the assembly of First Nations, but leaders gathered in Winnipeg on Wednesday raised questions about the national body's mandate to represent aboriginals on treaty issues.

FINANCIAL POST

* Bombardier Inc CEO and President Pierre Beaudoin said he hopes that its CSeries airliners will take its first flight in June, demonstrating that the Quebec transportation giant has learned the lessons from Boeing Co's difficulties with its 787 Dreamliner.

* The Canadian and global economies will continue struggling to maintain momentum this year, but in a relatively hopeful new outlook, the International Monetary Fund (IMF) said it saw light at the end of the tunnel.

The IMF now expects Canada's economy to expand by a modest 1.8 percent this year and by 2.3 percent in 2014.

China

CHINA SECURITIES JOURNAL

--The value-added growth of large industrial enterprises is expected to rise 10 percent, said Zhu Hongren, chief engineer at the Ministry of Industry.

--The Industrial & Commercial Bank of China, the world's biggest bank by market value, said the volume of its renminbi cross-border business hit over 1.5 trillion yuan ($241.24 billion) in 2012, rising 70 percent from a year earlier.

SHANGHAI SECURITIES NEWS

- Hong Kong is working closely with Chinese authorities to promote the mutual recognition of investment funds, which would pave the way for these funds to be sold into both sides of the market, said the deputy chief executive of Securities & Futures Commission of Hong Kong.

- Steam coal prices on the Bohai Bay Rim Index fell 2 yuan from week ago to 629 yuan ($100)a tonne this week, marking the sixth consecutive session of falls, which has brought prices down by a total of 11 yuan since mid-December.

SHANGHAI DAILY

--Chinese companies are becoming increasingly confident in venturing overseas to expand trade and cement their prescence on a global scale, a private survey showed. About four in every five international Chinese companies surveyed by HSBC plan to boost overseas expansion, according to the survey.

--China will continue testing and expand the trial run of the new 4G network technology that allows 10-20 times faster internet access, the industry's top regulator said.

CHINA DAILY (www.chinadaily.com.cn)

--The yuan-denominated business of two major Chinese banks - Industrial and Commercial Bank of China Ltd and Bank of China Ltd - surged in 2012 as global demand for the currency increased.

--China's first locally manufactured, battery-powered vehicle has been handed over to its buyer in Shanghai.

Fly On The Wall 7:00 Market Snapshot

ANALYST RESEARCH

Upgrades

ASML (ASML) upgraded to Buy from Neutral at BofA/Merrill
Autodesk (ADSK) upgraded to Outperform from Sector Perform at RBC Capital
Bed Bath & Beyond (BBBY) upgraded to Outperform from Perform at Oppenheimer
CSX (CSX) upgraded to Outperform from Sector Perform at RBC Capital
Cubist (CBST) upgraded to Hold from Sell at Cantor
Dillard's (DDS) upgraded to Outperform from Neutral at Credit Suisse
Emerson (EMR) upgraded to Buy from Hold at Deutsche Bank
Gol Linhas (GOL) upgraded to Buy from Neutral at Goldman
Netflix (NFLX) upgraded to Buy from Neutral at Lazard Capital
Netflix (NFLX) upgraded to Market Perform from Underperform at Raymond James
Netflix (NFLX) upgraded to Neutral from Underperform at Macquarie
Netflix (NFLX) upgraded to Overweight from Neutral at JPMorgan
Ross Stores (ROST) upgraded to Outperform from Neutral at Credit Suisse
Tenet Healthcare (THC) upgraded to Outperform from Market Perform at Raymond James
Torchmark (TMK) upgraded to Buy from Neutral at SunTrust

Downgrades

Albermarle (ALB) downgraded to Hold from Buy at Deutsche Bank
Albermarle (ALB) downgraded to Neutral from Buy at Citigroup
Allegheny Technologies (ATI) downgraded to Neutral from Buy at Goldman
Altera (ALTR) downgraded to Market Perform from Outperform at William Blair
Apple (AAPL) downgraded to Hold from Buy at Jefferies
Apple (AAPL) downgraded to Sector Perform from Outperform at Scotia Capital
Coach (COH) downgraded to Neutral from Buy at ISI Group
Copa Holdings (CPA) downgraded to Neutral from Buy at Goldman
Douglas Dynamics (PLOW) downgraded to Neutral from Outperform at Credit Suisse
Energizer (ENR) downgraded to Market Perform from Outperform at BMO Capital
Magnum Hunter (MHR) downgraded to Hold from Buy at Jefferies
Netflix (NFLX) downgraded to Neutral from Outperform at Credit Suisse
Parkway Properties (PKY) downgraded to Sell from Hold at Cantor
Primerica (PRI) downgraded to Reduce from Neutral at SunTrust
Redwood Trust (RWT) downgraded to Market Perform from Outperform at JMP Securities
Reinsurance Group (RGA) downgraded to Equal Weight from Overweight at Morgan Stanley
Safeway (SWY) downgraded to Underweight from Equal Weight at Barclays
Stillwater Mining (SWC) downgraded to Neutral from Outperform at Credit Suisse
Tiffany (TIF) downgraded to Hold from Buy at Canaccord
Veeco (VECO) downgraded to Neutral from Buy at UBS

Initiations

Atwood Oceanics (ATW) initiated with an Overweight at Barclays
Church & Dwight (CHD) initiated with an Outperform at Credit Suisse
Clorox (CLX) initiated with an Outperform at Credit Suisse
Colgate-Palmolive (CL) initiated with an Outperform at Credit Suisse
Expedia (EXPE) initiated with a Buy at Ascendiant Capital
Kimberly Clark (KMB) initiated with an Underperform at Credit Suisse
Ocean Rig UDW (ORIG) initiated with an Overweight at Barclays
PBF Energy (PBF) initiated with an Overweight at Morgan Stanley
Pacific Drilling (PACD) initiated with an Overweight at Barclays
Procter & Gamble (PG) initiated with a Neutral at Credit Suisse
Splunk (SPLK) initiated with an Outperform at BMO Capital

HOT STOCKS

Apple (AAPL) CEO Cook: Very confident in our product pipeline
Apple said changing approach to guidance
Nokia (NOK) to propose no dividend be paid for 2012
Starwood Property (STWD), Starwood Capital to acquire LNR Property LLC for $1.05B
American Airlines (AAMRQ) signed 12-year capacity purchase agreement with Republic (RJET). Republic signed an agreement with Embraer (ERJ) to purchase 47 new aircraft
Amgen (AMGN) said on track to hit upper end of 2015 revenue guidance
Said no plans to raise additional debt in 2013
SanDisk (SNDK) said positioned for strong profitability in 2013
Netflix (NFLX) said no plans to launch additional international markets in 1H13
Said more and more interested in exclusive content
Symantec (SYMC) reorganized management, will reduce middle-management workforce
United Rentals (URI) sees FY13 increase in rental rates of approximately 4.5%

EARNINGS

Companies that beat consensus earnings expectations last night and today include:
Stanley Black & Decker (SWK), Cash America (CSH), Knight Capital (KCG), Jacobs Engineering (JEC), Teradyne (TER), Hill-Rom (HRC), Apple (AAPL), United Rentals (URI), Western Digital (WDC), Sealy (ZZ), SanDisk (SNDK), Netflix (NFLX), Stryker (SYK)

Companies that missed consensus earnings expectations include:
Cabot Microelectronics (CCMP), Logitech (LOGI), Noble Corp. (NE), F.N.B. Corp. (FNB), Energen (EGN), Hexcel (HXL), Greenhill & Co. (GHL)

Companies that matched consensus earnings expectations include:
KeyCorp (KEY), Susquehanna (SUSQ), Celadon Group (CGI), Cubist (CBST)

NEWSPAPERS/WEBSITES

Last year Japan's trade deficit nearly tripled to a record $78.3B and few expect a drastic improvement anytime soon, leaving Tokyo no choice but to continue with efforts to boost the economy, the Wall Street Journal reports
Citigroup’s (C) U.S. retail and commercial banking has the highest average deposits per branch among top lenders but generates lower profits than the others. The bank is attempting to turn that around, including an upgrade of computer systems, remodel branches and make employees more accountable in what is arguably the biggest internal overhaul at Citibank in decades, the Wall Street Journal reports
Growth in China's factory sector surged to a two-year high in January as manufacturers received more local and foreign orders in an encouraging sign for the country's economic rebound. The HSBC flash purchasing managers' index (PMI) increased to 51.9 in January, the highest since January 2011 and above the 50-point level that shows accelerating growth in the sector from the previous month, Reuters reports
Japanese regulators joined the U.S. in all but ruling out overcharged batteries as the cause of recent fires on the Boeing (BA) 787 Dreamliner, which has been grounded for a week. The FAA said there are still no firm answers as to the cause and no clear timetable yet for returning the plane to flight, Reuters reports
With toxic smog engulfing Beijing and much of the rest of the country for weeks, China is considering tighter vehicle curbs and emissions standards like Europe’s. That could benefit GM (GM), Volkswagen (VLKAY) and Hyundai Motor  in a market where sales are forecast to pass 20M units this year, Bloomberg reports
Building supply stocks such as USG (USG) in which Warren Buffett (BRK.A) holds a 16% stake, and Eagle Materials (EXP) that more than doubled last year look to rise further as the U.S. housing market extends its recovery, Bloomberg reports

SYNDICATE
ARIAD (ARIA) files to sell common stock
American Realty (ARCP) announces public offering of 1.5M shares of common stock
Buckeye Partners (BPL) files to sell 6M common units
KB Home (KBH) 5.5M share Secondary priced at $18.25

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Obama to the Left? Media Avoid Reality Behind Inaugural Rhetoric

If there was one consistent media message about the Obama inauguration ceremony, it was the idea that he was announcing a clear shift to the left. But coverage failed to provide much background on the president's actual policies, which would have challenged that impression.

"The president called for an ambitious liberal agenda in his inaugural address yesterday," said CBS Evening News anchor Scott Pelley (1/22/13).  On the PBS NewsHour (1/22/13), Gwen Ifill said, "President Obama's forceful new focus on progressive ideals echoed across the nation on the day after the inauguration." The headline across the front page of the New York Times (1/22/13) read, "Obama Offers Liberal Vision."

The supposed move to the left unnerved some pundits (FAIR Blog, 1/22/13); corporate media generally prefer Democratic presidents when they're talking about compromising with their Republican opponents.

Much of the attention to this progressive shift came due to Obama's comments about climate change:

We will respond to the threat of climate change, knowing that the failure to do so would betray our children and future generations. Some may still deny the overwhelming judgment of science, but none can avoid the devastating impact of raging fires, and crippling drought, and more powerful storms. The path towards sustainable energy sources will be long and sometimes difficult. But America cannot resist this transition; we must lead it.

The inclusion of climate change was treated as a particularly big deal, given that inaugural addresses seldom dwell on policy. "Speech Gives Climate Goals Center Stage" read one headline in the next day's New York Times (1/22/13). But that story, and much of the media commentary on his climate comments, failed to even mention the Keystone XL pipeline, currently under State Department review.

The carbon-intensive project, bringing tar sands oil from Canada to the Gulf Coast, would be a major source of heat-trapping greenhouse gases (NRDC, 1/17/13). (The Alberta tar sands contain as much as 240 gigatons of carbon, or almost half the total it's estimated humans can add to the atmosphere without dangerously raising global temperatures--Rolling Stone, 7/19/12.)

It is hard to fathom how meaningful action on climate change would be possible if Keystone were approved, but the White House has not spoken out in opposition to the pipeline (Nation.com, 1/22/13). Leaving out Obama's most important upcoming climate policy decision when covering his climate agenda is a media failure.

Part of the inaugural address discussed immigration policy as well, when Obama said this:

Our journey is not complete until we find a better way to welcome the striving, hopeful immigrants who still see America as a land of opportunity; until bright young students and engineers are enlisted in our workforce rather than expelled from our country.

On the PBS NewsHour (1/22/13), host Gwen Ifill introduced that soundbite by saying that Obama "also raised immigration reform, an issue that went unaddressed for much of his first term." And the New York Times (1/22/13) reported that for Latinos the inauguration was "an occasion to savor newfound political clout," though it was tempered by the "sense that Obama had better make good on the promises he failed to keep during his first term, including an immigration overhaul."

That's one way to look at it. But the reality is that Obama did have an immigration policy in his first term, and it was an extraordinarily punitive one. That policy record was mostly missing from discussions. An exception came from NPR correspondent Ted Robbins (1/21/13):

He and his administration have deported more than a million and a half people, which is a record, and he spent $18 billion, according to the Migration Policy Institute last year, on enforcement. And implemented Secure Communities, which is a local law enforcement sharing data of people they arrest with federal immigration authority.

And CNN's John King (1/21/13) told viewers: "It was the Obama administration that angered many Latinos, and especially Latino interest groups, by increasing the number of deportations."

Since the significance of Obama discussing policy is that the policies themselves affect the world and people's lives, reporters covering the speech would have served the public better if they had clarified how the president's rhetoric matched up with his record.

© 2012 Fairness & Accuracy In Reporting (FAIR)

FAIR, the national media watch group, has been offering well-documented criticism of media bias and censorship since 1986.

Japan sets record 2012 trade deficit

Japan’s trade deficit hit a new record for 2012. (File photo)

Japan says its trade deficit for 2012 hit a new record as exports suffered from sour diplomatic ties with the country’s biggest market, China.

The Japanese Finance Ministry released the latest official figures on Thursday, indicating that the trade shortfall last year totaled 6.92 trillion yen (about $78 billion), with the deficit in December alone standing at a higher-than-expected 641.5 billion yen.

The data marked a second consecutive annual trade deficit for the world’s third-largest economy.


The figures are bad news for the new government of Shinzo Abe, who won the December election, pledging to boost Japan’s economy.

Meanwhile, lesser demand from the eurozone has also worsened the trade balance of Japan.

“The figures will likely be better in 2013 as overseas economies improve,” said Masahiko Hashimoto, an economist at Daiwa Institute of Research in Tokyo, adding that the impact of a territorial feud with China would probably fade.

“The European economy may continue to worsen until the middle of the year but China and other Asian economies are likely to lead the global economy.”

Tokyo’s deficit with Beijing doubled to a record 3.52 trillion yen, as tensions between the two countries over a group of disputed islands in the East China Sea caused a consumer boycott of Japanese goods in China.

Massive protests held in China over the islands dispute and attacks on Japanese companies and factories prompted Tokyo to shut down its auto business in China temporarily in September 2012.

MSH/HSN/MA

The High Price Of Understated Inflation

The reliable data which policymakers and the public need if effective solutions are to be found is not available. As Tullett Prebon's Tim Morgan notes, economic data has been subjected to incremental distortion; Data distortion can be divided into two categories. Economic data has been undermined by decades of methodological change which have distorted the statistics to the point where no really accurate data is available for the critical metrics of inflation, growth, output, unemployment or debt. Fiscal data, meanwhile, obscures the true scale of government obligations. While he does not believe that the debauching of US official data is the result of any grand conspiracy to mislead the American people; he does see it as an incremental process which has taken place over more than four decades. From 'owner equivalent rent" to 'hedonics', few series have been distorted more than published numbers for inflation, and few if any economic measures are of comparable importance; and the ramifications of understated inflation are huge.

Via Dr. Tim Morgan, Tullet Prebon, the high price of understated inflation

Though the undermining of data quality has been widespread, few series have been distorted more than published numbers for inflation, and few if any economic measures are of comparable importance. In the United States, CPI-U inflation reported at 3.2% in 2011 probably masked real price escalation which was very much higher than that. This is hugely significant, because inflation is central to calculations of economic growth, wages, pensions and benefits. Moreover, understated inflation undermines calculations of the ‘real’ cost of credit as represented by interest rates and bond yields, a factor which, as we shall see, may have played a very significant role in the escalation of indebtedness during the credit super-cycle.

British inflation data, too, seems pretty optimistic Between 2001 and 2011, average weekly wages increased by 38%, which ought to have been a more than adequate rise when set against official CPI (consumer price index) inflation of 27% over the same period (fig. 4.1). But the reported rate of overall inflation between those years seems strangely at odds with dramatic increases in the costs of essentials such as petrol (+59%), water charges (+63%), electricity (+97%) and gas (+168%).

Those who question the accuracy of official inflation measures in Britain have nothing much more upon which to base their suspicions than intuition, experience and the known escalation of the prices of essentials. In the United States, this situation is quite different, and far greater data transparency has enabled analysts to reverse out the methodological changes of the last three decades. The scale of the distortions which have been identified is truly shocking.

The biggest single undermining of official inflation data results from the application of “hedonic adjustment”. The aim of hedonic adjustment is to capture improvements in product quality. The introduction of, say, a better quality screen might lead the Bureau of Labor Statistics (BLS) to deem the price of a television to have fallen even though the price ticket in the shop has remained the same, or has risen. The improvement in the quality of the product is equivalent, BLS statisticians argue, to a reduction in price, because the customer is getting more for his or her money.

A big problem with hedonic adjustment is that it breaks the link between inflation indices and the actual (in-the-shop) prices of the measured goods. Another is that hedonic adjustment is subjective, and seems to incorporate only improvements in product quality, not offsetting deteriorations. A new telephone might, for example, offer improved functionality (a hedonic positive), but it might also have a shorter life (a hedonic negative) and, critics claim, the official statisticians are all too likely to incorporate the former whilst ignoring the latter. The failure to incorporate hedonic negatives may be particularly pertinent where home-produced goods are replaced by imports, a process which has been ongoing for more than two decades. A Chinese-made airbrush might be a great deal cheaper than one made in America, but is the lower quality of the imported item factored in to the equation?

A second area of adjustment to inflation concerns ‘substitution’. If the price of steak rises appreciably, ‘substitution’ assumes that the customer will purchase, say, chicken instead. As with hedonic adjustment, the use of substitution not only breaks the link with actual prices (a process exacerbated by ‘geometric weighting’), but it also, as Chris Martenson explains, means that CPI has ceased to measure the cost of living but quantifies “the cost of survival” instead.

Geometric weighting, too, plays a significant role in the distortion of American inflation data. In any case, some of the weightings used in the official indices look strange, one example being medical care, which accounted for 16% of consumer spending in 2011 but is weighted at just 7.1% in the CPI-U.

Since the process of adjustment began in the early 1980s, the officially-reported CPI-U number has diverged ever further from the underlying figure calculated on the traditional methodology. Fig. 4.2 gives an approximate idea of quite how distorted US inflation data seems to have become over three decades. Instead of the 3.2% number reported for 2011, for example real inflation was probably at least 7%. Worse still, the official numbers probably understate the sharp pick-up in inflation which America has been experiencing. A realistic appreciation of the inflationary threat would be almost certain to have forced very significant changes in monetary policy.

Taken in aggregate, the extent to which the loss of dollar purchasing power has been understated is almost certainly enormous. Between 1985 and 2011, official data shows that the dollar lost 53% of its value, but the decrease in purchasing power might stand at more like 75% on the basis of underlying data stripped of hedonics, substitution and geometric weighting.

The ramifications of understated inflation are huge. First, of course, and since pay deals often relate to reported CPI, wage rises for millions of Americans have been much smaller than they otherwise would have been. Small wonder, then, that millions of Americans feel much poorer than official figures tell them is the case. By the same token, those Americans in receipt of index-related pensions and benefits, too, have seen the real value of their incomes decline as a result of the severe (and cumulative) understatement of inflation.

This process, of course, has saved the government vast sums in benefit payments. Rebasing payments for the understatement of inflation since the early 1980s suggests that the Social Security system alone would have imploded many years ago had payments matched underlying rather than reported inflation. In other words, the use of ‘real’ inflation data would have overwhelmed the federal budget completely or, conversely, might have forced government to come clean on what levels of welfare spending really can be afforded.

Another implication of distorted inflation, an implication that may have played a hugely important role in the creation of America’s debt bubble, is that real interest rates may have been negative ever since the late 1990s (fig. 4.3). Taking 2003 as an example, average nominal bond rates12 of 4.0% equated to a real rate of 1.7% after the deduction of official CPI-U inflation (2.3%), but were almost certainly heavily negative in real terms if adjustment is made on the basis of underlying inflation instead.

Logically, it makes perfect sense to borrow if the cost of borrowing is lower than the rate of inflation. Whilst most Americans may not have been aware of the way in which inflation numbers had been subjected to incremental distortion, their everyday experience may very well have led them to act on an intuitive understanding that borrowing was cheap. We believe that distorted inflation data may, together with irresponsible interest rate policies and woefully lax regulation, have been a major contributor to the reckless wave of borrowing which so distorted the US economy in the decade prior to the financial crisis.

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Baroness Warsi Slams Media For Fuelling Anti-Muslim Hatred

Baroness Warsi will hit out at the media for spreading negative stories about Islam on Thursday, arguing it must share the blame for a rise in hate crimes against Muslims and for "fuelling Islamophobia".

In a speech in London this evening, the minister for faith and communities and senior Foreign Office minister will say there is an "underlying, unfounded mistrust" among many Britons towards Muslims as well as a "misinformed suspicion of people who follow Islam".

Warsi will make the comments at a dinner held by Mama, a new government-backed group dedicated to measuring and monitoring anti-Muslim attacks.

The former Tory chairman will cite recent YouGov polling data that revealed just 23% of those asked thought Islam was not a threat to Western civilization.

"Perhaps most disturbingly, nearly half of people polled thought there would be a clash of civilisations between and Muslims and other Britons,” she will say.

Warsi will also say that early indications are that 50-60 per cent of reported religious hate crimes in 2011 were anti-Muslim.

"Sadly, much of this negative narrative is being perpetuated by certain sections of the media," she will say.

“Lord Justice Leveson’s report event revealed journalists were encouraged to make up stories about Muslims. And concluded that the unbalanced reporting of ethnic minorities was endemic.”

Warsi’s speech comes two years after her infamous "dinner-table test" speech in which she said prejudice against Muslims had become socially acceptable in the UK.

Downing Street distanced itself from the then Tory chairman, claiming it had not cleared the speech before key lines were briefed to the media.

Warsi who lost her job as chairman in the September reshuffle, will defend her 2011 comments and return to the theme, arguing it is her duty to counteract negative perception of Muslims.

“When I said that Islamophobia had ‘passed the dinner table test’ I meant anti-Muslim sentiment had become so socially acceptable, it could be found even in the most civilised of settings,” she will say.

"I got a fair amount of stick for making that statement: There were those who denied the problem existed. There were those who said talking about it was dangerous. But let me tell you what’s really dangerous: It’s when people are treated differently because they hold a different religious belief.”

She will warn Britain is danger of turning a "blind eye" towards discrimination and that "any form of prejudice, bigotry or discrimination is wrong" and "unBritish".

Warsi will add: "An attack on one faith is an attack on all faiths. And an attack on faith is an attack on freedom.

"It’s a matter for everyone who cares about Britain being the modern, equal, fair society that we want it to be. After all, anti-Muslim hatred is a form of prejudice. And there should be no place in Britain for this prejudice."

New Labor Stats Show Assault on Public Unions Is Working

As the Washington Post's Jim Tankersley points out and new data from the US Department of Labor released on Wednesday confirms, the Republican push to destroy public sector unions in the last several years is having its desired effect.

Union members and supporters protest right-to-work legislation at the Michigan Capitol on Dec. 6, 2012. (Photo:Jonathan Oosting/ MLive.com) According to the Bureau of Labor Statistics' new figures on unionization, the percentage of organized workers in the US took a sharp—and 'unusual'—decline last year, dropping from 11.8 percent in 2011 to 11.3 percent in 2012.

Moreover, as the New York Times highlights, the largest dip came not from the typical source of private union attrition caused by offshoring or factory closings, but from job losses in the public sector, which caused overall public sector union rates to drop more than full point in one year—from 37 percent to 35.9 percent.

Private sector unions—long in decline due to outsourcing linked to corporate globalization policies—now currently have about 7 million members, whereas public employee unions have roughly 7.3 million members.

The curious trend that Tankersley points out is the role that government-pushed austerity has played in union attrition. He writes:

The big culprit for last year’s drop doesn’t appear to be outsourcing (though union factory employment has fallen since the recession, while non-union employment has risen). The issue was austerity.

Specifically, state and local governments laid off a lot of workers last year to help balance their budgets. That means they let a lot of union members go. The Labor Department reports that more than half of all U.S. union members work in the public sector; government is nearly 36 percent unionized, while the private-sector union membership rate is less than 7 percent. (Last year’s stats suggest that some Republican governors’ efforts to reduce unionization in their state public sectors is working – Wisconsin posted a 2.1 percentage point drop in union membership from 2011 to 2012.)

Asking labor leaders to respond to the statistics on membership, Tankersley said they 'roundly' agreed that the drop in rates "reflected a concerted attack on organized labor and an austerity hit to the economy that affects everyone, not just folks with a union card."

“The economic crisis—and the politicians who took advantage of it for their own anti-worker purposes—had a negative impact,” Lee Saunders, president of the American Federation of State, County and Municipal Employees, told Tankersley.

And Richard Trumka, president of the A.F.L.-C.I.O., the nation’s main union federation, added: “Working women and men urgently need a voice on the job today, but the sad truth is that it has become more difficult for them to have one, as today’s figures on union membership demonstrate.”

Libor Rigging and the Criminalization of Global Banking

The Libor is the London Inter-Bank Offer Rate—the rate at which leading banks can borrow from each other in the London markets. It is, however, not simply the banking system’s cost of borrowing or obtaining funds; it has emerged as the anchor of about $800 trillion worth of international financial transactions.

Japan’s Fiscal Stimulus: Yes, There Is Such a Thing as a Free Lunch

Prime Minister Shinzo Abe speaks to the media at a press conference at the Liberal Democratic Party's headquarters in Tokyo, July 29, 2007. (Photo: Ko Sasaki / The New York Times) Prime Minister Shinzo Abe speaks to the media at a press conference at the Liberal Democratic Party's headquarters in Tokyo, July 29, 2007. (Photo: Ko Sasaki / The New York Times) Economists like to say there’s no such thing as a free lunch – this was even the title of a 1975 book by Milton Friedman. But sometimes there is a free lunch – in a vitally important sense – and now is one of those times for a lot of countries suffering from unnecessary unemployment and in some cases, recession.

Adam Posen doesn’t want to recognize that this is the case for Japan at present.  Posen is president of the Peterson Institute for International Economics, which is probably Washington’s most influential think tank on international economics.  Posen is not an “austerian” economist – in the second half of the 1990s he supported expansionary fiscal policy in Japan; and more recently, as a member of the Bank of England’s Monetary Policy Committee from 2009-2012, he supported expansionary monetary policy, including quantitative easing and very low interest rates.

So it is worth looking at his argument, because it may help us understand how the mainstream of the economics profession can sometimes be an obstacle to global economic recovery, as well as to important social goals such as reducing unemployment and poverty.

The Japanese government of Shinzo Abe recently announced a large stimulus program; the exact size is not clear but the government is seeking to boost GDP growth by 2 percentage points.  That would seem to be a good idea, since the Japanese economy is currently in recession, and the world economy to which it exports is not doing so well either.  Japanese inflation is currently negative, which means that the government can create money to pay for the stimulus without having to worry about increasing inflation.  In fact, deflation is the much greater worry, and the government wants the central bank to target a 2 percent inflation rate. (Deflation tends to discourage consumption, because purchases will be cheaper in the future; and investment, because investors are looking at shaky demand in the future, especially with the economy already in recession).

This is what I mean by a free lunch.  In fact, it’s a free lunch and a five-course dinner plus dessert.  It costs the central bank nothing to create this money for the government to spend; and any resulting increase in inflation actually helps get the Japanese economy out of its slump.  It also means that the government doesn’t have to add anything to its net debt – so, no increase in the public debt burden for the future.

But Posen argues that it’s an idea whose time has past.  Here is the crux of his argument:

Stuffing bank balance sheets with JGBs [Japanese government bonds] has constrained commercial lending by those banks – even during the recovery of 2003-08 – which harmed small and new business development. The persistently low returns on Japanese savings have further squandered investment opportunities, thereby creating a negative feedback loop with deflation and older savers’ risk aversion. The absence of external pressure has fed the combined long-term appreciation of the yen and stagnation of Japanese stock market returns, both severely distorting the economy. Needed public investment and funds for adequate healthcare and disaster recovery have been crowded out by debt payments …

I find it difficult to believe that Japanese government debt payments are crowding out public spending, much less private investment.  Net interest payments on Japan’s public debt are less than 1 percent of GDP. (This is also true for the U.S., incidentally, for those who have debt-phobia here.) This is quite small. I am also skeptical about the other problems that he attributes to Japan’s debt accumulation, such as the long-term appreciation of the yen and low stock market returns.  These have multiple causes, as does the amount of commercial lending by banks – which is more likely to be constrained by a weak economy than by government spending.

In any case, it’s difficult to see how a new stimulus program, financed by money creation, would worsen any of these problems – even if the potential for such an effect were possible -- since it doesn’t add to the country’s net debt burden or reduce banks’ lending capacity. 

And a big chunk of the stimulus is targeted toward “needed public investment” and disaster reconstruction that Posen is worried about being crowded out by public debt.

From a public interest perspective, the only worries about a stimulus program like this one would be if the money were poorly spent, e.g. on environmentally destructive rather than constructive activities; and – to a much lesser extent, if the government were to finance it through borrowing from the public, rather than the central bank (i.e. the free lunch).

Posen also argues that the stimulus won’t fix Japan’s “real problem” which is “a return to deflation and an overvalued currency.”  But it’s more likely to reduce these problems than to make them worse. Indeed press reports have noted:

The expectation of aggressive monetary easing and a much bolder BOJ [Bank of Japan] since Abe, who was prime minister in 2006-2007, returned to power has sparked a bull run in Japanese markets.

Tokyo's benchmark stock index, the Nikkei 225, has soared more than 20 percent since mid-November, while the yen has fallen roughly 11 percent in anticipation of aggressive monetary easing. The Nikkei hit a fresh 23-month high on Friday following the release of the stimulus package.

I would also take issue with a certain “false equivalence” regarding the alleged dangers of fiscal stimulus (in this case involving an economy with actual deflation) versus austerity, at a time when not only Japan but Europe is in recession, and much of the global economy is weak and facing downside risks. Posen writes:

Persistent fiscal policies that fail to adapt to changing cyclical conditions result in long-term damage. This holds true whether a government errs on the side of excessive austerity, as in Europe of late, or on the side of unjustified indiscipline, as in Japan since its recovery a decade ago . . . Italy, the UK and the US should fear the structural damage of following Japan’s example if fiscal expansion is not timed to end with recovery.

But the U.S. recovery is too weak; at the current pace it will take more than a decade to get back to full employment.  This is unacceptable. The world economy is projected to grow at 3.6 percent this year, as compared with 5.1 percent in 2010. Japan’s example should be followed anywhere that there is the economic capacity to do so, including in the United States and the eurozone.

Frontrunning: January 23

  • Doubt Greets Bank of Japan's Easing Shift (WSJ)
  • Japan hits back at currency critics (FT)
  • Japan upgrades economic view for first time in eight months (Australian) - only to lower them in a few months again
  • GOP critics get opportunity to grill Secretary Clinton on Benghazi (Hill)
  • Global economy set for ‘slow recovery’ (FT)
  • Obama to back short debt limit extension (FT)
  • Spain economy contracted 1.3% in 2012: Bank of Spain (Presstv)
  • Unfinished Luxury Tower Is Stark Reminder of Las Vegas’s Economic Reversal (NYT)
  • Draghi Says ‘Darkest Clouds’ Over Europe Have Subsided (BBG)
  • High-Speed Dustup Hits a Clubby Corner (WSJ)
  • U.S. Budget Discord Is Top Threat to Global Economy in Poll (BBG)
  • Sir Mervyn King says abandoning inflation target would be 'irresponsible' (Telegraph)
  • Spain Says It May Cover 13% of 2013 Funding in January (BBG)
  • BOE Cites Pound as Rebalancing Obstacle in 8-1 Stimulus Vote (BBG)
  • Riksbank Has Room for More Cuts as Krona Gains, Ekholm Says (BBG)

Overnight Media Digest

WSJ

* Microsoft Corp entered discussions in recent days with private equity firm Silver Lake Partners and Dell Inc founder Michael Dell to help finance a leveraged buyout of the computer maker, according to people familiar with the deliberations. (http://link.reuters.com/vuq45t)

* Google Inc reversed the trend of slowing revenue growth in its core online advertising business, signaling that the internet giant is beginning to get a handle on how the consumer shift toward mobile devices is affecting the online ad industry. (http://link.reuters.com/xuq45t)

* Johnson & Johnson officials learned of problems with a metal hip-replacement implant in 2008, a year before the company stopped making the joints and two years before recalling them, according to documents unsealed in a California state court. (http://link.reuters.com/gyq45t)

* Allergan Inc said it will buy MAP Pharmaceuticals Inc in a $958 million deal that would help the Botox maker expand sales of medical treatments. (http://link.reuters.com/jyq45t)

* IBM Corp got back on track in the fourth quarter after disappointing investors the previous quarter as its software business and sales in emerging markets returned to growth. (http://link.reuters.com/byq45t)

* The White House offered a tacit endorsement of a House Republican plan to defer a fight over the U.S.'s borrowing limit, likely clearing the way for a deal that would forestall a showdown over the country's borrowing limit until late spring. (http://link.reuters.com/tuq45t)

* Prime Minister David Cameron plans to let the British people vote in about five years on whether or not to stay in the European Union, a surprise move critics say will hurt both economies and cast a new shadow over the troubled bloc. (http://link.reuters.com/suq45t)

* Two prominent names in semiconductors, Advanced Micro Devices Inc and Texas Instruments Inc, provided more evidence of soft demand for personal computers and other products. (http://link.reuters.com/myq45t)

* Dish Network Corp plans to close a further 300 Blockbuster stores in the U.S. in the coming weeks, leaving the video chain with less than one-third of the stores acquired by the satellite-television company in 2011. (http://link.reuters.com/nyq45t)

* Banks are fighting an effort by Fannie Mae to cut costs on backup insurance policies often imposed on cash-strapped homeowners, a step that would crimp the lucrative fees the lenders collect on the coverage. (http://link.reuters.com/hyq45t)

* The U.S. Securities and Exchange Commission barred Egan-Jones Ratings Co from issuing ratings on certain bonds, an unprecedented step by the regulator and a setback for a small credit-rating firm. (http://link.reuters.com/zuq45t)

* IKEA is poised to embark on a global spending spree, but its departing chief executive says red tape is slowing how fast the home-furnishings retailer can open its pocket book. (http://link.reuters.com/dyq45t)

FT

 CAMERON TO PROMISE IN-OUT EU BALLOT David Cameron will on Wednesday vow to settle Britain's future in the European Union with a straight in-out referendum by 2017, in a high-risk strategy which will test the willingness of Paris and Berlin to cut the UK a better membership deal.

KING STANDS BY INFLATION TARGETING The governor of the Bank of England has called for it to shed some of the burden of reviving Britain's economy, suggesting the UK government should do more to support the "disappointingly slow" recovery.

POSEN ATTACKS BANK OF ENGLAND'S CULTURE A former policy maker at the Bank of England has attacked the management and culture of the bank, saying its directors abdicated responsibility for reining in a governor who had become far too powerful.

BoJ ACTION TRIGGERS CURRENCY WAR FEARS The Bank of Japan bowed to domestic political pressure and pledged to buy government bonds in potentially unlimited quantities as international policy makers aired fresh concern about the possibility of a global currency war.

BARCLAYS REVAMP TO COST UP TO 2,000 JOBS Barclays is cutting up to 2,000 jobs in its investment bank as part of a strategic overhaul by the bank's chief executive Antony Jenkins. BUMI MOVES CLOSER TO TAKING LEGAL ACTION Bumi intends to take legal action to recover lost funds at its Indonesian subsidiary, Berau Coal, as well as considering other claims resulting from a four-month long investigation into "financial irregularities" at its mining businesses.

NYT

* Microsoft Corp is in talks to help finance a takeover bid for Dell Inc that would exceed $20 billion, a person briefed on the matter said. Microsoft is expected to contribute up to several billion dollars. (http://link.reuters.com/gar45t)

* A closer look at Google Inc's results shows that while the company continues to be a moneymaking machine, its most lucrative business, search on desktop computers, is slowing, while it has not yet figured out how to make equivalent profits on mobile devices. (http://link.reuters.com/har45t)

* Allergan Inc has agreed to pay nearly $1 billion to acquire MAP Pharmaceuticals and gain full control of its experimental treatment for migraine headaches, the two companies announced Tuesday night. (http://link.reuters.com/par45t)

* Investigators in the United States and Japan indicated on Tuesday that many questions remained unanswered in their search for the cause of two incidents in which lithium-ion batteries burned on Boeing Co's 787 aircraft. (http://link.reuters.com/var45t)

* An internal analysis conducted by Johnson & Johnson in 2011 not long after it recalled a troubled hip implant estimated that the all-metal device would fail within five years in nearly 40 percent of patients who received it, newly disclosed court records show. (http://link.reuters.com/kar45t)

* Celgene Corp's drug Abraxane prolonged the lives of patients with advanced pancreatic cancer by almost two months in a clinical trial, researchers reported Tuesday, signifying an advance in treating a notoriously difficult disease but not as big a leap as some doctors and investors had hoped. (http://link.reuters.com/nar45t)

* A hotly contested tax on financial trades took a big step forward on Tuesday when European Union finance ministers allowed a vanguard of member states to proceed with the plan. (http://link.reuters.com/qar45t)

* The governor of Nebraska on Tuesday approved a revised route through the state for the Keystone XL pipeline, setting up a decision for President Obama that pipeline opponents say will be a crucial test of his intentions on climate change. (http://link.reuters.com/rar45t)

* Facing criticism for selling garments made at a Bangladesh factory where 112 workers died in a fire last November, Wal-Mart Stores Inc told its worldwide suppliers that it was adopting tougher rules on fire safety at its contractors and would have "zero tolerance" for suppliers that used unauthorized subcontractors.

Canada

THE GLOBE AND MAIL

* British Columbia community minister Bill Bennett said on Tuesday that the final regulatory pieces have fallen in place for a new liquefied natural gas plant to be built on a native reserve near Kitimat.

The massive LNG plant, a joint venture by Apache Canada Ltd and Chevron Canada Ltd, in cooperation with the Haisla First Nation, will process about 700 million cubic feet of gas per day, becoming a key link in the transportation chain between the province's northeast gas fields and off-shore markets.

* Cash-strapped Parks Canada is consulting the public on a long list of proposed fee hikes for the country's national parks and historic sites, pointing out that the rates have been frozen since 2008 and costs are on the rise.

But at the same time as fees are going up, many services are in decline following C$55 million in announced budget cuts and the resultant 600 jobs lost across the system.

Reports in the business section:

* Quebecor Inc may be the next Canadian regional cable company that will strike a deal to eventually sell some of its unused wireless spectrum, predicts a new analyst report.

* The Canadian federal government is ready to offer financial incentives as part of a pitch to get Volkswagen AG to locate some manufacturing facilities in the country.

Industry minister Christian Paradis said he urged senior Volkswagen executives to "look north" during meetings in Berlin this week, offering the prospect of tapping into Ottawa's newly-replenished C$250 million ($252 million) auto innovation fund.

NATIONAL POST

* Calgary energy firm Griffiths Energy International Inc (GEI) pleaded guilty to a bribery charge under the Corruption of Foreign Public Officials Act and faces fines in excess of C$10.3 million. The company admitted that it paid C$2 million to officials in Chad to get an advantage in two exploration blocks in the oil-rich African country.

* Manitoba chiefs meeting in Winnipeg this week are reportedly slated to consider pulling out of the Assembly of First Nations, highlighting the fragility of a national body that some say needs a reset of its own.

FINANCIAL POST

* Inmet Mining Corp made its long-awaited rejection of First Quantum Minerals Ltd's C$5.1 billion hostile bid on Tuesday.

The Toronto-based miner disputed First Quantum's assertion that it could realize enormous cost savings at Cobre Panama project by using its internal project team and hiring far fewer contractors.

* Supermarket chain Metro Inc will sell about half of its 25-year investment in convenience store operator Alimentation Couche-Tard to three Canadian banks for C$479 million.

The Montreal-based company said on Tuesday that it has agreed to sell 10 million Class B subordinate voting shares to BMO Nesbitt Burns, National Bank Financial and TD Securities for C$47.90 per share.

* Air Canada's Chief Executive Calin Rovinescu said he had faith that Boeing Co will be able to resolve the issues plaguing its 787 Dreamliner and believed in the benefits the plane will bring the country's largest carrier.

China

CHINA SECURITIES JOURNAL

--Analysts expect China's inflation to fall below 2 percent in January due to a high base from last year and as food prices have remained stable.

--China could cut its reserve requirement ratio twice at the beginning of this year with a re