Monday, January 21, 2008

Signs of the Economic Apocalypse, 1-21-08


Gold closed at 885.20 dollars an ounce Friday, down 1.4% from $897.40 for the week. The dollar closed at 0.6843 euros Friday, up 1.1% from 0.6768 at the close of the previous week. That put the euro at 1.4613 dollars compared to 1.4776 the Friday before. Gold in euros would be 605.76 euros an ounce, down 0.3% from 607.34 at the close of the previous Friday. Oil closed at 90.62 dollars a barrel Friday, down 2.3% from $92.73 for the week. Oil in euros would be 62.01 euros a barrel, down 1.2% from 62.75 at the close of the Friday before. The gold/oil ratio closed at 9.77 Friday, up 0.9% from 9.68 at the close of the previous week. In U.S. stocks the Dow closed at 12,099.30 Friday, down 4.2% from 12,606.30 at the end of the week before. The NASDAQ closed at 2,340.02 Friday, down 4.3% from 2,439.94 for the week. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.63%, down 15 basis points from 3.78 for the week.

The continued fall in the stock market has frightened the general public and the insiders, it seems. Hardly anyone now says there won’t be a recession. Predicting recession seems to be a bullish position now, with the bears predicting a depression or even a collapse.

US bank losses intensify recession fears

Patrick Martin

15 January 2008

Two more major banks reported heavy mortgage and consumer-loan losses Monday for the fourth quarter of 2007, reinforcing fears that that US financial crisis will likely trigger a recession, not only in America, but worldwide.

M&T Bank, based in Buffalo, New York, reported a 70 percent decline in earnings for the fourth quarter, largely due to losses on Collateralized Debt Obligations, the financial instrument widely used to transform home mortgages into tradeable securities.

Sovereign Bancorp of Philadelphia said it would take a $1.6 billion write-off for the fourth quarter, much of it related to mortgage lending. However, $600 million of the loss was due to defaults on consumer loans, an indication that the financial crisis is spreading. Sovereign said it had stopped issuing auto loans in seven of the 15 states in which it does business—Nevada, Utah, Arizona, Florida, Georgia and North and South Carolina.

Also on Monday, CNBC reported that the biggest US bank, Citigroup, will announce a colossal write-off of as much as $24 billion and the elimination of as many as 24,000 jobs. The bank is to report its fourth-quarter earnings Tuesday, and is also expected to announce a cut in its dividend.

Citigroup has been scouring the Middle East and Asia for investors in a position to take multi-billion-dollar stakes. Among those said to be involved is Prince Alwaleed bin Talal of Saudi Arabia. The bank is seeking to raise as much as $15 billion in new capital. On Monday, the state-owned China Development bank decided not to go ahead with a proposed investment of $2 billion in the company, forcing Citigroup to seek other benefactors.

The Financial Times reported Monday that Merrill Lynch, the largest US stockbroker, is seeking to raise an additional $4 billion in new capital, with the Kuwait Investment Authority as the leading candidate. Merrill Lynch is expected to write off as much as $14 billion in losses and lay off up to 1,000 workers.

The spectacle of giant US financial institutions going hat in hand to the oil sheiks and the government investment agencies of China, Taiwan and Singapore is one indicator of the deteriorating world position of American capitalism.

Another is the continued fall in the dollar, both against the currencies of rival capitalist powers, and against gold and other precious metals. Gold topped the $900 an ounce mark Monday in London trading, at one point hitting $914, an all time record. Platinum set a new record of $1,587 an ounce, while silver hit $16.58 an ounce, the highest figure in 27 years.

The dollar dropped to a record low of 1.0912 Swiss francs, while also hitting seven-week lows against the euro and the yen. At $1.4890 to the euro, the dollar is near to breaking the 1.50 barrier. That is widely regarded as a psychological milestone which could produce a much wider sell-off of dollars as countries currently accumulating dollars—especially the oil states and Asian exporters—seek to shift their surpluses to euros, yen or a basket of currencies more likely to retain their value.

The latest dollar plunge was said to be in response to comments last week by Federal Reserve Board chairman Ben Bernanke, in which he pledged “substantive additional action” to prop up the US economy, a statement widely viewed as a pledge to continue cutting US interest rates by at least a half percentage point this month.

Further cuts in US interest rates, carried out at the behest of Wall Street to stave off a collapse of confidence in the financial system, ultimately make the crisis even worse, since reducing the rate of return impels foreign investors to dump their dollar-denominated assets and shift their holdings into other, more lucrative, investments.

Exerting continuous pressure on the value of the dollar is the gargantuan US trade deficit, which hit its highest monthly total in 14 months last November, according to figures released by the US Commerce Department January 11. The trade deficit shot up 9.3 percent to $63.1 billion, much more than expected, driven by a 16.3 percent rise in the cost of imported oil. Oil imports hit $34.4 billion, accounting for more than half the net deficit.

Retail sales figures from December, to be announced publicly on Tuesday, are expected to show the combined impact on consumer spending of higher gasoline and home heating costs and plunging home values. An actual decline in retail sales in December, compared to the same month the year before, would be the first such negative reading since June.
Sales reports from individual retailers already suggest the dimensions of the downturn in consumer spending, with Macy’s reporting a 7.9 percent decline in same-store sales in December 2007, compared to December 2006. Kohl’s reported an 11 percent drop and Nordstrom a 4 percent drop. The broad decline is an indication that upscale as well as middle-income consumers are cutting back.

Other figures detailed the expanding dimensions of the home mortgage crisis, which is becoming a more generalized crisis of consumer credit:

* A Mortgage Bankers Association survey found that a record 18.81 percent of the nearly 3 million sub-prime adjustable-rate loans issued by its members were already past due.

* Freddie Mac, the big mortgage finance company, found that homeowners refinancing their mortgages were able to extract $20 billion less in the third quarter than the second. The $60 billion in home equity extracted was the lowest since the first quarter of 2005, and indicates that far less such cash will be available for consumer spending.

* The American Bankers Association found that delinquency rates for home equity lines of credit had climbed to their highest level in 10 years at the end of September.

* The Federal Reserve Board reported last week that total outstanding credit card debt rose at an 11.3 percent annual rate in November 2007. For the year, credit card debt is up 7.4 percent to $937.5 trillion, compared to increases of from 2 to 4 percent between 2003 and 2005.

The growing indebtedness of consumers, combined with the falloff of spending, demonstrates that millions of households, working class and middle class, are going further into debt just to finance their day-to-day expenses. Any new expenses can lead to major financial difficulties.

In the face of these figures, the sudden flurry of proposals by the political representatives of big business—the Bush administration, Congress, and the Democratic and Republican candidates—resemble nothing so much as the reorganization of the deck chairs on the Titanic.

White House officials told the press last week that Bush would propose a stimulus package for the US economy in his State of the Union speech scheduled for January 28, although no details had been worked out yet. Treasury Secretary Henry Paulson said January 11 that the US economy had slowed “rather materially” and that “time is of the essence” in initiating any stimulus package.

House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid, the two leading congressional Democrats, sent a joint letter to Bush Friday saying, “We want to work with you.” The letter received a favorable White House response, and Pelosi met with Fed chief Bernanke Monday to discuss what concrete actions could be taken.

Some combination of tax cuts for business, tax rebates for the working poor and a limited extension of unemployment benefits or home heating assistance is the likely outcome of such discussions, with a total amount estimated at $50 to $100 billion. Even these proposals are problematic, however, since congressional Republicans could block such measures, particularly those targeted to lower-income families.

The presidential candidates have chimed in, with the Republican candidates proposing more tax cuts for business and the wealthy—which would do nothing to alleviate the spreading economic distress among working people—and the Democrats offering stimulus packages that would amount to little more than band-aids.

Hillary Clinton’s plan, released Friday, calls for $70 billion in stimulus, including relief for homeowners facing foreclosure and an extension of unemployment benefits. Barack Obama slightly outbid her, offering a $75 billion plan, but with more targeted to business interests in the form of tax incentives.

None of these plans amount to more than a drop in the bucket compared to the vast dimensions of the social and economic crisis in the United States. By one estimate, the $30-a-barrel increase in oil prices over the past five months has by itself cost US consumers $150 billion—double the amount of “stimulus” proposed by the Clinton and Obama plans. It goes without saying that no big business politician is proposing that the oil companies disgorge any of their massive profits. On the contrary, the energy bill adopted by the Democratic Congress last month retains $12 billion in federal subsidies to the oil giants.

More fundamentally, a minor boost to consumer spending will do nothing to offset the spreading financial contagion or restabilize debt markets. The bursting of the housing bubble is only the initial stage of a financial crisis of unprecedented dimensions, one that will call into question the viability of the capitalist system worldwide.

It is probably past time to be worried much about the markets and high time to be worried about essentials like food. Talk of serious global food shortages has been increasing recently. High energy costs and conversion of food production to biofuel production are making food shortages a real possibility, even in developed countries which have had an abundance of food in recent generations.

An Oil Quandary: Costly Fuel Means Costly Calories

Keith Bradsher

January 19, 2008

KUANTAN, Malaysia — Rising prices for cooking oil are forcing residents of Asia’s largest slum, in Mumbai, India, to ration every drop. Bakeries in the United States are fretting over higher shortening costs. And here in Malaysia, brand-new factories built to convert vegetable oil into diesel sit idle, their owners unable to afford the raw material.

This is the other oil shock. From India to Indiana, shortages and soaring prices for palm oil, soybean oil and many other types of vegetable oils are the latest, most striking example of a developing global problem: costly food.

The food price index of the Food and Agriculture Organization of the United Nations, based on export prices for 60 internationally traded foodstuffs, climbed 37 percent last year. That was on top of a 14 percent increase in 2006, and the trend has accelerated this winter.

In some poor countries, desperation is taking hold. Just in the last week, protests have erupted in Pakistan over wheat shortages, and in Indonesia over soybean shortages. Egypt has banned rice exports to keep food at home, and China has put price controls on cooking oil, grain, meat, milk and eggs.

According to the F.A.O., food riots have erupted in recent months in Guinea, Mauritania, Mexico, Morocco, Senegal, Uzbekistan and Yemen.

“The urban poor, the rural landless and small and marginal farmers stand to lose,” said He Changchui, the agency’s chief representative for Asia and the Pacific.

A startling change is unfolding in the world’s food markets. Soaring fuel prices have altered the equation for growing food and transporting it across the globe. Huge demand for biofuels has created tension between using land to produce fuel and using it for food.

A growing middle class in the developing world is demanding more protein, from pork and hamburgers to chicken and ice cream. And all this is happening even as global climate change may be starting to make it harder to grow food in some of the places best equipped to do so, like Australia.

In the last few years, world demand for crops and meat has been rising sharply. It remains an open question how and when the supply will catch up. For the foreseeable future, that probably means higher prices at the grocery store and fatter paychecks for farmers of major crops like corn, wheat and soybeans.

There may be worse inflation to come. Food experts say steep increases in commodity prices have not fully made their way to street stalls in the developing world or supermarkets in the West.

Governments in many poor countries have tried to respond by stepping up food subsidies, imposing or tightening price controls, restricting exports and cutting food import duties.

These temporary measures are already breaking down. Across Southeast Asia, for example, families have been hoarding palm oil. Smugglers have been bidding up prices as they move the oil from more subsidized markets, like Malaysia’s, to less subsidized markets, like Singapore’s.

No category of food prices has risen as quickly this winter as so-called edible oils — with sometimes tragic results. When a Carrefour store in Chongqing, China, announced a limited-time cooking oil promotion in November, a stampede of would-be buyers left 3 people dead and 31 injured.

Cooking oil may seem a trifling expense in the West. But in the developing world, cooking oil is an important source of calories and represents one of the biggest cash outlays for poor families, which grow much of their own food but have to buy oil in which to cook it…

Growth in Biofuels

Biofuels accounted for almost half the increase in worldwide demand for vegetable oils last year, and represented 7 percent of total consumption of the oils, according to Oil World, a forecasting service in Hamburg, Germany.

The growth of biodiesel, which can be mixed with regular diesel, has been controversial, not only because it competes with food uses of oil but also because of environmental concerns. European conservation groups have been warning that tropical forests are being leveled to make way for oil palm plantations, destroying habitat for orangutans and Sumatran rhinoceroses while also releasing greenhouse gases…

Demand Outstrips Supply

As the multiple conflicts and economic pressures associated with palm oil play out in the global economy, the bottom line seems to be that the world wants more of the oil than it can get.

Even in Malaysia, the center of the global palm oil industry for half a century, spot shortages have cropped up. Recently, as wholesale prices soared, cooking oil refiners complained of inadequate subsidies and cut back production of household oil, sold at low, regulated prices.

Street vendors in the capital, Kuala Lumpur, complain that they cannot find enough cooking oil to prepare roti canai, the flatbread that is the national snack. “It’s very difficult; it’s hard to find,” said one vendor who gave only his first name, Palani, after admitting that he was secretly buying cooking oil intended for households instead of paying the much higher price for commercial use.

Many of the hardest-hit victims of rising food prices are in the vast slums that surround cities in poorer Asian nations. The Kawle family in Mumbai’s sprawling Dharavi slum, a household of nine with just one member working as a laborer for $60 a month, is coping with recent price increases for palm oil.

The family has responded by eating fish once a week instead of twice, seldom cooking vegetables and cutting its monthly rice consumption. Next to go will be the weekly smidgen of lamb.

“If the prices go up again,” said Janaron Kawle, the family patriarch, “we’ll cut the mutton to twice a month and use less oil.”

We often focus too much on the problems of the various free trade agreements for the developed countries involved in them. In the United States, that takes the form of complaining about jobs going to Mexico, or about Mexicans coming to the U.S. for jobs. But agreements like NAFTA also damage the poorer partners. The following piece about Mexico, where the government has for generations subsidized the price to consumers of staple food items like beans and corn, while putting tariffs on imported food, shows what happens when trade is “liberalized” with a wealthy partner.

NAFTA and Mexico's Agrarian Apocalypse
Zero Hour

John Ross

January 15, 2008

At the stroke of midnight this past January 1st, a hundred or so farmers and day laborers from both sides of the border converged on the hump of the Cordoba Las Americas bridge that connects up El Paso and Ciudad Juarez, to mark the demise of Mexican agriculture. In accordance with the timetables set by the North American Free Trade Agreement signed by Mexico, the U.S. and Canada 14 years ago, as of January 1st 2008, all tariffs on corn, beans, powdered milk, sugar and 200 agricultural products were reduced to zero, setting in motion a doomsday scenario that farmers organizations here say will inevitably lead to crisis in the Mexican "campo" or countryside, mass abandonment of unsustainable plots, increased hunger, and even armed rebellion by the nation's beleaguered small farmers.

"If they build steel walls to keep our people from entering the United States, we will make walls of people to keep their products out of Mexico," a grizzled leader of the militant farmers' front El Barzon Popular growled into his bullhorn as the protestors spread out in the frigid dark to block the lanes of the bridge over the river the U.S. calls the Rio Grande and Mexico the Rio Bravo. But traffic was slow and few trailers were lined up to ferry the thousands of tons of U.S. agricultural products that pass over the Cordoba Las Americas into Mexico every day.

Strung across the roadway, each protestor carried a letter of the alphabet in his or her hand but despite the palpable fear and loathing afoot out in the Mexican countryside as the tariffs plummet to nothing, the farmers could barely muster enough troops to spell out "Sin Maiz No Hay Pais - Y Tampoco Sin Frijol", including the appropriate spacing between words ("Without Corn, There Is No Country - And Also Without Beans.")

Despite the midnight deadline, the immediate impacts of this premeditated apocalypse may be postponed for a while - at least until the spring planting when farmers have to calculate how many hectares they can afford to put under crops. Unlike the U.S., farm subsidies are a thing of the past here, stripped away years ago in the rush to NAFTA.

Reduction to zero tariffs is not in fact a steep drop. 14 years of incremental decreases had wiped out 90% of all protectionist barriers by 2007 and U.S. corn growers were only shelling out 18% of the value of their exports to get their grain into Mexico. Moreover, NAFTA-driven dumping by lavishly subsidized U.S corn growers that allowed them to drop their loads in Mexico below cost and still make a boodle is being blunted by skyrocketing ethanol subsidies as maize climbs to record quotes on U.S. commodity markets - the grain hit an all-time record $177 USD a metric ton last spring but has begun to slide as storage capacity for ethanol corn is saturated and distribution lags far behind production.

Meanwhile, the uptick in world corn prices ripples out in the global marketplace with tortillas topping out at nine pesos the kilo on New Year's Day here - tortilla prices in Mexico have risen 126% under NAFTA from 1994 to 2007 despite - or because of - massive corn imports from the U.S. (44 million tons in the same period.) The tortilla remains the household measure for basic food prices in Mexico.

According to the World Food & Agricultural Organization or FAO, the world has only 11 weeks of consumable corn reserves left, the lowest inventory since record keeping began. Corn prices will remain unstable until producers can sort out the relationship between food cropping and biofuels, the FAO cautioned in a recent report. Low reserves and high prices are a sure formula for social upheaval, underscores the U.N. organization, pointing out that grain riots broke out in Morocco, Uzbekistan, Yemen, Guinea, Mauritania, and Senegal last year.

Despite the farmers' New Years protest on the Cordoba Bridge, the truth of the matter is that formal notice of the death of Mexican agriculture is long overdue. The damage was done long before NAFTA (or the Treaty of Free Trade With North America - TLCAN - here in Mexico) was a gleam in Ronald Reagan's eyeball. As Mexico decapitalized the "campo" following the 1982 default crisis, which allowed the World Bank and the International Monetary Fund to annex the Mexican economy and initiate "structural readjustment" of the agricultural sector, the nation ceded its nutritional sovereignty to U.S. imports.

The migration of impoverished subsistence farmers from southern Mexico that swelled the Mexico City misery belt in sprawling slums like Nezahualcoytl was the first concrete evidence of the evisceration of the "campo", ventures Harvard professor John Womack in a recent e-mail.
Womack is the author of the definitive biography of Emiliano Zapata, the incorruptible farmer-general who remains emblematic of the campesinos' struggle for land.

NAFTA-TLCAN, which, after all, is an integral part of the same scheme of "structural adjustments" to globalize Mexico's agricultural sector and force dependence on export cropping, has only accelerated the stampede from the countryside and into the migration stream. By the trade treaty's 10th anniversary in 2004, NAFTA-TLCAN had driven 1.2 million farmers off the land, according to a Carnegie Endowment evaluation of the pact's impacts issued that year. Since each farm family averages out to six people, the total number of expulsees from the campo hovers around 6 million.

In 1993, just before NAFTA-TLCAN became fact, Mexico's Secretary of Agriculture contracted UCLA professor Raul Hinojosa to calculate the fallout amongst poor farmers. The researcher's worst-case scenario was the diaspora of 10 million campesinos. Now, with the reduction of NAFTA-TLCAN tariffs to zero, that "goal" is just around the corner.

Where do they go? During ex-president Vicente Fox's six year term in office, 2.4 million Mexicans, 70% of them reportedly displaced farmers, migrated to the U.S. despite the formidable barriers erected by Washington to keep them out. U.S. anti-immigration pundits like Lou Dobbs and Republican and Democratic presidential hopefuls that beat up on undocumented Mexican workers might do better to pin the tail on the correct donkey - the North American Free Trade Agreement.

According to CONAPI, Mexico's Council on Population, 29 million Mexicans and Mexican descendants now live in the United States, two million more than live out in the Mexican campo from which so many of them have fled. Ironically, those 27 million who remain on the land back home are sustained by the $22,000,000,000 USD in "remisas" that those who have gone north send back, Mexico's second source of Yanqui dollars behind $100 barrel petroleum. Which is to say the Mexican agricultural sector is supported by those who have abandoned it.

Since NAFTA-TLCAN kicked in January 1st 1994, the same night the Zapatistas rose in Chiapas to remind Washington just how desperately poor and unstable its new trading partner really was, four Mexican presidents - Carlos Salinas, Ernesto Zedillo, Vicente Fox, and now Felipe Calderon, apparently rendered dumb by Washington's dominance, have turned a deaf ear to demands by farmers' organizations to re-open the treaty-agreement's agricultural chapters for renegotiation. Indeed, leftist Andres Manuel Lopez Obrador's insistence on renegotiating NAFTA-TLCAN was a nuts and bolts factor in the campaign to deny him the presidency.

For Calderon, who was awarded high office amidst widespread fraud, NAFTA-TLCAN has been a net gain for Mexico's farmers. The president and his cohorts like Agriculture Secretary (SAGARPA) Alberto Cardenas never tire of chanting the mantra that the trade pact has nearly tripled Mexican agricultural exports to the U.S. But what these neo-liberal mouthpieces forget to point out is that Mexico has run a $2,000,000,000 USD deficit in Ag exports to the U.S. every year since the late '90s as U.S. imports overwhelm the Mexican market.

Moreover, the Calderon-Cardenas happy stats disingenuously inflate the numbers - for example, Mexican beer on its way to transnational distributors who now invest heavily in breweries south of the border, accounts for 18% of $8.5 billion USD in Ag exports to the north through October 2007.
Under NAFTA, beer is considered an agricultural export.

Nor does the President and his cronies identify who it is that is actually benefiting from the NAFTA-TLCOM boom. According to the National Farmers Confederation or CNC, a creature of the once-ruling (71 years) PRI party and once gung-ho for the trade treaty, only 2% of all Mexican producers are sharing the largesse. The other 98%, including 3.5 million corn farmers, 85% of whom grow on five hectares or less (average U.S. corn spreads are 270 acres), have no access to the NAFTA-TLCAN market whatsoever. The big winners? About 20,000 corporate tomato growers, avocado and tropical fruit moguls, and specialty crop niche market sharpies (organic coffee -but organic anything) - plus, of course, the beer barons.

Meanwhile, on the other side of the ledger, two out of the three top chicken suppliers to Mexico are U.S. headquartered - Pilgrim's Pride and Tyson. Mexico now imports 22% of its corn, 55% of its wheat (which went to zero tariff in 2003), and 72% of its rice from U.S. growers. Wal-Mart, with over 700 megastores and now the largest employer and retail food seller in the country, provides a ready-made distribution system for getting U.S. Ag products into Mexican homes. Wal-Mart, now Mexico's leading tortilla seller, is the poster boy for the NAFTA-TLCAN credo of "convergence" - selling the same product in the same stores at the same price on all sides of the border.

But if Mexico's agricultural apocalypse has already come to pass, new ones are lighting up the radar screens. The zero tariff deadline will particularly play out on southern Mexico's mid-level sugar growers, mostly "pequenos proprietarios" or "small land owners" and their huge workforces of underclass campesinos. In respect to the beloved "frijol", although Cardenas's SAGARPA insists that Mexicanos no longer eat beans and the inundation of U.S.-grown legumes will have little impact on diet, beans are an emblematic commodity which combined with maiz form a protein that has sustained the Mexican "raza" (race) since its birth.

But the most lethal blow from zero tariffs will be a speeded-up abandonment of their plots by small corn farmers and their immersion in an already-swollen migration stream, a tale that does not presage a happy ending. Traditional migration routes to The Other Side are now shut down by U.S. militarization of the border, ICE raids in U.S. Mexican communities, and the anti-Mexican hysteria sweeping that northern neighbor as the presidential campaigns peak…

Violence has been pandemic in the Mexican campo ever since the European Conquest. Massacres and bloody land battles like Acteal in Chiapas (49 killed) and Rio Frio in Oaxaca (29) are contemporary expressions of the eternal war for the land here. Mexico's many guerrillas historically have incubated inside farmers' movements and still do. The Calderon-Cardenas strategy of deliberate denial of the crisis in the countryside is a little like whistling past the graveyard.

Secretary of Agriculture Alberto Cardenas, a former governor of Jalisco state, is an agro-tycoon from the central Mexican "Bajio", a fertile swatch of land from which big growers reap fortunes in export agriculture. A holdover from the Fox administration (Fox too made his fortune in Bajio export agriculture), he is a stocky, pugnacious and not very bright man who represents the right wing of the right wing PAN party, the "Yunque", a secretive Catholic cabal based in the Bajio from which Fox drew many of his cabinet members.

So when he had to sell Mexicans on the "benefits" of zero tariffs, Cardenas came up with the brilliant gimmick of getting Lorena Ochoa, the world's number one woman golfer and a Guadalajara native, to extol the health of the Mexican "campo" - an unfortunate play on words (a "campo de golf" is a golf course) - which has incited farmers' organizations to schedule a national march on Mexico City this January 31st.

For the Mexican underclass, "campos de golf" are the playgrounds of their "patrones" or bosses. 10 years ago, speculators secretly bought community land in Tepotzlan up in Zapata country in Morelos state to build a country club and golf course and began sucking up what little ground water the farmers still had left. Wild protests - the so-called "Golf War" - ensued. In the midst of flying rocks and burning construction machinery, a U.S. reporter asked the newly-elected mayor (the old one had sold out to the golfers) why the people were so agitated about a golf course. Lazaro Rodriguez paused, put his hand on the reporter's shoulder, and stared him in the eye like he was a nincompoop from Mars. "John," the exasperated mayor made it clear, "we don't play golf here."

Last week we looked at how capitalism works and how, by doing what it does, it ruins everything. What can we do about it? Marxism has been an indispensable tool for understanding capitalism, but historically has not been able to offer any solutions. Why is that so? If the diagnosis was so good why wasn’t the cure of revolutionary socialism effective?

According to Andrew Lobaczewski in Political Ponerology, most political movements are susceptible to what he calls “ponerization,” the infiltration of groups by pathological elements that end up twisting the original goals and motivations of the group to pathological purposes.

In order to have a chance to develop into a large ponerogenic association, however, it suffices that some human organization, characterized by social or political goals and an ideology with some creative value, be accepted by a larger number of normal people before it succumbs to a process of ponerogenic malignancy. The primary tradition and ideological values of such a society may then, for a long time, protect a union which has succumbed to the ponerization process from the awareness of society, especially its less critical components. When the ponerogenic process touches such a human organization, which originally emerged and acted in the name of political or social goals, and whose causes were conditioned in history and the social situation, the original group’s primary values will nourish and protect such a union, in spite of the fact that those primary values succumb to characteristic degeneration, the practical function becoming completely different from the primary one, because the names and symbols are retained. This is where the weaknesses of individual and social “common sense” are revealed. (p. 160)

To the extent that a social theory or movement has an incorrect view of human nature, to that extent is it susceptible to ponerization. For Marxism or revolutionary socialism, the erroneous view of human nature would be that human nature is a blank slate created by human practice. Its downfall was that it didn’t recognize the two types of humans: psychopaths and those with the potential to develop conscience. It shares that downfall with many other ideologies and religions.

Revolution, by overthrowing all traditional forms of order ended up creating the most fertile ground possible for the psychopath. We can see this historically in France, Russia, China and Cambodia. According to Lobaczewski, movements that start out with laudable goals are prime targets for pathological types because those movements can provide the perfect cover for the “other human race.”

Where does that leave us? In the position of learning from past mistakes and building movements that take the two human races into account. We would have to be able to limit the damage caused by the small percentage of psychopaths. That would involve being able to identify psychopathic behavior and being able to distinguish between genetic psychopaths for whom there is no hope (essential psychopaths in Lobaczewski’s terminology) and those who are not born pathological but made pathological. It would also avoid tactics used against the pathological borrowed from the pathological, for those tactics would only create fertile ground for ponerization.

The solution would be more evolutionary than revolutionary, because it would entail hard work on the part of those with the potential of conscience to develop that conscience while at the same time seeing both human nature and current events accurately.

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