Monday, November 13, 2006

Signs of the Economic Apocalypse, 11-13-06

From Signs of the Times, 11-13-06:

Gold closed at 628.90 dollars an ounce on Friday, down less than a tenth of a percent from $629.10 at the close of the previous Friday. The dollar closed at 0.7785 euros Friday, down 1.0% from 0.7863 euros for the week. The euro closed at 1.2846 dollars compared to 1.2718 at the end of the week before. Gold in euros would be 489.57 euros an ounce, down 1.0% from 494.65 for the week. Oil closed at 59.62 dollars a barrel Friday, up 0.8% from $59.14 at the close of the previous week. Oil in euros would be 46.41 euros a barrel, up 0.2% from 46.50 for the week. The gold/oil ratio closed at 10.55, down 0.9% from 10.64 at the end of the week before. In U.S. stocks the Dow Jones Industrial Average closed at 12,108.43, up 1.0% from 11,986.04 at the close of the previous Friday. The NASDAQ closed at 2,389.72, up 2.5% from 2,330.79 at the end of the week before. In U.S. interest rates the yield on the ten-year U.S. Treasury note closed at 4.59%, down twelve basis points from 4.71 for the week.

The U.S. stock market seemed to react well to the victory in the midterm elections by the Democratic party last Tuesday. The rise began late the week before the election as it became more clear that the Republicans were in trouble. The rise probably had to do with the clear signals that the Realist faction around George H.W. Bush is making a move to take power from the Neocons. The firing of Rumsfeld and the appointment of Robert Gates as Defense Secretary is a clear example of that, as is Gates’s replacement on James Baker’s Iraq Study Group by Lawrence Eagleburger (another Bush I national security/defense/State Department bigwig). Both Baker, the Democrats, and many Republicans are talking about a “diplomatic settlement” of the Iraq War, in other words negotiations with Syria and Iran as the only way to reestablish any kind of stability in the Middle East. The markets naturally respond well to the idea of wise grown-ups reestablishing control over U.S. policy. But is it too late? In addition, we cannot expect Israel to take the ousting of the Neocons lying down. Nor can we expect Cheney to go quietly. This is Caesar versus Pompey. Who will cross the Rubicon? What is the Rubicon in this instance?

Pundits in the United States keep telling us that “there are no good options in Iraq.” This means that the United States has suffered a significant defeat. The dispute among the elite is how to minimize the damage of that defeat. As much as one might wish for a complete dismantling of the American Empire, the world is usually better off when great empires decline gradually rather than swiftly and catastrophically. In the economic sphere the decline of the empire will manifest itself as the decline of the U.S. dollar as the world’s reserve currency. So far, however, the dollar has remained strong and U.S. stocks are at historic highs. Why?

Defeat In Iraq

by Martin D. Weiss, Ph.D.
Editor, Safe Money Report &

November 7, 2006

I’m in London, in transit for our return flight to Florida, and I have a brief, but painful, message for you this morning:

We’re going to lose the war in Iraq.

This is hard to swallow, I know. But it seems blatantly obvious to everyone except those who have the most to lose.

Every single newspaper on this side of the Atlantic is headlining the deepening chaos in Iraq. Even the sentencing of Saddam on Saturday, heralded in the U.S. as a victory, is likely to deepen the sectarian strife and inflame the anti-American insurgency, according to the Wall Street Journal’s Europe edition this morning.

In Washington, most politicians now seem vividly aware of the crisis — not to mention the sweeping impact it’s likely to have at the polls tomorrow.

But, strangely, the movers and shakers on Wall Street still seem oblivious to the impact the war could have on investors.

The Iraq war is the elephant in the living room. Investors look at it but don’t see it. They feel its presence but don’t want to touch it.

Nearly UnanimousWarnings of Chaos

I now count over a dozen warnings of chaos, many from the highest-placed sources:

Three weeks ago, a special briefing by the U.S. Central Command declared that Iraq is “on the brink of chaos,” slamming home four tough-to-swallow-but-hard-to-dispute conclusions:

Conclusion #1. Iraq’s urban areas are suffering wave after wave of ethnic cleansing, the fundamental driver behind civil war.

Conclusion #2. Violence in Iraq has reached an all-time high and is spreading geographically.

Conclusion #3. The massive U.S. effort to hastily recruit and train a large Iraqi army and police force is backfiring. These forces, overtly and covertly loyal to warring militia leaders, are no longer part of the solution. They’re the focal point of the problem.

Conclusion #4. The pivotal event that sealed the fate of America’s enterprise in Iraq was the bombing of the Golden Dome Shiite mosque in Samara — precisely what I told you in Money and Markets on the day that it happened…

Cleary, Politicians See the Handwriting On the wall. So Why Don’t Investors?

Why are most investors so complacent? Why do they see only the rosy side of the news?

A key reason is that investors have so far been shielded from the economic impact of the war because the U.S. government has failed to raise taxes to pay for it. Instead ...

· Virtually the entire cost — a whopping $200 billion or so each year — is being financed by debt, and ...

· Nearly all of that money is being borrowed from overseas — China, Japan and Europe.

But this doesn’t reduce the war’s economic impact. It only postpones it.

What will happen when the war ends in defeat?

First, worldwide confidence in the U.S. will plunge, prompting foreign investors to sell their U.S. investments. The U.S. dollar and U.S. bonds will plunge.

Second, due to fears of the Iran-Iraq axis, oil prices will go berserk, likely surpassing the $100-per-barrel level.

Third, gold will skyrocket, as investors flee the dollar for safety.

My recommendation: Don’t be deceived by the false optimism that has overcome Wall Street. Stay the course.

The defeat in Iraq has led to an intensification of the behind-the-scenes civil war among the ruling elite in the United States between the Realists and the Neocons. The Iraq War is widely seen as a Neocon project. All responsible parties are simultaneously trying to assign blame to others and incorporate as many enemy factions as they can into the tent so as spread the blame around. As mentioned above, those enemy factions include Iran, Syria and even the Democratic Party. Here is the Attytood blogger, Will Bunch, on the dog that didn’t bark in last week’s elections:
Tin-foil hat time: Were Bush and Rove "The Producers" of an intentional flop?

"Under the right circumstances, a producer could make more money with a flop than with a hit."-- Accountant Leo Bloom, from "The Producers."

There are five stages of grief -- anger is the second, right after denial, and that's where the Republicans are at right now. The sudden ouster of the highly unpopular defense secretary Defense Secretary Donald Rumsfeld, just hours after the GOP electoral bloodbath, has led to most angry Republican fingers pointing straight at Karl Rove & Co.:

"The White House said keeping the majority was a priority, but they failed to do the one thing that could have made a difference," one House GOP leadership aide said Thursday. "For them to toss Rumsfeld one day after the election was a slap in the face to everyone who worked hard to protect the majority."

Maybe it's just because the Democrats actually won something, but for the last few days, something has just not felt quite right about either Tuesday's election, or the White House's handling of the voting and the aftermath. We have no doubts that a majority of American voters wanted change on Election Day, and they wanted the Democrats to be the agent of that change.

But we've also followed politics -- and the rise of George W. Bush and Karl Rove -- intensely these past six or seven years, and so beginning on Tuesday night, we were increasingly surprised at all the dogs that did not bark in the 2006 election -- dogs that raised quite a ruckus in the last three national elections.

The exit polls that leaked out in the late afternoon ended up matching the final results almost exactly -- nothing like what happened in those other Bush-era elections. The razor-close races all broke late for the Democrats, unlike Florida in 2000 or Ohio in 2004...and when that happened, there were no major charges of fraud, no "Brooks Brothers Riot," and no demand for a recount. The last two losers -- Conrad Burns of Montana and George Allen of Virginia -- went quietly into the autumn night, despite relatively close vote tallies. There appear to be no other Rovian stunts, like calling in the GOP's chits with Joe Lieberman to get him to caucus with the Senate Republicans. And there was no October surprise, not in Iran and not back home.

And we thought most of these things before Bush's makes-no-sense-at-all handling of the Rumsfeld matter. We don't think a pre-election firing of Rumsfeld would have changed many voters' mind, but what if had changed just 1 percent. Burns and Allen (heh) would be returning to the Senate, and the GOP would at least control one house. Likewise, a lot of nailbiters like Rep.-elect Patrick Murphy's win in Bucks County would have gone the other way if Rumsfeld had been canned a week sooner.

All this is a long prelude to our thinking the unthinkable.

Is Karl Rove even more of an evil genuis than we think? Did he and Bush just produce an election flop...on purpose?

It sounds completely off-the-wall, and before this post is over we'll give some good reasons why they wouldn't do that. But we'll also give you a couple of good reasons why life could be better for the Bush White House and the future presidential ambitions of the GOP with the Dems running Congress.

But any good conspiracy theory -- and even a whacked out one -- needs evidence, so here goes:

1. Here in Pennsylvania, why did the Bush-led Justice Department step up its investigation of vulnerable U.S. Rep. Curt Weldon just weeks before Election Day. Weldon had a tough challenge from Joe Sestak, but few pundits thought he would lose before Oct. 13, that unlucky Friday when word leaked out that the lobbying activities of Weldon's daughter was the subject of a federak probe. His fate was sealed three days later, when FBI agents raided the daughter's home and other locations, in plain view of a stunned news media.

2. How did it come to pass that the predatory sexual habits of Rep. Mark Foley -- which we now know was a closely held secret among GOP insiders for years -- suddenly leaked out to ABC's Brian Ross a month before the election. There is one political operative in this country who is notorious for using rumors or allegations of homosexuality or pedophilia to destroy his election rivals -- and that operative is Karl Rove. According to accounts of how the story broke, it was Republican staffers who leaked the emails to Ross and to other D.C. insiders on the summer of 2006.

3. Given that Bush's approval rating hovered in the 35 to 40 percent range thoughout the election season, why did the White House suddenly make the president more visible by having more press conferences -- and thus taking more hostile questions on Iraq and other unpleasant subjects -- than at any other time in his six-year presidency, including two in roughly one week during the October home stretch?

4. Despite voters' increasingly strong dislike of Rumsfeld, the Defense Secretary was deliberately put in front of the cameras at a key time in the race, on Oct. 26, just 12 days before the election. His news conference was alternately awkward and combative; he said that "that anyone demanding deadlines for progress in Iraq should 'just back off,' because it is too difficult to predict when Iraqis will resume control of their country."

5. Likewise, given Bush's low popularity and approval ratings, why was he dispatched at the last minute to the closest races, when other Republicans thought that his presence did more harm than good? Bush appeared with Sen. Conrad Burns in Montana just five days before the election, and for Missouri Sen. Jim Talent the day after that; and made frequent visits on behalf of Virginia Sen. George Allen. All three lost by narrow margins. Tennesee's GOP candidate Bob Corker got the more popular Laura Bush instead...and won.

6. Just four days before the election, and with polls showing the Iraq war highly unpopular, you had these comments from Vice President Cheney: The Bush administration is determined to continue "full speed ahead" with its policy in Iraq, regardless of Tuesday's midterm elections, Vice President Cheney said Friday. Cheney said in an interview with ABC News that the administration is convinced that it is pursuing the right path in Iraq. "It may not be popular with the public. It doesn't matter, in the sense that we have to continue what we think is right," Cheney said. "That's exactly what we're doing. We're not running for office. We're doing what we think is right."

7. Then you had the whole Cheney-Rumsfeld fiasco. Bush went out of his way to praise the two men just five days prior to the election, knowing full well how unpopular they were: He said he valued Cheney's advice and judgment. "The good thing about Vice President Cheney's advice is, you don't read about it in the newspaper after he gives it," the president said. Bush credited Rumsfeld with overseeing wars in Iraq and Afghanistan while overhauling the military. "I'm pleased with the progress we're making," the president said. He replied in the affirmative when asked if he wanted Rumsfeld and Cheney to stay with him until the end.

8. And of course Rove made a number of confoundingly bad decisions, dumping millions of dollars into Senate races that seemed hopeless for the Republicans -- and ultimately were -- in the solidly "blue" states of New Jersey and Maryland, where in hindsight a few dollars spent in the right ways might have salvaged the once-"red" Montana and Virginia.

And that's on top of all the things that that the Rove-Cheney-Bush White House didn't do, as we mentioned in the outset -- recounts, massive voter intimidation, or -- as proven by those accurate exit polls -- even worse.

So why in the name of God would Bush and Rove want to produce a flop in 2006?

Well, on the domestic front, there may actually be some advantages for Bush with a Democratic Congress. For one thing, they'll probably pass a favorite program of the president and his big-business buddies, the guest worker program for immigrants, since it was the conservatives in the House holding that up. The GOP was probably also ready to relent on the minimum wage, which was becoming a political albatross for them.

The other stuff that Bush wouldn't like -- higher taxes on oil companies and the rich -- he can always veto, if his 49 senators (nine more than necessary) don't block a vote before it gets that far. He's already been promised by Nancy Pelosi and Howard Dean that he won't be impeached. From what we've seen, Bush didn't like the Republican leaders in Congress (especially the ousted Tom DeLay) all that much anyway.

But it really boils down to one word:


Everything we watched Bush do since Wednesday morning seems to be geared in one direction:
Bringing Democrats to the table on Iraq. The problem for the Democrats is this: They came to office without a plan for Iraq. Bush doesn't seem to have one either. Nobody does, although James Baker and his friends are said to be working on one. But now whatever emerges from the coming discussions will not longer be the GOP plan. It will be the Bush/Democrats' plan.

And we're afraid that the war planners are expecting things to get worse over there in 2007. Good politicians are able to ensure that when bad fallout is inevitable, that the blame can be shared. A GOP majority in Capitol Hill would have guaranteed that "the Republican war in Iraq" would dominate the 2008 presidential race, and that equation would hand the keys to the White House to the Democrats for sure. And Bush's patrons -- oilmen and the defense contractors -- need the White House a lot more than Congress, especially after the recent expansion of presidential powers. And now both parties will have a stake in Iraq, and the mostly likely in the coming fiasco there…

Mike Whitney also thinks the election was fixed, fixed by letting people’s votes be counted correctly and by the well-timed orchestration of news events leading up to the election. The fix was a power grab by the Realists.
Dead Ender, Gone Hunting ...
Cheney in a Box

Mike Whitney

November 11 / 12, 2006

It was the worst outcome imaginable.

They lost the House and the Senate in one night with one savage blow. Even the Confederate flag at Senator "Macakaw's" house was flying at half-mast. Suddenly the Reich that was "built to last a thousand years" had been reduced to small blocks of dusty-rubble extending from sea to shining sea. At the very epicenter of the twisted-iron and smoldering wreckage; was George W. Bush, President Hologram, the celluloid executive whose smirking puss had appeared daily on every American TV and in every American newspaper spreading the "good news" of domestic repression and nonstop war. Now, here he was, once again, convening a news conference, dazed and ashen, propped up amid the scattered debris of a midterm massacre; his party left in utter ruins.


In a moment worthy of Shakespeare, the Fraudster-in-chief had been scuttled by his own party; knifed in the back by his own friends and family who knew that it was finally time to extract the drunken driver from behind the wheel of a Mack Truck.

The Democrats didn't win anything; that's all hogwash. Bush was buried beneath an avalanche of bad news which was timed to begin with the release of Bob Woodward's book "State of Denial", followed by the National Intelligence Estimate (NIE), Lancet's Iraqi casualty report, the Mark Foley page fiasco, and a barrage of ethics-scandals, corruption investigations, and intensified coverage of the war. It was a carefully-coordinated coup intended to install "adults" (like Robert Gates) in positions of power, change the policy in Iraq, and remove Rumsfeld and Cheney from office.

One down; one to go.

The "vanilla" Democrats had nothing to do with Tuesday's results. It was a "planned demolition" from the get-go.

Robert Dreyfuss said it best in a recent article when he opined that Bush was handled in the same way "a family confronts an alcoholic. You bring everyone in, and you say, Look, my friend, it's time to change.'" (And then you remove the bad influences)

Elite powerbrokers and Republican Party kingpins extended their hoary grip all the way into the Oval Office and took the country back from the teenagers. But the boulder is still only half way up the hill. After all, what are their plans for Cheney?

Cheney wisely decided to go hunting when he discovered that friend Rumsfeld was being led to the gallows. Cheney's no fool. He knew that if he hung around, he'd be blamed as the co-conspirator of the Iraqi debacle and the subsequent destruction of the Republican Party.

So he did what Cheney always does; he skedaddled. He suddenly discovered that he "had more important things to do"; just like Vietnam.

He said he was going hunting, but that's rubbish. He wanted to be as far from the political fallout as humanly possible, so he vamoosed. There's nothing more to it than that. Besides, there've been no reports of "downed lawyers full of birdshot" this week in Wyoming so we know that Cheney's firearms are still safely tucked-away in the family vault.

Right now, Cheney is probably huddled somewhere with his national security team, rubbing his sweaty-hands together, figuring out how he can get back in the game and keep his fetid plan moving forward.

Cheney is smart; real smart. Smart like a cobra. He's not going down without a fight and he doesn't give a damn if he takes the whole country with him.

This is all about Cheney now; Dick Cheney, political survivor and skilled bureaucratic infighter. If anyone thinks that he's going to sit around waiting for the Democrats to start sniffing around the Republican corruption-cesspool; they're crazy.

He knows what's going on. He knows that Bush Senior, and Brzezinski, and Baker, and the rest of the "old order" Republicans have muscled in and are taking over. He knows he won't be able to bomb Iran, kill another 650,000 Iraqis, or declare martial law at home. And, he also knows that Conyers and the rest of them will be nosing-around the Halliburton "no bid" contracts; going through every sordid detail with a fine-tooth comb, and dredging up new scandals on a daily basis.

He grasps all of that. He understands the political climate and he knows that he only has two choices left; offense or defense?

Either he steps down or he collects his wits, gets his team together; Addington, Abrams, Chertoff, Gonzales etc; all the guys who are "one step ahead of the hangman"; and slaps together one "last-ditch" effort to establish absolute-dictatorial power that will put him forever beyond the reach of the law or of any future accountability for his war crimes.

It's a tough task. Bush is teetering and he's probably left the Cheney-Rumsfeld orbit already. Robert Gates' job is to influence Bush, to win him over with reason and, thus, move the country away from the brink of disaster. Cheney has been removed from the policy-making apparatus and he knows it.

So, what'll he do next?

What will Cheney do now that he's been backed into a corner and his power is oozing away like the blood from a sucking chest-wound?

Will he quietly retire and disappear into the political vapor or "lock-n-load" and go down with both guns blazing?

Here's a clue: Cheney is "dead-ender". He won't go peacefully.

What will Cheney and the Neocons do? Easy, let Israel attack Iran, thereby pinning hundreds of thousand of Americans and British inside Iraq with the escape routes cut off. Maybe that’s the Rubicon. Then either public anger will be turned on the leaders who lied us into war, and mass protests will allow the clampdown Cheney has been dreaming about, or the anger will be turned against Muslims again and they can once again lead a fascist nation at war. The economic consequences of such murderous folly would be immediate and severe:
Insanity Then And Now

…Currently, we are being told that Iran is threatening our very existence. What would happen to America if either it or Israel launched at strike at Iranian nuclear facilities many of which are located underneath crowded cities? Iran would regard the attack as a declaration of war by the U.S. and Israel even if only the latter made the initial air assault. The Iranians could fire Russian made SS-29 and SS-22 anti-ship missiles plus NATO Exocets simultaneously from 5 different angles totaling 140 degrees at every ship in the Persian Gulf. We would lose over 10,000 sailors in the first few minutes. 40% of the world's oil supply would be taken off the market and the price of oil would soar to $300 a barrel and gasoline to $10 a gallon. The world would correctly perceive that the American Navy was s floating death trap and dump the dollar. Prices would double and triple overnight. And then prices would spiral even higher cutting after tax wages by more than 50% and pensions by more than 90%. And those 40,000 Iranian suicide volunteers armed with the same missiles Hezbollah used in Lebanon would cut off American troops in Iraq from their supply lines. They could take many troops hostage. Of course the American public would demand we strike Iran, Syria and what's left of Iraq and the Mideast with nuclear weapons. But that would not restore the lives of our soldiers and sailors nor would it bring back the American economy and the country we knew as children. It certainly would not restore the Constitution and the Bill of Rights. Israel would survive and quickly make arrangements with Vladimir Putin's Russia to replace the United States as the world's sole remaining super power.

The problem is that the U.S. dollar-based economy will most likely crash even if peace in the Middle East is declared. The damage has gone too far for anything like the status quo to survive. An imperial nation with as much debt as the United States cannot remain economically or politically dominant. The dollar’s status as the world’s reserve currency will not long survive the defeat in Iraq. But, it has survived until now in the face of massive multiple deficits that would have destroyed any normal currency by now. Here is Der Spiegel:
America and the Dollar Illusion

By Gabor Steingart

The dollar is still the world's reserve currency, even though it hasn't deserved this status for a long time. The devaluation of the dollar can't be stopped -- it can only be deferred. The result could be a world economic crisis.

The two things investors crave most are high yields and high security. Since you can never have both at the same time, the moods of investors are like an emotional roller coaster. They shift constantly from fear to greed and back -- although major investors, like corporations and states, clearly prefer security over fancy returns. Their fear is stronger than their greed. They'll freely relinquish the really fat profits as long as the stability of their billions is guaranteed. They're afraid of political unrest, they loathe overly dramatic changes in currency value and the mere thought of creeping inflation sends them into a state of panic.

Few countries are able to provide the greatest possible security in the face of these dangers. They include the United States and Switzerland. Indeed, this security is why the dollar isn't just used in trading and investment, but also functions as the world's reserve currency. Almost every country in the world distrusts its own currency to the extent that it prefers to invest the money from its treasury in the United States.

One can almost completely rule out the possibility of political unrest in the United States. Inflation is combated by the Federal Reserve Bank. Given the size of the currency's spread and the quantity of dollars circulating worldwide, speculators have no cause to get overly anxious about the dollar.

Thus, those who have money prefer to keep it in dollars. The United States disposes of a virtual monopoly on the commodity called security. For many investors, purchasing a US government bond is nothing other than a way of preserving their money. In 2005, only 20 percent of all currency reserves in the world were held in euros, whereas more than 60 percent were held in dollars. The introduction of the euro was a considerable success, and one should not downplay it. Nevertheless, the dollar has remained the world's currency anchor. As long as this anchor rests firmly on the ocean floor, stability is guaranteed for the national economies that invest in the dollar.

But if that anchor should tear itself loose and begin to drift freely in the ocean of global finance, the chaos that ensues would result in trouble for more than just exchange rates.

Buying to avoid selling

But why are the same traders who used to purchase products now so mad about dollar bills? Why do they rely on the good called security -- a commodity whose quantity cannot be increased at all? Doesn't every business student learn that the currency of a country is only as stable -- and hence as valuable -- as what the national economy of that country has to offer and produces? Does no one see that the tension between the dream and the reality is increasing and that this tension will snap, leading to suffering for millions?

Of course they see it! Investors can see what is happening. They wonder about it and shake their heads. It even scares them a little, sending chills down their spine. But they keep buying dollars as though possessed. The greater their doubts, the more greedily they order dollars. Indeed, that's exactly what is so crazy about these investors and their behavior: The client isn't just a client. He creates the security he's purchasing by the very act of purchasing it. If he were to stop buying dollars tomorrow, suspicion about the currency would spread and insecurity would grow. Then the dream would end. The dollar would start to falter and all the wealth held in dollars would lose its value. Of course, that's not something investors want to see happen.

The only way to fight a weak dollar is to strengthen it. Many people no longer care whether the US currency still justifies the faith people seem to have in it. The new game, which amounts to playing with fire, works exactly the other way around: The dollar deserves the faith it gets because otherwise it loses that faith. Dollars are bought so they don't have to be sold. The dollar is strong because that's the only thing that can prevent it from growing weak. Reality is ignored because only by ignoring it can the dream come true. Or, to put it still more clearly: Behaving irrationally has become rational behavior.

Everyone knows the danger

Of course, those playing this game know that, in the long term, currencies can't be stronger than the national economies from which they derive. Consumption without production, imports without exports, growth on credit -- these are all things that can't last in this world. Ken Rogoff, the former chief economist of the International Monetary Fund (IMF) and a man who thinks as clearly as he speaks brashly, recently criticized US economic policy even as he seemed to be praising it: Rogoff said the current boom in the United States is "the best economic recovery money can buy."

But if things have become that obvious, why aren't investors recoiling in fear? Why do foreigners, US presidents of all stripes and even Federal Reserve presidents known for their seriousness allow themselves to get involved in such a risky game, when the risk is that of destroying everything? Why aren't those mechanisms of market regulation functioning that are supposed to represent the advantage of the capitalist system over planned economies?

The answer is terrifyingly simple: Everyone knows how dangerous the game is, but continuing to play it strikes them as less dangerous than quitting. After all, what's to be gained from overreacting? Investors allowed themselves to get caught in the dollar trap years ago, and there's no easy way out. If they start taking their dollar bills and government bonds to the market themselves, they would lose money -- either gradually or all at once. They would like to avoid both scenarios, at least for a time. A president who does no more than recognize the situation as an important issue may lose his position as public discontent looks for a vent. Though the governors of the Federal Reserve Bank are under the strongest obligation to tell the truth, they have let the right moment for effective intervention slip by.

… So why aren't the markets correcting themselves in this instance as they normally do? Who or what is preventing investors from behaving differently towards the dollar than they behaved towards New Economy stocks?

They're going to do it. The only question is when. Financial investors aren't tax collectors or accountants: Their job isn't that of a meticulous overseer. They love excess, and they regularly cause markets to overheat. After all, speculation is the business they're in, and being in that business involves living with the risk of going too far. Their professional attitude resembles that of race car drivers whose goal is victory and not avoiding accidents at all costs. What remains unclear is just how dramatic the crash will be. Experts have often forecast the effects of a dollar meltdown. If the downward trend were to begin, interest on credit would rise step by step in an attempt to curb devaluation. That way, the dollar crisis would spread from the world of currencies to the real world of factories, businesses and household accounts within days.

Major and minor private investments yield lower returns when interest rates climb. People would start to save, the economy would falter and eventually shrink. The first mass layoffs would arrive soon afterwards. US citizens would have to once more drastically reduce their level of consumption, as unemployment and waves of bankruptcy would shake up the country. Millions of households would become unable to pay back their bank loans. Then real estate prices and share values would begin to drop, having been overpriced for years and used as mortgages for consumer credit. When the real estate bubble bursts, consumption inevitably dwindles even further. The hunger for imports would fade, causing problems for exporting countries as well. It would only be a matter of days before newspapers would once more feature a term that seemed to have disappeared decades ago: world economic crisis.

Steroids for the giant

Last century, the United States already suffered from one deep economic crisis that gradually spread to the rest of the world. The Great Depression lasted 10 years and brought mass unemployment and starvation to the United States. The country's economic power sank by one-third. The crisis virus wrought havoc all over the West. Six million people were unemployed in Germany when the economic fever was at its peak.

Today's investors face a difficult choice, one they're not to be envied for. They can see the relative weakness of the US economy and they're registering the tectonic shifts in the world economy. They know that a great statistical effort is being made to prolong the American dream. For some time now, government statistics have announced sensational productivity leaps for the US economy -- productivity leaps that, strange as it may seem, haven't led to any rise in wages for years. This is in fact genuinely bizarre: Either capitalists are reaping the fruits of increased productivity all by themselves -- which would be a political scandal even in capitalism's heartland -- or the productivity leaps exist only on paper. There is much to suggest that the second hypothesis is correct.

Half the world is impressed by the low levels of unemployment in the United States. The other half knows that these statistics aren't official, but the result of a voluntary telephone survey. Many of those who declare themselves employed are assistants and day workers. Working just one hour a week is enough for one to be classified as "employed." Given that it's considered antisocial to declare yourself unemployed, the US statistics may well say more about American society's dominant norms than about its actual condition.

The US economy's high growth rates aren't to be completely trusted either. They are the result of high public and private debt. In no way do they express an increased output of domestically produced goods and services that the United States has achieved by its own strength. They say more about the successful sales ventures of Asians and Europeans. New loans taken by the US government were responsible for fully one-third of US economic growth in 2001. In 2003 they were responsible for a quarter. The United States is an economic giant on steroids -- doped so its decline in performance doesn't become too apparent…

The crash can be deferred, but not stopped

The dependence of foreign central banks on the dollar will defer its crash, but it won't prevent it. Today's snowdrift will become tomorrow's avalanche. The masses of snow are already accumulating at breathtaking speed. The avalanche could happen tomorrow, in a few months or years from now. Much of what people today think is immortal will be buried by the global currency crisis -- perhaps even the leadership role of the United States.

Incidentally, the commission that former US President Bill Clinton created to investigate the negative balance of trade concluded in clear terms that the government has to do whatever it can to put an end to the growing disparity between imports and exports. It demanded that the public give up its optimism and return to realism, that people start saving again and that the state reduce its imports in order to prevent too hard a crash landing.

None of that has been done. In fact, what is being done is the opposite of everything the experts recommended. Debt is growing, imports are increasing and an optimism now lacking every basis in reality has become official state policy. Lester Thurow, a member of Clinton's commission, draws the sober conclusion that no one will believe the US balance of trade could produce a crisis "until it happens."

Nick Beams puts the defeat of the United States in Iraq into a larger historical perspective:

The crisis of US imperialism in historical perspective

By Nick Beams
8 November 2006

The 2006 American elections have a truly global significance. They are taking place in conditions where the Bush administration and the entire US ruling elite is embroiled in a deep-going political crisis, precipitated by the disastrous consequences of the invasion and occupation of Iraq. As numerous books, articles and comment pieces—many of them echoing positions articulated within the American military—have made clear, the invasion of Iraq has been a fiasco. The underlying position of the various critics from within ruling circles is that it has weakened both the immediate and the long-term strategic position of the United States.

…Aside from these immediate questions, the Iraq debacle has provoked discussion in American foreign policy circles about the long-term position of the United States.

…Michael Lind of the New America Foundation, a thinktank established in the recent period to promote alternatives to the Bush administration, points to the decline in the long-term strategic position of the US and the collapse of the perspectives developed in the post-Cold War period.

In a recent article entitled “The World After Bush”, he writes:

“…Much of America’s weakness will be the result of self-inflicted wounds: the unnecessary invasion of Iraq, along with the Bush administration’s gratuitous insults to allies, its arrogant unilateralism and its hostility to international law. But as tempting as it may be to put all of the blame on the Bush administration, the truth is that most of the trends that will limit American power and influence in the next decade are long-term phenomena produced by economic, demographic and ideological developments beyond the power of the US or any government to influence. The rise of China, the shift in the centre of the world economy to Asia, the growth of neo-mercantilist petro-politics, the spread of Islamism in both militant and moderate forms—these trends are reshaping the world order in ways that neither the US nor any of its allies can do much to control.”

..Turning to the underlying economic issues, he writes:

“[T]he collapse of the neoconservative perspective in the Middle East and the world does not mean success for what he calls the neoliberal perspective of the Democratic Party. “Neoliberals agree with neoconservatives about the goal of US foreign policy—a global free market in a world policed by a benevolent, hegemonic US. Their differences are in the details. Although they are as opposed in practice to a multipolar world order as neoconservatives, neoliberals argue that the US should make its global hegemony more palatable to other countries by endorsing international law and working through international institutions like the UN and NATO.”

He notes that while some neoliberals call for a vast program of investment in developing countries, the Middle East in particular—a kind of new Marshall Plan—this will never be tested, because the money is not there in the first place.

While Lind does not go on to develop the argument, this fact does point to the underlying reason for the resort to militarism—the economic decline of the United States. His perspective is for what he calls a “concert of great powers, organised and led by the US” as the best hope for reconciling international peace with liberal order.

But what happens if those powers do not find it in their interest to be led and organised by the US? Such a concert is only possible provided the US is prepared to make concessions to its rivals and potential adversaries. Here, however, lies the fundamental problem. The US is not in a position to do that. As we have previously noted, the invasion of Iraq was directed not so much against Saddam Hussein, as against the European rivals of the US in the Middle East. The aim was to establish a puppet regime in Iraq and in that way reinforce the position of the US against its European and Asian rivals. The same is true of Iran.

The reason the US pursues such a belligerent policy is rooted in its long-term economic decline. In the immediate post-war period, the US financed the Marshall Plan and consciously rebuilt the other major capitalist powers—except Britain whose empire it was seeking to dismantle. Under today’s conditions, a “concert of great powers” can at best only be an unstable truce.

The historic context

The present situation has to be placed within its broad historical context—that is to say, examined on the basis of the historical development of the world capitalist system.

…The world economic crisis of the early 1970s, when the profit rate began to fall, signalled the onset of a new downswing in the curve of capitalist development. Over the next two decades, the fall in the rate of profit became the driving force for vast changes in the structure and functioning of capitalist production. These changes, bound up with the application of computer technologies to all aspects of communication and production, have resulted in a quantum leap in the globalisation of production.

Whereas in all previous epochs, surplus value was extracted from the working class within the confines of a given nation-state, this now takes place on a global scale. Capital exists in three forms: as money (the end of the capitalist production process with the sale of commodities and the start of a new round of production), as commodity capital (which emerges from the production process) and as productive capital (the means of production that are employed to extract surplus value from the working class in the course of the production process). Commodity capital and money capital became citizens of the world in an earlier period. Productive capital, however, still retained a certain national identity. But now the disaggregation of the production process beyond the framework of the nation-state means that productive capital has become truly global.

The globalisation of production since the mid-1970s has had vast social and political implications. If the downswing in the latter part of the nineteenth century was the trigger for the establishment of the mass organisations of the working class that held sway for the majority of the twentieth century, then the changes over the past three decades have brought about their disintegration and collapse. This was the significance of the demise of the Soviet Union in 1991.

Capital responded to the downturn in the rate of profit in the 1970s in the same way as it had in the past. It undertook a desperate struggle to revolutionise the process of production. The globalisation of production is the outcome.

…There are distinct parallels with the period before 1914. Then, the upturn in capitalist profit was occasioned, at least in part, by the first phase of globalisation—the exploitation of cheap raw materials and agricultural products. Today, it is being fuelled by the increased supplies of cheaper labour. But this mode of accumulation is bound to bring social and political instability because it is dependent on ever-deepening social inequality, which can have far-reaching consequences in both the advanced capitalist countries and the new entrants into the global market.

Like the period before 1914, there is an intensifying conflict among the major powers. The relative economic decline of the US, like that of Britain before it, has extended over several decades. However, it has now become an explosive factor in world politics, as the US attempts to compensate for its loss of economic hegemony by military means. There are criticisms of the Bush doctrine of militarism from within American ruling circles, given the disaster that has unfolded in Iraq. But whenever one reads the alternative proposals—a concert of powers, a return to multilateralism—one is struck by the fact that they all involve some weakening of the position of the US. For three and a half decades, ever since it unilaterally removed the gold backing from the US dollar and ended the Bretton Woods monetary system because it was not able to honour its obligations, the US has been seeking to resolve its economic problems at the expense of its rivals. That process is not going to be reversed. In a sense, the turn to military means represents the intensification of a process that has been unfolding over the entire preceding period.

…Just as in the late nineteenth and early twentieth centuries, the previously dominant imperialist power, Great Britain, had to increasingly resort to military means in the face of rising challengers (Germany, rival European powers and the US) so today the US faces direct threats to its position. These are the underlying driving forces of the deepening political instability, growing great power rivalry and war that we are witnessing today.

The next several months should be interesting indeed.


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