Monday, August 25, 2008

Signs of the Economic Apocalypse, 8-25-08

From SOTT.net

Gold closed at 828.10 dollars an ounce Friday, up 4.6% from $791.70 for the week. The dollar closed at 0.6769 euros Friday, down 0.7% from 0.6813 at the close of the previous week. That put the euro at 1.4774 dollars compared to 1.4677 the week before. Gold in euros would be 560.51 euros an ounce, up 3.9% from 539.42 at the close of the previous Friday. Oil closed at 114.57 dollars a barrel Friday, up 0.8% from $113.71 the week before. Oil in euros would be 77.55 euros a barrel, up 0.1% from 77.47 for the week. The gold/oil ratio closed at 7.23 Friday, up 3.9% from 6.96 at the end of the week before. In U.S. stocks, the Dow closed at 11,628.06 Friday, down 0.3% from 11,659.90 at the close of the previous Friday. The NASDAQ closed at 2,414.71 Friday, down 1.6% from 2,452.52 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.87% Friday, up three basis points from 3.84 for the week.

Gold recovered last week, rising almost 5% against the dollar, but it’s still a long way off its peak of $1000 an ounce. The euro stabilized as well, gaining a bit against the dollar after losing ground over the last few weeks. Movements in the price of gold have been hard to explain lately. Some of that is due to gold’s dual role as both a commodity and a currency. There also seems to be a divergence between real gold and paper gold lately. As gold prices dipped below $800 an ounce, it suddenly became hard to find real gold coins at near that price.

George Ure suggests that that is due to the bifurcation between real gold and paper gold:

Metals Markets Splitting?

Monday August 18, 2008

Gold and silver are up a little bit today, but not enough to explain some reader reports. Readers have been sending in all kinds of notes about the "odd behavior" of the precious metals. Here's one..


Unexpected consequences?

It's very interesting to witness supply-demand dueling with market price in the metals complex. Friday, I decided enough was enough, and went to the local dealer, intending to buy some bullion. Where in past I'd buy silver bars, now, I generally buy rounds, thinking it'd be easier to exchange for value when the spam hits the air-circulation device.

As I walked in the door, the fella was literally pulling boxes of silver out of his display cases. The place was otherwise pretty empty. We made some small talk about how clever he must have been to reduce stock at the recent high. Later it came out he, and other dealers in his network, just weren't going to sell at the depressed levels!

I have been trying to buy 2008 silver eagles (for gifts) since spot was at $18. He, the dealer, further explained if someone wanted to buy so the dealer was "right side up" trades might happen, otherwise no. I reminded about wanting the eagles for gifts, and would pay what was needed to get them. No joy.

Out of curiosity I checked eBay, same-same, no eagles. Non numismatics are also being pulled. When I saw the red announcement on Kitco the scene cleared. No one is selling. Sure, Kitco needs to keep taking orders, but metals dealers, like a gas station owner who filled tanks when oil was 147, won't sell at prices that lose money.

So, what's an ounce of silver worth? Is it $12? $13? Or, is it whatever it takes to get someone to sell? Might metals markets freeze up like credit markets? In past I'd have said no. Right now, evidence says yes.

What do you make of it ... and might this apply equally to other commodities?

A click over to the Kitco website this morning brings up this curious note at the top of their page:

"IMPORTANT NEW NOTICE: Due to market volatility and higher demand in the entire industry, we are anticipating delays in supply of all bullion products. Please note that you can continue to place orders and prices will be guaranteed; however, cancellation fees will still be applicable regardless of the length of the delay. Consequently once inventory is received there may also be delays in processing and shipping by our vaults. "

But wait! How can this all be?

Here's what I think is going on.

You know those gold and silver ETF's? What if - and this is only an if - they really don't have all the hard physical assets that their pieces of paper might attest to? What if they just have some actual physical and the rest is paper promising future deliveries? And further supposed this market is hedged six ways to Sunday.

Would that account for a momentary distortion where supply is heading toward unavailable and yet at the same time, price has also be collapsing? This flies right in the fact of economic reality. Something is truly amiss here.

And then there's the report last week that the US Mint was suspending sales of Gold American Eagles.

Now here's the curious thing: I went to the US Mint site this morning and wanted to see if they would sell a one ounce Gold Eagle. Yup, they will. But the price for an uncirculated 2008 Gold Eagle is not anywhere near spot ($790). They are asking $1,119.95 for a one ounce coin.

A few other savvy financial writers are onto this - and I would draw your attention to Jason Hommel's piece posted over at Gold Eagle titled "Why Paper Silver is not as good as Physical Silver" as a fine example.

My "best guess" is that we are seeing a bifurcated market develop where on the one hand we're seeing a physical market develop and the almost separate paper market for silver & gold related instruments. The predictive linguistics team doesn't think it will pop for a while yet, but what happens when the public realizes that the gold and silver ETF's are shown to be paper-trading exercises and not backed by physical? And investors figure that what they thought was actually backed by physical is just another paper abstraction and like so many others, is being hedged/disconnected from reality of the marketplace?

…I called my friend who manages a whole pile of money expecting him to have some keen insight - the kind that comes from pushing 9-places left of the decimal point around. His answer - which I'll paraphrase loosely - went something like this:

"What's happening is that the price of the metal at retail has little to do with the exchange prices of silver because the physical is such a small part of the market.

In other words, the physical price is being swamped by the financial price. Sure, you can see shortages of physical, but that's such a tiny piece of the LEVERAGE game that it's almost insignificant."

Oh, oh. I'm starting to 'get it'. As long as there's enough paper in play, we can have a complete disconnect from physical prices.

Now that I think about it, I can see why. If a tracking fund has no convertibility for the small players, it becomes almost like walking up to a craps game in progress on the sidewalk where the stakes are physical silver, and then starting to trade shares based on valuation of the stakes in the craps game, and then to top it off, you convince yourself that you own silver, even though in order to get into the convertibility part of the game, you need 50,000 shares, to be authorized by the players, be a registered broker-dealer, participate in DTC and be able to deliver or accept silver in a London vault.

If you think that's crazy, perhaps you haven't been watching metals prices.

Mike Whitney weighed in on both the drop in gold prices and the rise of the dollar.

The Incredibly Shrinking Dollar? Think Again ... Greenback Surges, Euro Shrivels

Mike Whitney

August 20, 2008

The greenback has surged 6 per cent in the last month alone. The euro, on the other hand, has been caught in the same recessionary downdraft that is buffeting a number of other currencies, all of which are unwinding at the same time although unevenly. Currency markets don't move in straight lines, but don't be fooled, most paper money is steadily losing value due to the unprecedented expansion of credit. Investors are moving to cash and hunkering down; the stock and bond markets are just too risky and real estate is in a shambles. As the equity bubble continues to lose gas, balance sheets will have to be mended and lending will slow to a crawl. At present, Germany's slowdown and Spain's housing crash are drawing most of the attention but, the spotlight is shifting fast. Next week it could be shining down on the America's failing banking system or poor corporate-earnings reports in the US. Then it will be the dollar marching off to the gallows.

Europe's troubles have put to rest to idea that other countries can "decouple" from the US and prosper without the help of the US consumer. That might be true in the long-term, but falling demand is already visible everywhere. Retail and auto sales are taking a thumping and 2009 is shaping up to be even tougher. It's looking more and more like the Europeon Central Bank was faked-out by the early signs of inflation and missed the deflationary sledgehammer that was about to come crashing down. It was a catastrophic blunder by European Central Bank (ECB) chief Jean Claude Trichet and it could cost him his job. Raising interest rates while sliding into the jaws of recession is madness. Now all of Europe is headed for a hard landing and there's no way to soften the blow. The ECB doesn't have the same tools as the Fed; Trichet can't simply backstop the whole system with green paper and T-Bills like Bernanke. He can either slash rates or sit on his hands and hope for the best.

Deficits are expected to soar in the European south (particularly Spain, Greece and Italy) while growth in the industrial north, e.g., Germany, will continue to shrink. Also, Spain, Ireland and England are undergoing the biggest housing meltdown in history after indulging in the same mortgage hanky-panky that took place in the US. Billions of dollars of low interest loans, that were issued to unqualified mortgage applicants, are gumming up the whole system and sending foreclosures skyrocketing.

Now the losses have to be written down and thousands of unoccupied houses sold at auction. The perception that the dollar is getting stronger is mostly an illusion. Deflation is "dollar positive" because investors who flee from toxic assets naturally move into cash. But that doesn't mean they have faith in the dollar; far from it. The fundamentals for the greenback get worse by the day. Fiscal and trade deficits are out of control, the national debt is tipping $10 trillion, foreign investment is drying up, and confidence in US leadership has never been lower. Paper currency is a country's IOU; and foreign central banks are wary of taking checks from a country that no longer wins wars or has the capacity to pay off its debts. That's why, for the first time, there's serious talk about the US losing its triple A rating on government debt. And it could happen sooner than anyone thinks. Every time the Fed uses the dollar to prop up the faltering banking system or provide limitless capital for defunct GSEs like Fannie Mae and Freddie Mac, the dollar comes under greater and greater pressure.

As the US housing market continues to collapse, trillions of dollars in equity and credit are disappearing in a deflationary bonfire. When a $400,000 home--with no down payment and negative equity--goes into foreclosure; $400,000 vanishes from the digital-pool of credit and has to be written down as a loss. So far, much of the losses have not yet been accounted for because the banks are using their own internal models for determining the value of their downgraded assets. Two weeks ago, Merrill Lynch sold $30 billion of mortgage-backed junk for 20 cents on the dollar. But they also financed the deal, which means that they really only got 5 cents on the dollar! This reflects the true "market value" of these assets.
They are virtually worthless. Naturally, Merrill's sale sent tremors through Wall Street where banks and other financial institutions are sitting on trillions of dollars of this garbage marking it down at a few percentage points every reporting period rather than doing what Merrill did and putting it all behind them. As a result, the banks have less capital to lend, which means economic activity will continue to slow and the country will go into a deep recession. The point is, that the Federal Reserve now holds about $400 billion of this junk-paper on their balance sheets and the US Treasury is planning to take on hundreds of billions more (perhaps as mush as $800 billion more under the new legislation!) to prop up Fannie Mae and Freddie Mac. The Bush administration is using the credibility of the dollar as collateral in its plan to bail out the most reckless, high-stakes Wall Street gamblers.

So, how does this affect the dollar?

The nation's debts are entirely balanced atop its currency. The greenback is like a circus strongman holding a barbell precariously over his head; as the weight is increased, the sweat begins to appear on his brow while the veins in his neck and forehead begin to bulge. Finally, the knees buckle and the and the over-matched weightlifter crashes to the canvas in a heap. That's the future of the dollar in a nutshell.

But how does that explain the sudden fall in gold prices; after all, gold is the logical alternative to paper money, right?

Wrong. Gold is "real money" alright, but it's also a commodity. And when commodities are smashed by a deflationary tidal wave--as they have been the last few weeks-- gold will follow them into the basement. In truth, gold has taken an even worse pasting than the euro; free-falling from $980 per ounce in mid-July to $786 at Friday's market close. $194 in a month.

When the economy is in the grips of deflation; all asset-classes get dragged down, gold included. Many of the hedge funds and other big market players are selling their gold positions recognizing that the commodities boom is over and it's time to move on. That doesn't mean that gold won't rebound sharply when Bernanke slashes rates or if Bush blows up some new part of the globe. It simply means that in the short term, "cash is king". Pension funds and hedge funds will continue to deleverage to reduce their credit exposure to put themselves in a better position to roll over their debt. That means that gold's slide could last a while. This doesn't look like a conspiracy to me, but I have my tin-foil hat in hand just in case.

No one knows where the bottom is for gold, but one thing is certain; its future prospects are a lot brighter than the dollar's. The Bush administration has yet to demonstrate that it can enforce Dollar Hegemony via military intervention. That is a very big deal indeed. If the dollar isn't backed by Middle East oil, then the $6 trillion stockpile of dollars and dollar-denominated assets that are languishing in foreign central banks and sovereign wealth funds, will continue to dwindle until the dollar's position as "reserve currency" comes to an end.

That's one doomsday scenario, but there is another one, too. If Bernanke and Paulson continue to pile all of the nation's credit problems (bad paper) on top of the greenback; foreign capital will head for the exits and the dollar will crash. Either way, the dollar's troubles are mounting and something's got to give.

Meanwhile, the troubles of Fannie Mae and Freddie Mac, the two government-sponsored mortgage companies, continued last week as their bond ratings were lowered.
Moody's ratings cut latest blow to Fannie, Freddie

Lynn Adler

NEW YORK (Reuters) - A major credit rating agency cut the preferred share rating on Fannie Mae and Freddie Mac amid mounting concern about the ability of the two largest U.S. home funding providers to access capital, in the latest blow before a widely expected government bailout.

Early in the day, influential stock market investor Warren Buffett told CNBC there is a "reasonable chance" that Fannie Mae and Freddie Mac stock will get wiped out in a government rescue, reflecting market sentiment that has slammed the companies' shares toward 20-year lows this week. The shares closed mixed on Friday.

In the ratings cut, Moody's Investors Service cited concern that market turmoil has hurt the mortgage finance giants' ability to get fresh capital. Moody's made a ratings adjustment that suggests a greater likelihood the government sponsored enterprises, called GSEs, will need "extraordinary financial assistance" from the government or shareholders.

"Given recent market movement, Moody's believes these firms currently have limited access to common and preferred equity capital at economically attractive terms," Moody's analysts said.

Many analysts expect the government will have to exercise new abilities to recapitalize the companies, effectively nationalizing them. Those worries yanked their stock closer to zero this week from more than $65 a year ago.

Fannie Mae shares rose 2 percent to $4.98 while Freddie Mac stock dropped 4 percent to $3.03. Freddie's shares had fallen about 20 percent at one point on Friday.

A source familiar with Treasury's thinking said on Friday that any backstop would aim to keep the shareholder-owned status of these GSEs, erasing sharper earlier losses.

The debt these companies issue to fund their mortgage purchases benefited, in contrast, from the view that a federal rescue assures repayment for bonds even if not for shareholders. Fannie and Freddie own or back nearly half of all outstanding U.S. mortgages.

"The institutions are too big to fail and the government needs them operating," said Jeff Given, portfolio manager at MFC Global Investment Management in Boston. "It's the only part of the mortgage market that's even remotely working right now.

"At the end of the day probably the U.S. government's going to come in," he added. "I wouldn't want to be a preferred share owner or a common stock owner, but if you own the debt or the MBS you're going to be okay…"

Fannie Mae and Freddie Mac were set up to serve the public interest by making mortgages more available to those wanting to buy houses. In a process of corruption followed in many areas, they ended up being little more than a way for insiders to steal money. The financial press won’t put things so bluntly, so we will have to turn to the pro football columnist for the sports news site ESPN (and Brookings Fellow), Gregg Easterbrook:
Government Policy Rewards CEO Lying, So We Get More of It

Increasingly Fannie Mae and Freddie Mac are looking like little more than devices to transfer money from the pockets of taxpayers to the pockets of Fannie and Freddie senior executives. Former Fannie Mae boss Franklin Raines paid himself about $50 million for years in which, we now know, the company lied about its earnings in order to inflate executive bonuses, while management was playing fast and loose with other people's money. Beginning in 2007, Fannie Mae and Freddie Mac went off the cliff, their stocks plummeting to less than 20 percent of their previous values, and taxpayers were put on the hook as guarantors of the firms' bad management decisions. The Congressional Budget Office estimates the Mae-Mac debacle will cost taxpayers $100 billion or more. Yet Freddie Mac CEO Richard Syron was paid $14.5 million for 2007, including a $2.2 million "performance bonus." Syron has taken home $38 million total from Freddie in the past five years. Fannie Mae CEO Daniel Mudd got $14.2 million for 2007, plus a substantial prepaid life insurance policy and other perks including "financial counseling, an executive health program and dining services," the Washington Post reported. Hey, $49,000-a-year median U.S. households, you are being taxed for millionaire Mudd's "dining services." Bon appetite.

Executives receiving very high pay justify their deals on two grounds: that they are risk-takers in high-pressure situations, and that they have valuable expertise. Now we know that no one at the top of Fannie Mae and Freddie Mac took any personal risks -- everything was federally guaranteed, and all mistakes billed to the taxpayer. Here, the New York Times reports that Syron was repeatedly warned in 2004 that the organization was taking on bad loans, and did nothing. Syron justified his inaction by complaining to the Times that he was under pressure from various Fannie constituents. That's why he was paid so much, to take the heat! Yet he took no heat, rather, devoted himself to avoiding responsibility. If things go well, executives are lavished with money and praised as risk-takers. If things go poorly, executives are lavished with money and blame others.

And just what incredible expertise do Syron and Mudd possess? They made billion-dollar blunder after billion-dollar blunder; they failed to realize things as basic as buyers borrowing without documentation of income may not be able to repay loans. People chosen at random from the phone book could hardly have performed worse. Yet the federal bail-out legislation just signed by George W. Bush does not require them to give back any of their ill-gotten gains.

This is the core lesson of CEO overpay scandals: The corrupt or incompetent executive always keeps the money. He may be caught and embarrassed by bad press, but he keeps the money while someone else -- shareholders, taxpayers, workers -- is punished.
Raines recently settled a federal legal complaint by agreeing to return about $3 million of his $50 million, but kept the rest; his employment contract was worded such that even if he was malfeasant, whatever he took from company coffers was his. Hilariously, federal prosecutors claimed victory because Raines "surrendered" to the government a large block of stock options -- options now worthless, owing to the Fannie Mae decline Raines helped set in motion by lying about Fannie numbers. Until Congress enacts a law that allows money taken by corrupt or incompetent executives to be recovered, the lying will continue. Lying by CEOs is what society rewards!

Why does Congress tolerate the swindle aspect of Fannie and Freddie? For the standard reason: Congress is on the take. Here, Lisa Lerer of Politico reports that in the past decade, Fannie and Freddie spent almost $200 million on campaign donations to Congress and on lobbying members of Congress, some of the lobbying money going to former members. This year, for instance, Fannie gave the legal max of $10,000 to Speaker of the House Nancy Pelosi and to Republican House Whip Roy Blunt, neither of whom face meaningful re-election challenge. As for costly lobbying, the implied deal is: Don't rock the boat while in office and someday you too will be a former member getting easy money to lobby former colleagues. During Senate debate on the Mae-Mac bailout, Majority Leader Harry Reid refused to permit a vote on an amendment that would have barred Fannie and Freddie from giving money to members of Congress. Reid did not merely oppose the measure, he refused to allow the Senate to vote on it -- so that members of Congress could remain on the take, without having to go on record about the matter.

Now that taxpayers are covering Fannie and Freddie's cooked books, the $200 million diverted to Congress in effect came from average Americans, forcibly removed from their pockets -- and thanks to Senator Reid, more will be forcibly taken from your pocket and placed into the accounts of senators and representatives. This is what TMQ calls a Sliver Strategy. The Sliver Strategy is a means to disguise embezzlement. Congress looked the other way while Fannie and Freddie approved vast amounts of bad debt, in order to shave off a sliver for itself -- in this case, the $200 million in lobbying and donations. Had Congress simply awarded itself $200 million, editorialists would have been outraged. Because the money was slipped in to a larger fiasco of much greater sums wasted, Congress got away with it.

The problem is that when such corruption becomes the norm, when it seems normal, it becomes hard to even imagine a state of affairs where such things are not tolerated. The will of the public to oppose these practices then becomes enfeebled, allowing more corruption which further weakens any healthy opposition, and so on.

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Monday, August 18, 2008

Signs of the Economic Apocalypse, 8-18-08


Gold closed at 791.70 dollars an ounce Friday, down 9.2% from $864.80 for the week. The dollar closed at 0.6813 euros Friday, up 1.8% from 0.6691 at the close of the previous week. That put the euro at 1.4677 dollars compared to 1.4944 the week before. Gold in euros would be 539.42 euros an ounce, down 7.3% from 578.69 at the close of the previous week. Oil closed at 113.71 dollars a barrel Friday, down 1.3% from $115.20 at the close of the Friday before. Oil in euros would be 77.47 euros a barrel, up 0.5% from 77.09 for the week. The gold/oil ratio closed at 6.96 Friday, down 7.9% from 7.51 at the end of the week before. In U.S. stocks, the Dow Jones Industrial Average closed at 11,659.90 Friday, down 0.6% from 11,734.32 at the close of the previous Friday. The NASDAQ closed at 2,452.52, up 1.6% from 2,414.10 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.84%, down nine basis points from 3.93 for the week.

The fall of gold accelerated last week with gold falling 9% against the dollar last week and 16% over the past two week. Commodities in general have been falling. We seem to be seeing the bursting of the commodities bubble due to the view that the world economy has not yet “decoupled” from the United States.

Gold, Oil Slump, Leading Commodities Plunge to Four-Month Low

Feiwen Rong and Chanyaporn Chanjaroen

Aug. 15 (Bloomberg) -- Gold plunged below $800 an ounce, heading for the biggest weekly slide in more than 25 years, and oil, wheat and sugar slumped as the dollar's rebound reduced the appeal of commodities after a six-year boom.

The Reuters/Jefferies CRB Index of 19 commodities tumbled as much as 2.7 percent to 379.07, the lowest since March 20, as silver, soybeans and corn lead the drop. A rally this month in the U.S. currency has curbed the appeal of dollar-priced raw materials as a hedge against inflation, and demand for commodities may be hurt as an economic slowdown spreads.

Commodities, measured by the CRB, are down 20 percent from a record July 3, descending into a bear market. Declining raw- materials prices may help ease global inflationary pressures after consumer prices in the U.S. accelerated 5.6 percent during the year to July, the biggest jump in 17 years.

“There will be a precipitous slowdown in global growth and that means a lot less demand for things like energy and base metals,” said Michael Pento, a senior market strategist at Delta Global Advisors in Huntington Beach, California. “It would be insane to step in and buy oil or metals now. These markets will be vulnerable for the next four of five months.”

Sixteen of 19 commodities in the CRB declined this month, after the index plunged 10 percent in July, the biggest such drop in 28 years. Only wheat, cattle and nickel are up in August.

Commodity Peak

“Prices have made a peak,” said Marc Faber, who forecast in June that commodities would start to fall. “Whether that is a final peak or an intermediate peak followed by higher prices, we don't know yet. It could go lower,” he said by telephone today from Chiang Mai, Thailand.

Gold futures fell as much as 4.5 percent to $777.70 an ounce, the lowest since Nov. 20 on the Comex division of the New York Mercantile Exchange. Gold fetched $788.60 at 12:56 p.m. A close at that price would leave the precious metal down 8.8 percent, the biggest weekly decline since February 1983.

Silver lost as much as 14 percent, dropping to the lowest price since Sept. 5.
“There's a perception that demand for commodities might be weakening,” David Jollie, editor of Johnson Matthey Plc's publication on platinum-group metals, said today by telephone from Royston, England. “North America and Western Europe are struggling, but the emerging economies remain strong.”

Gasoline Demand

Crude oil for September delivery dropped as much as $3.67, or 3.2 percent, to $111.34 a barrel on the Nymex, and traded at $111.86 at 12:59 p.m. Gasoline demand was down 2.1 percent in the first seven months of the year as record prices and slower economic growth cut consumer spending, the American Petroleum Institute said Aug. 13.

Europe's economy contracted in the second quarter for the first time since the introduction of the euro almost a decade ago, a report showed yesterday. According to a UBS AG report published Aug. 6, the world is “precariously close” to a recession in 2009.

“It's not just a U.S. problem, it's a global problem, and it's taking its toll on commodities,” said Peter Luxton, an energy analyst at Informa Global Markets. “What's happening elsewhere is starting to take its toll.”

U.S. Output

There are signs of a pickup in the U.S., the world's largest economy. Industrial production unexpectedly rose in July, helped by gains in automobiles, metals and machinery, the Federal Reserve reported today.

Demand for autos increased for a third month, reflecting a continued rebound from a strike at an auto-parts supplier. Gains elsewhere signal demand from overseas continued to boost orders even as U.S. consumer and business spending weaken.

Crude oil will probably fall below $100 within weeks, nearing the $90 threshold that would trigger a production cut by the Organization of Petroleum Exporting Countries, according to Alfa Bank. OPEC, the supplier of more than 40 percent of the world's oil, is scheduled to meet in Vienna on Sept. 9 to review production targets.

“OPEC will likely defend $90 a barrel or higher,” Alfa analysts led by Ronald Smith in Moscow wrote in an e-mailed report today. “OPEC will remain firmly in control of the oil market for at least the next decade.”

Investment Flows

Assets linked to commodity indexes have almost quadrupled to $297 billion as of June, from about $76.7 billion in January 2006, according to an estimate by Lehman Brothers Holdings Inc. Some investors buy commodities as a hedge against inflation and against declines in the dollar. The CRB index jumped to a record last month as the U.S. currency slumped to an all-time low against the euro.

A “buying orgy” in commodities was inflating prices and increasing the risk of a collapse, Paul Touradji, founder of Touradji Capital Management LLC, said in March.

Gold may rebound from the latest slump and rally through 2010 as fabrication demand rises and on expectations that the dollar will resume its slide against the euro, Citigroup Inc. said. It forecasts an average price of $950 next year and $1,000 in 2010.

“Longer term, we would not be surprised to see gold double,” the bank's analysts John Hill and Graham Wark wrote in a report. “We would be aggressive buyers at current levels expecting gold to work higher through 2009/10.”

It is interesting that Citigroup sees a stong rise in the price of gold in the future despite the sharp drop in recent weeks. George Ure agrees and explains the paradox by referencing hedge funds:

The Great De-Levering, Redux

As I explained on Tuesday, my friend who has written a book has explained in great detail how something called "The Great De-Levering" is taking hold in the world, so as you look at the price of gold which has crashed well under $800 an ounce this morning, it's neither a time for fear, or a time for panic. What's missed by the conspiracy minded is that there has been a tremendous build-up of excess financial leverage in the global economic system and it's in the process of all coming unraveled.

In the detailed explanation this week, the plot line simplifies to this:

· There are 9,000 hedge funds. Virtually all of them are over-leveraged to one extent, or another. They control something on the order of $500-trillion in synthetics, but some of that is double and quadruple-counted, so let's say only $250-trillion.
· So all it takes is one hugely run up asset class to suffer a short-term decline and two things happen:

o Those with over levered positions are forced out immediately.
o Those who try and hang onto positions find their balance sheets have been devalued. What might have been a $50 million position with gold at $1,000 an ounce today is down to a shade over $39-million.

· When the decline is asset values hits the top line of a hedge fund, their can quickly go from hugely profitable to horrible losses.
· These loses then trigger additional selling of assets in an attempt to stem the bleeding on the P&L
· Which then drives down other asset classes....and so forth.

As a result, with The Great De-Levering underway, if my serious money-managing friend is right, we should see the propagation of losses across almost all asset classes. Let's check the headlines and see how things are going as the week winds up, shall we?

· Gold falls more than 3 percent overnight. No surprise there.
· Silver, part of the same asset class dropped even more, down to $12.95 an ounce (update quotes at top of page).
· Oil is another asset class that could be expected to drop. Sure enough, we now read that "Oil seen dropping under $90 by Year End" in a headline. The headline in this morning's WSJ online report "Oil Falls on Economic Worries" while accurate, doesn't mention that the real driver is the Texas Hold-em Poker game being played as the 9,000 hedge funds play masters of the universe and try to hang on to be one of what my friend thinks will be only 3,000, or so, left by the end of the game.
· Headlineslike "Oil falls below $114 on slowing economies" only gets to part of the answer. Yes, a global recession/depression is bad, but remember energy is an asset class that's de-leveraging, too.
· Homes? Because of the mess in home financing, the sales of homes has fallen to a 10-year low. Well, oh duh. What were you expecting? This is a global (as in circularly referenced) economy. A sneeze here is a sinus headache there, and first thing you know, heart attacks are propagating. So much so that Mr., Bulbblator, former Fed Deity Alan Greenspan is saying now maybe the housing market won't bottom until next year. Now who woulda thought?

To be sure, there are a few asset classes which have done better than others. Wheat's outlook is mixed, so it has been in a rally for a few days, but it's not so much that wheat demand is up (it is) or that the world is running out of food (it is)( or that topsoil is disappearing (it is) and that Prince Charles is right about genetically modified foods posing a planetary health risk (they are).

Nope, the reason that grain has been in a short counter-trend rally here is what? The ultra-lemming behavior of the fund managers who play the game of financial pile-on even more tightly regimented that mindless 401(k) retail "investors".

…A colleague of mine called from Chicago yesterday to ask a simple enough question:

"George, we see the worst inflation numbers in 17-years, food is running on empty, there's a threat of global war which could go global, and all these other pressures -- so why isn't the price of gold going through the roof and making us rich?"

I then patiently explained that we live in a country which has been hijacked by a bad craps game involving hedge funds. Just for example, the big money boyz want Hillary so badly that she's now weaseled a her way into a nomination slot. Big money is throwing all kinds of dough her way because she'll socialize more losses and privatize more gains. What part of the picture is not clear? America has been hijacked by high rollers. How many times did Americans have to say "No Hillary!" and still we're being over-ruled by the hand-outs from the Fat Cats. What isn't clear?

The Fat Cats are also angling to get another War going as soon as they can because that will help their version of "the economy" by boosting defense spending. Which is why Condi Rice and a large naval armada are talking peace but really angling for regional conquest along Russia's southern border. Meantime, the Polish "defense shield" deal has been signed.

This puts a US/Western missile program about 300-miles from the Russian border and right next door to Belarus. How would you feel if the Russians angled to put a missile project in Edmonton, Alberta? That's how close we're talking. So no wonder Russia is pissed.
In this morning's email I received this:

"I’m a journalist for a Belgian business magazine. I read your comments on your discussion with your friend in the hedge fund business who is about to write a book

At one moment you say ‘Before Thanksgiving I might take a position long gold/commodities in the light of the discussion… because some serious money could enter this trade’ or something like that.

Before that the whole discussion was about the deleveraging of the hedge fund business acting in lock step (black boxes).

My question is, why wouldn’t the opposite happen ? May be they have too much leveraged positions in gold/commodities.

Can I quote you on the answer ?"

'K, point by point: My friends book is done - ready for print - he's just looking for an agent because he's too busy managing a fund with more zeros than I can count to mess with publishing it himself.

I guess my 'quotable answer" would be this: "Markets always go to extremes. At some point, the price of gold and silver will likely be oversold. The world is also a very dangerous place and we have the potential in Ossetia, Kashmir, and Bushir for direct conflict involving nuclear weapons. I expect one of these two thresholds will be passed before year's end, perhaps before November 1st. A flight to safety from war, or just the mechanics of being oversold might be playable, so I may try.

Once there, because hedge funds are so lemming-like, I a major short-term move up in the metals and that's when I might be in one last leveraged move which would precede a move to government bonds held directly because the middlemen (banks) have become shaky and untrustworthy as I read it. Having a 'split portfolio' of part gold/silver balanced against cash/government bonds held directly, seems to me a reasonable way for a small investor to cover both the possibility of hyperinflation on the one hand and massive deflation on the other.

The game is not about making a killing. It's about not getting killed.

We might add that it is not a game.

No doubt the easing of commodity inflation and the increase in industrial production in the U.S. is good news. The problem is that the root cause of the recent distress, the collapse of the housing market, shows no sign of letting up.

Bank seizures of US homes reach record high

Andre Damon

16 August 2008

Banks repossessed almost three times as many American homes last month as in July of 2007, while foreclosures jumped 55 percent over the same period, according to a report issued Thursday by RealtyTrac, a California-based seller of foreclosure data.

More than 272,000 properties, or one for every 464 US households, were in “some stage of foreclosure” last month, according to the report. The number of foreclosures in July jumped 8 percent to 272,171 from June, slightly lower than the record 273,001 foreclosures in May.

Even these staggering figures represent an “artificial depression” in foreclosures, Rick Sharga, a RealtyTrac vice president, told Bloomberg News, due to the fact that a number of states—including New York and California—implemented foreclosure moratoriums last month. Most of the affected properties will go into foreclosure in later months, Sharga said.

Bank repossessions grew significantly as a percentage of all foreclosure activity, “posting a 184 percent year-over-year increase, compared to a 53 percent year-over-year increase in default notices and an 11 percent year-over-year increase in auction notices,” according to James J. Saccacio, CEO of RealtyTrac.

When foreclosed properties fail to sell at county auctions, they are repossessed by banks pending their sale. Bank repossessions constituted only 16 percent of foreclosure activity a year ago, but they now make up some 28 percent, according to the report. While banks owned 224,000 foreclosed properties in 2006 and 445,000 in 2007, they owned 775,244 through July of this year.

The sheer mass of foreclosed homes is depressing real estate markets and steeply driving down prices, leading to more foreclosures. Foreclosed properties now represent approximately 17 percent of the inventory of existing homes for sale, according to the RealtyTrac report.

US Treasury Secretary Henry Paulson said two months ago that 1.5 million foreclosures started in 2007, and that as many as 2.5 million could begin in 2008. But, by all indications, even these figures constitute only a fraction of the homes yet to be foreclosed.

Some 6.5 million US properties are set to fall into foreclosure by the end of 2012, according to a report circulated last April by Credit Suisse. Some 12.7 percent of mortgage borrowers, or 8.4 percent of all US homeowners, stand to lose their properties in the next five years, according to the report.

Credit Suisse expects that housing prices will fall by ten percent in 2008 and five percent in 2009, precipitating what it refers to as “a wave of foreclosures.” It further predicts that some 63 percent of subprime borrowers will have negative equity by 2009, compared to only about 30 percent last year.

Nearly one third of Americans who bought homes since 2003 have negative equity—that is, they owe more on their homes than their current value—according to, a property valuation company. Zillow also found that 45 percent of those who bought at the peak of the housing market in 2006 are under water.

Home values have fallen 15.8 percent in the year to May, according to the S&P Case-Schiller index, which tracks home values in 20 major cities. Moreover, nearly one quarter of home sales in the past year were at a loss to the sellers. Such circumstances raise the incentives to foreclose, driving property values lower and precipitating a downward economic spiral.

Zillow also found staggering negative equity rates in cities most affected by the housing downturn. Four cities in California—Stockton, Modesto, Merced, and Vallejo-Fairfield—had more than 90 percent of homeowners underwater. Five more cities had negative equity percentages of more than 80 percent. Half of the sales in Stockton and Modesto were foreclosed properties, compared to 15 percent nationwide.

Figures released this week by the National Association of Realtors are similarly bleak. The association found that existing home sales fell to their lowest levels since 1998, falling six percent in the past year alone. The report also notes that the median price among single-family homes fell by almost eight percent in the past year, from $223,500 to $206,500.

California cities were among the worst hit. Home values in Sacramento, the state’s capital, fell by 36 percent in the past year, while those in Riverside/San Bernadino fell by 32.7 percent and in Los Angeles fell 30 percent.

These cities, consequently, had among the highest foreclosure rates, with more than one in every 90 homes in some stage of foreclosure during the month. All in all, one in every 182 California homeowners received a foreclosure notice in July.

Cape Coral-Fort Meyers, Florida had the highest metro foreclosure rate in the country, with one in every 64 households receiving a foreclosure filing in last month.

In addition to fueling a massive social crisis, the vicious cycle of falling home values and foreclosures will drag down economic growth and fuel unemployment, as the US ruling class seeks to purge the excesses out of its financial system by writing down billions of dollars in bad debt.

While throwing open the Federal Reserve Board and the US Treasury to Wall Street speculators, the government has done next to nothing to assist the millions of people having their lives uprooted. The housing bill recently passed by Congress assists at most 400,000 homeowners, representing only six percent of the 6.5 million people estimated to fall into foreclosure by 2012.

The time for payment of debts due and the restoration of stolen property has come.
The Fire This Time. The Republicans and the Economy

David Michael Green

August 9 / 10, 2008

Any American who’s been on the planet for more than a few years has lived through a series of economic ups and downs – what economists call the business cycle. These booms and busts seem to follow one another as inevitably as sunset does sunrise.

Phil Gramm hasn’t apparently noticed, but we’re now pretty deep into an economic downturn – whether or not it officially qualifies as a recession yet or is simply on the way to becoming one.

But two things are especially striking about this particular iteration of our economic malaise. One is that we never quite seem to have had the boom we were supposed to get in between this bust and the last one. Gross domestic product, the key single indicator of economic health used to measure the state of the economy, has done reasonably well since the downturn that began in 2000. So has the stock market, and so, especially, have the one percent or so of the richest Americans, who have lately transitioned from being ridiculously rich to obscenely rich.

Most of the rest of us, on the other hand, may be excused for wondering when the good times hit, ‘cause we somehow missed it. It’s funny (hah-hah, right?), but in the go-go late 1990s, some economists were wondering whether Alan “The Second Coming” Greenspan and Robert “Token Wall Street Pseudo-Democrat” Rubin hadn’t actually killed the business cycle forever, with only good times to come for generations on end. Ironically, the subsequent decade may be considered to have posed the same question, only with a very different meaning. Given the absence of any serious recovery content in the latest alleged recovery, maybe the business cycle is dead – only not with permanent boom, but permanent bust, instead.

In truth, though, we may come to look upon years like 2004 or 2005 as the good ol’ days. That’s because the second unique thing about the present downturn is the depth of down to which we may now be turning. I’m sure somebody was relieved when George Bush recently informed the country that the economic fundamentals are solid, but it sure wasn’t me. Hard as it is to imagine that this president could get something wrong or speak, uh, somewhat less than candidly, my fear is that conditions are quite the opposite of those the cheerleader-in-chief portrayed. I remember well the recessions of the 1970s, 1980s and 1990s. This one doesn’t feel anything like those. It seems a lot bigger. My fear is that the bottom may be falling out. My fear is that it’s the fire this time.

I’m not an economist (not that economists so very often know what the hell they’re talking about either), so I will readily admit that I don’t have a lot of expertise on this question. But I will say one thing with confidence, however, even as a economics dilettante (in political science we call those people ‘angry voters’). And that is that there are incredible signs of economic thin ice almost anywhere you turn today. The national debt has never been higher. Consumer debt has never been higher. Savings have never been lower. The trade deficit has never been higher. The dollar is spectacularly weak. Foreclosures are mushrooming. Quality jobs are disappearing in droves. People are working longer to maintain the same standard of living, or often less. Employers are economizing, among other ways, by cutting healthcare benefits. Real estate values are plummeting. Sure, it’s a great time to be a bankruptcy lawyer or a repo man, but probably most of us would agree that keeping people in those two fields well employed isn’t worth the trade-off of having an economy in the toilet.

There’s no question that America has historically been an industrious, innovative and hard-working country. We still are today, though the hard-working part has gotten simultaneously more hard, less rewarding, and less driven by desire for advancement than need for survival. Perhaps the paradigmatic moment of our time was Clueless George on the campaign trail in 2004, gushing over a woman he met who said she worked three jobs to keep afloat. For Bush, it was an ‘only in America’ moment – completely oblivious, as he seemed to be, that this represents almost nobody’s vision of the good life. Well, almost nobody. One imagines that Dick Cheney was smiling in the wings of that event, thinking to himself: “Once we get all of them doing that, our work here will be done!”. Nowadays, no industrialized country in the world has workers who put in more hours per year than the US. None has such a glaring absence of economic support programs as America does, either.

But we’ve worked hard here, historically, like the good Protestants we are, and we’ve been technologically innovative and admirably determined in achieving our far-reaching aspirations. That’s all good stuff, but just the same, though, there’s been an undeniable dark side to the phenomenal success of the American economy. We’ve worked hard to produce a lot, true, but we’ve also – in a word – stolen a lot as well.

We stole from indentured servants from the beginning. We stole from Native Americans within minutes of landing here, and never stopped until we’d grabbed all the land and resources we wanted, leaving them casinos and poverty in return. We harnessed yokes around Africans and imported them as if they were agricultural beasts of burden, and continued to do so for centuries. We built our economic accomplishments on the backs of near-slave immigrant laborers, from Chinese coolies to Mexican wetbacks, along with Irish, Italian, German, Jewish and a whole lot of other nationalities in-between. We stole fully half of Mexico following a trumped-up war no less bogus than the current one in Iraq, then we did the same for Hawaii, Cuba, the Philippines and more. We broke the backs of labor movements in order to enrich a few owners while grinding ‘human resources’ into impoverishment and early death. We exploited the entire continent-and-a-half of Latin America, installing local dictators in country after country who got personally wealthy by doing the oppressive and murderous dirty work for American resource extraction corporations. We assigned to women endless domestic chores without the slightest compensation, nor political power, nor even ownership of family wealth.

These are the obvious thefts – and there is no more accurate word for it – by which we’ve massively enhanced our wealth over a period of centuries. But there are less obvious ones as well. We have raped the environment for precisely the same purposes. You can get a lot wealthier a lot faster by not concerning yourself (or even paying compensation for) the environmental destruction caused by manufacturing, mining, drilling and more, than you would by having to be responsible for those very real costs of your enterprise. Economists like to gently refer to such factors as ‘externalities’. That’s a polite way to describe a process by which the rich get even richer through offloading the costs of their business to you and me, and keeping the profits for themselves.

Not content with any of that, however, we’ve also lately been engaged in other, new and improved, more subtle forms of national wealth theft. Rampant consumerism based on little plastic cards is quite effective, leaving costs to others, like our children. So is – as exhausted consumerism now heads for the ditch – turning our houses into piggy banks to keep an economy artificially afloat, until that can no longer be sustained either. Or running incredible trade deficits, or radically deflating the value of our currency to keep sales of American goods abroad halfway viable. Another nice trick you can do is run up the national debt and leave that to your kids as well. You can also ignore your infrastructural repair and development needs so people can party on now, instead of paying the taxes necessary to keep the economy strong for the next generation. Talk about eating your young. One of the best of all these games over last decades has been the uninhibited agenda of economic globalization which has now managed to successfully export American white collar jobs to India, right behind the blue collar ones that previously went to China. That was supposed to make us all richer, remember? Some people indeed are. Those without jobs, or working for half what they used to make, aren’t in that small group however.

What all of these ploys have in common is that they are all methods allowing one to live larger than we’re rightfully entitled to. Slavery is the most obvious example. You wanna live the good life? The most basic formula ain’t that hard to figure out. Kidnap some dude from a less technologically developed part of the world, terrorize him with overwhelming force and psychological violence to go along with the real kind, then watch as he plows your field while you sit on the porch sipping Mint Juleps. Then, repeat. This is the most obvious example, yes, but really no different in principle from ripping off your own kids with tax ‘cuts’ unaccompanied by spending cuts, which drive up the national debt and hand the next generation the bill. Plus interest. Or stealing in the form of externalizing costs for remediating environmental destruction while the eco-evildoers go off scot-free with grossly inflated profits (indeed, in some cases, these would be non-existent profits, were the real costs to have been factored in). And so on, and so on.

…But the bigger point is simply this. Americans historically did well by working hard, educating themselves and bringing clever innovation to the table. But for just as long they got really rich by stealing the extra wealth, whether from someone else’s labor, from their neighbors, from the environment in which we live, or from the future.

What if there are no more piggy banks from which to steal? What happens if the US economy has finally hit the wall of remorseless reality, and can only produce what it can honestly produce? What happens to the American economy and American standards of living if all the gimmicks have been exhausted?

The fire this time?

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Monday, August 11, 2008

Signs of the Economic Apocalypse, 8-11-08


Gold closed at 864.80 dollars an ounce Friday, down 6.1% from $917.50 for the week. The dollar closed at 0.6691 euros Friday, up 4.1% from 0.6425 at the close of the previous week. That put the euro at 1.4944 dollars compared to 1.5564 the week before. Gold in euros would be 578.69 euros an ounce, down 1.9% from 589.50 at the close of the previous week. Oil closed at 115.20 dollars a barrel Friday, down 8.6% from $125.10 at the close of the Friday before. Oil in euros would be 77.09 euros a barrel, down 4.3% from 80.38 at the close of the Friday before. The gold/oil ratio closed at 7.51 Friday, up 2.5% from 7.33 for the week. In U.S. stocks, the Dow Jones Industrial Average closed at 11,734.32 Friday, up 3.6% from 11,326.32 at the close of the previous Friday. The NASDAQ closed at 2,414.10 Friday, up 4.5% from 2,310.96 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.93%, unchanged for the week.

It was a dramatic week in the markets last week, with gold falling 6% against the dollar, oil falling almost 9%, and the dollar gaining 4% against the euro. The dollar’s strength was attributed to the realization that the whole world will share in whatever downturn is facing the United States. As for the fall in the commodities like oil and gold, it could either be a correction from a commodities bubble, or a tip of the balance toward deflation and away from inflation. All of the above bodes well for U.S. corporate profits, so U.S. stocks were up sharply.
Oil's plunge powers rally on Wall Street

Kristina Cooke

Fri Aug 8, 2008

NEW YORK (Reuters) - U.S. stocks soared on Friday rounding out their best week in more than three months, as oil plunged below $115 a barrel, easing inflation concerns and improving prospects for business and consumer spending.

The slide in oil prices to their lowest level in three months powered the biggest rally in retailing shares in six years, with Home Depot gaining 7.7 percent.

That eclipsed a steeper-than-expected quarterly loss from mortgage finance company Fannie Mae.

In fact, financials rallied, helped by the view that lower inflation will make it easier for the Federal Reserve to put off interest-rate increases, at a time when the financial sector is still struggling with tighter credit conditions.

"We're at the lowest level in oil prices in months and there is a real feeling that the trend has turned," said Al Kugel, chief investment strategist at Atlantic Trust.

"Lower oil prices are good for businesses and good for consumers, for the inflation picture, and they will improve growth somewhere down the line. So it's 'win win."'

…Concerns about slowing European and Asian economies boosted the dollar and fed worries about lower demand for oil. U.S. front-month crude dropped more than $5 inpost-settlement trading to $114.62 a barrel -- more than 20 percent below its July record high…

Not so fast on the “win-win” of low oil prices. That’s not a win for the oil companies, who have just recorded more record profits. Yet, as if by magic conjured up by oil companies, war broke out near a crucial oil pipeline:
Analysis: energy pipeline that supplies West threatened by war Georgia conflict

Robin Pagnamenta

August 8, 2008

The conflict that has erupted in the Caucasus has set alarm bells ringing because of Georgia's pivotal role in the global energy market.

Georgia has no significant oil or gas reserves of its own but it is a key transit point for oil from the Caspian and central Asia destined for Europe and the US.

Crucially, it is the only practical route from this increasingly important producer region that avoids both Russia and Iran.

The 1,770km (1,100 miles) Baku-Tbilisi-Ceyhan pipeline, which entered service only last year, pumps up to 1 million barrels of oil per day from Baku in Azerbaijan to Yumurtalik, Turkey, where it is loaded on to supertankers for delivery to Europe and the US. Around 249km of the route passes through Georgia, with parts running only 55km from South Ossetia.

The security of the BTC pipeline, depicted in the James Bond film The World is Not Enough, has been a primary concern since before its construction.

The first major attack on the pipeline took place only last week - not in Georgia but in Turkey where part of it was destroyed by PKK separatist rebels.

Output from the pipeline, which is 30 per cent owned by BP and carries more than 1 per cent of the world's supply, is likely to be on hold for several weeks while the fire is extinguished and the damage repaired.

But the threat of another attack by separatists in Georgia itself is very real.
Only a few days before the Turkish explosion, Georgian separatists threatened to sabotage the pipeline if hostilities continued.

The latest eruption of violence could easily spur fresh attacks. The BTC pipeline, which is buried throughout most of its length to make sabotage more difficult, was a politically highly charged project. It was firmly opposed by Russia, which views the Caucasus as its own sphere of influence and wants central Asian oil to be exported via its own territory.

Russia also backs the South Ossetian and Abkhazian separatists in Georgia and relations between Moscow and Tbilisi have curdled into outright hostility in recent months.

The BTC pipeline, which cost $3 billion to build, is a key plank of US foreign policy because it reduces Western reliance on oil from both the Middle East and Russia.

What is going on in Georgia? Don’t look to the mainstream western media for an answer. As usual, the alternative press proves a more reliable source for analysis.

US-Russian tensions in Caucasus erupt into war

Bill Van Auken

9 August 2008

Long-escalating tensions between Russia and the former Soviet republic of Georgia erupted into full-scale war Friday, leaving hundreds if not thousands of civilians dead and turning thousands more into refugees, forced to flee for their lives.

The immediate focus of the fighting is the attempt by Georgia to militarily seize control of the enclave of South Ossetia, which has existed as a de facto independent entity for the past 16 years, and Russia’s armed intervention to counter this assault.

Underlying this military confrontation, however, are far broader conflicts. Feeding the bloody confrontation in South Ossetia is US imperialism’s drive to establish hegemony over the vast energy resources of Central Asia and the Caucasus through the assertion of American military power in the region. The Russian ruling elite, for its part, is seeking to reassert its grip over a region that was ruled by Moscow for two centuries before the dissolution of the Soviet Union in 1991.

This bitter rivalry between Washington and Moscow—the world’s two greatest nuclear powers—lends the fighting in the Caucasus a particularly explosive and dangerous character. The tensions between the two countries have been exacerbated in the recent period by the Bush administration’s drive to incorporate Georgia into the NATO alliance, a move that Moscow sees as part of an attempt to establish a military encirclement of Russia.

The US-backed Georgian regime of President Mikheil Saakashvili sent massed military units into South Ossetia on Thursday morning, after claiming that South Ossetian military forces had shelled Georgian villages, supposedly violating a unilateral cease-fire declared by Tbilisi.

While the Georgian regime initially claimed it was carrying out a “proportionate response,” it quickly became clear that it had launched an all-out military offensive aimed at conquering the region. Using artillery, tanks, truck-mounted multiple rocket launchers and war planes, the Georgian military laid siege to the South Ossetian capital of Tskhinvali.

Much of the city was reportedly in flames Friday. The regional parliament building had burned down, the university was on fire, and the town’s main hospital had been rendered inoperative by the bombardment. The International Red Cross reported that ambulances were unable to reach the wounded.

“As a result of many hours of shelling from heavy guns, the town is practically destroyed,” Marat Kulakhmetov, the commander of Russian peacekeepers in the territory, told the Russian news service Interfax.

Eduard Kokoity, the South Ossetian leader, estimated late Friday that more than 1,400 civilians had been killed in the Georgian military assault.

“I saw bodies lying on the streets, around ruined buildings, in cars,” Lyudmila Ostayeva, 50, told the Associated Press after fleeing the city with her family to a village near the Russian border. “It’s impossible to count them now. There is hardly a single building left undamaged.”

Russian Foreign Minister Sergei Lavrov charged Georgia with utilizing massive violence with the aim of forcing the Ossetian population to flee. “We are receiving reports that a policy of ethnic cleansing was being conducted in villages in South Ossetia, the number of refugees is climbing, the panic is growing, people are trying to save their lives,” said Lavrov.

According to Moscow, among the dead were ten Russian peacekeepers, while 30 more were wounded in the shelling of their barracks by the Georgian forces. The peacekeepers were deployed in the area as part of an agreement reached between Moscow, Tbilisi and South Ossetia to end the fighting that erupted following the dissolution of the Soviet Union and the subsequent bid by the peoples of South Ossetia and Abkhazia to separate from Georgia. The inhabitants in both regions feared the newly independent Georgian regime would abolish their autonomous status.

Since then, however, Tbilisi has charged that the Russian troops are backing the South Ossetian forces.

Russia seized upon the deaths of its troops and the civilian casualties as the justification for sending a tank column and infantry into South Ossetia, where they have become engaged in fierce combat with Georgian units for control of Tskhinvali.

“In accordance with the constitution and federal law, I, as president of Russia, am obliged to protect lives and dignity of Russian citizens wherever they are located,” Russian President Dmitry Medvedev told a meeting of his security council at the Kremlin. “We won’t allow the death of our compatriots to go unpunished.”

Meanwhile, Georgian authorities charged that Russian warplanes had struck the country’s military bases, airfields and the main Black Sea port of Poti late Friday and early Saturday, killing some civilians. Bombs reportedly fell on the capital of Tbilisi and on the area of the Baku-Tbilisi-Ceyhan oil pipeline.

“All day today, they’ve been bombing Georgia from numerous warplanes and specifically targeting (the) civilian population, and we have scores of wounded and dead among (the) civilian population all around the country,” Saakashvili told the US news network, CNN.

Saakashvili announced that he had called up the country’s reserves, while sources in Georgia said he was expected to announce the imposition of martial law.

The timing of the Georgian incursion, on a day when world attention was focused on the opening of the Olympics in Beijing, where both Russian Prime Minister Vladimir Putin and US President George Bush are present, hardly seemed fortuitous.

Saakashvili, however, suggested that it was Russia that had chosen the date, calling it a “brilliant moment to attack a small country” and charging that the quick response by the Russian military demonstrated Moscow’s preparations for an intervention.

The Georgian president declared that his country was “looking with hope” to the US. The armed confrontation with Russia, he claimed, “is not about Georgia anymore. It’s about America, its values... America stands up for those freedom-loving nations and supports them. That’s what America is all about.”

Under the Bush administration, Washington has attempted to forge close ties with Georgia, particularly since the US-backed “Rose Revolution” that paved the way for Saakashvili’s rise to power.

US imperialism’s main interest in Georgia is as an American bridgehead into the oil and gas-rich Caspian Basin and as a strategic transit route for funneling energy supplies out of the region, while bypassing Russia.

To cement its ties with the Georgian regime, Washington has provided hundreds millions of dollars in military aid, while sending in large numbers of US military trainers for the country’s growing armed forces.

Georgian troops, meanwhile, account for the third largest contingent participating in the US occupation of Iraq, numbering some 2,000.
Tbilisi indicated Friday that it would seek US help in bringing at least 1,000 of these soldiers back to participate in the fighting in South Ossetia.

Russian Foreign Minister Lavrov alluded to the US military support for Georgia, declaring, “Now we see Georgia has found a use for these weapons and for the special forces that were trained with the help of international instructors.” He added, “I think our European and American colleagues... should understand what is happening. And I hope very much that they will reach the right conclusions.”

Last month, US Secretary of State Condoleezza Rice paid a provocative visit to Tbilisi, denouncing Russia and reiterating US backing for Georgian NATO membership. Washington’s NATO allies in Western Europe, however, have greeted the proposal coolly, seeing it as an unnecessary provocation against Russia, upon which they depend for energy supplies.

Whether Rice during her visit gave an explicit green light for the intervention in South Ossetia, or whether the Georgian regime felt the demonstration of US support gave it the assurance of Washington’s backing for such a military action, is not known.

Chevron named an oil tanker after Condoleezza Rice.
In the wake of Friday’s assault, Washington has stopped short of providing explicit support for the Georgian action, but has made it clear that it backs the position of its client state in the Caucasus.

The United Nations Security Council failed to support a Russian-backed resolution calling for an end to the fighting because of Washington’s opposition to a clause calling on all sides to “renounce the use of force.” The clear implication is that the US is backing Georgia’s right to take military action.

Secretary of State Rice, meanwhile, issued a statement effectively condemning Russia, while providing tacit justification for Georgia’s intervention. “We call on Russia to cease attacks on Georgia by aircraft and missiles, respect Georgia’s territorial integrity, and withdraw its ground combat forces from Georgian soil,” she said. “We underscore the international community’s support for Georgia’s sovereignty and territorial integrity within its internationally recognized borders.”

The eruption of war in the Caucasus is the end product of the increasingly aggressive policy pursued by US imperialism in the wake of the dissolution of the USSR nearly 17 years ago. Washington has systematically manipulated national conflicts in the region to further its own aim of military and economic hegemony. This began with the bloody wars in the former Yugoslavia.

All of the arguments used by Washington to justify its support for Bosnia and Kosovo and its military assault on Serbia during the Balkan wars of the 1990s could be employed just as effectively to condemn Georgia’s intervention and defend South Ossetia, as well as Russia’s military intervention on its behalf.

In this case, however, Washington has elevated Georgia’s “territorial integrity” as the paramount principle in the conflict, effectively justifying Georgia’s military intervention and an assault on the province’s Russian population that Moscow has branded as “ethnic cleansing.”

The apparent contradiction between these two policies only underscores the fact that US imperialism’s supposed aversion to ethnic cleansing and the suppression of ethnic enclaves is entirely dependent upon who is doing it and whether or not it serves US strategic interests.

There is a direct link between this latest war and those waged by the US in the Balkans. In February, the US and the West recognized Kosovo’s “independence” based on its unilateral secession from Serbia, in direct violation of various UN resolutions. The aim in backing this secession—as in its support for the suppression of similar secessionist entities in Georgia—was to further US military plans for the encirclement of Russia and the securing of access routes to the Caspian Basin.

In the run-up to Kosovo’s unilateral declaration of independence, Moscow had repeatedly warned that it would set a precedent for similar actions by other territories in the former USSR—Abkhazia and South Ossetia, in particular. In its aftermath, the Russian regime stepped up its support for both territories.

Now, the eruption of war in South Ossetia poses the threat of a regional conflagration that can bring the world’s two biggest nuclear-armed powers, the US and Russia, into direct military confrontation, with the immense dangers that such a conflict poses to humanity.

Presto, rising oil prices:
Oil Rises From 14-Week Low as Georgia Conflict Threatens Supply

Gavin Evans

Aug. 11 (Bloomberg) -- Crude oil gained in New York on concern oil supplies from the Caspian Sea may be disrupted should the conflict in Georgia escalate.

Oil rose from a 14-week low as fighting in the central European state entered a fifth day. Russian jets fired more than 50 missiles at the BP Plc-operated Baku-Tblisi-Ceyhan oil pipeline south of the Georgian capital of Tbilisi, the Daily Telegraph reported yesterday. There were no visible signs of damage to the pipeline, the newspaper reported.

“Whether we get an actual physical disruption in supply to Europe, that will be the critical thing,” said Gerard Burg, energy and minerals economist at National Australia Bank Ltd. in Melbourne. “If it impacts on Brent, it is going to affect a much wider market and has the potential to send prices higher.”
Crude oil for September delivery rose as much as $1.30, or 1.1 percent, to $116.50 a barrel in after-hours electronic trading on the New York Mercantile Exchange. It was at $115.99 at 7:58 a.m. in Singapore.

Brent crude for September settlement rose 92 cents, or 0.8 percent, to $114.25 on the ICE Futures Europe exchange the same time.

Russian troops entered the breakaway province of South Ossetia on Aug. 8 after fighting between local forces and the Georgian army. Georgia, which has withdrawn its forces, is now under attack from warplanes and artillery fire from neighboring Abkhazia province.

Baku Pipelines

The Baku-Tblisi-Ceyhan pipeline was shut Aug. 5 after a blast on part of the line in eastern Turkey. The pipeline had been delivering about 800,000 barrels of oil a day to the Turkish port of Ceyhan before the shutdown, BP said last week.

Crude oil deliveries on the Baku-Supsa pipeline to Georgia's Black Sea coast are unchanged from last week, BP Plc said yesterday.

Unless supplies are stopped or the conflict escalates, oil prices may come under pressure from the rising U.S. dollar and a more “bearish mood” toward most commodities, National Australia's Burg said.

New York oil futures fell 4 percent to settle at $115.20 on Aug. 8, after a plunge in the euro reduced the investment appeal of commodities. Gold, copper and grains also fell as weaker growth prospects in Europe reduced the likelihood of rate increases there and delivered the dollar its biggest gain against the euro since September, 2001.

The euro fell for a fourth day today, trading as low as $1.4911 in early Asian trading. It was last at $1.4950 from $1.5005 in late New York trading last week.
New York oil futures traded as low as $114.62 on Aug. 8, dropping below the $116.76 level that marks a 50 percent retracement of the climb in prices from February to July's record $147.27 a barrel. Some traders use the Fibonacci analysis to suggest prices that may encourage investors to buy or sell a commodity.

“It fell very heavily,” Burg said. “You can often see a little bit of a rebound in those situations.”

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Monday, August 04, 2008

Signs of the Economic Apocalypse, 8-4-08


Gold closed at 917.50 dollars an ounce Friday, down 1.0% from $926.80 for the week. The dollar closed at 0.6425 euros Friday, up 0.8% from 0.6371 at the close of the previous week. That put the euro at 1.5564 dollars compared to 1.5697 the week before. Gold in euros would be 589.50 euros an ounce, down 0.2% from 590.43 at the close of the previous week. Oil closed at 125.10 dollars a barrel Friday, up 1.4% from $123.41 for the week. Oil in euros would be 80.38 euros a barrel, up 2.2% from 78.62 at the close of the Friday before. The gold/oil ratio closed at 7.33 Friday, down 2.5% from 7.51 for the week. In U.S. stocks, the Dow closed at 11,326.32 Friday, down 0.4% from 11,371.92 at the close of the previous Friday. The NASDAQ closed at 2,310.96 Friday, virtually unchanged from 2,310.79 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.93%, down 16 basis points from 4.09 for the week.

A commentor on last week’s commentary pointed out that four more U.S. banks had failed since the IndyMac run. I missed that news. Events get so strange and alarming that they become the new normal. Ho-hum another bank failure. Apparently I wasn’t the only one because the mainstream media has been keeping this as quiet as possible. Mike Whitney wrote about this last week, quoting the chairperson of the FDIC (U.S. Federal Deposit Insurance Corporation) who was worried that internet blogs were making it harder to keep news of bank failures out of the news.

Bad News and Bank Runs: A Shock to the Collective Psyche

Mike Whitney

July 28, 2008

The Bush administration is going to be mailing out more "stimulus" checks in the very near future. There's just no way around it. The Fed is in a pickle and can't lower interest rates for fear that food and energy prices will shoot into the stratosphere. At the same time, the economy is shrinking faster than anyone thought possible with no sign of a rebound. That leaves stimulus checks as the only way to "prime the pump" and keep consumer spending chugging along. Otherwise business activity will slow to a crawl and the economy will tank. There's no other choice.

The daily barrage of bad news is really starting to get on people's nerves; it's obvious everywhere you look. Most of the TV chatterboxes have already cut-out the cheery stock market predictions and no one is praising the "impressive powers of the free market" any more. They know things are bad, real bad. That's why the business news is no longer presented like a happy-go-lucky Bollywood extravaganza with undulating females and exotic music. Now it’s more like B-grade slasher movie where everyone winds up dead at the end of the show.

A pervasive sense of gloom has crept into the television studios just like it has into the stock exchanges and the luxury penthouses on Manhattan's West End. It's palpable. That same sense of foreboding is creeping like a noxious cloud to every town and city across the country. Everyone is cutting back on non-essentials and trimming the fat from the family budget. The days of extravagant impulse-spending at the mall are over. So are the big ticket purchases and the trips to Europe. Consumer confidence is at historic lows, disposal income is a thing of the past, and credit cards are at their limit.

In the last three months bank credit has shrunk faster than any time since 1948. The banks aren't lending and people aren't borrowing; that's a lethal combo. When credit-creation slows, the economy falters, unemployment rises and the misery index soars. That's why Bush will mail out a new batch of stimulus checks whether he wants to or not; his back is up against the wall.

On Friday, after the market had closed, the FDIC shut down two more banks, First Heritage Bank and First National Bank. Kaboom. Two weeks earlier, regulators seized Indymac Bancorp following a run by depositors. The FDIC now operates like a stealth paramilitary unit, deploying its shock troops on the weekends to do their dirty work out of the public eye and at times when it will least effect the stock market. The reasons for this are obvious; there's only one thing the government hates more than seeing flag-draped coffins on the evening news, and that's seeing long lines of frantic people waiting impatiently to get what's left of their savings out of their now-deceased bank. Lines at the bank signal that the system is broken.

Banks-runs are a shock to the collective psyche. When depositors see a bank run they realize that their money is not safe. People aren't fools; they can smell a rat. When their confidence wanes, it extends to the whole system. Suddenly they start questioning everything they once took for granted. They become skeptical of the institutions which, just days earlier, seemed rock-solid.

Bank runs are a direct hit on the foundation of the free market system. Unchecked, the tremors can ripple through the entire society and trigger violent political upheaval, even revolution. The public may not grasp their significance, but everyone in Washington is paying attention. They take it seriously, very seriously.

An article in the San Francisco Business Times said that the FDIC is worried about the reporting on Internet blogs. They'd rather keep the information about the troubles in the banking system out of the news. Sheila Bair, chairman of the Federal Deposit Insurance Corp., summed it up like this after the run on Indymac:

"The blogs were a bit out of control. We're very mindful of the media coverage and blogs in controlling misinformation. All I can say is were going to continue to stay on top of it. The misinformation that came out over the weekend fed a lot of depositors' fears."

Is that a threat? The cure for a failed banking system is adequate capital and prudent oversight not threats to impartial critics of the system. That's balderdash. Commissar Blair apparently believes that bloggers should be treated the same way as journalists in Iraq, who, if they veer ever so slightly from the Pentagon's "the surge is a great triumph" script, find themselves on the smoky end of an M-16 at some unmarked checkpoint outside Baquba.

Last Sunday, sought Treasury Secretary Henry Paulson tried to reassure the public that the banking system is sound, while bracing people for more trouble ahead:
"I think it's going to be months that we're working our way through this period — clearly months. But again, it's a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation."

Paulson is wrong; the banking system is not sound nor is it well capitalized.

If the rate of bank closures continues at the present pace, by the middle of 2009 their will be restrictions on withdrawals. Bet on it.

So, while your bank still has money and can process your checks, it may be time to pay down debts, pay quarterly taxes and mortgage payments in advance, and think of having money outside of banks (gold, foreign currencies), etc., before your money is inaccessible or even evaporates! Don’t think all your investments outside of banks are immune from all this turmoil.
For example, money market mutual funds, where Americans have invested $3 trillion, are not covered by FDIC insurance (however, money market accounts offered by banks are covered). Recent losses in some of these money market mutual funds have caused some companies to rush to plug the losses. For example, Legg Mason Inc. and SunTrust Banks Inc., recently pumped $1.4 billion each into its money market funds. Bank of America Corp. has injected $600 million.

As for your checking and savings accounts, recognize you may have five different accounts in the same bank, but the FDIC only insures individuals, not each account, up to $100,000. Putting your money in different accounts in the same bank does not necessarily provide better insurance for your deposits.

And, sure enough, on Friday night, the FDIC announced another bank failure:

Small Florida bank is 8th U.S. failure this year

Fri Aug 1, 9:51 PM ET

WASHINGTON (Reuters) - Bank regulators closed a small Florida-based bank on Friday, the eighth U.S. bank to fail this year under pressure from a weak economy and a credit crisis precipitated by falling home prices.

The Federal Deposit Insurance Corp said First Priority Bank had $259 million in assets and $227 million in deposits and its failure will cost the federal fund that insures deposits an estimated $72 million.

SunTrust Banks Inc has agreed to assume the insured deposits of First Priority, whose six branches will reopen Monday as branches of SunTrust Bank.
Customers can access their money over the weekend by check, teller machine or debit card, the FDIC said.

It is the first bank to fail in Florida since Guaranty National Bank of Tallahassee failed in March 2004, according to the FDIC, which blamed the failure on exposure to the real estate market, predominantly in the construction lending area.

Florida is among several states whose housing markets have seen the sharpest declines.

The biggest bank failure by far this year is IndyMac, seized on July 11 with $32 billion in assets and $19 billion in deposits as of March, and the third-largest bank insolvency in U.S. history.

The FDIC oversees an industry-funded reserve used to insure up to $100,000 per account and $250,000 per individual retirement account at insured banks.

The agency also has running tally of problem banks that its examiners closely monitor. At the end of first quarter, 90 institutions were on that list.

The FDIC does not name the institutions on the list, which is expected to be updated this month for the second quarter.

Lots of attention has been paid to the credit crunch for consumers, but small businesses now face difficulty obtainint loans:

Worried Banks Sharply Reduce Business Loans

Peter S. Goodman

July 28, 2008

Banks struggling to recover from multibillion-dollar losses on real estate are curtailing loans to American businesses, depriving even healthy companies of money for expansion and hiring.

Two vital forms of credit used by companies — commercial and industrial loans from banks, and short-term “commercial paper” not backed by collateral — collectively dropped almost 3 percent over the last year, to $3.27 trillion from $3.36 trillion, according to Federal Reserve data. That is the largest annual decline since the credit tightening that began with the last recession, in 2001.

The scarcity of credit has intensified the strains on the economy by withholding capital from many companies, just as joblessness grows and consumers pull back from spending in the face of high gas prices, plummeting home values and mounting debt.

“The second half of the year is shot,” said Michael T. Darda, chief economist at the trading firm MKM Partners in Greenwich, Conn., who was until recently optimistic that the economy would continue expanding. “Access to capital and credit is essential to growth. If that access is restrained or blocked, the economic system takes a hit.”

Companies that rely on credit are now delaying and canceling expansion plans as they struggle to secure finance.

Drew Greenblatt, president of Marlin Steel Wire Products, figured it would be easy to get a $300,000 bank loan to finance a new robot for his factory in Baltimore. His company, which makes parts for makers of home appliances, is growing and profitable, he said. His expansion would add three new jobs to an economy hungry for work.

But when Mr. Greenblatt called the local branch of Wachovia — the same bank that had been aggressively marketing loans to him for years — he was distressed by the response.

“The exact words were, ‘We’re saying no to almost everybody,’ ” Mr. Greenblatt recalled. “This is why God made banks, for this kind of transaction. This is going to slow down the American economy.”

Earlier this year, credit extended by banks to companies and consumers was still growing at double-digit rates compared with three months earlier, according to an analysis of Federal Reserve data by Goldman Sachs. By mid-June, bank credit was declining at an annualized pace of more than 6 percent.

That is a drop of nearly $150 billion, an amount much larger than the value of the tax rebates the government has sent to households this year in an effort to spur economic activity.

Financial industry executives say tighter credit from major banks represents a swing back to a realistic assessment of risk, after years of handing out money with abandon. Those practices produced a mortgage crisis whose losses could reach $1 trillion, by many estimates.

“Before, they wouldn’t verify income and they were loose on the valuations of collateral,” said John W. Kiefer, chief executive of First Capital, a private commercial lender. “Now they’re tightening down on the ability to repay. They go off the reservation, and now they come back to basics. It’s preservation for many of them at this point. It’s survival.”

But if the newfound caution of American banks is prudent in the long run, the immediate impact is amplifying the troubles with the economy. The Federal Reserve has been lowering interest rates aggressively to make money flow more loosely and to spur economic activity.

The financial system is not going along: As banks hold on to their dollars, mortgage rates are climbing. So are borrowing costs for corporations.

Some suggest that the banks, spooked by enormous losses, have replaced a disastrously indiscriminate willingness to hand out money with an equally arbitrary aversion to lend — even on industries that continue to grow.

“There’s been a lot of disruption in the credit market, and a lot of traditional lenders have really tightened up,” said Gregory Goldstein, president of Macquarie Equipment Finance, which leases computer gear and other technology to companies. “Before, some of the standards they lent on were weak, but we think they have overshot and gone too far on the other end.”

Such was Mr. Greenblatt’s reaction, as he learned that an infusion of credit for his Baltimore factory would not come easily. His company has been enjoying double-digit sales growth. This month, it received the two largest orders in its history, he said.

“It was jubilation,” he said. “I was doing the Funky Chicken.”

The initial call to Wachovia left him dismayed.

“I’m stunned,” Mr. Greenblatt said. “God is smiling on this factory. We’re at such an exciting inflection point, and this is what a bank is supposed to do. There’s sand in the gears.”

No loan meant one fewer order for the factory in Chicago that makes the robot Mr. Greenblatt wants to buy, and fewer hours for workers there. It meant less business for the truck driver who would have hauled the robot to Baltimore, and no help-wanted ads for Marlin Steel Wire Products.

Mr. Greenblatt eventually got oral approval for the loan, though after more than a week. He was still waiting for the money at the end of last week.

Wachovia, which lost $8.9 billion in the second quarter, declined to discuss the loan. But the bank confirmed that it has been reducing its lending in troubled areas of the economy.

…But recent signs suggest that tight lending is spilling from housing into other areas of the business world. Companies with solid credit and profitable businesses can generally still get loans, but rates are higher and wait times are longer.

According to a survey of senior loan officers conducted by the Federal Reserve in April, 55 percent of American banks tightened lending requirements for commercial and industrial loans to large and midsize companies — up from about 30 percent in the previous survey, in January. About 70 percent of the respondents said they have made such loans more expensive.

“Banks will be much more cautious and keep raising the bar, and that will lead to an outright decline in total commercial and industrial loans,” predicted Stuart G. Hoffman, chief economist at the PNC Financial Services Group in Pittsburgh. “Banks clearly have to rebuild their capital base. They’re going to look a bit more nervously before they make those loans.”

Until last summer, banks lent freely, banking experts say, because they sold most of the loans they issued, making them less concerned about whether the customer could handle the payments: If the loan went bad, that was someone else’s problem.

But in the wake of the mortgage crisis, that system has all but shut down. Banks are now stuck with the loans they extend, making them more motivated to scrutinize their customers, particularly younger and smaller businesses.

“It’s the small business guy who creates most of the jobs,” said Mr. Kiefer, the First Capital chief executive. “If they can’t borrow to employ people, then we’ve got a mess on our hands…

While all the events in the banking crisis and the next Great Depression unfold, multinational corporations have quietly taken over core government functions in the United States, most alarmingly in the areas of war and intelligence. This may be one of the most important trends of the new century and probably has more ramifications than we can imagine and we are probably past the point of no return. Add to that the stories of trillions of dollars that can’t be accounted for and the billions in the “black budget” for intelligence and you have to wonder how much of the real economy is off the books. If so, how accurate can the macroeconomic models be? Is there some kind of “dark matter” that has to be taken into account?

The process has been covered very well by Naomi Klein, in The Shock Doctrine, where she describes the drive by U.S. Defense Secretary Donald Rumsfeld to “bring the revolution in outsourcing and branding that he had been part of in the corporate world into the heart of the U.S. military.” (The Shock Doctrine, p. 284) Chalmers Johnson wrote about the process in a long piece that appeared last week in Salon:

When war goes corporate

Grave threats to our national security may now include the mass privatization of U.S. intelligence and military operations.

Chalmers Johnson

Jul. 31, 2008

Most Americans have a rough idea what the term "military-industrial complex" means when they come across it in a newspaper or hear a politician mention it. President Dwight D. Eisenhower introduced the idea to the public in his farewell address of January 17, 1961. "Our military organization today bears little relation to that known by any of my predecessors in peacetime," he said, "or indeed by the fighting men of World War II and Korea … We have been compelled to create a permanent armaments industry of vast proportions … We must not fail to comprehend its grave implications … We must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex."

Although Eisenhower's reference to the military-industrial complex is, by now, well-known, his warning against its "unwarranted influence" has, I believe, largely been ignored. Since 1961, there has been too little serious study of, or discussion of, the origins of the military-industrial complex, how it has changed over time, how governmental secrecy has hidden it from oversight by members of Congress or attentive citizens, and how it degrades our constitutional structure of checks and balances.

From its origins in the early 1940s, when President Franklin Delano Roosevelt was building up his "arsenal of democracy," down to the present moment, public opinion has usually assumed that it involved more or less equitable relations -- often termed a "partnership" -- between the high command and civilian overlords of the United States military and privately owned, for-profit manufacturing and service enterprises. Unfortunately, the truth of the matter is that, from the time they first emerged, these relations were never equitable.

In the formative years of the military-industrial complex, the public still deeply distrusted privately owned industrial firms because of the way they had contributed to the Great Depression. Thus, the leading role in the newly emerging relationship was played by the official governmental sector. A deeply popular, charismatic president, FDR sponsored these public-private relationships. They gained further legitimacy because their purpose was to rearm the country, as well as allied nations around the world, against the gathering forces of fascism. The private sector was eager to go along with this largely as a way to regain public trust and disguise its wartime profit-making. In the late 1930s and early 1940s, Roosevelt's use of public-private "partnerships" to build up the munitions industry, and thereby finally overcome the Great Depression, did not go entirely unchallenged. Although he was himself an implacable enemy of fascism, a few people thought that the president nonetheless was coming close to copying some of its key institutions. The leading Italian philosopher of fascism, the neo-Hegelian Giovanni Gentile, once argued that it should more appropriately be called "corporatism" because it was a merger of state and corporate power.

Some critics were alarmed early on by the growing symbiotic relationship between government and corporate officials because each simultaneously sheltered and empowered the other, while greatly confusing the separation of powers. Since the activities of a corporation are less amenable to public or congressional scrutiny than those of a public institution, public-private collaborative relationships afford the private sector an added measure of security from such scrutiny. These concerns were ultimately swamped by enthusiasm for the war effort and the postwar era of prosperity that the war produced.

Beneath the surface, however, was a less well recognized movement by big business to replace democratic institutions with those representing the interests of capital. This movement is today ascendant. (See Thomas Frank's book "The Wrecking Crew: How Conservatives Rule," for a superb analysis of Ronald Reagan's slogan "government is not a solution to our problem, government is the problem.") Its objectives have long been to discredit what it called "big government," while capturing for private interests the tremendous sums invested by the public sector in national defense. It may be understood as a slow-burning reaction to what American conservatives believed to be the socialism of the New Deal.

Perhaps the country's leading theorist of democracy, Sheldon S. Wolin, has written a book, "Democracy Incorporated," on what he calls "inverted totalitarianism" -- the rise in the U.S. of totalitarian institutions of conformity and regimentation shorn of the police repression of the earlier German, Italian, and Soviet forms. He warns of "the expansion of private (i.e., mainly corporate) power and the selective abdication of governmental responsibility for the well-being of the citizenry." He also decries the degree to which the so-called privatization of governmental activities has insidiously undercut our democracy, leaving us with the widespread belief that government is no longer needed and that, in any case, it is not capable of performing the functions we have entrusted to it.

Wolin writes:

"The privatization of public services and functions manifests the steady evolution of corporate power into a political form, into an integral, even dominant partner with the state. It marks the transformation of American politics and its political culture, from a system in which democratic practices and values were, if not defining, at least major contributory elements, to one where the remaining democratic elements of the state and its populist programs are being systematically dismantled."

Mercenaries at work

The military-industrial complex has changed radically since World War II or even the height of the Cold War. The private sector is now fully ascendant. The uniformed air, land and naval forces of the country as well as its intelligence agencies, including the CIA (Central Intelligence Agency), the NSA (National Security Agency), the DIA (Defense Intelligence Agency), and even clandestine networks entrusted with the dangerous work of penetrating and spying on terrorist organizations are all dependent on hordes of "private contractors." In the context of governmental national security functions, a better term for these might be "mercenaries" working in private for profit-making companies.

Tim Shorrock, an investigative journalist and the leading authority on this subject, sums up this situation devastatingly in his new book, "Spies for Hire: The Secret World of Intelligence Outsourcing." The following quotes are a précis of some of his key findings:

"In 2006 … the cost of America's spying and surveillance activities outsourced to contractors reached $42 billion, or about 70 percent of the estimated $60 billion the government spends each year on foreign and domestic intelligence … [The] number of contract employees now exceeds [the CIA's] full-time workforce of 17,500 … Contractors make up more than half the workforce of the CIA's National Clandestine Service (formerly the Directorate of Operations), which conducts covert operations and recruits spies abroad …

…"The key phrase in the new counterterrorism lexicon is 'public-private partnerships' … In reality, 'partnerships' are a convenient cover for the perpetuation of corporate interests."

Several inferences can be drawn from Shorrock's shocking exposé. One is that if a foreign espionage service wanted to penetrate American military and governmental secrets, its easiest path would not be to gain access to any official U.S. agencies, but simply to get its agents jobs at any of the large intelligence-oriented private companies on which the government has become remarkably dependent. These include Science Applications International Corporation (SAIC), with headquarters in San Diego, California, which typically pays its 42,000 employees higher salaries than if they worked at similar jobs in the government; Booz Allen Hamilton, one of the nation's oldest intelligence and clandestine-operations contractors, which, until January 2007, was the employer of Mike McConnell, the current director of national intelligence and the first private contractor to be named to lead the entire intelligence community; and CACI International, which, under two contracts for "information technology services," ended up supplying some two dozen interrogators to the Army at Iraq's already infamous Abu Ghraib prison in 2003. According to Major General Anthony Taguba, who investigated the Abu Ghraib torture and abuse scandal, four of CACI's interrogators were "either directly or indirectly responsible" for torturing prisoners.

Remarkably enough, SAIC has virtually replaced the National Security Agency as the primary collector of signals intelligence for the government. It is the NSA's largest contractor, and that agency is today the company's single largest customer.
There are literally thousands of other profit-making enterprises that work to supply the government with so-called intelligence needs, sometimes even bribing congressmen to fund projects that no one in the executive branch actually wants. This was the case with Congressman Randy "Duke" Cunningham, Republican of California's 50th District, who, in 2006, was sentenced to eight-and-a-half years in federal prison for soliciting bribes from defense contractors. One of the bribers, Brent Wilkes, snagged a $9.7 million contract for his company, ADCS ("Automated Document Conversion Systems"), to computerize the century-old records of the Panama Canal dig!

A country drowning in euphemisms

…I applaud Shorrock for his extraordinary research into an almost impenetrable subject using only openly available sources. There is, however, one aspect of his analysis with which I differ. This is his contention that the wholesale takeover of official intelligence collection and analysis by private companies is a form of "outsourcing." This term is usually restricted to a business enterprise buying goods and services that it does not want to manufacture or supply in-house. When it is applied to a governmental agency that turns over many, if not all, of its key functions to a risk-averse company trying to make a return on its investment, "outsourcing" simply becomes a euphemism for mercenary activities.

As David Bromwich, a political critic and Yale professor of literature, observed in the New York Review of Books:

"The separate bookkeeping and accountability devised for Blackwater, DynCorp, Triple Canopy, and similar outfits was part of a careful displacement of oversight from Congress to the vice-president and the stewards of his policies in various departments and agencies. To have much of the work parceled out to private companies who are unaccountable to army rules or military justice, meant, among its other advantages, that the cost of the war could be concealed beyond all detection."

Euphemisms are words intended to deceive. The United States is already close to drowning in them, particularly new words and terms devised, or brought to bear, to justify the American invasion of Iraq -- coinages Bromwich highlights like "regime change," "enhanced interrogation techniques," "the global war on terrorism," "the birth pangs of a new Middle East," a "slight uptick in violence," "bringing torture within the law," "simulated drowning," and, of course, "collateral damage," meaning the slaughter of unarmed civilians by American troops and aircraft followed -- rarely -- by perfunctory apologies. It is important that the intrusion of unelected corporate officials with hidden profit motives into what are ostensibly public political activities not be confused with private businesses buying Scotch tape, paper clips, or hubcaps.

The wholesale transfer of military and intelligence functions to private, often anonymous, operatives took off under Ronald Reagan's presidency, and accelerated greatly after 9/11 under George W. Bush and Dick Cheney. Often not well understood, however, is this: The biggest private expansion into intelligence and other areas of government occurred under the presidency of Bill Clinton. He seems not to have had the same anti-governmental and neoconservative motives as the privatizers of both the Reagan and Bush II eras. His policies typically involved an indifference to -- perhaps even an ignorance of -- what was actually being done to democratic, accountable government in the name of cost-cutting and allegedly greater efficiency. It is one of the strengths of Shorrock's study that he goes into detail on Clinton's contributions to the wholesale privatization of our government, and of the intelligence agencies in particular.

Reagan launched his campaign to shrink the size of government and offer a large share of public expenditures to the private sector with the creation in 1982 of the "Private Sector Survey on Cost Control." In charge of the survey, which became known as the "Grace Commission," he named the conservative businessman J. Peter Grace Jr., chairman of the W.R. Grace Corporation, one of the world's largest chemical companies -- notorious for its production of asbestos and its involvement in numerous anti-pollution suits. The Grace Company also had a long history of investment in Latin America, and Peter Grace was deeply committed to undercutting what he saw as leftist unions, particularly because they often favored state-led economic development.

The Grace Commission's actual achievements were modest. Its biggest was undoubtedly the 1987 privatization of Conrail, the freight railroad for the Northeastern states. Nothing much else happened on this front during the first Bush's administration, but Bill Clinton returned to privatization with a vengeance.

According to Shorrock:

"Bill Clinton … picked up the cudgel where the conservative Ronald Reagan left off and … took it deep into services once considered inherently governmental, including high-risk military operations and intelligence functions once reserved only for government agencies. By the end of [Clinton's first] term, more than 100,000 Pentagon jobs had been transferred to companies in the private sector -- among them thousands of jobs in intelligence … By the end of [his second] term in 2001, the administration had cut 360,000 jobs from the federal payroll and the government was spending 44 percent more on contractors than it had in 1993."

These activities were greatly abetted by the fact that the Republicans had gained control of the House of Representatives in 1994 for the first time in 43 years. One liberal journalist described "outsourcing as a virtual joint venture between [House Majority Leader Newt] Gingrich and Clinton." The right-wing Heritage Foundation aptly labeled Clinton's 1996 budget as the "boldest privatization agenda put forth by any president to date."

After 2001, Bush and Cheney added an ideological rationale to the process Clinton had already launched so efficiently. They were enthusiastic supporters of "a neoconservative drive to siphon U.S. spending on defense, national security, and social programs to large corporations friendly to the Bush administration."

The privatization -- and loss -- of institutional memory

The end result is what we see today: a government hollowed out in terms of military and intelligence functions. The KBR Corporation, for example, supplies food, laundry and other personal services to our troops in Iraq based on extremely lucrative no-bid contracts, while Blackwater Worldwide supplies security and analytical services to the CIA and the state department in Baghdad. (Among other things, its armed mercenaries opened fire on, and killed, 17 unarmed civilians in Nisour Square, Baghdad, on Sept. 16, 2007, without any provocation, according to U.S. military reports.) The costs -- both financial and personal -- of privatization in the armed services and the intelligence community far exceed any alleged savings, and some of the consequences for democratic governance may prove irreparable.

These consequences include the sacrifice of professionalism within our intelligence services; the readiness of private contractors to engage in illegal activities without compunction and with impunity; the inability of Congress or citizens to carry out effective oversight of privately managed intelligence activities because of the wall of secrecy that surrounds them; and, perhaps most serious of all, the loss of the most valuable asset any intelligence organization possesses -- its institutional memory.

Most of these consequences are obvious, even if almost never commented on by our politicians or paid much attention in the mainstream media. After all, the standards of a career CIA officer are very different from those of a corporate executive who must keep his eye on the contract he is fulfilling and future contracts that will determine the viability of his firm. The essence of professionalism for a career intelligence analyst is his integrity in laying out what the U.S. government should know about a foreign policy issue, regardless of the political interests of, or the costs to, the major players.

The loss of such professionalism within the CIA was starkly revealed in the 2002 National Intelligence Estimate on Iraq's possession of weapons of mass destruction. It still seems astonishing that no senior official, beginning with Secretary of State Colin Powell, saw fit to resign when the true dimensions of our intelligence failure became clear, least of all Director of Central Intelligence George Tenet.

A willingness to engage in activities ranging from the dubious to the outright felonious seems even more prevalent among our intelligence contractors than among the agencies themselves, and much harder for an outsider to detect. For example, following 9/11, Rear Admiral John Poindexter, then working for the Defense Advanced Research Projects Agency (DARPA) of the Department of Defense, got the bright idea that DARPA should start compiling dossiers on as many American citizens as possible in order to see whether "data-mining" procedures might reveal patterns of behavior associated with terrorist activities.

On Nov. 14, 2002, the New York Times published a column by William Safire entitled "You Are a Suspect" in which he revealed that DARPA had been given a $200 million budget to compile dossiers on 300 million Americans. He wrote, "Every purchase you make with a credit card, every magazine subscription you buy and medical prescription you fill, every web site you visit and every e-mail you send or receive, every bank deposit you make, every trip you book, and every event you attend -- all these transactions and communications will go into what the Defense Department describes as a ‘virtual centralized grand database.'" This struck many members of Congress as too close to the practices of the Gestapo and the Stasi under German totalitarianism, and so, the following year, they voted to defund the project.

However, Congress's action did not end the "total information awareness" program. The National Security Agency secretly decided to continue it through its private contractors. The NSA easily persuaded SAIC and Booz Allen Hamilton to carry on with what Congress had declared to be a violation of the privacy rights of the American public -- for a price. As far as we know, Admiral Poindexter's "Total Information Awareness Program" is still going strong today.

The most serious immediate consequence of the privatization of official governmental activities is the loss of institutional memory by our government's most sensitive organizations and agencies. Shorrock concludes, "So many former intelligence officers joined the private sector [during the 1990s] that, by the turn of the century, the institutional memory of the United States intelligence community now resides in the private sector. That's pretty much where things stood on September 11, 2001."

This means that the CIA, the DIA, the NSA, and the other 13 agencies in the U.S. intelligence community cannot easily be reformed because their staffs have largely forgotten what they are supposed to do or how to go about it. They have not been drilled and disciplined in the techniques, unexpected outcomes, and know-how of previous projects, successful and failed.

As numerous studies have, by now, made clear, the abject failure of the American occupation of Iraq came about in significant measure because the Department of Defense sent a remarkably privatized military filled with incompetent amateurs to Baghdad to administer the running of a defeated country. Defense Secretary Robert M. Gates (a former director of the CIA) has repeatedly warned that the United States is turning over far too many functions to the military because of its hollowing out of the Department of State and the Agency for International Development since the end of the Cold War. Gates believes that we are witnessing a "creeping militarization" of foreign policy -- and, though this generally goes unsaid, both the military and the intelligence services have turned over far too many of their tasks to private companies and mercenaries.

When even Robert Gates begins to sound like President Eisenhower, it is time for ordinary citizens to pay attention. In my 2006 book "Nemesis: The Last Days of the American Republic," with an eye to bringing the imperial presidency under some modest control, I advocated that we Americans abolish the CIA altogether, along with other dangerous and redundant agencies in our alphabet soup of 16 secret intelligence agencies, and replace them with the State Department's professional staff devoted to collecting and analyzing foreign intelligence. I still hold that position.

Nonetheless, the current situation represents the worst of all possible worlds. Successive administrations and Congresses have made no effort to alter the CIA's role as the president's private army, even as we have increased its incompetence by turning over many of its functions to the private sector. We have thereby heightened the risks of war by accident, or by presidential whim, as well as of surprise attack because our government is no longer capable of accurately assessing what is going on in the world and because its intelligence agencies are so open to pressure, penetration and manipulation of every kind.

Chalmers Johnson here seems to back off from the implications of what he is relating, keeping the discussion well within the bounds of how “our” government should assess “what’s going on in the world.” This is not unusual for mainstream journalists and veterans of the so-called “intelligence community.”

In any case, as Naomi Klein points out, the unaccountable corporate money-power of the fully privatized pathocracy is now well placed to assume full control should the economy collapse. And it is well-placed to decide if and when the economy collapses.

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