Monday, May 29, 2006

Signs of the Economic Apocalypse, 5-29-06

From Signs of the Times, 5-29-06:

Gold closed at 653.30 dollars an ounce on Friday, down 0.9% from the previous Friday’s close of $659.00. The dollar closed at 0.7860 euros on Friday, up 0.4% from 0.7827 for the week. That put the euro at 1.2722 dollars compared to 1.2777 at the end of the previous week. Gold in euros, then, would be 513.52 euros an ounce, down 0.4% from 515.77 for the week. Oil closed at 71.38 dollars a barrel on Friday, up 4.4% from last week’s close of $68.36. Oil in euros would be 56.11 euros a barrel, up 4.9% from 53.50 at the end of the previous week. The gold/oil ratio closed at 9.15, down 5.4% from 9.64 for the week. In the U.S. stock market, the Dow Jones Industrial Average closed at 11,278.61 on Friday, down 1.2% from 11,144.06 at the end of the week before. The NASDAQ closed at 2,210.37, down 0.8% from 2,193.88 for the week. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 5.05%, down one basis point from 5.06 at the previous week’s close.

Lay and Skilling from Enron were convicted this week of numerous felonies. It doesn’t hurt to throw of few of those people in jail, but Enron just represented an extreme version of a common pattern of corporate behavior. But the trial did provide a glimpse into how the slicker types of psychopaths tend to rise to the top of corporate hierarchies. That is no accident, since the corportion by its very charter is designed to be a psychopath, a self-serving actor that cannot care about others. So human psychopaths rise to the top of corporate, political and military hierarchies, while the corporations move to the top of the world economic hierarchy. In the process of doing that, they have written the rules everyone must follow in order to facilitate their takeover. That, in essence, is neoliberalism, a sophisticated set of rules, arising out of unprecedented cooperation among psychopaths, that helps them maintain power over normal people.
In fact, the basic problems with corporations are structural, and inherent in the forms and rules by which they are compelled to operate. The corporation is not as subject to human control as most people believe it is; rather, it is a largely autonomous technical structure that behaves by a system of logic uniquely well-suited to its primary functions: to make profit, to give birth and impetus to new products and technologies, to expand its reach and powers, and to spread the consumer life-style around the globe. (Jerry Mander, “The Rules of Corporate Behavior,” The Case Against the Global Economy, Jerry Mander and Edward Goldsmith, eds, San Francisco, 1996, p. 310)

Corporate control of world media makes the job easier. They have bored their way into our souls:

The failure to grasp the nature and inevitabilities of corporate structure has left our society far too unconscious and passive to corporate desires and has helped corporations increase their global influence, power and freedom from accountability. More than any other institution (including government), corporations dominate our conceptions of how life should be lived. Corporate ideology, corporate priorities, corporate styles of behavior, corporate value systems, and coporate modes of organization have become synonymous with “our way of life...”

If you switch on your radio, flip on the television, or open your newspaper, corporations speak to you. They do it through public relaitons and through advertising. U.S. corporations [in 1996] spend more than $150 billion yearly on advertising, which is far more than is spent on al secondary education in this country…

The average U.S. viewer already watches 22,000 commercials every year. Twenty-two thousand times, corporations place images in our brains to suggest that there is something great about buying commodities. (Ibid., p. 310-11)

What about military power, you might ask? Certainly armies are more powerful than corporations. The rise of private military contractors (PMC’s) that accompanied the massive outsourcing of core military functions in the United States armed forces, has blurred the distinction. Is Blackwater consulting a coporation or a paramilitary army?

In any case, one of the most important achievements of all that propaganda is making the corporate neoliberal economy seem inevitable:

USA – the self-styled CEO of Planet Inc.
By Siv O'Neall

May 26, 2006, 15:44

Neoliberalism is not inevitable

For all those millions and millions of people who have been brainwashed into believing that neoliberalism is the inevitable solution to all our economic and humanitarian problems on the planet, there is news.

The inevitability of the neoliberal economic system is a huge hoax, which has been acted out at the expense of the human race in the sole interest of profit for the few and the total subjugation of the billions of the rest of us. We, the working people, are, so far, obediently bending our backs and making do with the few crumbs the corporate rulers are throwing our way while we accommodate them with out ingrained belief that that’s the way the system works, and that’s the only way the system can ever work.

Actually, neoliberalism was intended to gradually strangle the economies of the third-world countries and thus seriously degrade the living standards of the people. The World Bank, the IMF and the WTO were set up to make it possible for the rich countries of the world to run the business of the planet, naturally under the judicious leadership and the ultimate profit of the multinational corporations mainly linked to the psychopathic and ruthless mega power that is the U.S. of A. Psychopathic mainly in as much as it is totally impervious to human and geopolitical reality. Europe and Asia were supposed to toe the line or else risk being deprived of their share of the booty…

The brutality of eternal war and destabilization

However, keeping the world in continuous upheaval is the goal of the U.S. statesmen, and the openly expressed goal of the neocons in particular. Aggressive wars, civil wars, economic destabilization and bankruptcy of countries dependent on WTO and the World Bank for survival, are all means to the end of assuring U.S. world dominance. NATO was supposed to play the U.S. game (and did in the case of the Kosovo tragedy). The UN too was seen by the American administrations as a handy tool for enforcing American interests, thus the horrible ploy of the veto power of five countries, a power that has been used innumerable times by the U.S. and by the USSR/Russia, but far less by the other veto holding powers.

The one thing the U.S. administrations fear more than anything else is democracy – with its accompanying openness. Oh, they will mouth the word, but it doesn’t have any real meaning any more. Americans are condescendingly allowed to live happily in the fantasy world that hundreds of years of propaganda has created for them, the belief that theirs is a democratic country. And what’s more, it is the greatest democracy in the world, the most moral, the most devout, the most compassionate country in the world.

American ignorance and naiveté are unlimited and the leaders very carefully see to it that things remain that way. Even looking back on history, it is doubtful if anyone can honestly refer to the rapacious United States of America as a great democracy. Ruthless killings and brutal grabbing of other people’s territories have always been the rule of the game, ever since the indescribably cruel decimation of the Native Americans.

Both political options offered those of us living in these so-called democracies support the corporate agenda. Wayne Madsen last week, republished something he wrote in 2000 about the “left” alternative in the anglo-american countries, called “The Third Way” To A Fascist World: The cryptic international political movement of Clinton and Blair,” in which he wrote:

There is another more disturbing aspect to the Third Way agenda. The rights of the individual are increasingly marginalized in nations governed by Third Way leaders. In Blair’s Britain this trend has manifested itself into a call by Home Secretary Jack Straw for the elimination of trial by jury for all but the most serious crimes and scrapping the law against double jeopardy, which protects someone from being tried multiple times for the same crime. Straw has also promoted enhanced police surveillance capabilities of communications (wiretapping) and activities (video surveillance). Third Way Britain is rapidly beginning to look like 1984’s Airstrip One, the British component of the totalitarian transatlantic realm known as Oceania. George Orwell’s Thought Police also seem to have come alive in Third Way Britain. Straw wants to elevate certain public comments to the level of a major crime.

Similarly, the Clinton administration, through its efforts to give law enforcement and intelligence agencies practical unfettered access to communications, including the Internet, is endorsing the Third Way’s enmity towards an individual’s right to freedom of speech, thought, and assembly. Limiting privacy has been embraced by another philosophical guru of New Age political thought, George Washington University sociologist Amitai Etzioni. He heads the Communitarian Movement, an eclectic assortment of Third Way and global village aficionados. Etzioni, who is greatly admired by Bill and Hillary Clinton, Blair, and Jack Straw, argues that people have nothing to worry about when it comes to government invasion of privacy and that governments must put limits on privacy in the interests of “public safety.” Therefore, the Communitarians support drunk driving checkpoints, intrusive security screening of airline passengers, and mandatory drug and alcohol testing for certain professions. The Communitarians decry civil liberties groups as “radicals."

In his book, The Limits of Privacy, Etzioni argues that private companies are more of a threat to an individual’s privacy than government. However, the fact that the Third Way philosophy combines government and corporations into an unholy alliance of exploiters presents the real threat to individualism and privacy. Add to that the Third Way’s argument that people must surrender all kinds of personal liberties to fight the so-called “Drug War” and “Terrorism War” for the common good smacks of Orwellian Newspeak at its worst. The Communitarians and Third Wayers see privacy-intrusive technologies like biometrics and DNA testing as enabling mechanisms for their “brave new world.”

Six years later, we are living the effects of the complete and total lack of privacy.

To finish on a lighter note, given the recent correction in the precious metals market, here is the Mogambo Guru on gold and silver:

The Dollar Collapse
by The Mogambo Guru

Total Fed Credit was up only $1.6 billion last week, and while the custody holdings of foreign banks at the Fed was up a strong $9.2 billion last week, I chose to start off the lecture by dryly saying "The big news, to me, is that the dollar has started collapsing. There are so many ugly ramifications of this that I would not even know where to begin. So, let me merely say that the dollar falling is Unalloyed Bad News (UBN), which means that you and your family are all doomed to die horrible financial deaths, screaming in pain and anger, and let it go at that."

The room erupted in panic and confusion until they finally remembered that I am an idiot, and I obviously don’t know what I am talking about. Then they all felt better, until Doug Noland, he of the Credit Bubble Bulletin at the PrudentBear site, said "Everyone wants to believe that an orderly decline in the dollar poses few problems."

Forget An Orderly Decline Of The Dollar

Mr. Noland, if I understand him correctly (and the chances of that are pretty damned slim, given my obvious cognitive limitations and deficits), is slightly less pessimistic than I am about the possibility of an "orderly decline" in the value of the dollar. I am so pessimistic (audience shouts out "How pessimistic, Mogambo?") that security camera video footage reveals screaming in fear, actual foaming at the mouth, and I seem to have embarrassingly peed in my pants, too, out of the same fear. Now, THAT'S pessimistic!

Mr. Noland, because he is a real smart and classy guy, doesn't even mention the dark stain on my pants, but presents, instead, a lot of tightly-argued reasons why an "orderly decline" of the dollar seems improbable. I, on the other hand, am The Mogambo! And I am sure, absolutely sure, more sure than anything I have ever been sure of, and in fact, this is probably the single-most thing that I have been the most sure of in my whole horrible, wasted life, and that is that the decline of the dollar will NOT be "orderly." It will be abrupt and ugly. A quote that comes to mind, although uttered as a comment on people's lives, is "Nasty, brutish and short."

Nasty, Brutish And Short

My Infallible Mogambo Reasoning (IMR) is along the lines of "Suppose I told you that your money would gradually and continuously lose a lot of its value. Maybe half. Or more. My intuition tells me that you would not be happy."

I pause to gauge your reaction, which ranges between homicidal anger and paralyzing fear. Exactly so! Then I go on to say "But that same intuition tells me that you WOULD be happy, very happy, if I told you that I knew of a way to let you keep all your wealth, and you would not lose anything!" Ha! I can see by that smile on your face that I was right!

So how to achieve this miracle of wealth-preservation? All you have to do is sell all your dollars and dollar-denominated assets today, before the dollar is devalued further! Then you'd like to stick someone else with the whole loss!

Now you are ready for today's Mogambo Daily Pop Quiz (MDPQ). The question is "Would YOU stick around to take your share of financial lumps, of up to half of your net worth (or more), meted out month after month, year after year, in a promised 'orderly decline', or would you sell out now, and not take any lumps at all?"

From A Trickle To A Stampede

Hahaha! Me neither! And neither will anybody else! So it's a trick question! At first, a few will say "That stupid Mogambo moron (SMM) is right, for once in his miserable, pathetic life!" and they will rush to the exits to get someplace to dump dollars. And then a few more will rush to get out, as little light bulbs blink "on" above their heads. And then a few more. And then more and more and more until it is a stampede!

Hahaha! A stampede! Maybe it will be an "orderly stampede!" Hahahaha! "Orderly decline, orderly stampede! You say to-may-to, and I say to-mah-to!" Hahaha!

If, on the other hand, you answered "yes" to the question, then I am sorry to tell you that you failed the test, but I will not record your failing grade in your permanent record if you write a little paragraph or two explaining what in the hell is wrong with you, and then I will have pity on you.

Those With Gold And Silver Survived All Stampedes

And it is not just the same dreary story about too many prescription drugs, and too many over-the-counter drugs, and too many illegal drugs, or even that all these people left in a rude rush to dump dollars and dollar-denominated assets, but that the more important point is "Where did they go?" I'll tell you where they went! They went home and quickly scanned the entire course of economic history to find out where all the OTHER people in history went, when THEIR economic system started down the crapper, thanks to the same sorry stupid economic sins we have committed today.

I will save you the trouble of getting up off of your fat, lazy butt to find out, as I share your opinion about getting up off of my fat, lazy butt, and all the damned time, too. So I will simply tell you what happened: Those who bought gold and silver preserved all of their wealth as their currency and economy took a dump, and they actually ended up with a fortune in gold. Everybody else did not.

Gold Draws In Excess Fiat Money

And the reason may be contained in a witticism by reader Greg, who opines "Gold acts as a magnet to draw in excess fiat money."

…But no matter what the reason, they made money by accumulating gold, and the guys who made a fortune in gold went on to make bigger fortunes when they traded the gold for stocks, bonds, houses and real estate at the lows of the economic collapse, and they again prospered as the market values of all these things eventually went back up in the following decades after the collapse.

Get A Taste Of Hyperinflation

And if you want to see the advantage of gold in real-life action, then listen to this, from an essay written by Eric N. Young entitled "The Hyperinflation of Germany, July 1922-November 1923". He writes that in 1923, at roughly the height of the Weimar inflation and the end of Reichmark, "Although a loaf of bread cost $200 million marks in November 1923, it was possible to purchase an entire city block of prime commercial real estate in downtown Berlin for as little as $500 US dollars hard currency. The key was to have real money in the form of gold or silver, or currency backed by those metals."

An entire city block of prime real estate! Thanks to a gold-backed money! Of course, it took a long time (made even longer by WWII, which was, in turn, caused by the German people rebelling against inflation and injustice), but what is an entire city block of commercial real estate in Berlin worth today? Hahaha! A very long time horizon, to be sure, but that's how it works in real life!

Liquidate All Dollar-denominated Assets

So, from this fabulous bit of information we can generate one Fabulous Mogambo Market-Timing Tip (FMMTT) for those who are in the category of "Hyper-Aggressive Speculator", and the sub-species "All-Or-Nothing Risk Tolerance." At this stage of the cycle, the best advice to these people is liquidate every dollar-denominated asset they have (like cash, houses, stocks and bonds and everything in their retirement accounts), and use the money to buy silver and gold and commodities."

And the reason a lot of people don't do that may be for the same reason quizzical reader Roberta R. wonders about when she writes "I am writing to you about the paradigm of cashing in gold for fiat (money). I firmly believe in holding hard assets such as gold or silver; but what I have always had a hard time with is the concept of cashing in the gold. As you stated in your editorial, the Reichmark collapsed so far down that it took 87 trillion of them to buy an oz. of Au.

"This is where my brain begins to hurt. Now I am the proud owner of 87 trillion Reichmarks (FRN's) and maybe I can buy a couple loaves of bread. So, you cash out something with a real intrinsic value and you get fiat junk. But it just seems to me that you are back to square one the minute you sell."

She finished with "Working on a headache, Roberta."

I was happy to tell her that she was exactly right! She WAS back to square one! That's the beauty of gold! The answer why is contained in the problem: How much gold does it take to buy one loaf of bread, which costs $2 a loaf when gold is at $700 an ounce?

435,000 Loaves Of Bread For One Ounce Of Gold

Answer: 1/350th of an ounce. (You can buy 350 loaves of bread with one ounce of gold).

And then how much gold does it take to buy a $200 million loaf of bread when gold is at $87 trillion per ounce? Answer: 1/435,000th of an ounce! You can buy 435,000 loaves of bread with one ounce of gold! Hahaha! A little tiny flake of your gold ounce ought to do it! Hahaha!

So, Roberta, thanks to gold, your buying power has been preserved. THAT'S the beauty of the stuff! And in this particular example, you actually got wealthier, as bread became over 1,000 times cheaper in terms of gold! But notice that the bread cost 100 million times more, in terms of dollars!

****Mogambo sez: The recent $22 plunge in gold and $2 plunge in silver is just the death throes of the scumbags who have engineered the huge short interest in metals futures, and are now being choked to death by it. Every dip like that is Lady Fate smiling on you, letting you buy gold and silver at a temporary bargain! Whee! Lucky you!

The Mogambu Guru's straightforward writings are made possible by The Daily Reckoning.

Richard Daughty aka The Mogambo Guru is general partner and COO of the Smith Consultant Group and can be emailed at

Monday, May 22, 2006

Signs of the Economic Apocalypse, 5-22-06

From Signs of the Times 5-22-06:

Gold closed at 659.00 dollars an ounce on Friday, down 8.6% from $716.00 at the end of the previous week. The dollar closed at 0.7827 euros Friday, up 1.2% from 0.7737. The euro closed, then, at 1.2777 dollars compared to 1.2926 at the previous week’s close. Gold in euros, then, would be 515.77 euros an ounce, down 7.4% from 553.92 for the week. Oil closed at 68.36 dollars a barrel Friday, down 5.4% from $72.04 the previous Friday. Oil in euros would be 53.50 euros a barrel, down 4.2% from 55.73 for the week. The gold/oil ratio closed at 9.64 barrels of oil per ounce of gold on Friday, down 3.9% from 9.94 at the end of the week before. In the U.S. stock market, the Dow closed at 11,144.06 on Friday, down 2.1 % from 11,380.99 for the week. The NASDAQ closed at 2,193.88 Friday, down 2.3% from 2,243.78 at the end of the previous week. In U.S. interest rates the yield on the ten-year U.S. Treasury note closed at 5.06%, down 13 basis points from 5.19 for the week.

Last week saw a pullback in commodity prices with gold dropping 8.6% and oil dropping 5.4%. In another reversal of recent trends, the dollar gained ground after some down weeks. While such reversals might seem like good signs for the world economy, the increasing volatility of markets in recent weeks is not a good sign at all.
A turbulent week on global financial markets

Nick Beams19 May 2006

A correction or the start of something much bigger? That is the question hanging over financial markets following a major sell-off in currency, commodity and equity markets over the past few days.

In New York the Dow Jones industrial average fell a further 77 points on Thursday, following a 200-point drop the previous day. The high-tech Nasdaq index fell by 0.7 percent for its eighth straight daily decline—the longest losing streak since 1994. The S&P 500 index has fallen by 4.8 percent since May 10, when the Federal Reserve Board increase its benchmark interest rate to 5 percent. This is the biggest fall over a seven-day period since March 2003.

The immediate cause of the sell-off in equity markets is the fear that interest rates will continue to rise. Announcing its latest rise, the Fed’s open market committee indicated that future increases may “yet be needed to address inflation risks”. These fears were compounded by the announcement of a higher than expected inflation rate of 0.6 percent for April.

But it is not only the Fed’s plans on interest rates causing concern. Across the world, central banks have been tightening rates. The Bank of Japan has ended its policy of ultra-liquidity introduced to combat deflation and could soon move back to a more normal interest rate regime, while the European Central Bank has indicated that it favours further rate increases. The Japanese move is particularly significant because Tokyo has been the source of cheap funds for so-called “carry trades” in which borrowed yen are used for more profitable investments in the rest of the world.

Whatever the developments over the next few days, there is a perception that the situation has turned. According to David Bowers, chief global investment strategist at Merrill Lynch in London: “The prospect that central banks will have to actually cool things off is a very frightening prospect. There is a macroeconomic vulnerability for stocks here that there has not been before.”

Little more than a week ago, the Dow Jones index was heading for an all-time high of 12,000. But now the atmosphere has changed. As a comment in the Financial Times noted: “There’s a new term stalking the markets, one that hasn’t really been voiced for a while—volatility. Global concerns about the outlook for inflation and growth, and fears of a collapse in the dollar, have been pushing up price volatility for stocks, bonds, currencies and commodities.”

This represented a departure from the steady comfortable markets of recent years that were marked by general confidence, allowing investors to take on greater risks for higher returns.

While fears of interest rate rises may have provided the initial impetus for this week’s large movements, the underlying causes lie in the unprecedented imbalances in the global economy. World economic growth, and especially the China boom, has become increasingly dependent on the increased indebtedness of the United States, where the balance of payments deficit is now around 7 percent of gross domestic product. At the same time, the transfer of the balance of payments surpluses from China and East Asia into the US financial system has kept interest rates at historically low levels, ensuring that consumer spending can continue to be funded through debt.

Besides funding consumption spending, record low interest rates have also led to the creation of a series of financial bubbles—in stocks, housing, “emerging market” equities, and, most recently, industrial commodities.

Between March 1 and May 11 alone, the price of copper rose by 80 percent, gold 40 percent, zinc 75 percent, nickel 45 percent, aluminium 38 percent and tin 20 percent.

Analysing the longer-term trends in a comment published on Monday, Morgan Stanley chief economist Stephen Roach noted that over the past four years the prices of industrial commodities have risen by 53 percent, faster than has occurred in any of the four previous phases of global expansion. In real terms the increase is 42 percent, nearly double the 23 percent increase in the two commodity booms of the 1970s.

The increase is clearly not the result of rapid economic expansion. The average growth of world gross domestic product in the period 2002-2006 is likely to be 4.2 percent, compared to 4.4 percent in the four previous expansions.

Roach pointed out that while there is nothing exceptional about current rates of growth when compared to earlier periods of expansion, “the current surge in commodity prices has been off the charts when compared with those of the past”.

“In the midst of a slightly subpar upturn in global growth, a low-inflation world is experiencing the sharpest run-up in commodity prices in modern history.”

In other words, a large part of the rise in commodity prices is a financial bubble, in which an increase in prices induced by speculative inflow of funds leads to a further inflow, followed by another round of price increases.

Everything goes well, so long as the inflow of money continues and prices keep rising. But once the situation turns, the gains on the upswing turn into massive losses.

That turning point may have been reached if a report on Thursday’s trade by Telegraph journalist Ambrose Evans-Pritchard is anything to go by. “The risk of defaults” he wrote, “was hanging over the London Metal Exchange last night after a clutch of clients failed to meet margin calls on losing copper trades, leaving brokers struggling frantically to match their books.” According to one “market source” cited in the article: “The hedge books of the banks are seriously underwater on copper, but apart from that there are now brokers in trouble because clients can’t meet the margin payments.”

Much of the speculation in equity, commodity and currency markets is the result of the activities of hedge funds, which shift enormous amounts of money in the daily search for profits. It is estimated that somewhere between $800 billion and $1 trillion is invested in hedge funds.

This is five times the amount invested in September-October 1998 at the time of the financial crisis set off by the collapse of the Long Term Capital Management hedge fund, which had to be bailed out to the tune of more than $3 billion.

Today there are between 7,000 and 9,000 hedge funds in the US and they are estimated to account for as much as 20 percent of all US stock trading. In a speech last Tuesday, Federal Reserve Board chairman Ben Bernanke warned that financial authorities had to stay attuned to the potential risks.

“Authorities should and will try to ensure that the lapses in risk management of 1998 do not happen again,” he said. But with increased turbulence in all markets, that may be easier said than done.

For a contrary view on hedge funds the neoliberal James Surowiecki published a piece last week in The New Yorker arguing that hedge funds contribute to stability in the markets.
In the past five years, hedge funds have become a new power on Wall Street; the number of funds has doubled, to more than eight thousand, and the assets they control have tripled, to more than a trillion dollars. In the process, they’ve also become a favorite scapegoat for bad financial news, blamed for everything from inflating the housing bubble and demolishing stock prices to jacking up the price of oil. A German politician has called hedge funds “locusts” of the global economy, while William Donaldson, the former head of the S.E.C., has warned that “disaster” looms if hedge funds aren’t regulated. The title of a recent column made the point nicely: “Instruments of Satan.”

That’s not quite what Alfred Winslow Jones had in mind when he started the first hedge fund, in 1949. Looking to make money in both up and down markets, Jones adopted a strategy of buying some stocks and selling others short. Because, at the time, mutual funds were legally barred from selling stocks short, Jones avoided government regulations by restricting participation in the fund to a small number of wealthy investors. In the half century since, hedge funds have moved a long way beyond Jones’s simple “long-short” approach, and they now pursue a dizzying array of investment tactics in nearly every market in the world. But they have retained a few of the original characteristics: they’re free to invest in whatever assets they want; they can buy those assets with borrowed money, using leverage to improve their returns; they generally have long “lock-up” periods for their investors’ money; and, if they are successful, the people responsible earn vast fortune.

Aside from the part about vast fortunes, that doesn’t sound especially demonic. But hedge funds are easy to hate. They’re secretive, rarely making public disclosures about their investments or their performance, and so are fertile terrain for fraud and incompetence. Last year, investors in a fund called the Bayou Group found out that its managers had been lying about its performance for years, having blown all the money on bad investments. Hedge funds often trade in markets—and with investment strategies—that few investors understand. Many critics suspect hedge funds of hunting in packs: conspiring to bring down ailing companies or currencies, or artificially inflating the price of commodities. Worst of all, the funds’ reliance on leverage increases the scale of disaster when things go wrong. In 1998, the collapse of Long-Term Capital Management, a giant hedge fund that had made huge leveraged bets on currencies and government bonds, exacerbated a global financial crisis.

Yet hedge funds have been far more of a boon to financial markets than a bane. Markets work best when investors are drawing on diverse sources of information and relying on many different kinds of tools to figure out what’s going to happen next. The sheer variety of investing strategies that hedge funds use—in contrast to mutual funds, whose managers mostly just buy stocks and bonds—enhances the diversity of markets. In the U.S. stock market, hedge funds’ willingness to sell stocks short also makes the market smarter and more efficient.

Paradoxically, some of the characteristics of hedge funds that make them seem frightening also make them valuable. Secrecy, for instance, makes it harder for hedge-fund managers to imitate what their peers are doing, a common flaw among mutual-fund managers. And, because investors in hedge funds typically have to give notice of a month or more before withdrawing their money, managers are freer to pursue contrarian trading strategies that may work only over the long term. That doesn’t mean that hedge funds are immune to trends: a year ago, a number of big hedge funds suffered major losses from a bad bet on G.M.’s stocks and bonds. But a series of academic studies has found scant evidence of the pack mentality that hedge funds are often accused of. A recent paper by the economists Burton Malkiel and Atanu Saha, for instance, showed that the range of performance among hedge-fund managers was much wider than among mutual-fund managers, which suggests that they’re operating more independently.

Hedge funds are speculators, and we think of speculators as contributing to volatile markets and wild price spikes. But a recent study of eleven commodities markets found that when speculators made up forty per cent or more of the market, prices were roughly half as volatile as they were in markets where speculative trading was less prevalent. Similarly, a study published by the Federal Reserve Bank of Cleveland says that hedge funds tend “to reduce, not increase, the volatility of price,” something that the authors attribute to the funds’ willingness to go against the prevailing wisdom. It’s probably no accident that in the past three years, as hedge funds have made an increasingly large percentage of stock-market trades, market indexes have become far less volatile.

Perhaps hedge funds can provide stability for a while, but they buy that short-term stability at the cost of increased long-term instability. Maybe we are reaching the end of the period in which hedge funds and derivatives provide stability to markets. Hedge funds by definition need for some investments to go up while others go down. What if a point is reached where all assets point downward and no one is willing to go long? The crash will then be much worse than if there had been no hedge funds.

Here, the Financial Times put the blame for the recent drop in worldwide stock markets on hedge funds:

Market confidence gives way
Chris Hughes
Fri May 19, 1:20 PM ET

Investors said it could not last. They were right. The confidence that has propelled stock markets for three years gave way this week to fear.

Stock markets have ended the week approximately 4 per cent lower than where they began. The FTSE-100 is off 4.3 per cent at 5657.4 and the FTSE-All Share is down 4.6 per cent at 2884.1.

The visible explanation for the turn was a higher-than-expected US core inflation data on Wednesday, which prompted fears of rising interest rates and weaker global economic growth. In response, the FTSE-100 suffered its biggest daily fall in three years, while European bourses ended the day roughly 3 per cent lower.

But one piece of ugly economic data cannot fully explain either the initial rout or the market's gyrations for the rest of the week. The US inflation figure was, after all, just 0.1 percentage point higher than forecast.

The reality is that investors have had their fingers apprehensively poised on the "sell" button for several months, amid increasing doubts that the bull run in equities could last any longer.

"When markets have moved a long way in a short period of time, it doesn't take much to get people to sell," says Andrew Milligan, head of global strategy at Standard Life.

Hedge funds were feeling especially nervous. They counter their long positions in equities with some offsetting short positions. But the bull market had persuaded many to shift the balance increasingly towards long positions.

These were concentrated in a handful of sectors - mining, energy and stock exchanges - and were leveraged, or financed with debt. Moreover, these positions were duplicated across the industry. That was a risky cocktail.

Worries about the US economy were a natural catalyst to turn sentiment. A weakening dollar raises the spectre of higher import prices, and, in turn, higher US interest rates and bond yields.

Fears that higher interest rates could choke economic growth helped drive down commodity prices after their spectacular rise of recent weeks. Copper, for example, fell more than 7 per cent this week.

On top of the impact on global growth, higher interest rates would threaten the wave of debt-funded merger activity - especially by private equity houses - that has been a dominant driver of equity returns this year.

Xstrata's announcement late on Tuesday of a jumbo share placing may have also created some indigestion, given so many investors were long of the mining sector.

In taking profits, investors targeted the stocks that had given them the best returns. Mining and energy groups took the brunt of the pain. The continental stock exchanges were another obvious target. Hedge funds exacerbated the falls, as they sought to reduce their leveraged exposure to these sectors.

"When there's been one way of making money, you keep riding it. When there's a bit of nervousness, everyone heads for the exits," says Stuart Fowler, head of UK equities at Axa Investment Managers.

"I haven't the faintest idea what the real trigger was," adds hedge fund manager. "Fear has become more pervasive. When one person sells at the margins, it becomes self-perpetuating."

So why did the wider market fall too? One answer is heavy selling by investment banks of their proprietary equity positions to cover their exposure to derivative contracts written with hedge funds. A quick way for hedge funds to reduce their long exposure is to sell futures on an index. That forces the counterparty, typically an investment bank, to sell the underlying stocks.

But investment banks also had to sell equities to cover their exposure to so-called variance swaps written with hedge funds. These are derivative contracts enabling hedge funds to bet on rising volatility in the markets.

The Enron trial went to the jury last week. Enron is as emblematic of the present era of capitalism as the Titanic was of another. Here is an interesting take on Enron by Adam Ierymenko from the point of view of evolutionary biology. In it we can see how the process of ponerization, facilitated by corporate capitalism, leads to implosion. When the pathocrats take over completely there is no creativity left to exploit. Thieves can only steal things created by others. The system then falls in on itself:

I just watched a documentary entitled Enron: The Smartest Guys in the Room. This documentary was fascinating, especially from an evolutionary point of view. It provides a great cautionary tale illustrating at least one of the reasons why compulsory eugenics doesn't work.

One of my favorite papers in evolutionary biology, which I have mentioned here before, is this:

Muir, W.M., and D.L. Liggett, 1995a. Group selection for adaptation to multiple-hen cages: selection program and responses. Poultry Sci. 74: s1:101

It outlines the group selection effects observed when trying to breed chickens for increased egg production in multiple-hen cage environments. In short, selecting individual chickens for increased productivity in a group environment didn't select for increased productivity. Instead, it selected for mean chickens. The result was an overall reduction in productivity. Only by selecting at the group level was productivity increased.

This is a great experiment because it illustrates why evolutionary theory cannot be reduced to the phrase "survival of the fittest." That phrase isn't technically wrong, but it neglects so much that it might as well be. "Survival of the fittest" is either meaningless or misleading. It's like saying that mountain climbing is just "walking upward" while neglecting to discuss proper supplies, fitness training, establishment of base camps, selecting the proper climbing group, atmospheric oxygen considerations, and... the fact that you don't always walk upward. Sometimes you have to walk sideways, or downward, to get to the top.

So how does this chicken paper relate to Enron? Well, it turns out that Enron sorta reproduced this experiment through their corporate human resources policies. (Are you shuddering yet?)

Apparently one of the Enron CEOs was a big fan of Richard Dawkins' book The Selfish Gene. He took Dawkins' (in my opinion) overly reductionistic view of evolution and proceeded to even further reduce it in his own mind to social Darwinism of the knuckle-dragging "survival of the fittest" (grunt, grunt) variety. Enron's HR policy included an iterative performance evaluation and firing step reminiscient of a reality TV show like Survivor or The Weakest Link. Basically, they would evaluate the traders and most other employees based on performance metrics and then fire the lowest 10-15% of the company population.

Think chickens and trading floors folks. Enron was a trading, brokering, and investment company. (Go ahead, shudder some more.)

Everyone knows that there are many things you can do in any corporate environment to give the appearance and impression of being productive. Enron's corporate environment was particularly conductive to this: it's principal business was energy trading, and it had large densely populated trading floors peopled by high-powered traders that would sit and play the markets all day. There were, I'm sure, many things that a trader could do to up his performance numbers, either by cheating or by gaming the system. This gaming of the system probably included gaming his fellow traders, many of whom were close enough to rub elbows with.

So Enron was applying selection at the individual level according to metrics like individual trading performance to a group system whose performance was, like the henhouses, an emergent property of group dynamics as well as a result of individual fitness. The result was more or less the same. Instead of increasing overall productivity, they got mean chickens and actual productivity declined. They were selecting for traits like aggressiveness, sociopathic tendencies, and dishonesty.

After a couple rounds of this selection experiment, these mean chickens could be heard on recorded intra-office phone communications laughing about "those poor grandmothers" they were ripping off via market scams. They changed the company motto internally from "Enron: Ask Why?" to "Enron: Ask Why, Asshole."

Of course, everyone knows the rest of the story. While these mean chickens weren't terribly productive (the company was losing money hand over fist), they managed to peck their trading consoles so as to give the impression of increasing productivity. This worked, for a while. Then this whole monument to Darwinian fundamentalism collapsed rather spectacularly…

Here we see, perhaps, a way out of the rotten economic system we are in. An economics for what Lobaczewski, the inventor of the term ‘ponerology’, calls ‘normal people,’ those with a conscience who would like to work for the benefit of all, might select based on different factors than self-serving aggressiveness. From one of the comments on the above essay on Enron and chickens:

Seems like the best way to select for the right traits is not to select an individual based on that individual's traits. Behavior is group-oriented and emergent, so you must "break the barrier" between individuals in order to gain the correct metric.

Do not select a chicken based on how well that chicken lays.

Select for the chickens around whom all the other chickens lay more.

Select Chicken A based on the behaviors of all chickens not-A.

If you're selecting for group traits and emergent behavior, that's all you can do. That one thing alone would select for all the traits you want, and select against the meanness and sociopathy that surface when you select Chicken A based on Chicken A's performance.

Another commentator followed with this:

I think you capture the important point of observing the benefits of the surrounding chickens, but you cannot so easily discount the individual either. Chicken A itself is integral to the system.

For example: If you were indeed to "Select Chicken A based on the behaviors of all chickens not-A" then you might have the opposite effect of what happened in the paper cited. All the chickens would be passive and could theoretically not care if they get food or not. Thus producing less eggs.

I think the whole point behind Adam's post is that the dynamics of the system can't be broken down into a simple answer that can accordingly be maximized/taken advantage of.

Maybe this is why the universe seems to require a balance between service to self and service to others. In sports this effect is well known. In basketball, for example, much is made of players who make their teammates better. They usually do this with a combination of setting a good example through their own play (they are usually the best players on their teams) and by “keeping their teammates involved,” usually by distributing scoring opportunities to others thereby sacrificing, to a certain extent but not completely, their own scoring. This “external consideration,” to use a term coined by Gurdjieff, represents the opposite of the Enron ethic. It requires an active empathy, an understanding of, and the coordination of, the legitimate needs of others, something that parasitic pathocrats cannot fathom.

Monday, May 15, 2006

Signs of the Economic Apocalypse, 5-15-06

From Signs of the Times, 5-15-06:

Gold closed at 716.00 dollars an ounce on Friday, up 4.5% from $685.20 at the end of the previous week. The dollar closed at 0.7737 euros Friday, down 1.5% from 0.7854 for the week. The euro, then, closed at 1.2926, up from 1.2732 dollars compared to the end of the week before. Gold in euros would be 553.92 euros an ounce, up 2.9% from 538.17 for the week. Oil closed at 72.04 dollars a barrel, up 2.9% from $70.01 at the end of the previous week. Oil in euros would be 55.73 euros a barrel, up 1.3% from 54.99 for the week. The gold/oil ratio closed at 9.94, up 1.5% from 9.79. In the U.S. stock market, the Dow closed at 11,380.99 on Friday, down 1.7% from 11,577.74 at the end of the previous week. The NASDAQ fell sharply, closing at 2,243.78, down 4.4 % from 2,342.57 for the week. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 5.19%, up nine basis points from 5.10 at the previous week’s close.

The signs are ominous for the U.S. and world economy. Gold continued its sharp rise, especially in dollar terms, and oil seems to have renewed its climb after a brief pause. The dollar continued to fall. This week, however, saw a decrease in the U.S. stock market after it had approached an all-time high. The political crisis in the United States worsened last week as well, with Bush’s approval rating falling below 30%; soon he will be the most unpopular president since the beginning of polling. This week may see an indictment of Karl Rove. Significantly, the mainstream media is paying attention to all of these stories. Even cautious establishment outlets like National Public Radio has pundits worrying that Bush’s position is so hopeless he will launch an attack on Iran as a desperate, last-ditch attempt to salvage enough popularity to avoid prison (by keeping Congress in Republican hands). Not surprisingly, then, last week also saw the release of some bad consumer sentiment numbers in the United States, showing the sharpest drop in consumer confidence since Hurricane Katrina.

Let’s look at gold and the dollar. A whole range of evidence points to a currency collapse for the dollar. The problem is, this has never happened to the supposed “sole superpower” in the world. The fall of the dollar, which has so far been steady and not catastrophic, may be in for a few sharp shocks ending in disaster. Here’s a look at how it might unfold:

How does a currency collapse? And the U.S. $?
Excerpts From – “Gold Forecaster – Global Watch”
May 8, 2006

When a currency loses the confidence of its people, its fall becomes exponential, as has happened to the Zimbabwe $, where in 1982 one U.S.$ equalled 1 Zimbabwe $. Today around Z$200,000 buys one U.S. $ if you can find someone idiot enough to sell one for the Z$.

In day-to-day terms, the smallest note in Zimbabwe a Z$500 is the size of a U.S.$. The price of a single-ply sheet of toilet paper is more expensive at around Z$867.

The U.S.$ is nowhere near there, but clearly the U.S. Administration has no plan or even desire to rectify the U.S. Trade deficit. Consequently, we are seeing a growing number of Central Banks turning to the Euro for its reserves and away from the U.S.$.

Whilst most observers and particularly U.S. observers like to have tangible facts and numbers with which to mathematically gauge the present and the different possible futures, a collapsing currency situation is not as neatly gaugeable. Indeed it is driven in stages of ‘confidence’, which are rarely measurable in advance.

For instance we see today the move of the Pension and other long-term funds into the gold E.T.F.’ one finds there are no mathematically measurable factors with which to measure the pace of change to these funds. Yes, the number of ‘Road-shows’ the World Gold Council does affects this move to some extent, but how do you measure the spread of that knowledge and resulting investment in the E.T.F.’s outside of that? How does one measure the forces causing uncertainty and falling ‘confidence’.

It is an emotional progression, one that moves in lurches as particular incidents destroy confidence limb by limb. In such a climate a steady degeneration of confidence lead to an effect we shall call a "plateau - cliff" process.

• As confidence is whittled away the currency appears relatively stable.

• Then a particular event will occur that triggers a breakdown and the currency drops suddenly, like falling off a cliff, until it finds a short-term bottom and it holds that level for a period as though on a plateau. The process then repeats itself.

• The degeneration then accelerates, so the fall from the cliff to the next stable plateau happens more quickly.

• Then the height of the cliff [the fall] extends until it grows at an exponential basis.

• The final collapse will occur when the currency is completely discredited and used only by those unfortunate to have no other choice. Alternatively the currency is changed to a new one, one whose issue is backed by assets [Such as land - after the Weimar republic] and limited to a fixed relationship to those assets until confidence is restored by a healthy economy and a balanced Balance of Payments. This provides a basis in which to be confident about currency.

However, were the $ heading for a collapse, the U.S. $, a global reserve asset, nothing in the U.S. such as land or any other fixed U.S. asset would suffice. The asset would have to be accessible by its creditors, outside the States who would have to have a willingness to accept that asset in the case of a default by the U.S. The use of the $ domestically and internationally brings such problems that in the final extreme conditions the $ is inadequate as a global reserve currency. But for the market to whittle away confidence in the $ would take some time. But we believe that it will happen.

• Look back a couple of years and we saw the $ reigning supreme.

• Then warnings were given against it as the Trade deficit began to grow.

• The Fed or the Administration then allied itself to the euro, giving it the respite it has enjoyed over the last year.

Now there seems to be a breaking down of the $ of late and some Central Banks switching to the Euro out of the $. These were three distinct stages.

• The next stage is for the $ to fall heavily against the Euro and Euro oriented currencies.

• Next will come the defence of the $ until the weight of selling pressure exhausts the $ against other currencies [please note the U.S. has few foreign currencies left in its hands with which to defend the $, but the Fed put in place measures to allow it intervene in the international foreign exchanges.]

• This could delay the fall for some time, but history has shown that when a Central Bank defends a rate in the market, it gives in periodically and devalues. If insufficient it has to defend again and again.

• I have no doubt that Central Banks will use this defence to unload their dollars back to the States.

• At some stage the U.S. will have to impose Controls to prevent foreign capital from exiting the States and rejecting dollars coming home. These are called Exchange Controls.

• When this happens many currencies will begin facing the same problems as their reserves become suspect too and they cannot defend their own Balance of Payments deficits.

• At this point for the global economy to function adequately, a new “Global Currency” will have to be established and be supplied sufficient so as to regain global confidence. We cannot see this happening without gold in there to a greater or lesser extent. Of course this will have to be at prices believed by all nations, not just individuals!

During this process confidence in the currency will be the measuring factor, a nebulous, unstable element in itself. The process of the decay of confidence is described above. But confidence could well go down dramatically from the point we are at now with the $ in the monetary system. Soon the cliffs will extend until the defence of the currency comes, then a long plateau while the dollar is defended, until the heavy falls begin…

Even Alan Greenspan’s predecessor as Fed Chairman, Paul Volcker, is sounding the alarm.

"A Really High Gold Price"

By Eric J. Fry

On Tuesday, the Ben Bernanke hiked short-term interest rates to 5% - the 16th straight quarter-point increase – and promised to continue hiking rates "if the data warrant." Over the ensuing three days, global stock marketshave stumbled, the dollar has dropped 2% and the gold price has skyrocketed more than $50.

These financial data are probably not the sort of "data" that Bernanke had in mind, but they are exactly the sort that might warrant a 17th or 18th or 25th rate a desperate effort to defend the U.S. dollar.

…At $730 an ounce, the gold price has reached its highest level since thebeginning of the Volcker era. But beyond this superficial connection, the two eras possess very few obvious similarities, "obvious" being the operative word. Based on the prevailing economic [view], Volcker faced a far more dire situation than Bernanke faces. But we fear that the reality is exactly the opposite.

"Ben Bernanke," writes Ambrose Evans-Pritchard for the Telegraph of London," picks up a chalice brimming with the nastiest of toxins: a current account deficit of 7% of GDP, covered for now by fickle flows of capital from the Chinesecentral bank and petro-dollar sheikhdoms; a negative flow of global investments earnings for the first time in modern memory; a dollar hanging by a political thread; and hair- raising levels of debt."

Volker's chalice, by comparison was brimming with milk and honey. In 1979, America produced a current account surplus and boasted a national savings rate of nearly 10%. Today, both of these essential balance sheet line-items are in thered.

Meanwhile, we have amassed a few trillion dollars of government debt since the Volcker era. Our crippled national balance sheet, therefore, raises the risk ofserious economic crisis, should the dollar's slump become a rout.

And now that the dollar is slumping, while gold is soaring, the unimaginable rout of the dollar is becoming a bit too imaginable.

"How much longer can the dollar's supremacy last?" Paul Volker wondered aloud at the Grant's Interest Rate Observer Conference last month. "And what's the endgame?"

Implicit in Volcker's musing was the clear suggestion that the dollar's days are numbered. "Does this go on forever?" he asked rhetorically about the financing of Americanconsumption by foreign creditors. "What kind of pyramid can you build?"

"There seem to me to be a lot of unknowns that are facing this de facto world currency called the U.S. dollar and its increasing importance in the world," Volcker concluded. "Does that increase in importance have some natural limit?And if so, what is the endgame?"

"In response to the question posed by Paul Volcker," James Grant remarked, "not a few of the Grant's conferenceattendees had an answer at the ready: 'A really high gold price.'"

Asian central banks seem to be quietly losing confidence in the dollar. Quietly because they want to plan their escape from the burden of holding so many dollars and have everything in place before it happens. They can’t afford to spook the market just yet, but the following column which appeared on Bloomberg has a startling quote from China’s vice Minister of Finance:
Asia Is Getting Ready to Dump the Dollar Peg: Andy Mukherjee

May 8 (Bloomberg) -- Li Yong, China's vice minister for finance, said he had heard a “rumor” that the U.S. dollar was headed for a 25 percent drop. If the gossip was true, the consequences would be “shocking,” he said.

Li's comment, which he made at a discussion on global financial imbalances last week at the annual meeting of the Asian Development Bank in the Indian city of Hyderabad, was aimed directly at fellow panelist Tim Adams, the U.S. Treasury undersecretary of international affairs.

The unspoken message was: “Don't try to talk the dollar down.” And Adams knew better than to ask, “Well, what are you going to do about it?” The answer to that question has already begun taking shape: Asia may be getting ready to fix its currencies to a local anchor, dumping the region's unofficial dollar peg.

Even as they continue to pile up U.S. debt in their foreign- exchange reserves to keep their currencies stable against the dollar, Asian nations, China among them, are preparing for a scenario where the dollar does indeed collapse under the weight of a record U.S. current account deficit.

At the Hyderabad meeting, finance ministers of China, Japan and South Korea got together with their counterparts from the Association of Southeast Asian Nations, or Asean. The 13-nation group said it would sponsor a research project, titled “Toward greater financial stability in the Asian region: Exploring steps to create regional monetary units.”

Asian Currency Unit

This is no innocuous academic exercise. Regional monetary units are a euphemism for a parallel Asian currency, an idea that has been around since the 1997-98 financial crisis and is now, for the first time, entering the realm of policy making.

Both Japan and China are extremely serious about it and are vying to take ownership of the project.

An Asian Currency Unit, or ACU, will be an index that seeks to capture the value of a hypothetical Asian currency by taking a weighted average of several of them. The weight for a particular currency in the index may be determined by the size of the economy and the quantity of its total trade.

What's the big deal with the ACU? Given the data, anyone can set up an index. It isn't that Asia is talking about replacing its national currencies with the ACU. A European-style single currency in Asia is at least decades away. The ACU is an accounting unit; it won't change hands in the physical world.

The ACU will start making a difference when it becomes the fulcrum of exchange-rate management in Asia. There is some sign that Asian nations want to do just that.

A New Peg

Korea, Japan and China agreed in Hyderabad to “immediately launch discussions on the road map for a system to coordinate foreign exchange policy.”

The ACU can help a lot in such coordination. It can become a basket peg against which any Asian nation can fix the value of its currency within a band. The ACU, itself, will float.

Why might the ACU work when the now-defunct European Currency Unit, on which the concept is modeled, didn't? One good reason, as noted by economist Barry Eichengreen of the University of California, Berkeley, is that Europe's need for a parallel currency was satisfied by the dollar.

The ACU may well emerge as a viable currency for denominating export invoices, bank loans and bond issuances if the dollar is no longer perceived as a safe storage of value.

So far, Japan has been driving the ACU concept. Haruhiko Kuroda, a former Japanese vice minister of finance and currently the president of the Asian Development Bank, was vigorously pursuing it. The ADB was going to start computing and publishing several ACUs sometime this year.

China in Control

One such ACU would have comprised 13 members, including the Japanese yen, the Chinese yuan, the Korean won and the currencies of Singapore, Malaysia, Thailand, Indonesia, Brunei, Vietnam, Cambodia, Laos, Myanmar and the Philippines. Another ACU would have included both the yuan and the Taiwan dollar -- and that would have been anathema to China. Nor would China have liked to peg the yuan to an ACU that was overly dominated by the yen.

Now China has taken control. While the research will still be conducted in Japan, Asean will take the decision on the composition of the ACU. While Japan is a member of this club, its influence is in decline. The association is now firmly under China's thumb.

While China continues to exhort the U.S. not to follow weak- dollar policies, it, like everyone else, can only guess about the longevity of the present global imbalances.

If there is a sudden collapse in the dollar, the U.S. appetite for imported goods may vanish. The Chinese export engine may seize up and its fragile banking system may collapse under a spate of new bad loans. The idea behind the ACU is to buy some insurance, however inadequate, against all of this.


With its “my currency is your problem” attitude, the U.S. has made a negotiated settlement of global imbalances a diplomatic non-starter. China isn't willing to consider the U.S. argument that quicker appreciation of the yuan may prevent a costly adjustment later.

Once again in Hyderabad, Undersecretary Adams tried valiantly to get this message across to Chinese Vice Finance Minister Li. He was wasting his breath.
Li, as Adams noted wryly, “knows all my talking points.”

The fact that this correction of a massive structural imbalance in the world economy coincides with the looming collapse of a world politcal and military hegemony makes the situation all the more perilous. The following article published last week by William Engdahl details how the United States, in a desperate roll of the dice, just lost the Great Game:

America’s Geopolitical Nightmare and Eurasian Strategic Energy Arrangements

F. William Engdahl, May 7, 2006

Part I: The disintegration of the Bush Presidency

By drawing attention to Iraq and the obvious role oil plays in US policy today, the Bush-Cheney administration has done just that: They have drawn the world’s energy-deficit powers’ attention firmly to the strategic battle over energy and especially oil. This is already having consequences for the global economy in terms of $75 a barrel crude oil price levels. Now it is taking on the dimension of what one former US Defense Secretary rightly calls a ‘geopolitical nightmare’ for the United States.

The creation by Bush-Cheney-Rumsfeld and company of a geopolitical nightmare, is also the backdrop to comprehend the dramatic political shift within the US establishment in the past six months, away from the Bush Presidency. Simply put: Bush/Cheney and their band of neo-conservative warhawks, with their special relationship to the capacities of Israel in Iraq and across the Mideast, were given a chance.

The chance was to deliver on the US strategic goal of control of petroleum resources globally, in order to ensure the US role as first among equals over the next decade and beyond. Not only have they failed to ‘deliver’ that goal of US strategic dominance. They have also threatened the very basis of continued US hegemony or as the Rumsfeld Pentagon likes to term it, ‘Full Spectrum Dominance.’
The move by Bolivian President Evo Morales, following meetings with Velezuela’s Hugo Chavez and Fidel Castro, to assert national control over oil and gas resources is only the latest demonstration of the decline in US power projection…

Part II: Disintegration of US Eurasia Strategic Influence

A Foreign Policy disaster over China

In this context, the recent diplomatic insult from Bush to visiting China President Hu Jintao, is doubly disastrous for the US foreign position. Bush acted on a script written by the anti-China neo -conservatives, to deliberately insult and humiliate Hu at the White House.
First was the incident of allowing a Taiwanese ‘journalist,’ a Falun Gong member, into the carefully-screened White House press conference, to rant in a tirade against Chinese human rights for more than three minutes, with no attempt at removal, at a White House filmed press conference. Then came the playing of the Chinese National Hymn for Hu. The ‘Chinese’ hymn, however, was the (Taiwan) Republic of China hymn, not the (Beijing) Peoples’ Republic hymn.

It was no ‘slip-up by the professional White House protocol people. It was a deliberate effort to humiliate the Chinese leader. The problem is that the US economy has become dependent on Chinese trade imports and on Chinese holdings of US Treasury securities. China today is the largest holder of dollar reserves in form of US Treasury paper with an estimated $825 billion. Were Beijing to decide to exit the US bond market, even in part, it would cause a dollar free-fall and collapse of the $7 trillion US real estate market, a wave of US bank failures and huge unemployment. It’s a real option even if unlikely at the moment.

China’s Hu didn’s waste time or tears over the Bush affront. He immediately went on to Saudi Arabia for a 3 day state visit where both signed trade, defense and security agreements. Needless to say, this is no small slap in the fact to Washington by the traditionally ‘loyal’ Saudi Royal House.

Hu signed a deal for SABIC of Saudi Arabia to build a $5.2 billion oil refinery and petrochemical project in northeast China. At the beginning of this year, King Abdullah was in Beijing for a full state visit. Hmmmmm…Since the Roosevelt-King Ibn Saud deal giving US Aramco and not the British exclusive concession to develop Saudi oil in 1943, Saudi Arabia has been regarded in Washington as a core strategic sphere of interest.

Hu then went on to Morocco, another traditional US sphere of interest, Nigeria and Kenya, all regarded as US spheres of interest. Hmmmm. Only two months ago Rumsfeld was in Morocco to offer US arms. Hu is offering to finance energy exploration there.

The SCO and Iran events

The latest developments around the Shanghai Cooperation Organization (SCO) and Iran further underscore the dramatic change in the geopolitical position of the United States.

The SCO was created in Shanghai on June 15, 2001 by Russia and China along with four former USSR Central Asian republics-- Kazakhstan, Kyrgystan, Tajikistan and Uzbekistan. Prior to September 11 2001, and the US declaration of an Axis of Evil in January 2002, the SCO was merely background geopolitical chatter as far as Washington was concerned. Today the SCO, which has to date been blacked out almost entirely in US mainstream media, is defining a new political counterweight to US hegemony and its ‘one-polar’ world.

At the next June 15 2006 SCO meeting, Iran has been invited to become a full SCO member.

Last month in Teheran, the Chinese Ambassador, Lio G Tan announced that a pending oil and gas deal between China and Iran is ready to be signed.

The deal is said to be worth at least $100 billion, and includes development of the huge Yadavaran onshore oil field. China’s Sinopec would agree to buy 250 million tons of LNG over 25 years. No wonder China is not jumping to back Washington against Iran in the UN Security Council. The US had been trying to put massive pressure on Beijing to halt the deal, for obvious geopolitical reasons, to no avail. Another major defeat for Washington.

Iran is also moving on plans to deliver natural gas via a pipeline to Pakistan and India. Energy ministers from the three countries met in Doha recently and plan to meet again this month in Pakistan.

The pipeline progress is a direct rebuff to Washington's efforts to steer investors clear of Iran. Ironically, US opposition is driving these countries into each others’ arms, Washington’s ‘geopolitical nightmare.’

At the same June 15 SCO meeting, India, which Bush is personally attempting to woo as a geopolitical Asian ‘counterweight’ to China, will also be invited to join SCO. As well, Mongolia and Pakistan will be invited to join SCO. SCO is gaining in geopolitical throw-weight quite substantially.

Iran’s Deputy Foreign Minister Manouchehr Mohammadi told ITAR-Tass in Moscow in April that Iranian membership in SCO could ‘make the world more fair.’ He also spoke of building an Iran -Russia ‘gas-and-oil arc’ in which the two giant energy producers would coordinate activities.

US out in cold in Central Asia

The admission of Iran into SCO opens many new options for Iran and the region. By virtue of SCO membership, Iran can now take part in SCO projects, which in turn means access to badly-needed technology, investment, trade, infrastructure development. It will have major implications for global energy security.

The SCO has reportedly set up a working group of experts ahead of the June summit to develop a common SCO Asian energy strategy, and discuss joint pipeline projects, oil exploration and related activities. Iran sits on the world’s second largest natural gas reserves, and Russia has the largest. Russia is the world’s second largest oil producer after Saudi Arabia. These are no small moves.

India is desperate to come to terms with Iran for energy but is being pressured by Washington not to.

The Bush Administration last year tried to get ‘observer status’ at SCO but was turned down. The rebuff - along with SCO's demands for a reduced American military presence in Central Asia, deeper Russia-China cooperation and the setbacks to US diplomacy in Central Asia – have prompted a policy review in Washington.

After her October 2005 Central Asian tour, Secretary of State Condoleezza Rice announced re-organization of the US State Department's South Asia Bureau to include the Central Asian states, and a new US ‘Greater Central Asia’ scheme.
Washington is trying to wean Central Asian states away from Russia and China. Hamid Karzai's government in Kabul has not responded to SCO's overtures. Given his ties historically to Washington, he likely has little choice.

Gennady Yefstafiyev, a former general in Russia's Foreign Intelligence Service, says, ‘The US's long term goals in Iran are obvious: to engineer the downfall of the current regime; to establish control over Iran's oil and gas; and to use its territory as the shortest route for the transportation of hydrocarbons under US control from the regions of Central Asia and the Caspian Sea bypassing Russia and China. This is not to mention Iran's intrinsic military and strategic significance.’

Washington had based its strategy on Kazakhstan being its key partner in Central Asia. The US wants to expand its physical control over Kazakhstan's oil reserves and formalize Kazakh oil transportation via Baku-Ceyhan pipeline, as well as creating the dominant US role in Caspian Sea security. But Kazakhstan isn’t playing ball. President Nursultan Nazarbayev went to Moscow on April 3 to reaffirm his continued dependence on Russian oil pipelines. And China, as we noted back in December, is making major energy and pipeline deals with Kazakhstan as well. To make Washington’s geopolitical problems worse, despite securing a major US military basing deal with Uzbekistan after September 2001, Washington's relations with Uzbekistan today are disastrous. The US effort to isolate President Islam Karimov, along lines of the Ukraine ‘Orange Revolution’ tactics, is not working. Indian Prime Minister Manmohan Singh visited Tashkent in late April.

As well, Tajikistan relies heavily on Russia's support. In Kyrgyzstan, despite covert US attempts to create dissensions within the regime, President Burmanbek Bakiyev's alliance with Moscow-backed Prime Minister Felix Kulov, is holding.

In the space of 12 months Russia and China have managed to move the pieces on the geopolitical ‘chess board’ of Eurasia away from what had been an overwhelming US strategic advantage, to the opposite, where the US is increasingly isolated. It’s potentially the greatest strategic defeat for the US power projection of the post World War II period…

At least the fall of the U.S. Empire offers some hope for Latin America. Here’s the syndicated columnist, Charley Reese:
Capitalism Wasn't Working In Bolivia

Charley Reese

Bolivia's newly-elected president, Evo Morales, has nationalized the nation's oil-and-gas industry and says he will nationalize the timber and mining industries, too.

Good for him. Capitalism was obviously not working in Bolivia. How else can you explain that a nation rich in oil, gas and minerals is the poorest nation in South America? Obviously, the nation's wealth was not flowing to the people.

I confess I have no sympathy for corporations, multinational or otherwise. As a noted English cleric observed, the corporation "has neither a body to kick nor a soul to damn." Typically, multinational corporations find it is cheaper to bribe a dictator or crooked politician than to pay honest royalties and taxes. Thus they suck wealth right out of the country.

Morales has given the corporations 180 days to sign a new contract with the state-owned oil company, or they have to leave the country. In the meantime, he has ordered the Bolivian army to watch over the facilities — a smart move on his part — and sent in auditors to determine how much the oil companies should be compensated for the shares they will sell the government.

Morales has also signed a new trade pact with Venezuela and Cuba, so you can be sure he is on the Bush administration's bad-guy list. Our national scold, Condoleezza Rice, will soon be making catty comments about him. Come to think of it, she rarely has anything good to say about anybody but old George W. Unfortunately for her, the only people who pay any attention to anything she says is the lap-dog press in Washington. She is the silliest secretary of state in American history.

Ordinarily, I believe that a property-based capitalism is the best system. Unfortunately, that has been replaced by finance capitalism, and so we have to face the fact that when the super-rich and the giant corporations buy up all the assets and then sit on them, opportunity for average people shrinks almost to nothing.

That's always been the system in Latin America, and now the Bush administration is imposing the system on us. Congress and the president are bought and paid for. The deliberate influx of immigrants is driving down wages. The ability of corporations to shut their American plants and move them overseas is breaking the union movement. Wealth is accumulating in fewer and fewer hands — hence the proliferation of billionaires.

I hope Morales has a good personal security system. He is messing with big money, and messing with big money can get you killed almost quicker than anything else. People should recognize that money is power — the power to hire thugs and murderers, the power to shut down competitors, the power to corrupt the government. The only possible counterbalance to big money is honest government, which more or less lets us out, at least for the moment.
One historian's theory on the rise and fall of empires is that when all the wealth accumulates at the top, the people rebel and the wealth is redistributed. Then the process starts all over. That's sounds plausible to me. If you've ever seen the Palace of Versailles, you can understand why the French revolted. That's the best symbol of greed and ego on the planet.

The old German Oswald Spengler, predicted in his book "The Decline of the West" that the Age of Money would be replaced by the Age of Caesars. That seems to be happening. Certainly George Bush is the most Caesar-like president we've ever had. There are so many laws he's decided don't apply to him that he can rightly be called a scofflaw. And like Rome when the republic died, the legislative branch lies supine on the floor, unwilling to challenge the usurper.

I believe men like Morales and Venezuela's Hugo Chavez represent the best hope of breaking the chains of poverty that have held Latin America behind for so many generations. I hope more countries will realize that toadying to the U.S. is the worst thing they can do for their own people.

The American foreign policy today is clearly imperialistic, and as an American whose loyalty is to the Constitution, I fully oppose it. It's too bad the Democrats are too gutless to oppose it, too.

Monday, May 08, 2006

Signs of the Economic Apocalypse, 5-8-06

From Signs of the Times, 5-8-06:

Gold closed at 685.20 dollars an ounce on Friday, up 5.2% from $651.60 at the end of the previous week. The dollar closed at 0.7854 euros on Friday, down 0.8% from 0.7915 euros for the week. The euro, in turn, closed at 1.2732 dollars compared to $1.2634 at the end of the week before. Gold in euros would be 538.17 euros an ounce, up 2.4% from 525.75 for the week. Oil closed at 70.01 dollars a barrel Friday, down 2.7% from $71.88 at the previous week’s close. Oil in euros would be 54.99 euros a barrel, down 3.5% from 56.89 for the week. The gold/oil ratio closed at 9.79, up 0.9% from 9.07 the week before. In the U.S. stock market the Dow closed at 11,577.74 on Friday, up 1.9% from 11,367.14 at the close of the previous Friday. The NASDAQ closed at 2,342.57 on Friday, up 0.9% from 2,322.57 for the week. In U.S. interest rates, the yield on the ten-year U.S. Treasury Note closed at 5.10%, up five basis points from 5.05 the week before.

Interesting week. Gold continues to skyrocket, rising 14% over the last three weeks. Oil is holding firm at the $70 dollar range. The dollar sunk lower. The Bush gang continues to struggle, mired in several overlapping criminal scandals, throwing second-tier players overboard, facing horrible poll numbers, and with their “vision” in complete collapse (all except the enrich-friends, concentrate-wealth, and destroy-the-Constitution-agenda—that’s going great). And, last week saw the first real worker’s May Day in the United States in a long time, with the one-day boycott by supporters of undocumented workers following weeks of the largest labor protests in U.S. history.

But the market optimists are focussing on the stock market, which, in the United States, is near all-time highs (in dollar terms, anyways). A better reason for true optimism might be the rebirth of the labor movement in the United States, thanks to the undocumented workers. Wages even increased last month. The world-wide rejection of neoliberalism is also cause for hope. The danger is that neoliberalism may be replaced by neo-imperial competition among big powers with Chinese imperial fascism competing against Russian and American imperial fascism. Orwell has proven to be quite a prophet.

As we mentioned last week, John Kenneth Galbraith may have picked a good time to die as a look at his life and ideas reminds us of what the United States has lost in the last thirty-five years or so. Here is Brad DeLong in a review of a 2005 biography of Galbraith by Richard Parker:
A Man For All Seasons

That Galbraith's career has been dazzling nobody can dispute. Professors of post-World War II American history can still do no better than to assign his books The Affluent Society and The New Industrial State to teach students how the midcentury U.S. economy came to dominate the world (and what should have been done to make it work better). Anyone wanting to learn about the beginning of the Great Depression should start with The Great Crash; there is no other history of the stock-market crash of 1929 that is as short and even half as worthwhile. During World War II, Galbraith helped run the Office of Price Administration, working to square the growth-inflation circle by pushing production far above economists' measures of potential output without sparking runaway price increases that would threaten the economic mobilization. And after the war, his work on the Defense Department's "United States Strategic Bombing Survey" made Washington rethink the efficacy of its standard war-fighting policy -- staying high in the sky and dropping lots of explosives on all kinds of people far below -- although perhaps the rethinking did not go far enough.

Lots of ideas in the background of contemporary U.S. political and economic thought are Galbraith's. His work as an economist was a scattered but comprehensive attempt to think through the consequences of the transition from a nation of small farms and workshops to one of large factories and superstores. In doing so, he took on many of the questions most central to the new U.S. economic landscape: How much can advertising shape demand? In a world of passive shareholders, autonomous managers and engineers, and firm decisions that emerge out of internal bureaucratic contests, just what are the objectives that drive big firms? How does competition work when its principal dimensions are quality and marketing rather than price? And critically, how do the limits of polite discourse allow the system to hold itself together while constraining its flexibility?

For decades, Galbraith's influence in politics was unmatched by any other economist. The pieces of his advice best remembered are those that went against the "conventional wisdom" (a now ubiquitous phrase that Galbraith coined): strategic bombing did not win World War II; Vietnam was a strategically unimportant quagmire where the United States would do more harm than good; macroeconomic "fine tuning" is likely to blow up in the face of policymakers; the businessman's capacity for self-delusion is nearly infinite. Galbraith sees the United States as a would-be social democracy that has lost its way, assuming that if only the self-serving declarations of the right could be wiped away, the benefits of a bigger, more activist government would become obvious to everyone. The right-wing claim that the most efficient economy is one in which the gales of perfect competition scour the land is, in Galbraith's view, nonsense. Modern industrial and post-industrial production is a large-scale process, large-scale processes require planning, and planning requires stability -- which means that the gales of the market must be calmed.

This political vision, however, has been in retreat since the early 1980s. Nobody wants to hear about the importance of Big Government, Big Bureaucracy, or Big Labor (which hardly even exists). Galbraith's economic views have undergone an even more distressing eclipse. Among economists (excluding economic historians), the 70-year-olds have read Galbraith and think he is very important; the 50-year-olds have read Galbraith and know that the 70-year-olds think he is important but are not sure why; and the 30-year-olds have not even read him.

Parker has an explanation -- a relatively convincing one -- for the retreat of Galbraith's politics. The story behind it is the Democratic establishment's loss of nerve. Too many party intellectuals and politicians drink cocktails on Martha's Vineyard, in Parker's view, and too few spend time on the shop floor learning what issues are important to those sweeping up or manning an assembly line or tending the convenience-store cash register from midnight to six a.m. Thus, the mass base of the Democratic Party has withered, and without a mass base Democratic politicians listen too much to their rich contributors and turn into Eisenhower Republicans -- people who are interested above all in balancing the budget. Galbraith, a committed social democrat, has wielded his pen and his tongue in an effort to halt this decades-long rightward drift. But he has failed: his allies are too few, and the loss of nerve among the party elite is too complete.

Parker also has an explanation -- also a relatively convincing one -- for the eclipse of Galbraith's economic thought. The story here is of the blindness of an academic establishment steeped in Paul Samuelson's Foundations of Economic Analysis. Economists, Parker believes, have sold their birthright for a tasteless pottage of mathematical models. As a result, they can say much about theory but little about reality. And they ignore Galbraith because he is a guilt-inducing reminder of how much broader and more relevant economics can be.

What Would Galbraith Do?

This explanation, however, is far from complete. Late-twentieth-century American economics centers on the use of mathematical models to reach one of two conclusions: that the market is already doing a good job, or that some imperfection is causing "market failure" and correcting or counterbalancing the imperfection will make everything okay.

Thus there are New Classical macroeconomists, who believe that the market works fine and that even depressions are necessary and inevitable; Monetarists, who believe that recessions result from failures in the banking system, which can be corrected by ensuring stable growth of the money supply; and New Keynesians, who are indistinguishable from Monetarists save for their identification of market failures in the labor market or in the investment decisions of firms. In all these cases, it is clear what an economist must do to belong to a particular school: start underneath the lamppost, take a few steps in one direction by describing a market failure, and then start searching for lost keys. New Classicals master the solutions of "dynamic stochastic general-equilibrium representative-agent models." Monetarists analyze the details of the financial system in an effort to define a "neutral monetary policy." New Keynesians trace the implications of subtle differences in labor- and capital-market failures.

Just what a "Galbraithian" economist would do, however, is not clear. For Galbraith, there is no single market failure, no single serpent in the Eden of perfect competition. He starts from the ground and works up: What are the major forces and institutions in a given economy, and how do they interact? A graduate student cannot be taught to follow in Galbraith's footsteps. The only advice: Be supremely witty. Write very well. Read very widely. And master a terrifying amount of institutional detail.

Harry Johnson, in his superb but not entirely fair critique of Milton Friedman's Monetarists, said that in order to carry out an intellectual revolution in economics, one must propound a doctrine that has three qualities: it can be summarized in a single sentence, it provides the young with an excuse for ignoring the work of their elders, and it tells the young what they can do to further the revolution. John Maynard Keynes and Friedman both offered such doctrines. They said, respectively, that "aggregate demand determines supply" and that "inflation is always and everywhere a monetary phenomenon"; they dismissed their predecessors as obsolete; and they set hundreds of young to the task of estimating consumption, investment, and money-demand functions.

Galbraith propounded no such easily summarized doctrine. The closest we can get is: "the world is complicated, and both right-wing ideology and the conventional wisdom that is this age's self-image are terribly wrong." He offered critiques that required you to read and understand old theories, not new theories that allowed you to dismiss everything prior as irrelevant.

The result? Nearly all economists today are Paul Samuelson's children. Many are Keynes' children. Friedman, Robert Lucas, Robert Solow, and James Tobin all have plenty of descendants. But there are few Galbraithians on the ground. Would economics as a discipline be stronger if the 50-year-old and 30-year-old economists had a better appreciation of Galbraith? Almost surely. Will the winds of economic fashion shift and cause economists to appreciate Galbraith once again? For that to happen, an astute young economist would have to devote himself to "mathing up" chapters of The Affluent Society and The New Industrial State and publishing them in journals -- not a likely prospect in today's risk-adverse academic environment.

Here is Paul Craig Roberts on Galbraith:
Markets, Politics and the Public Interest
John Kenneth Galbraith, a Great America
May 3, 2006

By Paul Craig Roberts
A great American has passed away--John Kenneth Galbraith. He was 97 years old and still involved with the issues of our time.

Galbraith's most famous book is The Affluent Society (1958). In this book Galbraith argued that Americans were good at making money, but neglectful of the wider public interest.

Alas, the same is true today. The environment always suffers from the greed of developers and a number of other well organized interest groups that pull political strings. I have seen enough in my life to know that Galbraith was right that the "free market" is not always the answer. All too often, the "free market" is merely organized interests pulling political strings behind ideological cover.

…Galbraith could puncture the inanities that pass for "free market economics" better than anyone. Don't read me wrongly. There is a tremendous case for market economics. The fallibility of government is a well documented story. I am saying that there are a large number of special interests that disguise themselves with free market claims, and that these special interests, not true free market economics, determine US policy.

Today we need Galbraith more than we did in his own time. American economists have made themselves irrelevant. They don't address real issues. Lost in abstractions and ideology, the economy collapses around them while they give assurances that all is well.

America owes its former economic greatness to World War I and World War II, which destroyed Europe and Japan and left the US as the only manufacturer. As part of its cold war strategy, America gave itself away and has today a hollowed out economy based on consumer debt.

Under the Bush regime, the price of gold has sky-rocketed from $240 an ounce to $660 per ounce. That tells us something about the confidence the world has in the dollar as reserve currency.

John Kenneth Galbraith said "the total alteration in underlying circumstances has not been squarely faced. As a result, we are guided, in part, by ideas that are relevant to another world."

His words are more true today than when he wrote them.

A few minutes spent watching MSNBC is enough to convince a person that Roberts hit the nail on the head when he wrote that economists “don't address real issues. Lost in abstractions and ideology, the economy collapses around them while they give assurances that all is well.”

The protests in support of undocumented workers across the United States may represent a watershed. In part for the reason mentioned above, the rebirth, from the lowest levels, of the U.S. labor movement, going at the corporate rulers and anti-immigrant populists at the most basic level by declaring that they are fully human, fully equal human beings worthy of respect and rights regardless of their legal status. The protests were also significant when seen in a hemispheric context:

Mesoamerica comes to North America: The Dialectics of the Migrant Workers’ Movement

By James Petras

May 3, 2006

Between March 25 and May 1, 2006 close to 5 million migrant workers and their supporters marched through nearly 100 cities of the United States. This is the biggest and most sustained workers’ demonstration in the history of the US. In all of its 50-year history, the US trade union confederation, the AFL-CIO has never been capable of mobilizing even a fraction of the workers convoked by the migrant workers movement.

The rise and growth of the movement is rooted in the historical experience of the migrant workers (overwhelmingly from Mexico, Central America and the Caribbean), the exploitative and racist experience they confront today in the US and the future in which they face imprisonment, expulsion and dispossession.

An Independent Political Struggle

The migrant workers movement is engaged in an independent political struggle, directed against local, state and particularly the national government. The movement’s immediate objective is to defeat congressional legislation designed to criminalize employed migrant workers and a “compromise” designed to divide recently arrived workers from older workers. The key demand of the migrant workers is the legalization of all workers, new and old. The choice of direct action methods is a response to the ineffectiveness of the legalistic and lobbying activities of established middle class controlled Latino organizations and the total failure of the labor confederation and its affiliates to organize migrant workers in trade unions or even build solidarity organizations.

To understand the dynamic growth of migrant labor movement in the US and its militancy, it is necessary to analyze the profound structural changes of the 1980’s and 1990’s in Mexico and Central America.

NAFTA, Proxy Wars and Free Markets.

The Economic Determinants

"Free Trade" and Unemployment: Beginning in the 1980’s, the US via the IMF, and its client presidents in Mexico (Salinas, Zedillo and Fox) promoted a “free trade” policy codified in the North American Free Trade Area. This policy opened the door to the massive inflow of heavily subsidized US agricultural commodities undermining local small and medium size farmers. Large-scale foreign investments in retail enterprises, banking and finance led to the bankruptcy of millions of small business people. The growth of free trade industrial zones (maquiladoras) led to the decline of protective social and labor legislation. Foreign debt payments, corrupt privatizations and large-scale growth of precarious employment led to an absolute decline of wage levels, even as the number of Mexican billionaires multiplied. Huge profits and interest payments accruing to US corporations and banks flowed back to the US, as did billions of dollars from corrupt politicians, money laundered by US banks like CITI Corporation.

Displaced and impoverished rural and urban workers soon followed the outward flows of profits and interest. The reasoning according to the “free markets” was that free flows of US capital to Mexico should be accompanied by the free flow of labor, of Mexican workers to the US. But the US did not practice the “free market” doctrine: it pursued a policy of unrestricted entry of capital into Mexico and a restricted policy on labor migration.

The free market policies created a vast reserve army of unemployed and underemployed Mexican labor while the legal restraints on free migration forced the workers to migrate without legal documents.

The huge influx of labor was not simply a result of Mexican or Central American workers seeking higher wages, it was a result of the adverse structural conditions imposed by NAFTA which expelled workers from their workplace. The Mexican free market structure was an ‘empire-centered model of accumulation’, and because it was empire-centered, it became a magnet attracting labor in pursuit of employment in the Empire.

The US Imperial Wars of the 80s: The second major structural feature determining massive migrant worker movements from Central America was the US imperial wars of the 1980’s: the massive US military intervention via proxy armies in Nicaragua, El Salvador, Guatemala, and Honduras destroyed the possibility of social reform and viable economies throughout Central America. By financing death squads and promoting “scorched earth” counter-insurgency activity the US drove millions of Central Americans out of the countryside into the squalor of urban slums and overseas to Mexico, the US, Canada and Europe. The US “success” in imposing corrupt right-wing rulers throughout Central America, closed off all options for collective or self-improvement in the domestic economy. The implementation of neo-liberal measures led to even greater unemployment and a sharp decline in social services, forcing many to seek employment in the empire: the source of their misery.

Legacy of Struggle: Migrant Labor Militancy

The first wave of immigrants in the 1980’s in the aftermath of the neo-liberal shock and the military terror sought anonymously any kind of work even under the worst conditions; many hid their militant past but did not forget it. As the flow of migrant workers gained momentum, great concentrations of Latino workers settled in major cities of California, Texas, Arizona and New Mexico. This led to the creation of a dense network of social, cultural and sports clubs and informal organizations based on previous family, neighborhood and regional ties. New small businesses flourished, consumer power increased, children attended school with clear Latino majorities and numerous radio station were directed to the migrant workers in their own language. Quickly the sense of solidarity grew from the strength of numbers, the facility of communication, the proximity of fellow workers, and above all from the common experience of unregulated and unmitigated exploitation at the hardest jobs and the lowest pay, accompanied by racist attitudes from employers, white workers, police and other public authorities.

The decision by the Congress to add the further threat of imprisonment and mass expulsions occurred at the same time in which the social networks and solidarity within the Latino communities was deepening and expanding. The earlier militancy carried over from the mass popular resistance to the death squads in El Salvador, the taste of freedom and dignity during the Sandinista period in Nicaragua, the multiple militant peasant movements in Mexico came out of the closet and found a new social expression in the mass migrant workers movement.

The convergence of submerged or latent militancy and the demands for labor rights and legal recognition in the new exploitative/repressive context created the impetus for social solidarity of entire communities. Participation included whole families, entire neighborhoods and crossed generational boundaries: high school students joined construction workers, gardeners, garment workers and domestics to fill the streets of Dallas, Texas and Los Angeles, California, with hundreds of thousands of demonstrators, much to the surprise of non-Latino observers ignorant of their historical legacy, their powerful social networks and their decision to draw the line now between social existence and massive expulsion.

In summary we cannot understand the massive labor migration from Mexico without examining the massive flow of US capital to Mexico, its destructive impact on the socio-economic relations and the unregulated outflow or remittance of profits and interests back to the US. Likewise we cannot explain the massive long-term flows of labor migrants from Central America to the US without taking into account the massive flow of US arms to the ruling classes of the region, the large-scale destruction of small scale agriculture, the restoration to power of the kleptocratic oligarchies and the reversal of social reforms, especially in Nicaragua.

The Counter-Revolution: Central American and Mexican labor migration is a direct result of the victory of the US-led counter-revolution in the region. The emergence of the mass movement of labor migrants, in a sense, is the replay of the earlier struggles between US capital and Mexican and Central American labor on the new terrain of US state politics and with a new set of issues. The continuity of the struggles, in Central America and Mexico and now in the US is found in the common demands for “self-determination” and the common methods of struggle, direct action. This is reflected in the strong working class or ‘popular’ composition of the struggle, and the historical memory of class solidarity.

Meanwhile, on another continent, the resistance to neoliberalism gains confidence from victory. According to the World Socialist Web Site:
It is no accident that the huge demonstrations in America follow by only weeks the outbreak of mass protests in France that brought together students, workers and immigrant youth against the attempts by the Chirac government to attack the rights of younger workers and make the working class as a whole pay for the crisis of French capitalism.

The conditions for a powerful and united offensive of the international working class against global capitalism are emerging. Globalization has not only rendered the old national reformist orientation of the trade unions impotent, it has also dramatically increased the number of workers on a world scale, while imposing upon working people in every country ever-more similar conditions.

William Pfaff, writing in the New York Review of Books, explains the French student revolt to a U.S. audience, shattering many of the misconceptions:

The French, of course, have been against capitalisme sauvage ever since that rough beast loomed amid the satanic mills of Britain in the nineteenth century, subsequently making its transatlantic journey to establish its new lair. The usual foreign description of the French problem is that the nation and its political and economic elites are failing to confront the demands of the globalized economy, taking refuge in the unrealistic notion of a French "social model" that has no place in the modern world. Hence, any effort to make the employment market more flexible meets with popular rejection, with consequent high French unemployment.

In fact, the rate of French youth unemployment is not what it usually is made out to be, since free baccalaureate- and university-level education keeps young people off the job market much longer than in most countries. As a result, as London's Financial Times reported in its March 25–26 issue, the official figures are misleading. The newspaper calculates that 7.8 percent of French people under twenty-five are actually out of work, as compared with 7.4 percent in Britain and 6.5 percent in Germany. Accurate comparison with the United States is almost impossible because US unemployment figures do not include the imprisoned and those not actively seeking work.

The level of youth unemployment nonetheless is unacceptably high and France's employment structure is much more inflexible than elsewhere —particularly in Scandinavia, where heavy state intervention in support of individuals out of work backs up highly flexible hiring and firing. But France also has higher productivity than most of its neighbors as well as a more highly qualified and educated workforce, higher investment from abroad (including from the US), and a much higher savings rate. The French savings rate in recent years has fluctuated between 14 and 16 percent. The rate of household debt is roughly half that of the US, Britain, Denmark, and the Netherlands. From the economists' point of view this is far too prudent for a modern consumer society, but it is very good for state finance, which has access to French private savings, placed mostly in life insurance, where the profits also generate tax payments.

The savings rate is further indication that the French worry more about the future than their neighbors. They are concerned about pensions, employment security, and the size of the national debt, now more than a trillion euros. This is unimpressive by American standards but troubles the French.

… According to the current myth, France's existing welfare system can't be reformed. But it can. Last year the underrated predecessor to Prime Minister Villepin, the undramatic and common-sensical Jean-Pierre Raffarin, successfully made important changes both in the retirement system for public employees and in health care. But he observed that these changes required an entire year of talks with the "social partners"—unions, insurance groups, and the public administrations —aimed at edging the reforms forward until they could be quietly adopted; last-minute protesters could then be easily disregarded.

Villepin, in contrast, announced his new youth employment proposal without preliminary consultations. He did not bring the social partners into his confidence, and in parliament he overrode the minority left's opposition (which took the form of multiple frivolous amendments) by applying a constitutional provision allowing the government to cut off delays by posing an implicit vote of confidence. This naturally fed the left's appetite for conflict.

Villepin made no adequate rebuttal to the charge that his measure increased employment insecurity, or to the perception—probably true—that he wanted eventually to extend his reform to apply not only to first jobs but to others as well. French students already are so intimidated by the job market, and so keen on secure employment, that 76 percent of those between fifteen and thirty want to become state employees who can never be fired. The impulse of union officials as well as the young is to defend every advantage they have acquired— whether in securing university places and jobs (or unemployment payments), or in maintaining the thirty-five-hour week, as well as pensions and long vacations. They do so because for the first time since the 1970s, the public is experiencing wide and steady pressure on wages and the threat of unemployment.

…Many of the French have now adopted the view that the nation itself is in decline. "Declineism" has become the subject of much public and press analysis, although sometimes the discussion simply reflects the foreign accusation that France's problems come from its refusal to adopt the Anglo-American model of market capitalism. Other commentators articulate a widely described sense of powerlessness, whether to break a sterile quasi stalemate between left and right in domestic politics, or to formulate a riposte to hostile economic forces from abroad—despite the fact that France actually is a highly successful competitor in world markets and a global leader in high technology.

I would suggest a larger explanation for the prevailing anxiety: that, as throughout modern history, France functions as the coal miner's canary of modern society, reacting to political and social forces before anyone else. France's refusal to approve the European Union constitutional treaty two years ago caused an international shock because the voters rejected the view, all but universally held among European elites, that continuing expansion and market liberalization are essential to the EU, indeed inevitable. The reaction of the European public elsewhere to the French vote seems, on the whole, to have been one of relief.

Similarly, the current unrest in France can be interpreted as a signal of wider popular resistance in Europe to the most important element in the new model of market economics, its undermining of the place of the employee in the corporate order, deliberately rendering the lives of employees precarious. The usual criticism of government intervention in the French economy is that it is protectionist and tends to block managers from downsizing and outsourcing jobs, in order to add "value" to the corporation. The head of the Paris Enterprise Institute, financed by business to sponsor economic internships for French schoolteachers, Jean-Pierre Boisivon, told the International Herald Tribune in April that "in France we are still stuck in 1970s Keynesian-style economics— we live in the world of thirty years ago. In our schools we fabricate a vision of society that is very different from the one that exists in other countries."

Between the 1970s and the present two fundamental changes have been made in the leading—American— model of capitalism. The first is that the "stakeholder" version of reformed capitalism that prevailed during the period following World War II was replaced by a new model of corporate purpose and responsibility. The new capitalism's most important characteristic in the United States has been to transfer wealth to stockholders and managers, and (through corporate tax cuts) away from spending for public purposes and on employees (through depressing wages and eliminating employee benefits). A recent headline read: "AT&T–BellSouth Deal Gets Wall St. Applause. Merger Would Lead to 10,000 Job Cuts."

The earlier postwar model, influenced by the New Deal as well as by reform unionism, European social democracy, and Christian social doctrine, held that corporations had a duty to ensure the well-being of their employees and an obligation to the community, chiefly but not exclusively fulfilled through corporate tax payments.

That model was replaced by one in which corporation managers are held responsible only for creating short-term "value" for owners, as measured by market performance and dividends. The practical result is constant pressure to limit or reduce wages and worker benefits (leading in some cases to theft of pensions and other crimes), as well as political lobbying and public campaigns to lower corporate tax contributions to the government and the public interest. In short, the business system in the advanced market economies has been rejigged since the 1970s to take wealth from workers, and from the funding of government, and transfer it to stockholders and corporate executives.

…I once called the current system "CEO capitalism," since corporate chiefs today effectively control their boards of directors and are also the principal benefactors of the system, subject to critical attention chiefly from investment fund managers, themselves interested in maximized and steadily increasing dividends. The well-known American fund manager John C. Bogle—founder and former CEO of the Vanguard Group, Inc.—has taken up this argument and develops it in his recent book, The Battle for the Soul of Capitalism.

This change in corporate capitalism has been defended with the now-familiar argument that capitalism devoted to increasing short-term value would produce such prosperity that all would benefit, including the non-shareholding stakeholders. However, while much wealth has been generated, not much of it has ended with them.

The second change that has taken place is, of course, globalization. The crucial effect of this for society in the advanced countries is that it puts labor into competition with the poorest countries on earth. The Nobel laureate Joseph Stiglitz is one of many arguing that trade liberalization puts downward pressure on skilled as well as unskilled wages. The deficiencies of the "Washington consensus" model for economic development have been acknowledged for some years, with many recognizing the argument that economic development, historically, has tended to fare better behind protectionism (as in Japan and South Korea) than under Washington consensus methods, while free trade often proves predatory in backward societies, destroying functioning institutions and failing to replace them. One remedy, which Stiglitz supports, is that free trade be emphasized within blocs of economies at comparable stages of development, instead of the universal deregulation advocated until now.

We need to note the classical economist David Ricardo's neglected "iron law of wages," which says that in conditions of wage competition and unlimited labor supply, wages will fall to just above subsistence level. This "law" in the past seemed irrelevant since there never before has been unlimited access to labor. Thanks to globalization, that is now in prospect. The consequences have only begun to be felt.

In this perspective, what in France seems a sterile popular defense of an obsolete social and economic order might instead be understood as a premonitory appeal for a humane successor to an economic model that considers labor a commodity and extends price competition for that commodity to the entire world. The apparently reactionary or even Luddite position inspired by French reactions might prove prophetic.

…Neither political party, as a party, has made other than an equivocal or reactionary challenge to the social and economic model of market liberalism that much of France rejects. As elsewhere in Europe—notably in the European Commission under its current president—French elites seem unaware of the degree to which the global model they are being pressed to adopt is already under attack from within. Instead, the French, who consider pessimism evidence of intelligence, are telling themselves that the nation suffers some profound crisis.

They remain under the spell of the idea of France in Decline, which the events of recent weeks seem to them to have confirmed. A French critic of declinism, Philippe Grasset, objects to the widely heard plea that it is essential that France cease to set itself off by its taste for what is passé, its conservatism, its old-fashionedness, and that it adapt to new conditions. This necessarily presupposes that globalism is the unique route to follow, simultaneously irresistible, triumphant, and benevolent.

Grasset continues:

Yet one sees perfectly well that the opposite is true: globalism is less and less the only way to go; it is not at all irresistible, never ceases to run into difficulties, and is more and more unpredictable. We no longer need to question whether these doubts about it are valid; it is increasingly apparent that they are true, and that their truth soon will be irresistible.
In that case, it may one day be said that the children were the first to notice.
To counter the threat posed by anti-neoliberal workers movements throughout the world, government and media elites in the United States have done what they have always done in such circumstances: divide workers by race or religion. Again the World Socialist Web Site:

This is what lies behind the orchestrated “backlash” against the immigrants’ actions. The most reactionary, hypocritical and politically dangerous expression of this phenomenon has come from the Bush White House itself, with the seemingly absurd whipping up of a controversy over a Spanish-language version of the National Anthem produced by a number of Latino recording stars.

Never mind that Bush himself reportedly participated on a regular basis in campaign rallies where Spanish versions of the “Star Spangled Banner” were featured, with no apparent concern. The issue was manufactured and pumped up by Republican political operatives with the aim of appealing to the right-wing xenophobic layer within the Republican Party that constitutes the administration’s bedrock political base.

The stupidity and irresponsibility of such an appeal is breathtaking. The promotion by the US president of the concept of making English an official language—something that exists nowhere in the US Constitution—carries with it the threat of provoking the kind of intense social conflicts that, in some countries, have led to civil war.

Parallel with such backward nationalist appeals is the right-wing populist agitation conducted by disparate elements ranging from CNN commentator Lou Dobbs, who has been turned into a national political figure, to the fascistic Minutemen vigilantes and sections of the trade union bureaucracy. They all pretend that their hostility to immigrants is motivated by concern for the American working class, whose jobs are allegedly being taken away and wages depressed by the presence in America of 12 million undocumented workers.

This is a reactionary lie. The attacks on jobs, living standards and social benefits are the fault not of the immigrants, but of a global crisis of the capitalist system—an economic system that is defended by all those who are trying to turn the undocumented workers into scapegoats.

There is no way to defend any rights or past gains of the working class in America or any other country by supporting the walling off of the national economy against immigrants. The futility of such an approach is amply demonstrated by the abject failure of the official trade union movement in the US, which for decades tried to convince workers that they had a common interest with big business in defending “American jobs” against foreign companies and workers alike. The result was the shutdown of factory after factory and the destruction of hundreds of thousands of jobs, as US-based transnational corporations shifted production to Mexico, China and elsewhere, seeking ever-lower labor costs.

It may be that neoconservatism and neoliberalism are incompatible. Neoliberalism was surging ahead in the Clinton years with the so-called “Washington Consensus.” But the brutish foreign policy and rhetoric of the neoconservatives has helped sour the world on the neoliberal agenda. There is no “consensus” now. Neoliberal globalism depended for public support on the idea that everyone was going to benefit. But the neocon creation of a neo-feudal aristocracy to rule the world makes that belief no longer sustainable. The neocons knew that, which is why they put police state measures in place right from the start. The neocon agenda is at least self-consistent. The rejection of international law and norms of behavior by the United States and Israel has isolated those countries and that isolation, to a certain mind-set, confirms the fact that you cannot trust or work with the rest of the world. The saber rattling against Iran has helped boost oil prices which has helped consolidate wealth in a few hands, hands beholden to the neocon imperialists. The Iraq War, while bankrupting the United States, has enriched the few well-connected who own large blocks of the various defense and super-construction firms. Al Martin has some numbers:
This regime has craftily done everything it possibly can to A) increase the price of a barrel of crude oil and, B) increase the profit margins of oil companies. Why has it done so? Because NO single factor consolidates wealth like higher oil prices. First of all, you have to bear in mind that the top 20% of the nation owns 74% of all of the outstanding shares of the nation’s 50 largest publicly traded oil companies, including hydrocarbon derivative companies. So we have the top 20% of the nation owning 74% of all the stock.Now, look at the top 1% of the nation, the very core of the Bushonian constituency. The top 1% of the nation owns 24% of all of the outstanding shares in the nation’s publicly traded oil and gas companies and/or, let’s say, major oil and gas companies and major hydrocarbon derivative publicly traded corporations.When this Regime came to power, said top 1% of the population owned 61.9% of all of the private wealth in the nation. Today the same top 1% (because there’s very little turnover, it’s essentially the same top 1%, essentially the same people), now own 70.2% of all of the private wealth in the nation.In other words, wealth has increased by 8.3% within the top 1%. There’s been a further consolidation: 8.3% of all of the private wealth into the nation has flowed into the hands of the top 1% of the people under this regime.Of said 8.3%, fully one quarter of that money came from oil stock, from the ownership of publicly traded oil and gas stocks and/or refiners, drillers, explorers, what’s called “downstream” hydrocarbon energy stocks and/or interest in other oil-related securities. One quarter of the increase in wealth in the top 1% and, indeed, more than one third of the increase in the wealth of the top 20% has come from holdings of oil and oil-related publicly traded corporations.

So far there has been little public resistance in the United States to the massive transfer of wealth upward, because, by and large, the U.S. public has been economically comfortable. But with rising gasoline prices, which can easily be tied directly to obscene profits by oil companies, grumbling has increased. When housing prices crash, however, watch out.