Signs of the Economic Apocalypse, 11-27-06

From Signs of the Times, 11-27-06:

Gold closed at 635.40 dollars an ounce Friday, up 2.1% from $622.20 at the close of the previous Friday. The dollar closed at 0.7637 euros Friday, down 1.9% from 0.7794 euros for the week. The euro closed at 1.3094 dollars compared to 1.2830 at the end of the week before. Gold in euros would be 485.26 euros an ounce, up less than 0.1% from 484.96 for the week. Oil closed at 59.24 dollars a barrel Friday, up 0.5% from $58.92 at the end of the previous week. Oil in euros would be 45.24 euros a barrel, down 1.5% from 45.92 at the close of the Friday before. The gold/oil ratio closed at 10.73, up 1.6% from 10.56 for the week. In U.S. stocks, the Dow Jones Industrial Average closed at 12,280.17 Friday, down 0.5% from 12,342.56 at the end of the previous week. The NASDAQ closed at 2,460.26, up 0.6% from 2,445.86 at the close of the Friday before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.54%, down 16 basis points from 4.60 for the week.

The big news last week was the near 2% drop in the dollar. The rise of gold can be attributed directly to the drop in the dollar, since gold was virtually unchanged against the euro.

Dollar Drops to 19-Month Low Against Euro; Breaches $1.30 Level

By Kabir Chibber

Nov. 24 (Bloomberg) -- The dollar fell to its lowest in 19 months against the euro on speculation the Federal Reserve will lower interest rates early next year as central banks in Europe increase them.

The U.S. currency extended its losses after breaching $1.30 against the euro for the first time since April 2005, a level where traders had placed automatic orders to sell the dollar. The European Central Bank has raised rates to an almost four-year high and President Jean-Claude Trichet on Nov. 20 said inflation remains a threat. The Fed has left rates unchanged since August.

“The break of 1.30 is a strong signal that the dollar has to weaken,” said Carsten Fritsch, a currency strategist at Commerzbank AG in Frankfurt. “The sentiment for the dollar is negative. In the euro-zone, growth will remain strong.”

Against the euro, the dollar traded as high as $1.3109 and was at $1.3089 at 8:42 a.m. in New York, from $1.2945 yesterday. The dollar also fell to 115.63 yen, from 116.30, and to as low as $1.9351 versus the U.K. pound, the weakest in almost two years.

Fritsch said the dollar may drop to $1.35 by year-end.

The euro was at 151.35 yen, after reaching a record of 151.67 on Nov. 20.

...‘Wrong to Raise’

The rally in the euro may be curbed after Pervenche Beres, head of the European Parliament’s economic and monetary committee, said the region’s central bank would be wrong to push rates higher with the currency above $1.30.

“It’s not good news for the European economy,” she said in an interview in Berlin today. “It’s not the right time to raise interest rates.”

European stocks slumped today on speculation the stronger euro will hurt exports to the U.S., the region’s biggest trading partner.

The extra yield investors earn on U.S. government bonds over those in Europe has shrunk to the lowest in 17 months, attracting investors to assets in the euro region and away from the dollar.

The narrowing yield premium on dollar-denominated debt may also encourage central banks to hold more of their foreign- exchange reserves in other currencies.

People’s Bank of China Vice-Governor Wu Xiaoling said East Asia needs to reduce its reliance on dollar inflows because of the risk of a further slump in the currency. China’s foreign- exchange reserves exceed $1 trillion, the world’s largest.

Currency Reserves

Wu’s comments were released today in an article circulated during a press conference in Beijing.

“China holds most of its reserves in the dollar and these comments may lead to speculation they will sell,” said Tohru Sasaki, a strategist in Tokyo at JPMorgan Chase & Co. and a former chief currency trader at the Bank of Japan. “Diversifying reserves always puts downward pressure on the dollar.”

The U.S. currency fell for three straight years through 2004 versus the euro and the yen as the country’s trade deficit widened, reaching a record $1.3666 per euro on Dec. 30, 2004. It advanced against the euro and yen last year as the Fed pushed borrowing costs higher at every meeting…

Worries about the dollar affected the stock and bond markets:

Dollar plunge shakes stocks, bonds

By Jeremy Gaunt, European Investment Correspondent

Fri Nov 24, 7:21 AM ET

LONDON (Reuters) - The dollar plunged against major currencies on Friday, pulling the rug from under European stocks as the euro soared and sending investors scuttling into selected safe havens.

European stock indexes sank more than 1 percent, raising questions about exporters' future earnings and sparking concerns about whether the steady rises in global equities and general lack of volatility across financial markets had hit the skids.

Wall Street, meanwhile, looked set for a negative start, which would appear contradictory given dollar weakness but might presage a broader worry about the sustainability of stock markets at record highs.

"You might just find people generally quite happy to take a bit of money out of the market at this time of the year, given that they have made a lot and they might want to lock it in," said HSBC strategist Kevin Gardiner.

Buoyed by signs of solid euro zone economic growth and likely higher interest rates, the euro broke through the psychological barrier of $1.30 for the first time in 1-1/2 years as the dollar weakened across the board.

Britain's pound was up 0.8 percent at a near two-year high above $1.93 , and the dollar was 1 percent lower against the Swiss franc , and down a third of a percent against the yen at 115.8 yen.

Beyond the major players, Russia's rouble hit a 7-year high against the U.S. currency.

"The (economic) data is coming in stronger in the euro zone," said Mansoor Mohi-Uddin, currency strategist at UBS. "The U.S. data is on the weak side."

HIT A WALL?

Prospects of a slowdown in the U.S. economy and potentially lower U.S. interest rates have combined with concerns about fundamental economic imbalances to put the dollar under pressure.

However, if the current decline lasts a soaring euro could lower the horizon for European Central Bank interest rate hikes, changing the dynamics.

Many investors, meanwhile, have been wondering how long the currently benign financial market climate can last, expecting a trigger of some sort to shake things up.

Citigroup Private Bank, for example, has been telling its wealthy clients that December and January are historically the best months for hedge fund returns, implying volatility.

Other investors noted a pent up frustration at the recent lack of volatility on many markets, notably foreign exchanges.

"It's been a frustrating, rangebound market in the past few months. People feel now here is the chance," said David Simmonds, head of FX research at RBS.

Here’s this week’s bad news for the U.S. housing market:

Home sales plummet in 38 states in 3Q

By Lauren Villagran, AP Business Writer

New York - The feeble U.S. housing market showed more frailty when third-quarter home sales plummeted in 38 states, hitting Nevada, Arizona, Florida and California particularly hard, government data showed on Monday.

The once-booming real estate market's persistent weakness over the past year has reined in expectations for economic growth but hasn't been severe enough to offset a rising stock market, lower gas prices and improved consumer expectations.

The National Association of Realtors reported Monday that sales of existing homes fell in 38 states during the summer. Sales retreated to a seasonally adjusted annual rate of 6.27 million units nationwide, down by 12.7 percent from the same period a year ago. Nevada, Arizona, Florida and California led the declines.

Home prices also dropped: The realtors' survey showed that the midpoint price for an existing home sold during the summer dipped 1.2 percent year over year to $224,900. Some 45 metropolitan areas saw home prices decline.

Meanwhile, the latest report of building permits showed the slowest pace of annual growth in nine years in October. Housing construction slid sharply as builders tried to curb swelling inventories of unsold new and existing homes.

Stuart Hoffman, chief economist at PNC Financial Services Group, said he thinks the housing market still hasn't reached its low point.

"I think the permits numbers point to yet another flight of stairs down on housing before we hit the basement," he said. "On the other side, stocks are rising, consumer confidence is good and jobs are rising. Those factors are keeping this decline in housing contained."

There seemed to be some symbolic meaning to the death recently of the free-market evangelist, Milton Friedman. The thirty years since he was awarded the Nobel Prize for economics in 1976 can be seen as a coherent period that is just now coming to an end:

Milton Friedman 1912-2006: “Free market” architect of social reaction

By Nick Beams
21 November 2006

In his afterword to the second edition of Capital in 1873, Karl Marx noted that the scientific character of bourgeois economics had come to an end about 1830. At that point the class tensions generated by the development of the capitalist mode of production itself made further advances impossible. “In place of disinterested inquirers there now stepped forward hired prize-fighters; in place of genuine scientific research, the bad conscience and evil intent of apologetics.”

The economist Milton Friedman, who died last Thursday aged 94, will be remembered in years to come as one of the classic representatives of this tendency. Indeed his own career, culminating in his rise to the position of intellectual godfather of the “free market” over the past four decades, is a graphic example of the very processes to which Marx had pointed.

In the post-war boom, now looked back on as a kind of “golden age” for capitalism, at least in the major economies, Friedman was very much on the margins of bourgeois economics. When this writer begun a university study of economics in the latter half of the 1960s Friedman, and the free market Chicago School in which he was a central figure, were regarded as eccentrics, if not oddities. This was the heyday of Keynesianism, based on the notion that regulation of “effective demand” by government policies—increased spending in times of recession, cutbacks in periods of economic growth and expansion—could prevent the re-emergence of the kind of crisis that had devastated world capitalism in the 1930s.

All that was about to change. The breakdown of the post-war economic boom in the early 1970s, bringing deep recession as well as rapid inflation and high unemployment, saw the collapse of the Keynesian prescriptions. Under the Keynesian program, inflation was regarded as the antidote to unemployment. Now the two were taking place in combination—giving rise to the phenomenon of “stagflation”.

The boom’s demise was not the product of the “failure” of Keynesianism. Rather it was caused by the re-emergence of deep-seated contradictions within the capitalism economy. This meant that the bourgeoisie in the major capitalist countries could no longer continue with the program of class compromise based on concessions to the working class—the pursuit of full employment and the provision of social welfare measures that had characterised the boom—but had to undertake a sharp turn.

Friedman provided the ideological justification for the new orientation: the denunciation of government intervention as the cause of the crisis and insistence on a return to the principles of the “free market” which had been so discredited in the 1930s. Less than a decade after the collapse of the boom, Friedman’s “eccentric” theories had become the new orthodoxy and Keynesianism the new heresy.

In October 1976, the Swedish Academy in Stockholm, sensing the shift in the winds, awarded Friedman the Nobel Prize for economics. One month before, in a major speech to the British Labour Party conference, prime minister James Callaghan summed up what was to become the new conventional wisdom and its implications for government policy.

“We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.”

The Great Depression

…Friedman was active in Republican policy circles. In 1964 he served as an informal adviser to the presidential candidate and standard-bearer for the Republican right wing, Barry Goldwater, and was an adviser to both Richard Nixon in 1968 and Ronald Reagan in 1980. When Reagan won office, Friedman served as a member of his Economic Policy Advisory Board and in 1988 received the Presidential Medal for Freedom. In 2002, President George W. Bush honoured him for “lifetime achievements” and hailed him as a “hero of freedom” at a White House function on the occasion of his 90th birthday.

Friedman’s work on economic theory was guided by an adherence to what is known as the quantity theory of money. Friedman used this theory, which has a long history going back to the English philosopher David Hume, to formulate his opposition to the Keynesian perspective of demand management and government intervention. According to Friedman, if too much money were created by the monetary authorities, prices would increase—inflation, he insisted was always a monetary phenomenon. The task of government, he claimed, was not to regulate the economy through spending, but to ensure a sufficient expansion of the money supply to account for natural economic growth, and allow the market to solve the problems of unemployment and recession.

However if the Keynesians were to be refuted, Friedman saw that it was essential that the battle take place on their ground, with historical and statistical analyses. This was the background to his major theoretical work A Monetary History of the United States 1867-1960, written jointly with Anna Schwartz and published in 1963. Through an examination of economic history, Friedman and Schwartz sought to reveal the crucial role of the supply of money in determining the level of economic activity and, in doing so, to establish the necessary guidelines for future policy.

In its statement announcing the awarding of the Nobel prize to Friedman, the Swedish academy placed special emphasis on this work. “Most outstanding,” the citation read, “is, perhaps, his original and energetically pursued study of the strategic role played by the policy of the Federal Reserve System in sparking off the 1929 crisis, and in deepening and prolonging the depression that followed.”

But it is through an examination of the 1930s depression—the most important economic event of the twentieth century—that the theoretical bankruptcy of Friedman’s work stands most clearly revealed. According to Friedman, what would have been a normal recession in 1929-30 was transformed into an economic disaster by a series of policy mistakes made by the Federal Reserve, the body responsible for regulating the money supply.

In the first instance, he maintained, the Federal Reserve had wrongly started to tighten monetary policy in the spring of 1928, continuing until the stock market crash of October 1929 under conditions that were not conducive to tighter money—the economy had only just started to move out of the previous business cycle trough in 1927, commodity prices were falling and there was no sign of inflation. The Federal Reserve, however, considered it necessary to rein in the speculative use of credit on the stock market.

In Friedman’s view, however, the most significant impact of the Federal Reserve’s policies was not in sparking the depression but in bringing about the collapse of 1931-32. As banks were going into liquidation, the Federal Reserve, instead of expanding credit and stabilising the financial system, cut the money supply and exacerbated the crisis. Altogether, he and Schwartz found that the money supply in the US contracted by one third between 1929 and 1933. As critics of Friedman have pointed out, this fall was as much a product of the contraction in economic activity as an active cause.

Human “freedom”

Notwithstanding such objections, Friedman’s analysis served important political purposes—it transferred attention from the failures of capitalism and its free market to the role of governments. As Friedman expounded in an interview with Radio Australia in July 1998, the Great Depression was not a “result of the failure of the market system as was widely interpreted” but was “instead a consequence of a very serious government failure, in particular a failure in the monetary authorities to do what they’d initially been set up to do” and prevent banking panics.

The obvious question then was: why did the Federal Reserve fail to prevent a collapse? According to Friedman, the board of the New York Federal reserve was wracked by a series of conflicts following the death of its powerful governor Benjamin Strong. These prevented the implementation of correct policy.

“The fact that bad monetary policy was carried out,” he explained in a television interview for the PBS series the “First Measured Century”, “was, in part, the result of a real accident, which was that the dominant figure in the Federal Reserve System, Benjamin Strong ... had died in 1928. It is my considered opinion that if he had lived two or three more years, you might very well not have had a Great Depression.”

Such were the absurd lengths to which Friedman was prepared to go in order to prevent any critical examination of the role of capitalism and the “free market” in bringing about the greatest economic collapse in history. What was perhaps even more absurd was that his analysis was taken seriously in academic circles, which launched a search to discover Strong’s real views and whether he would have acted differently.

Friedman’s ascendancy to the ranks of “leading economist” had little to do with the intellectual and scientific value of his work. Rather, it was the result of his continuing efforts to extol the virtues of the free market and private property in opposition to the prevailing orthodoxy. Consequently, when the post-war compromise ended, and new prize-fighters were required, he was installed as chief propagandist for a new, socially regressive era based on the unfettered accumulation of wealth by a tiny minority ... all in the name of human “freedom”.

The basis of Friedman’s ideology was the conception that human freedom was inseparable from the unfettered operation of the market and the system of private property. Moreover, the market was not a particular social formation arising at a definite point in the history of human society but had a timeless quality. Just as the ruling classes in feudal times had the priests on hand to assure them that their place in the hierarchy was God-given, so Friedman assured the ruling classes of the present day that the social system which showered wealth and privileges upon them was rooted in the very nature of human social organisation itself.

In his book Capitalism and Freedom, published in 1962, he wrote: “Historical evidence speaks with a single voice on the relation between political freedom and the free market.” Expanding on this theme in a lecture delivered in 1991, he went on to identify the market with all forms of human social interaction.

“A free private market,” he wrote, “is a mechanism for achieving voluntary co-operation among people. It applies to any human activity, not simply to economic transactions. We are speaking a language. Where did that language come from? Did some government construct the language and instruct people to use it? Was there some commission that developed the rules of grammar? No, the language we speak developed through a free private market.”

Friedman’s attempt to turn the development of language, and by implication every human activity, into a market phenomenon collapses upon even the most preliminary analysis. The free market presupposes the existence of separate individuals who exchange the products of their private labour. In language, however, people do not exchange their private creations. In order to understand and in turn be understood, the individual must learn the language that has already been developed by socialised humanity. Friedman’s assertion makes about as much sense as would a claim that individual elements engage in a “market transaction” when they “exchange” electrons to form a compound.

The Chile “experiment”

If Friedman’s free market dogmas had no scientific content, they were nonetheless extremely valuable in the service of definite class interests, as the experience of Chile was to graphically demonstrate.

In 1975, following the overthrow of the elected Allende government in a military coup on September 11, 1973, the head of the junta, Augusto Pinochet, called on Friedman and his “Chicago boys”—economists trained under his tutelage—to reorganise the Chilean economy.

Under the direct guidance of Friedman and his followers, Pinochet set out to implement a “free market” program based on deregulation of the economy and privatization. He abolished the minimum wage, rescinded trade union rights, privatised the pension system, state industries and banks, and lowered taxes on incomes and profits.

The result was a social disaster for the mass of the Chilean population. Unemployment rose from just over 9 percent in 1974 to almost 19 percent in 1975. Output fell by 12.9 percent in the same period—a contraction comparable to that experienced by the United States in the 1930s.

After 1977, the Chilean economy enjoyed something of a recovery, with the growth rate reaching 8 percent. Ronald Reagan proclaimed Chile as a “model” for Third World development, while Friedman claimed that the “Chile experiment” was “comparable to the economic miracle of post-war Germany.” In 1982 he heaped praise on the dictator Pinochet whom, he declared, “has supported a fully free-market economy as a matter of principle. Chile is an economic miracle.”

But the recovery was short-lived. In 1983 the economy was devastated, with unemployment rising, at one point, to 34.6 percent. Manufacturing production contracted by 28 percent. Between 1982 and 1983, gross domestic product contracted by 19 percent. Rather than bringing freedom, the free market resulted in the accumulation of vast wealth at one pole and poverty and misery at the other. In 1970, 20 percent of Chile’s population had lived in poverty. By 1990, the last year of the military dictatorship, this had doubled to 40 percent. At the same time, real wages had declined by more than 40 percent. The wealthy, however, were getting wealthier. In 1970 the top one-fifth of the population controlled 45 percent of the wealth compared to 7.6 percent by the bottom one-fifth. By 1989, the proportions were 55 percent and 4.4 percent respectively.

The Chilean experience was no isolated event. It was simply the first demonstration of the fact that, far from bringing human freedom, the unleashing of the capitalist free market could only take place through the organized violence of the state.

In the United States, the monetarist free market program implemented during the Reagan administration was accompanied by the destruction of the trade unions, starting with the smashing of the air traffic controllers’ union, PATCO, in 1981. As Federal Reserve Board chairman Paul Volcker was later to remark: “The most important single action of the administration in helping the anti-inflation fight was defeating the air traffic controllers’ strike.”

Likewise in Britain, the Thatcherite economic counter-revolution, based on the ideas of Friedman and one of his most influential mentors, Friedrich Hayek, led directly to the smashing of the miners’ union through a massive intervention by the police and other state forces in the year-long strike of 1984-85.

Elsewhere the same processes were at work—notably in Australia, where the program of privatization, deregulation and the free market saw state-organised suppression of the workers’ movement, all carried out by the Hawke-Keating Labor governments between 1983 and 1996.

As Friedman went to his grave, the plaudits filled the air. Bush hailed him as “a revolutionary thinker and extraordinary economist whose work helped advance human dignity and human freedom.” Margaret Thatcher praised his revival of the “economics of liberty” and described him as an “intellectual freedom fighter”. US treasury secretary Henry Paulson said he would always be counted “among the greatest economists.” The New York Times obituary described Friedman as a “giant of economics” for whom criticism of his actions in Chile was “just a bump in the road.” Australian prime minister John Howard called him “a towering figure of world economic theory” while an editorial in Rupert Murdoch’s newspaper the Australian called him “liberty’s champion”.

And so it went on. Nothing, it seems, gratifies the rich and powerful so much as the justification of their elevated position in terms of freedom and liberty. In the coming period, however, under changed social conditions and in different political circumstances, the name Milton Friedman will evoke a very different response.

The era of Milton Friedman’s ascendancy will soon come to an end. But the giant is tottering but it hasn’t fallen yet. How much damage will be caused by the beast’s death throes? Gabriel Kolko captures this strange moment in history:

"As an Economic System, Capitalism is Going Crazy"
Factors in Our Colossal Mess

By Gabriel Kolko

November 25 / 26, 2006

These are dismal days for those who attempt to run the affairs of the world. But how should we understand it?

It would be a basic error to look at our present situation as if it were rationally comprehensible. The limits of rational explanations are that they assume rational men and women make decisions and that they will respect the limits of their power and behave realistically. This has rarely been true anywhere historically over the past century, and politics and illusions based on ideology or wishful thinking have often been decisive. This is especially the case with the present bunch in Washington.

We are right to fear anything, particularly a war with Iran that would immediately reel out of control and have catastrophic consequences not only to the region but globally. We are also correct to see limits to the power of irrational people, for the United States is strategically weak. It loses the big wars, as in Korea, Vietnam, and now Afghanistan and Iraq-even though its tactical victories often prove to be very successful-but also ultimately destabilizing and ephemeral. Had the U.S. not overthrown the Mossadegh regime in Iran in 1954 it is very likely the mullahs would never have come to power and we would not now be considering a dangerous war there.

Although the whole is far more important than the parts, the details of each part deserve attention. Many of these aspects are known, even predictable, there are -- to paraphrase Donald Rumsfeld -- the "known unknowns and the unknown unknowns" -- the "x-factor" that intercedes to surprise everyone. All of these problems are interrelated, interacting and potentially aggravate or inhibit each other, perhaps decisively, making our world both very difficult to understand -- or to run. Putting them together is a formidable challenge to thinking people outside systems of power. It has always been this way; fascism was in large part the result of economic crisis, and World War Two was the outcome. How factors combine is a great mystery and cannot be predicted -- not by U S or by those ambitious souls who have the great task of making sure there is no chaos. We wish to comprehend it but it is not decisive if we don't; for those who have responsibility to manage it, this myopia will produce the end of their world-and their privileges.

What is important to watch?

We can rule out the Left, that artifact of past history. Socialism ceased being a real option long ago, perhaps as early as 1914. Since I have just published an entire book, After Socialism, and detailed its innumerable myopias and faults, I need not say more than that it is no longer is a threat to anybody. The fakirs who lead the parties who still use "socialism" as a justification for their existence have only abolished defeats at the hands of the people from the price capitalism pays for its growing follies. That confidence- freedom from challenge by the unruly masses-- is very important but it is less and less sufficient to solve the countless remaining dilemmas. The system has become increasingly vulnerable, social stability notwithstanding, since about 1990 and the formal demise of "communism".

Assume Anarchy

The failure of socialist theory is much more than matched by the failure of capitalism because the latter has the entire responsibility for keeping the status quo functioning-and it has no intellectual basis for doing so. The crisis that exists is that capitalism has reached a most dangerous stage in destructiveness -- and no opposition to it exists. This malaise involves foreign affairs and domestic affairs -- vast greed at home and adventure overseas. If the foreign policy aspects are largely American-originated, the rest of the world tolerates or sometimes collaborates with it. Its downfall is inevitable, perhaps imminent. The chaos that exists will exist in a void. No powerful force exists to challenge, much less replace it, and therefore it will continue to exist -- but at immense and growing human cost. Alternative visions are, for the moment at least, mostly cranky.

Ingenious and precarious schemes in the world economy today have great legitimacy and flourish in the sense that the postulates of classical economics postulated are fast becoming irrelevant. It is the era of the fast talker and buccaneer-snake-oil salesmen in suits. Nothing old-fashioned has credibility. Joseph Schumpeter and other economists worried about pirates, but they are more important today than ever before-including than during the late 19th century when they were immortalized in Charles Francis Adams Jr's Chapters of Erie. The leitmotif is "innovation," and many respectables are extremely worried. I argued here in Counterpunch recently (June 15 and July 26) that gloom prevails among experts responsible for overseeing national and global financial affairs, especially the Bank for International Settlements, but I grossly underestimated the extent of anxieties among those who know the most about these matters. More importantly, over the past months officials at much higher levels have also become much more articulate and concerned about the dominant trends in global finance and the fact that risks are quickly growing and are now enormous. Generally, people who think of themselves as leftists know precious little of those questions, questions that are vital to the very health of the status quo. But those most au courant with global financial trends have been sounding the alarm louder and louder.

The problem is that capitalism has become more aberrant, improvisatory, and self-destructive than ever. We are in the age of the predator and gamblers, people who want to get very rich very quickly and are wholly oblivious to the larger consequences. Power exists but the theory to describe the economy which was inherited from the 19th century bears no relationship whatsoever to the way it operates in practice, a fact more and more recognized by those who favor a system of privilege and inequality. Even some senior IMF executives now acknowledge that the theory that powerful organization cherish is based on outmoded 19th century illusions. "Reconstructing economic theory virtually from scratch" and purging economics of "neoclassical idiocies," or that its "demonstrably false conceptual core is sustained by inertia alone," is now the subject of very acute articles in none other than the Financial Times, the most influential and widely-read daily in the capitalist world.

As an economic system capitalism is going crazy. In late November there were $75 billion in global mergers and acquisitions in a 24-hour period-a record. Global capitalism is awash with liquidity -- virtually free money -- and anyone who borrows can become very rich, assuming they win. The beauty of the hedge fund is that individual risks become far smaller and one can join with others to bet big -- and much more precariously. Henced, spectacular chances are now being taken: on the value of the U.S. dollar, the price of oil, real estate -- and countless others gambles. In the case of Amaranth Advisors, this outfit lost about $6.5 billion at the end of September on an erroneous weather prediction and went under. At least 2,600 hedge funds were founded from the beginning of 2005 to October 2006, but 1,100 went out of business. The new financial instruments -- derivatives, hedge funds, incomprehensible financial inventions of every sort-are growing at a phenomenal rate, but their common characteristic, as one Financial Times writer, John Plender, summed it up on November 20. , is that "everyone [has] become less risk adverse." Therein lies the danger.

Hedge funds will bet on anything, natural disasters and, soon, longevity of pension fund members being only the latest examples of their addiction to taking chances. London is fast replacing New York as the center of this activity, and the capital market in general, because the regulatory regime of the government the British Labour Party established is much more favorable to this sort of activity than that Bush's Republican minions allow -- though this may change because Wall Street does not like losing business.

On September 12, 2006, the International Monetary Fund released its report on "Global Financial Stability," and it was unprecedented in its concern that "new and complex financial instruments, such as structured credit products," might wreak untold havoc. "Liberalization," which the "Washington consensus" and IMF had preached and helped realize, now threatens the US dollar and much else. "The rapid growth of hedge funds and credit derivative mechanisms in recent years adds to uncertainty," and might aggravate the "market turbulence and systemic impact" of once-benign events. Hedge funds, it warned, have already "suffered noticeable losses."

…Power in Washington

President Bush made the election a referendum on the war and was badly repudiated; his party suffered a disaster. Disorientation, depression, and defeat have left the president and his neoconservatives adrift. They have power, two more years of it, and we are at the mercy of people who are irresponsible and dangerous. Their rhetoric proved a recipe for disaster in Afghanistan and Iraq -- a surrealistic nightmare. The American public is largely antiwar (55 percent of those who voted disapproved of the war, most of them strongly); they voted against the war and only tangentially for Democrats, most of who vaguely implied they would do something about the Iraq war but immediately after the election shamelessly reaffirmed their support for its essence. But people, and voters in particular, are such a nuisance everywhere. More quickly than in the past, they respond to reality, which means that traditional politicians must betray them very speedily. They create certain decisive parameters that ambitious politicians flout at greater risk than ever because the people have shown themselves ready to vote the rascals-whether Democrats in 1952 and 1968 or Republicans last November -- out of office. The American public is more antiwar than ever, and no one can predict what the future holds, including some Republicans outflanking the Democrats from a sort of antiwar left so that they can remain, or gain, office. That the people are subsequently cynically ignored-as they have been immediately after the last American election--is a fact also, but their role can neither be overestimated nor gainsaid. Experience shows that politicians, whatever they call themselves or in any nation we can think of, can never be trusted. Ever. But the facts on the ground -- reality -- are today very bad for those who advocate wars.

Israel: the Dream Comes Apart

Hawks in Israel, ascendant since the founding of the Jewish state, are still debating their thirty-three day war in Lebanon and the decisive limits to their once awesome, ultra-sophisticated modern military power exposed by their Lebanon adventure. The Israeli press is full of accounts of ministers' sexual offenses and corruption. Ehud Olmert's government is badly divided, backbiting, and may fall soon. The army is openly split and Olmert would like to dump its chief of staff, Dan Halutz, and the minister of defense. The Zionist project is in an unprecedented state of disrepair, with profound demoralization taking hold. Olmert himself is a complete mediocrity, a minor Likud politician who parlayed himself into the number two spot and was lucky. His comment when he visited the U.S. in the middle of November that America's Iraq war had brought stability to the region either infuriated or embarrassed everyone. He is basically a shrewd politician but very stupid man.

The most devastating analyses of Israel's war in Lebanon have appeared in Israel itself, and "the fact the Israeli army is at a low point," according to a writer in Haaretz, has goaded rather than deterred Iran. "Almost every weapon lost its significance and effectiveness as soon as it was used," Ofer Shelah wrote in the Jaffee Center's Strategic Assessment. The Israeli military relied on massive, overwhelming firepower delivered by the most modern means possible and it failed to stop incoming rockets and enemy mobility, much less win the war. Hizbollah not only showed Syria how to defeat the Israeli army but made Iran much more confident they can carry on what it is doing. The entire government and army leadership was incompetent.

…There are many dangers, from fascistic politicians like Avigdor Lieberman becoming even more powerful, to yet greater emigration abroad of those Jews with high skills. The latter is happening. Israel's ability to flout European opinion with impunity or to have Washington embark on military adventures from which Israel gains is increasingly limited. France has warned Israel that should it initiate a war with Iran it would create "a total disaster" for the entire world". Oil prices would rise, the entire Arab world would unite behind the Iranians, and Israel would be targeted but so would other nations. Even more important, Israeli strategists admit that Iranian nuclear weapons would only create a stable deterrent relationship between the two nations, and are not an "existential threat."

Repentance or Rapture?

Above all, in Iraq the American government is facing the failure of its entire Middle East project, an illusion in which the Israelis have a profound interest. Bush and gang are in a state of denial, but the U.S. is going the way of its defeat in Korea and Vietnam, and its military is increasingly overstretched and demoralized. It has based its foreign policies on fantasies and non-existent dangers, neo-con dreams and desires, only partially to meet equally illusory Israeli objectives to transform the entire Middle East so that it accepts Israel in whatever form the fickle Israeli electorate presents it. American foreign policy has been fraught with dangers since 1945, and I have documented them extensively, but this is the worst set of incompetents ever to hold power in Washington. It "shocked and awed," to use the departed Secretary of Defense's phrase, itself. Things are going disastrously for conservative warriors.

But it is very difficult to anticipate what this administration will come up with, though disasters over the past six years have made a number of alternatives far less probable. In a way, that is a good thing, although the cost in lives lost and wealth squandered has been immense. The Baker/Hamilton bipartisan commission is deeply split and if -- with emphasis on "if" -- if it happens to come up with a clear alternative the president is free to ignore it. The Pentagon has formulated alternatives, summed up as "go big," "go long"-both of which would require 5 to 10 years to "Iraqize" the war-- or "go home", but it is divided also. One thing certain, however, is that it has neither manpower, materiel, nor political freedom to make the same mistakes as in Vietnam-as the first two alternatives would have it do. There are no options in Iraq because the U S has traumatized the entire nation and created immense problems for which it has no solutions. No one can predict what it will do in Iraq because the administration wishes to preserve the illusion of success and is genuinely confused how to proceed. It has produced chaos. Iraq is very likely to remain a tragedy, one wracked by violence, for years to come. The Bush administration has created a massive disaster involving the lives of many millions of people.

A great deal depends on the President, whose policy has utterly failed in Iraq, is failing in Lebanon, and one of his options is escalation -- war with Iran. Israel might attack Iran in order to drag America in, but by itself it can only be a catalyst. Olmert and Bush approach these issues in a remarkably similar fashion. Either way, Bush has not ruled out war with Iran despite warnings from many military men that such a conflict would have vast repercussions, probably last years, and the U.S. would likely lose the war, even if it used nuclear weapons, after creating an Armageddon.

A number of the neocon theoreticians have repented the Iraq adventure, and even criticized some the basic premises that motivated it, but it would be an error to assume that this administration has some contact with reality and can be educated-by the electorate or by alienated neocon intellectuals. There are still plenty of people in Washington who advocate going for broke, who still retain fantastic illusions. There remains the imponderable factor of rapture -- fantasy and illusions mixed with desires. Is victory around the corner if we escalate with more troops? Will the Iraqi troops the Americans train attain victory over enemies that eluded U.S. forces? Many much wiser presidents have pursued such chimeras. Why not Bush too? Facts on the ground, which are much greater in constricting American power than they were six years ago, are a critical factor. They may not be sufficient to prevent irrational behavior. We simply cannot know.All of these factors, and perhaps others not mentioned here, will affect each other. The whole is very often no stronger than all the parts. All surprises that thwart the Bush administration's freedom to act are now to be welcomed, and while the world's financial system is the leading candidate for upsetting the U.S.'s calculations, it is scarcely the only one. The facts on the ground, realities rather than decisions, are usually crucial, and here the U S is losing in its megalomaniac ambition to shape the world. It has been this way for many nations led by men far superior in intellect to George Bush.

Wishes are not reality and the U S has an endemic ability to hold onto its wishes and fantasies as long as possible. Desire often leads to its acting despite itself. But its resources are far more constrained now than they were six years ago, much less for the United States during the Vietnam War-which it lost. The American public is already deeply alienated, the world financial system is teetering, the U S' military resources are virtually exhausted.

We shall see.