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Video: ‘Interest rates should be settled by free market’ – Ron Paul on continuing...

US stocks have taken another hit continuing to drop after Wall Street experienced its worst day in 8 months on Wednesday. The plunge has...

Actually, NYT, Hurting Growth Is the Whole Point of Raising Interest Rates

Federal Reserve Building (cc photo: Dan Smith/Wikimedia) The Federal Reserve Board raised interest rates on Wednesday. According to comments from Chair Jerome Powell and other...

Why Interest Rates Are Rising

The Fed is aggressively raising interest rates, although inflation is contained, private debt is already at 150% of GDP, and rising variable rates could...

Fox in the Hen House: Why Interest Rates Are Rising

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Mr. President, Be Careful What You Wish for: Higher Interest Rates Will Kill the...

Photo by | CC BY 2.0 Responding to earlier presidential pressure, the Federal Reserve is expected to raise interest rates this week for the...

Federal Reserve raises interest rates for first time since 2006

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Too Soon to Raise Interest Rates?

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What Is Going To Happen If Interest Rates Continue To Rise Rapidly?

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Raising Interest Rates? Canada’s Impending Household Debt Crisis


By Dan Parker

Late last year, TD bank chief economist Craig Alexander released a report stating ”tighter mortgage rules should do the job of cooling Canada’s hot housing market in the short term, but higher interest rates will be needed to return the market to saner levels”.

For a longer lasting solution to the overheated market, Alexander said  “Bank of Canada governor Mark Carney will need to hike interest rates to make borrowing more difficult and expensive. Interest rates simply cannot stay at current levels indefinitely”. Mr. Alexander’s main concern is the record level of debt the average Canadian consumer is carrying. By his estimation, raising interest rates is the way to decrease that indebtedness.

This banker treatise is questionable. First, it suggests that loan officers have no control over the amount of money they lend to a borrower. According to Mr. Alexander, low interest rates means that your local loan officer has no choice but to give you a bigger loan. The truth is the banks can simply adjust their credit ‘scoring’ system so that buyers with a certain disposable income qualify for loans that are less than they do now. The difference here is that this solution will actually decrease indebtedness, instead of increase it, which higher interest rates would do for anyone who has an existing loan coming up for renewal.

Another concern has to do with the fact that a main determinant of extending credit is the amount of the loan payment. If the bank feels you can pay $2,000 a month on a mortgage, then you generally qualify for the loan, if you have the right credit record and collateral.

In the first five years of that mortgage, because banks charge far beyond the quoted interest rate at the beginning of a mortgage, your monthly $2,000 dollars might average out so you pay off $1,000 in loan principal, and $1,000 in compounding interest charges to the bank. Raise the interest rates, and for a new loan, you might still qualify for the same $2,000 a month payment plan, all other things being equal. However, less of your loan payment would go to pay down the principal and more would go towards the compound interest charges of the bank. This would keep you in debt longer and not so coincidentally increase the profits of the bank.

It is worth noting here that the money your bank loans for a mortgage is created out of thin air at the push of a button. They do not lend the money of their depositors for this.

The only way higher interest rates decrease the overall debt is when they push a substantial number of individuals and businesses into bankruptcy. After these entities are financially and otherwise destroyed, their loans are written off, thereby bringing down the nation’s debt. One can only guess why this destructive policy is advocated, rather than bringing down overall debt by the far less damaging method of gradually tightening lending requirements.

What is more, interest charges are built into just about every product and service available. Higher interest rates means businesses would have to charge more to recover their loan costs. This would again make for a tougher financial situation for the average consumer and business. For an extreme example of what can happen one only has to turn back the clock to the 1980s, when 20% interest rates destroyed many businesses and individual lives; the victim’s only crime being a belief in the essential fairness and rationality of the financial system.

That our mainstream media can print information about raising interest rates as being the only way to decrease debt, without comment, shows just how compromised these corporations are. In essence, they are in a massive conflict of interest situation. Interlocking boards of directors and the financial industry have essentially subverted the news that most people rely on to make their democratic decisions.

The so-called right wing C. D. Howe institute joined in the chorus. It released a report averring that inflation rates were understated because of the way Statistics Canada measures this. The problem, says Philippe Bergevin, a senior policy analyst with the institute, is that the statistical agency calculates changes in the costs associated with owning a home, not the actual changes in the prices of homes sold. The article goes on to say “Low interest rate policy for extended periods is what got the world in a mess in the first place, Bergevin points out.”

The only thing that Bergevin truly ‘points out’ is that we do not get good financial information from the mainstream media. Mr. Bergevin also suggests that loan officers and banks have no control over the amount of money they lend, which is untrue. However, Bergevin goes further and blames the last financial crash on low interest rates. There is no mention of the derivatives mess and other gambling by the banking industry that drove much of the last financial meltdown. Or that to facilitate this gambling, banks in the U.S. engaged in so-called NINJA loans, the acronym standing for no income, no job loans. In truth, a 16 year old clerk at the 7-11 would be deemed incompetent if they used such judgement.

Deeper than this, it is the design of the money itself that continually pushes booms and busts. The primary flaw is charging compound interest on newly created money. Without going into too much detail, this concept is confirmed by high school math. It is fact that compound interest is an example of an exponential formula. It is fact that exponential formulas are highly unstable and guaranteed to eventually crash whatever system they are mirroring. Beyond this, banks are causing even more problems because of what is really the mother of all gambling addictions.

Yet once again, it is the average consumer that is blamed for the problems created by the so-called experts. The reality is that if a person wants to stay informed about economic matters, they must step away from our mainstream information sources. Alternatively, one could take each aforementioned quote by the experts, reword it to mean the exact opposite, and thereby have a better understanding of the situation.

Dan Parker lives in Whitecourt, Alberta and for the past 10 years has published the only mass media print product in western civilization that tells the truth about the money system. 5,500 copies of the monthly Community Advisor are mailed out to every individual and business in Whitecourt, with more copies dropped off at coffee shops, waiting rooms etc. All issues are available online at

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According to the website of the European Food Safety Authority (EFSA), it is the keystone of European Union (EU) risk assessment regarding food and feed safety. The website also states that the EFSA provides independent scientific advice and clear communication on existing and emerging risks and that it is an independent European agency funded by the EU budget. The authority operates separately from the European Commission, European Parliament and EU Member States.

Nice sounding words, but over half of the 209 scientists sitting on the agency's various panels have direct or indirect ties with the industries they are meant to regulate. Indeed, according to a recent independent screening performed by Corporate Europe Observatory (CEO) and freelance journalist Stéphane Horel, almost 60% of experts sitting on EFSA panels have direct or indirect links with industries regulated by the agency.

The report ‘Unhappy Meal. The European Food Safety Authority’s independence problem’ identifies major loopholes in EFSA's independence policy and finds that EFSA's new rules for assessing its experts, implemented in 2012 after several conflicts of interest scandals, have failed to improve the situation (1).

The authors warn that this situation casts a severe doubt on the credibility of the scientific output of the key body responsible for food safety at the EU, with the agency issuing recommendations and risk assessments on crucial public health issues such as food additives, packaging, GMOs, contaminants and pesticides.

According to the report, the EFSA's new rules for assessing its experts' interests enable dozens of experts with multiple commercial interests (consultancy contracts, research funding, etc) to still be granted full membership of EFSA panels, including a majority of panel chairs and vice-chairs.

Main author Stéphane Horel said:
“We were shocked by our findings. Even without checking for undeclared interests, the number of conflicts of interest in this agency is very worrying. Experts with conflicts of interest dominate all panels but one. We found that the bulk of conflicts are from research funding and private consultancy contracts, but certain crucial institutions for scientists (scientific societies, journals) are also targeted by industry lobbying, and EFSA seems to ignore this”.

The report also shows that EFSA failed to properly implement its own new rules in several instances and that there is no visible difference between panels assembled under the new policy and those composed using the old policy.

Martin Pigeon, researcher and campaigner at CEO, said:
“There are specific cases the agency was warned about years ago which remain a problem… We hope this report is an eye-opener on the necessity to defend public research integrity from the threats posed on public health by industry influence”.

Further concerns

On the heels of that report now comes the news that the European Commission's Health and Consumers Directorate (SANCO) has short-listed a director of the biggest EU food industry lobby group FoodDrinkEurope among the candidates to the Management Board of the EFSA (2).

Ms Beate Kettlitz works in a leading position for the lobby group, which represents all major European food and drink corporations. Moreover, it is the second year in a row that the Commission has tried to appoint representatives from FoodDrinkEurope as Members of EFSA's Management Board.

A year ago, the European Commission nominated FoodDrinkEurope's Executive Director Mella Frewen (a former Monsanto lobbyist). Her appointment was rejected by the European Parliament and the MemberStates.

EFSA’s Management Board is key: it is the food agency's governing body. Everyone eating food in Europe is affected by its decisions. 

Martin Pigeon of CEO:

“The fact that the European Commission shortlists a food industry lobbyist, once again, for EFSA's Management Board is an incomprehensible signal for all those concerned about the protection of consumers and the environment. Such a professional on EFSA's board would by definition be a permanent threat to the EU's food safety agency's independence”

Seven seats on EFSA's Management Board are up for renewal in June 2014. The European Commission has published a list of 23 names, mostly from national food safety agencies, research institutes and academia for the EU Parliament's consideration and the Member States' decision. But four persons among those short-listed also have interests in the food industry:

 Jan Mousing, re-applying for the position, is the CEO of the Danish Knowledge Centre for Agriculture, a private company describing itself as the “main supplier of professional knowledge for the agricultural professions” in Denmark;

 Piet Vanthemsche, who is also re-applying for the position, holds a leading position in industrial farmers union COPA and also sits in MRBB holding, an agri investment fund which also has shares in companies selling GMOs.

Alan Reilly, Chief Executive of the Irish Food Safety Authority (Ireland's public food safety administration), is also a member of the Scientific Advisory Board of the European Food Information Council (EUFIC), a Brussels-based food lobby group financed by the some of the largest private food and drink companies in Europe.

Milan Kovac, from the Slovak Ministry of Agriculture, was a board member of ILSI Europe until 2011. ILSI Europe, an industry research institute supported by all the biggest agrofood multinationals, is a central actor in the agrofood industry's scientific influence over EFSA.

The Commission's justification for these nominations is an industry-friendly interpretation of EFSA's founding regulation, which states that four of the 14 board members “shall have a background in organisations representing consumers and other interests in the food chain”.

In their recent joint press release, CEO and Testbiotech note that nowhere is it mentioned that the food industry should be involved, in fact quite the contrary: EFSA's 2011 independence rules stipulate that “persons employed by industry shall not be allowed to become members of EFSA's Scientific Committee, Scientific Panels and working groups.”

Such trends are worrying to say the least. Writer and researcher William F Engdahl has already alluded to a ‘cancer of corruption’ between the biotech sector and the EFSA (3). And this year, Friends of the Earth Europe (FoE) and GM Freeze released their own research report that expressed serious health-related concerns over the excessive and largely unmonitored use of glyphosate (weedkiller) in Europe (4). Very valid concerns, considering recent research pertaining to the health impacts (5). In 2011, Earth Open Source said that official approval of glyphosate had been rash, problematic and deeply flawed. A comprehensive review of existing data released in June 2011 by Earth Open Source suggested that industry regulators in Europe had known for years that glyphosate causes birth defects in the embryos of laboratory animals. Questions were thus raised about the role of the powerful agro-industry in rigging data pertaining to product safety and its undue influence on regulatory bodies (6).  

The aim of powerful private companies is to make money, to maximise profit for shareholders. Any safety requirements are secondary concerns, if they are concerns at all. Therefore, we expect bodies like the EFSA to take up these concerns on our behalf and to resist the food lobby and agribusiness in their attempts to translate their massive financial clout into political influence, not least where its own Management Board and ‘expert panels’ are concerned.   

On its website, the EFSA states:

“Food is essential to life. We are committed to ensuring food safety in Europe.”

Is it?

Get involved and resist the corporate takeover of Europe: Visit


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Planned Parenthood Celebrates 97 Years of Eugenics, Overt Sexualization of Children
Oct. 17, 2013

Earlier today, Planned Parenthood happily announced it has reached 97 years of running its highly successful eugenics campaign – a campaign which has promoted and normalized birth control, sterilized Americans by the thousands and helped cull the population by killing infants – in addition to its pervasive efforts to teach children about sex at an early age.

One is reminded of the words of Margaret Sanger, the founder of Planned Parenthood, who during her lifetime extolled “The Eugenic Value of Birth Control Propaganda,” and its effectiveness at “[improving] the quality of the race.”

Indeed, the individuals who long for a reduction in the world’s population – like Ted Turner and Prince Philip, Duke of Edinburgh – are likely ecstatic at the eugenics front surviving this long without facing major upheaval by the masses.

Last year, the American Life League produced a great video report exposing Planned Parenthood’s sex-education programs, which start at an extremely young age and actually encourage things like sexual promiscuity, homosexuality and anal sex, to name a few, in efforts to create a generation of sex addicts that will feed an endless cycle of abortions and profit.

Below are a few quotes we don’t anticipate Planned Parenthood will tweet anytime soon:

“A total world population of 250-300 million people, a 95% decline from present levels, would be ideal.” – Ted Turner, in an interview with Audubon magazine.

“In the event that I am reincarnated, I would like to return as a deadly virus, in order to contribute something to solve overpopulation.” – Prince Philip Reported by Deutsche Press Agentur (DPA), August, 1988.

“I must confess that I am tempted to ask for reincarnation as a particularly deadly virus.” – Prince Philip, in his Foreward to If I Were an Animal; United Kingdom, Robin Clark Ltd., 1986.

“I don’t claim to have any special interest in natural history, but as a boy I was made aware of the annual fluctuations in the number of game animals and the need to adjust the ‘cull’ to the size of the surplus population.” – Preface to Down to Earth by HRH Prince Philip, Duke of Edinburgh, 1988, p.8.

“The most merciful thing that a family does to one of its infant members is to kill it.” – Margaret Sanger (editor). The Woman Rebel, Volume I, Number 1. Reprinted in Woman and the New Race. New York: Brentanos Publishers, 1922.

“Birth control must lead ultimately to a cleaner race.” – Margaret Sanger. Woman, Morality, and Birth Control. New York: New York Publishing Company, 1922. Page 12.

“Eugenics is … the most adequate and thorough avenue to the solution of racial, political and social problems.Margaret Sanger.” – The Eugenic Value of Birth Control Propaganda.” Birth Control Review, October 1921, page 5.

This article was posted: Thursday, October 17, 2013 at 3:01 pm


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Why are Unionization Rates at Historic Low?

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay.

The Bureau of Labor Statistics last week reported on the numbers of workers in unions. Let's just back up a step first. In 1955, 35 percent of workers were in unions. Most of those were private-sector workers. Well, last week's report says that private-sector workers were down as low as 6.6 percent. Thirty-five percent of public-sector workers are unionized, for an overall rate of 11.3. One more time: 1955, overall rate of unionization 35 percent; last week, 11.3 percent.Now, in that same week, the Dow Jones Industrial Average on the stock market broke 14,000 for the first time in five years—the market's at a historic high.Now joining us to talk about all of this is Stephanie Luce. She's an associate professor of labor studies at the Murphy Institute School for Professional Studies at the City University of New York. She's the author of Fighting for a Living Wage and coauthor, The Living Wage: Building a Fair Economy and The Measure of Fairness. She joins us from New York. In fact, she's in Brooklyn. Thanks for joining us, Stephanie.PROF. STEPHANIE LUCE, LABOR STUDIES, THE MURPHY INSTITUTE, CUNY: Thanks for having me.JAY: So let's focus on the main number here, which is from 35 percent in '55 down to 11 and change now. That's a rather drastic decrease. Why do you think this is happening?LUCE: Well, I think, you know, this steady decrease has been going on for several decades. And for a while, the number of workers in unions was going up as an absolute number, but the density was falling. And now density is falling as well. And I think really you can kind of divide this into different categories of explanations. One of the explanations is that unions themselves are to blame. They were slow to recognize a changing global economy. They were resistant to immigrant workers belonging to unions. They were not innovative in their organizing strategies and not aggressive about corporate globalization. But on the other hand, there's a lot of external forces, too, which is that employers have really been on the offensive against unions in the last 30 years and have in fact changed laws, changed regulations, and even broke—you know, they've—breaking laws as a way to fight unions and keep unions out of the workplace. So we see weak labor law, weakly enforced labor law, but also changing global rules and regulations around workers' rights.JAY: Well, let's start with some of the internal factors first, and then we'll go to external. I mean, it seems to me one of the internal factors is that the leaders of many of the major unions get paid very, very well. I mean, some of them are in the $200,000, $300,000 mark, plus they get all this expense accounts. You can often run into, you know, leaders of major unions eating steaks, you know, $40, $50 steaks and such for lunch. And I've seen it. This isn't just some stereotype. And, frankly, it's, you know, their argument as well: people that run businesses, you know, live this way; why shouldn't the leaders of workers live like this? But that's exactly the point is they started living and thinking like people that run businesses.LUCE: Right. Yeah. There's no doubt that we've had bureaucratization and some corruption and a greater hierarchy within the labor movement. That certainly is a problem. There are a lot of unions that are not really democratically run. They don't really involve their members. You know. And I think that for some people to say, well, that should suggest that we don't need unions or unions are outdated, I often say, well, that's also true in Congress. We see a lot of members of Congress, you know, engaging in corruption and not so democratic. But we're not necessarily calling to abolish Congress, right? We're calling for reform and revitalizing to make it more democratic and more engaging. And I think the same is true of unions, which is that, you know, unions' leaders have had faults, but I'm not ready to give up on them as institutions. I think they still represent one of the only chances that workers have for a democratic voice in the workplace.JAY: Well, one of the numbers in a recent blog you wrote I think is important, which is, the average union member earns 27 percent more than the average nonunion member. So, I mean, I think that shows that, you know, whatever the weaknesses of our unions are, they're still rather—it's a hell of a lot better being in one than not being in one. But in some ways has that not also been part of the problem, which is, for, you know, post World War II there was a kind of a gravy train, especially for the upper tier of workers, like autoworkers and workers in transportation and critical sectors of the economy, where they got very significant wage gains—it wasn't just the union leaders; many of the workers were doing very well. It wasn't unusual to, you know, have a couple of cars and know you could afford university and all the rest. But they didn't give a damn about all the unorganized workers and some of the other sectors of the economy. They kind of were just looking after their own people. And then one day they look around and they find out, oh-oh, we're next.LUCE: Yeah. Well, I mean, I think on the first part is that, yes, unions led to, you know, workers getting a decent income and having some stability, maybe buy a home and send their kids to college. I don't know that we want to—I don't know that I would critique that as too high, because I think workers were getting a share of what they were producing.But on the second point, you're right: they should have been aggressively trying to organize more workers, getting nonunion workers into unions, keeping ahead of what's going on in the economy in terms of changing industries and sectors. And I think not enough of them did that. I wouldn't say no one was doing that, but certainly not enough. And they for the most part, you know, got lazy and behind the trend and didn't keep up with where the economy was going.JAY: Yeah. I mean, I think it's important. There are some unions that are actively organizing and a few unions that are quite militant about their own members and reaching out to others. But I would say the majority have not been—although now that they're being targeted, I mean, maybe you could see a kind of turning point with Reagan and the air traffic controllers. Since that point, sort of the guns have been pointed at some of these stronger American unions. Again, before we get to external factors, let's talk a little bit about the politics of this. I mean, part of the issue is, when there's been Democratic Party governments, either at state levels and nationally, the unions don't seem to have used the clout they used to have to get legislation that might have made it easier to organize unions. And now that they're so weak, they don't have much clout.LUCE: Yeah. And, in fact, even going back to when they were stronger, in the 1970s, we had, you know, Jimmy Carter in office, and we—the Democrats controlled everything, and yet unions were not able to win major labor law reform. So I think that the Democrats have really not been the friend of labor that unions might think that they are. It's not that union leaders are all stupid, but they also realize that they don't have a real exit strategy in this political system, so they've aligned themselves with the Democrats, and for the most part that's been a losing strategy.I think that it didn't work so well even in the '70s when they were strong, and today, as you just said, it certainly is not a way to win any major reform. I think that unions have to seriously rethink their allegiance to the Democratic Party. If it's not realistic to start their own party, they could at least think about withholding their contributions in terms of money and time that they give to electing Democrats over and over again who turn around and sometimes stab them in the back.JAY: This number stands out for me, that unionized workers make 27 percent more than nonunionized workers. Why isn't that fact better known? Like, instead of spending all these millions of dollars of union money promoting the Democratic Party, why don't they spend millions of dollars promoting the fact that unionized workers make more than nonunionized workers? 'Cause I don't think most nonunionized workers know that.LUCE: Well, I think, you know, it's not just wages. They're actually much more likely than nonunion workers to receive health insurance, pension, paid days off, and job security. And a union contract is one of the only ways that workers have to gain any kind of job security in our employment-at-will system. I think there's a little bit of a double-edged sword there, which is, sometimes by promoting that union workers do better, they're afraid that they make themselves more of a target from employers. Like, if they highlight how much, you know, they provide to workers, then does that in fact make unions a greater target? I think that's a mistake, because they already are a target. Employers certainly know this themselves. You know. And another interesting point, though, that I want to highlight is it's not just that—union members make more money than nonunion members, but a lot of research suggests that by having greater union density actually brings up the economy as a whole. So it's good for even nonunion workers when there's greater union density. Some research by Bruce Western at Princeton, he estimates that about 20 to 33 percent of the growth in inequality in this country is because of the falling union density, and he says that what unions did is create a general sense, a norm of equity, a general sense of wage fairness. And what unions do is also reduced inequality between workers. They actually reduced discrimination, for example, between male and female workers or between white and black workers. So there are lots of positive benefits of unions that help not just workers but the economy as a whole.JAY: There's quite a deep-seated feeling, though, amongst unorganized workers that organized, unionized workers, higher-paid unionized workers, is pushing work outside the country, and they blame the unionized workers.It's interesting. We covered a strike in Sudbury, Canada, which—the dynamic here is similar, although unionization rates in Canada are still somewhat higher than in the United States. But this is essentially a one-industry town, a nickel mining town. The nickel miners spend all their money in the town. It's because they've been highly paid that the town does relatively well. They go on strike. And I think—you know, I can't give a scientific take on this, but a majority of ordinary people in the town we talked to were actually blaming the workers for wanting to be highly paid even though they're the spending money in the town, because the company's threatening to go get the nickel somewhere else in the world—which is kind of funny, 'cause obviously, you know, they wanted that nickel. But this division between organized and unorganized workers, I don't see the unions actively fighting it, 'cause even in Sudbury the union wasn't doing that much public relations work to make people understand why that's good for the town.LUCE: Well, I do think some unions are trying. Some unions are active in things like living-wage campaigns and labor-community coalitions to help, you know, low-end workers. But I think, you know, you're right that they need to do a better job of explaining what's going on. I mean, what's interesting is a lot of the drop in unionization in the last year was not because—you know, some of it's jobs moving overseas, but a lot of it is in the public sector. These are not jobs that are moving overseas. This is just, you know, governors attacking workers' rights to form unions. Another huge drop in unionization over the last several decades was in construction. Again, these are not because the employer's moving those jobs to China. These are the same jobs, they're staying here in the United States, but they're being converted to nonunion jobs. So I think you're right. We need a better story and understanding of what's going on in the economy, and that it's not just an inevitable result of globalization that, you know, unions are going to die off.JAY: Yeah. The one words or letters that we have not heard from President Obama during the last presidential election—we haven't heard anything now that he's been inaugurated—was EFCA, the Employee Free Choice Act. This was supposed to be the grand bargain, if you want, with the unions, that President Obama's going to reform labor legislation. And not a whisper of it now.LUCE: Right. Right. And I'm not surprised, because I didn't ever believe that Obama was just going to come in and sign this sweeping labor law reform that, as I said, Jimmy Carter and the Democrats didn't do in the 1970s. I don't think we're going to see any kind of widescale reform like that without massive social protest. I think the unions were grossly mistaken to think they were going to get something in through backdoor channeling, lobbying, or whatever it might be instead of having, you know, massive sit-downs or, you know, people marching in the streets or other forms of social protest. And I feel Obama himself even kind of made that comment when he was first elected. But the unions really didn't pursue that avenue.JAY: Right. Well, thanks for joining us, Stephanie.LUCE: Thank you so much.JAY: And thank you for joining us on The Real News Network.


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ECB Keeps Rates Unchanged As Trade-Weighted Euro Soars

As expected by most, the ECB just announced its three key interest rates unchanged, meaning the surge in the trade- weighted EUR will continue to weigh on European exports.

From the ECB:

7 February 2013 - Monetary policy decisions

At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.75%, 1.50% and 0.00% respectively.

The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 2.30 p.m. CET today.

Today's lack of action by the ECB means that Europe's GDP will start seeing cuts as a result of a soaring trade-weighted EUR as noted below:

From Bloomberg:

The euro has climbed 11 percent on a trade-weighted basis since Mario Dragi pledged on July 26 to do whatever it takes to preserve the currency. A 10 percent gain against a basket of trading partners reduces euro-area GDP by 0.5 percentage point in the first year, according to Elga Bartsch, chief European economist at Morgan Stanley in London

That's 0.5% the Eurozone can't afford to lose.

Nexd up: Drahi's press conference at 8:30am in which he resembles Greenspan in his meandering and meaningless rhetoric ever more.

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The Explanatory Power of Interest Rate Developments

The euro has risen almost 2% against the US dollar thus far this year, while the yen has fallen about 4.5% against the greenback.  Beneath this divergence may be a common consideration:  Interest rate developments. 

One of the key developments has been the steep backing up of short-term European interest rates.  Consider that the implied yield on the March Euribor 13 futures contract has risen from about 10 bp in early in Dec to 35 bp last week.  The yield rise in the Dec '13 contract has been even more pronounced.  In early Dec, the implied yield was about 11 bp.  Now it is near 56 bp.

It is important to note that the increase in yields began at the end of last year and has accelerated this year.  It is being driven by at least three considerations.  First, this may be partly a reflection of less need to safe haven.  There has been a transformation of the main guiding principle from capital preservation to taking on more risk. 

Second, European banks have been borrowing less from the European Central Bank.  The ECB's balance sheet was shrinking even before the European banks repay part of their LTRO borrowings.  Third, the repayment of the LTRO funds was greater than expected at 137 bln euros.  If the borrowings from the second LTRO are repaid in similar proportion, the ECB's balance sheet will shrink another 148 bln euros next month.  Of course it is possible that the banks simply shift some funding from the long-term repo to shorter-term refinancing from the ECB and the weekly operations will be closely monitored. 

One of the consequence these considerations is that the US-German 2-year spread, which historically tracks the euro-dollar exchange rates, has collapsed.  In early December 2012, at about 32 bp, the US was offering the largest premium over German on 2-year money in four months.  It is now flirting to move into Germany's favor.    Over the past 30 and 60 day periods the euro and the 2-year rate differential move in the same direction about 71% of the time. 

The 10-year interest rate differential between the US and German has also moved toward Germany.  The US was offering a 44 bp premium at the end of last year and less than 30 now.  Over the past 30 days, the correlation with the euro and the 10-year interest rate differential is as high as the correlation with the 2-year differential.

What about the weakness of the yen?  Is it simply rhetoric, or do interest rate developments also help explain what is happening?  The 2-year premium over Japan has increased 15 bp the end of 2012 to over 20 bp today., which is the upper of the eight month trading range.  

Just as striking has been the widening differential at the long-end of the curve.  At the end of last year, the US offered about 90 bp more than Japan and now it is offering more than 120 bp. The correlation between the dollar-yen and the 10-year differential is just below 0.90.

The widening of the interest rate differential is largely a function of the increase in US 10-year yields.  Thus far this year, the 10-year Treasury yield has risen 21 bp compared with a 4 bp decline in the 10-year JGB.  We remain struck by how well Japanese government bonds have performed in the face of the yen's depreciation.  While there has been some steepening at the long end (10 yr-30-yr), since the start of the year and for the past three months, Japan's 10-year yield has matched the yield decline seen in the 2-year. 

By extension, interest rate differentials may also help explain the euro's strength against the yen.  In addition, the same consideration is bolstering the euro against sterling.  The premium the UK offers over Germany on 2-year money is below 8 bp, the smallest since Dec 2011.

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Hagel Prostrates Himself Before the Lobby, Gets Votes

The drama around Chuck Hagel's nomination for Secretary of Defense seems to be heading into its predictable third act. While much attention has been given to Hagel's heterodox views (for D.C.) on the Middle East, and the threat that several Democrats might oppose his nomination over Israel, both the nominee and the party seem to be getting in line behind the President (and conveniently the lobby).Chuck Hagel's nomination for Secretary of Defense seems to be heading into its predictable third act.

Politico is reporting this morning on a letter Hagel sent to California Sen. Barbara Boxer answering her concerns regarding his views on U.S. policy towards Iran and Israel, the Israel lobby, as well as issues pertaining to women and gays and lesbians in the military. You can read Hagel's letter here. In it he does an about face on several positions to move towards the conventional wisdom in Washington. The most glaring example is the issue of sanctions against Iran, where Hagel had previously argued against unilateral U.S. sanctions in favor of multilaterial action. No longer. From the letter:

I have long supported economic sanctions that are applied in concert with allies and partners. I strongly supported the Obama Administation's approach which has brought to bear unprecedented multilateral sanctions on Iran, including UN Council Resolution 1929. Regarding unilateral sanctions, I have told the President I completely support his policy on Iran. I agree that with Iran's continued rejection of diplomatic overtures, further effective sanctions, both multilateral and unilateral -- may be necessary and I will support the President.

Hagel also apologized for using the term "Jewish lobby" and promised the special relationship is in safe hands if he is confirmed:

As to my use of the phrase "Jewish lobby" to describe those who advocate for a strong U.S.-Israeli relationship, I've acknowledged that this was a very poor choice of words. I've said so publicly and I regret saying it. I used that terminology only once, in an interview. I recognize that this kind of language can be construed as anti-Israel.  I know the pro-Israel lobby is comprised of both Jewish and non-Jewish Americans. In the Senate, I was a strong supporter of Defense appropriations, which provided enduring support for Israel’s security. Most Americans, myself included, are overwhelmingly supportive of a strong U.S.-Israel strategic and security relationship.

Hagel proves his pro-Israel bona fides by promising to deepen military cooperation with Israel and repeating a beltway mantra as American as baseball and apple cake:

America’s relationship with Israel is one that is fundamentally built on our nations shared values, common interests and democratic ideals. The Middle East is undergoing dramatic and historic changes, ones which surround Israel with tremendous uncertainty. We are working together daily, hand in hand, in unprecedented ways, to counter old, new and emerging mutual threats. I fully intend to expand the depth and breadth of U.S.-Israel cooperation.

Caving to political pressure sure pays quick dividends. Following the letter, Boxer annoucned she is on board with the Hagel nomination. Charles Schumer also announced he will support Hagel following similar outreach. From the New York Times:

Of deepest concern to Mr. Schumer and many Israel advocacy groups, are Mr. Hagel’s positions on the nuclear threat posed by Iran, particularly his suggestions in the past that a military strike against Iran would be counterproductive. It is a position that is out of step with the Obama administration, which became increasingly hawkish on Iran during the 2012 campaign.

“On Iran, Senator Hagel rejected a strategy of containment and expressed the need to keep all options on the table in confronting that country,” Mr. Schumer said. “But he didn’t stop there. In our conversation, Senator Hagel made a crystal-clear promise that he would do ‘whatever it takes’ to stop Tehran from obtaining nuclear weapons, including the use of military force.”

As a senator from Nebraska, Mr. Hagel voted against several rounds of sanctions against Iran that ultimately passed the Senate, citing unilateral sanctions are ineffective. On this matter too, Mr. Schumer seemed to find comfort. “Senator Hagel clarified that he ‘completely’ supports President Obama’s current sanctions against Iran,” Mr. Schumer said. “He added that further unilateral sanctions against Iran could be effective and necessary.”

On nearly every other issue that Mr. Schumer brought up with Mr. Hagel — his views on the militant Islamist groups Hezbollah and Hamas, his prior comments about gays, his use of the term “Jewish lobby” to refer to Israel advocacy groups — all seemed to be tamped down in the meeting.

“I know some will question whether Senator Hagel’s assurances are merely attempts to quiet critics as he seeks confirmation to this critical post,” Mr. Schumer said. “But I don’t think so. Senator Hagel realizes the situation in the Middle East has changed, with Israel in a dramatically more endangered position than it was even five years ago.”

The Real Interest Rate Risk: Annual US Debt Creation Now Amounts To 25% Of...

By now most are aware of the various metrics exposing the unsustainability of US debt (which at 103% of GDP, it is well above the Reinhart-Rogoff "viability" threshold of 80%; and where a return to just 5% in blended interest means total debt/GDP would double in under a decade all else equal simply thanks to the "magic" of compounding), although there is one that captures perhaps best of all the sad predicament the US self-funding state (where debt is used to fund nearly half of total US spending) finds itself in. It comes from Zhang Monan, researcher at the China Macroeconomic Research Platform: "The US government is now trying to repay old debt by borrowing more; in 2010, average annual debt creation (including debt refinance) moved above $4 trillion, or almost one-quarter of GDP, compared to the pre-crisis average of 8.7% of GDP."

This is a key statistic most forget when they discuss the stock and flow of US debt: because whereas the total US deficit, and thus net debt issuance, is about $1 trillion per year, one has to factor that there is between $3 and $4 trillion in maturities each year, which have to be offset by a matched amount of gross issuance just to keep the stock of debt flat (pre deficit funding). The assumption is that demand for this gross issuance will always exist as old maturities are rolled into new debt, however, this assumption is contingent on one very key variable: interest rates not rising.

It is the question of what happens to this ~$4 trillion in annual debt creation by the US, as well as other key ones, that Monan attempts to answer in the following paper on what happens to the world if and when the moment when rates truly start rising, instead of just undergo another theatrical 2-4 week push higher only to plunge over fears the Fed may soon pull the punchbowl.

By Zhang Monan, published first in Project Syndicate

The Real Interest-Rate Risk

Since 2007, the financial crisis has pushed the world into an era of low, if not near-zero, interest rates and quantitative easing, as most developed countries seek to reduce debt pressure and perpetuate fragile payment cycles. But, despite talk of easy money as the “new normal,” there is a strong risk that real (inflation-adjusted) interest rates will rise in the next decade.

Total capital assets of central banks worldwide amount to $18 trillion, or 19% of global GDP – twice the level of ten years ago. This gives them plenty of ammunition to guide market interest rates lower as they combat the weakest recovery since the Great Depression. In the United States, the Federal Reserve has lowered its benchmark interest rate ten times since August 2007, from 5.25% to a zone between zero and 0.25%, and has reduced the discount rate 12 times (by a total of 550 basis points since June 2006), to 0.75%. The European Central Bank has lowered its main refinancing rate eight times, by a total of 325 basis points, to 0.75%. The Bank of Japan has twice lowered its interest rate, which now stands at 0.1%. And the Bank of England has cut its benchmark rate nine times, by 525 points, to an all-time low of 0.5%.

But this vigorous attempt to reduce interest rates is distorting capital allocation. The US, with the world’s largest deficits and debt, is the biggest beneficiary of cheap financing. With the persistence of Europe’s sovereign-debt crisis, safe-haven effects have driven the yield of ten-year US Treasury bonds to their lowest level in 60 years, while the ten-year swap spread – the gap between a fixed-rate and a floating-rate payment stream – is negative, implying a real loss for investors.

The US government is now trying to repay old debt by borrowing more; in 2010, average annual debt creation (including debt refinance) moved above $4 trillion, or almost one-quarter of GDP, compared to the pre-crisis average of 8.7% of GDP. As this figure continues to rise, investors will demand a higher risk premium, causing debt-service costs to rise. And, once the US economy shows signs of recovery and the Fed’s targets of 6.5% unemployment and 2.5% annual inflation are reached, the authorities will abandon quantitative easing and force real interest rates higher.

Japan, too, is now facing emerging interest-rate risks, as the proportion of public debt held by foreigners reaches a new high. While the yield on Japan’s ten-year bond has dropped to an all-time low in the last nine years, the biggest risk, as in the US, is a large increase in borrowing costs as investors demand higher risk premia.

Once Japan’s sovereign-debt market becomes unstable, refinancing difficulties will hit domestic financial institutions, which hold a massive volume of public debt on their balance sheets. The result will be chain reactions similar to those seen in Europe’s sovereign-debt crisis, with a vicious circle of sovereign and bank debt leading to credit-rating downgrades and a sharp increase in bond yields. Japan’s own debt crisis will then erupt with full force.

Viewed from creditors’ perspective, the age of cheap finance for the indebted countries is over. To some extent, the over-accumulation of US debt reflects the global perception of zero risk. As a result, the external-surplus countries (including China) essentially contribute to the suppression of long-term US interest rates, with the average US Treasury bond yield dropping 40% between 2000 and 2008. Thus, the more US debt that these countries buy, the more money they lose.

That is especially true of China, the world’s second-largest creditor country (and America’s largest creditor). But this arrangement is quickly becoming unsustainable. China’s far-reaching shift to a new growth model implies major structural and macroeconomic changes in the medium and long term. The renminbi’s unilateral revaluation will end, accompanied by the gradual easing of external liquidity pressure. With risk assets’ long-term valuation falling and pressure to prick price bubbles rising, China’s capital reserves will be insufficient to refinance the developed countries’ debts cheaply.

China is not alone. As a recent report by the international consultancy McKinsey & Company argues, the next decade will witness rising interest rates worldwide amid global economic rebalancing. For the time being, the developed economies remain weak, with central banks attempting to stimulate anemic demand. But the tendency in recent decades – and especially since 2007 – to suppress interest rates will be reversed within the next few years, owing mainly to rising investment from the developing countries.

Moreover, China’s aging population, and its strategy of boosting domestic consumption, will negatively affect global savings. The world may enter a new era in which investment demand exceeds desired savings – which means that real interest rates must rise.

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Canadian Aid to Haiti Tied to Mining Interests

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Yves Engler is a Canadian commentator and author. His most recent book is The Ugly Canadian - Stephen Harper's Foreign Policy, and previously he published The Black Book of Canadian Foreign Policy and Canada in Haiti: Waging War on The Poor Majority


PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Baltimore. And we're continuing our series of interviews with Yves Engler about his book The Ugly Canadian, which is all about Stephen Harper's foreign policy. And this week we're going to talk about Haiti. Thanks for joining us, Yves.

YVES ENGLER, AUTHOR AND POLITICAL COMMENTATOR: Thanks for having me.JAY: So there's a controversy brewing in Canada as we speak. The minister of international cooperation and trade, I guess his name is Julian Fantino, who used to be the Ontario police commissioner. People may have heard his name on The Real News, 'cause he used to be—he was very involved in the G-20 events that led to the arrests of over 1,000 people. But now he's a minister in the Harper government. And he announced that CIDA, which is the arm of the Canadian government that gives money away that's supposed to be used to reduce poverty, he's saying CIDA needs to work more closely with, facilitate, perhaps even co-invest with Canadian mining companies and energy extraction companies. And Haiti is one of the targets for this. So what is this controversy all about?ENGLER: Basically, about a year ago CIDA announced a number of projects for Canadian NGOs, like Plan Canada, World Vision, to work with mining companies like Barrick Gold, IAMGOLD, in places like Burkina Faso in Peru. And basically the public aid agency (the Canadian International Development Agency) is putting up millions of dollars for projects whereby the NGO works with the mining company in the local community where the mining company's operating. And basically it's a credible financial inducement to NGOs to work with the mining company, because so much, you know, millions of dollars of public money is being made available. But basically the point of the aid projects is to pacify local opposition to the mining company. And what's happened in recent days is that Fantino, the minister, has come out and made a couple of public declarations saying very explicitly that this is the new direction for CIDA. These previous projects were announced about a year ago, and there was a fair bit of—there's been a fair bit of controversy about them, but now there's sort of a solidification of that process. And Conservative MPs in the standing committee on international development in the House of Commons have put forward a report saying that they would want to solidify their relationship between the aid agency and the extractive—Canadian extractive industries. And so there's a real controversy around it. There's all kinds of elements of sort of embarrassment to the minister. He seems very ignorant about most of the issues. He's been sort of shown to be ignorant by opposition members of Parliament.But I think it's a disturbing trend within the Conservative government of, one, further politicizing aid money. There's been a whole bunch of NGOs that have had their budgets cut over the past years because they were challenging Canadian mining companies abroad, because they were standing up for Palestinian rights. And so there's been a sense of the real politicization, further politicization of Canadian aid. And this is a new element, to where we're sort of extending this element to it of really working with the extractive industry.JAY: So the point here is people are concerned that CIDA money now—and Haiti is—we're going to focus on Haiti—is the second-largest recipient of Canadian foreign aid money after Afghanistan, but that in Haiti and places like this, decisions of where CIDA money will go will have to do more with what makes a mining or Canadian extractive industry look good rather than what's going to be most effective in terms of poverty reduction.ENGLER: Exactly. I mean, what this is is a very extreme example of it. I've said this before or argued this before that basically there's four purposes of Canadian aid money. This goes back historically and continues today. The first purpose is a tool of geopolitics. It's a way of supporting certain political forces in countries that are more amenable to our interests, to, you know, propping up the—let's say, the right-wing Colombian government in the face of a leftward shift in Latin America, which is one of the things that's taken place in recent years. It's been, obviously, used alongside Canadian troops. And if you look where Canadian troops are very active, in places like Afghanistan or, recently, until recently, you know, in Haiti, significant Canadian aid goes there. So the first intent of Canadian aid since its starting in 1950, and continuing today, is as a tool of geopolitics. The second motivation of Canadian aid is basically to advance Canadian corporate interests, everything from tied aid to what we're seeing today with advancing the interests of Canadian mining companies in the global south. The third motivation of Canadian aid is to co-opt Canadians, sort of, particularly young Canadians, into being more sympathetic towards Canadian foreign policy and sort of moving people more towards a sort of NGO model, rather than a more resistanced model towards Canadian foreign policy.And the fourth motivation of Canadian aid is what most people think aid is about, which is about helping the world's poor. And the recent example with bringing the NGOs and the mining companies together is just a particularly flagrant example of this. But this is not something new, and the case of Haiti is a particularly clear example of that, where Canadian aid—. Haiti has been the second major recipient of Canadian aid after Afghanistan for basically the last eight years, since Canada participated with the U.S. and France in overthrowing Haiti's elected government, as well as thousands of other elected officials, back in February 2004. And since that time, Haiti has been a major recipient of Canadian aid. A big chunk of that Canadian aid goes to building up a Haitian police force, which was basically designed to protect the 1 percent in Haiti, the Haitian elite. So there's a long history of Haiti being very politicized. It's just the Conservatives are making it, you know, that much more about advancing corporate and imperial interests.JAY: Are they making it more in practice? Or are they just being more honest about what they're doing? It seems to me CIDA's mostly, or to a large extent, played that role for years.ENGLER: That is certainly largely true, in the sense that part—one of the things the Liberal government did is they were willing to fund, you know, a few dissident NGOs, right? The Conservatives aren't willing to fund any dissident NGOs, basically. And basically if you don't say almost exactly what they want to hear, you simply get your funding cut off.But the thrust of the policy hasn't really changed. It's just the sort of intensity of the policy at the level of NGOs, I think at the level of the corporate sector as well. So, for instance, CIDA back in the '90s was involved in rewriting Colombia's mining code in a way that was incredibly beneficial to foreign mining interests, dropped the royalty rates they had to pay from something like 15 percent down to, like, 1.4 percent, a whole series of policies that were very much in the interests of Canadian mining companies. That was sort of one step removed. It wasn't—that wasn't money going directly to Canadian mining companies for projects in their local communities. That was, you know, changing the overarching environment in which Canadian mining companies operate in Colombia to better serve foreign mining interests, particularly Canadian mining interests.This example, the recent model, is even more direct, it's even more flagrant, and if you like, you could say even more honest in the case of the Conservatives as just being, hey, there's no difference between what the aid agency's about and what the mining company's about, and they've actually—the previous minister, Bev Oda, made a speech in February basically saying that to the Prospectors & Developers Association [incompr.]JAY: So what are Canadian commercial interests in Haiti? Why is Canada so involved in Haiti?ENGLER: Canadian mining companies are significant players in Haiti. There's actually one Canadian mining company, St. Geneviève, that has the prospecting rights for 10 percent of Haitian territory. So there are Canadian mining companies operating there. There's a major—the second-biggest employer, until the earthquake—and I presume it still is the second-biggest employer, but at least it wasn't till the earthquake—is Gildan activewear, a Montreal-based blank T-shirt maker, one of the biggest blank T-shirt makers in the world. And they operate a whole bunch of sweatshop kind of production, both directly and indirectly. There are—so, you know, Canadian banking interests of longstanding players in Haiti.I wouldn't say that the corporate interests in Haiti are, you know, sufficiently important to explain the Canadian policy in Haiti. I think that a big part of it comes down to the fact that Washington has made it very clear that it wants Ottawa to be a big player in Haiti. And that goes back to the time of the coup d'etat in 2004. And there's, you know, WikiLeaks documents showing how right when Stephen Harper came to office at the start of 2006, the American ambassador in Ottawa immediately asked that—the question of Haiti was a high priority for him in his first meeting with Stephen Harper. So there are some serious corporate interests, but I think it's more broadly part of Canada's tie to the U.S. empire.JAY: The division of labor.ENGLER: Division of labor. And Canada, one element in that division of labor is the fact that a big chunk of Canada is a, you know, French-speaking place. So there are some sort of added relationships between Quebec—.JAY: A very big Haitian community in Montreal.ENGLER: Exactly. There's about 100,000 people from the Haitian diaspora in Montreal. And so there's relationships there, and there's—it's often, you know, Canadian—Quebec officials, really, that are—when we talk about Canadian policy [incompr.] Haiti, it's really generally Quebec politicians, NGOs, businesses, police, etc., that are operating in Haiti. And the language plays a role, and, you know, longstanding ties even, you know, from the Catholic Church ties that go back decades and decades.JAY: Are there some positive things coming out of current Canadian poverty reduction investment or policy in Haiti?ENGLER: I've been to Haiti a couple of times, and you can see individual projects that will be beneficial, you know, seeing a school that this Canadian aid agency is helping out. So, you know, there are certainly examples. There's, you know, funding for—since the earthquake, funding for, you know, camps, you know, the people who were displaced, that are beneficial. But if you—you have to look at the policy in its macro. And the policy in the macro, the point of the aid money, is to advance Canadian interests. And since the time of the coup d'etat in 2004, Canadian interests have been very clearly on behalf of the small Haitian elite and have been against the vast majority, the majority impoverished of the country.And so, you know, lots of Canadian money goes to supporting the UN military force in Haiti. Well, that's a military force that has been there to basically protect the Haitian elite. It's the force that's, you know, brought cholera, that's been involved in, you know, shooting on demonstrators, all kinds of human rights violations that have come with that UN force. And the Conservative government's a big proponent of the UN force of Haiti, because it's seen as advancing Western interests in the country. So, yes, there are definitely many individual projects, aid projects in Haiti that do have very concrete benefits to many people's lives. But the thrust of the policy, even the aid policy, let alone the broader policy—the thrust of the aid policy is spending huge amounts of money on building prisons, on building up the Haitian national police. Canada has been a major player with the Haitian national police since the time of the coup. The early part of that was about bringing in former Haitian military, many of which have terrible human rights records, into the Haitian police force, and basically building up a pro-elite Haitian police force. And the Canadian government has continued that training and continued that role in terms of building that police force. You know, even since the earthquake, the biggest sector of Canadian aid money has gone to refurbishing prisons and building police academies and training the police force. So it's certainly a very elite-centric policy in Haiti.JAY: Alright. Thanks very much for joining us, Yves. We'll be continuing this discussion about other areas of Canadian foreign policy. Thanks for joining us, Yves.ENGLER: Thanks for having me.JAY: And thank you for joining us on The Real News Network.


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Can Malaysia withstand the next financial crisis?

As developed economies of the world still continue their struggle to recover from the global financial crisis in 2008, the lack of confidence in global economic stability has placed greater demand on emerging markets to cushion themselves for the next crash. While woefully unsustainable debt levels deepen and weak regulatory oversight persist, the lack of tangible reforms creates an imperative for countries like Malaysia to stay ahead of the curve.

This was the theme of the Perdana Leadership Foundation’s sixth CEO Forum held in Kuala Lumpur last week, where more than thirty panelists analyzed the shaky state of the global economy and offered insights into Malaysia’s strengths and vulnerabilities, as well as the country’s susceptibility to external economic turbulence. In addition to market-related vulnerabilities, panelists also identified inter-religious anxieties between communities as factors that could put national unity and political stability at risk. 

Tan Sri Dato’ Dr. Lin See Yan, a trustee of the Tan Sri Jeffrey Cheah Foundation, identified how high fences built to withstand economic shocks and de-risk the financial system are seldom designed for all possibilities. He branded the European Union as the weakest link in the global financial system, noting that the bloc’s debt problems kept growing, austerity has proven to be counter productive, the euro currency remains overvalued, and the European Central Bank (ECB) has stagnated in the midst of its bond-buying strategy.

Lin also noted the possibility of another crisis originating from within the United States due to vulnerabilities posed by the country’s ballooning $17 trillion debt levels, the growing housing bubble, and the persistence of trading high-risk financial products backed by complex securitizations. He also raised concerns over recent data on the Chinese economy, which has shown a decline in fixed asset investments, raising speculation about whether or not the Chinese authorities would introduce a stimulus package. 

Tan Sri Azman Yahya, executive chairman of Symphony Life, believes that growth in China will continue to be on the upswing despite concerns of deceleration, even without significant investment, by virtue of Beijing’s prudent economic reforms. China has already announced at the recent G20 meeting of finance ministers that it will not make major policy adjustments in the form of stimulus despite slightly lower growth indicators. Reforms will be prioritized to stabilize employment and contain systemic risks such as widespread default. 

High government deficits, unprecedented government and private sector debt levels, and low household savings are deeply worrying trends in mature economies, according to Yahya, who claims that eventual tapering by the US Federal Reserve to cease quantitative easing (QE) measures could trigger a loss of confidence in the US dollar, causing an offloading and crash of US securities capable of tanking global markets. 

Yahya identified the risks posed by the lack of tangible financial sector reforms, the unsustainable US debt bubble, the growing loss of confidence in the US dollar, and surmised that the next crisis may strike within five years. He identified the high growth levels of Asia-Pacific countries as a buffer to crises emanating from stagnate western economies, noting how China’s middle class is set to expand to one billion by 2025, while growth will be increasingly be powered by consumption. 

Panelists at the forum generally agreed that the Asia-Pacific region is in a far healthier state today in comparison to the 1997 crisis, as China’s growth strategy moves away from the investment-driven template to more sustainable consumption-led expansion. Countries in the ASEAN region are also cooperating at higher levels. Analysts agree that Malaysia has proven to be fairly resilient and adept at crisis management, as it managed to navigate through treacherous economic periods while retaining consistently healthy growth levels over the past two decades. 

The country defied the IMF’s economic orthodoxy and introduced capital control measures during the 1997 Asian financial crisis to counter the short selling of the Malaysian ringgit by currency speculators, which triggered dramatic depreciation and rapid falls in stock market capitalization. Malaysia recovered faster than its neighbors and consolidated its banking system, putting buffers in place by introducing broader market regulations and strengthening banks to withstand shocks. 

During the global financial crisis in 2008, triggered by the bursting of the US housing bubble and the subsequent collapse of large financial institutions trading toxic mortgage-related financial products, the country found itself better prepared. The way the crisis struck in 1997 took Malaysian policymakers totally off guard. The country’s economy was highly stable and experiencing growth at 8 percent; loans were being repeatedly prepaid and Malaysia was stepping in rescue Thailand after attacks on the baht.

The current scenario also demands that countries expect the unexpected. The general consensus among panelists the Perdana forum was that a new financial crisis could present itself at some point within the next eighteen months to five years, with the potential for several mini-crises to bubble up and trigger recessionary depression. It is nearly impossible to accurately pinpoint when the next crisis will hit, but there are numerous flashpoints to consider.

In addition to vulnerabilities stemming from uncontrolled derivative trading and speculative hot money flows, debt and bubbles loom. During the 2008 crisis, insolvent private banks and lending institutions were deemed too-big-to-fail, but today, central banks are on the road to inheriting that status. Debt levels have ballooned to unprecedented levels driven by QE and low interest rates. Stagnate wages and easy credit has goaded consumers to keep borrowing to maintain consumption.

Both the United States and the United Kingdom are experiencing high unemployment levels and dramatic income inequality, giving rise to greater levels of social unrest while the stock markets of both countries have performed above par – surpassing the highs of pre-crisis levels. The sharp ascent of share prices, which has been heralded as proof of an economic recovery, does not correlate with rising activity in the productive economy or with per capita income.

The distinguished economist Ha-Joon Chang has referred to these developments as ‘the biggest stock market bubble in modern history.’ It is clear that share prices do not reflect real economic activity. The core of the problem is that successive rounds of QE have increased liquidity rates and fuelled asset bubbles rather than being channeled into productive assets.

Panelists addressed how many of the new jobs being created in mature economies are low-wage positions that offer little career mobility. The broad appeal of protest campaigns organized by fast-food workers to demand a living wage is a testament to the strains on ordinary people who are unable to meet the cost of living. Americans are pessimistic about their nation’s economic recovery policies because many find themselves facing more trying domestic circumstances.

Tun Dr. Mahathir Mohamad attended the Perdana forum to give the closing keynote address, where he likened the implementation of solutions to avert economic crises to a medical doctor treating a patient, stressing the need to understand the systemic contradictions of the global financial system. Dr. Mahathir denounced fractional reserve banking practices, which result in banks lending far greater amounts of money than they actually possess in cash reserves, and the leveraging practices taken advantage of by currency speculators and hedge funds.

The former Malaysian prime minister accused Europe and the US of being in a state of denial as to how markets are manipulated, primarily because the political classes themselves benefit from speculation. Dr. Mahathir believes that the role of the financial sector is overemphasized in national economies and advised greater market regulation. Governments must be ready to step in to limit the abuses of the banking system, according to Mahathir, who characterized the inherent inequality of the modern age as one where 99 percent of people are beholden to the ultra-wealthy 1 percent, citing the slogan popularized by the Occupy Wall Street protest movement.

Mass protest movements demanding accountability from Wall Street have remained potent because the underlying conditions that generated the crisis have not been addressed in any meaningful way. Instead of steering monetary policies in a sensible direction and broadening regulatory oversight to identify risky financial products and prevent predatory speculation, the banking lobby has strong-armed western politicians into accepting a growth model where short-term profits for the few take precedence over long-term investments in productive assets for the many.

Elsewhere in the world, the economic power and political autonomy of BRICS countries and their plans to establish a development bank to finance infrastructure growth throughout the developing world offers a far more sustainable investment model. To offset the risks of future crises, it is imperative to find the political courage to reduce the importance of the non-productive financial sector in national economies in favor of investments into productive assets that create infrastructure and job opportunities.

Panelists at the Perdana forum argued that even if measures are taken to bolster productive assets, financial and economic crises may strike in unexpected ways: resulting from cyber threat vulnerabilities, sudden geopolitical instability, conflicts over resources and the pricing of resources, and complications that can result from the use of non-traditional currencies.

Malaysia is considered a safe investment destination due to its political stability and imperviousness to natural disasters; the country’s competent young workforce is eager to enter innovative service sector positions, a major asset in contrast to other Asian countries struggling to maintain population growth. To meet the present development aspirations, it is necessary for the country to protect against both external and internal crises.

The Malaysian leadership faces a difficult balancing act on all fronts. It must do more to improve inter-communal harmony without rolling back civil liberties. Despite the country’s strong performance legitimacy, trust and confidence in the government and the integrity of institutions remains low due to endemic corruption. There is a need for a comprehensive social safety net system to address rising income inequality on a needs-basis.

Simultaneously, economic circumstances demand that developing countries remove energy and social subsidies in order to increase efficiency and become a more attractive destination for capital. Navigating through the crises ahead will require bold leadership. Malaysia will be in a better position to withstand turbulence if it takes meaningful steps to reduce income disparities and pursues inclusive social policies that will restore grassroots trust in the leadership.

This article appeared in the September 29, 2014 print edition of The Malaysian Reserve newspaper.

Nile Bowie is an independent journalist and political analyst based in Kuala Lumpur, Malaysia. His articles have appeared in numerous international publications, including regular columns with Russia Today (RT) and newspapers such as the Global Times, the Malaysian Reserve and the New Straits Times. He is a research assistant with the International Movement for a Just World (JUST), a Malaysian NGO promoting social justice and anti-hegemony politics. He can be reached at

Buying Up the Planet: Out-of-control Central Banks on a Corporate Buying Spree

Finance is the new form of warfare – without the expense of a military overhead and an occupation against unwilling hosts. It is a competition in credit creation to buy foreign resources, real estate, public and privatized infrastructure, bonds and corporate stock ownership. Who needs an army when you can obtain the usual objective (monetary wealth and asset appropriation) simply by financial means?                                                                                       — Dr. Michael Hudson, Counterpunch, October 2010

When the US Federal Reserve bought an 80% stake in American International Group (AIG) in September 2008, the unprecedented $85 billion outlay was justified as necessary to bail out the world’s largest insurance company. Today, however, central banks are on a global corporate buying spree not to bail out bankrupt corporations but simply as an investment, to compensate for the loss of bond income due to record-low interest rates. Indeed, central banks have become some of the world’s largest stock investors.

Central banks have the power to create national currencies with accounting entries, and they are traditionally very secretive. We are not allowed to peer into their books. It took a major lawsuit by Reuters and a congressional investigation to get the Fed to reveal the $16-plus trillion in loans it made to bail out giant banks and corporations after 2008.

What is to stop a foreign bank from simply printing its own currency and trading it on the currency market for dollars, to be invested in the US stock market or US real estate market?  What is to stop central banks from printing up money competitively, in a mad rush to own the world’s largest companies?

Apparently not much. Central banks are for the most part unregulated, even by their own governments. As the Federal Reserve observes on its website:

[The Fed] is considered an independent central bank because its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government, it does not receive funding appropriated by the Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms.

As former Federal Reserve Chairman Alan Greenspan quipped, “Quite frankly it does not matter who is president as far as the Fed is concerned. There are no other agencies that can overrule the action we take.”

The Central Bank Buying Spree

That is how “independent” central banks operate, but it evidently not the US central bank that is gambling in the stock market. After extensive quantitative easing, the Fed has a $4.5 trillion balance sheet; but this sum is accounted for as being invested conservatively in Treasuries and agency debt (although QE may have allowed Wall Street banks to invest the proceeds in the stock market by devious means).

Which central banks, then, are investing in stocks? The biggest player turns out to be the People’s Bank of China (PBoC), the Chinese central bank.

According to a June 15th article in USA Today:

Evidence of equity-buying by central banks and other public sector investors has emerged from a large-scale survey compiled by Official Monetary and Financial Institutions Forum (OMFIF), a global research and advisory group. The OMFIF research publication Global Public Investor (GPI) 2014, launched on June 17 is the first comprehensive survey of $29.1 trillion worth of investments held by 400 public sector institutions in 162 countries. The report focuses on investments by 157 central banks, 156 public pension funds and 87 sovereign funds, underlines growing similarities among different categories of public entities owning assets equivalent to 40% of world output.

The assets of these 400 Global Public Investors comprise $13.2 trillion (including gold) at central banks, $9.4 trillion at public pension funds and $6.5 trillion at sovereign wealth funds.

Public pension funds and sovereign wealth funds are well known to be large holders of shares on international stock markets. But it seems they now have rivals from unexpected sources:

One is China’s State Administration of Foreign Exchange (SAFE), part of the People’s Bank of China, the biggest overall public sector investor, with $3.9 trillion under management, well ahead of the Bank of Japan and Japan’s Government Pension Investment Fund (GPIF), each with $1.3 trillion.

SAFE’s investments include significant holdings in Europe. The PBoC itself has been directly buying minority equity stakes in important European companies.

Another large public sector equity owner is Swiss National Bank, with $480 billion under management. The Swiss central bank had 15% of its foreign exchange assets – or $72 billion – in equities at the end of 2013.

Public pension funds and sovereign wealth funds invest their pension contributions and exchange reserves earned in foreign trade, which is fair enough. The justification for central banks to be playing the stock market is less obvious. Their stock purchases are justified as compensating for lost revenue caused by sharp drops in interest rates. But those drops were driven by central banks themselves; and the broad powers delegated to central banks were supposed to be for conducting “monetary policy,” not for generating investment returns. According to the OMFIF, central banks collectively now have $13.2 trillion in assets (including gold). That is nearly 20% of the value of all of the stock markets in the world, which comes to $62 trillion.

From Monetary Policy to Asset Grabs

Central banks are allowed to create money out of nothing in order to conduct the monetary policies necessary to “regulate the value of the currency” and “maintain price stability.”  Traditionally, this has been done with “open market operations,” in which money was either created by the central bank and used to buy federal securities (thereby adding money to the money supply) or federal securities were sold in exchange for currency (shrinking the money supply).

“Quantitative easing” is open market operations on steroids, to the tune of trillions of dollars. But the purpose is allegedly the same—to augment a money supply that shrank by trillions of dollars when the shadow banking system collapsed after 2008. The purpose is not supposed to be to earn an income for the central bank itself. Indeed, the U.S. central bank is required to return the interest earned on federal securities to the federal government, which paid the interest in the first place.

Further, as noted earlier, it is not the US Federal Reserve that has been massively investing in the stock market.  It is the PBoC, which arguably is in a different position than the US Fed. It cannot print dollars or Euros. Rather, it acquires them from local merchants who have earned them legitimately in foreign trade.

However, the PBoC has done nothing to earn these dollars or Euros beyond printing yuan. It trades the yuan for the dollars earned by Chinese sellers, who need local currency to pay their workers and suppliers. The money involved in these transactions has thus doubled. The merchants have been paid in yuan and the central bank has an equivalent sum in dollars or Euros. That means the Chinese central bank’s holdings are created out of thin air no less than the Federal Reserve’s dollars are.

Battle of the Central Banks?

Western central banks have generally worked this scheme discreetly. Not so much the Chinese, whose blatant gaming of the system points up its flaws for all to see.

Georgetown University historian Professor Carroll Quigley styled himself the librarian of the international bankers. In his 1966 book Tragedy and Hope, he wrote that their aim was “nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole.” This system was to be controlled “in a feudalist fashion by the central banks of the world acting in concert by secret agreements,” central banks that “were themselves private corporations.”

It may be the Chinese, not acting in concert, who break up this cartel. The PBoC is no more transparent than the US Fed, but it is not an “independent” central bank. It is a government agency accountable to the Chinese government and acting on its behalf.

The Chinese have evidently figured out the game of the “independent” central bankers, and to be using it to their own advantage. If the Fed can do quantitative easing, so can the Chinese – and buy up our assets with the proceeds. Owning our corporations rather than our Treasuries helps the Chinese break up US dollar hegemony.

Whatever power plays are going on behind the scenes, it is increasingly clear that they are not serving we-the-people. Banks should not be the exclusive creators of money. We the people, through our representative governments, need to be issuing the national money supply directly, as was done in America under President Abraham Lincoln and in colonial times.


Ellen Brown is an attorney, founder of the Public Banking Institute and the author of twelve books, including the best-selling Web of Debt. Her latest book, The Public Bank Solution, explores successful public banking models historically and globally.

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Financial Apocalypse – Crash Is Here Now! Retailers Closing, Food Prices Spiking, China &...

By Susan Duclos

An old  question comes to mind.... if a tree falls in the forest but no one is there to hear it, does it still make a sound?

 Of course it does.

The same goes with the economic crash that is occurring now, if no one is willing to report it, if the government denies it, if the MSM covers it up, does it mean it isn't really happening?

 While the US government's official position is that we are still in "recovery," the signs all point to our upcoming financial demise, from food prices spiking which will ultimately lead to food shortages and riots, retailers closing stores by the hundreds because they are losing revenue, China and Russia among other countries dumping the use of the dollar and the recent news that the US economy has shrunk for the first time (officially) since 2011, we are looking economic death right in the face and most people don't even know the extent of the devastation about to occur.

 Starting with the retail apocalypse, we go to ZeroHedge, who provides the raw data:

 • Wal-Mart Profit Plunges By $220 Million as US Store Traffic Declines by 1.4%

• Target Profit Plunges by $80 Million, 16% Lower Than 2013, as Store Traffic Declines by 2.3%

• Sears Loses $358 Million in First Quarter as Comparable Store Sales at Sears Plunge by 7.8% and Sales at Kmart Plunge by 5.1%

• JC Penney Thrilled With Loss of Only $358 Million For the Quarter

• Kohl’s Operating Income Plunges by 17% as Comparable Sales Decline by 3.4%

• Costco Profit Declines by $84 Million as Comp Store Sales Only Increase by 2%

• Staples Profit Plunges by 44% as Sales Collapse and Closing Hundreds of Stores

• Gap Income Drops 22% as Same Store Sales Fall

• American Eagle Profits Tumble 86%, Will Close 150 Stores

• Aeropostale Losses $77 Million as Sales Collapse by 12%

• Best Buy Sales Decline by $300 Million as Margins Decline and Comparable Store Sales Decline by 1.3%

• Macy’s Profit Flat as Comparable Store Sales decline by 1.4%

• Dollar General Profit Plummets by 40% as Comp Store Sales Decline by 3.8%

• Urban Outfitters Earnings Collapse by 20% as Sales Stagnate

• McDonalds Earnings Fall by $66 Million as US Comp Sales Fall by 1.7%

• Darden Profit Collapses by 30% as Same Restaurant Sales Plunge by 5.6% and Company Selling Red Lobster

• TJX Misses Earnings Expectations as Sales & Earnings Flat

• Dick’s Misses Earnings Expectations as Golf Store Sales Plummet

• Home Depot Misses Earnings Expectations as Customer Traffic Only Rises by 2.2%• Lowes Misses Earnings Expectations as Customer Traffic was Flat 

Food Prices Spike, via USA Today:

 • Beef - Thus far, retailers have absorbed the bulk of a 22% beef price increase the past year, but Nalivka expects retailers to pass more costs to consumers this year.

• Pork: Retail pork prices rose 6.8% in the past year

• Poultry: Poultry prices increased 4.7% last year, the Agriculture Department says

• Milk: Retailers have been hit by a 36% wholesale price increase since December, and Jones says per-gallon retail prices could rise another 25 cents to 50 cents this year.

• Fruits and Vegetables: Orange prices increased 3.4% last month, and strawberry prices are up 12% vs. a year ago. Analyst Michael Swanson says prices for other fruits and vegetables could spike this year 

In the videos below we the question of whether China can kill the US Dollar, a discussion on economic death and the news of the US economy shrinking for the first time since 2011, which is being called "temporary."

The numbers don't lie... people do.

Video above details:

Not only this, but China holds around 1.3 trillion dollars of US debt. A debt accumulated by China's stockpile of dollars from international trade which they lend back to the US at ridiculously low interest rates.

But what happens if they stop playing the game? Well, in some respects they already have.

For the last few years, increasing numbers of commentators, including Max Keiser, have been predicting the collapse of the US dollar, a collapse that could be closer than you think. America currently faces a very real, impending threat -- China. China accounts for more global trade than anyone else on the planet, and most of that trade happens in US dollars keeping demand for the dollar high and overseas trade at low costs.

But what happens if they stop playing the game? Well, in some respects they already have.

Cross posted at Before It's News

Fed Reserve Laundering Purchases Through Belgium To Hide US Downfall – Dr. Paul Craig...

By Susan Duclos

The second the news broke that Belgium purchased $141 billion in Treasury bonds within a three month period in 2014, almost everyone understood who was really behind it and why, because Belgium simply does not have the resources to make a purchase of that volume.

The federal reserve is behind Belgium's extraordinary purchase, in order to disguise the financial downfall after Russia dumped a fifth of it's treasury holdings.

Via FT:

Russia has offloaded a fifth of its holdings of US Treasury debt in March at a time of heightened speculation that its assets would be frozen as part of sanctions over the crisis in Ukraine.
It was the largest seller during the month while Belgium extended its big buying streak, according to US Treasury International Capital data released on Thursday.

A decline of $25.8bn in Russia’s Treasury holdings to $100.4bn involved the selling of short-term bills.

Russia isn't the only one that has been dumping US Treasury bonds. Back in December China sold the second largest amount of US Treasury bonds, and once again, who jumped in?


More from Greg Hunter and Dr. Paul Craig Roberts, who holds a PhD in economics, explains, via USAWatchDog:

We know that Belgium didn’t have any money to buy $141 billion worth of bonds over a three month period. That sum comes to 29% of the Belgium GDP. So, they don’t have a surplus in their budget that is 29% of their GDP, and they don’t have trade or current account surplus in that amount. In fact, everything is in the red. Their budget deficit is in the red, and their trade and current accounts are in the red. So, Belgium didn’t have the money, and yet, they managed to pick up $141.2 billion in U.S. Treasuries over a three month period. So, where did they get the money?


We know their central bank couldn’t have printed euros to buy the bonds with because the Belgium central bank can’t print euros. Belgium is part of the euro system and has lost the ability to create its own money. So, the only source for that kind of money would have been the Federal Reserve. The Federal Reserve thought it needed to hide the fact it was buying $141 billion in bonds over a three month period when it was officially reducing or tapering the quantitative easing down to $65 billion. It didn’t want to have to admit it was really purchasing $112 billion a month, almost double the announced purchases.”

Dr. Roberts also says, “I think also the Fed did not want it to get out that some large country is unloading Treasuries. Somebody dropped over $100 billion in Treasuries in one week. If that was a large holder and that became known, it could panic smaller holders and you could see a stampede, and the Fed could lose control of interest rates. So, I think the Fed thought the best thing to do is launder its purchase through a different country; and, thereby, disguise what is actually happening.”

The fact is the US Dollar and economy is being propped up simply by being the reserve currency and countries are tired of the US using that to print money out of thin air with nothing to back it up. The economy is not growing, as is also explained in the video below, but to maintain the illusion, the administration, via the Federal Reserve, is actually laundering purchases through other countries in order to hide the impending downfall.

The entire interview below is a must-see.

Financial Tyranny in Puerto Rico: The Puerto Rico Government and the Creation of the...

Timothy Alexander Guzman, Silent Crow News - Puerto Rico has hit a brick wall. A financial tyranny is slowly emerging as desperation is starting to reflect on the Puerto Rican Government. Not only Puerto Rico’s underground economy will face a tax burden that will be enforced by the government, but also businesses, both small and large. According to Reuters they claim that Puerto Rico is hiring “tax specialists” but it seems that they are much more than just tax specialists according to the article:

The Treasury is hiring about 200 more tax specialists. Some of those will be checking on the books of businesses across the island, but some will be mystery shopping – making purchases at specially selected stores without identifying themselves to check for violators. 

Sales tax evaders could get slapped with a maximum $20,000 fine.

But $20,000 for a small business could mean a hefty chunk of revenues. That means a delicate balance for the government: Changing attitudes so that more businesses register and pay their taxes and fees, while not piling so many bills onto small businesses that they collapse

Can you imagine a $20,000 fine imposed on both small and large businesses by the Puerto Rican Government? This will destroy business activities all across the island; even if they managed to collect half of the debt at $35 billion not counting the added interest rates that accumulates over time would help the debt burden:

From the western mountain town of Lares to the capital San Juan, officials are wrestling with how to bring the underground economy out of the shadows and onto the tax rolls without creating such an onerous financial burden that thousands of small and medium businesses can’t survive.

More than a quarter of the island’s economy is informal, some studies say, from large companies evading taxes to individuals selling items for cash at roadside stands. But estimates vary widely because the activity can be so hard to track. 

While not new, the problem has become urgent of late. The government desperately needs to find new revenue to bolster a budget full of holes and turn around an economy now eight years in recession. It is scrambling to avoid a painful debt restructuring some view as almost inevitable

Imposing tax collections or even adding new taxes while Puerto Rico is in a deep recession to meet Wall Street’s demands would destroy whatever is left of the economy. Foreign investors including American and European companies both small and large are becoming more hesitant to invest in Puerto Rican Industries and its real estate markets as the debt crisis continues to spark major concerns. The Associated Press also reported in February that the government has set up a task force that would “target” business owners and individuals. The report stated the following:

Treasury Secretary Melba Acosta said a task force has been set up to target both business owners and individuals, adding that authorities are investigating more than 100 cases and more are expected to follow. Puerto Rico currently has only a 56 percent “capture” rate on tax revenues that should be taken in, losing some $800 million annually as a result, economist Gustavo Velez says.   

The Treasury Department already has referred 12 cases representing a total of more than $8 million in unpaid taxes to the island’s justice department. “This money belongs to the people of Puerto Rico,” Justice Secretary Cesar Miranda said. “It represents a teacher’s salary, a town’s road, a police officer’s uniform.”  

Two business owners have been charged with 36 counts of tax evasion and illegal appropriation, and officials warned that dozens of others could face similar accusations 

Puerto Rico’s government is in a bind. They are indebted to Wall Street and its Hedge Fund partners as they are to Washington. Hedge funds do not include Puerto Rico’s Government officials in their meetings. Bloomberg News reported that Jones Law Firm (who was one of the law firms restructuring Detroit’s bankruptcy) had a meeting that did not include Puerto Rican officials, “Commonwealth officials aren’t involved in the Jones Day meeting and didn’t call for it, according to the statement.” But Puerto Rico’s Government Development Bank’s statement said that “We made significant progress in implementing our fiscal and economic development plans in 2013, and are determined to continue that progress in 2014.” The Puerto Rico government will proceed to actions dictated by Washington and Wall Street duopoly that will undermine the economy.

$70 Billion in debt will increase as the islands residents continue to flee towards other depressed states for job opportunities within the US, including Florida, New York and Chicago. All states mentioned have high unemployment rates, foreclosures as more business and individual bankruptcies continue to rise. Florida now leads the United States in what you would call “Zombie Foreclosures.” In a 2014 article by called ‘Florida leads nation in ‘zombie foreclosures,’ RealtyTrac says’ claimed that “RealtyTrac considers a “Zombie Foreclosure” when a homeowner abandons a house that is facing a pending foreclosure action. There are about 55,000 of those in Florida, more than triple the nearest state of Illinois.” An economic situation Puerto Ricans arriving in Florida would find to be as dire as it was in their homeland. Increasing tax collections on Puerto Rican businesses and people would only elevate the economic situation to an even worst state of economic affairs. This would create insecurities even among the small business owners who sell produce or ice cream on the road. As you tax more businesses to pay the States debts, you reduce profits that would be used to reinvest in equipment, supplies and even create or maintain jobs to grow the economy.

Not only would it place the burden on the Puerto Rican people, it would frighten foreign businesses, private investors and individuals from investing on the island’s economy that can create jobs. Puerto Rico’s government under Governor Padilla is just another administration under Washington’s rule. Taxing businesses and individuals was the only option the Puerto Rican Government had with regards to their enormous debt burden they face. Besides, Puerto Rico’s largest employer is the government; a bureaucracy that does not produce any goods for trade besides Pharmaceuticals and a handful of other products for the US market. The new actions taken by the Padilla government on behalf of the financial elites is at the expense of those who are financially struggling. It is just business as usual.


Wall Street Greed: Not Too Big for a California Jury

Sixteen of the world’s largest banks have been caught colluding to rig global interest rates.  Why are we doing business with a corrupt global banking cartel?

United States Attorney General Eric Holder has declared that the too-big-to-fail Wall Street banks are too big to prosecute.  But an outraged California jury might have different ideas. As noted in the California legal newspaper The Daily Journal:

California juries are not bashful – they have been known to render massive punitive damages awards that dwarf the award of compensatory (actual) damages.For example, in one securities fraud case jurors awarded $5.7 million in compensatory damages and $165 million in punitive damages. . . . And in a tobacco case with $5.5 million in compensatory damages, the jury awarded $3 billion in punitive damages . . . .

The question, then, is how to get Wall Street banks before a California jury. How about charging them with common law fraud and breach of contract?  That’s what the FDIC just did in its massive 24-count civil suit for damages for LIBOR manipulation, filed in March 2014 against sixteen of the world’s largest banks, including the three largest US banks – JP Morgan Chase, Bank of America and Citigroup.   

LIBOR (the London Interbank Offering Rate) is the benchmark rate at which banks themselves can borrow. It is a crucial rate involved in over $400 trillion in derivatives called interest-rate swaps, and it is set by the sixteen private megabanks behind closed doors.

The biggest victims of interest-rate swaps have been local governments, universities, pension funds, and other public entities. The banks have made renegotiating these deals prohibitively expensive, and renegotiation itself is an inadequate remedy. It is the equivalent of the grocer giving you an extra potato when you catch him cheating on the scales. A legal action for fraud is a more fitting and effective remedy. Fraud is grounds both for rescission (calling off the deal) as well as restitution (damages), and in appropriate cases punitive damages.

Trapped in a Fraud

Nationally, municipalities and other large non-profits are thought to have as much as $300 billion in outstanding swap contracts based on LIBOR, deals in which they are trapped due to prohibitive termination fees. According to a 2010 report by the SEIU (Service Employees International Union):

The overall effect is staggering. Banks are estimated to have collected as much as $28 billion in termination fees alone from state and local governments over the past two years. This does not even begin to account for the outsized net payments that state and local governments are now making to the banks. . . .

While the press have reported numerous stories of cities like Detroit, caught with high termination payments, the reality is there are hundreds (maybe even thousands) more cities, counties, utility districts, school districts and state governments with swap agreements [that] are causing cash strapped local and city governments to pay millions of dollars in unneeded fees directly to Wall Street.

All of these entities could have damage claims for fraud, breach of contract and rescission; and that is true whether or not they negotiated directly with one of the LIBOR-rigging banks.

To understand why, it is necessary to understand how swaps work. As explained in my last article here, interest-rate swaps are sold to parties who have taken out loans at variable interest rates, as insurance against rising rates. The most common swap is one where counterparty A (a university, municipal government, etc.) pays a fixed rate to counterparty B (the bank), while receiving from B a floating rate indexed to a reference rate such as LIBOR. If interest rates go up, the municipality gets paid more on the swap contract, offsetting its rising borrowing costs. If interest rates go down, the municipality owes money to the bank on the swap, but that extra charge is offset by the falling interest rate on its variable rate loan. The result is to fix borrowing costs at the lower variable rate.

At least, that is how they are supposed to work. The catch is that the swap is a separate financial agreement – essentially an ongoing bet on interest rates. The borrower owes both the interest onits variable rate loan and what it must pay on its separate swap deal. And the benchmarks for the two rates don’t necessarily track each other. The rate owed on the debt is based on something called the SIFMA municipal bond index.  The rate owed by the bank is based on the privately-fixed LIBOR rate.

As noted by Stephen Gandel on CNNMoney, when the rate-setting banks started manipulating LIBOR, the two rates decoupled, sometimes radically. Public entities wound up paying substantially more than the fixed rate they had bargained for – a failure of consideration constituting breach of contract. Breach of contract is grounds for rescission and damages.

Pain and Suffering in California

The SEIU report noted that no one has yet completely categorized all the outstanding swap deals entered into by local and state governments.  But in a sampling of swaps within California, involving ten cities and counties (San Francisco, Corcoran, Los Angeles, Menlo Park, Oakland, Oxnard, Pittsburgh, Richmond, Riverside, and Sacramento), one community college district, one utility district, one transportation authority, and the state itself, the collective tab was $365 million in swap payments annually, with total termination fees exceeding $1 billion.

Omitted from the sample was the University of California system, which alone is reported to have lost tens of millions of dollars on interest-rate swaps. According to an article in the Orange County Register on February 24, 2014, the swaps now cost the university system an estimated $6 million a year. University accountants estimate that the 10-campus system will lose as much as $136 million over the next 34 years if it remains locked into the deals, losses that would be reduced only if interest rates started to rise. According to the article:

Already officials have been forced to unwind a contract at UC Davis, requiring the university to pay $9 million in termination fees and other costs to several banks. That sum would have covered the tuition and fees of 682 undergraduates for a year.

The university is facing the losses at a time when it is under tremendous financial stress. Administrators have tripled the cost of tuition and fees in the past 10 years, but still can’t cover escalating expenses. Class sizes have increased. Families have been angered by the rising price of attending the university, which has left students in deeper debt.

Peter Taylor, the university’s Chief Financial Officer, defended the swaps, saying he was confident that interest rates would rise in coming years, reversing what the deals have lost. But for that to be true, rates would have to rise by multiples that would drive interest on the soaring federal debt to prohibitive levels, something the Federal Reserve is not likely to allow.

The Revolving Door

The UC’s dilemma is explored in a report titled “Swapping Our Future: How Students and Taxpayers Are Funding Risky UC Borrowing and Wall Street Profits.” The authors, a group called Public Sociologists of Berkeley, say that two factors were responsible for the precipitous decline in interest rates that drove up UC’s relative borrowing costs. One was the move by the Federal Reserve to push interest rates to record lows in order to stabilize the largest banks. The other was the illegal effort by major banks to manipulate LIBOR, which indexes interest rates on most bonds issued by UC.

Why, asked the authors, has UC’s management not tried to renegotiate the deals? They pointed to the revolving door between management and Wall Street. Unlike in earlier years, current and former business and finance executives now play a prominent role on the UC Board of Regents.

They include Chief Financial Officer Taylor, who walked through the revolving door from Lehman Brothers, where he was a top banker in Lehman’s municipal finance business in 2007. That was when the bank sold the university a swap related to debt at UCLA that has now become the source of its biggest swap losses. The university hired Taylor for his $400,000-a-year position in 2009, and he has continued to sign contracts for swaps on its behalf since.

Investigative reporter Peter Byrne notes that the UC regent’s investment committee controls $53 billion in Wall Street investments, and that historically it has been plagued by self-dealing. Byrne writes:

Several very wealthy, politically powerful men are fixtures on the regent’s investment committee, including Richard C. Blum (Wall Streeter, war contractor, and husband of U.S. Senator Dianne Feinstein), and Paul Wachter (Gov. Arnold Schwarzenegger’s long-time business partner and financial advisor). The probability of conflicts of interest inside this committee—as it moves billions of dollars between public and private companies and investment banks—is enormous.

Blum’s firm Blum Capital is also an adviser to CalPERS, the California Public Employees’ Retirement System, which also got caught in the LIBOR-rigging scandal. “Once again,” said CalPERS Chief Investment Officer Joseph Dear of the LIBOR-rigging, “the financial services industry demonstrated that it cannot be trusted to make decisions in the long-term interests of investors.” If the financial services industry cannot be trusted, it needs to be replaced with something that can be.


The Public Sociologists of Berkeley recommend renegotiation of the onerous interest rate swaps, which could save up to $200 million for the UC system; and evaluation of the university’s legal options concerning the manipulation of LIBOR. As demonstrated in the new FDIC suit, those options include not just renegotiating on better terms but rescission and damages for fraud and breach of contract. These are remedies that could be sought by local governments and public entities across the state and the nation.

The larger question is why our state and local governments continue to do business with a corrupt global banking cartel. There is an alternative. They could set up their own publicly-owned banks, on the model of the state-owned Bank of North Dakota. Fraud could be avoided, profits could be recaptured, and interest could become a much-needed source of public revenue. Credit could become a public utility, dispensed as needed to benefit local residents and local economies.


Ellen Brown is an attorney, founder of the Public Banking Institute, and a candidate for California State Treasurer running on a state bank platform. She is the author of twelve books, including the best-selling Web of Debt and her latest book, The Public Bank Solution, which explores successful public banking models historically and globally.

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The Global Banking Game Is Rigged, and the FDIC Is Suing

Taxpayers are paying billions of dollars for a swindle pulled off by the world’s biggest banks, using a form of derivative called interest-rate swaps; and the Federal Deposit Insurance Corporation has now joined a chorus of litigants suing over it. According to an SEIU report:

Derivatives . . . have turned into a windfall for banks and a nightmare for taxpayers. . . . While banks are still collecting fixed rates of 3 to 6 percent, they are now regularly paying public entities as little as a tenth of one percent on the outstanding bonds, with rates expected to remain low in the future. Over the life of the deals, banks are now projected to collect billions more than they pay state and local governments – an outcome which amounts to a second bailout for banks, this one paid directly out of state and local budgets.

It is not just that local governments, universities and pension funds made a bad bet on these swaps. The game itself was rigged, as explained below. The FDIC is now suing in civil court for damages and punitive damages, a lead that other injured local governments and agencies would be well-advised to follow. But they need to hurry, because time on the statute of limitations is running out.

The Largest Cartel in World History

On March 14, 2014, the FDIC filed suit for LIBOR-rigging against sixteen of the world’s largest banks – including the three largest US banks (JPMorgan Chase, Bank of America, and Citigroup), the three largest UK banks, the largest German bank, the largest Japanese bank, and several of the largest Swiss banks. Bill Black, professor of law and economics and a former bank fraud investigator, calls them “the largest cartel in world history, by at least three and probably four orders of magnitude.”

LIBOR (the London Interbank Offering Rate) is the benchmark rate by which banks themselves can borrow. It is a crucial rate involved in hundreds of trillions of dollars in derivative trades, and it is set by these sixteen megabanks privately and in secret.

Interest rate swaps are now a $426 trillion business. That’s trillion with a “t” – about seven times the gross domestic product of all the countries in the world combined. According to the Office of the Comptroller of the Currency, in 2012 US banks held $183.7 trillion in interest-rate contracts, with only four firms representing 93% of total derivative holdings; and three of the four were JPMorgan Chase, Citigroup, and Bank of America, the US banks being sued by the FDIC over manipulation of LIBOR.

Lawsuits over LIBOR-rigging have been in the works for years, and regulators have scored some very impressive regulatory settlements. But so far, civil actions for damages have been unproductive for the plaintiffs. The FDIC is therefore pursuing another tack.

But before getting into all that, we need to look at how interest-rate swaps work. It has been argued that the counterparties stung by these swaps got what they bargained for – a fixed interest rate. But that is not actually what they got. The game was rigged from the start.

The Sting

Interest-rate swaps are sold to parties who have taken out loans at variable interest rates, as insurance against rising rates. The most common swap is one where counterparty A (a university, municipal government, etc.) pays a fixed rate to counterparty B (the bank), while receiving from B a floating rate indexed to a reference rate such as LIBOR. If interest rates go up, the municipality gets paid more on the swap contract, offsetting its rising borrowing costs. If interest rates go down, the municipality owes money to the bank on the swap, but that extra charge is offset by the falling interest rate on its variable rate loan. The result is to fix borrowing costs at the lower variable rate.

At least, that is how it’s supposed to work. The catch is that the swap is a separate financial agreement – essentially an ongoing bet on interest rates. The borrower owes both the interest onits variable rate loan and what it must pay out on this separate swap deal. And the benchmarks for the two rates don’t necessarily track each other. As explained by Stephen Gandel on CNN Money:

The rates on the debt were based on something called the Sifma municipal bond index, which is named after the industry group that maintains the index and tracks muni bonds. And that’s what municipalities should have bought swaps based on.

Instead, Wall Street sold municipalities Libor swaps, which were easier to trade and [were] quickly becoming a gravy train for the banks.

Historically, Sifma and LIBOR moved together. But that was before the greatest-ever global banking cartel got into the game of manipulating LIBOR. Gandel writes:

In 2008 and 2009, Libor rates, in general, fell much faster than the Sifma rate. At times, the rates even went in different directions. During the height of the financial crisis, Sifma rates spiked. Libor rates, though, continued to drop. The result was that the cost of the swaps that municipalities had taken out jumped in price at the same time that their borrowing costs went up, which was exactly the opposite of how the swaps were supposed to work.

The two rates had decoupled, and it was chiefly due to manipulation. As noted in the SEUI report:

[T]here is . . . mounting evidence that it is no accident that these deals have gone so badly, so quickly for state and local governments. Ongoing investigations by the U.S. Department of Justice and the California, Florida, and Connecticut Attorneys General implicate nearly every major bank in a nationwide conspiracy to rig bids and drive up the fixed rates state and local governments pay on their derivative contracts.

Changing the Focus to Fraud

Suits to recover damages for collusion, antitrust violations and racketeering (RICO), however, have so far failed. In March 2013, SDNY Judge Naomi Reece Buchwald dismissed antitrust and RICO claims brought by investors and traders in actions consolidated in her court, on the ground that the plaintiffs lacked standing to bring the claims. She held that the rate-setting banks’ actions did not affect competition, because those banks were not in competition with one another with respect to LIBOR rate-setting; and that “the alleged collusion occurred in an arena in which defendants never did and never were intended to compete.”

Okay, the defendants weren’t competing with each other. They were colluding with each other, in order to unfairly compete with the rest of the financial world – local banks, credit unions, and the state and local governments they lured into being counterparties to their rigged swaps. The SDNY ruling is on appeal to the Second Circuit.

In the meantime, the FDIC is taking another approach. Its 24-count complaint does include antitrust claims, but the emphasis is on damages for fraud and conspiring to keep the LIBOR rate low to enrich the banks. The FDIC is not the first to bring such claims, but its massive suit adds considerable weight to the approach.

Why would keeping interest rates low enrich the rate-setting banks? Don’t they make more money if interest rates are high?

The answer is no. Unlike most banks, they make most of their money not from ordinary commercial loans but from interest rate swaps. The FDIC suit seeks to recover losses caused to 38 US banking institutions that did make their profits from ordinary business and consumer loans – banks that failed during the financial crisis and were taken over by the FDIC. They include Washington Mutual, the largest bank failure in US history. Since the FDIC had to cover the deposits of these failed banks, it clearly has standing to recover damages, and maybe punitive damages, if intentional fraud is proved.

The Key Role of the Federal Reserve

The rate-rigging banks have been caught red-handed, but the greater manipulation of interest rates was done by the Federal Reserve itself. The Fed aggressively drove down interest rates to save the big banks and spur economic recovery after the financial collapse. In the fall of 2008, it dropped the prime rate (the rate at which banks borrow from each other) nearly to zero.

This gross manipulation of interest rates was a giant windfall for the major derivative banks. Indeed, the Fed has been called a tool of the global banking cartel. It is composed of 12 branches, all of which are 100% owned by the private banks in their districts; and the Federal Reserve Bank of New York has always been the most important by far of these regional Fed banks. New York, of course is where Wall Street is located.

LIBOR is set in London; but as Simon Johnson observed in a New York Times article titled The Federal Reserve and the LIBOR Scandal, the Fed has jurisdiction whenever the “safety and soundness” of the US financial system is at stake. The scandal, he writes, “involves egregious, flagrant criminal conduct, with traders caught red-handed in e-mails and on tape.” He concludes:

This could even become a “tobacco moment,” in which an industry is forced to acknowledge its practices have been harmful – and enters into a long-term agreement that changes those practices and provides continuing financial compensation.

Bill Black concurs, stating, “Our system is completely rotten. All of the largest banks are involved—eagerly engaged in this fraud for years, covering it up.” The system needs a complete overhaul.

In the meantime, if the FDIC can bring a civil action for breach of contract and fraud, so can state and local governments, universities, and pension funds. The possibilities this opens up for California (where I’m currently running for State Treasurer) are huge. Fraud is grounds for rescission (terminating the contract) without paying penalties, potentially saving taxpayers enormous sums in fees for swap deals that are crippling cities, universities and other public entities across the state. Fraud is also grounds for punitive damages, something an outraged jury might be inclined to impose. My next post will explore the possibilities for California in more detail. Stay tuned.


Ellen Brown is an attorney, founder of the Public Banking Institute, and a candidate for California State Treasurer running on a state bank platform. She is the author of twelve books, including the best-selling Web of Debt and her latest book, The Public Bank Solution, which explores successful public banking models historically and globally.

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Devastating Imminent Stock Crash — Buffet, Faber, Spitznagel, Mannarino And More (Video)

By Susan Duclos

Financial gurus, trends forecasters, stock market experts, hedge fund managers and more are all yelling at the top of their lungs, from rooftops, figuratively, with warnings of the devastating and imminent stock market crash and economic collapse, that will make the 1929 crash seem like a walk in the park.

Top names in the financial industry like Celente, Faber, Schiff, Spitznagel and Buffet are just the tip of the iceberg of the latest examples of these dire warnings.


"The crisis is imminent," Schiff said. "I don't think Obama is going to finish his second term without the bottom dropping out. And stock market investors are oblivious to the problems."


"I think somewhere down the line we will have a massive wealth destruction. I would say that well-to-do people may lose up to 50 percent of their total wealth."


This selloff in the emerging markets, with their currencies going down and their interest rates going up, it’s going to be disastrous and there are going to be riots everywhere… 
…So as the decline in their economies accelerates, you are going to see the civil unrest intensify.

Those are just samples and in the first video below, by Gregory Mannarino, more is explained about the upcoming stock market "meltdown."

 Cross posted at Before It's News

Critiquing Richmond’s eminent domain plan – Prof. Hockett’s response

The comment below to my eminent domain article merited a detailed response, so I sent it to Professor Robert Hockett, the Cornell University law professor who was the principal author of the Richmond plan.  His answer was so useful that I thought I would submit it as a separate post, also below.  Thanks Bob and Marc!

Marc Joffe, on March 4, 2014 at 8:40 pm said:

I am not in a position to debate the legal theory – which looks plausible. But I think you are missing certain facts which make this situation something far more murky than a plucky local government standing up for the little guy against evil banks.

First, Wall Street has already collected its profits from these securitization deals – in the form of fees paid when the mortgages were bundled 7 or more years ago. While we don’t know exactly who owns all the securities that would be negatively impacted by an eminent domain, we do know that a lot of it is held by public employee pension funds. So instead of taking it to the big banks, you may well be taking it to the humble public servant.

Second, not everyone who took on these mortgages is a poor innocent victim. Some wanted to take cash out of their properties for one reason or another, and actually got the money cheap due to the lending bubble. Also, many homeowners with underwater mortgages in Richmond are not poor. The original pool slated for eminent domain included 3000+ square foot McMansions and waterfront properties. Finally, with the recent rebound in home prices, many fewer homes are underwater and foreclosure rates are down – so you are addressing yesterday’s problem.

As for the council, they need to work with Mortgage Resolution Partners because they want someone to cover their legal costs during the inevitable litigation. The City could be driven into bankruptcy if it is forced into endless litigation or suffers an adverse judgement. More disturbing is the recent expose from the Center for Investigative Reporting showing that Richmond public housing – a Council responsibility – is dilapidated and infested with vermin. If we can’t trust elected officials to provide livable public housing why should we rely on them to resolve blight arising from private foreclosures.

Prof. Hockett’s response:

   It never ceases to amaze me how, even after years now of explaining and advocating the eminent domain approach to the underwater PLS loan problem and detailing precisely (a) when it is and when it is not called for, (b) how it works, and (c) the premises upon which it is predicated, people still seem to misunderstand or mischaracterize the plan and entirely overlook or breeze past its fundamental premise.  That premise is, again, that deeply underwater loans are subject to enormous default risk (just look at Fannie’s and Freddie’s 10K filings for a hint as to how high that risk is – nearly 70% for non-prime and 40% even for prime loans), such that one actually RAISES the actuarial value of the targeted loans by purchasing them and writing down principal so long as one targets the RIGHT loans.  That idea is transparently conveyed, I would have thought, in the VERY TITLE of the NY Fed piece: you can pay Paul AND Peter where these loans are concerned.  

    Why, then, do we continue to encounter, again and again, blithe references to ’securities that would be negatively impacted,’ ‘investors who would lose,’ etc.?  The whole POINT of the plan is to target ONLY deeply underwater loans and associated securities that will be POSITIVELY affected.  Those are EXACTLY the loans Richmond and other cities are looking at.  And they are getting the values of those loans appraised by the industry’s own favored appraiser – MIAC.   

    Next, on the ‘yesterday’s problem’ meme, this one entirely ignores the locally concentrated nature of the nation’s underwater mortgage loan problem.  Well more than half of Richmond’s, Irvington NJ’s, Newark NJ’s, Baltimore MD’s, Wayne County MI’s, … etc. etc. etc. … loans are deeply underwater.  (Take a look at the CoreLogic or Zillow ‘heat maps’ for a ‘big picture’ view of the problem’s distribution.)  There is no ‘recovery’ worth the name in these places.  Note moreover that even nationally the underwater rate is still around 20% – after having been between 25% and 30% at its worst.  All this even though we are now approaching year eight – EIGHT! – since home prices began tanking in the summer of ’06!  Are we to wait another 12-16 years for the remainder of the problem to ‘take care of itself?’  And just what is the source of future appreciation supposed to be, given continued real wage and income stagnation, continuing high unemployment, and Fed intentions to taper from historically low interest rates - rates that account for all ‘recovery’ that’s thus far occurred – in coming months?  

    Hope springs eternal, it seems, and that is a beautiful thing.  But it is quite beyond the pale to expect Richmond to watch helplessly – and indeed hopelessly - as thousands more of its own residents are rendered homeless in the name of the beautiful ‘hope’ of pontificating well-to-do financiers. 

    Like remarks hold of one commentator’s observation concerning Richmond’s recent public housing problem.  That is indeed a terrifying story, which I’ve followed carefully from the start, but people like this fellow are drawing the very contrary of the right lesson.  The lesson is not that ‘we can’t trust local government to manage public housing well, therefore let us sit back and watch thousands more lose their homes and be forced into public housing.’  The lesson, rather, is ‘let us finally end the foreclosure crisis, in order both that there be no more demand on scarce public housing resources and that there finally be a restoration of municipal revenue, which of course shrinks to the vanishing point when wave after wave of foreclosure destroys property value and with it the city revenue base – all while, with cruel irony, municipal abatement costs brought on by abandoned and dilapidating homes shoot through the roof.’ 

    There could be no more effective solution to Richmond’s challenges – including those with public housing – than to get its residents back into their own homes, and to prevent any more residents from needlessly LOSING their homes. 

    Finally, I don’t think that the ‘endless litigation’ meme deserves any credence either.  I have repeatedly assessed every one of the four to five putatively ‘legal’ objections that opponents have tried out over the past several years, and literally not a single one of them – not the Takings Clause ‘argument,’ not the Due Process Clause / jurisdictional ‘argument,’ not the ‘dormant’ Commerce Clause ‘argument,’ and not, funniest of all, the Contract Clause ‘argument’ - is serious.  They appear to be meant more to terrorize municipal counsel than actually to impugn the legal bona fides of the eminent domain plan.  (Surely that’s why they flew all over the internet on impressive law firm letterhead long before any suits were filed.)  Opponents have lost two suits against Richmond already on precisely the grounds that I said that they would within minutes of their filing them back last August and September.  I don’t think these opponents are irrational; at some point they are going to stop throwing millions of their own dollars away on comical ’Hail Mary’ lawsuits doomed ab initio to failure, and instead enter into constructive dialogue with the cities on how best to select, and then value, loans locked in PLS trusts whose values can be raised by writing down principal.  Surely Richmond’s reliance on MIAC in appraising its targeted loans ought to reassure them of the cities’ good faith. 

    Because value is now being needlessly lost in the form of continuing – yet avoidable – delinquencies, defaults, and costly foreclosures, what we are talking about here - and what I’ve been talking about all along - is value recoupment.  It’s about ending an ongoing, deadweight loss.  The salvaged value can be distributed solomonically over homeowner, bondholder, and all other stakeholders alike.  And it is precisely this distribution – as well as determining how best to maximize the surplus that is to be distributed – that those who now slander and carp at the cities ought to be JOINING the cities in effecting.  To do otherwise is simply to throw away value.

Editor’s comment: “distributed solomonically” – great image! That sums it up.

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China Starts To Make A Power Move Against The U.S. Dollar

In order for our current level of debt-fueled prosperity to continue, the rest of the world must continue to use our dollars to trade with one another and must continue to buy our debt at ridiculously low interest rates.  Of course the number one foreign nation that we depend on to participate in our system [...]

Celente: Currencies Are Crashing! (Video)

By Susan DuclosIn the video interview below with trends forecaster Gerald Celente, who has been predicting trends for 30 years, he explains why raising interest rates as economies are slowing down is the number one reason currencies are crashing all ov...

Bernanke at Brookings

Bernanke at Brookings

by Stephen Lendman

On January 31, he stepped down as Fed chairman. Janet Yellen replaced him. He's entering a new world of million-dollar book deals. He'll make $100,000 a pop speeches. 

Expect appointments to corporate boards. CEOs value his rainmaking services. 

On February 3, Brookings headlined "Federal Reserve Chairman Ben Bernanke to Join Economic Studies at Brookings."

He's a "Distinguished Fellow in Residence." He's affiliated with the Hutchins Center on Fiscal and Monetary Policy (HCFMP). On January 16, Brookings launched it. 

Its board of trustees vice chair Glenn Hutchins contributed $10 million in seed money. He co-founded the multi-billion dollar private equity firm Silver Lake Partners. Guess what type policies HCFMP will endorse. 

"We are proud to welcome chairman Bernanke into the Brookings family," said president Strobe Talbot. He's Clinton's former deputy secretary of state. He was directly involved in some of his worst policies.

Brookings' agenda is brazenly imperial. It's pro-corporate. It's anti-populist. It feigns concern about inequality. It supports government of, by and for privileged elites alone. Expect Bernanke to fit right in.

His Fed tenure was deplorable. He betrayed the public trust. His record attests to his wickedness. 

His agenda was ruthlessly anti-populist. He did more to thirdworldize America for profit than any of his predecessors. 

He handed Wall Street crooks multi-trillions of dollars. He facilitated the greatest wealth transfer in history. He created a protracted Main Street Depression. No end in sight looms.

Noted investor Jeremy Grantham's commentaries are refreshing. He cuts to the heart of issues. He pulls no punches doing so.

He titled an earlier commentary "Night of the Living Fed: Something Unbelievably Terrifying."

He highlighted "runaway commodities, (zombi) banks back to life, homes destroyed, families evicted, and currency wars."

He blamed Bernanke. "If I were a benevolent dictator," he said, he'd limit the Fed solely to maintaining price stability. 

He'd make sure the economy got enough liquidity to function normally. He's "force (the Fed) to swear off manipulating asset prices through artificially low rates and asymmetric promises."

He referred to the Greenspan/Bernanke put. He'd eliminate "immoral hazard." It's immoral behavior. It's outsized excess. It's grand theft.

It bails out large investors. Doing so encourages imprudent risks. Winning is guaranteed. Regulatory checks are absent. Anything goes is policy.

Things persist "under the guise of 'saving the system,' " said Grantham. Money manipulators have things their way.

Fed chairmen are tools of monied interests. They know who butters their bread. They return favors manyfold. Greenspan did from August 1987 through January 2006.

Bernanke exceeded his worst policies. He did so from February 1, 2006 through January 31, 2014. 

Both chairmen qualify as maestros of misery. They created bubble financial conditions. America's 1% profited hugely. They did so at the expense of most others.

Virtually all global assets are overpriced. Bubble conditions exist. Grantham compared them to Einstein's definition of insanity. The madness of repeating the same mistakes. Expecting a different outcome doesn't work.

Last spring, Grantham compared Fed policy to beating a donkey. He called it the 1% growing economy. "(H)e keeps beating it until it either turns into a horse or drops dead from too much beating," said Grantham.

"We've been conned." We're manipulated to believe "debt is everything." In 1982, it was one-and-a-quarter times GDP.

It's nearly triple that amount now. It has nothing to do with long-term growth. It's an "accounting world. It's paper," said Grantham.

"The real world is the quantity and quality of your people, and the quality and quantity of capital spending."

"Are you building new machines? Are you being inventive?" Are you educating a new generation properly?

"We're in this death grip that only paper things matter." Vital issues go unaddressed. Wealth keeps getting transferred "from the poor to the rich."

Interest rates are outrageously now. They're practically zero. Speculators benefit. Ordinary people lose out. 

Retirees are deprived of vital income. Financial interests are served at the expense of the real economy.

During his tenure as Fed chairman, Bernanke handed speculators over $20 trillion. Most was practically interest free. They took full advantage.

Money printing madness defines Fed policy. Helicopter Ben dropped none on Main Street. In 2002, his helicopter money speech said:

"The US government has a technology, called a printing press (today its electronic equivalent)." 

It "allows it to produce as many US dollars as it wishes at essentially no cost."

Most circulating money is bank-generated credit. It's created out of thin air. It's when banks extend loans.

When old ones are repaid faster than new ones, money supply shrinks. QE is supposed to reverse things.

Things haven't worked out this way. Key is where Fed money goes. Dropping it on Main Street stimulates economic growth.

Handing it to Wall Street crooks parks it in their reserve accounts. It's not used for lending.

Former Reagan budget director David Stockman said it "stayed trapped in the canyons of Wall Street." He called it "high grade monetary heroin."

It's "kill(ing) the patient." It's "legalized bank robbery." It's recklessly out-of-control.

It "inflate(d) yet another unsustainable bubble." They all burst. No exceptions. This time isn't different.

Money printing madness and bailouts reflect "the single most shameful chapter in American financial history," said Stockman.

Bernanke operated by Abraham Maslow's maxim. "(I)f the only tool you have is a hammer, every problem looks like a nail," he said.

QE continues. It's slowing. Yellen can rev it up full bore any time. It's self-defeating. It contracts the money supply. It's by sucking up collateral needed to create credit.

It constrains economic growth. It doesn't create jobs. It solely benefits Wall Street. Banksters made out like bandits. Speculators profited hugely. They did so at the expense of Main Street. 

Financial warfare rages. America and other societies are affected. Ordinary people are hurt most. Hard times keep getting harder.

QE works when used constructively. Money injected responsibly into the economy creates growth. It creates jobs. When people have money they spend it.

A virtuous cycle of prosperity follows. America once was sustainably prosperous. Today it’s in decline. It's heading for third world status. It's more kleptocracy than democracy.

Money power in private hands assures trouble. Ellen Brown explained more. Up to 40% of "everything we buy goes (for) interest."

It goes to "bankers, financiers and bondholders." A third or more of national wealth shifts from Main Street to Wall Street. 

Complicit politicians let it happen. They do so for generous benefits derived. Greed is the national pastime. So is looting America for profit.

Most people think paying bills and credit card charges on time avoids interest charges. Not so, says Brown. 

"Tradesmen, suppliers, wholesalers and retailers all along the chain of production rely on credit to pay their bills."

Their costs pass on to consumers. Unwittingly they pay. Ordinary people make wealthy ones richer. They do so at their own expense. What better argument for public banking than that.

Borrowing from public banks eliminates or greatly reduces interest rate charges. It works at federal, state and local levels.

Public banks don't have to earn profits. They're not beholden to Wall Street or shareholders. They're self-sustaining. They can lend for their own needs. They can do it for businesses, farmers and consumers.

The more loans roll over, the more debt-free money is created. If used productively for growth, it's virtually inflation-free. As long as new money produces goods and services, price stability follows.

Economies flourish. All boats are lifted. Millions of high-pay/good benefit jobs can be created. Homes become more affordable. Foreclosures end. So do out-of-control speculation, booms and busts.

Private savings, pensions, and investments become secure. So do Social Security, Medicare and other vital social programs. They can be in perpetuity.

Surpluses replace deficits. Sustained prosperity follows. It's not pie in the sky. It happened before. It can happen again. 

Good policies achieve good results. Bad ones wreck things for most people. Hard times get harder. Current conditions reflect Exhibit A.

They didn't happen by accident. Bernanke's Fed bears full responsibility. Economist Steve Keen commented on his legacy.

"It certainly won't be as he expected," said Keen. He'll likely "be blamed for causing the 'Great Recession...' "

He blamed his predecessors "for causing the Great Depression."

"His finger-pointing doesn't get any more blatant than" praising Milton Friedman on his 90th birthday. It was in 2002.

"I would like to say to Milton and Anna (Schwartz): Regarding the Great Depression. You're right. We did it. We're very sorry. But thanks to you, we won't do it again."

He's done it and then some. The worst is yet to come. 

"(I)f Ben had truly learned from both his analysis of the data and 'Milton and Anna (Schwartz), then you'd think that surely he would have ensured that the rate of growth of M1" would never drop "to or below zero, wouldn't you?"

That's exactly what happened. America's money supply is lower than when he became Fed chairman. He has no control over whether banks choose to make loans.

Doing so increases money supply growth. Holding back shrinks it. "So on Ben's own theory of what caused the Great Depression, he could quite easily be found guilty," said Keen.

Crisis conditions occurred on his watch. His policies were "the very things he said the Fed got wrong in the late 1920s."

He wrote his own legacy. It won't change now. He's ideologically over-the-top. He's responsible for more human wreckage than any of his predecessors.

He caused epidemic levels of poverty, unemployment and deprivation. He engineered the greatest wealth heist in world history. 

He debauched the dollar. He created multiple market bubbles.
He created worse crisis conditions than in 1929.

Market analyst Yves Smith calls him Greenspan on steroids. He'll be remembered as the economy wrecker of last resort.

He's unapologetic. Debt pyramiding doesn't work. Money printing madness reflects grand theft. Accountability isn't Bernanke's long suit.

He's off to greener pastures. He's cashing in for services rendered. He'll be well rewarded for enriching Wall Street. Banksters take care of their own.

Stephen Lendman lives in Chicago. He can be reached at 

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

Visit his blog site at 

Listen to cutting-edge discussions with distinguished guests on the Progressive Radio News Hour on the Progressive Radio Network.

It airs Fridays at 10AM US Central time and Saturdays and Sundays at noon. All programs are archived for easy listening.

Enough Is Enough: Fraud-ridden Banks Are Not L.A.’s Only Option

“Epic in scale, unprecedented in world history. That is how William K. Black, professor of law and economics and former bank fraud investigator, describes the frauds in which JPMorgan Chase (JPM) has now been implicated. They involve more than a dozen felonies, including bid-rigging on municipal bond debt; colluding to rig interest rates on hundreds of trillions of dollars in mortgages, derivatives and other contracts; exposing investors to excessive risk; failing to disclose known risks, including those in the Bernie Madoff scandal; and engaging in multiple forms of mortgage fraud.

So why, asks Chicago Alderwoman Leslie Hairston, are we still doing business with them? She plans to introduce a city council ordinance deleting JPM from the city’s list of designated municipal depositories. As quoted in the January 14th Chicago Sun-Times:

The bank has violated the city code by making admissions of dishonesty and deceit in the way they dealt with their investors in the mortgage securities and Bernie Madoff Ponzi scandals. . . . We use this code against city contractors and all the small companies, why wouldn’t we use this against one of the largest banks in the world?

A similar move has been recommended for the City of Los Angeles by L.A. City Councilman Gil Cedillo. But in a January 19th editorial titled “There’s No Profit in L A. Bashing JPMorgan Chase,” the L.A. Times editorial board warned against pulling the city’s money out of JPM and other mega-banks – even though the city attorney is suing them for allegedly causing an epidemic of foreclosures in minority neighborhoods.

 “L.A. relies on these banks,” says The Times, “for long-term financing to build bridges and restore lakes, and for short-term financing to pay the bills.” The editorial noted that a similar proposal brought in the fall of 2011 by then-Councilman Richard Alarcon, backed by Occupy L.A., was abandoned because it would have resulted in termination fees and higher interest payments by the city.

It seems we must bow to our oppressors because we have no viable alternative – or do we? What if there is an alternative that would not only save the city money but would be a safer place to deposit its funds than in Wall Street banks?

The Tiny State That Broke Free

There is a place where they don’t bow. Where they don’t park their assets on Wall Street and play the mega-bank game, and haven’t for almost 100 years. Where they escaped the 2008 banking crisis and have no government debt, the lowest foreclosure rate in the country, the lowest default rate on credit card debt, and the lowest unemployment rate. They also have the only publicly-owned bank.

The place is North Dakota, and their state-owned Bank of North Dakota (BND) is a model for Los Angeles and other cities, counties, and states.

Like the BND, a public bank of the City of Los Angeles would not be a commercial bank and would not compete with commercial banks. In fact, it would partner with them – using its tax revenue deposits to create credit for lending programs through the magical everyday banking practice of leveraging capital.

The BND is a major money-maker for North Dakota, returning about $30 million annually in dividends to the treasury – not bad for a state with a population that is less than one-fifth that of the City of Los Angeles. Every year since the 2008 banking crisis, the BND has reported a return on investment of 17-26%.

Like the BND, a Bank of the City of Los Angeles would provide credit for city projects – to build bridges, restore lakes, and pay bills – and this credit would essentially be interest-free, since the city would own the bank and get the interest back. Eliminating interest has been shown to reduce the cost of public projects by 35% or more.

Awesome Possibilities

 Consider what that could mean for Los Angeles. According to the current fiscal budget, the LAX Modernization project is budgeted at $4.11 billion. That’s the sticker price. But what will it cost when you add interest on revenue bonds and other funding sources? The San Francisco-Oakland Bay Bridge earthquake retrofit boondoggle was slated to cost about $6 billion. Interest and bank fees added another $6 billion. Funding through a public bank could have saved taxpayers $6 billion, or 50%.

If Los Angeles owned its own bank, it could also avoid costly “rainy day funds,” which are held by various agencies as surplus taxes. If the city had a low-cost credit line with its own bank, these funds could be released into the general fund, generating massive amounts of new revenue for the city.

The potential for the City and County of Los Angeles can be seen by examining their respective Comprehensive Annual Financial Reports (CAFRs). According to the latest CAFRs (2012), the City of Los Angeles has “cash, pooled and other investments” of $11 billion beyond what is in its pension fund (page 85), and the County of Los Angeles has $22 billion (page 66). To put these sums in perspective, the austerity crisis declared by the State of California in 2012 was the result of a declared state budget deficit of only $16 billion.

The L.A. CAFR funds are currently drawing only minimal interest. With some modest changes in regulations, they could be returned to the general fund for use in the city’s budget, or deposited or invested in the city’s own bank, to be leveraged into credit for local purposes.

Minimizing Risk

 Beyond being a money-maker, a city-owned bank can minimize the risks of interest rate manipulation, excessive fees, and dishonest dealings.

Another risk that must now be added to the list is that of confiscation in the event of a “bail in.” Public funds are secured with collateral, but they take a back seat in bankruptcy to the “super priority” of Wall Street’s own derivative claims. A major derivatives fiasco of the sort seen in 2008 could wipe out even a mega-bank’s available collateral, leaving the city with empty coffers.

The city itself could be propelled into bankruptcy by speculative derivatives dealings with Wall Street banks. The dire results can be seen in Detroit, where the emergency manager, operating on behalf of the city’s creditors, put it into bankruptcy to force payment on its debts. First in line were UBS and Bank of America, claiming speculative winnings on their interest-rate swaps, which the emergency manager paid immediately before filing for bankruptcy. Critics say the swaps were improperly entered into and were what propelled the city into bankruptcy. Their propriety is now being investigated by the bankruptcy judge.

Not Too Big to Abandon

Mega-banks might be too big to fail. According to U.S. Attorney General Eric Holder, they might even be too big to prosecute. But they are not too big to abandon as depositories for government funds.

There may indeed be no profit in bashing JPMorgan Chase, but there would be profit in pulling deposits out and putting them in Los Angeles’ own public bank. Other major cities currently exploring that possibility include San Franciscoand Philadelphia.

If North Dakota can bypass Wall Street with its own bank and declare its financial independence, so can the City of Los Angeles. And so can the County. And so can the State of California.


Ellen Brown is an attorney, chairman of the Public Banking Institute, and author of 12 books including The Public Bank Solution. She is currently running for California state treasurer on the Green Party ticket.

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Looking Back on Five Years of Economic Turmoil: Heart Burn or Heart Attack?

When significant US economic markets went haywire in the summer and fall of 2008, a fear, even panic, struck those charged with developing and implementing economic policy. The prevailing thinking-- unbridled capitalism with near-religious confidence in market mechanisms-- appeared to be in irreversible retreat.
The housing market cooled, home values shrank, and the financial structure built around home ownership began to collapse. As the stock market fell freely from previous highs, led by the implosion of bank stocks, investors withdrew dramatically from the market. Credit froze and consumption slowed. Thus began a downward spiral of employee layoffs, reduced consumption, capital hoarding, and retarded growth, followed by more layoffs, etc. etc.
As fear set in, policy makers scrambled to find an answer to a crisis that threatened to deepen and spread to the far reaches of the global economy. With interest rates near zero, they recognized that the monetarist toolbox, in use since the Carter administration, offered no answer.
At the end of the Bush administration, bi-partisan leaders approved the injection of hundreds of billions of public dollars into the financial system with the hope of stabilizing the collapsing market value of banks, a move popularly dubbed a “bailout.”
Early in the Obama administration, Democratic Party administrators crafted another recovery program totaling about three-quarters of a trillion dollars, a program involving a mix of tax cuts, public-private infrastructure projects, and expanded direct relief. Economists generally viewed this effort as a “stimulus” program designed to trigger a burst of economic activity to jump-start a stalled economic engine. Dollar estimates of aggregate US Federal bailouts and stimuli meant to overcome the crisis rose as high as the value of one year's Gross Domestic Product in the early years after the initial free fall. The Federal Reserve continues to offer a $75 billion transfusion every month into the veins of the yet ailing US economy.
Bad Faith
The last three decades of the twentieth century brought forth a new economic consensus of not merely market primacy, but total market governance of economic life. Regulation of markets was believed to destabilize markets and not correct them. Public ownership and public services were seen as inefficient and untenable holdouts from market forces. Public and private life beyond the economic universe were subjected to markets, measured by market mechanisms, and analyzed through the lens of market-thought. Indeed, market-speak became the lingua franca unifying all of the social sciences and humanities in this era. With the fall of the Soviet Union, capital and its profit-driven processes penetrated every corner of the world. Only independent, anti-imperialist, market-wary movements like those led by Hugo Chavez, Evo Morales, and a few others gained some political success against the unprecedented global dominance of private ownership and market mechanisms.
While capitalism in its most unadorned, aggressive form enjoyed the moments of triumph, forces were at play undermining that celebration. Those forces crashed the party in 2000 in the form of a serious economic downturn, the so-called “Dot-com Recession” featuring a $5 trillion stock market value loss and the disappearance of millions of jobs. Economists marveled at how slowly the jobs were returning before the US and global economy were hit with another, more powerful blow in 2008. Clearly, the first decade of the twenty-first century will be remembered as one of economic crisis and uncertainty, a turmoil that continues to this day.
Apart from the human toll-- millions of lost jobs, poverty, homelessness, lost opportunities, destruction of personal wealth-- the crisis-ridden twenty-first century challenged the prevailing orthodoxy of unfettered markets and private ownership. Even such solid and fervent advocates of that orthodoxy as the Wall Street Journal, The Economist, and The Times were rocked by the crisis, questioning the soundness of classical economic principles. No principle is more dear and essential for the free marketeers than the idea that markets are self-correcting. While there may be short-term economic imbalances or downturns, free-market advocates believe that market movement always tends towards balance and expansion in the long run. Thus, a persistent, long term stagnation or decline is thought to be virtually impossible (with the caveat that there are no restrictions imposed on the market mechanism).
So when perhaps the greatest era of extensive global open-market economy experienced the most catastrophic economic collapse since the Great Depression, serious doubts arose about the fundamental tenets of market ideology. And during the darkest days of 2008 and 2009, a veritable ideological panic swept over pundits and experts of the Right and the “respectable” Left. Some rehabilitated an out-of-fashion economist and spoke of a “Minsky moment.” Liberals proclaimed the death of neo-liberalism (the popular term for the return to respectability of classical economics that began in the late 1970s). And still others foresaw a restoration of the interventionist economics represented by John Maynard Keynes, the economic theories that guided the capitalist economy through most of the post-war period. Even the most conservative economists conceded that market oversight, if not regulation, was both necessary and forthcoming.
Yet, change has not come forth. Despite over five years of decline and stagnation, despite a continued failure of markets to self-correct, free-market ideology continues to dominate both thinking and policy, clearly more faith-based than reality-based. In part, the resilience of open-market philosophy emanates from the shrewd manufacture of debt-fear by politicians and debt-mongering by financial institutions. By raising the shrill cry of exploding debt and impending doom, attention was diverted from the failings of the unfettered market and towards government austerity and massive debt reduction.
Clearly all the Nobel Prize-winning mathematical economic models thought to capture economic activity failed to predict and explain the 2008 crash. No amount of faith could disguise the monumental failure of raw, unregulated markets and the policies that promoted them. Two competing, sharply contrasting, and simplistic explanations came forward.
Defenders of free markets shamelessly, brazenly argue that government meddling thwarted the full and free operation of market mechanisms, thus, exacerbating what would have been a painful, but quickly resolved correction. Following the metaphor alluded to in this article’s title, heartburn was misdiagnosed, treated with radical surgery, only to create a life-threatening condition.
Of course this is self-serving nonsense.
Whatever else we may know about markets, we know this: since the process of deregulating markets began in earnest in the late 1970s, crises have only occurred more frequently, with greater amplitude, and harsher human consequences. Before that, and throughout the earlier post-war period, government intervention and regulation tended to forestall downturns, moderate their nadir, and soften the human toll. And a glimpse at an earlier period of market-friendly policy– the early years of the Great Depression-- demonstrates the folly of simply waiting for the promised correction: matters only grew worse. Then, as now, life proved to be a hard taskmaster; when market mechanisms really go awry, no one can afford to wait for self-correction.
Liberal and soft-Left opponents of an unfettered market offer a different argument. They saw the crisis as, not the absence of free markets, but the failure to oversee and regulate markets adequately. On this view, shared by nearly all liberals and most of the non-Communist Left, markets are fundamental economic mechanisms-- essential, if you will-- but best shepherded by government controls that steer markets back when they threaten to run amok.
Thus, the 2008 crisis would have been averted, they believe, if rules and regulations remained in place that were previously designed and implemented to protect the economy from market excesses; if we had not loosened the rules and regulations, we would never have experienced the disaster of 2008.
This view is bad history and even worse economics.
While liberals would like to believe that regulations and institutions spawned by the New Deal of the 1930s stabilized capitalism and tamed markets, the truth is otherwise. The massive war spending initiated sometime before the US entry into World War II solved the problems of growth and excess manpower associated with the long decade of stagnation, hesitant recovery, retreat, and further stagnation that befell the economy beginning in 1929.
Capitalism gained new momentum with post-war reconstruction. Productive forces were restored where they had been destroyed, refreshed where they were worn, and improved in the face of new challenges. This broad restructuring of capitalism produced new opportunities for both profit and growth. At the same time, the lesson of massive socialized, public, and planned military spending were not lost. New threats were conjured, new fears constructed. The hot war in Korea and the ever-expanding Cold War fueled an unprecedented US expansion. It is not inappropriate to characterize this post-war expansion as a period of “military-Keynesianism.” That is, it was an era of Keynesian policies of planned, extensive government spending married to military orders outside of the market. Insofar as it transferred a significant share of the capitalist economy to a command, extra-market sector, it marked a new stage of state-monopoly capitalism, a stage embracing some of the features of socialism.
But by the mid-1960s this “adjustment” began to lose its vitality. Profit growth, the driving force of capitalist expansion, started a persistent decline (for a graphic depiction of this trend, see the chart on page 103 of Robert Brenner's The Economics of Global Turbulence (New Left Review, May/June 1998).
The falling rate of profit coupled with raging inflation by the middle of the 1970s. The military-Keynesian solutions to capitalist crisis were spent, exhausted, proving inadequate to address a new expression of the instability of capitalism. Perhaps nothing signaled the bankruptcy of the prevailing (Keynesian) orthodoxy more than the desperate WIN campaign-- Whip Inflation Now of the Gerald Ford presidency, an impotent attempt to stem the crisis with mass will-power where intervention failed.
Contrary to the claims of liberals, social democrats and other reform-minded saviors of capitalism, the resultant shift in orthodoxy was notmerely a political coup, a victory of retrograde ideology, but instead it was an unwinding of the failed Keynesian policies of the moment. Thus, the Thatcher/Reagan “revolution” was only the vehicle for a dramatic adjustment of the course of capitalism away from a spent, ineffective paradigm.
With Paul Volker assuming the chairmanship of the Federal Reserve and the beginnings of systematic deregulation, the Carter administration planted the seeds of the retreat from the old prescriptions. Volker, with his growth-choking interest rates, ensured a recession that would sweep away any will to resist belt-tightening. But it took the election of the dogma-driven Ronald Reagan to emulate the UK's Margaret Thatcher and use the occasion to eviscerate wages and benefits in order to pave the way for profit growth.
The cost of restoring life to the moribund capitalist economy was borne by the working class. Foolishly, the stolid, complacent labor leadership had banked on the continuation of the tacit Cold War contract: Labor supports the anti-Communist campaign and the corporations honor labor peace with consistent wage and benefit growth. Instead, profit growth was restored by suppressing the living standards of labor-- cutting “costs.” A vicious anti-labor offensive ensued.
While the loyal opposition insists on portraying the break with Keynesian economics as something new (commonly dubbed “neo-liberalism”), it was, in fact, a surrender to the old. The bankruptcy of bourgeois economics could offer no new, creative answer to capitalist crisis; it could only cast off a failed approach and restore profits by relentlessly squeezing the labor market.
This response could and only did succeed because of the extraordinary weakness of the labor movement. As the profit rate began to rebound, labor lacked the leadership and will to not only secure a share of productivity increases, but to even defend its previous gains.
Thus, capitalism caught a second wind by retreating from the post-war economic consensus and reneging on the implicit labor peace treaty. Profit growth returned and the system sailed on.
But the continuing advance of deregulation and privatization brought with it a return to the unbuffered anarchy of markets. The Savings and Loan crises of the 1980s and 1990s and the stock market crash of October 1987 were all harbingers of things to come and reflections of deeper instability.
With the fall of the Soviet Union and Eastern European socialism, a huge new market was delivered to the global capitalist system, a market that further energized the opportunities for capital accumulation and expanded profits. Millions of educated, newly “free” (free of security, safe working conditions, legal protection, and organization) workers joined reduced-wage and low-wage workers from the rest of the world to form a vast pool of cheap labor. From the point of view of the owners of capital, paradise had truly arrived. Thus, an immense, one-sided class war and the wage-depressing integration of millions of new workers set capitalism on a profit-restoring path to health, putting the now impotent Keynesian orthodoxy in the rear-view mirror. Few would guess that this trip would endure for less than two decades before capitalism would again encounter serious crises.
Significant economic growth in a period of weak labor necessarily produces galloping inequality. With corporate and wealthy-friendly tax policies, many government redistribution mechanisms are starved or dismantled. The flow of wealth accelerates to corporations and the super-rich and away from those who work for a living. The coffers of the investor class swell with money anxious for a meaningful, significant return on investment. As the process of capital accumulation intensifies, fewer and fewer safe, high-yield productive investment opportunities arise to absorb the vast pool of ever-expanding wealth concentrated in the hands of a small minority.
In a mature capitalism, new, riskier avenues-- typically removed from the productive sector-- emerge to offer a home for capital and promise a return. Bankers and other financial “wizards” compete ferociously to construct profit-generating devices that promise more and more. These instruments grow further and further from productive activity. Moreover, their resultant “profits” are ever further removed from real, tangible, material value. Instead, they virtually exist as “hypothetical” capital, or “counter-factual” capital, or “future-directed” capital, or “contingent” capital. Some Marxists rush to label this product of speculation as “fictitious,” but that obscures its ultimate origin in exploitative acts in the commodity-production process. It is this expansion of promissory capital that fuels round after round of speculative investment lubricated with greater and greater debt.
Metaphors abound for the end game of this process: “bubbles,” “house of cards,” etc. But the ultimate cause of crisis is the failure to satisfy the never ending search for return. That is, the cause of crisis resides in the process of accumulation intrinsic to capitalism and the inability to sustain a viable return on an ever enlarging pool of capital and promissory capital. Capitalists measure their success by how their resources are fully and effectively put to use to generate new surpluses. That is the deepest, most telling sense of “rate of profit.” It is the gauge guiding the capitalist-- an effective rate of profit based on accumulated assets. Apart from official and contrived measures of profit rates, the growth of accumulated capital, weighed against the available investment opportunities, drives future investment and determines the course of economic activity.
In 1999, the profitability of the technology sector dropped precipitously as a result of the unrealizable investment of billions of yield-seeking dollars in marginal companies and internet services. As an answer to the problem of over-accumulation, investing in the fantasies of 20-year-old whiz kids proved to be as irrational as sane observers thought it to be. The crash followed.
And again in the heady days of 2005, buying bizarre securities packed with the flotsam and jetsam of mortgage shenanigans seemed a way of finding a home for vast sums of “unproductive” capital. After all, capital cannot remain idle; it must find a way to reproduce itself. But what to do with the earnings from reselling the demand-driven securities? More of the same? More risk? More debt? And repeat?
The portion of US corporate profits “earned” by the financial sector grew dramatically from 1990 until the 2008 crash, touching nearly 40% in the mid-2000s and demonstrating the explosion of alternative investment vehicles occupying idle capital. It is crucial to see a link, an evolutionary necessity, between the restoration of profitability, intense capital accumulation, and the tendency for profitability to be challenged by the lack of promising investment opportunities. It is not the whim of bankers or the cleverness of entrepreneurs that drives this process, but the logical imperative of capital to produce and reproduce.
Some Comments and Observations
There are other theories of crisis offered by the left. One theory, embraced by many Communist Parties, maintains that crisis emerges from over-production. Of course, in one sense, over-accumulation is a kind of overproduction, an overproduction of capital that lacks a productive investment destination. But many on the left mean something different. They argue that capitalism produces more commodities in the market place than impoverished, poorly paid workers can purchase. There are two objections to this: one theoretical, one ideological.
First, evidence shows that a slump in consumption or a spike in production does not, in fact, precede economic decline in our era. If overproduction or its cousin, under-consumption, were the causeof the 2008 downturn, data would necessarily show some prior deviation from production/consumption patterns. But there are none. Instead, the reverse was the case: the crisis itself caused a massive gap between production and consumption, exacerbating the crisis. The threat of oversupply lingers in the enormous deflationary pressure churning in the global economy. Despite the fact that consumer spending is such a large component of the US economy, the effects of its secular stagnation or decline has been largely muted by the expansion of consumer credit and the existence, though tenuous, of social welfare programs like unemployment insurance.
Second, if retarded or inadequate consumption were the cause of crises, then redistributive policies or tax policies would offer a simple solution to downturns, both to prevent them and reverse them. Thus, capitalism could go on its merry way with little fear of crisis. Certainly this is the ideological attraction of overproduction explanations of crises: they allow liberals and social democrats to tout their ability to manage capitalism through government policies.
However they cannot manage capitalism because crises are located, not in the arena of circulation (matching production and consumption), but in the profit-generating mechanism of capitalism, its veritable soul.
Because of the centrality of profit, the over-accumulation explanation has an affinity with another theory of crisis: Marx's argument for the tendency of the rate of profit to fall. In fact, it can be viewed as a contemporary version of the argument without nineteenth-century assumptions.
Happily, many commentators today have revisited the theory outlined in Volume III of Capital, finding a relevance ignored throughout most of the twentieth century. Only a handful of admirers of Marx's work kept the theory alive in that era, writers like Henryk Grossman, John Strachey, and Paul Mattick. Unfortunately, today's admirers, like the aforementioned predecessors, share the flaw of uncritically taking Marx's schema to be Holy Grail. For the most part, Marx used very occasional formalism as an expository tool and not as the axioms of a formal system. Those trained in modern economics are prone to leap on these formulae with an undergraduate zeal. They debate the tenability of a model that depicts the global economy as a collection of enterprises devouring constant capital at a greater rate than employment of labor and mechanically depressing the rate of profit. This is to confuse simplified exposition with robust explanation. Much can be learned from Marx's exposition without turning it into a scholastic exercise.
Among our left friends, it has become popular to speak of the crisis and era as one of “financialization.” This is most unhelpful. Indeed, the crisis had much to do with the financial sector; indeed, the financial sector played and is playing a greater role in the global economy, especially in the US and UK; but conjuring a new name does nothing to expose or explain the role of finance. Like “globalization” in an earlier time, the word “financialization” may be gripping, fashionable, and handy, but it otherwise hides the mechanisms at work; it’s a lazy word.
There is a point to this somewhat lengthy, but sketchy journey through the history of post-war capitalism. Hopefully, the journey demonstrates or suggests strongly that past economic events were neither random nor simply politically driven. Instead, they were the product of capitalism's internal logic; they sprang from roadblocks to and adjustments of capitalism's trajectory. As directions proved barren, new directions were taken. While it is not possible to rule out further maneuvers addressing the inherent problem of over-accumulation, the problem will not go away. It will return to haunt any attempt that presumes to conquer it once and for all. And if capitalism carries this gene, then it would be wise to look to a better economic system that promises both greater stability and greater social justice. Of course, finding that alternative begins with revisiting the two-hundred-year-old idea long favored by the working class movement: socialism. Affixed to that project is the task of rebuilding the movement, the political organization needed to achieve socialism.
As things stand in today's world, there are most often only two meager options on the regular menu: one, to save and maintain capitalism with the sacrifices of working people and the other, to save and maintain capitalism with the sacrifices of working people and a token “fair share” sacrifice on the part of corporations and the rich. Neither is very nourishing.
The first option is based on the thin gruel of “trickle down” economics and the nursery-rhyme wisdom of “a rising tide raises all boats.” It is the prescription of both of the major US political parties, Japan's Abe, the European center parties, and UK Labour.
The second option promises to save capitalism as well, but through a bogus fair distribution of hardship across all classes. This is the course offered by most European left parties and even some Communist Parties.
But a system-- capitalism-- that is genetically disposed to extreme wealth distribution and persistent crisis does not make for an appetizing meal. Instead, we need to dispense with programs that promise to better manage capitalism, as Greek Communists (KKE) like to say. That is for others who are at peace with capitalism or underestimate its inevitable failings.
The only answer to the heart failure of capitalism is to change the diet and put socialism on the menu.

Zoltan Zigedy

Bracing for An Eventual Day of Reckoning

Bracing for An Eventual Day of Reckoning

by Stephen Lendman

Financial markets today reflect a total disconnect from reality. Former Reagan administration Office of Management and Budget director, David Stockman, calls the Fed "a serial bubble machine."

"It's only a question of time before central banks lose control," he warns. He expects "panic when people realize that (market) values are massively overstated."

They're "extremely dangerous, unstable, and subject to serious trouble and dislocation in the future," he stresses.

The Fed is responsible for "exporting lunatic policies worldwide." All bubbles burst. They end badly. For sure this one. It's a whopper. It's just a matter of time until all hell breaks lose.

Market analyst Graham Summers sees dangerous equity market topping signs. They include:

  • margin debt hitting new all-time highs;

  • bearish sentiment at all-time lows;

  • market leaders peaking or approaching it;

  • declining market breadth;

  • earnings are falling; and

  • equities "diverg(ing) dramatically from earnings and revenues.

Topping takes longer than many people expect, said Summers. Recent market movements aren't "promising."

"(F)or certain we are in a bubble. It's just a question of when it bursts."

Economic Collapse discussed 2014 forecasts by noted analysts. They warn about next year "shak(ing) America to the core." They may be right or wrong.

Money printing madness kept party time going longer than most analysts expected. Eventually good times end. 

On December 13, the Wall Street Journal headlined "Markets Get Set to Lose a Crutch," saying:

"Investors are bracing for the Federal Reserve to reduce its market-boosting stimulus as soon as the coming week..."

Next Wednesday, Fed governors meet. They'll "decide the fate of (their) $85 billion monthly bond-buying" binge. 

So-called tapering may be announced. If not now, perhaps early next year.

Harry Dent expects "another slowdown and stock crash accelerating between very early 2014 and early 2015." He expects more trouble later on.

Marc Faber warned investors early. He did so numerous times before. He's doing it again, saying:

"You have to say that we are again in a massive financial bubble in bonds, in equities, in (other) asset prices that have gone up dramatically."

Mike Maloney calls the 2008 crash "a speed bump on the way to the main event." The consequences will be "horrific," he warns.

"(T)he rest of the decade will bring us the greatest financial calamity in history."

Jim Rogers said "what happened in 2008-2009 (was) worse than the previous economic setback."

It's because "debt was so much higher." Now it's "staggeringly much higher."

Whenever the next market disruption comes, it's "going to be worse than in the past," he stresses.

It's "because we have unbelievable levels of debt, and unbelievable levels of money printing all over the world."

"Be worried and be prepared," he warns. He doesn't know when trouble will arrive, he says. "(B)ut when it comes, be careful."

Robert Shiller is worried. At the same time, he's "not sounding the alarm yet." Stock price levels are high. So are other financial assets. Things "could end badly," Shiller warns.

Economics Professor Laurence Kotlikoff said:

"Eventually somebody recognizes (what's happening), and starts dumping their bonds, and interest rates go up, and inflation takes off, and were off to the races."

Michael Pento said Washington "brought us out of the Great Recession, only to set us up for the Greater Depression, which lies on the other side of interest rate normalization."

Russel Napier believes we're "on the eve of a deflationary shock…" It'll "likely reduce equity valuations from very high to very low levels."

Market strategist Robert Farrell is best remembered for his "10 Market Rules to Remember:"

Number one: markets (always) return to their mean average over time.

Number two: excesses in one direction lead to opposite ones.

Number nine: when conventional wisdom agrees, "something else is going to happen."

Gerald Celente publishes his annual top 10 trends. He calls 2014 "a year of extremes." His number one trend is "March Economic Madness."

Timing is one of the toughest aspects of forecasting, he said. No one knows precisely when things will happen. Often they're when few expect them.

Celente "missed the mark with (his) Crash of 2010 prediction," he admitted. Why, he asked? Because of worldwide money printing madness.

It was unprecedented. Who could have predicted it? It can't last. Celente believes "around March, or by the end of" 2014 Q II, "an economic shock wave will rattle" world equity markets. It remains to be seen if he's right this time.

Market analyst Market Weiss calls the US economy so addicted to Fed money printing madness "that just the thought of withdrawal (causes) market convulsions."

Since crisis conditions erupted in 2008, Bernanke made one excuse after another. He did so irresponsibly. 

He "smash(ed) the 100-year Fed prohibition against running the money printing presses 24/7," said Weiss.

First he claimed conditions left him no choice, saying:

"Unless we flood the banking system with money, megabanks will fail and global financial markets will collapse in a heap of rubble."

When the worst of crisis conditions eased, his "new rationale" was "trillion-dollar federal budget deficits year after year," said Weiss.

Former Troubled Asset Relief Program (TARP) head Neil Barofsky believes Wall Street perhaps got around $23 trillion. 

Hundreds of billions more went to troubled European banks. Perhaps they're still getting plenty. Open checkbook Fed policy assures Wall Street whatever it wants.

Fed policy reasons that "(u)nless we buy Treasuries (and mortgage-backed) securities by the truckload, the deficits will smash the bond markets and sabotage the economic recovery?"

What recovery? It landed on Wall Street. It benefitted America's super-rich. It missed Main Street. Protracted Depression era trouble persists. 

Ordinary people struggle daily to get by. Many never had things worse. Improvement is nowhere in sight. 

A "long line-up of excuses" kept Fed policy "pedal to the metal on its giant money presses," said Weiss. Fed chairwoman elect Janet Yellen promises more of the same.

Things improved from earlier, she said. They haven't done so "enough." The "not improved enough" mantra is the theme heading into next year.

Before Lehman Brothers collapsed in 2008, the Fed's monetary base was $849.8 billion. On October 30, 2013, it exceeded $3.6 trillion.

It expanded over threefold in six years. It did what no one thought possible. It did what honest analysts called irresponsible. According to Weiss:

If the Fed expanded the monetary base at the same pace it's done since 1961, "it would have taken nearly 150 years to come this far."

Pre-2008, expanding the monetary base rapidly occurred only two other times:

  • ahead of potential Y2K trouble; and

  • post-9/11.

So far, post-2008 monetary madness exceeded Y2K expansion 43-fold. It's nearly 70 times larger than post-9/11 policy.

Most alarming, said Weiss, is that the Fed hasn't "begun to resolve the underlying diseases" responsible for earlier crises. It "merely papered over their symptoms." 

They fester and grow. They're worse than ever. They assure eventual day of reckoning trouble. 

The 2008 crisis resulted from excessive debt, derivatives and other toxic financial assets, unprecedented wealth concentration among powerful institutions, and reckless speculation fueled by monetary madness and near-zero interest rates.

Total credit market debt keeps rising. In 2008, it was $53.5 trillion. Through 2013 Q II, it's $57.6 trillion.

The notional value of derivatives held by US banks grew from $175.8 trillion in September 2008 to $231.6 trillion this year.

According to the Office of the Comptroller of the Currency (OCC):

"Derivatives activity in the US banking system continues to be dominated by a small group of large institutions."

It names four megabanks. They include JP Morgan Chase, Bank of America, Citibank and Goldman Sachs. They control 93% of all banking industry derivatives.

Massive federal deficits persist. So does Europe's debt crisis. Money printing madness doesn't resolve things. 

It kicks the can down the road. It does so irresponsibly. It creates greater problems ahead. It papers over what desperately needs addressing now. It needed it years ago.

Weiss thinks the only Fed solution is "panicky retreat." Consider history, he says. Fed policy created bond market trouble in the 1970s.

In 1979, Treasury bonds rose to 13% yields. T-bills to 17%, and the prime rate to 21%.

In the early 1990s, Fed policy kept short rates lower than normal. In 1994, things changed. The largest ever modern era calendar year decline in bond prices occurred.

Alan Greenspan wasn't noted for accurate forecasts. Weeks before the 2000 market peak, he claimed:

"The American economy was experiencing a once-in-a-century acceleration of innovation, which propelled forward productivity, output, corporate profits and stock prices at a pace not seen in generations, if ever." 

It was reminiscent of noted economist Erving Fisher. Shortly before the 1929 crash, he fell from grace. He did so claiming economic fundamentals were strong.

Stock market prices were undervalued, he said. An unending era of prosperity lay ahead. It took over a decade to arrive. It took WW II to deliver it.

For years into the new millennium, Greenspan let growing financial trouble fester. In January 2006, he retired. 

Ben Bernanke replaced him. Business as usual continued. Lehman Brothers collapse followed. So did hard times for millions. Things were never better for Wall Street.

Money printing madness continues. How will things change this time? Watch for telltale signs, Weiss advises. 

He promised to discuss them as they occur. The moment of truth approaches. No one knows for sure when it'll arrive. It always did before. It will this time.

Watch bond prices. They're experiencing the biggest interest rate reversal in 37 years, says Weiss. Yields are rising. 

How high remains to be seen. If history is a guide, the worst is yet to come. 

Rising bond yields spell trouble for stocks. It remains to be seen how bad things eventually get.

Note: On December 17, Fed governors announced tapering. Monthly bond buying will be reduced from $85 billion to $75 billion on January 1. 

Interest rates will remain near zero. Whether further tapering continues next year remains to be seen. So will how markets react going forward.

Wednesday they celebrated. Bubbles have a way of bursting when least expected. This one imploding is long overdue.

Stephen Lendman lives in Chicago. He can be reached at 

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

Visit his blog site at 

Listen to cutting-edge discussions with distinguished guests on the Progressive Radio News Hour on the Progressive Radio Network.

It airs Fridays at 10AM US Central time and Saturdays and Sundays at noon. All programs are archived for easy listening.

US Hegemony and Puerto Rico’s Economic Crisis

Timothy Alexander Guzman, Silent Crow News – A major economic crisis is looming in the Caribbean.  Puerto Rico, a US Commonwealth will be the center of attention in the world of finance in the coming months ahead.  Puerto Rico’s economy has been in a recession since 2006 and its bonds are close to junk status.  Puerto Rico is facing an alarming economic downturn that is clearly unsustainable.  The economy is headed for a major collapse, one not seen since the great depression, this time it could be far worse.  Puerto Rico has $70 billion in debt and an underfunded government pension system that will be eventually face cuts which only adds to more economic uncertainties for the population.  Unemployment levels are at 14.7 percent and a mass migration of the Puerto Rican people to the United States in search of better opportunities has taking hold.  Puerto Rico’s economy is dependent upon the United States government and its corporations, which many are pharmaceutical conglomerates.  It is politically and socially a “Colonial Possession” of the United States since the Spanish-American war of 1898.  However, Puerto Rico is not alone.  The United States has other colonial possessions namely Guam, American Samoa in the Pacific and the U.S. Virgin Islands.  France and Great Britain also has “Colonial Possessions” or “Overseas Territories” in a number of regions throughout the world.  Puerto Rico is no exception to the rule; it is a colony that has been exploited politically and economically for more than a century under US rule.

Puerto Rico’s economy is in a dire situation. As of October 2013, the official number of people who are unemployed is at 14.7 percent, perhaps a lot higher if you count those that have dropped out of the labor force because they are no longer looking for employment opportunities.  The Public debt is currently at $70 Billion and increasing daily. Early this month an article written by Justin Velez-Hagan who is executive director of The National Puerto Rican Chamber of Commerce for Forbes magazine titled ‘Default: Puerto Rico’s Inevitable Option’ describes what lead to Puerto Rico’s debt crises:

With triple tax exemption (federal, state, and local), combined with higher-than-average yields, Puerto Rican bonds became so popular in recent years that it was able to rack up $70 billion of debt now held by institutional investors and mutual funds alike. The debt-to-GDP ratio is now nearly 70% and growing, not including pension obligations, which raises the ratio to over 90%. With a per capita debt load of $19,000 and growing, Puerto Ricans shoulder almost 4 times the burden of U.S. leader Massachusetts which carries a deficit of $5,077 per citizen

Puerto Rico’s debt is 4 times larger than Massachusetts who Velez-Hagan acknowledges as the most indebted state per citizen with $19,000. The Washington Post also sounded alarm bells concerning Puerto Rico’s economic crises. In ‘Puerto Rico, with at least $70 billion in debt, confronts a rising economic misery’ Michael A. Fletcher describes what the commonwealth faces with cuts to pensions and government jobs and a rise in taxes all across the board including small and big businesses causing a migration of Puerto Ricans to major US cities:

The economy here has been in recession for nearly eight years, crimping tax revenue and pushing the jobless rate to nearly 15 percent. Meanwhile, the government is burdened by staggering debt, spawning comparisons to bankrupt Detroit and forcing lawmakers to severely slash pensions, cut government jobs and raise taxes in a furious effort to avert default.

The implications are serious for Americans outside Puerto Rico both because a taxpayer bailout would be expensive and a default would be far more disruptive than Detroit’s record bankruptcy filing in July. Officials in San Juan and Washington are adamant that a federal bailout is not on the table, but the situation is being closely monitored by the White House, which recently named an advisory team to help Puerto Rican officials navigate the crisis.

The island’s problems have ignited an exodus not seen here since the 1950s, when 500,000 people left for jobs on the mainland. Now Puerto Ricans, who are U.S. citizens, are again leaving in droves.  They are choosing the uncertainty of the job market in Orlando or New York City or Philadelphia over what they view as the certainty that their dreams would be crushed by the U.S. territory’s grinding economic problems.

Bloomberg Businessweek also published an article with concerns affecting the “Muni-Bond Market” that can rattle Wall Street’s Mutual Fund companies. ‘Puerto Rico’s Borrowing Binge Could Rock the Muni-Bond Market’ stated the facts:

The island’s plight affects almost anyone with a mutual fund invested in the municipal-bond market. Exempt from local, state, and federal taxes in the U.S., Puerto Rican bonds are held by 77 percent of muni funds, according to research firm Morningstar (MORN). About 180 funds, including ones run by OppenheimerFunds, Franklin Templeton Investments (BEN), and Dreyfus (BK), have 5 percent of their assets or more in Puerto Rican bonds.

General-obligation bonds, or GOs, which account for about 15 percent of the commonwealth’s public debt, carry the lowest investment-grade rating from Moody’s Investors Service (MCO) and S&P. A downgrade could force many mutual funds to sell part of their Puerto Rican holdings, flooding the market. “Puerto Rico could represent a systemic issue for the municipal-bond market,” says Carlos Colón de Armas, an economist and former official of the Government Development Bank, which conducts the island’s capital-markets transactions. “We are now in a situation where the bonds are trading like junk. I think the ratings agencies have been careful not to lower the GOs further, to avoid creating havoc in the muni-bond market.”

The Obama administration is sending a team of economic advisors according to Bloomberg News last month “With a $70 billion debt load and a substantially underfunded government pension system, the island has fueled market speculation it may need a bailout from Washington.” The report also stated what was on the agenda:

Most of the group’s work will focus on improving Puerto Rico’s management of federal funds to ensure officials are getting the amounts they are entitled to and putting them to effective use, according to the officials.  “There is less here than some people think,” said Jeffrey Farrow, who served as the Clinton White House’s liaison on Puerto Rican affairs. “This is pretty straightforward and an extension of what they have been doing in the past, but more intense, formalized and public.”

The first team of officials was scheduled to be from the Environmental Protection Agency and the Health, Education and Housing and Urban Development departments, officials said.  Puerto Rico’s education, health and housing departments are among of the biggest recipients of federal funding and have also been responsible for past Puerto Rico budget shortfalls.

The EPA’s intervention may stem from concerns regarding the ability of the Puerto Rico Electric Power Authority to comply with new federal air quality regulations that take effect in 2015.

The Environmental Protection Agency (EPA) is one of the agencies participating under Washington’s request. Washington has required that the Puerto Rico government and the Puerto Rico Electric Power Authority (PREPA) comply with new federal air quality regulations by 2015. The online news source Caribbean Business reported back on July 11th, 2013 ‘PREPA falling behind on 2015 EPA Deadline’ that Puerto Rico is in a race to meet Washington’s air-quality standards by 2015:

A high-ranking regulatory official is concerned that the Puerto Rico Electric Power Authority (Prepa) isn’t moving fast enough to comply with strict federal air-quality standards taking effect in two years, as industry sources told CARIBBEAN BUSINESS that key decisions on the compliance process won’t be taken until next spring.  Prepa plans to either close or convert most of its oil-firing units to natural gas to comply with the new air-quality standards, but it won’t select a liquefied natural gas (LNG) supplier and decide on a method to deliver the gas to north-coast plants until March 2014, according to industry sources. That means the final contracts would probably not be enacted and finalized until the fourth quarter of 2014, they added.

Meanwhile, Prepa has an agreement with Texas-based Excelerate Energy to construct an offshore LNG terminal to feed the massive Aguirre powerplant in Guayama. A formal application with the Federal Energy Regulatory Commission was filed in April and the project remains in the permitting phase. Excelerate officials have said they expect the facility to be in service in early 2015, but that outlook depends on getting timely federal approval on its environmental impact statement and several permits.

Puerto Rico’s plan to convert most of its oil-firing units to natural gas will have an impact on its economy. Puerto Rico Electric Power Authority (PREPA) does not have the economic capacity to invest in the construction of new plants that would supply natural gas. “While the cash-strapped public utility can’t afford to build its own plants, there is interest from large energy companies to construct new generation units through public-private partnerships (P3s)” the report stated. “That is especially the case because the move to natural gas isn’t just about compliance, but about bringing down power costs.” Caribbean Business said that Edgardo Fábregas, a former member of PREPA’s board confirmed that the public utility is considering a plan to construct a gas-fired plant “The former Prepa board member said the public utility was considering a longer-term plan to construct, through a P3 initiative, a massive natural gas-fired plant, probably on the site of Arecibo’s Cambalache plant, which is rarely used.” The report also said that Fábregas admitted to the costs associated with the project:

To do a project right, building a plant that could “flex up or down” rapidly and would have the capacity to power the entire north coast, would cost $7 billion, and take six years to build. The project would allow for the elimination of the Palo Seco and San Juan plants, Fábregas said. “We have to move to natural gas as soon as we can, but at the end of the day, you have to renew your system. I understand the cost and time implications involved, but if we don’t start, we will never finish,” he added.

According to Robert Bryce, a senior fellow with the Center for Energy Policy and the Environment at the Manhattan Institute for Policy Research, a conservative think tank based in New York City produced a report called ‘The High Cost of Renewable-Electricity Mandates’. He wrote about the effects of Washington’s new air-quality proposal:

Motivated by a desire to reduce carbon emissions, and in the absence of federal action to do so, 29 states (and the District of Columbia and Puerto Rico) have required utility companies to deliver specified minimum amounts of electricity from “renewable” sources, including wind and solar power. California recently adopted the most stringent of these so-called renewable portfolio standards (RPS), requiring 33 percent of its electricity to be renewable by 2020.  Proponents of the RPS plans say that the mandated restrictions will reduce harmful emissions and spur job growth, by stimulating investment in green technologies.

But this patchwork of state rules—which now affects the electricity bills of about two-thirds of the U.S. population as well as countless businesses and industrial users—has sprung up in recent years without the benefit of the states fully calculating their costs.  There is growing evidence that the costs may be too high—that the price tag for purchasing renewable energy, and for building new transmission lines to deliver it, may not only outweigh any environmental benefits but may also be detrimental to the economy, costing jobs rather than adding them.  The mandates amount to a “back-end way to put a price on carbon,” says one former federal regulator. Put another way, the higher cost of electricity is essentially a de facto carbon-reduction tax, one that is putting a strain on a struggling economy and is falling most heavily, in the way that regressive taxes do, on the least well-off among residential users.

To be sure, the mandates aren’t the only reason that electricity costs are rising—increased regulation of coal-fired power plants is also a major factor—and it is difficult to isolate the cost of the renewable mandates without rigorous cost-benefit analysis by the states.

The new mandate is called Renewable Portfolio Standards (RPS) that automatically “require electricity providers to supply a specified minimum amount of power to their customers from sources that qualify as “renewable,” a category that includes wind, solar, biomass, and geothermal.” The report clarified what the results of the new energy plan would bring:

The federal Environmental Protection Agency (EPA) is similarly bullish on the state programs. The RPS rules are designed “to stimulate market and technology development,” the agency says, “so that, ultimately renewable energy will be economically competitive with conventional forms of electric power. States create RPS programs because of the energy, environmental, and economic benefits of renewable energy.”[4]

Although supporters of renewable energy claim that the RPS mandates will bring benefits, their contribution to the economy is problematic because they also impose costs that must be incorporated into the utility bills paid by homeowners, commercial businesses, and industrial users. And those costs are or will be substantial. Electricity generated from renewable sources generally costs more—often much more—than that produced by conventional fuels such as coal and natural gas. In addition, large-scale renewable energy projects often require the construction of many miles of high-voltage transmission lines. The cost of those lines must also be incorporated into the bills paid by consumers.

What Edgardo Fábregas forgets to mention is that Bryce’s analysis on the price of producing electricity through renewable energy sources can be astronomical. It is an amazing prediction given by the EPA under the Obama administration’s directives. It is important to note that the major players in the RPS programs are connected to Wall Street and major banks that includes Goldman Sachs who is one of President Obama’s major campaign contributors. Author and journalist Matt Taibbi wrote an article on the history of Goldman Sachs and the US government’s relationship for Rolling Stone magazine called ‘The Great American Bubble Machine’. Taibbi explains how Goldman Sachs would benefit from Washington’s air-quality mandates:

The new carbon credit market is a virtual repeat of the commodities-market casino that’s been kind to Goldman, except it has one delicious new wrinkle: If the plan goes forward as expected, the rise in prices will be government-mandated. Goldman won’t even have to rig the game. It will be rigged in advance.

Here’s how it works: If the bill passes, there will be limits for coal plants, utilities, natural-gas distributors and numerous other industries on the amount of carbon emissions (a.k.a. greenhouse gases) they can produce per year. If the companies go over their allotment, they will be able to buy “allocations” or credits from other companies that have managed to produce fewer emissions. President Obama conservatively estimates that about $646 billion worth of carbon credits will be auctioned in the first seven years; one of his top economic aides speculates that the real number might be twice or even three times that amount.

The feature of this plan that has special appeal to speculators is that the “cap” on carbon will be continually lowered by the government, which means that carbon credits will become more and more scarce with each passing year. Which means that this is a brand new commodities market where the main commodity to be traded is guaranteed to rise in price over time. The volume of this new market will be upwards of a trillion dollars annually; for comparison’s sake, the annual combined revenues of all electricity suppliers in the U.S. total $320 billion.

One other important factor to consider regarding Puerto Rico’s energy demands in the future is the supply of natural gas. Puerto Rico is hoping to secure a steady supply of natural gas from the United States for the next 100 years. “A key part of the plan is to secure a long-term LNG contract with the U.S., which has the most economical prices in the world, the result of a boon in U.S. natural gas exploration, which has unearthed a supply that experts say will last a century” according to the Caribbean Business report.  In the 2012 State of the Union Address, US President Barack Obama said “We have a supply of natural gas that can last America nearly 100 years, and my administration will take every possible action to safely develop this energy.” F. William Endahl, a research associate at Global Research wrote a ground breaking report, ‘The Fracked-up USA Shale Gas Bubble’ wrote that the 100 year supply of natural gas is in fact an inaccurate prediction:

In a sobering report, Arthur Berman, a veteran petroleum geologist specialized in well assessment, using existing well extraction data for major shale gas regions in the US since the boom started, reached sobering conclusions. His findings point to a new Ponzi scheme which well might play out in a colossal gas bust over the next months or at best, the next two or three years. Shale gas is anything but the “energy revolution” that will give US consumers or the world gas for 100 years as President Obama was told.

Berman wrote already in 2011, “Facts indicate that most wells are not commercial at current gas prices and require prices at least in the range of $8.00 to $9.00/mcf to break even on full-cycle prices, and $5.00 to $6.00/mcf on point-forward prices. Our price forecasts ($4.00-4.55/mcf average through 2012) are below $8.00/mcf for the next 18 months. It is, therefore, possible that some producers will be unable to maintain present drilling levels from cash flow, joint ventures, asset sales and stock offerings.” [16]

Berman continued, “Decline rates indicate that a decrease in drilling by any of the major producers in the shale gas plays would reveal the insecurity of supply. This is especially true in the case of the Haynesville Shale play where initial rates are about three times higher than in the Barnett or Fayetteville. Already, rig rates are dropping in the Haynesville as operators shift emphasis to more liquid-prone objectives that have even lower gas rates. This might create doubt about the paradigm of cheap and abundant shale gas supply and have a cascading effect on confidence and capital availability.” [17]

What Berman and others have also concluded is that the gas industry key players and their Wall Street bankers backing the shale boom have grossly inflated the volumes of recoverable shale gas reserves and hence its expected supply duration. He notes, “Reserves and economics depend on estimated ultimate recoveries (EUR) based on hyperbolic, or increasingly flattening, decline profiles that predict decades of commercial production. With only a few years of production history in most of these plays, this model has not been shown to be correct, and may be overly optimistic….Our analysis of shale gas well decline trends indicates that the Estimated Ultimate Recovery per well is approximately one-half the values commonly presented by operators.” [18] In brief, the gas producers have built the illusion that their unconventional and increasingly costly shale gas will last for decades.

However, Caribbean Business says that “Prepa has invited several suppliers to bid on a project to supply the north-coast plants with natural gas. It is spelling out its gas needs at its Palo Seco and San Juan plants, letting the energy companies decide the best way to supply the natural gas” and that “Prepa has made some progress on its natural gas conversion plan, which energy experts say is the only way to bring down the high cost of electricity.” Allowing energy companies decide how to supply gas would add to the price in the long run. Russia Today recently reported that “fracking technology” is causing major environmental problems within the United States. Since 2008, the state of Texas has been experiencing more earthquakes than ever before:

Between 1970 and 2007, the area around the Texas town of Azle (pop. 10,000) experienced just two earthquakes. The peace and quiet began to change, however, at the start of 2008, when 74 minor quakes were reported in the region. Now an increasing number of people, including scientists, are speculating that natural gas production by fracking – a process that forces high pressure water and chemicals into rock in order to extract natural gas reserves – is the culprit. The problem, however, is proving the claims.

Cliff Frolich, earthquake researcher at the University of Texas, said waste water injection wells from fracking could be responsible for the recent spate of earthquake activity. “I’d say it certainly looks very possible that the earthquakes are related to injection wells,” he said in an interview with KHOU television.

Frolich left room for doubt when he said thousands of such wells have operated in Texas for decades with no quakes anywhere near them. Frolich co-authored a 2009 study on earthquake activity near Cleburne, just south of Azle, which concluded: “The possibility exists that earthquakes may be related to fluid injection.” A recent government study lent credence to Frolich’s findings.

There have been Anti-fracking protests around the world. Fracking or “hydraulic fracturing” is a water-intensive process where millions of gallons of water, sand, and chemicals combined are injected underground with intensive pressure to fracture rocks that surround an oil or gas well. This process then releases extra oil and gas from the rock which flows into the well. “Fracking Technology” is proving to be environmentally dangerous for the health and safety of communities located in close proximity to these well sites. It causes many problems for the air we breathe and long-term environmental damage. For example, water can become contaminated from the toxins fracking has caused. It is an environmental hazard.

EPA rules and regulations also have the potential to impose a “carbon tax option” for states according to The Hill, A Washington D.C. based daily newspaper reported last month that Brookings Institution economist Adele Morris said that a carbon excise tax can be imposed on states:

Morris, a carbon tax supporter, argues that a carbon excise tax could be part of the “menu of specific approaches” that the agency gives states that will craft plans to meet the federal guidelines. Morris suggests that the EPA could “allow states to adopt a specific state-level excise tax or fee on the carbon content of fuels combusted by the power plants regulated under this rule.”

In other words, an excise tax associated with renewable energy supplies can be added only leading to higher energy costs for households, businesses and major industries. It would also allow Puerto Rico to contribute to the environmental degradation because of its future demands of natural gas which has no guarantee of supplies for the next 100 years. It is a recipe for disaster for both the economy and the environment.

 Will new EPA rules bankrupt farmers?

It is estimated that Puerto Rico imports at least 85% of the food supply from the United States according to the Latin American Herald Tribune. ‘Puerto Rico Imports 85 Percent of Its Food’ stated that “Puerto Rico imports 85 percent of the food its residents consume due to the lack of competitiveness among companies in this U.S. commonwealth, Agriculture Secretary Javier Rivera told Efe.” Agriculture Secretary Rivera admits that the majority of food is imported from the United States even though Puerto Rico has the capability to produce its own food, but cannot compete with US food suppliers. Rivera continued “Although we have the technical capacity, we’re not able to produce competitively” Why? “The secretary attributed the drop in production to the high operating costs of growing food on the island, which are, in turn, a result of high labor costs, as well as rising energy and fertilizer prices. Rivera acknowledged that therefore many farmers – of which there are fewer than 2,000 on the island, according to recent statistics – have come to depend on government subsidies to stay in business.” With new EPA regulations, remaining farmers will bear higher-energy costs because of the EPA’s new federal air quality regulations that will start in 2015. Agriculture on the island would be affected and farmers would be economically bankrupt when energy prices begin to rise.

From the 1929 Great Depression to the Recession of 2014

Looking back to the 1930’s, Puerto Rico was in economic despair due to the effects of the Great Depression. In 1940, the Popular Democratic Party (PPD) under the leadership of Washington’s puppet governor Luis Munoz Marin came to power with 37.9% of the vote compared to 39.2% of the Republican-Socialist coalition. The PPD also won the 1944 elections with 64.8% of the vote. The PPD was determined to transform Puerto Rico’s economy from an Agricultural farm-based to an export-driven modern industrial economy.

The US and Puerto Rico governments wanted to fast track the urbanization in many areas from a rural society to a modern, industrial urban center that would resemble New York City’s economy. For a short period of time, the project did increase living wages, improved housing conditions, health care and education. It also led to equitable land reforms,. At the same time the plan increased unemployment rates because many Puerto Ricans were unqualified for the types of jobs the new Industrial economy provided. It increased the migration levels to the United States, namely New York, New Jersey and Pennsylvania.

Puerto Rico became more dependent on U.S. markets and created more public and private debts. The most important aspect of US economic and political control of Puerto Rico was the cultural transformation of the population. It became what sociologist call “Americanization”. They were subjected to American culture, media, laws, and even its foods under Washington’s economic and social plan. In ‘Economic History of Puerto Rico: Institutional Change and Capitalist Development’ by James L. Dietz, professor of economics and Latin American studies at California State University wrote:

Industrialization and the accompanying decline of agriculture after the late 1940s did nothing to expand and make permanent the relative autonomy of the early 1940s. Instead, the PPD program had just the opposite result: it laid the foundation for increased dominance by U.S. capital from the 1950s to the present. The PPD’s goal of eventual political independence, after the attainment of social justice and a solution to the island’s economic problems, faded further into the future and eventually disappeared altogether. It may be that Munoz and the PPD never really were committed to independence, as many have suggested, but it is more likely that, as the PPD’s redirection of the economy under Munoz’s leadership tied its destiny ever closer to that of the United States, what they had became what they wanted as what they had wanted slipped further and further from their grasp

In ‘How an Economy Grows and why it Crashes’ author and economist Peter Schiff stated that “The evidence supporting these claims is largely emotional. What is far more certain is that the government’s monopoly control of public projects and services almost always leads to inefficiency, corruption, graft, and decay.” Puerto Rico’s economy was under US control then as it is now. Dietz says that “From 1941 to 1949, the government followed a program of land reform, control over and development of infrastructure and institutions, administrative organization, and limited industrialization through factories owned and operated by the government.” Comparing to what Peter Schiff said the Puerto Rican government’s control of certain economic sectors led to numerous “inefficiencies” and “Decay.” The bleak economic growth of Puerto Rico did not improve through a program called ‘Operacion Manos a la Obra’ or ‘Operation Bootstrap’ in English. It was known as “Industrialization by Invitation” to attract foreign investment. It failed in the long-run. Dietz further wrote:

“Yet Operation Bootstrap made it difficult for Puerto Ricans to improve their standard of living through their own efforts, since it put control over that process in the hands of U.S. firms, whose interests did not necessarily coincide with those of the majority on the island. It is likely that no one consciously intended such results from a development program that seemed so promising, but Puerto Rico’s colonial relation with the United States prevented, or at a minimum made more difficult, a more independent existence for the economy and society”

Puerto Rico’s dependence on the US mainland became evident as the years went by, but right from the beginning of World War II, Puerto Rico’s economy suffered.  “The war shut Puerto Rico off from its primary export market and source of imported goods, and meanwhile, there were no war industries to absorb surplus labor; consequently, unemployment increased” according to Dietz.  Today, Puerto Rico is suffering from a recession that started in 2006. In another report by Caribbean Business ‘PR reverses growth forecast, now predicts another year of recession’ and stated the dire predictions by the government of Puerto Rico, “The Puerto Rico government has dropped expectations for economic growth this fiscal year as the island struggles to pull out of a marathon downturn dating back to 2006. The Planning Board said Friday it is now projecting that the economy will shrink by 0.8 percent in fiscal 2014, dropping its previous forecast for razor-thin growth of 0.2 percent.” Puerto Rico’s economy will continue to decline as the US economy continues with its own economic problems. It will become more difficult as time progresses for Puerto Rico.

The Collapsing US Dollar and the Fall of Rome   

The US Dollar as a the world’s reserve currency is in its last stages because the US owes trillions of dollars in household, corporate and financial debt and future underfunded welfare liabilities.  The demand for U.S. dollars kept prices and interest rates low. It allowed the U.S. government to acquire the economic power it needed to dominate the world economically. It allowed the Federal Reserve Bank to print dollars unconditionally. Although the US dollar is still dominate with more the 50% of foreign currency reserves in the world, a gradual transition for other currencies is coming in the near future. The dollar will eventually lose its value. Interest rates on every loan and credit card will rise.

This is a recipe for disaster, because if a country such as Puerto Rico cannot produce its own food and is dependent on a foreign source that is the most indebted nation in world history with more than $17 trillion dollars in debt which continues to increase each passing day is a serious problem for Puerto Rico’s future. Tyler Durden of provided a chart in 2012 to show the fiscal danger the United States faces in the near future. Durden explains:

We present the following chart showing total US Federal debt/GDP as well as Deficit/(Surplus)/GDP since inception, or in this case as close as feasible, or 1792, which appears to be the first recorded year of historical fiscal data. We can see why readers have been so eager to see the “real big picture” – the chart is nothing short of stunning.

Amend the Fed: We Need a Central Bank that Serves Main Street

December 23rd marks the 100th anniversary of the Federal Reserve. Dissatisfaction with its track record has prompted calls to audit the Fed and end the Fed. At the least, Congress needs to amend the Fed, modifying the Federal Reserve Act to give the central bank the tools necessary to carry out its mandates.

The Federal Reserve is the only central bank with a dual mandate. It is charged not only with maintaining low, stable inflation but with promoting maximum sustainable employment. Yet unemployment remains stubbornly high, despite four years of radical tinkering with interest rates and quantitative easing (creating money on the Fed’s books). After pushing interest rates as low as they can go, the Fed has admitted that it has run out of tools.

At an IMF conference on November 8, 2013, former Treasury Secretary Larry Summers suggested that since near-zero interest rates were not adequately promoting people to borrow and spend, it might now be necessary to set interest at below zero. This idea was lauded and expanded upon by other ivory-tower inside-the-box thinkers, including Paul Krugman.

Negative interest would mean that banks would charge the depositor for holding his deposits rather than paying interest on them. Runs on the banks would no doubt follow, but the pundits have a solution for that: move to a cashless society, in which all money would be electronic. “This would make it impossible to hoard cash outside the bank,” wrote Danny Vinik in Business Insider, “allowing the Fed to cut interest rates to below zero, spurring people to spend more.” He concluded:

. . . Summers’ speech is a reminder to all liberals that he is a brilliant economist who grasps the long-term issues of monetary policy and would likely have made an exemplary Fed chair.

Maybe; but to ordinary mortals living in the less rarefied atmosphere of the real world, the proposal to impose negative interest rates looks either inane or like the next giant step toward the totalitarian New World Order. Business Week quotes Douglas Holtz-Eakin, a former director of the Congressional Budget Office: “We’ve had four years of extraordinarily loose monetary policy without satisfactory results, and the only thing they come up with is we need more?”

Paul Craig Roberts, former Assistant Secretary of the Treasury, calls the idea “harebrained.” He is equally skeptical of quantitative easing, the Fed’s other tool for stimulating the economy. Roberts points to Andrew Huszar’s explosive November 11th Wall Street Journal article titled “Confessions of a Quantitative Easer,” in which Huszar says that QE was always intended to serve Wall Street, not Main Street.  Huszar’s assignment at the Fed was to manage the purchase of $1.25 trillion in mortgages with dollars created on a computer screen. He says he resigned when he realized that the real purpose of the policy was to drive up the prices of the banks’ holdings of debt instruments, to provide the banks with trillions of dollars at zero cost with which to lend and speculate, and to provide the banks with “fat commissions from brokering most of the Fed’s QE transactions.”

A Helicopter Drop That Missed Its Target

All this is far from the helicopter drop proposed by Ben Bernanke in 2002 as a quick fix for deflation. He told the Japanese, “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.” Later in the speech he discussed “a money-financed tax cut,” which he said was “essentially equivalent to Milton Friedman’s famous ‘helicopter drop’ of money.” Deflation could be cured, said Professor Friedman, simply by dropping money from helicopters.

But there has been no cloudburst of money raining down on the people. The money has gotten only into the reserve accounts of banks. John Lounsbury, writing in Econintersect, observes that Friedman’s idea of a helicopter drop involved debt-free money printed by the government and landing in people’s bank accounts. “He foresaw the money entering the economy through bank deposits, not through bank reserves which was the pathway available to Bernanke. . . . [W]hen Ben Bernanke fired up his helicopter engines he took the only path available to him.”

Bernanke created debt-free money and bought government debt with it, returning the interest to the Treasury. The result was interest-free credit, a good deal for the government. But the problem, says Lounsbury, is that:

The helicopters dropped all the money into a hole in the ground (excess reserve accounts) and very little made its way into the economy.  It was essentially a rearrangement of the balance sheets of the creditor nation with little impact on the debtor nation.

. . . The fatal flaw of QE is that it delivers money to the accounts of the creditors and does nothing for the accounts of the debtors. Bad debts remain unserviced and the debt crisis continues.

Thinking Outside the Box

Bernanke delivered the money to the creditors because that was all the Federal Reserve Act allowed. If the Fed is to fulfill its mandate, it clearly needs more tools; and that means amending the Act.  Harvard professor Ken Rogoff, who spoke at the November 2013 IMF conference before Larry Summers, suggested several possibilities; and one was to broaden access to the central bank, allowing anyone to have an ATM at the Fed.

Rajiv Sethi, Barnard/Columbia Professor of Economics, expanded on this idea in a blog titled “The Payments System and Monetary Transmission.” He suggested making the Federal Reserve the repository for all deposit banking. This would make deposit insurance unnecessary; it would eliminate the need to impose higher capital requirements; and it would allow the Fed to implement monetary policy by targeting debtor rather than creditor balance sheets. Instead of returning its profits to the Treasury, the Fed could do a helicopter drop directly into consumer bank accounts, stimulating demand in the consumer economy.

John Lounsbury expanded further on these ideas. He wrote in Econintersect that they would open a pathway for investment banking and depository banking to be separated from each other, analogous to that under Glass-Steagall. Banks would no longer be too big to fail, since they could fail without destroying the general payment system of the economy. Lounsbury said the central bank could operate as a true public bank and repository for all federal banking transactions, and it could operate in the mode of a postal savings system for the general populace.

Earlier Central Bank Ventures into Commercial Lending

That sounds like a radical departure today, but the Fed has ventured into commercial banking before. In 1934, Section 13(b) was added to the Federal Reserve Act, authorizing the Fed to “make credit available for the purpose of supplying working capital to established industrial and commercial businesses.” This long-forgotten section was implemented and remained in effect for 24 years. In a 2002 article on the Minneapolis Fed’s website called “Lender of More Than Last Resort,” David Fettig noted that 13(b) allowed Federal Reserve banks to make loans directly to any established businesses in their districts, and to share in loans with private lending institutions if the latter assumed 20 percent of the risk. No limitation was placed on the amount of a single loan.

Fettig wrote that “the Fed was still less than 20 years old and many likely remembered the arguments put forth during the System’s founding, when some advocated that the discount window should be open to all comers, not just member banks.” In Australia and other countries, the central bank was then assuming commercial as well as central bank functions.

Section 13(b) was eventually repealed, but the Federal Reserve Act retained enough vestiges of it in 2008 to allow the Fed to intervene to save a variety of non-bank entities from bankruptcy. The problem was that the tool was applied selectively. The recipients were major corporate players, not local businesses or local governments. Fettig wrote:

Section 13(b) may be a memory, . . . but Section 13 paragraph 3 . . . is alive and well in the Federal Reserve Act. . . . [T]his amendment allows, “in unusual and exigent circumstances,” a Reserve bank to advance credit to individuals, partnerships and corporations that are not depository institutions.

In 2008, the Fed bailed out investment company Bear Stearns and insurer AIG, neither of which was a bank. Bear Stearns got almost $1 trillion in short-term loans, with interest rates as low as 0.5%. The Fed also made loans to other corporations, including GE, McDonald’s, and Verizon.

In 2010, Section 13(3) was modified by the Dodd-Frank bill, which replaced the phrase “individuals, partnerships and corporations” with the vaguer phrase “any program or facility with broad-based eligibility.” As explained in the notes to the bill:

Only Broad-Based Facilities Permitted. Section 13(3) is modified to remove the authority to extend credit to specific individuals, partnerships and corporations. Instead, the Board may authorize credit under section 13(3) only under a program or facility with “broad-based eligibility.”

What programs have “broad-based eligibility” is not clear from a reading of the Section, but it isn’t individuals or local businesses. It also isn’t state and local governments.

No Others Need Apply

In 2009, President Obama proposed that the Fed extend its largess to the cash-strapped cities and states battered by the banking crisis. “Small businesses and state and local governments are having serious difficulty obtaining necessary financing from debt markets,” Obama said. He proposed that the Fed buy municipal bonds to cut their rising borrowing costs.

The proposed municipal bond facility would have been based on the Fed program to buy commercial paper, which had almost single-handedly propped up the market for short-term corporate borrowing. Investors welcomed the muni bond proposal as a first step toward supporting the market.

But Bernanke rejected the proposal. Why? It could hardly be argued that the Fed didn’t have the money. The collective budget deficit of the states for 2011 was projected at $140 billion, a drop in the bucket compared to the sums the Fed had managed to come up with to bail out the banks. According to data released in 2011, the central bank had provided roughly $3.3 trillion in liquidity and $9 trillion in short-term loans and other financial arrangements to banks, multinational corporations, and foreign financial institutions following the credit crisis of 2008. Later revelations pushed the sum up to $16 trillion or more.

Bernanke’s reasoning in saying no to the muni bond facility was that he lacked the statutory tools.. The Fed is limited by statute to buying municipal government debt with maturities of six months or less that is directly backed by tax or other assured revenue, a form of debt that makes up less than 2% of the overall muni market.

The Federal Reserve Act was drafted by bankers to create a banker’s bank that would serve their interests. It is their own private club, and its legal structure keeps all non-members out.  A century after the Fed’s creation, a sober look at its history leads to the conclusion that it is a privately controlled institution whose corporate owners use it to direct our entire economy for their own ends, without democratic influence or accountability.  Substantial changes are needed to transform the Fed, and these will only come with massive public pressure.

Congress has the power to amend the Fed – just as it did in 1934, 1958 and 2010. For the central bank to satisfy its mandate to promote full employment and to become an institution that serves all the people, not just the 1%, the Fed needs fundamental reform.


Ellen Brown is an attorney, president of the Public Banking Institute, and author of twelve books, including the best-selling Web of Debt. In The Public Bank Solution, her latest book, she explores successful public banking models historically and globally. Her blog articles are at

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The Debt Matrix: Consumption and Modern-Day Slavery

“Home life ceases to be free and beautiful as soon as it is founded on borrowing and debt”

Henrik Ibsen

Timothy Alexander Guzman, Silent Crow News – According to Oxford Dictionary the term Slave is defined as a person who is the legal property of another and is forced to obey them” as in the case of the United States during the 18th and 19th centuries where slavery was a legalized institution.  Oxford dictionary also defines slavery as “a person who works very hard without proper remuneration or appreciation” as in today’s world of a person working for a company or corporation where their efforts are usually under appreciated.  It also describes a slave as “a person who is excessively dependent upon or controlled by something” or “a device, or part of one, directly controlled by another”.  Debt can be an instrument used to control an individual or a nation for that matter.  In this case, an individual is dependent upon “Credit” to buy products.  Then the credit becomes a debt that has to be repaid.  It becomes a “control mechanism” as the creditor becomes the “Slave Owner” and the debtor becomes the “Slave”.  What is the point?   In today’s world of unlimited credit, consumers become modern-day slaves to their creditors.  What is the difference between slavery in 18th century America with imported African slaves and the America of 2013?  There is no difference besides the physical abuse of the African slaves by their owners.  In America, consumers suffer psychological abuse by its creditors.  As long as an individual remains in debt bondage, that person will have to repay that debt until the day that person literally dies in most cases.

Black Friday is the day that starts the most important holiday for big name retailers and Wall Street speculators and that is Christmas.  It is the shopping season that investors, economists and corporations pay close attention to as they measure consumer confidence and the profits they reap from consumer spending.  Major retailers and corporations such as Wal-Mart expect to make profits.  Wall Street expects consumers to spend on Black Friday through the Christmas holidays following the Federal Reserve’s continued policies of Quantitative Easing (QE).  Economists across the spectrum predict that the new Federal Reserve chairwoman Janet Yellen will continue to buy US bonds indefinitely continuing Ben Bernanke’s current policies.  All the while consumers continue to accumulate debt.  Black Friday was marked with chaos followed by violence as mobs of consumers’ raided shopping centers and malls for discounts and sales on numerous products including flat screen televisions, toys, clothing and other goods they most likely don’t need.  Regardless of the economic situation, consumers will continue to buy.  Granted, Christmas is about giving your loved ones gifts in a traditional sense.  It is also about spending time with the family.  It is supposed to be a joyous holiday for families, but the American population is mired in debt ranging from credit cards, mortgages, student loans and auto loans.  Earlier this month Bloomberg reported that U.S. households increased their debt levels by continuing to borrow at unprecedented levels:

Consumer indebtedness rose $127 billion to $11.28 trillion, the biggest increase since the first quarter of 2008, according to a quarterly report on household debt and credit released today by the Fed district bank. Mortgage balances climbed $56 billion, student loans increased $33 billion, auto loans were up $31 billion and credit-card debt rose by $4 billion.

“We observed an increase of household balances across essentially all types of debt,” Donghoon Lee, senior research economist at the New York Fed, said in a statement. “With non-housing debt consistently increasing and the factors pushing down mortgage balances waning, it appears that households have crossed a turning point in the deleveraging cycle.”

Consumerism has taking hold in America.  The population continues to stampede at malls and in some cases injuring and even killing individuals.  In 2008, a Wal-Mart worker was trampled to death in Long Island, New York by a stampede of hungry consumers looking for bargains.  There were also several people injured during the incident.  This Black Friday proved to be more of the same as shoppers filled shopping malls.  Some malls experienced violent crowds pushing and fighting with each other over items that were on sale.  It is absolutely mind boggling to see average people become violent over products sold at major retail stores.  Morality is in decline in America.

Regardless of debt the American public faces, it seems that shopping is the only thing that matters.  As debt increases it becomes harder for them to repay.  Can the American people ever awaken from their dystopian nightmare of mass consumption of products they don’t need?  They are accumulating large amounts of debt thanks to the Federal Reserve Bank’s printing of unlimited cheap money with incredibly zero to low interest rates.  Although, many do buy their basic necessities such as food and clothing, buying the latest products that includes video games and other computer gadgets are turning consumers into life-long debt slaves that will continue to pay their credit card companies with “interest” until the debt is paid.  That can take a long period of time since interest rates are tied to credit cards and other revolving loan payments.  According to the Federal Reserve Bank (who continues endless money printing) and other government institutions, the average US household owes between $7,000 and $15,112 on credit cards.  The average mortgage debt is at $146,215 and student loans’ reaching the $1 trillion mark is at $31,240.  The total amount of debt the United States owes to its creditors namely China is at $17 Trillion and steadily increasing as the Federal Reserve Bank continues to buy its own US bonds.

Debt Slavery is the new modern-day slavery as millions continue to buy products on credit becoming perpetual servants of mega corporations and international banks.  How?  As you buy with credit cards or loans, the “interest rates” attached to the purchases made is the bond that ties you and the corporate interests or bankers for eternity.  The debt people get into is difficult to escape as interest rates accumulate over time it becomes extremely difficult to repay since it keeps adding up.  In the 2009 film called ‘The International’ with Clive Owen and Naomi Watts which was actually inspired by the BCCI (Bank of Credit and Commerce International) scandal in real life had an interesting scene involving an Italian politician named Umberto Calvini, who is a weapons manufacturer who explains to Eleanor Whitman (Watts) and Louis Salinger (Owens) that IBBC was interested in buying a missile guiding system that his factory produces then later assassinated.  He explained that the true value was not conflicts but the debt it produces:

Calvini: “No, this is not about making profit from weapon sales.  It’s about control.”

Eleanor: “Control the flow of weapons, control the conflict?”

Calvini: “No. No No. The IBBC is a bank. Their objective isn’t to control the conflict, it’s to control the debt that the conflict produces. You see, the real value of a conflict – the true value – is in the debt that it creates. You control the debt, you control everything.  You find this upsetting, yes?  But this is the very essence of the banking industry, to make us all, whether we be nations or individuals, slaves to debt.”

It was an interesting scene coming out of Hollywood, which by every standard is a propaganda machine.  Debt is serious business especially for banks and corporations.  .

With all of the problems the American public faces with the prospect of a future war on Iran will impact the world’s economy.  With 100 million people out of work in the United States and a reduction in food stamps and inflation hitting food prices, there is much concern.  Celebrities’ personal lives still dominate headlines in the main stream media.  The ‘War on Terror’ has taken away civil liberties and the ‘War on Drugs’ has increased the prison population.  High-crime rates in major cities remain problematic. With the rollout of 7000 drones in 2015, endless wars, a looming dollar collapse, and endless Pharmaceutical commercials that keep people heavily drugged are serious problems for the American public.  Yet, shopping on Black Friday resulting in violence and chaos among uneasy crowds seems to be the norm.

The media and corporate advertisements have turned the American population into a “Slave” state of mind. Many people in the United States are accumulating debt at levels never seen in its 237 years of its existence.  It is a lesson to the world in what NOT to do.  An economy that is consumer based with credit is a disaster in the making because that debt only becomes unmanageable in the long run, especially when the people have no means to repay its debt obligations.  An economy based on consumerism leads to moral decay.  When people become ingrained in consumption disregarding the debt they inherit, they become immune to the realities around them.  When the situation becomes intense with a coming dollar collapse and a possible war in the Middle East, reality will sink in.  Then when the necessities such as food and shelter become scarce the people will begin to panic and lose control over their own lives.  Who knows what people in America will be capable of, but then again as you saw what happened on Black Friday, it is a reminder of how people react when products they don’t really need are on sale.  Imagine how they will react in times of economic despair.

Market Euphoria During Troubled Times

Market Euphoria During Troubled Times

by Stephen Lendman

Major equity markets approach nosebleed levels. Experts disagree on whether bubble extremes approach. They're not unusual. They happen often.

The myth about markets reflecting reality is hokum. Keynes once warned about "enterprise becom(ing) the bubble on a whirlpool of (destructive) speculation." Hard times usually follows.

Easy credit fuels speculation. Euphoria follows. Greed trumps good sense. Folly pays a big price. This time is different talk proliferates. Momentum drives prices higher.

Stories of easy riches abound. Why miss out. Overvaluation leads to more of it. Fraudsters sell at the top. Greater fools buy at the wrong time. Hindsight is the best insight. Excess ends badly every time.

Downward momentum happens faster than market upswings. Years of gains are wiped out in months. Valuations evaporate rapidly.

Goldilocks economies turn rancid without warnings. Lenders remember how to say no. Reality arrives with a bang. Animal spirits disappear. Angst becomes pervasive.

This time IS different. Market appreciation is supposed to reflect good times. They go hand in hand. Ordinary people are fighting for the soul of the American dream. 

It's fast disappearing. It's dying. Main Street Depression conditions are killing it. They're at levels last seen in the 1930s.

Spin hides them. Fed governors say QE and low interest rates stimulate economic growth. It's cover for what's been ongoing since late 2008.

It artificially inflates markets. It keeps too-big-to fail banks from collapsing. It's failed to stimulate economic growth. It weakened the dollar. It created bond and equity market bubbles.

Offshoring manufacturing and professional high-pay/good benefit jobs to low wage countries prevents growth. Replacing them with low pay/poor or no benefits ones doesn't compensate.

Money printing madness isn't forever. Reality has final say. The greater the excess, the bigger the bang when it arrives. America is in decline. It's on a collision course with trouble.

Weakness defines current conditions. Markets astonishingly defy gravity. They're rising during economic decline. 

It's practically unheard of during hard times. Market declines nearly always accompany them. Not this time. Fed/Wall Street manipulation elevates them higher.

Imagine doing so during protracted economic weakness. Short-term recoveries punctuate it. Fundamental problems are unresolved.

Real investment is weak. Western unemployment and poverty remain disturbingly high. Banks aren't lending. Major ones are insolvent. Consumers are spending less. Government debt levels are rising. They're dangerously high.

In the past two decades, Japan experienced multiple recessions. Doing so reflects classic stagnation. It reflects longterm decline.

Money printing madness hasn't stimulated sustained economic growth. Since 2008, Japan experienced a triple-dip recession. Expect a fourth to follow.

Eurozone economies and Britain remain extremely troubled. Greece, Spain, Portugal, Ireland and Italy are basket cases. 

Austerity is force fed when stimulus is needed. Hard times for ordinary people go from bad to worse. Troubled banks assure continued economic weakness.

Markets are addicted to free money. Providing it comes at the expense of Main Street. Communities are wrecked. Economic growth is sacrificed. Offshoring jobs America most needs exacerbates things.

Fragility, weakness and instability characterizes economic conditions. Hard times keep getting harder. 

Markets are oblivious to what's happening. Free money keeps party time going. Perhaps another banking crash will change things. Maybe it'll be worse than before. Cassandras predict it. Maybe they're right. Hindsight explains best.

Ben Inker co-heads GMO investments Asset Allocation team. He's a GMO Board of Directors member. He believes US equity markets are about 40% overvalued.

He calls fair S&P fair value 1,100. It currently exceeds 1,800. It's in nosebleed territory. It could go much higher before topping out. Markets work that way. 

Irrational exuberance characterizes them in times like these. There's never been anything like them before in memory. Coinciding with hard times is unheard of. For how long remains to be seen.

Small cap overvaluation is even more extreme than large cap S&P equities.

"The US stock market is trading at levels that do not seem capable of supporting the type of returns that investors have gotten used to receiving from equities," said Inker. 

"Our additional work does nothing but confirm our prior beliefs about the current attractiveness - or rather lack of attractiveness - of the US stock market."

Legendary investor Jeremy Grantham co-founded GMO. Admirers call him the philosopher king of Wall Street. He operates north in Boston.

What's ongoing reflects another bubble/bust scenario. According to Grantham:

"One of the more painful lessons in investing is that the prudent investor almost invariably must forego plenty of fun at the top end of markets." 

"This market is already no exception, but speculation can hurt prudence much more and probably will." 

"Ah, that’s life. Be prudent and you'll probably forego gains. Be risky and you'll probably make some more money, but you may be bushwhacked and, if you are, your excuses will look thin."

Robert Shiller popularized the Shiller P/E ratio. It's 50% above its longterm average. The US equity market is way overvalued.

Shiller's S&P ratio uses a 10-year inflation-adjusted earnings average to calculate valuation. Historically, it averaged 16.5 longterm.

Shiller's current ratio slightly exceeds 25. It's worrisome. At 28.8, it's bubble territory," he says.

Warren Buffett has his own favorite metric. He calculates market value of all publicly traded securities based on a percentage of Gross National Product (GNP). He calls it the best single valuations measure.

GNP values goods and services produced at home and abroad. According to Buffett:

"If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you." 

"If the ratio approaches 200% - as it did in 1999 and (early) 2000 - you are playing with fire."

In late November, it was 134%. It's in the 94th percentile of results over the past six decades. It's well above the 60-year average. 

It's way overvalued. It perhaps heading for 1999 levels. The fullness of time will tell.

Economic conditions then were strong. Weakness followed. Protracted hard times reflects what's ongoing now.

Markets may go higher before peaking. Or maybe not. Betting on continued advances is a fool's game. 

Winning makes investors look smart. Losing extracts pain when bubbles pop. Is this time different? We heard it lots of times before. 

It bears repeating. Hindsight is the best insight. Forewarned is forearmed.

A Final Comment

On November 25, the Washington Post headlined "Among American workers, poll finds unprecedented anxiety about jobs, economy."

John Stewart is typical of others. He's middle-aged. His job pays too little to live on. "I can't save any money," he said. He can't "buy the things (he) need(s) to live as a human being."

Over four years into so-called recovery, "American workers are living with unprecedented economic anxiety," said WaPo. Low income workers feel it most.

A recent WaPo-Miller Center poll showed over six in 10 workers fear losing their jobs. Concerns are greater than found in previous surveys dating from the 1970s.

Low income workers worry most. At the same time, angst today affects "all levels of the income ladder.

"Once you control for economic and demographic factors, there is no partisan divide," said WaPo. 

"There's no racial divide, either, and no gender gap. It also doesn't matter where you live."

At issue is protracted Main Street Depression level economic conditions. Millions of Americans are unemployed. Millions more are underemployed.

Incomes don't keep up with inflation. Job insecurity is unprecedented in modern times.

Conditions go from bad to worse. Every day reflects a struggle to survive. It's the new normal. It shows no signs of ending.

Stephen Lendman lives in Chicago. He can be reached at 

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

Visit his blog site at 

Listen to cutting-edge discussions with distinguished guests on the Progressive Radio News Hour on the Progressive Radio Network.

It airs Fridays at 10AM US Central time and Saturdays and Sundays at noon. All programs are archived for easy listening.

Has the US Dollar Lost its Credibility? Legitimate Concerns for the World’s “Reserve”...

Timothy Alexander Guzman, Silent Crow News - The confidence in the US dollar as the world’s reserve currency since the US government shutdown has continued its rapid decline.  On October 14th, started the third week of a US government shutdown reported that the US dollar fell against the Euro.  A deal involving a spending bill would most likely happen between both Democrats and Republicans by the October 17th deadline.  But the damage was already done to the credibility of US dollar in the long-term.  The world has no confidence in Washington.  It is fair to say that they are holding the global economy hostage because of their political brinkmanship.

According to Olivier Blanchard, the IMF’s chief economist recently warned that there could be major financial disaster throughout the world if the United States did not increase their “Debt Ceiling” to avoid a default on its financial obligations as it is in the midst of running out of money.  Raising the debt ceiling by October 17 only means they can continue to borrow money to fund its operations and pay interest on government securities held by China, Japan and other investors.  Blanchard stated “Failure to lift the debt ceiling would, however, be a major event. Prolonged failure would lead to an extreme fiscal consolidation and almost surely derail the U.S. recovery. But the effect of any failure to repay the debt would be felt right away, leading to potential major disruptions in financial markets, both in the United States and abroad.”  The United States government continues to borrow money to pay its debts is already at $16.7 Trillion.  Raising the debt ceiling can go over the $17 Trillion mark.  How long can this go on for?  The US government will continue to borrow money at the expense of many nations who hold US Treasuries that are worthless due to the Federal Reserves endless money printing.

There should be a concern for international investors that include governments, big and small businesses and individuals who own U.S. treasuries.  The Federal Reserve Bank’s endless Quantitative Easing (QE) continues to devalue the US Dollar as Fed chairman Ben Bernanke promised to continue buying $85 billion a month worth of US treasuries and mortgages that will lead to high inflation.  It’s an economic policy that is bound for failure.

China, the largest creditor to the US government has been purchasing assets in Africa Asia, Europe and Latin America to diversify out of the US dollar due to the Federal Reserve’s reckless monetary policy.  The International Business Times, an online news publication based in New York City published an article last month called ‘China Steps Up Farmland, Oil and Mining Assets Acquisitions Abroad’ about how countries in Africa benefit with Chinese investments in infrastructure and from much needed capital:

In 2013, Chinese companies have acquired minority mining-sector stakes in 16 deals totaling $696m outside China, according to Dealogic. The majority of the deals are located in Australia and the rest in Indonesia, Canada and the UK.

Africa is often regarded as the most attractive destination for Chinese outbound mining acquisitions. Chinese firms are benefiting from their reserves of cash unavailable to western competitors to scoop up assets at steep discounts.

“China needs access to natural resources while African countries need a lot of capital and infrastructure support. Therefore, it is very easy for Chinese businesses to gain access to the abundant natural resources in African countries by providing them with capital and infrastructure aid,” a respondent told accountants Deloitte during a 2010 survey.

The report also said that China has been acquiring oil and gas assets worth over $100 billion dollars.  China needs oil and gas for its manufacturing sectors.

Chinese companies have completed 83 overseas oil and gas purchases worth $100.7bn in the past five years, according to data compiled by Bloomberg. Cnooc’s $15.1bn acquisition of Canada-based Nexen early in 2013 was China’s largest overseas acquisition.

Over the last five years, Sinopec and CNOOC, the country’s second and third-biggest oil and gas producers, spent $41bn and $26bn, respectively, on overseas assets.

China National Petroleum Corp has invested more than $9bn to purchase overseas assets in 2013, including the $4.2bn purchase of a stake in Mozambique’s Rovuma fields in July. The company is planning to double its overseas output by 2015.

PetroChina, China’s biggest oil and gas producer, is looking to invest $60bn on overseas acquisitions over the period to 2020. By that time, the company intends to raise its production abroad to more than 50% of its total.

How long before countries that hold a large amount of US treasuries such as China and Russia.  Can they start dumping US treasuries in the near future?  It won’t likely happen this year but within the next 2 years, it is possible.  China has been making crucial decisions to solve their economic problems concerning their $1.2 trillion in US treasuries they hold.  China has been accumulating multiple assets by investing in numerous regions in the world.  For example, China has made arrangements to swap Yuan’s for other currencies with Japan and Russia for their bilateral trade agreements.  China also has arraignments with Australia, Iceland, South Korea, Malaysia, Brazil, India and South Africa who will use their own currencies for trade.  China has built relationships with many countries in Africa for its much needed resources for its economy.  China has even invested in numerous infrastructure projects that spur economic opportunities for the African people that create jobs for both short and long-term projects.  It is a strategic move for China by building business relationships with African governments that seek to improve economic conditions for its own people.  China National Offshore Oil Corporation (CNOOC) acquired the Canadian energy giant Nexen for $15 billion.  China also invested in oil and gas pipelines in Central Asia and mineral mines in Australia and Africa.  China also signed deals worth up to $5 billion for a 600-mile long railway to transport goods with the Kenyan government who recently suffered from a terrorist attack in Nairobi.  An online website dedicated to procurements and supply chain professionals worldwide called stated that “the line will stretch from the border town of Malaba in the west to the busy port of Mombasa, carrying Kenyan goods as well as freight from Uganda, Rwanda, Burundi and the Democratic Republic of the Congo.”  Chinese investors have been snapping up vineyards in Bordeaux, France. A Chinese meat producer recently purchased one of the world’s largest pork producers Smithfield for $4.7 billion to meet the Chinese public’s demand for pork.  With $1.2 trillion in reserves, China would only be irresponsible if it did not to purchase hard assets for its future economic growth.  The world is closely paying attention to Washington’s political charade at the expense of its own public and the world’s investors.  With uncertainty breeds distrust.  With distrust of a government’s inability to assure investors that their purchases of US treasuries are fundamentally secure, then the confidence the world once had in the US dollar is lost.  Reuters just reported that the Japanese Yen is a safe-haven (at least in the short-term) until the US Congress come to an agreement before the October 17th deadline.  “The U.S. dollar fell broadly early on Monday while the yen gained across the board as investors sold the U.S. currency in favour of the safe-haven yen as a deal to avoid a government default remained elusive ahead of a crucial deadline this week.”   China continues to buy gold as the US dollar continues its decline.  A Xinhua editorial in 2011 stated that “Should Washington continue turning a blind eye to its runaway debt addiction, its already tarnished credibility will lose more luster, which might eventually detonate the debt bomb and jeopardize the well-being of hundreds of millions of families within and beyond the U.S. borders.”

The dollar has lost 95% of its value since the Federal Reserve Bank was established in 1913 to control the money supply (See chart below).

Governments around the world are trying to ditch the dollar as an instrument for trade.  However, the US and its Western allies has declared wars and instigated coup d’états in the past against governments who were willing to use other forms of money including gold for trade.  One example was Iraq under Saddam Hussein (Once a US Patsy) tried to replace the petrodollar with the Euro.  Time magazine published an article in 2000 that openly admitted that Iraq’s president wanted to use the Euro instead of the dollar.  It was one of the main reasons that Bush administration invaded Iraq besides oil resources.  The article titled ‘Foreign Exchange: Saddam Turns His Back on Greenbacks’:

Europe’s dream of promoting the euro as a competitor to the U.S. dollar may get a boost from SADDAM HUSSEIN. Iraq says that from now on, it wants payments for its oil in euros, despite the fact that the battered European currency unit, which used to be worth quite a bit more than $1, has dropped to about 82[cents]. Iraq says it will no longer accept dollars for oil because it does not want to deal “in the currency of the enemy.

The assassination of Muammar Gaddafi is another example.  Gaddafi’s idea was to create a single African currency known as the “Gold Dinar” that would have undermined the US Dollar in Africa for all oil traded in petrodollars. It was a proposal that made Washington and its Western partners nervous.  It was also a concern that Gaddafi also called for the African Investment Bank that would have been an independent institution that would have given interest-free loans to African nations, eliminating the role of International Monetary Fund (IMF).  Gerald Pereira, an executive board member of the former Tripoli-based World Mathaba once said that “Gaddafi’s creation of the African Investment Bank in Sirte (Libya) and the African Monetary Fund to be based in Cameroon will supplant the IMF and undermine Western economic hegemony in Africa.”  The United States can no longer sustain their dollar policy, whether by force or economic coercion.  The US Dollar has lost its credibility due to the government’s actions.  Since World War II, the US government has increased its military spending over the years along with the Fed’s unlimited money printing with forever low-interest rates creating cheap money.  With the loss of its manufacturing base that produces products for export is a recipe for disaster. With a U.S. government shutdown added to the mix, projects a negative image on the world stage.  The Qatar based QNB Group (Qatar National Bank) issued a press release this past Sunday on what a default by the US government would mean for the American economy and the world.  It stated the following:

A default on US government debt would be catastrophic for the US and world economy. Ratings agencies would automatically need to classify all US government debt in default. This would force institutional investors around the world, including central banks, to sell their holdings of US government bonds, as they have statutory requirements to hold only investment- grade assets. The US government would then no longer be able to rollover a large portion of its debt, let alone issue new ones. For the US economy, the lack of debt instruments to finance government spending would mean reneging on its other obligations, including Social Security, medical payments, military deployments and food stamps. A large portion of the US economy would therefore grind to a halt. For the world economy, it would imply a loss of the reserve currency that anchors the global financial system, with severe instability in exchange and bond markets. This would inevitably result in a sharp global recession.

In light of these catastrophic consequences, QNB Group expects that Congress will pass a new budget and increase the debt ceiling in the coming days. Nevertheless, the political deadlock over the last couple of weeks has created an atmosphere of uncertainty that could affect confidence, investment and growth in the US. More importantly, the credibility of the US dollar as the world’s reserve currency could be affected, as global investors seek to mitigate the risk of a future political deadlock. Overall, without political collective commitment, it is unlikely that the US dollar will continue to remain the world’s reserve currency.

The US government’s charade over the Republicans and Democrats failure to enact appropriations or a government spending bill and funding for the Patient Protection and Affordable Care Act (Obamacare) is seen as anything but dysfunctional.  The republicans want Obamacare defunded.  The irony is that Obamacare is similar to Romneycare which had the same mandate to force you to buy health insurance.  It was admitted by Jonathan Gruber, a professor at Massachusetts Institute of Technology (MIT) who advised both Mitt Romney and Barack Obama on how to create their healthcare plans was upset to learn that Mitt Romney lied about how his plan was different than Obama’s.  He was interviewed by an online news website called Capital New York and said “The problem is there is no way to say that,” Gruber said “because they’re the same f***ing bill. He just can’t have his cake and eat it too. Basically, you know, it’s the same bill. He can try to draw distinctions and stuff, but he’s just lying. The only big difference is he didn’t have to pay for his. Because the federal government paid for it. Where at the federal level, we have to pay for it, so we have to raise taxes.”  We are facing global economic crises by Washington’s political theater.  It will allow countries to lose confidence in the US Dollar in the long-term.  It is a dangerous economic formula that can lead to a global economic depression.

China, Russia, Iran, Brazil and many others are diversifying out of the US Dollar monopoly.  There will be a global sell-off of US Treasuries if these political shenanigans continue in any future political crises between both Democrats and Republicans.  Confidence is waning as investors seek a way out.  It will be difficult period in time.  The world must seek a better economic system that is not reliant on the US Dollar.  A gold-backed currency or a basket of various currencies backed by either gold or silver would be a good start.  Right now the world is waiting to see what comes out of Washington.  No matter what happens, confidence in the US Dollar is at an all-time low regardless if the spending bill passes and they raise the debt ceiling.  The Question is how will they convince the world to re-invest in the US Dollar once again?

Beijing’s Race to Diversify out of US Treasuries: New Agreements would Allow Singapore...

Timothy Alexander Guzman, Silent Crow News - China is accelerating the role of the Chinese Yuan with agreements with Singapore that would allow direct trading between each other’s currency” according to Singapore’s central bank. The Agence-France Presse (AFP) reported that China and Singapore will cooperate on a number of agreements that would boost economic ties for both countries.  China is concerned with its US treasury holdings worth up to $1.2 trillion after Washington’s spectacle earlier this month over its fiscal policies that pushed the world’s economy into a crises.  The move, along with other agreements on financial cooperation, is expected to bolster Singapore’s status as a leading offshore trading centre for the Chinese Yuan, officially called the renminbi (RMB)”the report said.  “China and Singapore will introduce direct currency trading between the Chinese yuan and Singapore dollar,” the Monetary Authority of Singapore (MAS) said in a statement, adding that details will be announced separately.” China is in a good position because it allows Singapore to invest in Chinese stocks and bonds with Yuan’s boosting its capital markets. The report said that “China will also grant Singapore-based investors a 50-billion-yuan ($8.2 billion) investment quota under its Renminbi Qualified Foreign Institutional Investor programme, MAS said.  This would allow investors based in the city-state to use the Yuan to invest in Chinese stocks and bonds.”  China is racing against time in case lawmakers in Washington do not come up with an agreement to raise the “Debt Ceiling” to borrow more money or solve their economic problems.  China is diversifying out of US Dollars at a rapid pace since the 2007-2008 financial crises that resulted in the bankruptcy of major financial institutions, bailouts and government takeovers such as Lehman Brothers, Fannie Mae, Freddie Mac, Citigroup and American Insurance Group (AIG).  China is also frustrated with the US government’s backing of its neighbors internal affairs with Beijing regarding the South China Sea.  Reuters reported on October 10th, 2013 the following:

The US is also aggressively backing the Philippine government’s maritime dispute with China when U.S. Secretary of State John Kerry angered China’s leadership “All claimants have a responsibility to clarify and align their claims with international law. They can engage in arbitration and other means of peaceful negotiation,” Kerry told leaders at the East Asia Summit in Brunei, including Chinese Premier Li Keqiang.  “Freedom of navigation and overflight is a linchpin of security in the Pacific,” he added.

It is important to note that Hillary Clinton, who is rumored to run as a Democratic candidate in the 2016 US Presidential elections, told an ASEAN summit in 2010 that the US had a “national interest” in the “freedom of navigation. “  Clinton also angered China that only proves that the US is directly intervening in a regional dispute.  Since the Obama administration got into office they have repeatedly used the ASEAN forums for multilateral discussions between China and its South East Asian counterparts supporting the opposition and ignoring Beijing’s call to settle the disputes bilaterally. The US has supported the Philippines (considered a US puppet state) and Vietnam to counter China’s claims aggressively resulting in numerous maritime incidents in the South China Sea and has divided all countries within ASEAN.  China is threatened economically and militarily by the US government (See graph below).

China is making moves to loosen the US government’s strangle hold over its economy and its regional disputes with its neighbors.  China’s economic growth will benefit Singapore in the long run as “Chinese institutional investors will also be allowed to use the Yuan to invest in Singapore’s capital markets.”  The AFP also stated that “Relevant agencies in Singapore and China are also in discussions to facilitate China-incorporated companies, which have received regulatory approval to list directly in Singapore.” And that “The new initiatives will further promote the international use of the Renminbi through Singapore,” the MAS said.  Times are changing for the world’s economy.  China and other countries are in preparation for a possible US default in the future.  When can the US Dollar collapse?  It is hard to tell since the US economy is intertwined with the global economy.  But one thing is for sure China and other countries across the planet are diversifying out of the US Dollar and it is accelerating.  That is a fact.  Singapore is not taking any chances either.  “Its managing director Ravi Menon added: “Financial ties between the two countries have deepened considerably and Singapore is well placed to promote greater use of the RMB in international trade and investment in the years to come.”  The AFP report said “China’s rise as the world’s second biggest economy has seen the Yuan take on a bigger role in international financial markets.”  2014 will be an interesting year for world financial markets.  What will happen when Washington is once again on the center stage in January?  Will they continue to increase the “Debt Ceiling” so that they can borrow until the end of time? Or will they play “Political Brinkmanship again?  Will the Federal Reserve Bank “Taper” its monetary policy by Mid-2014 if the US economy improves as Chairman Ben Bernanke promised or will the new Chairwoman Janet Yellen, a member of the Council on Foreign Relations (CFR) and a protégé of Alan Greenspan continue to print US “Fiat” currencies with low interest rates?  Many questions on the US economy remain elusive.  China has many reasons to worry about its financial future and its sovereignty and that is a declining empire called the United States government.

Public Banking in Costa Rica: A Remarkable Little-known Model

In Costa Rica, publicly-owned banks have been available for so long and work so well that people take for granted that any country that knows how to run an economy has a public banking option. Costa Ricans are amazed to hear there is only one public depository bank in the United States (the Bank of North Dakota), and few people have private access to it.

So says political activist Scott Bidstrup, who writes:

For the last decade, I have resided in Costa Rica, where we have had a “Public Option” for the last 64 years.

There are 29 licensed banks, mutual associations and credit unions in Costa Rica, of which four were established as national, publicly-owned banks in 1949. They have remained open and in public hands ever since—in spite of enormous pressure by the I.M.F. [International Monetary Fund] and the U.S. to privatize them along with other public assets. The Costa Ricans have resisted that pressure—because the value of a public banking option has become abundantly clear to everyone in this country.

During the last three decades, countless private banks, mutual associations (a kind of Savings and Loan) and credit unions have come and gone, and depositors in them have inevitably lost most of the value of their accounts.

But the four state banks, which compete fiercely with each other, just go on and on. Because they are stable and none have failed in 31 years, most Costa Ricans have moved the bulk of their money into them.  Those four banks now account for fully 80% of all retail deposits in Costa Rica, and the 25 private institutions share among themselves the rest.

According to a 2003 report by the World Bank, the public sector banks dominating Costa Rica’s onshore banking system include three state-owned commercial banks (Banco Nacional, Banco de Costa Rica, and Banco Crédito Agrícola de Cartago) and a special-charter bank called Banco Popular,  which in principle is owned by all Costa Rican workers. These banks accounted for 75 percent of total banking deposits in 2003.

In Competition Policies in Emerging Economies: Lessons and Challenges from Central America and Mexico (2008), Claudia Schatan writes that Costa Rica nationalized all of its banks and imposed a monopoly on deposits in 1949. Effectively, only state-owned banks existed in the country after that.  The monopoly was loosened in the 1980s and was eliminated in 1995. But the extensive network of branches developed by the public banks and the existence of an unlimited state guarantee on their deposits has made Costa Rica the only country in the region in which public banking clearly predominates.

Scott Bidstrup comments:

By 1980, the Costa Rican economy had grown to the point where it was by far the richest nation in Latin America in per-capita terms. It was so much richer than its neighbors that Latin American economic statistics were routinely quoted with and without Costa Rica included. Growth rates were in the double digits for a generation and a half.  And the prosperity was broadly shared. Costa Rica’s middle class – nonexistent before 1949 – became the dominant part of the economy during this period.  Poverty was all but abolished, favelas [shanty towns] disappeared, and the economy was booming.

This was not because Costa Rica had natural resources or other natural advantages over its neighbors. To the contrary, says Bidstrup:

At the conclusion of the civil war of 1948 (which was brought on by the desperate social conditions of the masses), Costa Rica was desperately poor, the poorest nation in the hemisphere, as it had been since the Spanish Conquest.

The winner of the 1948 civil war, José “Pepe” Figueres, now a national hero, realized that it would happen again if nothing was done to relieve the crushing poverty and deprivation of the rural population.  He formulated a plan in which the public sector would be financed by profits from state-owned enterprises, and the private sector would be financed by state banking.

A large number of state-owned capitalist enterprises were founded. Their profits were returned to the national treasury, and they financed dozens of major infrastructure projects.  At one point, more than 240 state-owned corporations were providing so much money that Costa Rica was building infrastructure like mad and financing it largely with cash. Yet it still had the lowest taxes in the region, and it could still afford to spend 30% of its national income on health and education.

A provision of the Figueres constitution guaranteed a job to anyone who wanted one. At one point, 42% of the working population of Costa Rica was working for the government directly or in one of the state-owned corporations.  Most of the rest of the economy not involved in the coffee trade was working for small mom-and-pop companies that were suppliers to the larger state-owned firms—and it was state banking, offering credit on favorable terms, that made the founding and growth of those small firms possible.  Had they been forced to rely on private-sector banking, few of them would have been able to obtain the financing needed to become established and prosperous.  State banking was key to the private sector growth. Lending policy was government policy and was designed to facilitate national development, not bankers’ wallets.  Virtually everything the country needed was locally produced.  Toilets, window glass, cement, rebar, roofing materials, window and door joinery, wire and cable, all were made by state-owned capitalist enterprises, most of them quite profitable. Costa Rica was the dominant player regionally in most consumer products and was on the move internationally.

Needless to say, this good example did not sit well with foreign business interests. It earned Figueres two coup attempts and one attempted assassination.  He responded by abolishing the military (except for the Coast Guard), leaving even more revenues for social services and infrastructure.

When attempted coups and assassination failed, says Bidstrup, Costa Rica was brought down with a form of economic warfare called the “currency crisis” of 1982. Over just a few months, the cost of financing its external debt went from 3% to extremely high variable rates (27% at one point).  As a result, along with every other Latin American country, Costa Rica was facing default. Bidstrup writes:

That’s when the IMF and World Bank came to town.

Privatize everything in sight, we were told.  We had little choice, so we did.  End your employment guarantee, we were told.  So we did.  Open your markets to foreign competition, we were told.  So we did.  Most of the former state-owned firms were sold off, mostly to foreign corporations.  Many ended up shut down in a short time by foreigners who didn’t know how to run them, and unemployment appeared (and with it, poverty and crime) for the first time in a decade.  Many of the local firms went broke or sold out quickly in the face of ruinous foreign competition.  Very little of Costa Rica’s manufacturing economy is still locally owned. And so now, instead of earning forex [foreign exchange] through exporting locally produced goods and retaining profits locally, these firms are now forex liabilities, expatriating their profits and earning relatively little through exports.  Costa Ricans now darkly joke that their economy is a wholly-owned subsidiary of the United States.

The dire effects of the IMF’s austerity measures were confirmed in a 1993 book excerpt by Karen Hansen-Kuhn  titled “Structural Adjustment in Costa Rica: Sapping the Economy.” She noted that Costa Rica stood out in Central America because of its near half-century history of stable democracy and well-functioning government, featuring the region’s largest middle class and the absence of both an army and a guerrilla movement. Eliminating the military allowed the government to support a Scandinavian-type social-welfare system that still provides free health care and education, and has helped produce the lowest infant mortality rate and highest average life expectancy in all of Central America.

In the 1970s, however, the country fell into debt when coffee and other commodity prices suddenly fell, and oil prices shot up. To get the dollars to buy oil, Costa Rica had to resort to foreign borrowing; and in 1980, the U.S. Federal Reserve under Paul Volcker raised interest rates to unprecedented levels.

In The Gods of Money (2009), William Engdahl fills in the back story. In 1971, Richard Nixon took the U.S. dollar off the gold standard, causing it to drop precipitously in international markets. In 1972, US Secretary of State Henry Kissinger and President Nixon had a clandestine meeting with the Shah of Iran. In 1973, a group of powerful financiers and politicians met secretly in Sweden and discussed effectively “backing” the dollar with oil. An arrangement was then finalized in which the oil-producing countries of OPEC would sell their oil only in U.S. dollars.  The quid pro quo was military protection and a strategic boost in oil prices.  The dollars would wind up in Wall Street and London banks, where they would fund the burgeoning U.S. debt. In 1974, an oil embargo conveniently caused the price of oil to quadruple.  Countries without sufficient dollar reserves had to borrow from Wall Street and London banks to buy the oil they needed.  Increased costs then drove up prices worldwide.

By late 1981, says Hansen-Kuhn, Costa Rica had one of the world’s highest levels of debt per capita, with debt-service payments amounting to 60 percent of export earnings. When the government had to choose between defending its stellar social-service system or bowing to its creditors, it chose the social services. It suspended debt payments to nearly all its creditors, predominately commercial banks. But that left it without foreign exchange. That was when it resorted to borrowing from the World Bank and IMF, which imposed “austerity measures” as a required condition. The result was to increase poverty levels dramatically.

Bidstrup writes of subsequent developments:

Indebted to the IMF, the Costa Rican government had to sell off its state-owned enterprises, depriving it of most of its revenue, and the country has since been forced to eat its seed corn. No major infrastructure projects have been conceived and built to completion out of tax revenues, and maintenance of existing infrastructure built during that era must wait in line for funding, with predictable results.

About every year, there has been a closure of one of the private banks or major savings coöps.  In every case, there has been a corruption or embezzlement scandal, proving the old saying that the best way to rob a bank is to own one.  This is why about 80% of retail deposits in Costa Rica are now held by the four state banks.  They’re trusted.

Costa Rica still has a robust economy, and is much less affected by the vicissitudes of rising and falling international economic tides than enterprises in neighboring countries, because local businesses can get money when they need it.  During the credit freezeup of 2009, things went on in Costa Rica pretty much as normal. Yes, there was a contraction in the economy, mostly as a result of a huge drop in foreign tourism, but it would have been far worse if local business had not been able to obtain financing when it was needed.  It was available because most lending activity is set by government policy, not by a local banker’s fear index.

Stability of the local economy is one of the reasons that Costa Rica has never had much difficulty in attracting direct foreign investment, and is still the leader in the region in that regard.  And it is clear to me that state banking is one of the principal reasons why.

The value and importance of a public banking sector to the overall stability and health of an economy has been well proven by the Costa Rican experience.  Meanwhile, our neighbors, with their fully privatized banking systems have, de facto, encouraged people to keep their money in Mattress First National, and as a result, the financial sectors in neighboring countries have not prospered.  Here, they have—because most money is kept in banks that carry the full faith and credit of the Republic of Costa Rica, so the money is in the banks and available for lending.  While our neighbors’ financial systems lurch from crisis to crisis, and suffer frequent resulting bank failures, the Costa Rican public system just keeps chugging along.  And so does the Costa Rican economy.

He concludes:

My dream scenario for any third world country wishing to develop, is to do exactly what Costa Rica did so successfully for so many years. Invest in the Holy Trinity of national development—health, education and infrastructure.  Pay for it with the earnings of state capitalist enterprises that are profitable because they are protected from ruinous foreign competition; and help out local private enterprise get started and grow, and become major exporters, with stable state-owned banks that prioritize national development over making bankers rich.  It worked well for Costa Rica for a generation and a half.  It can work for any other country as well.  Including the United States.

The new Happy Planet Index, which rates countries based on how many long and happy lives they produce per unit of environmental output, has ranked Costa Rica #1 globally.  The Costa Rican model is particularly instructive at a time when US citizens are groaning under the twin burdens of taxes and increased health insurance costs. Like the Costa Ricans, we could reduce taxes while increasing social services and rebuilding infrastructure, if we were to allow the government to make some money itself; and a giant first step would be for it to establish some publicly-owned banks.


Ellen Brown is an attorney, president of the Public Banking Institute, and author of twelve books, including the best-selling Web of Debt. In The Public Bank Solution, her latest book, she explores successful public banking models historically and globally. Her blog articles are at

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The Growing Rift With Saudi Arabia Threatens To Severely Damage The Petrodollar

The number one American export is U.S. dollars.  It is paper currency that is backed up by absolutely nothing, but the rest of the world has been using it to trade with one another and so there is tremendous global demand for our dollars.  The linchpin of this system is the petrodollar.  For decades, if you have wanted to buy oil virtually anywhere in the world you have had to do so with U.S. dollars.  But if one of the biggest oil exporters on the planet, such as Saudi Arabia, decided to start accepting other currencies as payment for oil, the petrodollar monopoly would disintegrate very rapidly.  For years, everyone assumed that nothing like that would happen any time soon, but now Saudi officials are warning of a "major shift" in relations with the United States.  In fact, the Saudis are so upset at the Obama administration that "all options" are reportedly "on the table".  If it gets to the point where the Saudis decide to make a major move away from the petrodollar monopoly, it will be absolutely catastrophic for the U.S. economy.

The biggest reason why having good relations with Saudi Arabia is so important to the United States is because the petrodollar monopoly will not work without them.  For decades, Washington D.C. has gone to extraordinary lengths to keep the Saudis happy.  But now the Saudis are becoming increasingly frustrated that the U.S. military is not being used to fight their wars for them.  The following is from a recent Daily Mail report...

Upset at President Barack Obama's policies on Iran and Syria, members of Saudi Arabia's ruling family are threatening a rift with the United States that could take the alliance between Washington and the kingdom to its lowest point in years.

Saudi Arabia's intelligence chief is vowing that the kingdom will make a 'major shift' in relations with the United States to protest perceived American inaction over Syria's civil war as well as recent U.S. overtures to Iran, a source close to Saudi policy said on Tuesday.

Prince Bandar bin Sultan told European diplomats that the United States had failed to act effectively against Syrian President Bashar al-Assad and the Israeli-Palestinian conflict, was growing closer to Tehran, and had failed to back Saudi support for Bahrain when it crushed an anti-government revolt in 2011, the source said.

Saudi Arabia desperately wants the U.S. military to intervene in the Syrian civil war on the side of the "rebels".  This has not happened yet, and the Saudis are very upset about that.

Of course the Saudis could always go and fight their own war, but that is not the way that the Saudis do things.

So since the Saudis are not getting their way, they are threatening to punish the U.S. for their inaction.  According to Reuters, the Saudis are saying that "all options are on the table now"...

Saudi Arabia, the world's biggest oil exporter, ploughs much of its earnings back into U.S. assets. Most of the Saudi central bank's net foreign assets of $690 billion are thought to be denominated in dollars, much of them in U.S. Treasury bonds.

"All options are on the table now, and for sure there will be some impact," the Saudi source said.

Sadly, most Americans have absolutely no idea how important all of this is.  If the Saudis break the petrodollar monopoly, it would severely damage the U.S. economy.  For those that do not fully understand the importance of the petrodollar, the following is a good summary of how the petrodollar works from an article by Christopher Doran...

In a nutshell, any country that wants to purchase oil from an oil producing country has to do so in U.S. dollars. This is a long standing agreement within all oil exporting nations, aka OPEC, the Organization of Petroleum Exporting Countries. The UK for example, cannot simply buy oil from Saudi Arabia by exchanging British pounds. Instead, the UK must exchange its pounds for U.S. dollars. The major exception at present is, of course, Iran.

This means that every country in the world that imports oil—which is the vast majority of the world's nations—has to have immense quantities of dollars in reserve. These dollars of course are not hidden under the proverbial national mattress. They are invested. And because they are U.S. dollars, they are invested in U.S. Treasury bills and other interest bearing securities that can be easily converted to purchase dollar-priced commodities like oil. This is what has allowed the U.S. to run up trillions of dollars of debt: the rest of the world simply buys up that debt in the form of U.S. interest bearing securities.

This arrangement works out very well for the United States because we can wildly print money and run up gigantic amounts of debt and the rest of the world gobbles it all up.

In 2012, the United States ran a trade deficit of about $540,000,000,000 with the rest of the planet.  In other words, about half a trillion more dollars left the country than came into the country.  These dollars represent the number one "product" that the U.S. exports.  We make dollars and exchange them for the things that we need.  Major exporting countries (such as Saudi Arabia) take many of those dollars and "invest" them in our debt at ultra-low interest rates.  It is this system that makes our massively inflated standard of living possible.

When this system ends, the era of cheap imports and super low interest rates will be over and the "adjustment" to our standard of living will be excruciatingly painful.

And without a doubt, the day is rapidly approaching when the petrodollar monopoly will end.

Today, Russia is the number one exporter of oil in the world.

China is now the number one importer of oil in the world, and at this point they are actually importing more oil from Saudi Arabia than the United States is.

So why should Russia, China and virtually everyone else continue to be forced to use U.S. dollars to trade oil?

That is a very good question.

In fact, China has been making a whole lot of noise recently about the fact that it is time to start becoming less dependent on the U.S. dollar.  The following comes from a recent CNBC article authored by Michael Pento...

Our addictions to debt and cheap money have finally caused our major international creditors to call for an end to dollar hegemony and to push for a "de-Americanized" world.

China, the largest U.S. creditor with $1.28 trillion in Treasury bonds, recently put out a commentary through the state-run Xinhua news agency stating that, "Such alarming days when the destinies of others are in the hands of a hypocritical nation have to be terminated."

For much more on all of this, please see my previous article entitled "9 Signs That China Is Making A Move Against The U.S. Dollar".

But you very rarely hear anything about this on the evening news, and most Americans do not understand these things at all.  The fact that the U.S. produces the de facto reserve currency of the planet is an absolutely massive advantage for us.  According to John Mauldin, this advantage allows us to consume far more wealth than we actually produce...

What that means in practical terms is that the United States can purchase more with its currency than it produces and sells. In theory those accounts should balance. But the world's reserve currency, for all intent and purposes, becomes a product. The world needs dollars in order to conduct its trade. Today, if someone in Peru wants to buy something from Thailand, they first convert their local currency into US dollars and then purchase the product with those dollars. Those dollars eventually wind up at the Central Bank of Thailand, which includes them in its reserve balance. When someone in Thailand wants to purchase an imported product, their bank accesses those dollars, which may go anywhere in the world that will take the US dollar, which is to say pretty much anywhere.

And as Mauldin went on to explain in that same article, a significant amount of the money that we ship out to the rest of the globe ends up getting reinvested in U.S. government debt...

That privilege allows US citizens to purchase goods and services at prices somewhat lower than those people in the rest of the world must pay. We can produce electronic fiat dollars, and the rest of the world accepts them because they need them to in order to trade with each other. And they do so because they trust the dollar more than they do any other currency that is readily available. You can take those dollars and come to the United States and purchase all manner of goods, including real estate and stocks. Just this week a Chinese company spent $600 million to buy a building in New York City. Such transactions happen all the time.

And there is one other item those dollars are used to pay for: US Treasury bonds. We buy oil and all manner of goods with our electronic dollars, and those dollars typically end up on the reserve balance sheets of other central banks, which buy our government bonds. It's hard to quantify the exact amount, but these transactions significantly lower the cost of borrowing for the US government. On a $16 trillion debt, every basis point (1/10 of 1%) means a saving of $16 billion annually. So 5 basis points would be $80 billion a year. There are credible estimates that the savings are well in excess of $100 billion a year. Thus, as the debt grows, the savings also grow! That also means the total debt compounds at a lower rate.

Unfortunately, this system only works if the rest of the planet has faith in it, and right now the United States is systematically destroying the faith that the rest of the world has in our financial system.

One way that this is being done is by our reckless accumulation of debt.  The U.S. national debt is now 37 times larger than it was 40 years ago, and we are on pace to accumulate more new debt under the 8 years of the Obama administration than we did under all of the other presidents in U.S. history combined.  The rest of the world is watching this and they are beginning to wonder if we are going to be able to pay them back the money that we owe them.

Quantitative easing is another factor that is severely damaging worldwide faith in the U.S. financial system.  The rest of the globe is watching as the Federal Reserve wildly prints up money and monetizes our debt.  They are beginning to wonder why they should continue to loan us gobs of money at super low interest rates when we are beginning to resemble the Weimar Republic.

The long-term damage that we are doing to the "U.S. brand" far, far outweighs any short-term benefits of quantitative easing.

And as Richard Koo has brilliantly demonstrated, quantitative easing is going to cause long-term interest rates to eventually rise much higher than they normally should have.

What all of this means is that the U.S. government and the Federal Reserve are systematically destroying the financial system that has enabled us to enjoy such a high standard of living for the past several decades.

Yes, the U.S. economy is not doing well at the moment, but we haven't seen anything yet.  When the monopoly of the petrodollar is broken, it is going to be absolutely devastating.

And as I wrote about the other day, when the next great economic crisis strikes it is going to pull back the curtain and reveal the rot and decay that have been eating away at the social fabric of America for a very long time.

Just check out what happened in Detroit recently.  The new police chief was almost carjacked while he was sitting in a clearly marked police vehicle...

Just four months on the job, Detroit’s new police chief got an early taste of the city’s hardscrabble streets.

While in his patrol car at an intersection on Jefferson two weeks ago, Police Chief James Craig was nearly carjacked, police spokeswoman Kelly Miner confirmed today.

Craig said he was in a marked police car with mounted lights when a man quickly tried to approach the side of his car. Craig, who became police chief in June, retold the story Monday during a program designed to crack down on carjackings.

Isn't that crazy?

These days, the criminals are not even afraid to go after the police while they are sitting in their own vehicles.

And this is just the beginning.  Things are going to get much, much worse than this.

So let us hope that this period of relative stability that we are enjoying right now will last for as long as possible.

The times ahead are going to be extremely challenging, and I hope that you are getting ready for them.

The U.S. Labor Force Participation Rate Is At A 35 Year Low

The percentage of Americans that are participating in the labor force is the lowest that it has been in 35 years.  During the 70s, 80s and 90s, the labor force participation rate consistently rose as large numbers of women entered the workforce.  It peaked at 67.3 percent in early 2000, and just before the last recession it was sitting at about 66 percent.  Since the start of the last recession, the labor force participation rate has not stopped falling and it is now at a 35 year low.  In September, 11,255,000 Americans were considered to be "unemployed", and an astounding 90,609,000 Americans were considered to be "not in the labor force".  The number of Americans "not in the labor force" has increased by more than 10 million since Barack Obama entered the White House.  When you add the number of unemployed Americans to the number of Americans "not in the labor force", you come up with a grand total of more than 101 million working age Americans that do not have a job.

The Obama administration and the mainstream media continue to insist that we are in the midst of an "economic recovery", but that is a total joke.  Does the chart posted below look like a recovery to you?...

Americans are leaving the labor force in droves.  If the labor force participation rate was at the same level that it was when Obama first became president, the official unemployment rate would be up around 10 percent and everyone would be wondering when the "economic depression" would finally end.

It is funny how our perceptions of reality are so greatly shaped by what our televisions tell us to think.

Below I have posted a chart of the "inactivity rate" of U.S. men in the 25 to 54-year-old age group.  As you can see, the percentage of men in their prime working years that are not employed and not considered to be unemployed either has been rising steadily...

We have millions upon millions of men just sitting around and doing essentially nothing.  Not that women are doing so much better.  In fact, the labor force participation rate for women is at a 24 year low.

Some people may be tempted to think that all of this is happening because more Americans are choosing to stay home and raise children.  But that is not the case at all.  In fact, in a previous article I showed that the marriage rate in the U.S. is at an all-time low and the birth rate for young women in this country is also at an all-time low.

People are not staying home because of family obligations.  Rather, people are staying home because there aren't enough jobs available.

And when Americans that are actually employed do lose their jobs, it is taking them a very, very long time to find another one.  Just check out the following chart...

Once again, I must ask - does that look like a "recovery" to you?

Obama can say the word "recovery" as much as he would like, but that does not make it a reality.

So is anyone out there actually doing well?

Yes, as I have talked about frequently, some pockets of the country are doing quite nicely.  In fact, government workers (think Washington D.C.) and finance workers (Wall Street, etc.) are tied for the lowest rates of unemployment in the nation (3.9 percent).

But for almost everyone else, things are very hard right now and poverty continues to grow.

Just today, I came across a recent study that discovered that nearly half of all public students in the United States come from low income homes.

That is an incredible number.

But this is just the beginning of our problems.  Our debt continues to grow by leaps and bounds and our big banks are engaging in extraordinarily reckless behavior.  As Richard Russell recently discussed, it is only a matter of time before this entire house of cards comes tumbling down...

In this whole process, debt has been created to an extent never seen before in history.  So far, the debt has been managed with super-low interest rates and borrowing.  But the compounding process goes on, and the debt mountain continues to grow.  So, to be brief, I see the theme of today as the “haves” doing whatever they have to -- to remain in power.

The dangers in the background for the haves are the possibilities that (1) interest rates will begin to advance, and (2) inflation will rise and be so visible that even the common man will recognize it, and begin to protest, or even revolt and (3) the whole debt structure will rise so high that it will topple over of its own weight and take down the entire world economy with it.

So as bad as things are today, the truth is that they are far, far better than what is eventually coming.

If you want to get a glimpse of the future of the U.S. economy, just check out what has happened to Greece...

Greeks are on average almost 40 percent poorer than they were in 2008, data indicated, laying bare the impact of a brutal recession and austerity measures the government may be forced to extend into next year.

Gross disposable incomes fell 29.5 percent between the second quarters of 2008 and 2013, statistics service ELSTAT said on Tuesday. Adding in cumulative consumer price inflation over the same period takes the decline close to 40 percent.

As you can see from the charts posted above, our economy has never even come close to getting back to the level that we were at before the last financial crisis.

And now the next wave of the economic collapse is approaching.

Right now, Spain has an unemployment rate that is above 26 percent and Greece has an unemployment rate that is above 27 percent.

We will eventually be heading up toward those levels.

As millions of good paying jobs continue to be shipped overseas, and as technology continues to eliminate millions of our jobs, the unemployment situation in this country will continue to grow even worse.

And whenever the next great financial crisis inevitably strikes, that will greatly accelerate our employment problems.

If you can move toward becoming more independent of the "system", now would be a good time to do so.  The job that you have today may not be there next month or next year.

We are moving into the greatest period of economic instability in U.S. history.

Get ready for it while you still can.

Another One Trillion Dollars ($1,000,000,000,000) In Debt

Did you know that the U.S. national debt has increased by more than a trillion dollars in just over 12 months?  On September 30th, 2012 the U.S. national debt was sitting at $16,066,241,407,385.89.  Today, it is up to $17,075,590,107,963.57.  These numbers come directly from official U.S. government websites and can easily be verified.  For a long time the national debt was stuck at just less than 16.7 trillion dollars because of the debt ceiling fight, but now that the debt ceiling crisis has been delayed for a few months the national debt is soaring once again.  In fact, just one day after the deal in Congress was reached, the U.S. national debt rose by an astounding 328 billion dollars.  In the blink of an eye we shattered the 17 trillion dollar mark with no end in sight.  We are stealing about $100,000,000 from our children and our grandchildren every single hour of every single day.  This goes on 24 hours a day, month after month, year after year without any interruption.

Over the past five years, the U.S. government has been on the greatest debt binge in history.  Unfortunately, most Americans don't realize just how bad things have gotten because the true budget deficit numbers are not reported on the news.  The following is where the U.S. national debt has been on September 30th during the five years previous to this one...

09/30/2012: $16,066,241,407,385.89

09/30/2011: $14,790,340,328,557.15

09/30/2010: $13,561,623,030,891.79

09/30/2009: $ 11,909,829,003,511.75

09/30/2008: $10,024,724,896,912.49

The U.S. national debt is now 37 times larger than it was 40 years ago, and we are on pace to accumulate more new debt under the 8 years of the Obama administration than we did under all of the other presidents in U.S. history combined.

Of course all of the blame can't be placed at the feet of Obama.  During the last two elections the American people have given the Republicans a solid majority in the U.S. House of Representatives, and the government cannot spent a single penny without their approval.

Unfortunately, House Speaker John Boehner and the Republicans that are allied with him have repeatedly turned their backs on the people that gave the Republicans the majority and they have authorized trillions of dollars of new debt which will be passed on to future generations of Americans...

Since John Boehner became speaker of the U.S. House of Representatives on Jan. 5, 2011, the debt of the federal government has increased by $3,064,063,380,067.72. That is more than the total federal debt accumulated in the first 200 years of the U.S. Congress--during the terms of the first 48 speakers of the House.

In fact, if all of that debt had been given directly to the American people, every household in America would have been able to buy a new truck...

The $26,722 in new debt per household accumulated under Speaker Boehner would have been more than enough to buy every household in the United States a minivan or pickup truck--or to pay three years of in-state tuition (not counting room and board) at the typical state college.

Sometimes we forget just how much money a trillion dollars is.  In a previous article, I included some illustrations that I believe are helpful...

-If you were alive when Jesus Christ was born and you spent one million dollars every single day since that point, you still would not have spent one trillion dollars by now.

-If right this moment you went out and started spending one dollar every single second, it would take you more than 31,000 years to spend one trillion dollars.

We are doing the exact same thing that Greece did, only on a much larger scale.  What we are doing is not even close to sustainable, and it will inevitably end very, very badly.  The following is what Michael Pento, the president of Pento Portfolio Strategies, told RT the other day...

"That $17 trillion everybody says its 107 percent of GDP, that’s true. But who really cares about the percentage of GDP? It’s the percentage of the debt as a percentage of the revenue – its 700 percent of our revenue. Deficits are growing at 30 percent of our revenue every year added to the deficits we have already. So it’s unsustainable. What is going to happen eventually – a currency and bond market collapse! And it’s not going out 20 years, as I also heard someone mention. In 2016 we’ll probably be spending 40 percent of all of our revenue just to service our debt. That is what the interest payments will equal."

The U.S. debt situation is so bad that even the Prime Minister of Cyprus is scolding us...

"The U.S. has been fortunate in the sense that it’s like a bank, it prints the money that other people accept. So you can live beyond your means over an extended period of time without being punished by the market."

Unfortunately, we will not be able to live way beyond our means forever.  Reality is going to catch up with us at some point.

Right now, the rest of the world is lending us giant mountains of money at interest rates that are far below the real rate of inflation.  This is extremely irrational behavior, and this state of affairs will probably not last too much longer.

But if interest rates go up, it will absolutely cripple the U.S. economy.  For much more on this, please see this article.

And what would make things much, much worse is if the rest of the globe starts moving away from using the U.S. dollar.  At the moment, the U.S. dollar is the de facto reserve currency of the planet and this creates a tremendous demand for U.S. dollars and U.S. debt.

If that changes, it will be absolutely catastrophic for the United States, and unfortunately there are already lots of signs that this is already starting to happen.  I wrote about this in my recent article entitled "9 Signs That China Is Making A Move Against The U.S. Dollar".

But don't just take my word for it.  Just a couple of days ago a major U.K. newspaper came to the same conclusions...

China has overtaken the US as the world’s largest oil importer and goods trading nation. Over the next five years, it will surpass the rest of the world combined in its consumption of base metals.

Given the scale of the country’s consumption of fossil fuels and raw materials, it is only a matter of time before the renminbi replaces the dollar as the primary currency for trading commodities and resources such as crude oil and iron ore.

The debt ceiling farce in Washington and China’s growing reluctance to continue underwriting the US economy by buying up its bonds and adding to America’s near $17 trillion (£10.5 trillion) debt mountain suggests that this tectonic shift in the global trade system could be just around the corner.

So what will happen when the rest of the world decides that they don't need to use our dollars or buy our debt any longer?

At that point the consequences of decades of incredibly foolish decisions will result in an avalanche of economic pain that the American people are not prepared for.

Earlier today, I came across a photograph that perfectly captures what America is heading for.  The following photo of Mt. Rushmore crying has not been photoshopped.  It was taken by Megan Ahrens and it was posted on the Tea Party Command Center.  If George Washington was alive today, this is probably exactly how he would feel about the nation that he helped establish...

Things That Make You Go Hmmm… Like The Freaking Fed

The Fed has painted itself into an almighty corner with QE, and it looks as though we are finally getting to the point in the process where that fact begins to (a) occur to people and (b) matter.

Bill Fleckenstein has often spoken about the Fed's reaching the point where it "loses control of the bond market", and it is quite possible that we are rapidly approaching that point (the signs have certainly been strong in Japan). We may be there already. We won't know until we can look in the rearview mirror, I'm afraid; but the nonvirtuous circle the Fed has created is extremely clear:

The simple truth, as you can see from the diagram above, is that the economy and the markets are now 100% dependent on the largesse of the Federal Reserve to sustain them. What you CAN'T see from the diagram is the scary proposition that the Federal Reserve in turn is entirely dependent upon hope to get itself out of this unholy cycle.

The Fed is hoping (as are the ECB, BoE, and BoJ) that the economy recovers sufficiently through massive stimulus so that the recovery will be "self-sustaining"; but, as can clearly be seen by the action of the markets in recent weeks and months, that strategy (such as it is) appears doomed to failure.

Fortunately, Obama has finally been left with just nominated Janet Yellen as the new Fed chair, and she can be relied upon to continue Greenspan & Bernanke's work in conjuring unlimited free money out of thin air

Which is great for the status quo, but if we take another look at that chart of the US 10-year Treasury yield again, we see something that ought to set alarm bells ringing...

The retracement of interest rates AFTER the Fed's refusal to follow up their tough talk with a Taper has been far less marked than the rout that ensued after the subject was first tabled; and that spells trouble, because the housing market — the engine of the US "recovery" — cannot stand higher rates without being choked off...


Well, Janet Yellen might well confound everybody and launch the Taper as her first order of business. Or Buysenberg may even begin it as his last act in power; but either way, the market will now likely call the Fed's bluff, because it knows that the gun hanging on the wall in the shape of the Taper is not guaranteed to be fired. It may even turn out to be completely superfluous to the narrative; and if that is the case, then chances are it will never be fired.

Just as Walter White's honest intentions in trying to protect his family ended up trapping him in an ever-worsening spiral where countless millions of dollars only made his situation worse, Ben Bernanke is in a similar prison of his own making.


The Fed realizes the truth of that — hence the abandonment of both the Taper and their own credibility — but their chances of averting catastrophe are receding daily.

Full Grant Williams Letter below...

Ttmygh 14 October 2013

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Theater Of The Absurd: Greenspan Writes Book On Economic Forecasting

Given his track record, Alan Greenspan's publication of a guide to economic forecasting will likely prove as successful as Lance Armstrong's guide to drug-free cycling. As Bloomberg reports, Greenspan's new book "The Map and the Territory" is about as credible as art history by Mr. Magoo; as it pretends to tackle the subject of forecasting while saying next to nothing about the author’s historic failure to reduce the risks leading to the crisis, which he calls "almost universally unanticipated." Bloomberg's Daniel Akst sums it up best with his concluding sentence: "'The Map and the Territory' is an infuriating book, one that will leave readers wondering how its author could have come all this way and yet remain so hopelessly lost." Indeed...

Via Bloomberg,


As Fed chairman until 2006, practically the eve of the financial crisis, Greenspan couldn’t see the storm on the horizon.

Despite his mastery of the techniques described at somewhat numbing length in his book, he failed to draw any useful conclusions from a host of indicators that were pointing to trouble.

Omens were plentiful: the bubble in housing prices, the gross inadequacy of banking capital, the systemic risks of money-market funds, the explosive dangers of complex derivatives, the rise of an enormous and poorly regulated shadow banking system, the transparent pandering of the bond-rating companies, the collapse in mortgage-lending standards and the massive overleveraging of U.S. consumers.


“The Map and the Territory” pretends to tackle the subject of forecasting while saying next to nothing about the author’s historic failure to reduce the risks leading to the crisis, which he calls “almost universally unanticipated.”


Greenspan’s plodding text oscillates maddeningly between equivocation and chutzpah. He implies that it was a mistake to bail out the big banks in 2008, yet doesn’t say what he would have done instead, leaving us to wonder if, in Ben Bernanke’s shoes, he would have let the global financial system go up in flames.


But this is an odd concern from the man whose actions as Fed chief gave rise to faith in the “Greenspan put,” the notion that, while he was in office, the central bank would rush to float sinking markets with lower interest rates whenever they faltered.

“The Map and the Territory” is an infuriating book, one that will leave readers wondering how its author could have come all this way and yet remain so hopelessly lost.

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Republicans Have Done Real Damage to the Economy

Republicans believe that a bad economy works for them at election time. The thinking is that the public will turn on Democrats for not making things better. So they do what they can to make the economy bad. But maybe they went too far this time. This hostage-taking episode has done real, serious, lasting damage to the economy on top of the ongoing damage Republicans have been doing. Will the public still blame Democrats, or will they finally see what is going on here?

The Damage Last Time

Look what happened the last time (2011) Republicans threatened to force the country to default on its debts.

The 2011 hostage-taking hit jobs. In Debt-Ceiling Deja Vu Could Sink Economy Bloomberg reported that, "Growth in nonfarm payrolls decelerated to an average 88,000 a month during the three months of the debt-ceiling impasse, compared with an average of 176,000 in the first five months of 2011." Consumer confidence plunged to a 31-year low. The Conference Board's consumer confidence index fell from 59.2 to 44.5.

In November, 2012, the Bipartisan Policy Center released a "Debt Limit Analysis" estimating the costs of the 2011 hostage-taking:

The Government Accountability Office (GAO) issued a report detailing additional costs to taxpayers as a result of the 2011 debt limit increase

  • A substantial cost to taxpayers stemmed from elevated interest rates on U.S. securities issued in 2011 prior to when the debt limit was increased in August
  • GAO conducted an economic analysis to estimate the resulting change in interest rates
  • For Fiscal Year 2011, GAO estimated additional interest costs to taxpayers of $1.3 billion

The cost of the event to the federal government, however, continues to accrue because many of the bonds issued during that period remain outstanding

  • BPC extended GAO's methodology to analyze the long-term cost to taxpayers stemming from the elevated interest rates
  • Estimate of the ten-year cost to taxpayers of the 2011 debt limit standoff = $18.9 billion
  • To put this in perspective, the Congressional Budget Office (CBO) estimates that the "Doc Fix" to prevent the scheduled 27% cut to Medicare physician payments for 2012 cost $18 billion over ten years

That is serious damage. And, of course, the 2011 fight resulted in a downgrading of the US credit rating.

(See also: Think Progress, CHARTS: How The Debt Ceiling Debacle Hurt The Economy)

The Damage This Time

In this hostage fight the immediate damage is much worse than 2011. Consumer confidence, for example, has plunged even more dramatically than during the last debt-ceiling hostage-taking. But these measurements were taken only a week into the fight.

Standard & Poor's ratings agency has done some early calculations of the damage and says, "the shutdown has shaved at least 0.6% off of annualized fourth-quarter 2013 GDP growth, or taken $24 billion out of the economy." Note the words "at least." This is an early estimate and does not count direct costs to government and costs to government contractors.

The NY Times today summarizes some of the damage from this hostage-taking, in Gridlock Has Cost U.S. Billions, and the Meter Is Still Running,

Containers of goods idling at ports. Reduced sales at sandwich shops in downtown Washington. Canceled vacations to national parks and to destinations abroad. Reduced corporate earnings forecasts. Higher interest payments on short-term debt.

Even with the shutdown of the United States government and the threat of a default coming to an end, the cost of Congress's gridlock has already run well into the billions, economists estimate. And the total will continue to grow even after the shutdown ends, partly because of uncertainty about whether lawmakers might reach another deadlock early next year.

One example of the damage from this fight – just one,

Residential real estate, which has been one of the brightest points of the recovery, suffered. An index of sentiment among home builders fell in October from a month earlier, according to data released on Wednesday from the National Association of Home Builders. The decline was greater than analysts had expected. One cause for the decline is that the approval process for government-backed mortgages has slowed with the shutdown.

The Damage From Cutting Instead Of Investing

Republicans have forced the country into an austerity mode, instead of an invest and job-creation mode. Everything is being cut, so that the billionaires and their giant corporations can have lower taxes. Aside from the sequester cuts there have been trillions in other cuts.

Paul Krugman writes about this ongoing damage today in a blog post, What A Drag, estimating that just two of the cuts we have experienced (not counting other cuts and the sequester) have cut "about $200 billion of fiscal contraction at an annual rate, or 1.25 percent of GDP, probably with a significant multiplier effect."

That's just those two pieces of Republican damage to our economy. Looking at the overall effect of austerity on our economy,

"Add this to the effects of sharp cuts in discretionary spending and the effects of economic uncertainty, however measured, and I don't think it's unreasonable to suggest that extortion tactics may have shaved as much as 4 percent off GDP and added 2 points to the unemployment rate."

Damage: 4% off GDP and 2% added to unemployment.

The Sequester Damage

Then there is the ongoing economic damage done by the sequester cuts. Republicans hail the sequester's cuts as a great victory, an accomplishment in their ongoing fight to destroy government, but in reality the cuts are costing jobs and hitting the economy.

The 2013 job-loss from the sequester cuts is estimated at only 800,000 jobs, but the 2014 job loss is estimated to be 1.6 million.

These job-loss and slow-growth numbers do not include the ripple effect into the larger economy, nor the longer-term cost to our economy from the cuts to scientific research, education, child nutrition and other cuts.

And these cuts don't even save the government money! One example of the costs of the sequester cuts comes from the effect of cuts in the Meals On Wheels program. Because of the cuts, many elderly end up in hospitals with malnutrition-related problems, and/or are forced into nursing homes because they can no longer live at home. Aside from the cruelty and resulting human suffering (not considered a "cost") this costs money from government services including Medicare and Medicaid.

The Ongoing Damage From Obstruction

Republicans have been obstructing ... everything. The ongoing economic damage has been just incredible but because it gradually worsens things the public is not as aware as they should be. There are two obstructions taking place. In the Senate Republicans have been filibustering every bill, every nominee ... everything. In the House the "Hastert Rule" prevents the majority of the Congress from being able to vote. By preventing bills from coming up for a vote if they might be passed by a majority that includes Democrats and some "RINO" Republicans, anything that could help the country and economy is blocked.

So along with the series of manufactured crises there is a constant, ongoing drag because people have come to believe government will generally continue to hamper rather than boost economic progress. They see no jobs programs coning down the pike, see the infrastructure crumbling, and see the corporate/billionaire-favoring trade deals killing jobs.

Krugman again, from his blog post, What A Drag,

The now widely-cited Macroeconomic Advisers report estimated the cost of crisis-driven fiscal policy at 1 percentage point off the growth rate for three years, or roughly 3 percent now. More than half of this estimated cost comes from the "fiscal drag" of falling discretionary spending, with the rest coming from a (shaky) estimate of the impacts of fiscal uncertainty on borrowing costs.

The Damage Next Time

So what will the damage be next time, and how can we fight it? Yesterday's "deal" only puts off the fight for a few months. With more of this on the horizon companies will be hesitant to hire or invest. Consumers will remain wary and distrustful.

Republicans still have one power: the power to destroy. And they will use that power until we take it away from them.

Old Tanks & Modern Mayhem

Sofia, Bulgaria.

The military museum in this sprawling capitol city consists of a tiny building and a huge outdoor display of weapons that look as if they had been wheeled in fresh from the battlefields and parked, higgledy piggledy: mountain howitzers that shelled Turks in 1912 rub hubs with Cold War era Russian artillery.  MIGs, dusty and weather beaten, crowd a sinister looking Luna-M “Frog” tactical nuclear missile.  Two old enemies, a sleek German Mark IV Panzer and its dumpy, but more lethal adversary, a Russian T-34, squat shoulder to shoulder.

Poor Bulgaria. The Russians won’t be back, but once again the Germans are headed their way, only this time armed with nothing more than a change of currency and the policies of austerity that go along with it. The devastation those will inflict, however, is likely to be considerable.

Bulgaria is preparing to jettison its own, the lev, and adopt the Euro, the currency of the European Union (EU), although the country has dragged its heels about actually making the switch. With good reason. Currency control is a practical and commonsense way for countries to deal with interest rates, debt, and inflation, as well as to stimulate economic activity. The U.S. Federal Reserve constantly manipulates the dollar to accomplish these goals.

But the Euro is controlled by the European Central Bank based in Frankfort, Germany. Because Germany has the biggest economy in the EU, and is at the center of a “core” of wealthy nations that also use the Euro—France, Austria, and the Netherlands—Berlin largely calls the shots. That has translated into a tight-fisted control of the money supply, an aversion to economic stimulation, and years of enforced austerity for countries trying to recover from the 2007 economic crisis sparked by the U.S..

The result, according to Martin Wolf of the Financial Times, is that in addition to Mercedes and BMWs, Germany “exports bankruptcy and unemployment.”

Hardest hit by these policies are the “distressed six”: Greece, Ireland, Italy, Portugal, Spain and Cyprus, where draconian austerity policies have created soaring unemployment, devastating social services cutbacks, and widespread misery.

Led by German Chancellor Angela Merkel and Conservative British Prime Minister David Cameron—Britain retains its own currency, but has been an enthusiastic supporter of Germany, and has applied austerity to its own economy—the strategy has been an unmitigated disaster.

While supporters of this “slash and cut” approach to reviving the European economy claim their policies are a success—German Finance Minister Wolfgang Schauble says the world should “rejoice” at recent economic figures, and British Chancellor of the Exchequer George Osborne crows that critics of the strategy have been proven wrong—figures show a very different picture.

The overall EU jobless rate is 12 percent, although that figure is misleading because it varies so much by country, region, and cohort. Unemployment is 12 percent in Italy, 13.8 percent in Ireland, 16.5 percent in Portugal, 26.3 percent in Spain, and 27.9 percent in Greece. And even these figures make the jobless rate look sunnier than it is. Unemployment among Greek youth is 60 percent, and areas of southern Spain post numbers in excess of 70 percent. Indeed, an entire generation of young people across the continent is being cut out of the economic pie.

“It is true that unemployment figures have improved in recent times, but it is equally true that unemployment is at such a high level that any marginal improvement is irrelevant,” an Madrid-based economist for Exane BNP Paribas told the Financial Times. “Many people are no longer actively looking for jobs and long term unemployment already affects more than 50 percent of the total unemployed population.”

Figures also show that EU growth rates are essentially dead in the water, which means that it will be years before there is any real fall in the jobless rate. EU gross domestic product is 3 percent below pre-crisis levels and those figures go sharply south for the distressed six: down 7.5 percent for Spain, 7.6 percent for Portugal, 8.4 percent for Ireland, 8.8 percent for Italy, and 23.4 percent for Greece.

It is true that growth in Britain is up 2.2 percent, but that figure is over three years and remains 3.3 percent below pre-crisis levels. Moreover, the Office of Budget Responsibility projected back in 2010 that the economy would expand by 8.2 percent by 2013. Economists Oscar Jorda and Alan Taylor of the University of California at Davis estimate that austerity probably knocked about 3 percent off of the British growth rate.

The EU is turning into a house divided. A wealthy core that keep their economies on an even keel and unemployment rates relatively low—Austria and Germany have the lowest jobless rates in the EU at 5.2 and 5.3 percent, respectively—while the south and the periphery turn into low wage, high unemployment labor reservoirs. If “core” workers grumble at stagnant wages and reduced benefits, there are always Spaniards, Italians, Greeks and Portuguese willing to take their places.

What the distressed countries really need is a serious stimulus program to jump-start their economies by putting people back to work. But that is not something they are likely to get, especially given the outcome of the recent German elections, where Merkel’s Christian Democrats and her allies in the Bavarian Christian Social Union retained power. Merkel told a rally in Berlin, “Our European course will not change,” and the Greek newspaper Ta Nea glumly called it a victory for the “Queen of austerity.”

In reality, the German election was less a vote for more austerity than a reflection of domestic concerns about stability. And, in any case, Merkel’s opponents actually won the election. Merkel and her allies control 311 seats in the Parliament, but the Greens, Social Democratic Party and Left Party won 329 seats. While the Greens and Social Democrats have acquiesced to some austerity policies, they are not as hard line as Merkel. If the Greens and the SDP could overcome their hostility to the Left Party—which took 64 seats, one more than the Greens—the center-left could form a government that could potentially alter the economic chemistry of the EU.

In the meantime, Bulgaria awaits its fate with an odd combination of clear sightedness and illusion.

Surveys show that most people think the Euro will cut their living standards and have a negative impact on the economy. Bulgaria is already in difficult straits, partly because when it joined the EU it lost its biggest customer, Russia, partly because it is small, and partly because it still suffers from a post-communist hangover. It is the poorest country in the EU.

Like many former communist bloc countries, when Bulgaria broke loose from the domination of Soviet Union in 1990, it went on a privatization tear that ended up largely gutting its industrial and agricultural base. It is now trying to claw back by reviving agriculture and building up the tourist industry.

But tourism is volatile, and Bulgaria appears to have over expanded, much as Spain did. The Black Sea coast south of Burgas is lined with high rises and gated communities, but many of them are dark when the sun goes down. There is a distinct feel of a real estate bubble.

The illusion is that Bulgarians support EU membership because they think it means the Union will bail them out of any future trouble, as it did Greece, Spain, Portugal and Ireland. In fact, the Union did not bail out any of those countries; it rescued failed banks and financial institutions that had recklessly gambled away their assets on real estate speculations. These “loans” also required huge cutbacks in social services and massive layoffs of public workers.

When the bubble popped, it was taxpayers in those countries who ended up picking up the bill, including those incurred by “core” French, German, Dutch, Austrian and British banks.

In the coming war over “stimulus vs austerity” Bulgaria is unlikely to play a pivotal role, though conquerors have underestimated her in the past. The question is, will the country resign itself to second tier status in the EU, or will Bulgarians join with increasing numbers of Greeks, Spaniards and Portuguese who are saying “enough”?

A good start toward turning things around would be to take up a call by Greece’s Syriza Party for a European debt summit similar to the 1953 London Debt Agreement, That pact allowed Germany to recover from World War II by cutting its debt by 50 percent and spreading payments out over 30 years.

The Mark IVs Panzers are museum pieces. These days the power to wreak destruction doesn’t depend on commanding armored divisions. All one needs to overrun Europe now are currency control, banks and obsequious politicians.

Conn Hallinan can be read at

This is just a beginning: Gezi resistance and the legitimacy crisis of the AKP...

Last summer, Turkey has witnessed an unprecedented social mobilisation, maybe the most significant and intensive one in the post-1980 military coup period. Between the 28 and 30 of May, a group of environmentalists, who were camped in the Gezi Park to prevent the destruction of the park for the re-construction of the 18thcentury Ottoman Taksim Barracks, were violently evicted by the police. While the activists were beaten and tear gassed, their tents and equipment were burned by the officials. This sparked a massive outrage and paved the way to the subsequent demonstrations and clashes with the police forces that lasted for almost four months. In this guest post, Ertan Erol assesses the wider implications of this moment of social mobilisation in Turkey.

Photo by Sterneck
The reaction of the members of the governing Justice and Development Party (AKP) remained undecided and more or less surprised until the Prime Minister Recep Tayyip Erdogan concretised his hard-line position accusing the protestors of being looters and part of a foreign conspiracy that aims to increase interest rates and, thus, damage the Turkish economy. While the PM gradually elevated his criticisms on the protests and launched series of pro-government rallies called ‘Respect to People’s Will’ in the major cities of Turkey, the pro-government media launched a campaign of slander making various claims about the protesters, allegedly showing their links with foreign agents and their fanatically anti-religious and anti-Islamic orientations. In the international arena the AKP officials also continuously claimed that the police reaction was moderate, at least not heavier or different than the use of police force in the Western world. PM Erdogan himself gave the example of the police intervention during the Occupy Wall Street events in New York claiming that 17 people had been killed, which was immediately refuted by the US Embassy in Ankara. 
Photo by eser.karadag
Nevertheless, the AKP’s arguments trying to justify the use of police force during the Gezi Resistance have no credibility. A recent report published by Amnesty International (October 2013) noted that the right of peaceful assembly that is protected by various international conventions and by the 34th article of Turkey’s constitution was arbitrarily denied in many parts of the country due to the abusive use of force by the police (quoting the Turkish Medical Association): 8000 people were injured of which 61 severely, 11 lost an eye, 104 suffered head injuries and 3 people died as the direct result of the brutal use of force (2013: 15). In the same report it was also stated that the police force abused the use of less lethal weapons such as tear gas and water cannons. According to government sources only in the first 20 days of the protests 130.000 gas canisters had been used, while 60 water cannons, which in some cases carried water mixed with chemical irritants that might cause first degree burns on human skin, were arbitrarily implemented against the protestors and bystanders (2013 18, 19). The report also noted unofficial detentions, sexual assaults, beatings by the police force, and the arbitrary prosecutions and raids aimed at organisers of the protests, lawyers, journalists, medical personnel and social media users. 

Photo by eser.karadag
The Gezi Protests and the violent, repressive and illegal response by the government and its law enforcement forces was immediately interpreted as an authoritarian turn in the AKP’s 11 years of rule. However, I argue that the protests and the government’s strong response needs to be located and identified within a wider process of neoliberal re-territorialisation of Turkey in the last three decades. Only by doing that, is it possible to identify these protests in the context of legitimacy crises that neoliberal hegemony is also facing simultaneously in other parts of the world such as Mexico, Chile, Brazil and Colombia.

Photo by eser.karadag
 In that sense, it is indispensible to look back to 2010 and pin down the TEKEL workers’ resistance as a turning point, which should be seen as the beginning of the political legitimacy crisis of the AKP rule. In 2010 when the state tobacco company TEKEL was privatised and the TEKEL workers were forced to choose between resignation and accepting to sign yearly contracts, which were not guaranteed to be renewed, the TEKEL workers launched a fierce campaign of resistance and camped in a public park in Ankara. Since the 1980 military coup, it had been the first time a working class movement was able to mobilise and maintain a significant amount of people. It is possible to argue that the reason why the AKP government used brutal police force to disperse the workers and protesters was the vitality of the case as the most obvious crack in the neoliberal hegemonic coalition that the AKP was representing. Thus, the TEKEL resistance became a turning point both for the government and the social movements either in the urban areas concerning public spaces or in the rural areas against the construction of micro dam projects. Since the TEKEL resistance it has become practically impossible to make a public demonstration criticising government policies without receiving strong police intervention with tear gas, detention and arbitrary legal prosecution. In 2013, starting from a protest in Taksim against the destruction of an old cinema building to the clashes following the prohibition of the May Day celebrations in Taksim square, the erosion of the political legitimacy of the AKP government increased the repressive response of these peaceful protests. This situation paved the way to the social explosion on 31st May which led to the four months of anti-government protests and different forms of political disobedience, which are now all summed up under the name of Gezi resistance. The impact of neoliberal re-territorialisation of public space in Istanbul coincided with the wider aspects of the crisis of neoliberal hegemony, which led to the explosion of social struggles and opened up significant space of self-determination and counter-hegemonic socio-spatial practices.

Photo by Sabo Tabi
Hoping to tackle this problem of legitimacy, the AKP government recently presented a series of liberalising reforms, a ‘democratisation package’, offering changes such as lifting the ban on the use of headscarf by public servants, or the general use of Kurdish letters Q, X and W and the original names of Kurdish towns, as well as returning the land previously belonging to an Assyrian Monastery in the southeast of Turkey. However, the package can hardly be perceived as a serious attempt of democratisation, since it is far from satisfying even the basic demands of the minority groups in Turkey or responding to the calls of the general public such as for the elimination of the 10 percent national threshold in general elections.    
In this context, one of the most common slogans of the protests becomes more meaningful: ‘This is just a beginning, the struggle will continue’. There is a direct link between the TEKEL resistance, the resistance in the Anatolian mountains and the Gezi Park protests, and additionally between the recent social struggles in Chile, Mexico, Brazil and Colombia. All are responses to processes of neoliberal re-territorialisation of social space on the periphery of global capitalism. Therefore, it should be expected that we will witness a continuous proliferation of social mobilisations and resistances in these countries, as neoliberal restructuring intensifies and extends the contradictions of neoliberal hegemony across different social scales.  

Ertan Erol has finished his PhD on the regional integration and development projects of Mexico and Turkey at the University of Nottingham in 2013. He is now working in the Department of International Relations at the University of Istanbul as an assistant researcher.

9 Signs That China Is Making A Move Against The U.S. Dollar

The U.S. DollarOn the global financial stage, China is playing chess while the U.S. is playing checkers, and the Chinese are now accelerating their long-term plan to dethrone the U.S. dollar.  You see, the truth is that China does not plan to allow the U.S. financial system to dominate the world indefinitely.  Right now, China is the number one exporter on the globe and China will have the largest economy on the planet at some point in the coming years.  The Chinese would like to see global currency usage reflect this shift in global economic power.  At the moment, most global trade is conducted in U.S. dollars and more than 60 percent of all global foreign exchange reserves are held in U.S. dollars.  This gives the United States an enormous built-in advantage, but thanks to decades of incredibly bad decisions this advantage is starting to erode.  And due to the recent political instability in Washington D.C., the Chinese sense vulnerability.  China has begun to publicly mock the level of U.S. debt, Chinese officials have publicly threatened to stop buying any more U.S. debt, the Chinese have started to aggressively make currency swap agreements with other major global powers, and China has been accumulating unprecedented amounts of gold.  All of these moves are setting up the moment in the future when China will completely pull the rug out from under the U.S. dollar.

Today, the U.S. financial system is the core of the global financial system.  Because nearly everybody uses the U.S. dollar to buy oil and to trade with one another, this creates a tremendous demand for U.S. dollars around the planet.  So other nations are generally very happy to take our dollars in exchange for oil, cheap plastic gadgets and other things that U.S. consumers "need".

Major exporting nations accumulate huge piles of our dollars, but instead of just letting all of that money sit there, they often invest large portions of their currency reserves into U.S. Treasury bonds which can easily be liquidated if needed.

So if the U.S. financial system is the core of the global financial system, then U.S. debt is "the core of the core" as some people put it.  U.S. Treasury bonds fuel the print, borrow, spend cycle that the global economy depends upon.

That is why a U.S. debt default would be such a big deal.  A default would cause interest rates to skyrocket and the entire global economic system to go haywire.

Unfortunately for us, the U.S. debt spiral cannot go on indefinitely.  Our debt is growing far, far more rapidly than our GDP is, and therefore our debt is completely and totally unsustainable.

The Chinese understand what is going on, and when the dust settles they plan to be the last ones standing.  In the aftermath of a U.S. collapse, China anticipates having the largest economy on the planet, more gold than anyone else, and a respected international currency that the rest of the globe will be able to use to conduct international trade.

And China is not just going to sit back and wait for all of this to happen.  In fact, they are already doing lots of things to get the ball moving.  The following are 9 signs that China is making a move against the U.S. dollar...

#1 Chinese credit rating agency Dagong has downgraded U.S. debt from A to A- and has indicated that further downgrades are possible.

#2 China has just entered into a very large currency swap agreement with the eurozone that is considered a huge step toward establishing the yuan as a major world currency.  This agreement will result in a lot less U.S. dollars being used in trade between China and Europe...

The swap deal will allow more trade and investment between the regions to be conducted in euros and yuan, without having to convert into another currency such as the U.S. dollar first, said Kathleen Brooks, a research director at

"It's a way of promoting European and Chinese trade, but not doing it with the U.S. dollar," said Brooks. "It's a bit like cutting out the middleman, all of a sudden there's potentially no U.S. dollar risk."

#3 Back in June, China signed a major currency swap agreement with the United Kingdom.  This was another very important step toward internationalizing the yuan.

#4 China currently owns about 1.3 trillion dollars of U.S. debt, and this enormous exposure to U.S. debt is starting to become a major political issue within China.

#5 Mei Xinyu, Commerce Minister adviser to the Chinese government, warned this week that if the U.S. government ever does default that China may decide to completely stop buying U.S. Treasury bonds.

#6 According to Yahoo News, China has already been looking for ways to diversify away from the U.S. dollar...

There have been media reports this week that China's State Administration of Foreign Exchange, the body that handles the country's $3.66 trillion of foreign exchange reserve, is looking to diversify into real estate investments in Europe.

#7 Xinhua, the official news agency of China, called for a "de-Americanized world" this week, and also made the following statement about the political turmoil in Washington: "The cyclical stagnation in Washington for a viable bipartisan solution over a federal budget and an approval for raising debt ceiling has again left many nations' tremendous dollar assets in jeopardy and the international community highly agonized."

#8 Xinhua also said the following about the U.S. debt deal on Thursday: "[P]oliticians in Washington have done nothing substantial but postponing once again the final bankruptcy of global confidence in the U.S. financial system".  The commentary in the government-run publication also declared that the debt deal "was no more than prolonging the fuse of the U.S. debt bomb one inch longer."

#9 China is the largest producer of gold in the world, and it has also been importing an absolutely massive amount of gold from other nations.  But instead of slowing down, the Chinese appear to be accelerating their gold buying.  In fact, money manager Stephen Leeb says that his sources are telling him that China plans to buy another 5,000 tons of gold.  There are many that are convinced that China eventually plans to back the yuan with gold and try to make it the number one alternative to the U.S. dollar.

So exactly what would happen if the Chinese announced someday that they were going to back their currency with gold and would no longer be using the U.S. dollar in international trade?

It would change the face of the global economy almost overnight.  In a previous article, I described some of the things that we could expect to see happen...

If China does decide to back the yuan with gold and no longer use the U.S. dollar in international trade, it will have devastating effects on the U.S. economy.  Demand for the U.S. dollar and U.S. debt would drop like a rock, and prices on the things that we buy every day would soar.  At that point you could forget about cheap gasoline or cheap Chinese imports.  Our entire way of life depends on the U.S. dollar being the primary reserve currency of the world and being able to import things very inexpensively.  If the rest of the world (led by China) starts to reject the U.S. dollar, it would result in a massive tsunami of currency coming back to our shores and a very painful adjustment in our standard of living.  Today, most U.S. currency is actually used outside of the United States.  If someday that changes and we are no longer able to export our inflation that is going to mean big trouble for us.

The fact that we get to print up giant mountains of money and virtually everyone around the world uses it has been a huge boon for the U.S. economy.

When that changes, the word "catastrophic" is not going to be nearly strong enough to describe what is going to happen.

According to a Rasmussen Reports survey that was released this week, only 13 percent of all Americans believe that the country is on the right track.  But the truth is that these are the good times.  The American people haven't seen anything yet.

Someday people will look back and desperately wish that they could go back to the "good old days" of 2012 and 2013.  This is about as good as things are going to get, and it is only downhill from here.

What Happened When I Tried to Meet With My Elected Representative John Boehner

Photo Credit: By United States House of Representatives ( [Public domain or Public domain], via Wikimedia Commons

October 16, 2013  |  

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This is a story that should be fairly disturbing. I am a 19 year old college student hailing from West Chester, Ohio. I set forth last spring (early April) to speak to my congressman—John Boehner—about issues that were incredibly important to me. At the time my family was in financial crisis. My father had been out of work for almost a year, my mother's hours had been cut, though her job didn't provide her with healthcare anyway.

Of course, I was having trouble paying for college. I attend The Ohio State University, which has one of the lowest tuition of any University in the state of Ohio—but it was still a lot of money. I had taken off the fall semester of my freshman year to work and hopefully pay some bills. I wanted to talk to Congressman Boehner because at the time a huge debate over student loan interest rates was going on. I wanted to tell him how much this mattered, how students like me would use the opportunity given—but we just needed a little help.

I was so sure I could do this. I was so absolutely sure that if a normal person worked hard enough, they could speak to their most local representative to Washington.

I was wrong. Dead wrong.

How I Started

I began by sending an email and making a phone call to the local West Chester office. When both responses resulted in the same exact letter of reply, I grew conscientious about whether Congressman Boehner was actually hearing anything I was saying. I began to get the impression that I was simply being sent the same generic response about Rep. Boehner working during college to pacify me, rather than because people actually cared.

This is when I decided I wanted to talk to him face-to-face. I knew it wouldn't be easy and that I wouldn't be given much time. I was okay with that. I know that with five minutes I could explain to the Congressman how important education was to me, and how we needed to offer lower interest rates, not higher. I sent emails asking to meet with him, underlining my concerns with college affordability.

I kept getting the same letters in the mail. The same generic responses.

A month had passed, and I was more than a bit angry. It was looking to be harder and harder to go back to OSU next semester, and my most local representative to Washington DC didn't seem to care.

I decided to call his Washington DC office and explain to them my desire to meet with Congressman Boehner. They seemed unsure about this request, but the aide on the phone was extremely polite and gave me the email address for the scheduling team. I was encouraged by this, it seemed like I was heading in the right direction.

On June 17th, 2013 I sent the following email:

To whom this may concern:

My name is Jake Geers, I am a student and community organizer who is the son of two hard working Americans. I have been working full time alongside my education and would like the opportunity to give a middle American perspective to the congressman regarding the student loan crisis in America. I am willing to meet with Rep. Boehner here in west Chester or in Washington D.C.

Please email me back with any questions. I understand the schedule may be full, and despite the pending deadline of July 1 I am fully open to speaking with the congressman any day after July 7th.

A Bad Month for the the Dollar

September was not a good month for the U.S. dollar.  The world’s reserve currency is sustained in large part by the Petrodollar, the agreement by the Saudis and OPEC to price oil in dollars and only accept dollars for payment.  The US gets a guaranteed demand for its fiat currency and in exchange the US has agreed to protect militarily Saudi oil fields.  However, after President Obama was forced to back off his plans to attack Syria in support of the Saudi backed insurgency fighting the Assad regime, one of the pillars of the Petrodollar scheme was shaken to its core.
If America has no more stomach for war in the Middle East, how certain can the Saudis be that  America will protect the regime militarily if the need arises?  Now that the President has acquiesced to public opinion in his decision on whether to use military force, can he be counted on in the future to hold up his end of the bargain in the Petrodollar scheme?  The United States may have by far the world’s largest military, but what use is it if it can’t be used?   And even when it is, seven years of war in Iraq  has done little more than bring the country under the influence of Iran.
Another major problem for the dollar is the fact that the Fed has spent five years printing money and its balance sheet, at about 3.4 trillion dollars, is almost a quarter of US GDP.  When Bernanke let the world know he was going to tap on the brakes, interest rates soared and the equities markets got spooked.  He, like the President, had to back off.
And to finish the month we get an exercise in game theory galore with the House leadership playing high stakes chicken with the President by offering him only two solutions to the debt-ceiling, both of which would leave him devastated politically.  He can either postpone implementation of his signature accomplishment, Obamacare, or shut down the government- it seems Mr. Boehner has taken a page from Mr. Putin’s playbook.  After the foreign policy debacle with Syria, can the President afford to reside for long over a shutdown government?  His other option is to be made politically irrelevant.  One would think that his opponents will feel emboldened to hold their ground.
The dollar is backed by a military that has been left neutered by an incalcitrant home front, by a Federal  Reserve Chairman who has no idea how to stop printing money by the trillions, and by an executive and legislative branch who spend billions on election campaigns yet are unable to renew the credit card used to pay the monthly bills of the government they supposedly serve.
It seems difficult to fathom that gold will not recover its march toward $2,000 an ounce and beyond while the dollar’s stature as a secure store of value continues to be gutted by an inept and irresponsible national leadership.

The Armageddon Looting Machine: The Looming Mass Destruction from Derivatives

Increased regulation and low interest rates are driving lending from the regulated commercial banking system into the unregulated shadow banking system. The shadow banks, although free of government regulation, are propped up by a hidden government guarantee in the form of safe harbor status under the 2005 Bankruptcy Reform Act pushed through by Wall Street. The result is to create perverse incentives for the financial system to self-destruct.

Five years after the financial collapse precipitated by the Lehman Brothers bankruptcy on September 15, 2008, the risk of another full-blown financial panic is still looming large, despite the Dodd Frank legislation designed to contain it. As noted in a recent Reuters article, the risk has just moved into the shadows:

[B]anks are pulling back their balance sheets from the fringes of the credit markets, with more and more risk being driven to unregulated lenders that comprise the $60 trillion “shadow-banking” sector.

Increased regulation and low interest rates have made lending to homeowners and small businesses less attractive than before 2008. The easy subprime scams of yesteryear are no more. The void is being filled by the shadow banking system. Shadow banking comes in many forms, but the big money today is in repos and derivatives. The notional (or hypothetical) value of the derivatives market has been estimated to be as high as $1.2 quadrillion, or twenty times the GDP of all the countries of the world combined.

According to Hervé Hannoun, Deputy General Manager of the Bank for International Settlements, investment banks as well as commercial banks may conduct much of their business in the shadow banking system (SBS), although most are not generally classed as SBS institutions themselves. At least one financial regulatory expert has said that regulated banking organizations are the largest shadow banks.

The Hidden Government Guarantee that Props Up the Shadow Banking System

According to Dutch economist Enrico Perotti, banks are able to fund their loans much more cheaply than any other industry because they offer “liquidity on demand.” The promise that the depositor can get his money out at any time is made credible by government-backed deposit insurance and access to central bank funding.  But what guarantee underwrites the shadow banks? Why would financial institutions feel confident lending cheaply in the shadow market, when it is not protected by deposit insurance or government bailouts?

Perotti says that liquidity-on-demand is guaranteed in the SBS through another, lesser-known form of government guarantee: “safe harbor” status in bankruptcy. Repos and derivatives, the stock in trade of shadow banks, have “superpriority” over all other claims. Perotti writes:

Security pledging grants access to cheap funding thanks to the steady expansion in the EU and US of “safe harbor status”. Also called bankruptcy privileges, this ensures lenders secured on financial collateral immediate access to their pledged securities. . . .

Safe harbor status grants the privilege of being excluded from mandatory stay, and basically all other restrictions. Safe harbor lenders, which at present include repos and derivative margins, can immediately repossess and resell pledged collateral.

This gives repos and derivatives extraordinary super-priority over all other claims, including tax and wage claims, deposits, real secured credit and insurance claims. Critically, it ensures immediacy (liquidity) for their holders. Unfortunately, it does so by undermining orderly liquidation.

When orderly liquidation is undermined, there is a rush to get the collateral, which can actually propel the debtor into bankruptcy.

The amendment to the Bankruptcy Reform Act of 2005 that created this favored status for repos and derivatives was pushed through by the banking lobby with few questions asked. In a December 2011 article titled “Plan B – How to Loot Nations and Their Banks Legally,” documentary film-maker David Malone wrote:

This amendment which was touted as necessary to reduce systemic risk in financial bankruptcies . . . allowed a whole range of far riskier assets to be used . . . . The size of the repo market hugely increased and riskier assets were gladly accepted as collateral because traders saw that if the person they had lent to went down they could get [their] money back before anyone else and no one could stop them.

Burning Down the Barn to Get the Insurance

Safe harbor status creates the sort of perverse incentives that make derivatives “financial weapons of mass destruction,” as Warren Buffett famously branded them. It is the equivalent of burning down the barn to collect the insurance. Says Malone:

All other creditors – bond holders – risk losing some of their money in a bankruptcy. So they have a reason to want to avoid bankruptcy of a trading partner. Not so the repo and derivatives partners. They would now be best served by looting the company – perfectly legally – as soon as trouble seemed likely. In fact the repo and derivatives traders could push a bank that owed them money over into bankruptcy when it most suited them as creditors. When, for example, they might be in need of a bit of cash themselves to meet a few pressing creditors of their own.

The collapse of . . . Bear Stearns, Lehman Brothers and AIG were all directly because repo and derivatives partners of those institutions suddenly stopped trading and ‘looted’ them instead.

The global credit collapse was triggered, it seems, not by wild subprime lending but by the rush to grab collateral by players with congressionally-approved safe harbor status for their repos and derivatives.

Bear Stearns and Lehman Brothers were strictly investment banks, but now we have giant depository banks gambling in derivatives as well; and with the repeal of the Glass-Steagall Act that separated depository and investment banking, they are allowed to commingle their deposits and investments. The risk to the depositors was made glaringly obvious when MF Global went bankrupt in October 2011. Malone wrote:

When MF Global went down it did so because its repo, derivative and hypothecation partners essentially foreclosed on it. And when they did so they then ‘looted’ the company. And because of the co-mingling of clients money in the hypothecation deals the ‘looters’ also seized clients money as well. . . JPMorgan allegedly has MF Global money while other people’s lawyers can only argue about it.

MF Global was followed by the Cyprus “bail-in” – the confiscation of depositor funds to recapitalize the country’s failed banks. This was followed by the coordinated appearance of bail-in templates worldwide, mandated by the Financial Stability Board, the global banking regulator in Switzerland.

The Auto-Destruct Trip Wire on the Banking System

Bail-in policies are being necessitated by the fact that governments are balking at further bank bailouts. In the US, the Dodd-Frank Act (Section 716) now bans taxpayer bailouts of most speculative derivative activities. That means the next time we have a Lehman-style event, the banking system could simply collapse into a black hole of derivative looting. Malone writes:

. . . The bankruptcy laws allow a mechanism for banks to disembowel each other. The strongest lend to the weaker and loot them when the moment of crisis approaches. The plan allows the biggest banks, those who happen to be burdened with massive holdings of dodgy euro area bonds, to leap out of the bond crisis and instead profit from a bankruptcy which might otherwise have killed them. All that is required is to know the import of the bankruptcy law and do as much repo, hypothecation and derivative trading with the weaker banks as you can.

. . . I think this means that some of the biggest banks, themselves, have already constructed and greatly enlarged a now truly massive trip wired auto-destruct on the banking system.

The weaker banks may be the victims, but it is we the people who will wind up holding the bag. Malone observes:

For the last four years who has been putting money in to the banks? And who has become a massive bond holder in all the banks? We have. First via our national banks and now via the Fed, ECB and various tax payer funded bail out funds. We are the bond holders who would be shafted by the Plan B looting. We would be the people waiting in line for the money the banks would have already made off with. . . .

. . . [T]he banks have created a financial Armageddon looting machine. Their Plan B is a mechanism to loot not just the more vulnerable banks in weaker nations, but those nations themselves. And the looting will not take months, not even days. It could happen in hours if not minutes.

Crisis and Opportunity: Building a Better Mousetrap

There is no way to regulate away this sort of risk. If both the conventional banking system and the shadow banking system are being maintained by government guarantees, then we the people are bearing the risk. We should be directing where the credit goes and collecting the interest. Banking and the creation of money-as-credit need to be made public utilities, owned by the public and having a mandate to serve the public. Public banks do not engage in derivatives.

Today, virtually the entire circulating money supply (M1, M2 and M3) consists of privately-created “bank credit” – money created on the books of banks in the form of loans. If this private credit system implodes, we will be without a money supply. One option would be to return to the system of government-issued money that was devised by the American colonists, revived by Abraham Lincoln during the Civil War, and used by other countries at various times and places around the world. Another option would be a system of publicly-owned state banks on the model of the Bank of North Dakota, leveraging the capital of the state backed by the revenues of the state into public bank credit for the use of the local economy.

Change happens historically in times of crisis, and we may be there again today.


Ellen Brown is an attorney, president of the Public Banking Institute, and author of twelve books including the best-selling Web of Debt. In The Public Bank Solution, her latest book, she explores successful public banking models historically and globally. Her websites are http://WebofDebt.com, and

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Syria And The Warmongering Peddlers Of Cheap, Skin-Deep Morality

AP Photo/Narciso Contreras
Countercurrents 26/8/2013

And here we go again. In Syria, things were getting desperate for Washington. It needed a major made-for-TV, cross-the-red-line incident involving chemical weapons. Unsurprisingly, by hook or by crook – probably crook (1) – it got it. The BBC, British Foreign Secretary William Hague and a multitude of other media outlets and politicians now clamour, or at least strongly imply the need, for direct military action to bolster the illegal ‘indirect’ military intervention from the West and its allies that has already been taking place for a long time.

The story being peddled goes that the (axis of) evil Syrian regime has used a ‘weapon of mass destruction’ to help win a war it was already winning, thereby incurring the wrath of the US. Strange logic indeed.

It’s a case of déjà vu. British MP George Galloway in front of a US senate hearing back in 2005 exposed the ‘pack of lies’ that the US-led invasion of Iraq was built on. Similar forms of deceit have been the foundations for shaping public opinion regarding attacking LibyaAfghanistanPakistan and numerous other countries. The presence of WMDs was used to justify attacking Iraq, while ‘humanitarianism’ or ‘fighting terror’ was the excuse used elsewhere.

But what is it about the term ‘weapons of mass destruction’ that provokes a knee jerk reaction from media people and politicians who foam with rage and let seep from their mouths high minded platitudes about morality?

“Morality is simply the attitude we adopt towards people we personally dislike.” Oscar Wilde in ‘An Ideal Husband’.

If in the above quote from Wilde, we replace ‘people’ with ‘regimes’, we may appreciate the nature of the West playing fast and lose with its notions of morality. Supply arms, including chemical weapons, to dictatorial regimes throughout West Asia with atrocious human rights records because, notwithstanding the fact it is great business, they are ‘good friends of ours’ (to coin a highly apt mafia term).  Yes, all friends and good ones at that, as long as they remain loyal to the  ‘Project for the New American Century’ (2).

The PNAC, or the project for world domination, is partly built on gullible, easily led public opinion, which is (often) fanned by the emotionally laden letters ‘W-M-D’. A Pavlov’s dog public and media, which respond on cue to the moralistic bleatings of condescending criminals that masquerade as respectable politicians and who rely on the public’s ignorance to fuel their barbarity in the name of ‘protecting civilians’ from an impending bloodbath, while going on to cause one in Libya, to ‘defeat terror’, while funding it in Syria, or to ‘support democracy’, while undermining it in Egypt.

These politicians and much of the mainstream media confine the narrative about WMD to a military battlefield, or a threat of outright violent destruction. The term is never to be associated with the US dropping atom bombs on Japan, the West using mini-nukes in the form of depleted uranium or the use of white phosphorous to kill and maim (3). From the cancers caused to the environmental contamination, where is Hague’s, the BBC’s or any other number of media outlets’ moral indignation about this type of mass destruction?

Where too is their condemnation of treacherous economic, trade, food or agriculture policies that blight hundreds of millions across the globe? Where is their condemnation over the criminal manipulation of currency markets, commodities, interest rates and derivatives, or the neo-liberalism and the corporate-financial cartels that conspire to shape trade via the WTO, IMF or the World Bank (4,5,6,7,8)?

That’s right, condemnation of these economic and political weapons of mass destruction and suffering are nowhere to be seen or heard simply because such political figures and media institutions with their skin-deep morality are in place merely to serve the interests of fraudulent capital and its fraudulent policies.

This type of mass destruction and mass misery does not involve headline-grabbing, eye-catching episodes of carnage and death. This violence is structural in form, is arguably ultimately just as destructive and is ongoing and all pervasive (9). In Western countries, this is disguised as a need for ‘austerity’. In poorer countries, it is called ‘development’.

Under the ‘structural adjustment’ policies imposed on poor countries, it has become a case of export or be damned, embrace corporate agriculture or be damned, borrow and build dams or be damned. And, in the process, elites – both foreign and indigenous – prosper, while the people and the environment end up being damned anyhow (10). It’s almost becoming a cliché to mention the hundreds of thousands of farmers in India who ‘embraced’ it all and died. It’s no cliché though, it happened.

It’s no cliché that the petrochemical-backed, corporate-driven ‘Green Revolution’ is raping the environment (11). It’s no cliché to say that genetic engineering is a highly financially lucrative ‘experiment’ that is jeopardising our health and the future of humanity (12). Neither is it a cliché that millions, from Egypt to the US, are bearing the brunt of economic policies that result in misery for the many and record profits for the few.

Perhaps we should look at Hague and his ilk and assess whether they actually do care about the plight of ordinary folk in the manner they claim to. Do they really care about the plight of Syrians? Perhaps we might care to ponder that they clearly do not, given the back door deals and wars they have sanctioned for the benefit of powerful corporations (13,14).

Why should they care so much about people in far off places when they show little for those in their own countries? The post-war Keynesian consensus has been gradually dismantled, leading to the offshoring of much of their own economies and leaving millions in debt, in poverty, thrown onto the scrapheap or used as fodder to fight wars for the rich under the banner of ‘humanitarianism’ or ‘protecting our freedoms’. And, as far as ‘protecting our freedom’ is concerned, look to Edward Snowden and especially Hague’s squirming reaction to the revelations to see how hollow this rings.    

Moral outrage within certain influential quarters about the latest happenings in Syria might be enough to fool some of the public, but let the record show that this fake outrage runs skin deep and is extremely selective.


Storm Clouds?

As the panic over the destiny of the Federal Reserve's “quantitative easing” program reaches hysterical proportions, uncommonly bizarre economic anomalies are surfacing. In the last week of June, the news that first quarter US Gross Domestic Product growth report was reduced dramatically from 2.4% to 1.8% was met by an equally dramatic, but paradoxical positive jump in equity markets. Normally, a rather staggering drop in GDP estimates would trigger stock market losses-- investor confidence would be battered. But the opposite occurred. 

What's going on?

Pundits and investors hailed the bad news because they hope that it will keep the Federal Reserve committed to the $85 billion per month bond purchasing project dubbed “quantitative easing.” They believe that the Fed would not dare to relax the program in the face of poor economic performance. And they recognize that without the Fed’s foot firmly pressing the accelerator, the capitalist economy will stagnate or slow. The Federal Reserve program is truly a life-support system for our economy, and capitalism's apologists recognize that they are in deep trouble without it. Therefore, investors welcomed the fall in GDP growth!

Even Paul Krugman, the popular voice of social democratic theory in the US, has caught the contagion of fear. In a late-June appeal in The New York Times (Ettu, Ben?) to Federal Reserve head, Ben Bernanke, Krugman calls for the Fed to keep its foot aggressively on the gas pedal. A firm advocate of an alternative policy option, fiscal stimulus (spending on infrastructure, public works, etc), Krugman holds his nose and urges the continuation of the Fed's monetary stimulus program of printing money for bond purchases.

So why can't we just all agree to get along and urge the Federal Reserve to keep printing dollars?

In the first place, the Fed's policy of dollar-printing promiscuity is losing its healing powers. The effect of the purchase of government debt-- Treasury notes-- in order to restrain bond yields and interest rates has diminished since mid-2012. Moreover, the Fed remedy has lost its magic entirely in May and June of this year, with the yield on the 10-year Treasury note rising by two-thirds, mortgage rates jumping about 27% from March to the end of June, and the US and European (except Germany) bond market experiencing a sell-off. All of these indicators demonstrate that quantitative easing, as a stimulus policy, is simply losing its punch.

The Federal Reserve sees its injection of $85 billion into the economy every month as a hedge against the dreaded deflation, a sure companion to stagnation or negative growth. They watch to see when inflation crosses their target of 2% in order to slap on the brakes to avoid an overheated economy. But there is no reason for the Fed to fret: inflation is well below their target, a clear sign that without monetary stimulus we would be in a deflationary period. Corporations are hoarding cash rather than investing: they are holding 5.6% of their total assets in cash, against a forty year average of 4.4%. It was weak business investment, in part, that caused the first quarter GDP growth revision downward by 25%.

The Chicago Federal Reserve's three-month moving average National Activity index remained in negative territory, underlining the diminishing effects of quantitative easing.

Aside from its ineffectiveness, quantitative easing poses more serious, more fundamental problems: Fed monetary promiscuity distorts markets and masks underlying economic processes. Given that a capitalist economy is an enormously complex organism made up of mutually interactive actors, commodities and processes, manipulating some of the central elements such as interest rates, the money supply, debt growth, etc. can have unforeseen and damaging repercussions in other sectors of the economy. Mechanisms fail and balances are disrupted. A therapy becomes an injury. This is a lesson that the leadership of the Peoples' Republic of China is learning from the volatility created by its shadow banking sector. Even with majority public ownership of the biggest banks, the informal private sector distorts the impact of policy decisions.

In Marxist terms, the massive Federal Reserve intervention in financial markets violates the law of value. That is, it replaces the exchange of equivalent-for-equivalent in financial markets, with exchanges determined independently of market forces by the officers of the Fed. Those exchanges must, at some point, be reconciled; but in the meantime, they distort exchange relationships in other sectors of the economy. They create a disconnect between the financial sector and the signals sent to the productive economy. They distort the rate of profit in the financial sector, channeling capital into speculation and over-reliance on cheap credit. It’s no wonder that corporations hoard cash and seek higher returns on retained capital and easily available capital.

In reality, quantitative easing invites the very conditions that led to the 2007-8 collapse.

And we are now seeing omens in the economic data.

The exuberant 2013 stock market is suffering a retreat, but even more ominously, demonstrating growing volatility. Last year, the small investor jumped back in the market, a sure sign that a bear market was in sight. Much of the volatility comes from market manipulators exploiting the amateur day-traders. Like the swaggering Vegas weekend gambler, they are ripe for the picking. One can watch the picking by following the end-of-day trading; they don't know when to get in or when to get out.

US exports are pulling back.

The post-World War II record profits reported in 2012 are threatened. Of 108 companies scheduled to report profits in the second quarter of 2013, 87 offered negative guidance to their shareholders. Falling profits, contrary to underconsumption theorists, are a better predictor of a downturn than falling consumption. Consumption generally falls as a result and as an amplifier of economic decline.

Today, US consumption hangs precariously in the balance. While savings are declining, wages are in free fall. The year ending in September 2012 experienced a wage decline of 1.1%. First quarter estimates augur a shocking decline. The consumer is simply running out of money, savings, and available credit.

And the just announced June unemployment figures actually show an increase in the more telling U6 calculation to 14.3%. That rate includes those who have dropped out of the job market and those working part-time but desiring a full-time job.

Not a promising picture.

In most of the world's capitalist countries, the labor movements and left political parties have yet to decouple their fate from that of the monopoly capital, profit-driven, market-governed system. They are like ships on turbulent waters unwilling to bring their vessels and crew to port. They are simply counting on the storm to subside. They are neither prepared for nor expecting a hurricane or a shipwreck. After five disastrous years, one would hope that left and labor leaders would began to look for alternatives to capitalism, a safe haven for their fellow passengers.

Zoltan Zigedy

The Global Economy: A Midyear Snapshot

What happens to the US economy when the Federal Reserve stops printing money to buy mortgage based securities, treasury notes, and other bonds? What happens when that body stops injecting 85 billion dollars into the US economy every month?
These questions torture the economic pundits in the mainstream press.
Contrary to what most believe there has been no recovery. The reports from the other principal global economies have been dismal, recording stagnation or anemic growth. In the mean time, the US economy has been sustained by forced feeding. The Federal Reserve quietly prints notes and takes around 85 billion dollars worth of various securities off the market and parks them on the Fed's balance sheets. The announced reasons for this action are to keep interest rates low, attracting borrowers, and to thus stimulate business growth and job creation. An unannounced consequence of the 85 billion dollar injection has been a surge in equity markets and housing prices. Since both stock portfolios and home values are the principal components in the psychological “wealth effect” -- the subjective, personal sense of financial well-being -- they have spurred the impression of recovery and consumer confidence. Behind this conjured image of recovery, the US economy continues to stagnate and erode.
Whenever the Federal Reserve has suggested that it might slow or end this life-support, markets have dropped precipitously.
Obviously, the Federal Reserve program, dubbed “quantitative easing,” is a back-door stimulus program. Not a stimulus program of the New Deal type, not public works and public jobs, but more a reclamation of the garbage piled up after the massive, destructive party thrown by the financial sector and a rekindling of the pre-crisis euphoria. No one in the political establishment, neither Republican nor Democrat, had the stomach for a full-blown New Deal program, nor did they have any desire to pass even a little of the cost of a fix-up on to their corporate masters.
So the task of recovery fell in the lap of the Federal Reserve, an ostensibly independent non-political body. The Federal Reserve is not political, except when it is. While it can't be dictated to by the branches of government, its make-up of ivy league professors and financial industry veterans guarantees loyalty to corporate moguls. It also keeps an ear open to the powerful as well as the rich. On occasion the Fed even hears the voices from the barricades, but only when they are at the barricades!
It shares that “independence “ with the Supreme Court. Like the Supreme Court, the Fed gets occasionally chastised when it either missed or failed to get the message of a ruling class change in policy.
All central banks boast of their independence, but all listen closely for a shift in political favor. The Central Bank of Japan recently demonstrated its fealty to political change. With the election of Shinzo Abe as Prime Minister, the Bank relented to his pressure and began a policy of quantitative easing with the goal of doubling Japan's money supply in two years. Abe, a right-wing nationalist, advocates purchasing securities and bonds through a speed-up of the Bank's printing presses, but makes no effort to conceal his real goal: radically reducing the exchange rate of the national currency, the Yen.
Like his foreign policy initiatives, Abe's currency policy is a bold act of aggression, in this case, economic aggression. A weak yen makes Japanese manufacturing products cheaper in global markets, giving Japan a competitive edge against other global manufacturers. The rise of Japanese nationalism has not gone unnoticed by other Asian powers. Chinese demonstrators have trashed Japanese cars in a way reminiscent of similar spectacles in the US decades ago. Japanese automobile sales have dropped sharply in the PRC.
While retaliation may well be on the horizon, the Abe policies have brought a sharp drop in the Yen's value, but also great volatility in Asian equity markets.
Similarly, for all the US Federal Reserve's aggressiveness in printing money, the stock market's surge and the recovery of housing prices have masked serious issues plaguing the real US economy.
[June 2: “Investors have ignored poor economic news as stocks have risen... The Basil, Switzerland based Bank of International Settlements said... that central banks' policies of record low interest rates and monetary stimulus had helped investors “tune out” bad news-- every time an economic indicator disappointed, traders simply took that as confirmation that central banks would continue to provide stimulus.” as reported by Fox News.]
Disposable personal income growth is collapsing, for example. Excepting the 2008-2009 collapse, disposable personal income growth was lower in 2012 than any time since 1959 and is trending even lower in 2013. Not surprisingly, the personal savings rate-- a rate that grew dramatically after the frivolity leading to the 2008-2009 collapse-- has now dropped sharply. Clearly, workers are taking home less while reducing their savings to pay the bills. While unsustainable, this tact has buoyed consumer spending.

[May 31: The Commerce Department reported a .2% pull back in consumer spending for April, 2013.]

Manufacturing production in the US has declined for three of the last four months.Caterpillar Inc., a bell weather of the basic manufacturing sector, has witnessed factory orders of machines, calculated on a rolling three-month average, decline steadily throughout 2012, moving into negative territory at year's end.

Hyper-exploitation in 2009, in the form of unprecedented gains of productivity growth, pulled the US economy from its nadir. But since 2009, productivity gains have slackened with a substantial decline in the last quarter of 2012 and only a very modest recovery in the first quarter of 2013. Consequently, anemic corporate revenue growth is increasingly crimping earnings, once again threatening the rate of profit.
Pressures on profit are demonstrated by the falling yield on junk bonds. The demand for yield-- the never-ending search for a higher rate of profit-- has driven the yield on the riskiest investments lower than at any time in recent memory (a leading high-yield bond index records a return below 5%, the lowest since records began in 1983!). Conversely, treasury bonds, once popular as a safe haven, are now commanding greater and greater yield despite the fact that the Federal Reserve gobbles them up and removes them from bond markets. Obviously, investors do not want safe Treasuries; investors do want risky junk bonds! The gap between Treasury yields and junk bond yields are narrower than any time since 2007. Are we skating on the same thin ice, the same crisis of accumulation?
Accelerating private debt in Asia suggests that much of the capital seeking higher profit growth rates has landed there. But Asia is not the hot bed of growth that it was a few years ago. The mounting private debt in Asian economies supports risky, speculative projects and services like commercial and residential real estate. With international trade tepid, these once export-leading countries are attempting to sustain growth through speculation and the hope of global recovery. The new Chinese leadership seems determined to reduce the role of the state sector, market regulation, and public financing, the very factors that allowed the PRC to painlessly weather the global crisis. They are determined to entrust the fate of the economy to global markets. The simultaneous shrinking of government debt and the explosion of private debt underline this policy shift.
[May 31: The Reserve Bank of India reported the lowest annual GDP growth rate in a decade for the end of the fiscal year, March 31.]
The once robust South American economies are also slowing. Exports to the PRC are declining and exports to the EU are on the skids, retarding growth throughout the region. Stagnant growth presents new challenges to the conservative neo-liberal regimes on the continent as well as the more progressive social democratic governments. Nor do South American economies offer any relief, as they have until recently, to the global economy.
And, of course, Europe is in a depression-- a deep and profound depression. The EU as a unity faces both centrifugal and centripetal forces that challenge any policy resolution. Moreover, the major parties – conservative, liberal, and social democratic-- have exhausted their policy toolboxes. Until a new road is chosen, the European Union will only drag the world economy towards a similar fate.
[May 31: Eurostat reports the EU unemployment rate reached a new high-- 12.2% in April-- the highest level ever recorded since euro-wide tracking began in 1995.]
The global economy faces two stubborn challenges: first, a crisis of accumulation and second, an insufficiency of global demand. They are, of course, inter-related, continuation of the 2008-2009 collapse, and immune to conventional treatment. The vast inequalities of wealth and the resultant massive accumulation of capital hungering for investment opportunities (driven by Marx's tendency for the rate of profit to fall) stand at the center of the lingering crisis. Capital continues to seek increasingly risky and unproductive profit schemes, schemes that strangle productive, socially useful (but unprofitable!) activities. At the same time, the crisis has immiserated millions and idled a vast mass of human capital. Left with limited resources and limitless insecurities, these casualties of the crisis have necessarily reduced their patterns of consumption. A shrinkage in global demand followed.
Some still harbor illusions of taming capitalism and slaking its thirst for profit. As the years of crisis continue, it looks more and more like the beast must be slaughtered.

Zoltan Zigedy

Stockman’s Rant

On the rare occasion, an article appears in the mainstream press that takes a deeper, more thoughtful view of human affairs, a document that gives a hint or glimpse of an unspoken truth beyond the pablum that occupies media puppets. Such an occasion was the publishing of The New York Times opinion piece entitled “State Wrecked: The Corruption of Capitalism in America” (3-31-2013) and authored by former Reaganite budget director, David Stockman.

Now Stockman is a renegade from corporate Republicanism; he actually believes in the ancient principles put forward by Adam Smith and other classical capitalist thinkers. While corporate Republicans cozy up to their party’s ugly, fascistic outliers, they always, in the end, make their bed with the rich and powerful. Stockman, on the other hand, actually embraces the mythical virtues of small business ownership and town hall democracy. In classical Marxist terms, he represents the ideology of the petite-bourgeoisie.
In the swamp occupied by Democratic and Republican politicos—the breeding ground for conventional politics—such views are unwelcome. Principled politics from the right or the left are alien equally to the snakes and the rats that prey on the cognitively weak and unwary.
Stockman is in a panic because he sees beyond the stock market euphoria and Pollyanna commentaries that have induced the mass delusions of the last several months. And what he sees angers him.
Stockman constructs an indictment, a list of charges against the current US economy: growth of output is woefully inadequate, jobs are both indecently scarce and low paying, the incomes and the net worth of “ordinary” citizens are dropping while poverty is on the rise. To anyone with a grip on reality, these are not signs of real economic recovery or systemic success. He notes that “we’ve had eight decades of increasingly frenetic fiscal and monetary policy activism intended to counter the cyclical bumps and grinds of the free market and its purported tendency to underproduce jobs and economic output. The toll has been heavy.” And yet imagine the toll if no remedial action had been taken! Surely, this unintended critique of eighty years of state-monopoly governance counts as a devastating charge against modern capitalism. If the era of state-monopoly capitalism can do no better than produce the sad state outlined by Stockman, it is decidedly a failure.
Stockman dares speak the truth so discomforting to liberals and social democrats: [World War II] “did far more to end the Depression than the New Deal did,” though he misleadingly praises the Eisenhower years for its “sound money and fiscal rectitude.” Perhaps he is too young to remember the massive increases in military spending, the ambitious interstate highway system, and the enormous growth of public spending brought on by the Cold War and the Sputnik panic. In any case, the dose of war socialism and the “frenetic… activism” of state-monopoly capitalism kept the capitalist ship afloat, though with fewer and fewer rewards for the majority of US citizens.
Stockman correctly sees that the remedies pursued by US state-monopoly capitalism directed more and more of the lubricant of public funds towards the financial sector over the last decades: the Greenspan “put,” the Long-Term Capital Management bailout, extended ultra-low interest rates, TARP, Fed purchases of bank junk, the support of federal bond prices, and support for equity markets. He calls this, not incorrectly, “Keynesianism—for the wealthy.”
And this is a salient point. It is commonplace to express the differences between Democratic and Republican policy makers since the Reagan era as pro- and anti-Keynesianism. But this is wrong. Ironically, it was only during the Clinton administration that growth of government spending was at all curtailed and today fiscal and monetary expansion remains a ready tool of the ruling class well after Reagan's departure. Certainly Keynesian pump priming has taken new and evolving forms over decades: direct job creation, military spending, massive space programs, infrastructure projects, public-private partnerships, repair of financial institutions, and stimulation of financial demand. While one or the other may be the favored priming tool of rulers at any given time, the similarities of the forms are far more important to recognize than their differences. State intervention in markets continues to be at the core of contemporary state-monopoly capitalism. Stockman sees this; others don't.
In Stockman's account, the enabler of pump priming in all of its forms has been debt. Borrowing or printing money is the means to continue the regimen of “frenetic fiscal and monetary policy activism.” But, in his view, this regimen is running out of steam. “The future is bleak.” And the “Fed has incited a global currency war (Japan just signed up, the Brazilians and Chinese are angry, and the German dominated euro zone is crumbling) that will soon overwhelm it...”
A bleak picture indeed, but one entrenched in reality.
So if modern capitalism-- in its state-monopoly form-- is a disaster, does that mean that Stockman advocates socialism?
Definitely not. Instead he holds out for a nostalgic return to the gold standard. Avoiding what he calls “end-state metastasis,” “would necessitate a sweeping divorce of the state and the market economy [the wholesale rejection of state-monopoly capitalism! ZZ]. It would require a renunciation of crony capitalism and its first cousin: Keynesian economics in all its forms. The state would have to get out of the business of imperial hubris, economic uplift and social insurance and shift its focus to managing and financing an effective, affordable, means-tested safety net.”
 In short, Stockman advocates going back to a conjured idyllic time before state-monopoly capitalism, a time imagined by the petite-bourgeoisie as one of healthy competition, entrepreneurship, and opportunity. For him, the golden age of capitalism would be the pre-depression era of small town USA, family farms, vibrant and expansive industry and foreign policy isolationism. Of course any pretense of continuity or viability of that era was dashed by the Great Depression. In fact, the policies decried by Stockman (and associated by Marxists with state-monopoly capitalism) served as a temporary backstop to the further contraction of the capitalist system produced by that fantastic era.
Stockman may wish for a return to an earlier time just as others may wish to time travel back to the court of Louis XIV, but it isn’t going to happen. Capitalism, like any organism, has its own life span, its own history. Saved from a critical illness, capitalism passed from its laissez faire period to a period of intensifying state intervention and management. Today, that phase of capitalism’s development—state-monopoly capitalism-- is also threatened with a critical illness. I would not be so bold as to predict capitalism’s imminent death, but certainly it will not be revived by reliving its past as Stockman fantasizes.
At a time when liberals and conservatives argue pathetically over the right mix of austerity and stimulus, Stockman is a welcome mainstream herald of the profound crisis pummeling global capitalism. His anxiety and anger reflect a deeper understanding of the contradictions of the moment. His rant, spiked with sarcasm and vitriol, stands in stark relief against the smugness of the lap dog punditry.
Krugman Strides into the Ring
 The Stockman screed generated a storm of opposition. Liberals and the fuzzy, mushy left were particularly affronted. Unlike Stockman, they would like to only turn the clock back to the early seventies, another supposedly “idyllic” time when business unionism was generating satisfactory contracts, the “Great Society” programs were blooming, and war in Vietnam was winding down (at least for US combatants). The fruits of the civil rights struggles and urban uprisings were realized in the creation of programs, bureaucracies, and other buffering agents against domestic insurgency. Jobs servicing the Great Society generated a stratum of social liberals who matured into the base of a social democratic left inside and outside of the Democratic Party. For them, the world turned evil and foreboding with the Reagan “revolution,” a movement they characterize as neo-liberalism.
In the dust-up with Stockman, Paul Krugman, columnist for The New York Times, assumed the role of savior and protector of their interests and perspective. Krugman, the darling of the “respectable” left, attacked Stockman for his audacious critique of the track record of state intervention in the capitalist economy. Anyone who follows Krugman knows that his response to the crisis is a simple solution: spend more public funds and spend freely until growth perks up. The soft left finds this an agreeable solution because it promises to save capitalism (and forestall socialism!) while creating a potential material basis for pet welfare programs. It is simply the fantasy of another New Deal. And never mind that Krugman doesn’t share the fantasy!
Apparently, the Stockman-Krugman battle merited a major media appearance before the Sunday morning gasbags, the big stage for what our media passes off as intellectual fare. While I lacked the stomach to watch the sparring between the two, refereed by the likes of Huffington, van Sustern, and Will, I would commend an entertaining account of the match by Mike Whitney in Counterpunch (Krugman vs. Stockman, April 11, 2013).
The merit of Stockman’s account is that he is righteously indignant with an economic system that has failed the great majority of people and inflicted great pain and uncertainty. He goes beyond the dominant rhetoric of “we are all in this together” and “we are all at fault” to find systemic rot in capitalism. He correctly places the blame for this at the doorstep of state-monopoly capitalism, the stage of capitalism evolved to rescue the system from the accumulated contradictions of laissez faire capitalism, contradictions brought to light by the Great Depression. But he cannot go where logic would take him. He cannot entertain options that would transcend capitalism. Thus, he is resigned to a pathetic nostalgia for a bygone era where the contradictions of capitalism did not appear in such sharp focus. While he stretches the bounds of mainstream thinking, he can not see beyond markets and private ownership; he cannot see socialism.
Krugman and most of the US left are thoroughly conventional in their thinking—they offer a more “enlightened” management of the economic system and a cheerful capitalism with a human face. They would be hard pressed to point to a period when capitalism bore a human face, however. Nonetheless, they are undaunted before a rising tide of interest in the socialist option. They are resolute in their fear and rejection of real socialism.
Pressured by five years of relentless economic crisis and increasing signs of favor towards socialism, especially with the young, our feckless left offers a cold plate of empty slogans of localism, anti-consumerism, platitudinous “participatory” democracy, cooperatives, and a vacuous “new” economy. As if these are answers to the $17 trillion dollar US multinational, monopoly capital behemoth. In truth, these are simply evasions and dissemblance. 
If Stockman is right and capitalism is “state-wrecked,” then its time to leave the wreckage and turn to socialism. 
Zoltan Zigedy

The Failure of Laissez Faire Capitalism and Economic Dissolution of the West


Author’s  Note

I receive numerous questions from readers about our economic situation and the condition of civil liberty.

There is no way I can answer so many inquiries, and no need. I have written two books that provide the answers, and they are inexpensive. I have done my job. It is up to you to inform yourself. Kindle Reader software is available as a free online download that permits you to read ebooks in your own web browser.

My latest, The Failure Of Laissez Faire Capitalism And Economic Dissolution of the West , is available as an ebook in English as of March 2013 from and from Barnes&Noble.

My book is endorsed by Michael Hudson and Nomi Prims and has a 5 star rating from Amazon reviewers (as of March 23, 2013). Pam Martens’ review at Wall Street On Parade is available here

Libertarians who have not read the book have had an ideological knee-jerk reaction to the title. They demand to know how can I call the present system of crony capitalism laissez faire. I don’t. The current system of government supported crony capitalism is the end result of a 25-year process of deregulation.

Deregulation did not produce libertarian nirvana. It produced economic concentration and crony capitalism.

Amazon provides as a free read the introduction by Johannes Maruschzik to the German edition. Below is my Introduction to my book.

Paul Craig Roberts, March 27, 2012

Not only has your economy been stolen from you but also your civil liberties. My coauthor Lawrence Stratton and I provide the scary details of the entire story in The Tyranny of Good Intentions [5]. In the US law is no longer a shield of the people against arbitrary government. Instead, law has been transformed into a weapon in the hands of the government.

Josie Appleton documents that in England also law has been turned into a weapon against the people. [6] Anglo-American law, the foundation of liberty and one of the greatest human achievements, lies in ruins.

Libertarians think that liberty is a natural right, and some Christians think that it is a God-given right. In fact, liberty is a human achievement, fought for by Englishmen over the centuries. In the late 17th century, the achievement of the Glorious Revolution was to hold the British government accountable to law. William Blackstone heralded the achievement in his famous Commentaries On The Laws Of England, a bestseller in pre-revolutionary America and the foundation of the US Constitution.

In the late 20th century and early 21st century, governments in the US and Great Britain chafed under the requirement that government, like the people, is ruled by law and took steps to free government from accountability to law.

Appleton says that the result is a “tectonic shift in the relationship between the state and the citizen.” Citizens of the US and UK are once again without the protection of law and subject to arbitrary arrests and indictments or to indefinite detention in the absence of indictments.

In the US, citizens can be detained indefinitely and even executed without due process of law. There is no basis in the US Constitution for these asserted powers. The unconstitutional powers exist only because Congress, the judiciary and the American people have accepted the lie that the loss of civil liberty is the price paid for protection against terrorists.

In a very short time the raw power of the state has been resurrected. Most Americans are oblivious to this outcome. As long as government is imprisoning and killing without trials demonized individuals whom Americans have been propagandized to fear, Americans approve. Americans do not understand that a point is reached when demonization becomes unnecessary and that precedents have been established that revoke the Bill of Rights.

If you are educated by these two books, you will be better able to understand what is happening and, thus, you will be in a better position to survive what is coming.

Introduction to The Failure of Laissez Faire Capitalism and Economic
Dissolution of the West: Towards a New Economics for a Full World

The collapse of the Soviet Union in 1991 and the rise of the high speed Internet have proved to be the economic and political undoing of the West. “The End Of History” caused socialist India and communist China to join the winning side and to open their economies and underutilized labor forces to Western capital and technology. Pushed by Wall Street and large retailers, such as Wal-Mart, American corporations began offshoring the production of goods and services for their domestic markets. Americans ceased to be employed in the manufacture of goods that they consume as corporate executives maximized shareholder earnings and their performance bonuses by substituting cheaper foreign labor for American labor. Many American professional occupations, such as software engineering and Information Technology, also declined as corporations moved this work abroad and brought in foreigners at lower renumeration for many of the jobs that remained domestically. Design and research jobs followed manufacturing abroad, and employment in middle class professional occupations ceased to grow. By taking the lead in offshoring production for domestic markets, US corporations force the same practice on Europe. The demise of First World employment and of Third World agricultural communities, which are supplanted by large scale monoculture, is known as Globalism.

For most Americans income has stagnated and declined for the past two decades. Much of what Americans lost in wages and salaries as their jobs were moved offshore came back to shareholders and executives in the form of capital gains and performance bonuses from the higher profits that flowed from lower foreign labor costs. The distribution of income worsened dramatically with the mega-rich capturing the gains, while the middle class ladders of upward mobility were dismantled. University graduates unable to find employment returned to live with their parents.

The absence of growth in real consumer incomes resulted in the Federal Reserve expanding credit in order to keep consumer demand growing. The growth of consumer debt was substituted for the missing growth in consumer income. The Federal Reserve’s policy of extremely low interest rates fueled a real estate boom. Housing prices rose dramatically, permitting homeowners to monetize the rising equity in their homes by refinancing their mortgages.

Consumers kept the economy alive by assuming larger mortgages and spending the equity in their homes and by accumulating large credit card balances. The explosion of debt was securitized, given fraudulent investment grade ratings, and sold to unsuspecting investors at home and abroad.

Financial deregulation, which began in the Clinton years and leaped forward in the George W. Bush regime, unleashed greed and debt leverage. Brooksley Born, head of the federal Commodity Futures Trading Commission, was prevented from regulating over-the-counter derivatives by the chairman of the Federal Reserve, the Secretary of the Treasury, and the chairman of the Securities and Exchange Commission. The financial stability of the world was sacrificed to the ideology of these three stooges that “markets are self-regulating.” Insurance companies sold credit default swaps against junk financial instruments without establishing reserves, and financial institutions leveraged every dollar of equity with $30 dollars of debt.

When the bubble burst, the former bankers running the US Treasury provided massive bailouts at taxpayer expense for the irresponsible gambles made by banks that they formerly headed. The Federal Reserve joined the rescue operation. An audit of the Federal Reserve released in July, 2011, revealed that the Federal Reserve had provided $16 trillion–a sum larger than US GDP or the US public debt–in secret loans to bail out American and foreign banks, while doing nothing to aid the millions of American families being foreclosed out of their homes. Political accountability disappeared as all public assistance was directed to the mega-rich, whose greed had produced the financial crisis.

The financial crisis and plight of the banksters took center stage and prevented recognition that the crisis sprang not only from the financial deregulation but also from the expansion of debt that was used to substitute for the lack of growth in consumer income. As more and more jobs were offshored, Americans were deprived of incomes from employment. To maintain their consumption, Americans went deeper into debt.

The fact that millions of jobs have been moved offshore is the reason why the most expansionary monetary and fiscal policies in US history have had no success in reducing the unemployment rate. In post-World War II 20th century recessions, laid-off workers were called back to work as expansionary monetary and fiscal policies stimulated consumer demand. However, 21st century unemployment is different. The jobs have been moved abroad and no longer exist. Therefore, workers cannot be called back to factories and to professional service jobs that have been moved abroad.

Economists have failed to recognize the threat that jobs offshoring poses to economies and to economic theory itself, because economists confuse offshoring with free trade, which they believe is mutually beneficial. I will show that offshoring is the antithesis of free trade and that the doctrine of free trade itself is found to be incorrect by the latest work in trade theory. Indeed, as we reach toward a new economics, cherished assumptions and comforting theoretical conclusions will be shown to be erroneous.

This book is organized into three sections. The first section explains successes and failures of economic theory and the erosion of the efficacy of economic policy by globalism. Globalism and financial concentration have destroyed the justifications of market capitalism. Corporations that have become “too big to fail” are sustained by public subsidies, thus destroying capitalism’s claim to be an efficient allocator of resources. Profits no longer are a measure of social welfare when they are obtained by creating unemployment and declining living standards in the home country.

The second section documents how jobs offshoring or globalism and financial deregulation wrecked the US economy, producing high rates of unemployment, poverty and a distribution of income and wealth extremely skewed toward a tiny minority at the top. These severe problems cannot be corrected within a system of globalism.

The third section addresses the European debt crisis and how it is being used both to subvert national sovereignty and to protect bankers from losses by imposing austerity and bailout costs on citizens of the member countries of the European Union.

I will suggest that it is in Germany’s interest to leave the EU, revive the mark, and enter into an economic partnership with Russia. German industry, technology, and economic and financial rectitude, combined with Russian energy and raw materials, would pull all of Eastern Europe into a new economic union, with each country retaining its own currency and budgetary and tax authority. This would break up NATO, which has become an instrument for world oppression and is forcing Europeans to assume burdens of the American Empire.

Sixty-seven years after the end of World War II, twenty-two years after the reunification of Germany, and twenty-one years after the collapse of the Soviet Union, Germany is still occupied by US troops. Do Europeans desire a future as puppet states of a collapsing empire, or do they desire a more promising future of their own?

Why Democrats Shouldn’t Put Social Security and Medicare on the Table

Why Democrats Shouldn’t Put Social Security and Medicare on the Table

Posted on Mar 21, 2013

By Robert Reich

This post originally ran on Robert Reich’s Web page.

Prominent Democrats — including the President and House Minority Leader Nancy Pelosi — are openly suggesting that Medicare be means-tested and Social Security payments be reduced by applying a lower adjustment for inflation.

This is even before they’ve started budget negotiations with Republicans — who still refuse to raise taxes on the rich, close tax loopholes the rich depend on (such as hedge-fund and private-equity managers’ “carried interest”), increase capital gains taxes on the wealthy, cap their tax deductions, or tax financial transactions.

It’s not the first time Democrats have led with a compromise, but these particular pre-concessions are especially unwise.

For over thirty years Republicans have pitted the middle class against the poor, preying on the frustrations and racial biases of average working people who can’t get ahead no matter how hard they try. In the Republican narrative, government takes from the hard-working middle and gives to the undeserving and dependent needy. 

In reality, average working people have been stymied because almost all the economic gains of the last three decades have gone to the very top. The middle has lost bargaining power as unions have shriveled. American politics has been flooded with campaign contributions from corporations and the wealthy, which have used their clout to reduce marginal tax rates, widen loopholes, loosen regulations, gain subsidies, and obtain government bailouts when their bets turn sour.

Now five years after the worst downturn since the Great Depression and the biggest bailout in history, the stock market has recouped its losses and corporate profits constitute the largest share of the economy since 1929. Yet the real median wage continues to fall — wages now claim the lowest share of the economy on record — and inequality is still widening. All the economic gains since the trough of the recession have gone to the wealthiest 1 percent of Americans; the bottom 90 percent continue to lose ground.

What looks like the start of a more buoyant recovery is a sham because the vast majority of Americans have neither the pay nor access to credit that allows them to buy enough to boost the economy. Housing prices and starts are being fueled by investors with easy money rather than would-be home buyers with mortgages. The Fed’s low interest rates have pushed other investors into stocks by default, creating an artificial bull market.

If there was ever a time for the Democratic Party to champion working Americans and reverse these troubling trends, it is now — forging an alliance between the frustrated middle and the working poor. This need not be “class warfare” because a healthy economy is in everyone’s interest. The rich would do far better with a smaller share of a rapidly-growing economy than a ballooning share of one that’s growing at a snail’s pace and a stock market that’s turning into a bubble.

But the modern Democratic Party can’t bring itself to do this. It’s too dependent on the short-term, insular demands of Wall Street, corporate executives, and the wealthy. 

It was Bill Clinton, after all, who pushed for repeal of Glass-Steagall, championed the North American Free Trade Act and the World Trade Organization without adequate safeguards for American jobs, and rented out the Lincoln Bedroom to a steady stream of rich executives.

And it was Barack Obama who continued George W. Bush’s Wall Street bailout with no strings attached; pushed a watered-down “Volcker Rule” (still delayed) rather than renew Glass-Steagall; failed to prosecute a single Wall Street executive or bank because, according to his Attorney General, Wall Street is just too big to jail; and permanently enshrined the Bush tax cuts for all but the top 2 percent.

Meanwhile, over the last several decades Democrats have allowed Social Security taxes to grow and its revenue stream to become almost as important a source of overall government funding as income taxes; turned their backs on organized labor and labor-law reforms that would have made it easier to form unions; and then, even as they bailed out Wall Street, neglected the burdens of middle-class homeowners who found themselves underwater and their homes worth less than what they paid for them because of the Street’s excesses.

In fairness, it could have been worse. Clinton did stand up to Gingrich. Obama did get the Affordable Care Act. Congressional Democrats have scored tactical victories against social conservatives and Tea Party radicals. But Democrats haven’t responded in any bold or meaningful way to the increasingly concentrated wealth and power, the steady demise of the middle class, and further impoverishment of the nation’s poor. The Party failed to become a movement to reclaim the economy and our democracy.

And now come their pre-concessions on Social Security and Medicare.

Technically, a “chained CPI” might be justifiable if seniors routinely substitute lower-cost alternatives as prices rise, as most other Americans do. But in reality, seniors pay 20 to 40 percent of their incomes for healthcare, including pharmaceuticals — the prices of which are rising much faster than inflation. So there’s no practical justification for reducing Social Security benefits on the assumption inflation isn’t really eating away at those benefits as much as the current cost-of-living adjustment allows. 

Robert B. Reich, chancellor’s professor of public policy at UC Berkeley, was secretary of labor in the Clinton administration. Time magazine named him one of the 10 most effective Cabinet secretaries of the last century. He has written 13 books, including the best-sellers “Aftershock” and “The Work of Nations.” His latest, “Beyond Outrage,” is now out in paperback. He is also a founding editor of The American Prospect magazine and chairman of Common Cause.

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Cyprus: The Mouse that Roared

Protesters raise their open palms showing the word "No" during an anti-bailout rally outside the parliament in Nicosia March 18, 2013. (Photo: REUTERS/Yorgos Karahalis)The Cyprus banking crisis presents, in microcosm, everything that is perverse about the European leaders’ response to the continuing financial collapse. And bravo to the Cypriot Parliament for rejecting the EU’s insane demand to condition a bank bailout on a large tax on small depositors.

If this crisis threatens to spread to other nations, it’s a good object lesson. Here is the punch line of this column: Its time for Europe’s small nations, who are getting slammed into permanent depression by the arrogance of Berlin and Brussels, to think about abandoning the euro. At least the threat would strengthen their bargaining position, and if they actually quit the euro, the result could hardly be worse than their permanent sentence to debtors’ prison. More on that in a moment.

This is not rocket science, folks—austerity doesn’t work.

The back story: Cyprus, with just over a million people, is not a poor country. Its per capita GDP is actually above the European Union average. Cyprus has only used the euro since 2008.

Once Cyprus was in the Eurozone, like the banks of Ireland and Iceland before them, the two main Cypriot banks got cute. They offered above-market interest rates to suck in lots of deposits, mainly, as it turned out, from Russians. Then, to pay the high interest, they made speculative investments. You can guess the rest.

When the Cyprus government turned to the EU and the European Central Bank for a bailout, the idiots in charge came up with a scheme requiring ordinary depositors to pay for the sins of the bankers. (Imagine if the Fed had done that when it bailed out Wall Street.)

Though the details are much more complex in the austerity schemes imposed on Greece, Spain, Portugal, and Ireland, the basic story is the same. The big guys get greedy and the little guys pay the price. This time, the double standard was even more naked than usual.

The Cyprus government went along, but after massive protests by ordinary citizens, the Parliament failed to approve the tax. So, what now?

The Cypriots tried to do a deal with the Russians, offering to sell them rights of offshore natural gas deposits, in exchange for a bailout by Moscow. But that doesn’t seem to be going forward. So now, the Cypriots, inadvertently, have the power of the weak. If they refuse to cave, their European masters may soften the terms.

Or not. The German government, in particular, is dug in. Fiscal sinners must pay dearly. For now, there’s a bank holiday, withdrawals are strictly limited, and the economy is grinding to a halt.

Interestingly, however, the ECB has not suspended advances to Cypriot banks, which would cause a total collapse with wider repercussions. So what’s really occurring is a high-stakes game of chicken.

Enough is enough, I’d say. These policies of no-mercy have pushed all of Europe into prolonged depression. Unemployment rates in Greece and Spain are upwards of 25 percent. Among the young, they approach 50 percent.

Britain, which doesn’t use the Euro, volunteered for austerity. They more they cut spending and raise taxes, the more the economy shrinks and the worse the ratio of debt to GDP gets—because GDP keeps shrinking as a consequence of the austerity.

This is not rocket science, folks—austerity doesn’t work.

But, austerity elsewhere is good for Germany, because it pulls in capital and leaves Germany with the Continent’s lowest interest rates, and because the euro is an undervalued currency where Germany is concerned, which is good for German exports.

It’s time for the peripheral European countries—Greece, Spain, Portugal, Ireland, and now Cyprus—to push back. Only a unified threat to quit the euro might get the attention of Brussels and Berlin.

What would happen if one or more countries actually reverted to their own currencies? Financial elites around the world say that would be catastrophic, but for Europe’s small nations, the catastrophe is now.

If Cyprus or Greece or Spain or Portugal (or better yet, all of them en bloc) decided to quit the euro and revert to drachmas and pesetas, they would need to block bank accounts, impose currency and capital controls, and default on some of all of their foreign debts, which would be re-denominated in the new local currency. There would be lawsuits up the gazork, but the IMF and ECB would have to step in to limit the broader damage even if they disapproved.

It would not be pretty, but it has been done before. In fact, in the past century, some 69 countries have abandoned currencies. It happened after the break-up of the Soviet Union. It happened after World War II. In fact, withdrawal of the Hitler-era Reichsmark in favor of the post 1948 Deutschmark was accompanied by massive debt relief for Germany. (How about that, Ms. Merkel?)

After a relative brief period of worse economic pain, these small nations would emerge with far greater freedom of action over their own economic destiny. They would have currencies that were a lot cheaper internationally, which would be good for exports and for tourism. In the short run, they would have to finance most of their capital needs internally, but foreign capital would soon return. It always does—especially once economies start growing again. And freed from artificial austerity burdens, these nations could resume growth.

The Germans, of course, would have fits. Because Germany enjoys the greatest advantage from the mismanaged euro and would suffer a relative loss if the Eurozone shrank and some debts to German banks were written off. But what are the Germans going to do—invade? Happily, the allies after World War II insisted on a very small German army.

Even if these nations did not end up actually quitting the euro, a credible threat might get the elite in charge to soften the terms of austerity.

In his poem, “I Sing of Olaf Glad and Big,” an ode to an abused conscientious objector who refused to be cowed by psychological torture and beatings, E.E. Cummings wrote:

Olaf (upon what were once knees)

does almost ceaselessly repeat

"there is some shit I will not eat."

That’s not a bad credo for the small, peripheral, suffering nations of Europe.

Selling the Store: Why Democrats Shouldn’t Put Social Security and Medicare on the Table

Prominent Democrats — including the President and House Minority Leader Nancy Pelosi — are openly suggesting that Medicare be means-tested and Social Security payments be reduced by applying a lower adjustment for inflation. House Minority Leader Nancy Pelosi (D-Calif.) said last week she's willing to consider cuts to Social Security as part of a sweeping deficit-reduction package, the so-called 'Grand Bargain.'. (Photo: File)

This is even before they’ve started budget negotiations with Republicans — who still refuse to raise taxes on the rich, close tax loopholes the rich depend on (such as hedge-fund and private-equity managers’ “carried interest”), increase capital gains taxes on the wealthy, cap their tax deductions, or tax financial transactions.

It’s not the first time Democrats have led with a compromise, but these particular pre-concessions are especially unwise.

For over thirty years Republicans have pitted the middle class against the poor, preying on the frustrations and racial biases of average working people who can’t get ahead no matter how hard they try. In the Republican narrative, government takes from the hard-working middle and gives to the undeserving and dependent needy.

In reality, average working people have been stymied because almost all the economic gains of the last three decades have gone to the very top. The middle has lost bargaining power as unions have shriveled. American politics has been flooded with campaign contributions from corporations and the wealthy, which have used their clout to reduce marginal tax rates, widen loopholes, loosen regulations, gain subsidies, and obtain government bailouts when their bets turn sour.

Now five years after the worst downturn since the Great Depression and the biggest bailout in history, the stock market has recouped its losses and corporate profits constitute the largest share of the economy since 1929. Yet the real median wage continues to fall — wages now claim the lowest share of the economy on record — and inequality is still widening. All the economic gains since the trough of the recession have gone to the wealthiest 1 percent of Americans; the bottom 90 percent continue to lose ground.

If there was ever a time for the Democratic Party to champion working Americans and reverse these troubling trends, it is now — forging an alliance between the frustrated middle and the working poor.

What looks like the start of a more buoyant recovery is a sham because the vast majority of Americans have neither the pay nor access to credit that allows them to buy enough to boost the economy. Housing prices and starts are being fueled by investors with easy money rather than would-be home buyers with mortgages. The Fed’s low interest rates have pushed other investors into stocks by default, creating an artificial bull market.

If there was ever a time for the Democratic Party to champion working Americans and reverse these troubling trends, it is now — forging an alliance between the frustrated middle and the working poor. This need not be “class warfare” because a healthy economy is in everyone’s interest. The rich would do far better with a smaller share of a rapidly-growing economy than a ballooning share of one that’s growing at a snail’s pace and a stock market that’s turning into a bubble.

But the modern Democratic Party can’t bring itself to do this. It’s too dependent on the short-term, insular demands of Wall Street, corporate executives, and the wealthy.

It was Bill Clinton, after all, who pushed for repeal of Glass-Steagall, championed the North American Free Trade Act and the World Trade Organization without adequate safeguards for American jobs, and rented out the Lincoln Bedroom to a steady stream of rich executives.

And it was Barack Obama who continued George W. Bush’s Wall Street bailout with no strings attached; pushed a watered-down “Volcker Rule” (still delayed) rather than renew Glass-Steagall; failed to prosecute a single Wall Street executive or bank because, according to his Attorney General, Wall Street is just too big to jail; and permanently enshrined the Bush tax cuts for all but the top 2 percent.

Meanwhile, over the last several decades Democrats have allowed Social Security taxes to grow and its revenue stream to become almost as important a source of overall government funding as income taxes; turned their backs on organized labor and labor-law reforms that would have made it easier to form unions; and then, even as they bailed out Wall Street, neglected the burdens of middle-class homeowners who found themselves underwater and their homes worth less than what they paid for them because of the Street’s excesses.

In fairness, it could have been worse. Clinton did stand up to Gingrich. Obama did get the Affordable Care Act. Congressional Democrats have scored tactical victories against social conservatives and Tea Party radicals. But Democrats haven’t responded in any bold or meaningful way to the increasingly concentrated wealth and power, the steady demise of the middle class, and further impoverishment of the nation’s poor. The Party failed to become a movement to reclaim the economy and our democracy.

And now come their pre-concessions on Social Security and Medicare.

Technically, a “chained CPI” might be justifiable if seniors routinely substitute lower-cost alternatives as prices rise, as most other Americans do. But in reality, seniors pay 20 to 40 percent of their incomes for healthcare, including pharmaceuticals — the prices of which are rising much faster than inflation. So there’s no practical justification for reducing Social Security benefits on the assumption inflation isn’t really eating away at those benefits as much as the current cost-of-living adjustment allows.

Likewise, although a case can be made for reducing the Medicare benefits of higher-income beneficiaries, as a practical matter their savings are almost as vulnerable to rising healthcare costs as are the more modest savings of middle-income retirees. “Means-testing” Medicare also runs the risk of transforming it into a program for the “less fortunate,” which can undermine its political support.

Medicare for all, or even a public option for Medicare, would give the program enough clout to demand health providers move from a fee-for-service system to one that paid instead for healthy outcomes.

In short, Medicare isn’t the problem. The underlying problem is the sky-rocketing costs of health care. Because Medicare’s administrative costs are a fraction of those of private health insurance, Medicare might be part of the solution. Medicare for all, or even a public option for Medicare, would give the program enough clout to demand health providers move from a fee-for-service system to one that paid instead for healthy outcomes.

With healthcare costs under better control, retirees wouldn’t be paying a large and growing portion of their incomes for healthcare — which would alleviate pressure on Social Security. I’m still not convinced a “chained CPI” is necessary, though. A preferable alternative would be to raise the ceiling on the portion of income subject to Social Security taxes (now $113,600).

Besides, Social Security and Medicare are the most popular programs ever devised by the federal government, which is why Republicans hate them so much. If average Americans have trusted the Democratic Party to do one thing it has been to guard these programs from the depredations of the GOP.

Putting these two programs “on the table” is also tantamount to accepting the most insidious and dishonest of all Republican claims: That for too long most Americans have been living beyond their means; that we are rapidly approaching a day of reckoning when we can no longer afford these generous “entitlements;” and that prudence and responsibility dictate that we must now begin to live within our means and cut back these projected expenditures, particularly if we are to have any money left to invest in the young and the disadvantaged.

The truth is the opposite: That for three decades the means of most Americans have been stagnant even though the overall economy has more than doubled in size; that because almost all the gains from growth have gone to the top, most Americans haven’t been able to save enough for retirement or the rising costs of healthcare; and that because of this, Social Security and Medicare are barely adequate as is.

Democrats shouldn’t succumb the lie that the elderly and young are in competition for a portion of a shrinking pie, when in fact the pie is larger than ever. It’s just that those who have the largest and fastest-growing portions refuse to share it.

Paul Ryan’s House Republican budget takes on Medicare, but leaves Social Security alone. Why should Democrats lead the charge on either?

The Republicans are already slashing help for the young and the disadvantaged. Democrats shouldn’t succumb the lie that the elderly and young are in competition for a portion of a shrinking pie, when in fact the pie is larger than ever. It’s just that those who have the largest and fastest-growing portions refuse to share it.

We are the richest nation in the history of the world — richer now than we’ve ever been. But an increasing share of that wealth is held by a smaller and smaller share of the population, who have, in effect, bribed legislators to reduce their taxes and provide loopholes so they pay even less.

The budget deficit “crisis” has been manufactured by them to distract our attention from this overriding fact, and to pit the rest of us against each other for a smaller and smaller share of what remains. Democrats should not conspire.

Needy children should be getting far more help, better pre-school care, better nutrition. Seniors need better healthcare coverage and more Social Security. All Americans need better schools and improved infrastructure.

The richest nation in the history of the world should be able to respond to the legitimate needs of all its citizens.

This work is licensed under a Creative Commons License

Robert Reich

Robert Reich, one of the nation’s leading experts on work and the economy, is Chancellor’s Professor of Public Policy at the Goldman School of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton. Time Magazine has named him one of the ten most effective cabinet secretaries of the last century. He has written thirteen books, including his latest best-seller, Aftershock: The Next Economy and America’s Future; The Work of Nations; Locked in the Cabinet; Supercapitalism; and his newest, Beyond Outrage. His syndicated columns, television appearances, and public radio commentaries reach millions of people each week. He is also a founding editor of the American Prospect magazine, and Chairman of the citizen’s group Common Cause. His widely-read blog can be found at

Economic Update: Guest Victor Wallis

Professor Wolff is joined by Victor Wallis to discuss ecology and economics comparing capitalist and socialist responses to environmental crisis. Part 2 deals with Keynesian economics as a theory that clashes with both the mainstream economics ("neoclassical") that celebrates private capitalism and with critical theories such as Marxian economics that are opposed to capitalism.

On Economic Update with Professor Richard Wolff, Wolff and guests will discuss the current state of the economy, both locally and globally in relation to the economic crisis.

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The Worldwide Offshore Banking System: Cyprus, Offshore Haven of the Russian Oligarchs


The news about the Cyprus banks has been on the radar screen recently.

Somehow, the most frequently asked question is what will Russian oligarchs do about it, because it’s them who have created an offshore world of their own there.

Will they seek new offshore havens? Get the money back to Russia? Stay in Cyprus and adapt to the new realities of life on the island? In fact, the oligarchs and their money are an issue of minor importance. It all brings more serious things in focus, like, for instance, the future of world banking system that had became sick a long time ago. The Cyprus events produce evidence the system is at death’s door… 

Now, about the signs testifying to the assertion.

First. The banking system has lost the makings of an entity sticking to market laws.  The last financial crisis has produced ample evidence of it. The banks displayed lack of vitality. If not for states lending a helping hand, there would have been no banks anymore, they would have all gone to the wall and vanished by now.  Buying out dubious bad debts, acquiring shares in capital stock, granting various stabilization loans, the US and Western Europe injected flows of money into the system.

The US has injected around two trillion dollars of taxpayers into the banking sector.  In fact, it was nothing else, but the nationalization of the largest financial bodies, the Wall Street topping the list. The banks nationalization in the United Kingdom was no less impressive.

True, the nationalizations in question have not been measures of strategic scope, but rather actions of tactical level.  Gradually the state has started to pull out of banking sector and the situation has by and large returned to what it was in 2007-2008.  Such state intervention was called “banking socialism” in the West. A taxpayer is being made accustomed to the idea it’s him who has to bail out large banks. Everybody knows the phrase “Too Big to Die”. It is addressed to Wall Street and London City. Still, the “banking socialism” appears to be too egregious against the background of comprehensive economic liberalism and stokes protest among 90% of people.

Second. For many centuries money-lenders have lobbied banking secrecy laws. It has always been a lynchpin of Western democracy and capitalist financial system.Nowadays the banking secrecy is vanishing in the hays. US financial regulators (first of all  the U.S. Securities and Exchange Commission), the US Justice Department and US Tax Services launched an attack against Switzerland, or its banks to be more precise. This country has always been known to be a bastion of banking secrecy. The attack boiled down to providing information on those who evaded paying taxes to the US government.

The struggle lasted for around three years. Switzerland gave up. The banking secrecy institute doesn’t exist anymore there.  The success has inspired the United States. Foreign Account Tax Compliance Act – FATCA went into effect on January 1 2013. Actually, it requires all banks in the world to be the agents of US Tax Services. The law is an attempt to establish a direct control by the United States over world banks and financial bodies.  It goes without saying, that if the attempt is a success, there will be no banking secrecy in the world anymore.

Third. Banks have stopped to make profits as loan granting institutions. It’s not a phenomenon taking place only during crisis, but rather a fact of everyday life in the days of what we call normal economic growth. The reason is simple.  The United States Federal Reserve System,  the European Central Bank, the Bank of England, the Bank of Japan let the printing press go in full swing after the last financial crisis. It had been considered to bea crime before. Now it is called “quantity alleviation”, sounds smart and nice to ear.

Money has become cheap and accessible. It cannot be expensive when the annual interest rates in the US and Japan are at zero level (0.25%).   Abundance leads to low interest rates for commercial banks. A profit from granting loans becomes an illusion. Banks become something hard to find a definition for instead of being institutions dealing with deposits and loans as they used to be. They convert into kind of transit-distribution entities rechanneling the production of printing presses into far away corners of the world to buy real assets. First of all, I mean undercover FBI activities in 2007-2011.

It has been mentioned many a time. Let’s remember the details. The Federal Reserve System gave out $16 trillion in loans to American and foreign banks in the given period of time.  According to the audit conducted in the summer of 2011, the loans were never included into the Federal System’s balance sheets. Besides, the loans were granted without the approval by Congress, as required by law. Finally, not a dime had been redeemed by the time of audit. The debts appear not to be paid back till now. Looks like colossal sums of money were directed to different parts of the world to buy assets that had abruptly lost values in the interests of the Federal System’s share-holders, that is the Rockefellers and the Rotchilds.  It’s like feast in time of plague. The banks failed to become deposit-lending institutions again.

Fourth. The latest events in Cyprus serve as final symptoms of lethal disease. World banksters (they are called this way for behaving more like gangsters)have lost any shame. They have stuck the paws into the pockets of clients, ignoring such “prejudices” as national and international law. From legal point of view, the introduction of taxes on bank deposits is an encroachment on the rights of clientele – the very same private property that should be protected at any cost as they have said so many times.  It’s not income taxes on deposits (a normal thing in many countries), but the partial confiscation of money that fully belongs to clientele according to the contracts between banks and customers. Nothing else but confiscation was meant   according to the order given by some murky structures of the European Union; the order of this kind could have been given only by global banksters.

The Cyprus confiscation brings something to mind. For instance, the confiscation of foodstuffs by Bolsheviks in the times of Civil War in Russia. Or the order by Franklin Delano Roosevelt in 1939 demanding all gold was to be given to the state by legal entities and individuals in a month.   Actually, it is banking Bolshevism what we are facing.  It has corresponding features.  One is ample financial flows from the state to banks; the other is the confiscation of deposits. It’s limited by Cyprus so far. But it’s just a probe to start with.

Banks lose confidence in the world. Nobody wants to deal with banksters of one’s own accord.  Is it the end of world banking system? I doubt it. People can me made deal with banks. Coercion is not excluded. There is too much Bolshevism in the behavior of contemporary banksters.  It brings to mind Financial Capital by Rudolf Hilferding, the book written half a century ago. Hilferding praised the bankers management skills that helped to establish the formation of a more stable “organized capitalism”. He saw little difference between this type of capitalism and socialism.  The kind of socialism Leon Trotsky Bronstein dreamed of. The system of internment camps.  There is a solid ground to believe the banksters have rushed to drastically reform world banking system to make it match the new world order.  New world order could be compared to “organized capitalism”. Or camp socialism. Whatever you prefer.

P.S.  Late on March 19 the news came the parliament of Cyprus defeated a controversial bailout proposal that would have taxed bank deposits. Still the need to drastically change the world banking system remains. Probably the attempts to impose this kind if tax will be repeated, if not in Cyprus, then in some other country. One way or another, the probe is launched. Now about the deposits. For centuries bankers have made fortune on deposits. The profit has been received thanks to interest rates. These days appear to be coming to the end. For instance, large Swiss banks started to introduce commissions for putting money in deposits. This example may be followed by bankers of other countries. The commission is actually a tax paid not to the state but to a private structure dealing with deposits and loans with government’s permission (license). No matter what happens in Cyprus, the world banking system is in for great shocks and unavoidable transformation.

German Commerzbank Suggests Wealth Tax In Italy Next

While some argue that Cyprus was "one of the biggest money-washing machines for Russian criminals," and others that Cyprus ex-Pat community and energy resources brough deposits (not to say their high deposit interest rates), it seems the European Unio...

What Is Modern Monetary Theory, or “MMT”?

Hundred dollar bill macro(Photo: Tetsumo)Modern Monetary Theory is a way of doing economics that incorporates a clear understanding of the way our present-day monetary system actually works – it emphasizes the frequently misunderstood dynamics of our so-called “fiat-money” economy. Most people are unnerved by the thought that money isn’t “backed” by anything anymore – backed by gold, for example. They’re afraid that this makes money a less reliable store of value. And, of course, it is perfectly true that a poorly managed monetary system, or one which is experiencing something like an oil-price shock, can also experience inflation. But people today simply don’t realize how much bigger a problem the opposite condition can be. Under the gold standard, and largely because of the gold standard, the capitalist world endured eight different deflationary slumps severe enough to be called “depressions.” Since the gold standard was abolished, there have been none – and, as we shall see, this is anything but coincidental.

The great virtue of modern, fiat money is that it can be managed flexibly enough to prevent *both* deflation and also any truly damaging level of inflation – that is, a situation where prices are rising faster than wages, or where both are rising so fast they distort a country’s internal or external markets. Without going into the details prematurely, there are technical reasons why a little bit of inflation is useful and normal. It discourages people from hoarding money and encourages healthy levels of consumption and investment. It promotes growth – provided that a country’s fiscal and monetary authorities manage it properly.

The trick is for the government to spend enough to ensure full employment, but not so much, or in such a way, as to cause shortages or bottlenecks in the real economy. These shortages and bottlenecks are the actual cause of most episodes of excessive inflation. If the mere existence of fiat monetary systems caused runaway inflation, the low, stable rates of consumer-price inflation we have seen over the past thirty-plus years would be pretty difficult to explain.

The essential insight of Modern Monetary Theory (or “MMT”) is that sovereign, currency-issuing countries are only constrained by real limits. They are not constrained, and cannot be constrained, by purely financial limits because, as issuers of their respective fiat-currencies, they can never “run out of money.” This doesn’t mean that governments can spend without limit, or overspend without causing inflation, or that government should spend any sum unwisely. What it emphatically does mean is that no such sovereign government can be forced to tolerate mass unemployment because of the state of its finances – no matter what that state happens to be.

Virtually all economic commentary and punditry today, whether in America, Europe or most other places, is based on ideas about the monetary system which are not merely confused – they are starkly and comprehensively counter-factual. This has led to a public discourse about things like budget deficits and Treasury debt which has become, without exaggeration, utterly detached from reality. Time and time again, these pundits declaim that hyperinflation is imminent, that interest rates are on the verge of an uncontrollable upward spike, and that the jig will be up for sure just as soon as the next T-bond auction fails. But even though, time after time, it is the pundits’ prognostications which fail, no one seems to take any notice. This must change. A reality-based economics is needed to make these things make sense again, and Modern Monetary Theory is here to put everyone on notice that a quite different jig is the one that’s really up.

The gold standard was finally and completely abolished over the course of a two-year period which started in 1971, when Richard Nixon ended the convertibility of the dollar for gold and devalued U.S. currency for the first time since the end of World War II. In 1973, the U.S. stopped trying to peg the dollar to any currency or commodity, instead allowing its value to be set on a freely-floating international currency market. The monetary system we inaugurated then is the one we still have now.

It is not the same as the one which has been adopted by most of Europe – and this very prominent source of confusion about the role of money in the world today will receive close scrutiny at the proper point. But first, we need to carefully unpack the implications of taking both gold and any sort of “peg” out of the monetary equation in the first place. In 1971, gold-linked money became fiat-money – not for the first time, of course, but for the first time in a long time. And it wasn’t just any currency. It was, by far, the world’s most important currency, economically. It was also the world’s reserve currency – the good-as-gold and backed-by-gold currency which the entire non-communist world used to settle transactions between various countries’ central banks. And yet, what everyone, and especially every American was told at the time was that it really wouldn’t make much difference. 

The political emphasis, at the time, was entirely on the importance of making sure that no one panicked. The officials of the Nixon administration acted like cops who had just roped off a fresh crime scene: “Just move right along, folks,” they kept intoning. “Nuthin’ to see here. Nuthin’, to see.” All of the experts and pundits said essentially the same thing – this was just a necessary technical adjustment that was only about complicated international banking rules. It wouldn’t affect domestic-economy transactions at all, or matter to anyone’s individual economic life. And so it didn’t – at least, not right away or in any way that got linked back to the event in later years. The world moved on, and Nixon’s action was mainly just remembered as a typical, high-handed Nixonian move – one which at least carried along with it the virtue of having pissed off Charles De Gaulle.

But what had really happened was epoch-making and paradigm-shattering. It was also, for the rest of the 1970s, polymorphously destabilizing. Because no one had a plan for, or knew, what all of this was going to mean for the reserve currency status of the U.S. dollar. Certainly not Richard Nixon, who was by then embroiled in the early stages of the Watergate scandal. But no one else was in charge of this either. In the moment, other countries and their central banks followed Washington’s line. They wanted to forestall any kind of panic too. But, inevitably, as the real consequences of the new monetary regime kicked in, and as unforeseen and unintended knock-on effects began to be felt, this changed.

The world had a choice to make after the closing of the gold window, but even though it was a very important choice, with very high-stakes outcomes attached to it, there was no international mechanism for making it – it just had to emerge from the chaos. Either the U.S. dollar was going to  continue to be the world’s reserve currency or it wasn’t. If it wasn’t, the related but separate question of what to use instead would come to the fore. But, as things unfolded, no other choice could be imposed on the only economic powerhouse-nation, so all the other little nations eventually just had to work out ways to adjust to the new status quo.

Even after Euro-dollar chaos, oil market chaos, inflationary chaos, a ferocious multi-national property crash and a severe, double-dip American recession, the dollar continued to be the reserve currency. And it still wasn’t going to be either backed by gold or exchangeable at any fixed rate for anything else. But while the implications of this were enormous, almost no one understood them at the time, or ever, subsequently, figured them out. For the 1970s was the period during which Keynesianism was decertified as the reigning economic philosophy of the capitalist world – replaced by something which, at least initially, purported to have internalized and improved upon it. This too was a choice that wasn’t so much made as stumbled into. The chaotic, crisis-wracked world we now live in is the one which subsequent versions of this then-new economic perspective have helped to create.

Conventional, so-called “neo-classical” economics pays little or no attention to monetary dynamics, treating money as just a “veil” over the activity of utility-maximizing individual “agents”. And, as hard as this is for non-economists to believe, the models which these ‘mainstream’ economists make do not even try to account for money, banking or debt. This is one big reason why virtually all members of the economics profession failed to see the housing bubble and were then blind-sided by both the 2008 financial collapse and the grinding, on-going Eurozone crisis which has followed in its wake. And the current group-think among ‘mainstream’ economists is yet another case where failure is no obstacle to continued funding – or continued failure. The absence of any sort of professional, intellectual or academic accountability will be a theme here.

The public policy reversal that began with Margaret Thatcher and Ronald Reagan promised that the deregulation of capitalism would lead to greater shared prosperity for everyone. Today, even though the falsehood of this claim is brutally obvious, the same economic nostrums and stupidities that were used to justify it in the first place continue to be trotted out and paid homage to by a class of financial-media personalities who equate making a lot of money with understanding money. It does not seem to occur to them that financial criminals and practitioners of bank-fraud can get rich through sociopathy alone.

What needs to be said is this: Keynesian economics worked before, and the improved version – now generally called “post-Keynesian” – will work again, to deliver what the market-fundamentalism of the past three decades has patently and persistently failed to deliver *anywhere in the world*. Namely – a prosperity which is shared by everyone. The principal purpose of Modern Monetary Theory is to explain, in detail, why this this worked in the past and how it can be made to work again.

Here’s how: start with a 100% payroll tax cut for both workers and employers – one that will only expire (if it does at all) when we have achieved full employment. This will not de-fund Social Security. And yes, we’ll come back to this point and cover it in great detail in due course. But first, stop and think back on the effect which federal revenue-sharing had on the economy in 2009 and 2010. If you’re thinking there were fewer teachers, nurses, policemen and fire-fighters getting laid off, you are correct. If you’re thinking that more roads, dams, bridges and sewer systems were getting repaired, you’re right again. But if you think that adding 800 million dollars to the deficit over two years is a guaranteed way to generate hyper-inflation, double-digit interest rates and bond-auction failures, leading ultimately to a frenzied worldwide rush to dump dollar-denominated financial assets, well, now would be a good time to ask yourself why you believe this.

One more point – one more plank in this three-point program to restore fiscal and monetary sanity: let’s give everyone who wants to work and is able to work some *work to do*. A currency-issuing government can purchase anything that is for sale in its own currency, including the labor of every last unemployed person who is still looking for a job. So, a key policy recommendation of Modern Monetary Theory is the idea of a “Job Guarantee”. The federal government should take the initiative and organize a transitional-job program for people who just can’t find work in the private sector – as it currently exists in real-world America today. Because the smug one-liner that starts and ends with: “Government can’t create jobs – only the private sector can create jobs!” is about the un-funniest joke on the planet right now.

The government creates millions of jobs already. Isn’t soldiering a job? Isn’t flying the President around in Air Force One a job? What about all the doctors and nurses down at the V.A. hospital, and the day-care workers on military bases? They certainly all appear to be employed. When you go into a convenience store to buy some – uh – local-and-organic Brussels sprouts, say, how closely does the clerk examine the bills and coins you tender? Did any clerk or cashier ever squint or turn your five-dollar bill sideways and back and ask, “Hmm.. are you sure this money came from work that was performed in the private sector?” No. They didn’t. Because the money governments pay to public employees is exactly the same money everyone else gets paid in.

A guaranteed transition-job would need to be different from the familiar examples cited above in certain ways. It would be important to make sure that such a program always hired “from the bottom”, not from the top. That’s an important way of making sure that such programs don’t create real-resource bottlenecks by competing with the private sector for highly skilled or specialized labor. Hence, a transition-program job would more closely resemble an entry-level job at a defense plant. Such a job only exists because of Pentagon orders for fighter planes or helmets or dog food for the K-9 units. There is no sort of ambiguity about where the stuff is going or how it is being paid for. And when the people who mow the lawn or sweep the parking lot get paid, they know, without having to think about it, that their wages will spend exactly the same way down at the grocery store as everyone else’s.

Defence spending is actually quite a good analog to the idea of a transitional-job program – one that would provide work to any and every person who wanted it. The only time the American economy ever achieved an extended, years-long period with zero unemployment, low, well-controlled inflation rates and with no significant financial aftershock at the end was the World War II era – broadly defined to include the Lend-Lease buildup of 1940 and 1941. This solution to the problem of mass unemployment worked in the 1940s and it would work today. In the 1940s, of course,the jobs were almost all war-related. But, economically, this makes no difference.

The connection between war and economic prosperity has been noticed before. It led some 19th Century thinkers (and also Jimmy Carter) to wonder whether there could be a “moral equivalent of war”. Well, there can be – by way of the Job Guarantee. The biggest pre-condition has been met, because one result of most wars has been that they forced the combatant countries off the gold standard. Now, all countries have left it. What matters next is whether there are enough real resources available to produce goods and services that are equal in value to the government’s job-guarantee spending. If these resources are available – if they are not already being used to produce something else – then the increased demand that results from the payment of job-guarantee wages will not be inflationary, regardless of what they go to produce.  

Money is 100% fungible.  Whether the job-guarantee program makes fighter planes or wind turbines makes no economic difference – the workers employed by it will spend their wages on the same things other workers buy. What matters, economically, is whether there are sufficient real resources and labor available to produce these goods and services in line with the increased demand for them. If there are, no additional government intervention is necessary in order to mobilize them. The same private-profit motivation which induces a company to produce one widget can be relied upon to induce the production of another one.

Most popular misconceptions about job-guarantee work as inefficient “make-work” ignore these private-sector dynamics. It is simply assumed that if the publicly-funded workers don’t personally contribute to making shoes or soap, their wages will result in “more money chasing the same goods” – and that this will automatically cause inflation. This is an obvious fallacy which has been empirically falsified many, many times, but most people continue to treat it as an article of economic faith. So, one of MMT’s most pressing tasks today is to make the case that we can, indeed, end mass unemployment without undermining price stability.

There are many other economic problems and challenges in the world today. Modern Monetary Theory is not a panacea for them. Even if its insights and policy recommendations become widely known, and even if they are someday fully implemented, societies will still face challenges such as inequality, regulatory capture and predatory financial behavior, including the kind of predatory mortgage lending that led to the worldwide crash in 2008. In order to understand these additional economic problems and dangers, we need to look at economics in a larger context, and correctly situate Modern Monetary Theory within this wider frame.

Modern Monetary Theory is based on earlier work which also focused on the relationship between the state and its money – ideas which come under the generic designation of “Chartalism”. MMT also remains firmly within the Keynesian tradition of macroeconomnic theorizing, and recognizes an extensive interconnectedness with other economists whose work is categorized as “post-Keynesian”. Some of MMT’s other notable academic progenitors include Hyman Minsky, Abba Lerner and, more recently, the English economist Wynne Godley, whose emphasis on achieving consistency in the analysis of economic stocks and flows presaged the emphasis which MMT-orbit economists put on it today.

The label “Modern Monetary Theory” is not particularly apt. It became attached to its advocates through the informal agency of Internet comment-threading, not because anyone considered it either very useful or very descriptive. In other words, it “just stuck”. In fact, the identity of the first person to use the “MMT” label is lost to online history. So, to be clear, MMT is only modern in the broad sense in which virtually everything that got started in the Western world in the 19th Century is called “modern”. It is not exclusively monetary either – it has quite a bit to say about fiscal policy as well. And it was not, initially, theoretical – it started as a body of quite empirical observations about the dynamics of the monetary system and the many ways they are being misunderstood these days. For MMT has a dual pedigree which is itself quite remarkable.

On the one hand, it represents the patient, decades-long academic work of a cadre of perhaps eight or ten working economists (originally there were three or four, plus their students). But MMT was independently co-discovered by a single person. A person who had no specific training or academic background in economics at all – the American businessman and auto-racing enthusiast Warren Mosler. How he came to initially suspect and, ultimately, clearly understand that the spending of sovereign governments had become operationally independent of their taxing and borrowing is recounted in his 2010 book, “The Seven Deadly Innocent Frauds of Economic Policy.”  The 1996 publication of an earlier book of his, “Soft-Currency Economics,” launched MMT as a social, intellectual and online movement. And while the academic side of MMT was completely unknown to him at first, it was not long before the two camps discovered each other, and this has led to a very extensive collaboration in the years since.

Today, MMT is being discovered by a rapidly-growing worldwide Internet audience. And the public’s growing interest in MMT is evident in other ways as well. One of the movement’s leading spokespersons, Dr. Stephanie Kelton of the University of Missouri at Kansas City, has been a repeat guest on an MSNBC weekend show. She, and other MMT economists, are frequent guests on a number of popular, mostly-progressive radio programs as well – both in the U.S. and in English-speaking countries around the world. And Warren Mosler’s seminal 2010 book was recently published in Italian.

(For obvious reasons, the stressed and austerity-damaged countries of the Eurozone’s southern tier are places where people are becoming more open to fresh economic ideas. At a 3-day conference in Rimini, Italy in 2012, a panel of four MMT/post-Keynesian speakers lectured to a crowd of over 2,000 people in a packed sports arena. Many in the audience crossed multiple international borders to attend.)

MMT has been mentioned, though not yet accurately described, in several of Paul Krugman’s columns for the New York Times. And certain aspects of it have been noticed even more widely in the media – for MMT is the theoretical basis of the “trillion-dollar coin” approach to fiscal cliffs. (The idea was first proposed and debated on Warren Mosler’s website.) In short, MMT is getting harder and harder to ignore. And since it really does have answers to some of the world’s most urgent and otherwise perplexing questions, it seems likely that MMT will soon become quite impossible to ignore. What follows is written to try to hasten that day.

This will be an intentionally simplified, non-technical exposition of the principal tenets of Modern Monetary Theory. The no-algebra version, in other words. It is intended as a guide for non-economists and other lay people who may have heard the phrase or seen a video clip about MMT and who wish to learn more. It is not a substitute for more complete and, necessarily, much more technical treatments that are available elsewhere, including the MMT Primer here at NEP.

Confining myself to examples and cases so widely known that no one will wonder where they came from accounts for the absence of footnotes in this. And since I make no claim to have learned knowledge of anything, I will just say, up front, that everything I know was thought of first by someone else. But rather than interrupt the narrative or complicate the process by trying to establish who said any particular thing first, I hope it is sufficient for me to just thank the MMT community at large for any material that I have borrowed or re-purposed along the way.

I also depart, here, from MMT’s mostly-neutral stance on contested political and ideological questions. For while MMT principles apply equally, irrespective of things like the size of government or the conceptions and misconceptions of people running governments, it has a policy bias no one can really miss.  I choose to emphasize rather than de-emphasize this bias – and I will sometimes even put it front-and-center. I hope no one will mistake this for any sort of rebuke toward those who choose not to do this. We have simply reached a point where practical applications need to be put on an equal footing with their theoretical underpinnings.

For somewhere – maybe somewhere in Italy – and on a day which may not be all that far off now, Modern Monetary Theory is going to start changing the world.

The Sequester’s Hidden Danger

The sequester is dangerous, but not for the reasons we think. Contrary to what some alarmists predicted, there is little evidence that the automatic, across-the-board cuts to the US budget that went into effect on Friday are causing cataclysmic harm. The stock market has risen slightly to near record heights, and most economists agree that the $85 billion down payment this year on about $1 trillion in cuts over the next ten will not trip the economy into recession. Recent polls, meanwhile, indicate that a large part of the electorate has no opinion on the sequester, which is still poorly understood—making it perhaps less of a political liability for either party than some anticipated.Felix Vallotton

But what makes the sequester threatening is not that it will plunder the economy in 2013. Rather, it is that these arbitrary cuts are exactly the opposite of what the economy needs both in the short run, and—if the promised $1 trillion in further cuts over ten years is made—in the long term. In the coming months, it will make it difficult for the president to cut the unemployment rate from current levels around 8 percent, a fact that Republicans must enjoy since it reduces their chances of losing the House in 2014, and raises their chances of winning the presidency in 2016 if they can continue to cut spending.

And the sequester will be painful. Educational and housing subsidies will be cut, as will unemployment insurance and research spending. More than $40 billion will be cut from the defense budget, music to my ears, but not to those who will lose jobs at defense contractors. Above all, claims that economic growth down the road will be spurred by reducing the federal deficit through spending cuts are not credible.

Indeed, the real danger of the sequester lies in the misguided deficit-cutting mania that created it in the first place. Put in place by Congress with the president’s approval and encouragement in 2011, the idea of automatic sequestration came out of the same obsession with austerity measures that has put much of Europe into recession and prevented the US economic recovery from fulfilling its potential. Deficit reduction has wide support in Washington and its most active promoters are financed by some of the nation’s wealthiest citizens, who argue that it is a far better alternative than asking them to contribute more in taxes. We must cut deficits now, even before we have a full economic recovery, the thinking goes, to deal with rapidly rising healthcare costs that will drive up the government’s Medicare and Medicaid expenses beginning twenty-five years from now.

This approach to economic policy has no sound basis in either historical experience or current economic analysis. Washington’s austerity economics—the notion that you can induce economic recovery in a weak economy simply by cutting government expenditures—willfully ignores, denies, or declares nonsense the true lessons of the Great Depression, which demonstrated precisely the opposite. More or less since Adam Smith, economists had argued you must increase savings to increase investment, which in turn drove economic growth and produced rising incomes. One way to do this is to get federal deficits down as a percent of GDP. But in the 1930s, it was clear that government efforts to save money had not prevented the global economy from tumbling into severe depression. To the contrary, they helped create the depression of the early 1930s and then a second major downtown in 1937. This is around the time that John Maynard Keynes had the dramatic insight that it wasn’t savings that led to investment but the other way around: more government spending raises incomes and therefore savings, from which more investment is made.

It is true that Keynesian stimulus was derided by economists beginning in the 1970s. Only monetary stimulus—that is, cutting interest rates—was thought to matter. But now rates have been brought so low that they do far less than hoped. And in truth there has been a growing recognition that monetary policy is not by itself adequate to assure a strong economy. Meantime, a “new” Keynesianism developed among some but by no means all mainstream economists, who support the view that modest government stimulus is sensible. But this general approach is a pallid version of the original and still holds, I think too strongly, that reducing deficits is necessary to assure adequate savings.

We need not go back to the Great Depression to understand the dangers of austerity and deficit mania. In our own time, the abysmal performance of austerity-bound European economies have demonstrated the same problem. Take the case of Britain. After the recent global economic crisis, David Cameron, Britain’s Conservative Prime Minister, and George Osborne, his absurdly overconfident chancellor of the Exchequer, repudiated Keynes’ central insight. Two years ago, with the British economy just coming out of recession, these men raised taxes and cut social spending in order to reduce the British deficit and, they claimed, enable newly confident businesses to use all that savings to invest and re-charge the economy. It was pure anti-Keynesianism. The chancellor promised that the budget deficit would fall nicely as a percent of gross domestic product. Thus, a path would be cleared for more capital investment by otherwise “crowded out” private companies.

None of that has come close to happening. Britain is now probably entering its third recession since 2009. With such slow growth, tax revenue is dismal, and the country’s deficit, excluding interest payments, remains the highest, by percentage of GDP, of any European nation. And what of all that promised investment that was predicted? Not only did a chunk of new savings fail to materialize, capital injections in the economy have been weak. They contributed only 0.4 percent to economic growth in 2012, half of the government’s forecast. As for exports, which the government also insisted would rise as the value of the pound fell, the nation’s current account deficit, the excess of its imports (plus investment income) over exports, is now no better than in 2009.

Despite these dismal results, the British citizenry apparently still think the policies are sensible. They have not thrown Cameron and Osborne out. But what is driving Britain’s growth is consumer spending and government spending, not business investment and exports as the austerity advocates forecast. And consumer spending alone is just not strong enough to produce adequate growth. It is Keynes who was right, not Osborne. Meanwhile, economies in Europe’s southern tier, including Spain, Portugal, Italy, and Greece, are mired in recession.

These policies are an appalling intellectual failure. Yet our current leaders in Washington seem unable to learn this lesson, even in the face of such stark examples of Britain and other European countries. Though he backed the stimulus in early 2009, Barack Obama had already displayed a sympathy for deficit reduction policies before he took office, and he subsequently appointed the Bowles-Simpson commission to suggest ways to balance the budget as soon as possible. He did not accept their proposals, but the austerity advocates quickly gained the upper hand.

Many may wonder why it is so easy to renounce the remarkable Keynes. In part, it is because he so deeply challenged Smith’s Invisible Hand itself, that almost religiously held principle that markets themselves are self-adjusting as prices change to make demand and supply equal.

We all know that austerity economics rules in Europe, but it also rules in the US where the damage done will be considerable if less obvious. Even policymakers who are sympathetic to Keynesianism for the most part propose only moderate stimulus. As a result of Washington’s refusal to raise taxes to cut deficits, the government will not invest adequately in infrastructure, green technologies, public research, pre-k education, and in many other areas of critical need—all in order to meet spurious deficit cutting goals. It also finds expression in a greater willingness to cut needed programs, mostly for the poor, who will suffer as a result. At some point, such mean-spiritedness must take a toll on a nation’s moral confidence. And the budget battles may only just be beginning.

The economy would have been significantly stronger already had there been not been $1.5 trillion in earlier budget cuts. And it may yet improve once we digest the latest round of cuts. But let’s not mistakenly attribute future improvement in the economy to austerity policies. It will be in spite of them.

© 2013 NYR Blog

Jeff Madrick

Jeff Madrick teaches at Cooper Union. His latest book is Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present.

Quantitative Easing (QE) for the People: Comedian Grillo’s Populist Plan for Italy


Default on the public debt, nationalization of the banks, and a citizen dividend could actually save the Italian economy.

Comedian Beppe Grillo was surprised himself when his Five Star Movement got 8.7 million votes in the Italian general election of February 24-25th.  His movement is now the biggest single party in the chamber of deputies, says The Guardian, which makes him “a kingmaker in a hung parliament.”

Grillo’s is the party of “no.” In a candidacy based on satire, he organized an annual “V‑Day Celebration,” the “V” standing for vaffanculo (“f—k off”).  He rejects the status quo—all the existing parties and their monopoly control of politics, jobs, and financing—and seeks a referendum on all international treaties, including NATO membership, free trade agreements and the Euro.

“If we get into parliament,” says Grillo, “we would bring the old system down, not because we would enjoy doing so but because the system is rotten.” Critics fear, and supporters hope, that if his party succeeds, it could break the Euro system.

But being against everything, says Mike Whitney in Counterpunch, is not a platform:

To govern, one needs ideas and a strategy for implementing those ideas. Grillo’s team has neither. They are defined more in terms of the things they are against than things they are for. It’s fine to want to “throw the bums out”, but that won’t put people back to work or boost growth or end the slump. Without a coherent plan to govern, M5S could end up in the political trash heap, along with their right-wing predecessors, the Tea Party.

Steve Colatrella, who lives in Italy and also has an article in Counterpunch on the Grillo phenomenon, has a different take on the surprise win. He says Grillo does have a platform of positive proposals. Besides rejecting all the existing parties and treaties, Grillo’s program includes the following:

  • unilateral default on the public debt;
  • nationalization of the banks; and
  • a guaranteed “citizenship” income of 1000 euros a month.

It is a platform that could actually work. Austerity has been tested for a decade in the Eurozone and has failed, while the proposals in Grillo’s plan have been tested in other countries and have succeeded.

Default: Lessons from Iceland and South America

Default on the public debt has been pulled off quite successfully in Iceland, Argentina, Ecuador, and Russia, among other countries.  Whitney cites a clip from Grillo’s blog suggesting that this is also the way out for Italy:

The public debt has not been growing in recent years because of too much expenditure . . . Between 1980 and 2011, spending was lower than the tax revenue by 484 billion (thus we have been really virtuous) but the interest payments (on the debt of 2,141 billion) that we had to pay in that period have made us poor. In the last 20 years, GDP has been growing slowly, while the debt has exploded.

. . . [S]peculators . . . are contributing to price falls so as to bring about higher interest rates. It’s the usurer’s technique. Thus the debt becomes an opportunity to maximize earnings in the market at the expense of the nation. . . . If financial powerbrokers use speculation to increase their earnings and force governments to pay the highest possible interest rates, the result is recession for the State that’s in debt as well as their loss of sovereignty.

. . . There are alternatives. These are being put into effect by some countries in South America and by Iceland. . . . The risk is that we are going to reach default in any case with the devaluation of the debt, and the Nation impoverished and on its knees. [Beppe Grillo blog]

Bank Nationalization:  China Shows What Can Be Done

Grillo’s second proposal, nationalizing the banks, has also been tested and proven elsewhere, most notably in China. In an April 2012 article in The American Conservative titled “China’s Rise, America’s Fall,” Ron Unz observes:

During the three decades to 2010, China achieved perhaps the most rapid sustained rate of economic development in the history of the human species, with its real economy growing almost 40-fold between 1978 and 2010.  In 1978, America’s economy was 15 times larger, but according to most international estimates, China is now set to surpass America’s total economic output within just another few years.

According to Eamonn Fingleton in In The Jaws of the Dragon (2009), the fountain that feeds this tide is a strong public banking sector:

Capitalism’s triumph in China has been proclaimed in countless books in recent years. . . .  But . . . the higher reaches of its economy remain comprehensively controlled in a way that is the antithesis of everything we associate with Western capitalism.  The key to this control is the Chinese banking system . . . [which is] not only state-owned but, as in other East Asian miracle economies, functions overtly as a major tool of the central government’s industrial policy.

Guaranteed Basic Income—Not Just Welfare

Grillo’s third proposal, a guaranteed basic income, is not just an off-the-wall, utopian idea either. A national dividend has been urged by the “Social Credit” school of monetary reform for nearly a century, and the U.S. Basic Income Guarantee Network has held a dozen annual conferences.  They feel that a guaranteed basic income is the key to keeping modern, highly productive economies humming.

In Europe, the proposal is being pursued not just by Grillo’s southern European party but by the sober Swiss of the north.  An initiative to establish a new federal law for an unconditional basic income was formally introduced in Switzerland in April 2012. The idea consists of giving to all citizens a monthly income that is neither means-tested nor work-related. Under the Swiss referendum system of direct democracy, if the initiative gathers more than 100,000 signatures before October 2013, the Federal Assembly is required to look into it.

Colatrella does not say where Grillo plans to get the money for Italy’s guaranteed basic income, but in Social Credit theory, it would simply be issued outright by the government; and Grillo, who has an accounting background, evidently agrees with that approach to funding.  He said in a presentation available on YouTube:

The Bank of Italy a private join-stock company, ownership comprises 10 insurance companies, 10 foundations, and 10 banks, that are all joint-stock companies . . .  They issue the money out of thin air and lend it to us.  It’s the State who is supposed to issue it.  We need money to work.  The State should say: “There’s scarcity of money?  I’ll issue some and put it into circulation.  Money is plentiful?  I’ll withdraw and burn some of it.” . . . Money is needed to keep prices stable and to let us work.

The Key to a Thriving Economy

Major C.H. Douglas, the thought leader of the Social Credit movement, argued that the economy routinely produces more goods and services than consumers have the money to purchase, because workers collectively do not get paid enough to cover the cost of the things they make.  This is true because of external costs such as interest paid to banks, and because some portion of the national income is stashed in savings accounts, investment accounts, and under mattresses rather than spent on the GDP.

To fill what Social Crediters call “the gap,” so that “demand” rises to meet “supply,” additional money needs to be gotten into the circulating money supply. Douglas recommended doing it with a national dividend for everyone, an entitlement by “grace” rather than “works,” something that was necessary just to raise purchasing power enough to cover the products on the market.

In the 1930s and 1940s, critics of Social Credit called it “funny money” and said it would merely inflate the money supply. The critics prevailed, and the Social Credit solution has not had much chance to be tested. But the possibilities were demonstrated in New Zealand during the Great Depression, when a state housing project was funded with credit issued by the Reserve Bank of New Zealand, the nationalized central bank. According to New Zealand commentator Kerry Bolton, this one measure was sufficient to resolve 75% of unemployment in the midst of the Great Depression.

Bolton notes that this was achieved without causing inflation.  When new money is used to create new goods and services, supply rises along with demand and prices remain stable; but the “demand” has to come first. No business owner will invest in more capacity or production without first seeing a demand. No demand, no new jobs and no economic expansion.

The Need to Restore Economic Sovereignty

The money for a guaranteed basic income could be created by a nationalized central bank in the same way that the Reserve Bank of New Zealand did it, and that central bank “quantitative easing” (QE) is created out of nothing on a computer screen today.  The problem with today’s QE is that it has not gotten money into the pockets of consumers. The money has gotten—and can get—no further than the reserve accounts of banks, as explained here and hereA dividend paid directly to consumers would be “quantitative easing” for the people.

A basic income guarantee paid for with central bank credit would not be “welfare” but would eliminate the need for welfare.  It would be social security for all, replacing social security payments, unemployment insurance, and welfare taxes.  It could also replace much of the consumer debt that is choking the private economy, growing exponentially at usurious compound interest rates.

As Grillo points out, it is not the cost of government but the cost of money itself that has bankrupted Italy. If the country wishes to free itself from the shackles of debt and restore the prosperity it once had, it will need to take back its monetary sovereignty and issue its own money, either directly or through its own nationalized central bank. If Grillo’s party comes to power and follows through with his platform, those shackles on the Italian economy might actually be released.

Ellen Brown is an attorney and the author of eleven books, including Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free. Her websites are and She is also chairman of the Public Banking Institute. Details of the June 2013 Public Banking Institute conference are here.

Money for the People: Comedian Grillo’s Populist Plan for Italy

Money for the People: Comedian Grillo’s Populist Plan for Italy

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Posted on Mar 7, 2013
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By Ellen Brown, Web of Debt

This piece first appeared at Web of Debt.

Comedian Beppe Grillo was surprised himself when his Five Star Movement got 8.7 million votes in the Italian general election of February 24-25th.  His movement is now the biggest single party in the chamber of deputies, says The Guardian, which makes him “a kingmaker in a hung parliament.” 

Grillo’s is the party of “no.” In a candidacy based on satire, he organized an annual “V Day Celebration,” the “V” standing for vaffanculo (“f—k off”).  He rejects the status quo—all the existing parties and their monopoly control of politics, jobs, and financing—and seeks a referendum on all international treaties, including NATO membership, free trade agreements and the Euro.

“If we get into parliament,” says Grillo, “we would bring the old system down, not because we would enjoy doing so but because the system is rotten.” Critics fear, and supporters hope, that if his party succeeds, it could break the Euro system.

But being against everything, says Mike Whitney in Counterpunch, is not a platform:

To govern, one needs ideas and a strategy for implementing those ideas. Grillo’s team has neither. They are defined more in terms of the things they are against than things they are for. It’s fine to want to “throw the bums out”, but that won’t put people back to work or boost growth or end the slump. Without a coherent plan to govern, M5S could end up in the political trash heap, along with their right-wing predecessors, the Tea Party.

Steve Colatrella, who lives in Italy and also has an article in Counterpunch on the Grillo phenomenon, has a different take on the surprise win. He says Grillo does have a platform of positive proposals. Besides rejecting all the existing parties and treaties, Grillo’s program includes the following:

• unilateral default on the public debt;
• nationalization of the banks; and
• a guaranteed “citizenship” income of 1000 euros a month.

It is a platform that could actually work. Austerity has been tested for a decade in the Eurozone and has failed, while the proposals in Grillo’s plan have been tested in other countries and have succeeded.

Default: Lessons from Iceland and South America

Default on the public debt has been pulled off quite successfully in Iceland, Argentina, Ecuador, and Russia, among other countries.  Whitney cites a clip from Grillo’s blog suggesting that this is also the way out for Italy:

The public debt has not been growing in recent years because of too much expenditure . . . Between 1980 and 2011, spending was lower than the tax revenue by 484 billion (thus we have been really virtuous) but the interest payments (on the debt of 2,141 billion) that we had to pay in that period have made us poor. In the last 20 years, GDP has been growing slowly, while the debt has exploded.

. . . [S]peculators . . . are contributing to price falls so as to bring about higher interest rates. It’s the usurer’s technique. Thus the debt becomes an opportunity to maximize earnings in the market at the expense of the nation. . . . If financial powerbrokers use speculation to increase their earnings and force governments to pay the highest possible interest rates, the result is recession for the State that’s in debt as well as their loss of sovereignty.

. . . There are alternatives. These are being put into effect by some countries in South America and by Iceland. . . . The risk is that we are going to reach default in any case with the devaluation of the debt, and the Nation impoverished and on its knees. [Beppe Grillo blog]

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Quantitative Easing for the People: Default on the Public Debt, Nationalize the Banks, and...

Comedian Beppe Grillo was surprised himself when his Five Star Movement got 8.7 million votes in the Italian general election of February 24-25th. His movement is now the biggest single party in the chamber of deputies, says The Guardian, which makes him “a kingmaker in a hung parliament.”

Grillo’s is the party of “no.” In a candidacy based on satire, he organized an annual “V Day Celebration,” the “V” standing for vaffanculo (“f—k off”). He rejects the status quo—all the existing parties and their monopoly control of politics, jobs, and financing—and seeks a referendum on all international treaties, including NATO membership, free trade agreements and the Euro.

“If we get into parliament,” says Grillo, “we would bring the old system down, not because we would enjoy doing so but because the system is rotten.” Critics fear, and supporters hope, that if his party succeeds, it could break the Euro system.

But being against everything, says Mike Whitney in Counterpunch, is not a platform:

To govern, one needs ideas and a strategy for implementing those ideas. Grillo’s team has neither. They are defined more in terms of the things they are against than things they are for. It’s fine to want to “throw the bums out”, but that won’t put people back to work or boost growth or end the slump. Without a coherent plan to govern, M5S could end up in the political trash heap, along with their right-wing predecessors, the Tea Party.

Steve Colatrella, who lives in Italy and also has an article in Counterpunch on the Grillo phenomenon, has a different take on the surprise win. He says Grillo does have a platform of positive proposals. Besides rejecting all the existing parties and treaties, Grillo’s program includes the following:

• unilateral default on the public debt;
• nationalization of the banks; and
• a guaranteed “citizenship” income of 1000 euros a month.

It is a platform that could actually work. Austerity has been tested for a decade in the Eurozone and has failed, while the proposals in Grillo’s plan have been tested in other countries and have succeeded.

Default: Lessons from Iceland and South America

Default on the public debt has been pulled off quite successfully in Iceland, Argentina, Ecuador, and Russia, among other countries. Whitney cites a clip from Grillo’s blog suggesting that this is also the way out for Italy:

The public debt has not been growing in recent years because of too much expenditure . . . Between 1980 and 2011, spending was lower than the tax revenue by 484 billion (thus we have been really virtuous) but the interest payments (on the debt of 2,141 billion) that we had to pay in that period have made us poor. In the last 20 years, GDP has been growing slowly, while the debt has exploded.

. . . [S]peculators . . . are contributing to price falls so as to bring about higher interest rates. It’s the usurer’s technique. Thus the debt becomes an opportunity to maximize earnings in the market at the expense of the nation. . . . If financial powerbrokers use speculation to increase their earnings and force governments to pay the highest possible interest rates, the result is recession for the State that’s in debt as well as their loss of sovereignty.

. . . There are alternatives. These are being put into effect by some countries in South America and by Iceland. . . . The risk is that we are going to reach default in any case with the devaluation of the debt, and the Nation impoverished and on its knees. [Beppe Grillo blog]

Bank Nationalization: China Shows What Can Be Done

Grillo’s second proposal, nationalizing the banks, has also been tested and proven elsewhere, most notably in China. In an April 2012 article in The American Conservative titled “China’s Rise, America’s Fall,” Ron Unz observes:

During the three decades to 2010, China achieved perhaps the most rapid sustained rate of economic development in the history of the human species, with its real economy growing almost 40-fold between 1978 and 2010. In 1978, America’s economy was 15 times larger, but according to most international estimates, China is now set to surpass America’s total economic output within just another few years.

According to Eamonn Fingleton in In The Jaws of the Dragon (2009), the fountain that feeds this tide is a strong public banking sector:

Capitalism’s triumph in China has been proclaimed in countless books in recent years. . . . But . . . the higher reaches of its economy remain comprehensively controlled in a way that is the antithesis of everything we associate with Western capitalism. The key to this control is the Chinese banking system . . . [which is] not only state-owned but, as in other East Asian miracle economies, functions overtly as a major tool of the central government’s industrial policy.

Guaranteed Basic Income—Not Just Welfare

Grillo’s third proposal, a guaranteed basic income, is not just an off-the-wall, utopian idea either. A national dividend has been urged by the “Social Credit” school of monetary reform for nearly a century, and the U.S. Basic Income Guarantee Network has held a dozen annual conferences. They feel that a guaranteed basic income is the key to keeping modern, highly productive economies humming.

A basic income guarantee paid for with central bank credit would not be “welfare” but would eliminate the need for welfare. It would be social security for all, replacing social security payments, unemployment insurance, and welfare taxes.

In Europe, the proposal is being pursued not just by Grillo’s southern European party but by the sober Swiss of the north. An initiative to establish a new federal law for an unconditional basic income was formally introduced in Switzerland in April 2012. The idea consists of giving to all citizens a monthly income that is neither means-tested nor work-related. Under the Swiss referendum system of direct democracy, if the initiative gathers more than 100,000 signatures before October 2013, the Federal Assembly is required to look into it.

Colatrella does not say where Grillo plans to get the money for Italy’s guaranteed basic income, but in Social Credit theory, it would simply be issued outright by the government; and Grillo, who has an accounting background, evidently agrees with that approach to funding. He said in a presentation available on YouTube:

The Bank of Italy a private join-stock company, ownership comprises 10 insurance companies, 10 foundations, and 10 banks, that are all joint-stock companies . . . They issue the money out of thin air and lend it to us. It’s the State who is supposed to issue it. We need money to work. The State should say: “There’s scarcity of money? I’ll issue some and put it into circulation. Money is plentiful? I’ll withdraw and burn some of it.” . . . Money is needed to keep prices stable and to let us work.

The Key to a Thriving Economy

Major C.H. Douglas, the thought leader of the Social Credit movement, argued that the economy routinely produces more goods and services than consumers have the money to purchase, because workers collectively do not get paid enough to cover the cost of the things they make. This is true because of external costs such as interest paid to banks, and because some portion of the national income is stashed in savings accounts, investment accounts, and under mattresses rather than spent on the GDP.

To fill what Social Crediters call “the gap,” so that “demand” rises to meet “supply,” additional money needs to be gotten into the circulating money supply. Douglas recommended doing it with a national dividend for everyone, an entitlement by “grace” rather than “works,” something that was necessary just to raise purchasing power enough to cover the products on the market.

In the 1930s and 1940s, critics of Social Credit called it “funny money” and said it would merely inflate the money supply. The critics prevailed, and the Social Credit solution has not had much chance to be tested. But the possibilities were demonstrated in New Zealand during the Great Depression, when a state housing project was funded with credit issued by the Reserve Bank of New Zealand, the nationalized central bank. According to New Zealand commentator Kerry Bolton, this one measure was sufficient to resolve 75% of unemployment in the midst of the Great Depression.

Bolton notes that this was achieved without causing inflation. When new money is used to create new goods and services, supply rises along with demand and prices remain stable; but the “demand” has to come first. No business owner will invest in more capacity or production without first seeing a demand. No demand, no new jobs and no economic expansion.

The Need to Restore Economic Sovereignty

The money for a guaranteed basic income could be created by a nationalized central bank in the same way that the Reserve Bank of New Zealand did it, and that central bank “quantitative easing” (QE) is created out of nothing on a computer screen today. The problem with today’s QE is that it has not gotten money into the pockets of consumers. The money has gotten—and can get—no further than the reserve accounts of banks, as explained here and here. A dividend paid directly to consumers would be “quantitative easing” for the people.

A basic income guarantee paid for with central bank credit would not be “welfare” but would eliminate the need for welfare. It would be social security for all, replacing social security payments, unemployment insurance, and welfare taxes. It could also replace much of the consumer debt that is choking the private economy, growing exponentially at usurious compound interest rates.

As Grillo points out, it is not the cost of government but the cost of money itself that has bankrupted Italy. If the country wishes to free itself from the shackles of debt and restore the prosperity it once had, it will need to take back its monetary sovereignty and issue its own money, either directly or through its own nationalized central bank. If Grillo’s party comes to power and follows through with his platform, those shackles on the Italian economy might actually be released.

Ellen Brown

Ellen Brown developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest of eleven books, she turns those skills to an analysis of the Federal Reserve and “the money trust.” She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. She is president of the Public Banking Institute, http://PublicBankingInstitute. org , and has websites at and

Whiny Billionaires in Need of Sequestration

Whiny Billionaires in Need of Sequestration

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Posted on Mar 5, 2013
AP/Osamu Honda

In this March 10, 2009 photo, Stephen A Schwarzman, Chairman & CEO, The Blackstone Group discusses “The Global Impact of the Financial Crisis.”

By Robert Scheer

Where is the Occupy movement now that the depravity of the super rich is on full display? 

The suddenly increased national debt is primarily the result of a deep recession caused by the top bankers and hedge fund hustlers of Wall Street, saved from their folly by massive and costly federal intervention. The result has been a season of obscene profit for them, while the rest of the nation has floundered. But instead of making the rich pay, ordinary citizens will be visited with job furloughs and a savaging of public services that often are lifesaving.

Consider two stories this week that make Karl Marx look prescient: one, in The Wall Street Journal, concerns the payout of $1 billion in bonuses to nine private equity executives; the other, under a New York Times headline, states that the jobless recovery has bee