Monday, October 16, 2006

Signs of the Economic Apocalypse, 10-16-06

From Signs of the Times, 10-16-06:

Gold closed at 593.70 dollars an ounce on Friday, up 2.7% from $578.00 for the week. The dollar closed at 0.7992 Friday, up 0.6% from 0.7941 euros at the close of the Friday before. That put the euro at 1.2513 dollars compared to 1.2594 at the previous week’s close. Gold in euros would be 474.47 euros an ounce, up 3.4% from 458.95 for the week. Oil closed at 58.70 dollars a barrel, down 2.1% from $59.91 at the end of the previous week. Oil in euros would be 46.91 euros a barrel, down 1.4% from 47.57 euros at the end of the week before. The gold/oil ratio closed at 10.11, up 4.8% from 9.65 for the week. In the U.S. stock market the Dow closed at 11,960.51 Friday, up 0.9% from 11,850.21 at the close of the previous week. The NASDAQ closed at 2,357.29 Friday, up 1.0% from 2,299.99 at the end of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.80%, up 11 basis points from 4.69 for the week.

Last week saw a bit of excitement as the Dow set records and approached 12,000:

Stocks gain as Dow hits another record high

By Chris Sanders
Fri Oct 13, 7:02 PM ET

NEW YORK (Reuters) - Stocks rose on Friday, driving the Dow to another all-time high as positive retail sales data helped the broader market, while a gain in oil prices pushed up energy shares such as Exxon Mobil Corp..

September retail sales unexpectedly fell on a record decline in gasoline sales. However, when the record 9.3 percent drop in gasoline sales was stripped out of the government data, retail sales actually rose 0.6 percent on strong clothing and department store sales. That sign of a healthy economy gave investors a solid reason to buy shares.

"It's no surprise the market is hanging in there," said Scott Wren, senior equity strategist at A.G. Edwards & Sons Inc. in St. Louis, adding that "people are out there spending money. If you look at the retail sales numbers and strip out the gasoline, they look pretty good and they should be in a good job market with falling energy prices."

Gains in recently out-of-favor large-cap tech stocks, including International Business Machines Corp. and Qualcomm Inc., helped boost the Dow and the Nasdaq, respectively. IBM rose 1.6 percent, or $1.38, to $86.08 on the New York Stock Exchange, while Qualcomm gained 2.3 percent, or 90 cents, to $39.84 on the Nasdaq.

The Dow Jones industrial average gained 12.81 points, or 0.11 percent, to end at a record 11,960.51, which also marked a fresh intraday all-time high. The Standard & Poor's 500 Index rose 2.79 points, or 0.20 percent, to finish at 1,365.62, just below a fresh 5 1/2-year high at 1,366.63. The Nasdaq Composite Index advanced 11.11 points, or 0.47 percent, to close at 2,357.29.

For the week, the blue-chip Dow average rose 0.9 percent, while the S&P 500 gained 1.2 percent and the Nasdaq climbed 2.5 percent.


U.S. crude oil futures ended stronger on Friday after jumping to a session high above $59 on news of oilfield shutdowns in Norway and indications that OPEC may meet next week to formalize a production-cut agreement, boosting energy shares such as Exxon Mobil and ConocoPhillips .

Exxon Mobil shares rose 1.1 percent, or 75 cents, to $68.40, while ConocoPhillips gained 2.1 percent, or $1.22, to close at $60.03 on the New York Stock Exchange. Exxon Mobil was the top-weighted gainer in the S&P 500 and also gave a major boost to the Dow average.

NYMEX November crude rose 71 cents to settle on Friday at $58.57 a barrel, off its session high at $59.45.

On Friday, the Dow's advance was curbed in part because conglomerate General Electric Co. posted third-quarter profit in line with Wall Street expectations.

Investors were concerned because GE, the U.S. economic bellwether with operations ranging from jet engine manufacturing to commercial lending, reported weak margins, particularly at its plastics and NBC Universal units.

GE's stock fell 0.7 percent, or 24 cents, to $35.98. In addition to being a major drag on the Dow, GE was the heaviest weight on the S&P 500 and helped limit its gains for the day.


Investors' appetite for tech stocks, though, offset the worries about GE.

"The confirmation from Microsoft that (the operating system) Vista is coming and the delays are behind them has got them stirred up," said Joseph Battipaglia, chief investment officer of Ryan, Beck & Co. in Yardley, Pennsylvania.

"There is an expectation of some spending to come after that" Vista release, he added.

Microsoft's stock rose 0.5 percent, or 15 cents, to $28.37 on the Nasdaq. It's also a Dow component and in the S&P 500.

Aside from retail sales, the University of Michigan's preliminary reading of its October consumer sentiment index rose to 92.3, exceeding economists' forecast.

The evidence of strong consumer spending bolstered the perception that the Federal Reserve is not inclined to cut interest rates soon. That view prompted some investors to sell bonds.

The yield on the benchmark 10-year U.S. Treasury note , which moves in the opposite direction of its price, rose to 4.81 percent on Friday from 4.78 percent late on Thursday.


A drop in the shares of Centex Corp., the fourth-largest U.S. home builder, helped drive an index of home builder stocks down 4.1 percent. Centex shares declined 5.5 percent, or $3.03, to $52.06, a day after the company sharply cut its earnings outlook as a slumping housing market led to record home sale cancellations.

A negative brokerage recommendation prompted investors to sell the shares of Home Depot Inc., making it among the heaviest weights on the Dow.

Home Depot's stock dropped 2.6 percent, or $1.00, to $36.90 on the NYSE after Prudential Equity Group began coverage of the biggest retailers with an "unfavorable" rating and suggested investors reduce the proportion of Home Depot holdings.

Prudential cited high gasoline prices, higher interest rates and a deteriorating housing market.

Trading was active on the NYSE, with about 1.51 billion shares changing hands, below last year's daily average of 1.61 billion, while on Nasdaq, about 2.00 billion shares traded, above last year's daily average of 1.80 billion.

Advancing stocks outnumbered declining ones by a ratio of almost 7 to 5 on the NYSE and about 3 to 2 on Nasdaq.

The pre-election drop in oil prices has helped push optmistic sentiment beyond the circles of media pundits into the public at large.

Falling gasoline price bolsters U.S. consumers

By Burton Friers

Fri Oct 13, 10:16 PM ET

NEW YORK (Reuters) - Falling gasoline prices spurred U.S. shoppers last month and consumers' enthusiasm firmed in October as the drop in fuel costs left them free to spend elsewhere, reports showed on Friday.

Overall retail sales posted a fall of 0.4 percent in September, the Commerce Department said, but when a record 9.3 percent drop in gasoline sales was stripped out, they showed a healthy rise of 0.6 percent, helped by strong clothing and department store purchases.

Meanwhile, the University of Michigan said its index that gauges consumer sentiment jumped to 92.3 in October, higher than the reading of 86.5 economists had predicted in a Reuters poll and up from September's result.

"Happy days are here again," said Patrick Fearon, senior economist at A.G. Edwards and Sons in St. Louis, Missouri.

"Consumers' improved mood was largely tied to falling gasoline prices."

Analysts polled by Reuters were expecting a 0.2 percent rise in overall retail sales.

U.S. stocks ended higher as the retail sales data helped drive the Dow Jones industrial average to a record high.

U.S. Treasury debt prices slipped and yields rose, as the data reinforced the perception that the Federal Reserve is in no hurry to lower interest rates to stimulate economic growth.


The strength of Friday's figures was consistent with earlier reports from the retail sector showing growth in consumer spending after a difficult summer when gasoline prices were hovering near record highs.

Average gasoline prices slid from a peak of $2.92 a gallon in mid-August to $2.38 a gallon in late September, according to the Energy Department.

SpendingPulse, a retail data service of MasterCard Advisors, an arm of MasterCard Worldwide, said on Monday that Americans felt freer to splurge with the help of lower gasoline prices and a soaring stock market.

In dollar terms, it said September seasonally adjusted sales, excluding autos, reached $287.7 billion, up 5.3 percent from a year ago.

This followed reports last week from U.S. department stores and clothing retailers, who posted surprisingly strong September sales.

…"If September's sales are any indication, shoppers appear confident heading into the holiday season," the National Retail Federation said in a statement after the retail sales report.

"As gas prices dipped last month, consumers had more disposable income to spend on other items, especially back-to-school necessities like clothing and sporting goods."

The University of Michigan data also showed inflation expectations for the next year were lower, though they were slightly higher for the next five years.

A report from the Labor Department showed U.S. import prices dropped by a more-than-expected 2.1 percent in September, the largest decline in almost 3-1/2 years, due largely to the big fall in petroleum prices.

It was the first fall in overall import prices since March and was led by a 10.3 percent fall in petroleum prices while the cost of non-petroleum imports inched up 0.1 percent.
Some analysts have been trying to peddle the idea that the bursting of the housing bubble is now behind us. Wishful thinking, most likely. Here is “theroxylandr:” blogger:

Real estate bubble: why the worst is still ahead

Any bubble, including Nasdaq bubble of 2000, when the index lost 78% of its value after the bubble burst, follow the same psychological pattern of participants, i.e. bubble inflators. This pattern is:

1. euphoria
2. denial
3. recognition
4. panic
5. hope (optional)
6. capitulation

Btw, the lost wars usually follow the same pattern.
Now let see the reported RBC Homeowner’s Survey, where homeowners expressed their ridiculous expectations:

· 75.6%: see their Home’s value climbing over the next few years
· 46%: expect a gain of 5% or more annually
· 30%: foresee a rise of 10% to 15% a year
· 70%: said their home’s value has risen 10% or more in the past 3 years
· 6% think their home’s value will sink in the next few years
· 7.8%: worry that their mortgage might exceed the value of their home

As you can see 46% of homeowners are in deep denial and 30% have plain brain damage. Only 6% are absolutely correct.

This stage is called denial, when obvious facts are still ignored by the majority of the market players. It is the same stage where Nasdaq was in early 2001. Please check the charts to see what happened next.

In fact, if the housing situation does stabilize, it can only happen by means of an even bigger replacement bubble in some other sector. Each time one bubble replaces another, the stakes get higher. Some are suggesting a derivatives bubble is being created to soften the impact of a housing bust world-wide. If so, that might be the last bubble; what could replace THAT?”

Bubble - Bubble Toil And Trouble

by Captain Hook

October 15, 2006

The study below originally appeared at Treasure Chests for the benefit of subscribers on Monday, October 2, 2006.

While I may be a bit premature about attaching a Halloween oriented motif to this piece, at the same time, it fits the situation better than any other in mind so we’ll just have to go with it. And to what does it refer, a witches brew perhaps? Well, in a way yes, that’s it in a nutshell all right. Of course alternatively one could just as easily characterize it as a ‘big mess’ in less dramatic terms. What mess is this to which we are referring? Why it’s the next asset bubble, in progress as we speak. Actually, it’s been there for quite some time now, but not too many see it for what it is in reality. It’s the bubble to replace the housing bubble, which of course was the bubble that replaced the tech bubble, all of which being a product of an insane credit bubble, undoubtedly the primary source of our undoing in the end. Which bubble is this then, after such a grand buildup? Why it’s the derivatives bubble of course. You know, the one that keeps growing like a mushroom still to this day.

According to the
Bank for International Settlements (BIS), the combined turnover in the world's derivatives exchanges totaled USD 344 trillion during Q4 2005. No, that’s not a typo, that’s $344 trillion of notional value, where if one were to annualize a total, it doesn’t take long to figure out the world is now trading in excess of a quadrillion worth of this paper every year. Is that a big enough bubble for you? And it goes without saying this has been a boon to the brokerages and banks that deal in these formerly exotic financial instruments, where whether you realize it or not, even if you don’t participate in them directly, simply by owning a mutual fund, or a bank account for that matter, indirectly you too are captive to this trend.

Can derivatives be classified as ‘real’ assets however? Are they not just contracts, or promises to pay if you will? And if they cannot be considered ‘real’ assets then, how can they be characterized as a bubble? An interesting viewpoint, one a banker attempting to baffle you with bull-pucky would raise at an opportune time while reciting a rendition of ‘double speak’. But if this were true, then why are they ascribed value, traded for hard currency, and held on balance sheets? And why does the BIS itself count up all those values, notional as they may be? Answer: While it’s true the notional values of derivatives will never be realized, which of course is the larger part of the scam bankers perpetuate on savers who participate in them, and much like how the insurance industry prospers, ‘premiums’ are paid (but rarely collected on), which as mentioned above go directly to the bottom line of the writers, who for the most part just happen to be banks and brokerages. [i.e. and if not in principal (where they only take the sweet deals themselves), as agents.]

On the surface this may all appear fine and dandy to the unsuspecting, especially if you are one of the increasingly few who actually benefit from this trickery perpetuated under the guise of ‘free enterprise’, where to the victors go the spoils, right? And hey, myself I’m all for fair play. The only problem is the banks and brokers have become too powerful, where they routinely and not so inconspicuously put there own interests ahead of those (the ignorant public) they are suppose to be serving. Of course everybody wants to be a millionaire these days, where we have been conditioned to think this is possible, which is a very large part of the reason this ‘mess’ is allowed to continue growing. What’s more, in spite of a long and illustrious history in the manufacture of US paper, one that includes aiding in the Super-cycle collapse of US stocks back in 1929, I am willing to go out on a bit of a limb at this juncture and speculate the confidence men from Goldman Sachs are at the top of their game right now, evidenced in what appears to be ‘free reign’ in managing fiscal policy at home, while spearheading foreign initiatives designed to continue expanding the paper empire abroad.

With this in mind, and returning to the main topic at hand, it should be no surprise then that the use of derivatives around the world is still on the rise, and that if Mr. Paulson has his way, China will fall into the fold very quickly. One must realize that in order to be a good ‘western’ banker today, which he still is essentially, Hank wants to see China keep its economy humming along no matter what the cost, because he knows growth velocities at home are suffering, and that without accelerated US paper growth in the east, even the Wall Street Dawgs will begin to suffer soon. Here’s a scary thought. If the paper pushers are put out of work, much like those already rendered useless in the ‘real economy’ through the export of manufacturing jobs to Asia, the only ones left working will be government. And then, whom would they tax?

The lack of credible alternatives is a strong incentive to allow asset bubbles to continue growing, and largely explains why officialdom condones / promotes / supports such activities, but it’s getting harder and harder to find new ones. One has to wonder how it’s all going to end knowing growth rates in bubbles under construction will undoubtedly prove unsustainable as well.

This is why Hank is over in China attempting to keep the flow of paper heading overseas accelerating as long as possible, which is why one should not be surprised to hear about derivatives markets opening there too, where simply getting them indebted is not sufficient to support necessary growth in the larger credit bubble anymore. Nope, western bankers need them buying derivatives too, and right away in support of all the other bubbles. North American’s are already enslaved up to their eyeballs in debt and derivatives rendering little to no growth prospects at home in this regard. So, what do Wall Street capitalists do? They export the manufacturing base to China boosting worker’s wages so they can be enslaved in debt servitude, as well as creating markets for all the other paper Da Boyz want to send over. Genius no? The only thing is even the Chinese have growth limits, along with the fact they may be acting to slow, which poses risks to the western model. A slowdown here would not be good for the credit bubble, at large.

So, the big question is what if the Chinese do not embrace the use of derivatives in good measure? Will the derivatives bubble pop soon too if this is the case? For an answer to that question, along with being a window on the larger condition of the paper world in full measure these days, and like GM was considered a ‘bell weather’ when the US still had a manufacturing base, one might want to keep a watchful eye on Goldman’s stock, symbol GS on New York. While it appears to be pushing higher in deference to the ever-expanding derivatives / credit bubble(s), and the increased business that goes along with this trend, when the party is over for real, meaning growth in foreign markets is leveling off – Huston – we may have a problem. For now however, the top brass in China continue to see globalization as the pigs in Animal Farm would, an easy ride on the backs of others to good times. Thusly, we will have derivatives in China, and higher prices for Goldman’s stock price in all likelihood, as well.

In March I put out some thoughts on why the echo bubble in stocks likely had much further to go than some could contemplate at the time. Upon reviewing this piece, you will notice we centered our attention on the plight of GS shares back then knowing we would likely return one day, and here we are now expanding on these understandings. Back in March, GS was $150, and today its $170, apparently on it’s way to a Fibonacci (Fib) resonance defined target of approximately $190. Just as an aside, I use this price targeting method because it’s my belief movements within humans are still primarily a function of nature, no matter how much we attempt to separate ourselves from this reality.

That being said, and while this is all pure speculation, if the Fib based projection presented above is in fact correct, the implication in my mind is that both the derivatives bubble, and perhaps even the larger credit bubble itself, are approaching ‘critical mass’, and that ‘reversals of fortune’ are possibly at hand in the not too distant future. One thing is for sure, even if this were not the case, a good test will be seen once Fib resonance related resistance is achieved, so at a minimum, one might keep this in mind.

And what if this does turn out to be the real deal? You will be very happy in a few years if you take precautions now I will wager, because in a larger sense we are talking about the derivatives and credit bubbles here today, but it should not be forgotten all of our asset bubbles depend on co-existence, and that if growth rates begin to wane, the leveraged buyout bubble, the stock market echo bubble, ALL the other asset bubbles will undoubtedly feel the pinch.

Traveling a little further down the rabbit hole in expanding on the above, and narrowing our focus onto the US stock market in terms of how it fits into the grand scheme of things, as mentioned above, while growth prospects in domestic derivatives markets are likely to slow in coming days for a variety of reasons, and not ignoring the importance of credit based derivatives in the big picture, not only monitoring growth rates is important in measuring future health prospects, but also structure as well. To what structure do we refer and why is it important? In the case of equity based derivatives markets, we are referring to put / call ratios, where if you are unaware, open interest ratios happen to be the best reflection of investor sentiment in the market today based on our studies.

Further to this, and in attempting not take away from the main thrust of this piece, while at the same time covering a related aspect of the derivatives world that could hasten a popping of the larger bubble, it must be briefly mentioned that if US equity index options markets ever became disorderly (not liquid), such a condition would spread to credit and currency related contracts as well, potentially setting off a chain reaction of defaults that for all intents and purposes would shut down the global financial system. Moreover, considering the size and extent of the current derivatives bubble, if the above numbers are extrapolated into the future, very soon we will be dealing in multi-quadrillions of notional values within the totality of international markets. That’s one thing about bankers; they are very predicable, where if one quadrillion is good, ten will undoubtedly be viewed as better in maintaining paper empires. The only thing is, when a bubble of this nature (size) pops, there’s no coming back. Please note this whole train of thought is very consistent with conditions one would expect to see at a top of 'grand' proportions in human intercourse.

Now it’s time to throw some corny (in today’s world) and obvious truisms at you, which in retrospect a few years out, may be looked back on as ‘hitting the nail right on the head’. Here’s another. Whatever has a beginning also has an end. Sounds like Confucius, no? Relating to this, ‘whenever a more natural end is avoided, no matter what you are talking about, the result is usually violent’. Awe, there’s the rub. This is why we watch sentiment in US equity indices so closely, because one of these days open interest put / call ratios will drop across the board, and the floor that currently exists under prices will be gone. Why is this important? Answer: In spite of what you may think on the subject, US monetary authorities are not in a position to monetize the entire financial system, and if stocks were ever to start falling precipitously with options related support(s) removed, not only would they likely not be able to do much about it right away, it’s also likely panic and dislocations will spread to other markets as well. This is because today primary dealers not only deal in stocks in a big way, but also in debt / credit markets, and currencies, with the term ‘counter party risk’ potentially becoming applicable in cross-markets. Puff on that one for a bit.

This is why you want to step out of the paper game with some of your assets, not the least of which is the US dollar (think of China's growing $1 trillion holdings) considering it's poised to lose reserve status one of these days. What’s more, all should realize this is the biggest and most obvious contrarian play ever, where man has never been so far from his natural beginnings. One can only see this if looking through the right pair of glasses however, which was the purpose of this paper, to provide such a view, along with a warning. Much trouble of increasing complexity lies down the road for all, and only the prepared will fair well.

In the end then, it’s important to realize derivatives and debt are all forms of phony money, designed to artificially pump up an ailing financial system. Moreover, once more people not only begin to realize this, but act on this knowledge, gold, silver, and any of the other real ‘hard’ currencies you care to mention will come into their own, even if only to support new paper regimes ultimately as reorganizations are engineered in the future. Of course this eventuality is still years off, and when you see it, the trend towards tangible assets will be a lot closer to its end than beginning, along with rather substantial bubbles in gold and silver correspondingly.

The economic optimism in display in the U.S. recently can only be adopted if one puts on blinders and ignores the deficits, the debt, and, perhaps most importantly, the war. Without the Global War on Whatever They’re Calling it Now, the problems of debt and deficit in the zone of the world’s reserve currency would be bad enough. Wars, however, and most particularly unsuccessful imperial wars, exacerbate debt and deficit.

More reasons a monetary crisis is inevitable

Doug Casey

October 12, 2006

Doug Casey is the chairman of Casey Research, LLC., publisher of the highly acclaimed International Speculator.

Even a casual observer can see that the Fed is now caught between a rock and a hard place. If it lowers interest rates to head off the economic devastation that would come with a collapsed housing bubble—housing is estimated to have, directly and indirectly, contributed 57% of U.S. economic activity over the past 5 years—the Fed risks triggering a wholesale rush by foreigners to dump their trillions of U.S. dollars. But if it raises interest rates to protect the dollar, the Fed risks turning an economic downturn into the most serious recession since the 1930’s.

It is our view at Casey Research that, for a number of reasons, not the least being that we are soon to enter the presidential election cycle, the government will take the course of inflation.

A couple of other factors lead us to that view. One is demographic.

The first-born baby boomers are turning 60 this year, and they and their little brothers and sisters will soon have their hands out for the Social Security and Medicare entitlements they’ve been promised. But the boomers represent an extraordinary bulge in the age profile of the U.S. population. The bulge means that the share of the population receiving government retirement benefits will grow, while the share of the population paying for them will shrink. To paper over this gross imbalance and still keep the entitlement checks going out, deficits will have to increase at a stupendous rate—and the engine of monetary creation will have to ramp up to entirely new and increasingly dangerous levels.

The second factor promising more inflation is the “Forever War” against Islam—already being called World War Three in many quarters. As the chart by our own Bud Conrad shows, the dollar has been a casualty of every U.S. war. War costs are paid for with deficits, and the deficits translate into rising price inflation every time.

Contrary to Wall Street’s opinion, these aren’t problems the Fed can sweep under the rug. Fed Chairman Bernanke is an academic with a reasonable understanding of the technical details, but his career bias has been to dodge recessions by cranking up the presses that print all those $100 bills. “Helicopter Ben” is the nickname he earned for facetiously proposing to drop cash out of helicopters to stave off a deflation.

Given the options in front of him, and his bias toward monetary expansion, we are convinced that the Fed will return to loose monetary policies—masked by ongoing tampering with the CPI indicators and by obfuscating the truth about the money supply. That’s the path of least resistance. In the short run, no one gets hurt, and it delivers the U.S. government its daily fix of billions needed to keep the ship of state afloat.

Monetary expansion will buy some time, but then the real trouble starts. A loose monetary policy eventually produces price inflation. As the inflation becomes noticed, foreign holders will lose confidence in the dollar. Then, as they head for the exit, the Fed will face a stark decision: either raise interest rates to economy-crushing levels to save the dollar, or let the dollar collapse and tolerate even worse inflation a little further down the line.

There’s room in the Fed’s lifeboat for the dollar, and there’s room for the economy, but there isn’t room for both. Bernanke has already all but announced that it will be the dollar that gets thrown overboard.

While no one can say how long it will take for a monetary crisis to emerge or what will ultimately trigger it, now is the time to acknowledge the risk—and in fact the likelihood—that it will occur in the next few years. That potential is confirmed with each newsflash telling us that the housing slump is accelerating and that signs of recession are appearing. Those are code words for the Fed to begin pumping more paper money into the system.

Of course wars, even disastrous ones, make some people rich. They just benefit at the expense of their home society and currency. George Ure blames those fictive psychopaths, the corporations, and those real psychopaths who benefit from those corporations, for the chronic warfare that so damages the average people of the world:

The West is hostage to a view that is profit-oriented; power derives from money, and money flows from corporations. Corporations exist to grow - and without growth profits shrink, and without profits the whole of the Western paradigm is in trouble. When growth doesn't exist to increase standards of living, the excess production must be spent somewhere else, and wars are a fine place to blow up, burn up, and shoot up excess production. I note that as soon as the gunfire stopped Lebanon last month, in came the bankers to make money. It has been almost too pat, too smooth, too orchestrated, at least for my taste.
To get a better understanding of how the psychopaths in charge think and act, ponder the following economic experiment. The economy itself is a weapon in their hands:
Gaza as Laboratory
The Great Experiment

Uri Avnery
October 14-15, 2006

Is it possible to force a whole people to submit to foreign occupation by starving it?

That is, certainly, an interesting question. So interesting, indeed, that the governments of Israel and the United States, in close cooperation with Europe, are now engaged in a rigorous scientific experiment in order to obtain a definitive answer.

The laboratory for the experiment is the Gaza Strip, and the guinea pigs are the million and a quarter Palestinians living there.

In order to meet the required scientific standards, it was necessary first of all to prepare the laboratory.

That was done in the following way: First, Ariel Sharon uprooted the Israeli settlements that were stuck there. After all, you can't conduct a proper experiment with pets roaming around the laboratory. It was done with "determination and sensitivity", tears flowed like water, the soldiers kissed and embraced the evicted settlers, and again it was shown that the Israeli army is the most-most in the world.

With the laboratory cleaned, the next phase could begin: all entrances and exits were hermetically sealed, in order to eliminate disturbing influences from the world outside. That was done without difficulty. Successive Israeli governments have prevented the building of a harbor in Gaza, and the Israeli navy sees to it that no ship approaches the shore. The splendid international airport, built during the Oslo days, was bombed and shut down. The entire Strip was closed off by a highly effective fence, and only a few crossings remained, all but one controlled by the Israeli army.

There remained a sole connection with the outside world: the Rafah border crossing to Egypt. It could not just be sealed off, because that would have exposed the Egyptian regime as a collaborator with Israel. A sophisticated solution was found: to all appearances the Israeli army left the crossing and turned it over to an international supervision team. Its members are nice guys, full of good intentions, but in practice they are totally dependent on the Israeli army, which oversees the crossing from a nearby control room. The international supervisors live in an Israeli kibbutz and can reach the crossing only with Israeli consent.
So everything was ready for the experiment.

THE SIGNAL for its beginning was given after the Palestinians had held spotlessly democratic elections, under the supervision of former President Jimmy Carter. George Bush was enthusiastic: his vision of bringing democracy to the Middle East was coming true.

But the Palestinians flunked the test. Instead of electing "good Arabs", devotees of the United States, they voted for very bad Arabs, devotees of Allah. Bush felt insulted. But the Israeli government was ecstatic: after the Hamas victory, the Americans and Europeans were ready to take part in the experiment. It could start:
The United States and the European Union announced the stoppage of all donations to the Palestinian Authority, since it was "controlled by terrorists". Simultaneously, the Israeli government cut off the flow of money.

To understand the significance of this: according to the "Paris Protocol" (the economic annex of the Oslo agreement) the Palestinian economy is part of the Israeli customs system. This means that Israel collects the duties for all the goods that pass through Israel to the Palestinian territories - actually, there is no other route. After deducting a fat commission, Israel is obligated to turn the money over to the Palestinian Authority.

When the Israeli government refuses to pass on this money, which belongs to the Palestinians, it is, simply put, robbery in broad daylight. But when one robs "terrorists", who is going to complain?

The Palestinian Authority - both in the West Bank and the Gaza Strip - needs this money like air for breathing. This fact also requires some explanation: in the 19 years when Jordan occupied the West Bank and Egypt the Gaza Strip, from 1948 to 1967, not a single important factory was built there. The Jordanians wanted all economic activity to take place in Jordan proper, east of the river, and the Egyptians neglected the strip altogether.

Then came the Israeli occupation, and the situation became even worse. The occupied territories became a captive market for Israeli industry, and the military government prevented the establishment of any enterprise that could conceivably compete with an Israeli one.

The Palestinian workers were compelled to work in Israel for hunger wages (by Israeli standards). From these, the Israeli government deducted all the social payments levied on Israeli workers, without the Palestinian workers enjoying any social benefits. This way the government robbed these exploited workers of tens of billions of dollars, which disappeared somehow in the bottomless barrel of the government.

When the intifada broke out, the Israeli captains of industry and agriculture discovered that it was possible to get along without the Palestinian workers. Indeed, it was even more profitable. Workers brought in from Thailand, Romania and other poor countries were ready to work for even lower wages and in conditions bordering on slavery. The Palestinian workers lost their jobs.

That was the situation at the beginning of the experiment: the Palestinian infrastructure destroyed, practically no means of production, no work for the workers. All in all, an ideal setting for the great "experiment in hunger".

THE IMPLEMENTATION started, as mentioned, with the stoppage of payments.

The passage between Gaza and Egypt was closed in practice. Once every few days or weeks it was opened for some hours, for appearances' sake, so that some of the sick and dead or dying could get home or reach Egyptian hospitals.

The crossings between the Strip and Israel were closed "for urgent security reasons". Always, at the right moment, "warnings of an imminent terrorist attack" appeared. Palestinian agricultural products destined for export rot at the crossing. Medicines and foodstuffs cannot get in, except for short periods from time to time, also for appearances, whenever somebody important abroad voices some protest. Then comes another "urgent security warning" and the situation is back to normal.

To round off the picture, the Israeli Air Force bombed the only power station in the Strip, so that for a part of the day there is no electricity, and the water supply (which depends on electric pumps) stops also. Even on the hottest days, with temperatures of over 30 degrees centigrade in the shade, there is no electricity for refrigerators, air conditioning, the water supply or other needs.

In the West Bank, a territory much larger than the Gaza Strip (which makes up only 6% of the occupied Palestinian territories but holds 40% of the inhabitants), the situation is not quite so desperate. But in the Strip, more than half of the population lives beneath the Palestinian "poverty line", which lies of course very, very far below the Israeli "poverty line". Many Gaza residents can only dream of being considered poor in the nearby Israeli town of Sderot.

What are the governments of Israel and the US trying to tell the Palestinians? The message is clear: You will reach the brink of hunger, and even beyond, if you do not surrender. You must remove the Hamas government and elect candidates approved by Israel and the US. And, most importantly: you must be satisfied with a Palestinian state consisting of several enclaves, each of which will be utterly dependent on the tender mercies of Israel.

AT THE moment, the directors of the scientific experiment are pondering a puzzling question: how on earth do the Palestinians still hold out, in spite of everything? According to all the rules, they should have been broken long ago!

Indeed, there are some encouraging signs. The general atmosphere of frustration and desperation creates tension between Hamas and Fatah. Here and there clashes have broken out, people were killed and wounded, but in each case the deterioration was halted before it became a civil war. The thousands of hidden Israeli collaborators are also helping to stir things up. But contrary to all expectations, the resistance did not evaporate. Even the captured Israeli soldier has not been released.

One of the explanations has to do with the structure of Palestinian society. The Hamulah (extended family) plays a central role there. As long as one person in the family is working, the relatives, too, do not die of hunger, even if there is widespread malnutrition. Everyone who has any income shares it with all his brothers and sisters, parents, grandparents, cousins and their children. That is a primitive system, but quite effective in such circumstances. It seems that the planners of the experiment did not take this into account.

In order to quicken the process, the whole might of the Israeli army is now being used again, as from this week. For three months the army was busy with the Second Lebanon War. It became apparent that the army, which for the last 39 years has been employed mainly as a colonial police force, does not function very well when suddenly confronted with a trained and armed opponent that can fight back. Hizbullah used deadly anti-tank weapons against the armored forces, and rockets rained down on Northern Israel. The army has long ago forgotten how to deal with such an enemy. And the campaign did not end well.

Now the army returns to the war it knows. The Palestinians in the Strip do not (yet) have effective anti-tank weapons, and the Qassam rockets cause only limited damage. The army can again use tanks against the population without hindrance. The Air Force, which in Lebanon was afraid to send in helicopters to remove the wounded, can now fire missiles at the houses of "wanted persons", their families and neighbors, at leisure. If in the last three months "only" 100 Palestinians were killed per month, we are now witnessing a dramatic rise in the number of Palestinians killed and wounded.

How can a population that is hit by hunger, lacking medicaments and equipment for its primitive hospitals and exposed to attacks on land, from sea and from the air, hold out? Will it break? Will it go down on its knees and beg for mercy? Or will it find inhuman strength and stand the test?

In short: What and how much is needed to get a population to surrender?

All the scientists taking part in the experiment - Ehud Olmert and Condoleezza Rice, Amir Peretz and Angela Merkel, Dan Halutz and George Bush, not to mention Nobel Peace Price laureate Shimon Peres - are bent over the microscopes and waiting for an answer, which undoubtedly will be an important contribution to political science.

I hope the Nobel Committee is watching.

Uri Avnery is an Israeli writer and peace activist with Gush Shalom. He is one of the writers featured in The Other Israel: Voices of Dissent and Refusal. He is also a contributor to CounterPunch's hot new book The Politics of Anti-Semitism.