Signs of the Economic Apocalypse, 2-19-07

Gold closed at 673.00 dollars an ounce Friday, up 0.2% from $671.70 at the close of the previous Friday. The dollar closed at 0.7611 euros Friday, down 1.0% from 0.7688 euros at the previous week’s close. The euro closed at 1.3140 dollars compared to 1.3008 at the end of the week before. Gold in euros would be 512.18 euros an ounce, down 0.8% from 516.37 euros for the week. Oil closed at 59.28 dollars a barrel Friday, down 1.0% from 59.89 at the close of the previous Friday. Oil in euros would be 45.11 euros a barrel, down 2.1% from 46.04 at the end of the week before. The gold/oil ratio closed at 11.35 Friday, up 1.2% from 11.22 for the week. In U.S. stocks, the Dow closed at 12,767.57 Friday, up 1.5% from 12,580.83 at the close of the previous Friday. The NASDAQ closed at 2,496.31, up 1.5% from 2,459.82 the Friday before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.69%, down nine basis points from 4.78 for the week.

Gold continued its rise last week as the dollar continued a gentle slide against the euro. Oil remains weak. The drop in oil from the high last summer of more than $75 a barrel. Now given the unravelling of the U.S. occupation of Iraq since then, and given the threat of an expanded war against Iran in the Persian Gulf one would think that oil would have soared. The mistake people make in thinking about this is to assume that the United States under Bush is trying to keep oil prices low.

What if, in fact, they are afraid of low oil prices? The other mistake people make is to assume that the United States under Bush wants stability in the Middle East. What if, in fact, their decisions have been based on the wish to make the Middle East more unstable? Put these two assumptions together and lots of things make sense that didn’t before. Imagine if the U.S. was “successful” in its invasion and Iraq oil was flowing freely. What would the price of oil look like then? More importantly, what would the profits of Exxon-Mobil look like then?

And since the long-term strategy of Israel to destabilize their Arab neighbors, to encourage Islamic fundamentalism, and to undermine secular regimes dovetails closely with big oil’s interest grabbing control of reserves while keeping supplies low enough to keep prices high, suddenly all the “mistakes” in Iraq don’t seem so much like mistakes.

Juan Cole compiled recent reports on the Iraqi oil industry that show the plan has been a big success. The U.S. has large numbers of soldiers near large deposits and the flow of oil out of the ground has decreased:

Ben Lando of UPI reports on the remarks of former Iraqi petroleum minister Issam al-Chalabi (no relation) at an oil conference in Houston:

The global energy information firm Platts reports Iraq’s production in January dropped to an average 1.66 million barrels a day from nearly 1.9 million in December. Around 96 percent of Iraq`s budget comes from selling oil, and exports dropped to about 1.2 million barrels, Chalabi said...

‘They can`t increase; the only way is for production to go down,’ said Mohamed Zine, regional manager of the Middle East for energy analyst firm IHS.

‘There’s been no improvement, nothing,’ said Zine, whose views on the situation in Iraq are often less dramatic than Chalabi’s. ‘It’s getting worse.’

Before the war, Iraq was producing 2.6 mn barrels a day, with a capacity of 3. In January it could only do 1.6 mn barrels a day. There are widespread reports of rapid deterioration of facilities and fields being polluted with water. Lando adds:

Iraq also pays billions of dollars annually to purchase oil products for transportation, heating and cooking, a change from before the war when Iraq sold such products, Chalabi said . . . Last year an oil ministry spokesman said smuggling is worth $700 million monthly that should go to federal coffers.

It may be that we need to re-examine the assumption that nation-states act in their perceived best interests. Certainly, the state actors are acting in their best interests, but, in a world dominated by a global kleptocracy (rule by thieves) they may not be acting in the best interests of the institutions they run. Just as an officer of a corporation almost always acts in the best interest of him- or herself, but may not act in the best interest of the corporation. In the example of Iraqi oil, Cheney or Bush may be acting in the best interests of Exxon-Mobil (or Israel) but not that of the United States. Another way of putting it would be that all states are failed states.

The US and Israel: The Real Failed States

By Paul Craig Roberts

February 5, 2007

Growing references by the US and Israel to the Muslim Middle East as a collection of failed states are part of the propaganda campaign to strip legitimacy from Muslim states and set them up for attack. These accusations spring from the hubris of many Israelis, who see themselves as "God's Chosen People," a guarantee of immunity instead of a call to responsibility, and many Americans, who regard their country as "a city upon a hill" that is "the light of the world." But do the US and Israel fit the profile of successful states, or are they failed states themselves?

A compelling case can be made that the US and Israel are failed states. Israel allegedly is a democracy, but it is controlled by a minority of Zionist zealots who commit atrocities against Palestinians in order to provoke terrorist acts that are then used to perpetuate the right-wing's hold on political power. Israel has perfected blowback as a tool of political control. The Israeli state relies entirely on coercion and has no diplomacy. It stands isolated in the world except for the US, which sustains Israel's existence with money, military weapons, and the US veto in the United Nations.

Israel survives on life support from the US. A state that cannot exist without outside support is a failed state.

What about the United States? The US is an even greater failure. Its existence is not dependent on life support from outside. The US has failed in another way. Not only has the state failed, but the society as well.

…The United States is a failed state, because in the US it is not possible for leadership to emerge. Politics is controlled by powerful interest groups, such as AIPAC, the military-industrial complex, transnational corporations, and "security" agencies that are accumulating vast amounts of unaccountable power. The American people spoke in November and it means nothing whatsoever.

The people are enfeebled because the media no longer has independence. The US media serves as propagandist for the state. It cannot be otherwise in a highly concentrated media run not by journalists but by advertising executives protecting stock values that derive from federal broadcast licenses granted by the state.

Like the three monkeys, Congress sees no evil, the media speaks no evil, and the people hear no evil. In the US "news" consists of the government's propaganda. "News" in America is exactly like the "news" in George Orwell's 1984.

The US is a failed state, because it is not true to any of the principles upon which it was established. All over the world today, America is seen as a rogue state, a hegemonic evil, and as the greatest threat to peace and stability. In its new identify, America is the total opposite of the Founding Fathers intention. There is no greater failure than that.

Academics differentiate between failed states and rogue states. The US and Israel meet both criteria. The US and Israel lead the world in aggressive military actions and in killings of civilian populations. Both countries meet the main indicators of failed states as published in Foreign Policy's 2005 Failed States Index.

The leading indicators of failed states are inequality (not merely poverty), "criminalization or delegitimization of the state, which occurs when state institutions are regarded as corrupt, illegal, or ineffective," and "demographic factors, especially population pressures stemming from refugees" and "internally displaced populations."

All economic indicators show that income and wealth inequality is rapidly increasing in the US. The growth in inequality is the result of the state's policy that favors shareholders and corporate executives at the expense of American workers.

The income differences between Israelis and ghettoized Palestinians are huge.
Trials and investigations of leading political figures in the US and Israel are an ongoing occurrence. Currently, the former chief-of-staff of the vice president of the US is on trial for lying to the FBI in an attempt to obstruct an investigation into the Bush Regime's illegal disclosure of an undercover CIA operative. The accused claims he is the fall guy for higher ups.

In Israel the president of the country is accused of rape and faces indictment.
Both the US and Israel routinely ignore international law and are accused of committing war crimes by human rights organizations. The US Congress stands revealed as totally ineffective and unwilling to constrain the executive. The American people have learned that they cannot change the government's policies through elections. By fomenting the demise of the civil liberties that they are sworn to uphold, President Bush and Attorney General Gonzales have delegitimized the American state, turning it into an instrument of oppression.

Israel's policies in the West Bank have displaced a million Palestinians, forcing them to be refugees from their own land. Jordan is filled with Palestinian refugees, and Palestinian existence in the West Bank is being increasingly confined to ghettos cut off from farm land, schools, medical care and from other Palestinians. President Jimmy Carter has described Israeli-occupied Palestine as "apartheid."

For decades in the face of public opposition the US government has encouraged massive legal and illegal immigration of diverse peoples whose failure to assimilate is balkanizing the US population. Economic refugees from Mexico are changing the culture and allegiance of entire sections of the American southwest, and racial animosities are on the rise.

In a recent interview, Noam Chomsky defined one characteristic of a failed state as a "democratic deficit, that is, a substantial gap between public policy and public opinion." We see this gap in Bush's decision to escalate the war in Iraq despite the opposition of 70% of the American public. What does democracy mean if elected leaders ignore public opinion?

Another characteristic of failed states is the failure to protect their own citizens. Israel's aggressive policies against Palestinians provoke terror attacks on Israeli citizens. These attacks are then used to justify more oppression of Palestinians, which leads to more terror. Bush's military aggression in the Middle East is the main cause of any terror threats that Americans now face.

Another characteristic of a failed state is the departure of citizens. Many Israelis, seeing no future for Israel in the government's hostility to Arabs, are leaving Israel. Among Israelis themselves, the legitimacy of the Israeli state is so endangered that the Knesset has just passed a law to revoke the citizenship of "unpatriotic" Israelis.

In the US a large percentage of the population has lost confidence in the government's veracity. Polls show that 40% of Americans do not believe the government's story that the 9/11 attacks were the work of Arab terrorists. Many believe the attack was a "false flag" operation carried out by elements in the Bush Regime in order to create public acceptance for its planned invasions in the Middle East.

…The case against Israel and the US does not preclude some Muslim states from also meeting the criteria for failure. However, Iraq, an artificial creation of Western colonial powers, was driven into failure and civil war by American aggression. Iran, a nation with a 5,000 year history, is certainly not a failed state. The main failed states in the Middle East are those that are US puppets. They represent American hegemony, not the interests of their people.

What the US and Israel are attempting to do is to turn the entire Muslim Middle East into failed states, that is, into puppet regimes. By extending their hegemony in the Middle East, the US and Israel hope to prolong their own failed existence.

Roberts said in the article above that the U.S. is not dependent on outside sources for its existence, but it could be said that it is dependent on foreign central bank purchases of U.S. government debt for its economic and political strength. Max Fraad Wolf has some interesting numbers and observations about that:

Imbalance and Privilege: Hedge Fund America

Max Fraad Wolf

February 15, 2007

There are some strange facts about the asset and trade positions of the US economy in our globalizing world. The US runs massive and growing trade deficits, is borrowing at a clip that would arouse the suspicions of a casino pit boss, and has been selling her assets to anyone who will buy. In the last 24 months the US balance on goods and services comes in just shy of -$1.5 trillion. Across the same period we have sunk further into debt to the rest of the world.

As a result of all that short fall we have been selling assets and borrowing. The Net International Investment Position (NIIP) is the Bureau of Economic Analysis (BEA) broadest measure of US owned foreign assets less foreign owned US assets. The chart above uses data from line 2 of the BEA data on market valuation of US NIIP in millions of dollars taken annually 1982-2005… [T]here has been a dramatic and sustained deterioration in the US NIIP over the last several decades. Between 1986 and 1988 America transformed herself from creditor to the world to debtor extraordinaire. We have never looked back, nor have we been forced to.

We have enjoyed positive net income from our increasingly larger negative total holding of foreign assets. This has partially insulated us from instability, Dollar plunges and rising interest rates. Declines in our currency get help from those most hurt- foreign owners of US assets. As Greenbacks fall we increase our positive income stream because the value of our assets rises and the value of our liabilities falls. Our imports are linked closely to or pegged to the dollar and our export markets are less so. Thus, falling dollars impose massive cost on asset holders and trading partners, reducing the regularity and severity of episodes. At least that has been true thus far. Spiking interest rates and falling Dollars have neither regularly nor, painfully recurred. There has been no forced rebalancing as economic theory suggests. Herein lays the source of much trouble and many sound forecasts gone awry.

Many have seen the growing negativity of net assets and predicted a coming dollar downdraft and violent rebalancing. Dollar slides have occurred- sometimes rapidly and to destabilizing effect. There have been episodes of rebalancing, but they are few and the trend is still clearly away from balance. US NIIP has continued down, beyond the targets advertised as hard constraints. We have avoided the forecast costs. How? Why?

There are many and complex answers to this question. Key among the factors is our persistent ability to attract copious capital- at fairly low interest rates and with no risk premium associated with rising indebtedness. Our trade deficit’s net outflow of dollars comes back as purchases of US assets and loans to US borrowers. The world buys our debt, at low yields and across maturities. They don’t just buy, they hold. They hold come hell or high water. Our foreign friends also undertake direct investment here. Their returns, even unadjusted for currency, are terrible. Our returns on foreign investment are much, much higher. It is estimated that American assets overseas outperformed foreign assets invested in the US by 210 basis points 1952-2004 and by just shy of 300 basis points 1973-2004. Thus, our dwindling net assets are more than offset by vastly superior yields. It has helped us that we tend to acquire riskier assets, equities and Foreign Direct Investment (FDI), while they snap up debt. Rather amazingly, over past decades, the return to US FDI is over 400 basis points higher than the return to foreign FDI in the US.

We are also allowed to borrow in Dollars. Our foreign assets are over 75% non-Dollar denominated. This means our assets grow and our liabilities shrink in value as the Dollar falls. Most importantly, we have managed to earn more with less and less net foreign assets than they have managed to earn with more and more net US assets… In other times and places such arrangements have been referred to as tribute and were not handled through global “free” asset markets. Today they are. It might be worthy of note that the more unstable floating exchange rate period has been very kind to the US. Money comes to America for safety and to fund the world’s consumer demand. Thus, we invest according to portfolio theory getting maximum cash returns and they maximize across a broad range of non-cash-return considerations.

…There are a few leading “explanations” for the superior returns of US assets abroad. The least interesting is called the “Dark Matter” theory and basically explains away the size of our NIIP as a failure to accurately measure complex and non-quantitative US assets held abroad. This merits little comment and recalls the classic line from Young Frankenstein, when the hunchback responds to the obvious question with “what hump?” On the more plausible side are explanations focused on the privileged and unique position of the US as the guarantor of liquidity and the printer of the global reserve currency. America is able to borrow cheaply and lend dear with lower risk premiums attached to her debt. This allows us to act as banker to the world skimming off an “intermediation” fee that allows positive returns on portfolio maturity and quality composition. This has some explanatory power. However, it would seem we are doing everything possible to cancel this advantage without appearing to lose the returns associated. A more rigorous and complex version of the history and measure of this oddity is well told with supporting data in World Banker to World Venture Capitalist, by Pierre-Olivier Gourinchas and Helene Rey/

Gourinchas and Rey divide the reasons for persistent positive returns on declining US owned assets abroad into two broad categories. The first source of positive returns has to do with the relative composition of US versus foreign held assets. The second has to do with the returns on these assets. Here we discover that the US has a preference for equity and foreign direct investment (FDI), while the rest of the world has accumulated trillions in US Government debt securities. We hold riskier assets as a much larger portion of our portfolio. In addition, US FDI investment abroad earns much higher returns than foreign FDI in the US. We run much more leverage, higher risk and therefore, earn higher returns. The US even enjoys superior returns on its FDI compared to foreigners’ FDI here. The US functions like a leverage loving hedge fund, hunting down and eating alpha. What this says about the others in the global portfolio allocation game, I leave to you to decide. All are acting in self-interest and all are aware of what they are doing. None seem to see a palatable alternative.

Others have added valuable elements to our understanding of NIIP anomalies. Some suggest that profits are reported outside the US where taxes are lower, artificially reducing the reported returns here. Many hold that foreign firms buy here for political reasons or to gain access to our market. I would add funding our trade shortfall as a leading motivation. Many who buy and hold do so to defend favorable exchange rates, curry favor and provide credit to the US State and consumer. This is a payment to continue the world economic and political order.

Before leaving you to ponder all this, we need to address what it means that we are no longer above water in terms of the income from our negative net assets. It likely means building pressure on the dollar. If and when this occurs, it means pain to foreign creditors and possible political risk. The sheer size of our negative NIIP is flirting with offsetting the past advantage of positive net income. Rebalance will occur, our relative returns will rise further, or this former support will stay a drag. This signals the end of a support for our over indebtedness, although that may make time to manifest. It begs a bigger question for the rest of the world. Why is it so vital for them to subsidize us so much and for so long? What will happen to their swollen positions in low yielding Dollar assets? Last but not least, if America is a leveraged hedge fund among nations, should Uncle Sam really be casting stones at the private sector firms mirroring US macroeconomic strategy?

One way to boil down what Wolf said is that no state is really acting in its own best interests, not the United States and not those countries buying U.S. debt. Nothing makes sense if we assume that states act in their nation’s best interest but much more makes sense if we assume that state actors (whoever they really are) act in their own best interests.

Inflation, currency collapses, they don’t care about that. Money can be made and power expanded in any situation as long as you know the timing of the shifts in direction. U.S. debt cannot be expanded forever, nor can a currency collapse and economic depression be postponed forever. It will probably happen soon triggered by some “unforeseen” event that many people will actually have foreseen.

The point we may be at now is the point in blowing up balloon that the size doesn’t grow as much but the internal pressure increases more rapidly. This is the point just before a balloon pops, if more air (money?) is pushed in. The massive, global size of this balloon means that the “shock and awe” will stun the public into accepting the clampdown. If they succeed in their plans, global total despotism will spell the end of neoliberal free-market globalism. Of course, the internet will have to go, too.

In fact, there has been some odd weather on the internet lately. Two of the biggest alternative news sites (Signs of the Times and another one) were down for several days last week. The recent attack on the root DNS nodes of the internet still troubles the sleep of those who think about such things. Here is an interesting post from Kevin at Cryptogon:

The New PSYOP Payload: Bird Flu and the Collapse of the Internet

February 14th, 2007

I’m still paying attention to the fallout from the incident involving the root DNS nodes. In the course of following that story, I came across the Strong Angel III operation, which proposed a scenario involving a pandemic avian flu outbreak with follow-on strategic information warfare attacks.

Today, Slashdot linked to a story from last June that I hadn’t come across:
Would the Bird Flu Kill the Internet, Too? Long quote, but stick with it, especially the part near the end:

If a bird flu pandemic sweeps the nation, we could avoid infection by working from home via the Internet.

Or, hammered by overuse, the Internet could shut down within two to four days of an outbreak, eliminating telecommuting as a viable option.
Disturbingly, that was one finding of a simulation, or war game, held in January in Davos, Switzerland, by the World Economic Forum and management consulting firm Booz Allen Hamilton Inc. More than 30 senior industry and governmental executives played out the arrival of the flu in Germany from Eastern Europe — and the results weren’t pretty.

“We assumed total absentees of 30% to 60% trying to work from home, which would have overwhelmed the Internet,” said participant Bill Thoet, vice president of Booz Allen Hamilton. “We did not assume that the backbone would be gone, but that the edge of the network, where everyone was trying to access their office from home, would be overwhelmed. The absence of maintenance was also a factor. The person who brought up the problem was himself a CEO of an Internet service provider.

“The conclusion [of imminent collapse] was not absolute, and the situation was not digitally simulated, but the idea of everyone working from home appears untenable,” Thoet said.

On this side of the Atlantic, predictions about how the Internet would fare in the face of a pandemic are less dire.

“We don’t believe that the Internet will be compromised within a matter of hours or days,” said Brent Woodworth, worldwide manager for IBM’s Crisis Response Team, which does consulting on disaster preparedness. “Most Internet traffic is reroutable, and as different areas are affected at different rates by a pandemic, the networks could anticipate increased traffic and adjust accordingly — with the caveat that critical components will be maintained.”

I’m not going to even deal with the fact that Booz Allen Hamilton Inc. was involved with this, or that the topic was addressed at the annual World Economic Forum gathering in Davos, Switzerland. Someone could probably make a career out of following up those points alone.

I want to focus on nine words from the excerpt above. I’m sure you propellerheads already know which nine words I’m talking about:

…With the caveat that critical components will be maintained.

One more time, from my informal essay on information warfare written in 2002:

You always hear that the Internet was designed to route information around dead or crowded nodes. Well, what you don’t hear is that this theory only applies when the amount of traffic on the system DOES NOT OVERWHELM the routers, switches and communications media. If transcon and intercity OC-192s and OC-768s start going down, the sudden traffic overflow onto the lower tiered intercity connections will bring everything to a grinding halt. Couple that with attacks on root DNS nodes and DOS attacks on systems still standing…

Put a fork in it, ladies and gentlemen. It’s done.

But wait, there’s more. This was just published yesterday: Flu Pandemic Could Choke Internet, Requiring Usage Restrictions:

Many companies and government agencies are counting on legions of teleworkers to keep their operations running in the event of an influenza pandemic. But those plans may quickly fall apart as millions of people turn to the Internet for news and even entertainment, potentially producing a bandwidth-choking surge in online traffic.

Such a surge would almost certainly prompt calls to restrict or prioritize traffic, such as blocking video transmissions wherever possible, according to business continuity planners who gathered on Friday at a SunGard Availability Systems hot-site facility in northern New Jersey to consider the impact of a pandemic on the Internet.

Businesses as well as home users likely would be asked to voluntarily restrict high-bandwidth traffic, the planners said. And if asking didn’t work, they warned, government action to restrict traffic might well follow.

“Is there a need for a YouTube during a national emergency?” asked John Thomas, vice president of enterprise systems at a large, New York-based financial institution that he asked not be identified.

Whether the avian flu will morph into a human pandemic is unclear. But if it does, hundreds of thousands, if not millions, of deaths could result worldwide. To try to limit a pandemic’s spread, many people will seek to work from home. Consequently, “the demand for communication will soar,” said Renate Noone, vice president of professional services at SunGard’s Availability Services unit.

Out of the vast cloud banks of speculative collapse theories, They seem to like this Bird Flu / Internet Collapse dog and pony show the most.

Remember what I said about that astonishing Brzezinski episode?

I don’t think that it’s possible to know which trick is going to be pulled with any precision. But they’re going to have to try to fit ten pounds of shit into a five pound bag, and soon. The question is how to blame “the terrorists” for the crash without the thing leading to nuclear war. I’m guessing that this Brzezinski thing is like saying, “Don’t do it ‘that’ way. Go back to the drawing board. We don’t want it to play out like ‘that.’” Iraq is clearly out of control. Add Iran to the mix? I don’t see how they maintain any level of control (militarily, politically, economically, take your pick) with an order of magnitude increase in the chaos on the ground. I think this crossed Brzezinski’s mind, and the minds of his handlers.

Is it possible that “the terrorists” have become too ridiculous of a meme for even the average imbecile on the street to believe anymore? The problem with 9/11 is that the dust settled too quickly. Uncomfortable questions started appearing way too fast… I don’t personally know anyone who believes the official 9/11 story anymore.

…So, how could They improve on “the terroristst” PSYOP payload?

It’s impossible to know for sure…

But if the Internet goes down, life as you know it ends and soldiers are going door to door making sure that you have received your required “vaccination” against whatever .mil engineered plague has just been released, you’ll pretty much have your answer.

As Kevin points out, those who are trying to take complete control need just enough chaos to open the door for their clampdown but not too much chaos. That might lead to unforeseen events. There lies the window of opportunity for those who want a freer, more creative future. But that opportunity can only be seized if enough people have practical, accurate knowledge of human nature and of the nature of that “other human race,” the psychopaths. To get an idea of what that type of knowledge would entail, see Andrew Lobaczewski’s Political Ponerology.