Monday, January 29, 2007

Signs of the Economic Apocalypse, 1-29-07

From Signs of the Times, 1-29-07:

Gold closed at 651.80 dollars an ounce Friday, up 2.5% from $636.10 at the close of the previous Friday. The dollar closed at 0.7743 euros Friday, up 0.3% from 0.7717 at the end of the week before. The euro, then, closed at 1.2916 dollars compared to 1.2959 at the close of the Friday before. Gold in euros would be 504.65 euros an ounce, up 2.8% from 490.86 for the week. Oil closed at 55.57 dollars a barrel Friday, up 6.9% from $51.99 at the end of the previous week. Oil in euros would be 43.02 euros a barrel, up 7.0% from 40.12 for the week. The gold/oil ratio closed at 11.73 Friday, down 4.3% from 12.24 at the close of the Friday before. In U.S. stocks, the Dow Jones Industrial Average closed at 12,487.02 Friday, down 0.6% from 12,565.53 at the close of the previous Friday. The NASDAQ closed at 2,435.49, down 0.6% from 2,451.31 for the week. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.87%, up nine basis points from 4.78 for the week.

Bush gave his State of the Union address last week. The newly-elected senator from Virginia, James Webb, gave the Democratic Party’s rebuttal. Webb’s speech, aside what he said about Iraq, was remarkable for his strong words on the rising economic inequality in the United States. Not surprisingly, that part of Webb’s speech was virtually ignored by the mainstream press:

A warning from Senator Webb: Democrat cites danger of deepening “class lines” in America

By Patrick Martin

25 January 2007

The official Democratic Party response to President Bush’s State of the Union speech Tuesday night was delivered by newly elected Senator James Webb of Virginia, a former Republican and secretary of the Navy in the Reagan administration.

Webb’s eight-minute speech dealt with two issues: the war in Iraq and the growth of economic inequality within the United States. Webb’s criticisms of the Bush administration’s conduct of the war in Iraq were typical of the congressional Democrats. He criticized Bush’s incompetence and cast the Iraq war as a diversion that weakened the position of the US in the global “war on terror,” although he was more scathing than most of his counterparts about the war’s toll on the United States, in both human and financial terms. (See: “Bush’s State of the Union speech highlights crisis of US ruling elite”).

The senator’s discussion of the economic conditions in the United States, however, went considerably beyond the pallid quasi-populist rhetoric normally employed by many Democrats. He spoke bluntly about the widening divide between rich and poor and the vast chasm that separates corporate CEOs from ordinary workers.

In beginning his remarks, Webb said there were other urgent issues beyond the scope of his brief speech, including “such domestic priorities as restoring the vitality of New Orleans.” This was an attack on Bush, who made no reference whatsoever to the greatest natural disaster in American history, an omission that exposed the utter indifference of the White House to the needs of the vast majority of the American people.

Webb continued: “When one looks at the health of our economy, it’s almost as if we are living in two different countries. Some say that things have never been better. The stock market is at an all-time high, and so are corporate profits. But these benefits are not being fairly shared. When I graduated from college, the average corporate CEO made 20 times what the average worker did; today, it’s nearly 400 times. In other words, it takes the average worker more than a year to make the money that his or her boss makes in one day. Wages and salaries for our workers are at all-time lows as a percentage of national wealth, even though the productivity of American workers is the highest in the world.”

After hailing the passage by the House of Representatives of an increase in the minimum wage—a drop in the bucket compared to the actual social need—Webb turned to the subject of the Iraq war. He returned to the theme of economic inequality towards the end of his speech:

“Regarding the economic imbalance in our country, I am reminded of the situation President Theodore Roosevelt faced in the early days of the 20th century. America was then, as now, drifting apart along class lines. The so-called robber barons were unapologetically raking in a huge percentage of the national wealth. The dispossessed workers at the bottom were threatening revolt.”

In his description of the deepening social divisions in America, Webb was stating facts that are well known throughout the media and political elite, but almost never referred to publicly or seriously analyzed outside of the World Socialist Web Site.

He used language, including the phrase “class lines,” that has been virtually banned from official bourgeois politics for many decades. Right-wing pundits and politicians regularly denounce any explicit reference to the socioeconomic polarization of American society as “class warfare,” in effect declaring that the class contradictions in America are so severe that even to acknowledge their existence is impermissible.

A man of the military and state apparatus, Webb is himself an ardent anticommunist. The former Marine officer and Vietnam War veteran held high political office in the Reagan administration. But he is one of the more thoughtful representatives of the US ruling elite, and, as a successful war novelist, able to articulate his concerns.

His remarks are thus significant both for what he did say, and what he didn’t. Webb drew very tame political conclusions from the explosive social facts he cited. He praised the example of a Republican president, Theodore Roosevelt, who struck a public posture of opposition to the excesses of the wealthy (“trust-busting”), in order to safeguard the profit system from the attacks of what Webb described as “demagogy and mob rule”—i.e., socialism.

In pointing to the growing class divide in America, the Democratic senator was addressing two audiences. He was, on the one hand, attempting to pump new life into the tattered myth of the Democratic Party as a party of the working man, while channeling economic discontent along nationalist lines and protectionist lines. At the same time he was alerting the ruling elite to the dangers it confronts as a result of its unabashed rapacity.

Webb’s remarks Tuesday night were very similar to a newspaper column he wrote more than two months ago, just after his upset election victory over incumbent Republican Senator George Allen. Again, the theme was the class divide in America, and Webb chose as the venue for his column the op-ed page of the Wall Street Journal, where it would be read by very few workers but many members of the moneyed elite.

In that column, Webb cited the same figures about CEO salaries and workers’ wages as in his reply to the State of the Union speech, noting that the gap was continuing to worsen. “America’s elites need to understand this reality in terms of their own self-interest,” he warned.

“More troubling is this: If it remains unchecked, this bifurcation of opportunities and advantages along class lines has the potential to bring a period of political unrest. Up to now, most American workers have simply been worried about their job prospects. Once they understand that there are (and were) clear alternatives to the policies that have dislocated careers and altered futures, they will demand more accountability from the leaders who have failed to protect their interests.”

There is little left to the imagination here: Webb was outlining for his well-heeled audience what, to borrow Bush’s language from the State of the Union speech, is the true “nightmare scenario” of the American ruling class: the development of a mass movement from below, sparked by the ever-widening gap between the wealthy elite and everyone else, which could burgeon into a political challenge to the existing social order.

Official media and political circles responded to these comments by virtually ignoring them.
In its account of Webb’s Democratic Party reply, the Washington Post published only one paragraph on his comments on the economy, quoting a single sentence about “the middle class of this country ... losing its place at the table.” The New York Times published two paragraphs, quoting the same sentence, as did CNN’s web site.

The Chicago Tribune made no reference to the criticism of social polarization, citing only Webb’s comments on the war in Iraq. The Associated Press did the same. The Los Angeles Times reported Webb’s reference to New Orleans and his contrasting “the declining economic fortunes of the middle class with the skyrocketing salaries of corporate chief executives.”

Not a single one of these news outlets, nor any of the television networks—which broadcast Webb’s speech in full—made any comment on the significance of Webb’s comparison of contemporary America to the America of the robber barons, when “America was then, as now, drifting apart along class lines.”

It is not that the television anchormen and media pundits—most of them closer in salary to CEOs than to blue-collar or white-collar workers—are indifferent to the political implications of these social divisions. Doubtless there was plenty of off-camera discussion, and perhaps a measure of agreement that the Bush administration has been too cavalier in trampling on the social needs of working people in order to enrich the wealthiest one percent. These are matters, however, best taken up behind the scenes, rather than talked about openly before a mass audience on network television.

The growing inequality Webb pointed to will only increase with the ballooning of personal debt and the bursting of the housing bubble. The news was mostly bad on the housing front, but there was some good news mixed in:

U.S. 2006 home sales drop biggest in 17 years

By Patrick Rucker

Thursday January 25, 3:20 pm ET

WASHINGTON (Reuters) - Sales of previously owned U.S. homes slipped 0.8 percent in December and took their biggest tumble in 17 years for all of 2006, leaving in doubt whether the worst of a housing slump has passed.

The National Association of Realtors on Thursday said December sales ran at a 6.22-million-unit annual rate, lower than the 6.25 million that Wall Street analysts had forecast.

Sales for 2006 were down 8.4 percent, the biggest annual drop since 14.8 percent in 1989 when the housing sector was under pressure from a crisis in the nation's savings and loan industry and before the 1990-91 recession.

But the monthly report on sales of so-called existing homes -- as opposed to newly built ones -- also contained some encouraging news since inventories of unsold homes were down 7.9 percent to 3.508 million units at the end of December.

In addition, the median price of homes sold in December was up to $222,000 from $217,000 in November. The median marks the mid-point, with half the houses sold at a price under $222,000 and half above it.

"We are seeing some signs of stabilization, but not recovery," said economist Gary Thayer of A.G. Edwards and Sons Inc. in St. Louis. Analysts closely monitor the key housing sector because of its potential impact on consumer spending, which drives two-thirds of overall U.S. economic activity.

…Another gauge of strain in housing came in a report showing a 42 percent leap in the number of homes taken back by lenders last year as more people became unable to pay the mortgage. RealtyTrac Inc. said more than 1.2 million foreclosures filings were made -- about one for every 92 households.

One difficulty in assessing the health of the housing sector, analysts warn, is that some sellers may simply withdraw unsold homes from markets until sales prospects brighten.

"I don't think we've hit bottom," said Stuart Hoffman, chief economist for PNC Financial Services Group in Pittsburgh. "The bottom won't be hit until spring or summer. There's too much inventory around."

Despite the drop in available homes for sale from November, the inventory of unsold existing homes is still 23.3 percent above a year earlier.

Despite the bits of good news, it’s hard to see how analysts can think that the bottom has been reached in housing. With at least a year or two’s worth of insanely structured mortgages sold in the parts of the country most hit by the housing boom, a wave of foreclosures is likely. The consequences of that would be lots of houses getting dumped on a weak market. Indeed, ominous signs of the beginning of such a wave were seen this week in California:

More Californians at risk of losing homes

By David Streitfeld

January 24, 2007

The number of Californians defaulting on their mortgage loans is rising rapidly, according to figures released Tuesday, providing striking evidence that more people are at risk of losing their homes.

Default notices jumped 145% in the last three months of 2006, accelerating a trend that began in late 2005 as home sales started to cool.

It was the largest number of default notices in any three-month period since 1998.

Analysts said the increase was not worrisome — yet. But if the number continues to escalate, it could drag down home values in certain communities, they warned.

"So far, this isn't alarming," said John Karevoll, chief analyst at DataQuick Information Systems, which compiled the data. But if default notices "keep going up at this rate, it could get nasty fast," he added.

Home markets that are most vulnerable include the Inland Empire and the Central Valley, both of which drew throngs of first-time buyers even as the housing boom was ending.

Such homeowners are the most at risk of losing their homes because they have relatively little equity in their properties, making it harder to refinance their mortgages.

Default notices are the initial step in the foreclosure process. In the fourth quarter of last year, lenders issued such notices to 37,273 borrowers across the state, warning them that they were at risk of foreclosure, compared with 15,196 during the same period a year earlier, DataQuick said.

Not every notice of default leads to a foreclosure, when a property is seized and sold to pay the mortgage. But foreclosures also are on the rise. There were 6,078 in the last quarter of 2006, up from 874 a year earlier.

Defaults and foreclosures fell steadily starting in the late 1990s as housing prices took off. In those heady days, practically anyone needing money to pay bills could refinance, cashing out equity from what seemed to be an endlessly refilling piggy bank.

In a stagnant or falling market, that option isn't available to recent buyers or those who have visited the pig once too often. Instead, many of those who are unable to make their payments must either sell the property or let the bank take it over.

Lenders have invented all sorts of newfangled loans, many of which are reset to higher interest rates after a fixed period. The ability of borrowers to repay such loans, particularly in a weak market, is untested.

"People are living on the edge, and they can't help it with the price of houses," said Barbara Swist, a Costa Mesa mortgage broker who is helping Brown sort through his options. "They have good jobs but they bought over their heads, buying into the American dream."

That's also the opinion of the Center for Responsible Lending, a nonprofit advocacy group based in Durham, N.C.

Last month, the center issued a lengthy analysis explaining how millions of so-called sub-prime loans would soon turn bad. Sub-prime loans are made at higher rates — and include more onerous terms — to borrowers who don't qualify for lower-cost "prime" mortgages.

Sub-prime foreclosures would increase the most, the authors concluded, in states that had seen strong price appreciation during the boom. That would include New York, Virginia, Maryland and particularly California.

The following article in the New York Times suggests that the plug is being pulled:

Tremors at the Door

By Vikas Bajaj and Christine Haughney
January 26, 2007

Wall Street’s big bet on risky mortgages may be souring a lot faster than had been previously thought.

The once booming market for home loans to people with weak credit — known as subprime mortgages and made largely to minorities, the poor and first-time buyers stretching to afford a home — is coming under greater pressure. The evidence can be seen in rising default rates, increasingly strained finances at mortgage lenders and growing doubts among investors.

Now, Wall Street firms, which had helped fuel the growth in the market by bankrolling and investing in subprime mortgage lenders, have begun to pinch off the money spigot.

Several mortgage lenders have recently collapsed. While the failures so far are small in number, some industry officials are concerned that they could be the first in a wave. The subprime sector, which produced loans worth more than $500 billion in the first nine months of last year, could shrink significantly.

A sharp contraction in subprime mortgages would have ripple effects, reducing consumers’ access to credit and affecting investors like foreign central banks, pensions and mutual funds that have been big buyers of mortgage-backed securities.

The recent bankruptcy of Ownit Mortgage Solutions, a lender based in Agoura Hills, Calif., provides a cautionary tale. Even as its revenue grew by more than a third in the first nine months of 2006, to $8.3 billion, the company was losing money. It shut down after its financial backers, which included Merrill Lynch & Company and JPMorgan Chase, could not come up with a deal to save it.

In addition to Ownit, Sebring Capital Partners, based outside Dallas, closed in December, and Mortgage Lenders Network of Middletown, Conn., has stopped making loans through brokers. It also laid off more than 800 employees and is under investigation by state regulators.

“Pick a company — small, medium or large — they all have the same problem: capital,” said Marc A. Geredes, who runs a small mortgage company, LownHome Financial, in San Jose, Calif. “The economics of the business do not make sense right now.”

Wall Street firms were attracted to such lenders because they helped feed a pipeline of securities backed by the mortgages, a market bigger than the one for United States Treasury bonds and notes. Merrill Lynch, for example, securitized $67.8 billion in residential mortgages in the first nine months of 2006, up 58.4 percent from the period a year earlier.

But an increasing number of borrowers are defaulting on subprime loans earlier now than they did a year ago, often within six months of having taken the loan out, shaking Wall Street’s confidence in its subprime partners.

In one indication that investors are losing their taste for mortgages, hedge funds that specialize in mortgage-backed securities had an outflow of $1.8 billion in 2006, down from an inflow of $1.8 billion in 2005, according to Hedge Fund Research. It was the only category of hedge funds to have a negative flow for the year.

“We have been and continue to be cautious about the subprime market — its lending standards, decline in home price appreciation, other deteriorating credit fundamentals,” said Jim Higgins, chief executive of Sorin Capital Management…

Predatory lending by those who own, combined with an attack on worker rights and protections have formed a pincer movement threatening the U.S. middle class. It is no accident that union membership has reached an all-time low for the modern era:

Union membership drops to 12 percent, the lowest yet

By Will Lester

12:42 p.m. January 25, 2007

WASHINGTON – Union membership dropped to 12 percent of U.S. workers last year, extending a steady decline from the 1950s when more than a third belonged to unions.

After membership had held steady at 12.5 percent in 2005, it declined anew last year, a decrease of more than 325,000 workers, the Bureau of Labor Statistics said Thursday.

Membership had been 20.1 percent in 1983, when the bureau first provided comparable numbers. About 35 percent of American workers were union members in the mid-1950s.

The latest gloomy news for organized labor comes at a time when the group is pushing legislation in the Democratic-controlled Congress that would make it easier for unions to organize.

But labor laws aren't the only obstacle to union membership.

“Much of the decline is coming from shifts in the economy,” said Greg Denier, a spokesman for Change to Win, a federation of labor unions. Thousands of jobs are being outsourced or lost to technological changes. And employers are aggressively campaigning against the formation of unions, he said.

Labor unions are pushing legislation that would let workers form unions more readily by simply signing a card or petition, impose stronger penalties on employers who violate labor laws, and allow for arbitration to settle contract disputes.

Advocates of the legislation say they doubt that it will get signed into law by President Bush, but that they think passage in Congress would make eventual signing of the law more likely.

The continuing drop in membership has given them new motivation.

“There's no better argument for quick passage,” said Stewart Acuff, organizing director of the AFL-CIO. The federation's own research suggests many people would join unions if they had the chance, he said.

Supporters say the proposal is more fair to workers because employers can't intimidate workers to discourage formation of a union. Opponents say it deprives workers of the right to vote privately on their union preferences, and can lead to union intimidation.

The union membership rate for government workers, 36.2 percent, was substantially higher than for private industry workers, 7.4 percent.

The latest membership statistics have to be “incredibly discouraging for labor,” said Gary Chaison, a labor specialist at Clark University in Worcester, Mass.
“Before they can grow, they have to stand still,” he said. “The unions are losing so many members each year because their jobs are being outsourced and they are organized in shrinking sectors of the economy, like autos, steel and textiles.”

The pressures on organized labor led to a split starting in the summer of 2005, with more than a half-dozen unions breaking free of the AFL-CIO. The breakaway unions cited the need for more emphasis on organizing, though the split was also caused by power struggles and personality disputes among union leaders.

Much of the recent union recruitment has focused on industries unlikely to lose jobs overseas – like the hotel industry, health care and service workers.

The continuing erosion of union membership is “just another sign of the collapse of the middle class,” said David Gregory, a professor of labor law at St. John's University Law School.

“Health and medical insurance coverage and retirement pension security were the result of decades of work of the labor unions,” he said. “I think we're going to dramatically see the cutting away of the safety net for workers.”

The Roxylander blogger predicts recession in 2007:

The Recession Call

Here I would like to join those very few who predict that a recession will happen sometimes this year. It’s very unpopular to call a recession, as people hate those who properly predict bad times and ridicule those who were mistaken. As my reputation is not really important I have a freedom to say whatever I want.

Any recession has a main theme. We had recessions caused by hyperinflation and by stock market bubble bust. This recession’s main theme is credit crunch. Credit crunch means that a certain individual or institution may not keep up with servicing his debt while maintaining the usual mode of operation. It doesn’t necessary mean bankruptcy or delinquency, but it means drop in consumption and inability to borrow more funds in order to service existing debts. Universal reduction in consumption is, by definition, a recession.

It’s hard to say when exactly the recession strikes, but it’s easy to point out some essential milestones that have to be passed by in order to reach the destination.

- Milestone 1. Major troubles in subprime mortgage market, Feb-March 2007

It may seem strange, but this a first shoe to drop. Subprime mortgage application is, simply speaking, the desire of an individual to borrow money that he is unlikely to be able to pay back. So far this individual is granted such a loan, because there is a big chance that he will refinance it again before defaulting. Watch implode-meter for developments, it all should happen soon.

- Milestone 2. Some increase in delinquencies in junk bond market, March-April 2007

At this point junk bonds are too expensive. They pay only a little premium above treasuries. I don’t expect anything spectacular, but some delinquencies in manufacturing and small business will increase the cost to borrow more money. Many corporations will start operating in more cost-saving mode, decrease capital expenditures, reduce new hiring.

- Milestone 3. Housing market is depressed again after some winter optimism, April-May 2007

Too many people count that the housing market bottomed and the worst is behind us. The record warm November/December made all seasonally-adjusted numbers looking too good. When the Spring comes, the illusion will vanish. We will see record inventories, price declines, mortgage delinquencies, construction layoffs - you name it. Housing bubble bust will be worse in 2007 than it was in 2006.

- Milestone 4. Increase in unemployment, May-July 2007

That’s the last shoe to drop before people will start talking about hard landing on TV. The weekly jobless claims will climb over 350k, new hiring will go down. Retail stores will warn that consumption is not keeping up with expected levels. Consumer confidence will decline.

- Milestone 5. Stock market decline, July-October 2007

There is just too much money in the markets to expect stock market to decline too soon. It is widely believed that stock market is not a very good leading indicator of recessions. Having said that, one can conclude that there is no reason to expect stock market to decline before the recession starts. Past experience tells that stocks usually feel healthy just few weeks before the official start of each recession. As I don’t expect this recession to start at least until Summer or later, I do not expect any market crashes before that timeframe.
Then what? Debtors’ prisons? Maybe not. According to Ran Prieur there are too many of us debtors:

"When an economic crash occurs do you think they will bring back debtors prisons?"

They would love to! The problem is the sheer number of people who owe money. If debtors awaken as a political force, and get organized, they can get the government to declare that certain kinds of debts are canceled. This has been normal throughout history. Most pre-Roman civilizations had traditions of periodic debt forgiveness, because they understood that wealth concentration, if unchecked, leads to inefficiency, instability, and collapse. Since the Romans invented the idea that accumulation of money/power is virtuous, redistribution has happened only through upheaval and catastrophe.

So this time the owners will fight like hell to hold onto everything. Their strategy will be to keep debtors isolated from each other, keep the debt issue in the background, keep the amnesty option off the table, and keep quietly collecting as much money as they can. When the depression comes, and almost nobody can pay, I expect them to keep piling up the numbers to absurd heights, and then sell the inflated debt, at an apparent discount, to whatever entity has the power to keep extracting payment. Maybe Blackwater. Then, if that entity is clever, it will forgive just enough debt to make debtors a minority, and put them in work camps.

Monday, January 22, 2007

Signs of the Economic Apocalypse, 1-22-07

From Signs of the Times, 1-22-07:

Gold closed at 636.10 dollars an ounce Friday, up 1.5% from $626.90 at the close of the previous Friday. The dollar closed at 0.7717 euros Friday, down 0.3% from 0.7738 at the end of the week before. The euro, then, closed at 1.2959 dollars compared to 1.2924 at the end of the previous week. Gold in euros would be 490.86 an ounce, up 1.1% from 485.07 for the week. Oil closed at 51.99 dollars a barrel Friday, down 1.9% from 52.99 at the close of the previous Friday. Oil in euros would be 40.12, down 2.2% from 41.00 for the week. The gold/oil ratio closed at 12.24, up 3.5% from 11.83 at the end of the week before. In U.S. stocks, the Dow closed at 12,565.53 Friday, up 0.1% from 12,556.08 at the close of the previous Friday. The NASDAQ closed at 2,451.31, down 2.1% from 2,502.82 for the week. In U.S. interest rates, the yield on the ten-year U.S Treasury note closed at 4.78%, up one basis point from 4.77 for the week.

With U.S. stocks at all-time highs and oil prices plunging, consumer optimism in the United States rose to the highest level in three years:

Consumer sentiment best in 3 years

By Rex Nutting, MarketWatch

Last Update: 10:18 AM ET Jan 19, 2007

WASHINGTON (MarketWatch) -- U.S. consumers' attitudes about the economy brightened in January, with a key gauge of consumer sentiment rising to its highest level in three years.

The University of Michigan consumer sentiment index jumped to 98.0 in January from 91.7 in December, according to Reuters, which has an arrangement to publish the index. It's the highest since January 2004 and was well above the 92.0 expected by economists surveyed by MarketWatch.

Consumers were more upbeat about the present and future economy. The current conditions index rose from 108.1 to 112.5, the highest since July 2005, just before oil prices spiked higher.

The expectations index rose from 81.2 to 88.7, the highest since December 2004.

The only negative note in the report came from a slight increase in consumers' inflation expectation over the next 12 months to 3% from 2.9%. The five-year inflation expectation remained at 3%.

Economists caution that the consumer sentiment index does not necessarily predict consumer behavior. However, the expectations index is one of 10 indicators that make up the index of leading economic indicators.

The cheery sentiments illustrate the way people tend to view the economy in isolation from anything else. With the Cheney administration pushing World War III as hard as they can, and evidence of catastrophic climate change unavoidable, it’s hard to understand the economic optimism. Most likely it is due to the fact that no one alive in the United States under the age of seventy can remember an economic collapse. And no one alive, period, who has lived in North America their whole lives can really know the consequences of losing a global war.

In the short term, however, the war is good for the corporations:
Raytheon expects jump in Patriot sales
Potential customers lining up amid a rise in global tensions

By Robert Weisman, Globe Staff
January 18, 2007

A week after President Bush said the United States will deploy Patriot anti missile systems to the Middle East as part of its efforts to stabilize the region, Raytheon Co. executives yesterday said they're expecting a spike in Patriot sales as world tensions escalate.

Raytheon has been talking to nine foreign customers about upgrading their existing Patriot systems, and is in discussions with several potential new customers, including Turkey and South Korea, executives from the Waltham company said in a program briefing.

Countries around the Middle East and the Korean peninsula are especially concerned about guarding against missile strikes from Iran and North Korea.

"There are a couple of regional threats around the world that have certainly been a lot more active in the past six to eight months," said Skip Garrett , vice president of international operations for Raytheon's integrated defense systems division in Tewksbury.

In his Jan. 10 speech to the nation, Bush said Patriot systems would be sent to US allies in the Middle East as part of his new strategy for Iraq and the wider region. But he did not specify what countries would receive the Patriots, where they would come from, and whether the Army would buy new batteries to replace those being deployed.

Yesterday, an Army spokesman said the Patriot batteries that Bush mentioned initially will arrive in Kuwait but would remain under control of US forces. They will be sent to the region as part of the USS John C. Stennis carrier strike group and the 3rd Battalion, 43rd Air Defense Regiment, deployed to bolster security, he said. He said the length of the deployment would be determined by the commander in the theater and there are no current plans by the Army to purchase more Patriots to replenish the US stock.

Garrett and Rick Yuse , the Raytheon vice president for integrated air defense, said renewed interest in the Patriots is more a result of rising global tensions than the increase of 20,000 troops in Iraq. Many of Raytheon's existing customers, including Germany, Greece, the Netherlands, Spain, Saudi Arabia, Kuwait, Israel, Japan, and Taiwan, are considering an upgrade to the Configuration-3 system, they said.

Raytheon is the Patriot system's integrator and also makes radar for the anti missile system. The new configuration includes not only upgraded radar and software but also the improved PAC-3 missile, built by Lockheed Martin Corp., to intercept tactical missiles such as the Russian-made Scuds or Iskanders. Thus far, only the US Army has fielded the new model, but the Netherlands and Japan have placed orders and other countries have been weighing upgrades in the aftermath of missile tests by North Korea and Iran in the past year.

"The heightened tension with North Korea and Iran are certainly drivers for sales of tactical ballistic missile defense systems," said Steven Zaloga , senior analyst for missile systems at Teal Group Corp., an aerospace and defense consulting firm in Fairfax, Va.

Raytheon doesn't break out Patriot revenue in its financial reports, and Garrett and Yuse didn't say yesterday how much the company was anticipating in increased revenue. Last year, Raytheon reported Patriot orders totaling $283.9 million.

The company typically sells multiple systems for $1 billion to $1.5 billion per order, and foreign sales must be approved by the US government, said Paul Nisbet , a defense analyst for JSA Research in Newport, R.I. Raytheon itself keeps about 60 to 65 percent of a sale, he said, with the remainder going to Lockheed Martin and other Patriot suppliers and vendors.

Nisbet estimated the Patriot program brought in more than $1 billion a year for Raytheon in the late 1980s and early 1990s. But in recent years the company's revenue from the antimissile system has dropped to about $200 million annually, he said.

"I'm sure they're getting more inquiries now," Nisbet said. "They must be."

The disconnect between financial indicators and true economic and social health illustrates what Catherine Austin Fitts calls the “tapeworm economy:”
Want to understand where our jobs, small farms and small businesses are going? Want to know what or who is draining us and our communities?

In a tapeworm economy a small group of insiders centralize political and economic power at the expense of people, living things and the environment, in a manner that destroys real wealth. A tapeworm economy is one in which it is considered acceptable to make money from our
popsicle index going down. In investment terms, it is an economy with a negative return on investment. It is parasitic in nature.

The way an actual tapeworm operates is to inject its host with a chemical that makes the host crave what is good for the tapeworm and bad for the host. So the Tapeworm Economy is adept at using media and education and numerous financial incentives to get us acting against our own strategic interests and instead supporting and depending on the Tapeworm.

The symptoms of the Tapeworm are many - narcotics trafficking that targets our children, runaway exploitive and predatory corporate practices such as the patenting of life, terminator seed and the destruction of our topsoil and food supply, fraudulent inducement of debt to homeowners, students and consumers, suppression of knowledge and renewable energy technology, criminal mismanagement of government credit and resources, black budget operations and the manipulation of currency, financial and precious metal prices and markets. These practices introduce organized crime throughout all aspects of our lives... these transactions drain our families and neighborhoods on a daily basis – much like a tapeworm drains its host.

What would be interesting is an economic sentiment survey of the insiders. How optimistic are they in their heart of hearts?
The unease bubbling in today's brave new financial world

By Gillian Tett

January 19 2007

Last week I received an e-mail that made chilling reading. The author claimed to be a senior banker with strong feelings about a column I wrote last week, suggesting that the explosion in structured finance could be exacerbating the current exuberance of the credit markets, by creating additional leverage.

"Hi Gillian," the message went. "I have been working in the leveraged credit and distressed debt sector for 20 years . . . and I have never seen anything quite like what is currently going on. Market participants have lost all memory of what risk is and are behaving as if the so-called wall of liquidity will last indefinitely and that volatility is a thing of the past.

"I don't think there has ever been a time in history when such a large proportion of the riskiest credit assets have been owned by such financially weak institutions… with very limited capacity to withstand adverse credit events and market downturns.

"I am not sure what is worse, talking to market players who generally believe that 'this time it's different', or to more seasoned players who… privately acknowledge that there is a bubble waiting to burst but… hope problems will not arise until after the next bonus round."

He then relates the case of a typical hedge fund, two times levered. That looks modest until you realise it is partly backed by fund of funds' money (which is three times levered) and investing in deeply subordinated tranches of collateralised debt obligations, which are nine times levered. "Thus every €1m of CDO bonds [acquired] is effectively supported by less than €20,000 of end investors' capital - a 2% price decline in the CDO paper wipes out the capital supporting it.

"The degree of leverage at work . . . is quite frankly frightening," he concludes. "Very few hedge funds I talk to have got a prayer in the next downturn. Even more worryingly, most of them don't even expect one."

Since this message arrived via an anonymous e-mail account, it might be a prank. But I doubt it. For, while I would not normally write an article about responses to an article (it is the journalist's equivalent of creating derivatives of derivatives) I am breaking this rule, since I have recently had numerous e-mails echoing the above points. And most of these come from named individuals, albeit ones who need to stay anonymous, since they work for institutions reaping profits from modern finance.

There is, for example, a credit analyst at a bulge-bracket bank who worries that rating agencies are stoking up the structured credit boom, with dangerously little oversight. "[If you] take away the three anointed interpreters of 'investment grade', that market folds up shop. I wonder if your readers understand that . . . and the non-trivial conflict of interest that these agencies sit on top of as publicly listed, for-profit companies?"

Then there is the (senior) asset manager who thinks leverage is proliferating because investors believe risk has been dispersed so well there will never be a crisis, though this proposition remains far from proven. "I have been involved in [these] markets since the early days," he writes. "[But] I wonder if those who are newer to the game truly understand the impact of a down cycle?"

Another Wall Street banker fears that leverage is proliferating so fast, via new instruments, that it leaves policy officials powerless. "I hope that rational investors and asset prices cool off instead of collapse, like they did in Japan in the 1990s," he writes. "But if they do, monetary policy will be useless."

To be fair, amid this wave of anxiety I also received a couple of "soothing" comments. An analyst at JPMorgan, for example, kindly explained at length the benefits of the CDO boom: namely that these instruments help investors diversify portfolios; provide long-term financing for asset managers and reallocate risk.

"Longer term, there may well be a re-pricing of assets as the economy slows and credit risk increases," he concludes. "But. there is a very strong case to be made that the CDO market has played a major role in driving down economic and market volatility over the past 10 years." Let us hope so. And certainly investors are behaving as if volatility is disappearing: just look at yesterday's remarkable movements in credit default swaps. But if there is any moral from my inbox, it is how much unease - and leverage - is bubbling, largely unseen, in today's Brave New financial world. That is definitely worth shouting about, even amid the records now being set in the derivatives sector.

As the deathwatch for Fidel Castro continues, Latin American socialism has been in the news lately, with Venezuela’s Hugo Chavez stepping up socialist rhetoric with talk of further nationalizations at his inauguration. Interestingly, the most biting criticism this week of Chavez came from the left: Bill Van Auken at the World Socialist Web Site:

The significance of Venezuela’s and Ecuador’s nationalizations

By Bill Van Auken

18 January 2007

Presidential inaugurations in Venezuela and Ecuador over the past week were marked by calls for “socialism” and “revolution.”

During a January 10 swearing-in ceremony in Caracas, Venezuela’s re-elected president, Hugo Chavez, announced plans to nationalize CANTV, the country’s national telephone company, which was privatized in 1991, together with the power industry. He also announced plans to increase state control over the country’s oil fields.

“All of that which was privatized, let it be nationalized,” declared Chavez. “We’re heading toward socialism, and nothing and no one can prevent it,” he added, declaring at one point, “I’m very much for [Leon] Trotsky’s line—the permanent revolution.”

In Ecuador, Rafael Correa assumed power on January 15 in a ceremony in which he announced plans to initiate a “radical revolution” and declared his adherence to the “new socialism” which he said was spreading throughout the region. He has threatened to limit payments on Ecuador’s crushing foreign debt and renegotiate foreign oil contracts. He has also threatened to close down the US military air base at Manta.

Speaking to an audience that included 17 heads of state, including Chavez, Brazilian President Luiz Inacio Lula da Silva, Nicaragua’s Daniel Ortega (the Sandinista leader was himself inaugurated just days earlier), Bolivia’s Evo Morales and Mahmoud Ahmadinejad of Iran, Correa declared, “The citizens’ revolution has just begun, and nothing and nobody can stop it.”

The back-to-back inaugurations accompanied by radical and even “socialist” rhetoric condemning Washington, combined with the Iranian president’s tour of the region in search of allies, sparked a new wave of sensationalist media coverage in the US about Latin America’s “turn to the left.”

It is worth noting that one of Correa’s predecessors, the former Ecuadorian army colonel Lucio Gutierrez, was counted as part of that turn when he won the presidency in 2002 on a platform quite similar to Correa’s. After little more than two years in office, he was driven from the presidential palace by mass protests sparked by his adoption of right-wing economic policies, his embrace of Washington, and the rampant corruption of his regime.

Chavez’s announcement of “new nationalizations” triggered a record fall on the Caracas stock exchange, where CANTV is the largest publicly traded company, as well as a run on Venezuelan-connected stocks sold on Wall Street.

Without a doubt, the events of the past week further substantiate the political shift underway in Latin America, triggered in part by the economic and social devastation wrought by the so-called “Washington Consensus” model of wholesale privatizations and free market policies. It has been further fueled by the relative economic decline of US capitalism in relation to its rivals in Europe and Asia and Washington’s overwhelming preoccupation with its military adventures in the Middle East.

The result has been a defeat for the traditional right-wing parties and the victory of candidates who either describe themselves as or were historically identified with the “left,” not only in Venezuela and Ecuador, but also in Bolivia, Brazil, Chile, Peru, Uruguay, Argentina and Nicaragua.

While these governments have different political origins and disagree widely on policy, they all engage in one form or another of populist rhetoric denouncing “neo-liberalism” and criticizing US policy. They have appealed to popular anger over the staggering social inequality that pervades the continent and, in most cases, have initiated limited social assistance program to secure the support of the most impoverished layers of society.

At the same time, declarations like those of Chavez and Correa about ushering in a “21st century socialism” notwithstanding, these governments have universally defended capitalist private property, abided by the general prescriptions of the international financial institutions, and maintained intact the traditional military and repressive forces of the states they lead.

In many ways, the policies advocated by Chavez—the former paratrooper lieutenant colonel and coup leader—far from signaling a resurgence of socialism, represent an echo of the kind of economic nationalism and military populism associated with figures such as Juan Peron in Argentina, or, in a later period, Gen. Omar Torrijos of Panama and Gen. Juan Velasquez Alvarado of Peru.

As for the new Venezuelan “nationalizations,” there seems to be considerably less there than meets the eye. While Chavez presented his proposals as a matter of Venezuela seeking to “recover its ownership of strategic sectors,” the actual targets for state takeover are of relatively little importance.

CANTV is by no means a telephone monopoly. The company’s land lines cover barely 11 percent of the population, while its cell phone unit, Movilnet, controls just 35 percent of this far more extensive and lucrative market.

The biggest shareholder in CANTV is the US-based Verizon Communications Inc., with a 28.5 percent stake. Last April, Verizon initiated a deal to sell its share to the Mexican billionaire Carlos Slim, owner of Telmex, which has amassed a significant share of the Latin American telecommunications market.

Telmex has faced stiff competition from Spain’s Telefónica, which is a minority shareholder in CANTV but controls its own cell phone company in Venezuela, Movistar, which has captured 48 percent of the market. There is speculation that the nationalization may be, in part, an attempt to derail the deal with Slim and favor Telefónica by protecting the Spanish company from its main rival.

Another motive in taking over CANTV is to remove the country’s largest publicly traded company from the market. The company’s shares, which are traded both in Caracas (for bolivars) and on Wall Street (for dollars), have served as means for Venezuelan financiers to funnel capital out of the country and turn their assets into dollar holdings abroad, contributing to a drain of capital and the country’s 18 percent inflation rate.

As for the takeover of the electric power sector, much of it is already in the hands of two state-owned companies. The main privatized company that would be affected, Electricidad de Caracas, is controlled by the US-based firm AES Corp.

Full compensation to shareholders

Government officials have made it clear that shareholders in CANTV as well as in any power companies that are taken over will be fully compensated from the funds that the state has accumulated from Venezuelan oil revenues. “Shareholders will receive the fair price of the value of their shares,” Finance Minister Rodrigo Cabezas told the Venezuelan daily El Universal.

When it comes to a truly strategic sector of the Venezuelan economy—oil and natural gas—it is clear that what the Chavez government is contemplating is by no means “nationalization,” at least not in the sense that it was practiced even by bourgeois nationalist governments in an earlier period, such as Peron in Argentina or Cardenas in Mexico.

Venezuela is the fifth-largest oil exporter in the world, with proven reserves of 78 billion barrels and potential heavy oil reserves in the Orinoco oil belt that have been estimated as high as 1.2 trillion barrels. The US gobbles up 60 percent of Venezuelan production.

The Chavez initiative in the oil sector has much in common with the “nationalization” proclaimed by President Evo Morales of Bolivia’s natural gas reserves, though Chavez seems to be forgoing the dramatic effect of sending troops into the oil fields.

It is, in short, an attempt to negotiate with the multinational energy companies operating in the Orinoco oil belt—ExxonMobil, Conoco, Chevron and the French firm Total—a majority stake in oil production for the state-owned PDVSA and a bigger share of the profits reaped by their joint ventures.

US-based energy giants are expected to agree to such negotiations in order to maintain their grip—even if it is reduced—on Venezuela’ oil reserves, a source of immense profits.

The country’s oil minister, Rafael Ramirez, made it clear Monday that the government had no intention of making changes to existing natural gas contracts, signed by Chavez’s own government in 1999, when it opened up that sector to private investment and exploitation.

The major Wall Street financial houses took Chavez’s proclamations about “21st Century socialism” and “permanent revolution” with more than a grain of salt.

“We still do not feel Chavez intends to stamp out the private sector altogether in Venezuela; the nationalization of CANTV and other former public utilities carries symbolic weight,” said JP Morgan.

“We do not see an across-the-board abolition of private property,” Merrill Lynch concurred.

The latter is an understatement. Over the past year, Venezuela’s private sector has grown at a rate of 10.3 percent, more than double the growth rate of the public sector. During this same period, there has been negligible growth in the country’s manufacturing sector, with the official unemployment rate standing at approximately 10 percent.

The main growth has been in the financial sector in Venezuela, which enjoys among the most profitable conditions anywhere in the world. As the Financial Times noted sardonically last August, “Bankers traditionally face firing squads in times of revolution. But in Venezuela, they are having a party.”

The article continued, “rather than nationalise banks, the ‘revolutionary’ distribution of oil money has spawned wealthy individuals who are increasingly making Caracas a magnet for Swiss and other international bankers. And it is not just private bankers who are banking on the revolution.”

The newspaper noted that in 2005, bank assets in Venezuela increased by a full third, from $29.3 billion to $39.8 billion.

In other words, notwithstanding the social welfare programs that Chavez has been able to finance with ballooning oil revenues, the commanding heights of the Venezuelan economy remain firmly under the control of international and domestic finance capital.

The increasingly bonapartist character of his government—included in his proposals for his new term of office are an enabling law allowing him to rule by decree for 18 months—reflects the immense social divide between wealth and poverty that still dominates Venezuelan society.

Chavez’s social measures, as limited as they are, combined with his anti-imperialist rhetoric, are provoking increasing ire in Washington. In his testimony before Congress last week on “global threats,” National Intelligence Director John Negroponte described the Chavez government as a threat to “democracy.”

In 2002, Washington responded to this “threat” by orchestrating a right-wing coup that was aborted only because of mass opposition from Venezuela’s workers and poor. It is certain that the CIA is developing plans for another attempt at overthrowing the Chavez government.

Whether Hugo Chavez has any more familiarity with Trotsky’s theory of permanent revolution than having seen the words imprinted on a book cover is not known. Whatever the case, its central perspective holds true for Venezuela and Latin America as a whole.

It is impossible for these countries to free themselves from the grip of imperialism on the basis of a national revolution led by any section of the bourgeoisie or its representatives—including radicalized military officers. That task can be achieved only by means of the independent political mobilization of the working class as part of an international revolutionary class to put an end to capitalism.

The following “contrarian” piece in the U.S. financial press illustrates Van Auken’s point:


by Mark Turner

Contributing EditorKWR International Advisor

January 10, 2007

“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” (Warren Buffet)

PERU (KWR) -– January 9, 2007 -- When Hugo Chavez made his speech to welcome his new cabinet on 8th January, not much was reported to the citizens of industrialized countries. The only news that reached most news wires was that he was about to nationalize the Venezuelan telephone company along with the electricity suppliers. The ensuing sell-off, starting just over an hour before the close of the New York Stock Exchange, took 15% off the market price of VNT in minutes on high volumes before the stock was halted. The next day, VNT dropped as low as $9.46 when cleared for trading, and finished the day down 27.5% at $12.20.

This doesn’t sound very investor-friendly, thus the title chosen for this article seems a little strange at first glance. But once the polemic, rhetoric, disinformation and plain simple lies told by both business reporters and by Venezuela’s president are stripped away, it becomes obvious to the level-headed investor that Chavez and his detractors provide some gilt-edged opportunities to make profits in the stock market.

This latest episode has thrown up VNT, KRY, GRZ and TX as likely targets for the nimble investor. Let us first look at VNT, the veritable eye of the storm. In his speech, Chavez said (in translation), “We must nationalize all that has been privatized.” He then specifically mentioned CANTV, saying, “Let’s nationalize it!”. CANTV, which trades under the ticker VNT on the NYSE, was taken private in 1991 under ex- president Andres Perez. It is currently run by a consortium that includes Verizon (28% of VNT) and Telefonica de España (6%), as well as other minority shareholders.

Headlines on Tuesday were of the robber–baron type. Most commentators assumed that by nationalization, Chavez was simply going to expropriate the assets of VNT and presumably surround its head office with armed soldiers so that the capitalist pig board members couldn’t get to their desks anymore. This, however, is not likely, and allows us to see the opportunity given to the investor that doesn’t swallow the hype surrounding the issue. Any nationalization of VNT would almost certainly involve compensation to the existing investors. Chavez has more than enough money to buy back VNT thanks to the enormous oil revenues currently swelling the state coffers. The argument for expropriation is flimsy to say the least. Expropriation of assets would certainly cause retaliation from injured parties, and Venezuela has far too much international exposure to imagine itself as living in a socialist vacuum. At the present time, it is not in Chavez’s interests to block sales of oil to the US, which consumes 60% of Venezuelan production. It is also worth remembering that 28% of VNT stock is held by Venezuelan citizens and it is highly doubtful that Chavez would leave them holding worthless share certificates. The stock is popular amongst Venezuelans, as it is considered as somewhat a “jewel in the crown” of local shares having risen by close to 100% in the past year. It also has a good reputation for paying juicy dividends ($1.01 on 4th December 2006) and allows locals to invest in dollars, thus avoiding the high inflation rates suffered by the national Bolivar currency.

Chavez has been made out as a crackpot, a fool and a dictator by the western news services. We believe this picture is biased largely by political interests and does not take into account the reality, particularly the financial reality behind this undoubtedly controversial figure. He aims his public speeches towards his party faithful, and rhetoric of the sort seen on Monday is hardly new to dedicated Chavez- watchers. However, his “social revolution” has not turned its back on the ways of 21st century business, and his pragmatic side comes forward when doing deals with capital-driven states and companies. He drove a hard bargain with oil companies, but evidence suggests it has been a win-win situation, as the oil companies are still happy to do business inside Venezuela. The huge revenues accrued by the Venezuelan state are attractive to all arms of the banking world, and anecdotal reports from Caracas say there has never been a better time to set up financial shop in the capital. Chavez is no fool; nobody who gets re-elected in Latin America can be called naive about the ways of the real world.

Potential investors should ask themselves a couple of simple business questions. Does Chavez want to sever relations with Spain? With the USA? Does he want to throw away his market for oil and cut revenues by half? His well-publicized “Bolivarian revolution” will go forward, but there is little chance of him simply stealing property from the rest of the world. Why antagonize his own clientele? The bluff and bombast from the speech podium is certainly not aimed at the business world and should be taken with a large pinch of salt when cold, hard cash is the issue.

…To conclude, the radical move by the Chavez government is real and in motion. His 2006 re-election has given him the mandate to move forward with his grand plans for a social revolution with less fear for a repeat of the coup d’etat he suffered in 2001. However, those companies with exposure to Venezuela have been priced down by panic sellers and sensationalist reporting. We therefore see this present time as an excellent opportunity to take positions in financially excellent companies trading at a short-term discount that will be resolved over time.

Mark Turner is Latin America equities analyst for Hallgarten and Company.

Van Auken’s criticism of Chavez’s brand of pragmatic populist socialism is an age-old one: is it better to obtain the best conditions for one’s people by taking the world as it is now, or is it better to work longer-term for a whole new arrangement? At least to this point in time, the Chavistas can point to a lot of success in contrast to the revolutionary socialist tradition in Latin America (Che Guevara, for example). But that success does nothing to remove the Tapeworm from the world economy. But Trotskyist theory cannot remove the Tapeworm either, because it is based on a false premise that there is only one human race, once which, at least potentially, has a soul. As Andrew Lobaczewski points out in Political Ponerology (see also this review by Catherine Austin Fitts), social or political theory will create disasters if implemented to the extent that they are based on incorrect views of human nature.

Monday, January 15, 2007

Signs of the Economic Apocalypse, 1-15-07

From Signs of the Times, 1-15-07:

Gold closed at 626.90 dollars an ounce Friday, up 2.9% from $609.30 at the close of the Friday before. The dollar closed at 0.7738 euros Friday, up 0.6% from 0.7691 at the close of the previous Friday. The euro, then, closed at 1.2924 dollars compared to 1.3003 at the end of the week before. Gold in euros would be 485.07, up 3.7% from 468.58 for the week. Oil closed at 52.99 dollars a barrel Friday, down 6.3% from 56.31 at the end of the previous week. Oil in euros would be 41.00 euros a barrel, down 5.6% from 43.31 euros at the close of the Friday before. The gold/oil ratio closed at 11.83, up 9.3% from 10.82 for the week. In U.S. stocks, the Dow closed at a new record, 12,556.08, up 1.3% from 12,398.0 at the close of the week before. The NASDAQ closed at 2,502.82, up 2.8% from 2,434.25 for the week. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.77%, up thirteen basis points from 4.64 at the close of the previous Friday.

Another week of warm weather in the U.S. northeast drove oil prices down sharply last week. The weekly drop of 5.6% could have been even more if not for a late rally on Friday. As oil was dropping, gold was climbing going up almost 3% for the week, pushing the gold/oil ratio up higher than it’s been in two years but not higher than the historical average of 15.2.

But let’s leave the weekly fluctuations of the markets aside for now and look again at how we got here and where we may be going. Mark Faber published a telling allegorical tale of the global economy, perhaps more telling than he realizes. To explain the globalized economy, the real economy versus the asset inflation economy, Faber proposes an island with two tribes. One tribe, making up only 1% of the population he calls the “Smartos.” They are smart but have no morals. The other tribe is very numerous but not so bright and he calls them the “Bushes.” The main alliance is between the Smartos and the elite of the Bushes.

Irreparable Cracks in the Financial System

by Marc Faber

A well-respected independent economist and strategist with a bearish trait told me recently that he wished he could be bearish, but that he couldn't find anything that he thought would disturb the asset markets and the global economy in the foreseeable future. Looking at the "real" global economy and at what people produce in terms of manufactured goods and services (ex-financial services), I would have to agree.

Comparing the current global economic expansion, which began in the US in November 2001, with previous economic expansions, it seems to me that the "real economy" isn't showing any signs of the overheating that, in the past, led to aggressive central bank monetary tightening. So, I am, like my strategist friend with the bearish trait, also impressed by the prospects for the global economy. However, I am increasingly concerned about the inflated asset markets around the world, and about the almost unanimous belief that nothing will ever come between the "Goldilocks" economic conditions and the Fed, in conjunction with the US Treasury standing ready to support markets should they decline meaningfully and disturb the current heavenly asset market conditions.

Let us examine the differences between the "real economy" and the "asset inflation economy" more closely. The real economy is typical of people's daily lives, their income, and their spending. If there is a boom in the real economy, wages and prices will tend to increase and the increased demand will be met by corporations' increased capital spending. The overheated economy eventually brings about a slowdown or a recession, because money becomes tight irrespective of the central bank's monetary policies. The recession then cleans up the system and allows the next expansion to get under way. Put very simplistically, this is the typical business cycle.

In the asset inflation economy, we are dealing with a totally different phenomenon. The higher the asset markets move, the more the increased asset prices can create liquidity. Let us assume an investor owns a real estate or stock portfolio worth 100 and that his borrowings are 50. For whatever reason (usually easy monetary conditions), the value of the portfolio now doubles to 200. Obviously, this allows the investor, if he wants to maintain his leverage at 50% of the asset value, to double his borrowings to 100. With the additional 50 in buying power, the investor can then either spend the money for consumption (as the US consumer has done in the last few years) or acquire more assets.

If he acquires more assets, the investor will drive the asset markets – ceteris paribus – even higher, which will allow him to increase his borrowings further. Now, I am aware of some economists who will dispute the fact that rising asset markets create liquidity. They argue that the seller of a portfolio or real estate or stocks at an inflated price will have to be met by a buyer at the inflated price. So, the increased liquidity of the seller is offset by a diminished liquidity of the buyer. However, the situation isn't quite that simple. Let us assume we are dealing with the market for Van Gogh's paintings, and let's assume that with the exception of just three works, Van Gogh's paintings are all in the hands of museums, foundations, or dedicated art lovers who wouldn't consider selling them except under the most unusual circumstances. Now enter the Russian oligarch who wishes to acquire a Van Gogh at any price. He might pay double the previous price paid for a Van Gogh, for one of the three paintings still available on the market. As a result of this one buyer, every Van Gogh work will now need to be revalued, and, in theory, all the owners of Van Gogh paintings could now increase their borrowings against the value of those works.

Two works by Van Gogh now remain on the market, one of which a hedge fund manager and an oil sheik from the Middle East both wish to acquire. In a bidding war, they push the price of that painting up another 100% above the previously paid price. Again, all of Van Gogh's works will need to be revalued and their owners can increase their borrowings against them. In other words, the buyers on the margin can move asset markets sharply higher in the absence of ready sellers and thus increase, through the additional borrowing power of the works' present owners, the overall liquidity in the system.

Under normal circumstances, the increased borrowings by the present owners would drive up interest rates. However, in a world of rapidly expanding money supply, this may not be the case. Moreover, which owner of a Van Gogh wouldn't mind paying 6% instead of 4.5% interest on his loans if Van Gogh's paintings were appreciating by 30%, or even 100%, per annum? (This is one reason why the Fed doesn't believe it can control spiralling asset prices with monetary policies.) In the real world, we are not dealing with just one Van Gogh market, but with many asset markets, but the point is that the marginal buyers set the price for assets. It should also be clear that not every owner of a Van Gogh will use his borrowing power and leverage his works of art or other assets.

But if an asset bull market has been in existence for a while, more and more investors will become convinced that the up-trend in asset prices will never end and, therefore, they will increasingly use leverage to maximize their gains. But not only that: lenders will also become convinced that asset prices will rise in perpetuity at a higher rate than the lending rate, and they will therefore relax their lending standards. This certainly seems to have occurred in the sub-prime lending industry.

There is one more point to consider. Liquidity isn't evenly distributed. Let's say that on an island there are two tribes. Ninety-nine percent of the population are the "Bushes" and 1% are the "Smartos." The two tribes arrived on the island at about the same time and had little capital at the time. So, initially, both tribes worked very hard in industry and in commerce to acquire wealth. But because of the Smartos' superior education and skills, their frugality, and also partly because of their greed and immorality, they soon acquired significantly more wealth than the Bushes, who, for the most part, were likeable but quite inept. After 50 years, most of the island's businesses were therefore in the hands of the Smartos, who make up just 1% of the population. Being clever, the Smartos generously gave some of their wealth to the tribal leaders of the Bushes, who controlled the entire government apparatus, the military establishment, and much of the land.

For a while this system functioned perfectly well. Among the Bushes there were also some smart people, and they were encouraged to accumulate wealth as well. However, they had to pay an increasingly high price to acquire assets, since most of the island's assets were owned by the Smartos and by the elite of the Bushes who, because of their wealth, never really had to sell any assets.
Cracks in the system began to appear because more and more of the wealth began to be increasingly concentrated in fewer and fewer hands. (According to the Financial Times, the concentration of wealth is extremely high in the United States, with 10% of the population currently holding 70% of the country's wealth, compared to 61% in France, 56% in the UK, 44% in Germany, and 39% in Japan.)

However, the Smartos then stumbled upon another avenue to wealth: globalization. The island was opened to foreign trade and investments, which allowed the business owners to shift their production to low-cost foreign countries and, at the same time, to keep the masses among the Bush tribe happy through the imports of price-deflating consumer goods. In the same way that, in the 18th and 19th centuries, the European settlers of America had exchanged with the Indians worthless beads and booze for land, now the Smartos and the elite of the Bushes exchanged cheap imported goods, whose supply they controlled and from which they earned handsome margins, for assets. As a result, the majority of the population of the Bushes experienced a relative wealth decline compared to the wealth of the Smartos.

Again, this worked perfectly well for a while: the populace was happy to buy deflating consumer goods (like Mr. Faber's wife who, whenever a favorite shoe store holds a sale, immediately buys three pairs instead of one), but it overlooked the fact that its wages and salaries were decreasing in real terms because manufacturing jobs and tradable services were increasingly shifting overseas. For some time this wasn't a problem, because the Smartos had bought the island's central bank. They made sure that sufficient money was made available to the system to sustain the consumption binge, which was largely driven by inflating asset prices. Plenty of liquidity and rising asset prices created among the Bushes the "illusion of wealth." Naturally, the island's trade and current account deficit began to worsen as it consumed significantly more than it produced, but initially that wasn't a problem, for the Smartos had encouraged the Bushes to engage – in the name of all kinds of good, just, and well-meant causes, and without any self-interest whatsoever – in overseas military expeditions, which led foreign creditors to believe in the island's economic and military might, and social stability.

For a time, they were, therefore, perfectly happy to finance the island's growing current account deficits. At the same time, the increase in defense spending shifted wealth from the masses to the elite of the Bushes, who largely controlled the military hardware and procurement industries. As a result, wealth and income inequity widened further as the masses became largely illiquid and had difficulty in maintaining their elevated consumption, while the Smartos and the elite of the Bushes accumulated an ever-increasing share of the national wealth. But never at a loss when it came to creating additional wealth, the Smartos devised another scheme to enrich themselves even further: lending to illiquid households (read sub-prime lending). Not that the Smartos would have lent their own money to these uncreditworthy individuals (they were far too clever for that); for a fat fee, they arranged and encouraged this novel type of financing. Credit card, consumer, and mortgage debts were all securitized and sold to pension funds and asset management companies whose beneficiaries were the majority of Bushes, who accounted, as indicated above, for 99% of the population.

In addition, these securitized products were sold to some credulous foreign investors. By doing so, the Smartos achieved three objectives. They earned large fees, and unloaded the risks indirectly onto the very people who borrowed the money, and onto foreigners. But most importantly, they provided the Bush tribe with a powerful incentive to support their expansionary monetary policies, which ensured continuous asset inflation. After all, any breakdown in the value of assets would have hurt the Bushes the most, since they carried most of the risks by having purchased all the securitized lower-quality financial instruments. But not only that! The Smartos knew that as asset prices increased, their prospective returns would diminish.

But this wasn't an immediate problem, as they promoted increased leverage to boost returns to the investors and at the same time their own fees. This strategy worked, of course, for as long as asset prices appreciated more than the interest that needed to be paid on the loans. On first sight, the debt- and, consequently, asset inflation-driven society of the island seems to work ad infinitum. But in the real world this isn't the case. Sooner or later, the system becomes totally unbalanced and entirely dependent on further asset inflation to sustain the imbalances. It is at that point that even a minor event can act as a catalyst to bring down asset prices and produce either "total," or at least "relative," illiquidity in the system, because a large number of assets whose value has declined no longer cover the loans against which they were acquired. "Total illiquidity" occurs when the central bank, faced with declining asset prices, doesn't take extraordinary measures to support asset prices.

"Relative illiquidity" follows when the central bank implements, in concert with the Treasury, extraordinary monetary and fiscal policies (cutting short-term interest rates to zero, and the aggressive purchase of bonds and stocks) in a desperate effort to support asset prices. In both cases, a degree of illiquidity occurs and depresses asset prices, but in different ways. In the case of "total illiquidity" (1929–1932 and Japan in the 1990s), asset prices tumble across the board in nominal and real terms with the exception of the highest-quality bonds and, possibly, precious metals (flight to safety). In the case of the island's central bank taking extraordinary monetary measures, asset prices don't necessarily decline in nominal terms, and in fact can even continue to appreciate.

However, they collapse in real terms, and against foreign currencies and precious metals. How so? Above, we have seen that the island's asset inflation led to excessive consumption and to growing trade and current account deficits because the Smartos and the elite of the Bushes were quick to understand that much larger capital gains could be obtained by playing the asset inflation game and by manufacturing overseas, than by investing in new production facilities and producing goods on the island.

The growing trade and current account deficits of the island were not immediately a problem, because they were offset by external surpluses in other parts of the world, which were frequently and erroneously labeled as "surplus savings" or a "savings glut." But whatever one wishes to call these surpluses or reserves, it is interesting to note that where they accumulated (mostly in China, Japan, Taiwan, Singapore, and Switzerland), they led to an interest rate structure that was lower than on the island. For the Smartos, this was an extremely fortuitous condition. For one, it was easy to convince the recipients and holders of these rapidly accumulating reserves to invest them in higher yielding assets on the island. In addition, it was for a while extremely profitable to borrow in low-yielding foreign currencies and to invest in relatively high-yielding assets on the island.

Obviously, this all changed when asset prices began to decline and the island's central bank had to take extraordinary measures by aggressively cutting short-term interest rates and supporting asset markets through bond and stock purchases. The interest rate cuts immediately narrowed the spread between the interest rate on the island and foreign currencies and led to a run on the island's currency, not only by foreigners but also by the Smartos, who had known all along that the asset inflation game would one day come to a bitter end. The deleveraging of this carry trade led to "relative illiquidity," which the island's central bank had to offset with even more liquidity injections, which while stabilizing asset prices led to even greater loss of confidence in the soundness of the island's currency, and in its bond market, which by then was mostly owned by foreign creditors.

As Mao Tse Tung had observed much earlier, there was by then "great disorder," but the situation was "excellent" for the Smartos. On the short end, interest rates had been cut so much that they were in no position to compensate for the continuous depreciation of the island's currency. So, the Smartos and the Bush tribe's elite began increasingly to borrow in the island's currency and to invest in foreign assets and precious metals. In fact, the island's central bank, by its market-supporting interventions, encouraged this process. Stocks and bonds were dumped on to the central bank and the Treasury's plunge protection team at still high prices, and the proceeds were immediately transferred to foreign assets and precious metals, which appreciated at an increasing speed compared to the island's assets, which suffered from the continuous depreciation of the currency.

And in order to facilitate this trade, the Smartos, who controlled both the Fed and the Treasury, continued to make positive comments about "a strong currency being in the best interest of the island." Sure, it would have been in the best interest of the island to have a strong currency, but it was certainly not in the best interest of the Smartos, who had devised their last grand plan: shift assets overseas and into precious metals, let the currency of the island collapse, and then repatriate the funds and buy up the remaining assets of the Bush tribe's middle and lower classes at bargain prices since they had never understood that their currency had collapsed against foreign currencies and against gold.

The strategy of the Smartos is exactly that pursued by the psychopaths in our midst. Only instead of them being 1% of the population they may make up as much as 6%. An interesting exercise would be to predict the strategy of the Smartos if they had prior information about a global cataclysm.

The pseudonymous “Werther” posted an article on Counterpunch this week that shows how the Smartos use war:

January 8, 2007
Parable of the Self-Licking Ice Cream Cone
Why We Fight


"War is a racket. It always has been.

"It is possibly the oldest, easily the most profitable, surely the most vicious. It is the only one international in scope. It is the only one in which the profits are reckoned in dollars and the losses in lives."

General Smedley Butler (1935)

As is our habit, we are wont to read The Washington Post, bulletin board of the Beltway illuminati, in Pravda fashion, from back to front, concentrating on subject matter mentioned three quarters of the way through the article. Let us take the Wednesday, 27 December edition of the Meyer-Graham newsletter as an example.

We learn, surprisingly on the front page, that Ethiopia has stepped up attacks on Somalia. Only on the jump page, however, towards the end of the 1,100-word article, does one uncover the Hitchcockian McGuffin:

" . . . U.S. policy in Somalia has been widely criticized for having the opposite of its intended effect, often encouraging the expansion of the [Islamic] Courts movement. This year, the United States supported warlords who called themselves an "anti-terrorism" coalition. The warlords generally bribed [sic. This must be a misstatement intended to mean "sought extortion payments from"] and terrorized ordinary Somalis, who came to despise them. The Islamic Courts came to power as an alternative to the hated warlords, establishing order based on Islamic law village by village and earning widespread support from beleaguered Somalis tired of 15 years of near-anarchy."

So, as the war on terror[ism] spreads through the Horn of Africa with its attendant misery, it just so happens that the United States government helped to fuel it. In its broad outlines, this is just how a $3.5-billion covert operation in Afghanistan two decades ago helped bring us a hole in Lower Manhattan. Or how our covert assistance to a Mesopotamian up-and-comer named Saddam Hussein led, like some Sophoclean tragedy [2], to the current "grave and deteriorating" circumstances in Iraq.

How is it that so many wars have an act of U.S. complicity in their origin? Is it merely the law of unintended consequences, or is there another logic at work? Perhaps the crucial mechanism in Mogadishu, and Kabul, and Baghdad is best described by that hoary Pentagon slang phrase, "the self-licking ice cream cone." [3]

The axiom of the self-licking ice cream cone has many applications, not only in the ignition of wars, but in their conduct. Again, the Post provides a kind of Delphic clue about this mechanism. The 26 December edition has a fascinating piece buried on page 19: "Old Iraq Strategy Lives On in Weekly Progress Reports." [4] The writer, Glenn Kessler, pokes a bit of fun at a series of weekly reports promulgated by the State Department to measure alleged "progress" in Iraq; indeed, this is the gravamen of the piece: how upbeat the reports can be despite a manifestly failed policy.

But again, as with the Somalia story, the lede is buried. Well into the piece, Kessler informs us that the weekly Iraq reports are produced by the consulting firm BearingPoint. But that is not the end of the story:

"The BearingPoint employees, who work out of offices in the State Department, arrange the meetings, set the agendas, take notes and provide summaries of the discussions, the official said. They also maintain the Web site of the U.S. Embassy in Baghdad."

As any veteran of bureaucratic wars surely knows, whoever arranges meetings, sets agendas, and takes the official notes determines the policy, regardless of who is nominally in charge. But who is BearingPoint, and what interest do they have in Iraq? The media watchdog provides the following:

In July of 2003, BearingPoint was awarded a contract by USAID worth $79.5 million to facilitate Iraq's economic recovery with a two-year option worth a total of $240,162,688. Responsibilities in this contract include:

1. Creating Iraq's budget.

2. Writing business law.

3. Setting up tax collection.

4. Laying out trade and customs rules.

5. Privatize state-owned enterprises by auctioning them off or issuing Iraqis shares in the enterprises.

6. Reopen banks and jump-start the private sector by making small loans of $100 to $10,000.

7. Wean Iraqis from the U.N. oil-for-food program, the main source of food for 60% of the population.

8. Issue a new currency and set exchange rates.

One is surprised that BearingPoint is not charged with rewriting Iraq's national anthem and choosing the members of its Olympic team. But, again, who is BearingPoint? That is hardly a name that rolls off the tongue like Microsoft, or Morgan Guaranty Trust.

According to another watchdog,, BearingPoint has an interesting history:

"BearingPoint traces its corporate lineage back over 100 years. In October 2002, KPMG Consulting Inc. changed its name to BearingPoint Inc. KPMG Consulting was formed in 1997 as the consulting division of accounting firm KPMG LLP. An initial public offering on Feb. 8, 2001, marked the official separation of KPMG Consulting from KPMG LLP. BearingPoint was the first of the Big Five consulting firms to separate from its audit and tax parent and become an independent, publicly traded company. The crisis that engulfed the accounting profession in the wake of the Enron/Arthur Andersen scandal later that year hastened the company's decision to change its name in 2002. . . . BearingPoint underwent a dramatic expansion by acquiring most of Arthur Andersen's worldwide consulting operations."

Bingo. The firm responsible for the corrupt accounting that papered over the Enron scandal, the greatest corporate failure in U.S. history, lives on, assimilated by BearingPoint. And it steers U.S. policy on Iraq as the government blindly lurches towards escalation, a policy ostensibly supported by only 11 percent of the U.S. population. [5]

One notes, however, that despite the manifest lack of popular support, the vast flügelhorn of the corporate media continues to sound the strains of the Escalation Waltz. Based on an informal and unscientific survey, we would estimate roughly 60-70 percent of the talking heads on the telescreen are in favor of, metaphorically speaking, feeding more cannon fodder into the Stalingrad pocket. More irritating still is the Zelig-like ubiquity of the truly scary John McCain.

And above it all, on his alabaster throne, sits the President, our Supreme Warlord. While even such a scalawag as Lyndon Johnson knew that an unpopular war is a losing hand for a politician to draw, President Bush seems unperturbed by it all. Many columnists have attributed his attitude to intellectual deficiencies, or irrational stubbornness, or megalomania. But if Bush possessed the IQ of Descartes and the wisdom of Aquinas, he could hardly act otherwise.

As a Texas plutocrat marinated in petroleum, Bush is merely acting out his destiny, and that of his class. Should the reader need reminding, one can always turn to the more iconoclastic foreign press. While the great American dailies are debating whether "we" need 20,000 additional troops or 40,000, or are limning the Napoleonic qualities of the new Iraq commander, General David Petraeus, the London Independent reveals the following:

"Iraq's massive oil reserves, the third-largest in the world, are about to be thrown open for large-scale exploitation by Western oil companies under a controversial law which is expected to come before the Iraqi parliament within days.

"The US government has been involved in drawing up the law, a draft of which has been seen by The Independent on Sunday. It would give big oil companies such as BP, Shell and Exxon 30-year contracts to extract Iraqi crude and allow the first large-scale operation of foreign oil interests in the country since the industry was nationalised in 1972." [6]

Was Auschwitz a German government-run death camp? Or was it just one of I.G. Farben's synthetic rubber factories, subject to a high employee turnover? One may also ask whether Iraq is the central front of the war on terrorism, or merely a profit center for corporations like BearingPoint and Exxon-Mobil.

Werther is the pen name of a Northern Virginia-based defense analyst.


[1] "Ethiopians Closing In On Capital of Somalia," The Washington Post, 27 Dec. 2006.

[2] This is no allusional flight of fancy. The saga of Poppy, Bar, and Dubya has always contained a heavy overlay of Oedipal melodrama. Saddam may usefully stand in as the Sphinx, a demon of destruction and bad luck, according to Hesiod.

[3] "Self-licking ice cream cone" is the descriptor for a self-fulfilling prophecy as described by the 20th century sociologist Robert K. Merton: "The self-fulfilling prophecy is, in the beginning, a false definition of the situation evoking a new behavior which makes the original false conception come true."

[4] "Old Iraq Strategy Lives On In Weekly Progress Reports," The Washington Post, 26 Dec. 2006.

[5] The CNN poll which found this level of support, if accurate, is astounding. Eleven percent of a random sample can probably be found to be in favor of necromancy. Much higher percentages "believe in" flying saucers.

[6] "How the West will make a killing on Iraqi oil riches," Independent [UK], 7 Jan. 2007.

As we mentioned last week while discussing extreme jobs and idle theory, another thing the Smartos do is make us Bushes work so hard and keep so busy we don’t have time or energy to see what they are really doing to us. Idle Theory proponents say that species that work at full capacity are more vulnerable than more idle species. Ran Prieur made the connection between Idle Theory in evolutionary biology and our condition in late capitalism. He elaborated on this last week:

When we talk about activity vs inactivity, there are at least three different levels on which these concepts mean different things. First is nonbiological cyclical motion, like a waterfall. Here constant activity is good, or even necessary. We don't want rivers to dry up, or planets to stop orbiting stars.

Second is normal biological life, like a squirrel gathering nuts. Here you want a balance -- gathering nuts is the squirrel's ecological role, and what it loves to do. But it needs some slack time, because if it's active all the time, it has no room to increase activity, and the first emergency will kill it. On this level, most primitive humans are extremely successful. They spend only a few hours a day on productive activity, which they enjoy, and the rest of the time, even if they're active, they're idle in terms of idle theory, because there's nothing they have to be doing.

Third is you at your crappy job. This is a level that squirrels and healthy primitive tribes would not even understand. All they know is free fun productive activity, and free fun nonproductive activity. In civilization, you're constantly busy doing stuff that's not free, fun, or productive: rearranging fragments of abstract information to enable the destruction of the biosphere because if you don't do it, you'll be denied food and shelter, and die. Civilization is like a game that primitive humans started in their spare time, and then couldn't get out.

Some people say the way out is to find a job you love, to replace bad activity with good activity. The problem is there are not that many lovable jobs, and most of them depend on unlovable jobs, like manufacturing computers. Other people say the way out is investment, which is even more exclusive and exploitative. What I did, and what I write about, is to take the low road:

First, need less. Learn to get by with less money, less stuff, less comfort, less personal space. It's true I have lots of comfort and space when I'm housesitting, but I don't need it -- I'm perfectly willing to squat an unheated shed with a train going by every hour and boil wheat berries on a camp stove, if that's what it takes to avoid wage labor. And just the willingness to go that low gives me power and freedom.

Next, do less. Most people have trouble with this. Forced activity is so pervasive that in its absence, we don't know how to act at all, and we get depressed and lethargic. But I think the only way out is through, to face the emptiness and gradually learn how to fill it with spontaneous action and play. If you can grasp the deep and total wrongness of forced activity, you can see that the deepest freedom is the freedom to say no, and a free world is not only possible -- it's inevitable.

Among the many interesting things Dmitri Orlov, the Russian émigré who writes about the coming economic collapse in the United States from his perspective of having lived through such a thing in Russia, said was that the people who had the worst time of the collapse in Russia were the go-getters. Forced idleness drove them crazy. Orlov warns us that in a post-collapse environment we will have to learn how to little for periods of time. But life after one’s currency can have its rewards, in spite of how hard an adjustment it will be for those of us who have been lucky enough to live in affluent countries:
Unlike the Russians or the Germans, whose historical memory includes one or more episodes of hyperinflation, it is hard for Americans to imagine living in a time when their paper money is not worth its weight in toilet paper. But such conditions have been known to occur. Savings boil off into the ether. People who still receive paychecks or retirement checks cash them immediately, and do their best to buy the things they need to survive as quickly as they can, before the prices go up again.

There are some steps you can take to prepare yourself for life without money. For a time, you might not have an income at all, or an income so meager it will not be enough for even one meal a day, so find out just how little money you need to stay active and healthy. Learn to rely on family, friends, and acquaintances. Find out what you can take from them, and what you have to offer in return.

Perhaps most importantly, assume that your retirement income, whether government or private, will in due course become quite close to zero, and make some other arrangements for your old age. If you have children, start buttering them up now – you will need their help to survive in your dotage. If you do not have children, then think about having some, or adopting one or two. If you do not have or want children, then be sure to have some good friends who are younger than you.

For each economic arrangement involving money, try to come up with an alternative arrangement that does not involve money. For example, if you pay a baby-sitter, try to find a baby-sitter who is willing to work in exchange for lessons. If you pay rent, find a caretaker situation where you pay with your labor. If you pay for food, start growing your own food.

As you are learning to live with less and less money, you will inevitably find that the money system works to your disadvantage.
If you have debt, it becomes harder and harder to make the payments. If you own property, it becomes harder and harder to afford the taxes. The money system takes a bite out of everything you do. But this is true only if your economic relationships are monetized – if they have monetary value and involve the exchange of money. As you try to reduce your dependence on the money economy, you will need to invent ways to demonetize your life, and that of the people around you.

Savings and personal property can be transformed into the stock in trade of human relationships, which then give rise to reciprocal flows of gifts and favors – efficient, private, and customized to personal needs. This requires a completely different mindset from that cultivated by the consumer society, which strives to standardize and reduce everything, including human relationships, to a client-server paradigm, in which money flows in one direction, while products and services flow in the opposite direction. Customer A gets the same thing as customer B, for the same price.

This is very inefficient from a personal perspective. Resources are squandered on new products whereas reused ones can work just as well. Everyone is forced to make do with mediocre, off-the-shelf products that are designed for planned obsolescence and do not suit them as well as one crafted to suit their specific needs. A commodity product can be manufactured on the opposite side of the planet, whereas a custom one is likely to be made locally, providing work for you and the people in your community. But this is also very efficient, from the point of view of extracting profits and concentrating wealth while depleting natural resources and destroying the environment. However, this is not the sort of efficiency you should be concerned with: it is not in your interest.

This, then, is the correct stance vis à vis the money economy. You should appear to have no money or significant possessions. But you should have access to resources, such as food, clothing, medicine, places to stay and work, and even money. What you do with your money is up to you. For example, you can simply misplace it, the way squirrels do with nuts and acorns. Or you can convert it into communal property of one sort or another. You should avoid getting paid, but you should accept gifts, and, of course, give gifts in return. You should never work for money, but always donate your time and effort charitably. You should have a minimum of personal possessions, but plenty to share with others. Developing such a stance is hard, but, once you do, life actually gets better. Moreover, by adopting such a stance, you become collapse-proof.

Orlov is well worth listening to. Learning from his experience may help make the coming years less traumatic. Knowledge protects. All is lessons, but the earlier one learns the lessons the better.