Rescuing Capitalism or Grand Theft & Military Dictatorship?

By Simon Davies and Donald Hunt
SOTT.net

World stock indexes fell the week ending 16th February led by the Dow losing more than 5% while gold continued to inch its way towards the psychologically important $1,000/oz level, driven by the approach of what looks like another emerging market crisis in Eastern Europe which is driving the Euro and Sterling lower, sending - it would seem - mobile money towards gold. The big US news, however, was the passage of the almost $800 billion stimulus package in the United States and the decidedly lukewarm reception to US Treasury Secretary Timothy Geithner's much heralded $2 trillion bank rescue plan.

The G7 finance ministers met in Rome in an exercise in hot air generation, stating, as if we needed reminding, that the "downturn" will persist through 2009 and that the various "stimulus measures" won't have any noticeable effect for a while as they "build over time". The ministers did pledge to restore confidence to financial markets and growth to the world economy but didn't happen to mention how they plan to do it. Timothy Geithner demanded "exceptional measures" from his counterparts which we can only assume means "exceptionally large amounts of money" to prop up the international banking system so that it can continue to concentrate even greater wealth in even fewer hands.

The vagueness of Mr Geithner's plan for rescuing US banks is rather strange considering his technocrat status and that his boss promised "change" which one might have hoped meant something different. Yet all we have seen so far from both Mr Geithner and Barack Obama is more of the same. They haven't the simple courage nor the desire to tell us straight that they need to recapitalise the US banking system to the tune of some $6 trillion - that's $6,000,000,000,000 - that they plan to have the US taxpayer bear the burden of almost incalculable losses from worthless assets all the while urging austerity and sacrifice for all but the elite including the further decimation of the last threads of America's social fabric. Instead they brandish rescue plans, stimulus packages and a myriad of programme acronyms in the hope that we might not notice.

Across the Atlantic the same games are being played. The distraction of the week being a ritualized bashing of banker's bonuses. In the UK, the Chancellor of the Exchequer, Alastair Darling, was decidedly ill at ease in a Channel 4 TV interview when pressed on the bonuses to be paid to bankers at the Royal Bank of Scotland which is now 69% government owned and whose excess liabilities over the every diminishing value of its assets are now on the balance sheet of the UK Treasury. He really is caught between a rock and a hard place - in one ear he can hear the clamour of the street, the people whose money he has liberally dished out to the Royal Bank of Scotland while in the other he has the whispering bankers who tell him that all will be lost if he can't retain the best staff, the ones who can make the bank profitable again. No doubt Barack Obama finds himself in much the same position.

Both of those voices are right; it is ridiculous to have a business that has been rescued with public money pay out vast wads of it to the already well remunerated employees when in any other business they'd have been sent home as the shutters were pulled down for the last time. That is what happened to the coal miners, steel workers and printer workers under Margaret Thatcher, that is what happened in every other industry and business that "couldn't cut it" in the world of the free market, that is what is happening to millions around the globe now. That bankers even have jobs should be sufficient; that they need bonuses to retain them is beyond ridiculous. Yet, those that earn the bank the most money are indeed highly mobile and until the wheeler-dealing banking industry is brought crashing to its final demise there will be those who are more than happy to employ bankers who can generate millions in income, and pay them accordingly. This will not change until there is a fundamental change in the way banks are run and in the activities in which they engage.

The brand of free market capitalism whose inevitable conclusion is exactly the crisis we see today is a pathological system that sucks all economic activity into its gapping maw; it is a system where the lowest denominator rules. Whoever sinks the lowest wins. It is a world driven by quarterly financial results, by illusory "shareholder value", by pure monetary valuation of all things and by insatiable greed, until there is fundamental change there will be no change at all.

What is needed is somebody with the power to deliver, to stand up and announce a truly radical reform of the financial system, one in which banks go back to being boring money lenders, one in which the derivatives they deal in are for the benefit of their clients to manage risk and not for themselves and their gambling cohorts in the hedge fund and "wealth management" industries, one where capital is allocated not to where it can make the hottest buck to where it can generate the greatest social benefit and one in which no bank is too big to fail so that should it fail it can be allowed to fall without the need for government life support. When that happens we will be seeing the "exceptional measures" that the US Treasury Secretary demanded of the G7 this weekend.

However, as a hollow parody of what might be, Mr Geithner and his fellow finance ministers final summit statement was a collective affirmation of what they have all already done in handing out citizens dollars to the banks and other favoured sectors and the by now familiar statement championing free trade and decrying protectionism.

The shallowness of these statements being illustrated by the fact that the US stimulus package that had just been passed by Congress as Timothy Geithner headed for Rome had "buy American" provisions in, albeit significantly more limited than originally proposed. Protectionism is on the rise in Europe, with the catchy slogan in the UK of "British jobs for British workers". Not to mention the recent bailout by the Dutch government of ING Bank, the terms of which require the bank to expand lending domestically within the Netherlands; an understandable provision given the Dutch taxpayer had just handed ING another €25 billion to ING - but protectionist, in the literal sense of favouring the domestic market, nonetheless.

We were left with the impression from the G7 summit that there is much more going on behind the scenes than we are being told. There is a G20 summit in April and a G8 one in July as which we are vaguely told that new "common principles" on transparency and regulation are expected, no doubt these new regulations will be trumpeted as being designed to prevent "failures" in the future while in fact completely failing to address the root causes of this crisis while in actuality creating the walls of the new economic world order. We wonder if the details of this new order are so staggeringly awful that they will only be revealed once full dictatorship is in place; if so it's going to be an interesting spring and summer.

We are also highly skeptical at the wave of government and media attention being focused on banker's bonuses. It is not that we do not think the matter a valid one it is just the amount of energy and focus on it makes us wonder what it is that we are not seeing. We know that governments do not and will not address the real issues of the collapsing economic order nor seize the real culprits, so our radar tells us that something is afoot when so much media space and government energy is focused on this one topic. Perhaps it just a diversion from the details of the deals being done behind the scenes; details that would cause uproar if widely circulated.

One such deal is the aforementioned state support for ING Bank. The deal is extraordinarily sweet for ING and, by definition, the converse for the Dutch citizen. The deal has been structured so that the Dutch state will buy a €27.7 billion portfolio of US Alt-A mortgaged backed securities (one level better than sub-prime) for 90% of the face value at a time when the market value is about 60% to 65% of face value. The other details of the deal are such that the negative effects to ING will be covered by the state, one example being the payment of a management fee of €700 million to the bank. In return ING has promised to provide new lending of €25 billion inside the Netherlands during 2009. However, that will be using "at least €10 billion of the government's credit guarantee scheme." Even financial analysts had to admit that, "this deal sounds almost too good to be true".

We came across the details of this deal in one of the professional banking magazines for which we have a limited free trial. To be a subscriber costs over €5,000 per annum and that is for just one magazine. We worked out that to have access to a reasonable level of information regarding what is happening in the banking world would cost us €20,000 or more per annum and even then that would be a less than complete picture. With these sorts of barriers to market information it is no wonder that we are kept in the dark. We certainly cannot afford such expenses and the mainstream media that can has no interest in informing us of the details.

If this deal is even partly indicative of what is happening behind the scenes, and the complete lack of transparency in the US and the UK suggests it is, then it is little wonder that we are being directed to the topic of banker's bonuses rather than the shenanigans of state handouts to the banks themselves.

While on the topic of banker's bonuses here are the details of the pay out to Merrill Lynch banker's just prior to the bank announcing $15 billion quarterly loss and $27 billion full year loss, losses that have been absorbed by the US citizen through the US government's support of Bank of America:-

- the top four bonus recipients received $121 million in aggregate,
- the next four, $62 million in aggregate,
- the next six, $66 million in aggregate,
- ie. the top fourteen people received $10 million or more and combined more than $250 million,
- Twenty received more than $8 million but less then $10 million,
- Fifty three received between $5 million and $8 million,
- One hundred and forty nine received between $3 million and $5 million,
- The top one hundred and forty nine bonus recipients received a combined $858 million, and
- Six hundred and ninety six individuals received $1 million or more.

You will notice that we have referred to "citizen's" money being used rather than the more familiar "taxpayer's" money as it is all the citizens of a nation that are paying for these bailouts not just the ones that pay taxes for it is the unemployed, the underemployed and the children who also suffer due to the raping of their nations treasury.

So just where is all this headed?

United States and Canada

The three-quarters of a trillion dollar economic stimulus package was passed by the U.S. Congress with the usual partisan pork barrel politics from both "sides" of the corrupt elite. Seeing as it's the Democrats whose president is in power its the turn of the Republicans to play the role of the opposition and seek personal favours to allow the passing of the Bill. For a president whose mandate is to provide change for the American people, Obama has been singularly unimpressive in his handling of the stimulus package, not only is not nearly radical enough to truly make a difference to ordinary Americans but it relies on the idea that tax cuts will result in more spending rather than saving and therefore falls back on the hackneyed and desperately out of place notion that Americans must consume their way out of this crisis. It is frustrating to see so much money being thrown around in an attempt to keep an economy based on excessive consumption going when what is needed is a fundamental re-balancing and restructuring.

The lack of clear direction in the stimulus package is of course a reflection of the political elite's loyalty to their corporate and banking paymasters and to political dogma. Patrick Martin, in noting that the Republicans had fewer qualms voting for the same spending last year in a giveaway to banks to hide their insolvency, puts their recent reticence down to ideology:-

A large section of the congressional Republican caucus adheres to an ultra-right ideological opposition to any government spending except on the military and direct handouts to the wealthy...

The editorial page of the Wall Street Journal denounced the stimulus bill in revealing terms, declaring, "Combine this new spending, and the borrowing it will require, with the trillions of dollars still needed for the banking system, and we are about to test the outer limits of our national balance sheet." The newspaper howls about the evils of deficit spending to meet the needs of the unemployed, while passing over the "trillions of dollars" for the banks as though it was a given.

While the entire political establishment fails to admit that there are infinitely better alternatives to pumping more and more money in the organs and institutions of a corrupt and diseased system they do acknowledge the likely effects of their bailouts and stimulus failing to rejuvenate that system. It is infuriating to see them sleep walking us towards economic Armageddon while being seemingly aware that that is exactly where they are taking us.

Here it is from the horse's mouth, the New York Times:-

Rise in Jobless Poses Threat to Stability Worldwide

From lawyers in Paris to factory workers in China and bodyguards in Colombia, the ranks of the jobless are swelling rapidly across the globe.

Worldwide job losses from the recession that started in the United States in December 2007 could hit a staggering 50 million by the end of 2009, according to the International Labor Organization, a United Nations agency. The slowdown has already claimed 3.6 million American jobs.

High unemployment rates, especially among young workers, have led to protests in countries as varied as Latvia, Chile, Greece, Bulgaria and Iceland and contributed to strikes in Britain and France.

Last month, the government of Iceland, whose economy is expected to contract 10 percent this year, collapsed and the prime minister moved up national elections after weeks of protests by Icelanders angered by soaring unemployment and rising prices.

Just last week, the new United States director of national intelligence, Dennis C. Blair, told Congress that instability caused by the global economic crisis had become the biggest security threat facing the United States, outpacing terrorism.

"Nearly everybody has been caught by surprise at the speed in which unemployment is increasing, and are groping for a response," said Nicolas Véron, a fellow at Bruegel, a research center in Brussels that focuses on Europe's role in the global economy.

In emerging economies like those in Eastern Europe, there are fears that growing joblessness might encourage a move away from free-market, pro-Western policies, while in developed countries unemployment could bolster efforts to protect local industries at the expense of global trade.

So, if the U.S. DNI (Director of National Intelligence), the spy chief, says that unemployment is the biggest threat to national security and we are told that they are "groping for a response" we wonder whether they honestly believe that bailing out the banking system and economic stimulus will work or whether they are preparing for a war against their own citizenry, a war that will be fought with the Taser, the prison camp and all the powers garnered under the guise of the "war-on-terror'. It would certainly put the last eight years into perspective.

According to Ed Hightower, the biggest problem with the U.S. stimulus package is that it is not big enough, the infrastructure investments in the stimulus bill only providing 5% of infrastructure needed according to a January report by the American Society of Civil Engineers. When we combine this with the assessment that the US banking system, as we said earlier is estimated to need at least $6 trillion, a number well in excess of what has been admitted to date, we are inclined to agree with Bill Van Auken that military dictatorship may not be far off:-

US intelligence chief: World capitalist crisis poses greatest threat

In testimony before the Senate Committee on Intelligence Thursday, Washington's new director of national intelligence, Dennis Blair, warned that the deepening world capitalist crisis posed the paramount threat to US national security and warned that its continuation could trigger a return to the "violent extremism" of the 1920s and 1930s.

This frank assessment, contained in the unclassified version of the "annual threat assessment" presented by Blair on behalf of 16 separate US intelligence agencies, represented a striking departure from earlier years, in which a supposedly ubiquitous threat from Al Qaeda terrorism and the two wars launched under the Bush administration topped the list of concerns.

Clearly underlying his remarks are fears within the massive US intelligence apparatus as well as among more conscious layers of the American ruling elite that a protracted economic crisis accompanied by rising unemployment and reduced social spending will trigger a global eruption of the class struggle and the threat of social revolution.

The presentation was not only the first for Blair, a former Navy admiral who took over as director of national intelligence only two weeks ago, but also marked the first detailed elaboration of the perspective of the US intelligence apparatus since the inauguration of President Barack Obama.

"The primary near-term security concern of the United States is the global economic crisis and its geopolitical implications," Blair declared in his opening remarks. He continued: "The crisis has been ongoing for over a year, and economists are divided over whether and when we could hit bottom. Some even fear that the recession could further deepen and reach the level of the Great Depression. Of course, all of us recall the dramatic political consequences wrought by the economic turmoil of the 1920s and 1930s in Europe, the instability, and high levels of violent extremism."

Blair described the ongoing financial and economic meltdown as "the most serious one in decades, if not in centuries."

"Time is probably our greatest threat," he said. "The longer it takes for the recovery to begin, the greater the likelihood of serious damage to US strategic interests."

The intelligence chief noted that "roughly a quarter of the countries in the world have already experienced low-level instability such as government changes because of the current slowdown." He added that the "bulk of anti-state demonstrations" internationally have been seen in Europe and the former Soviet Union.

But Blair stressed that the threat that the crisis will produce revolutionary upheavals is global. The financial meltdown, he said, is "likely to produce a wave of economic crises in emerging market nations over the next year." He added that "much of Latin America, former Soviet Union states and sub-Saharan Africa lack sufficient cash reserves, access to international aid or credit, or other coping mechanism."

Noting that economic growth in these regions of the globe had fallen dramatically in recent months, Blair stated, "When those growth rates go down, my gut tells me that there are going to be problems coming out of that, and we're looking for that." He cited "statistical modeling" showing that "economic crises increase the risk of regime-threatening instability if they persist over a one to two year period."

In another parallel to the 1930s, the US intelligence director pointed to the implications of the crisis for world trade and relations between national capitalist economies. "The globally synchronized nature of this slowdown means that countries will not be able to export their way out of this recession," he said. "Indeed, policies designed to promote domestic export industries - so-called beggar-thy-neighbor policies such as competitive currency devaluations, import tariffs, and/or export subsidies - risk unleashing a wave of destructive protectionism."

It was precisely such policies pursued in the 1930s that set the stage for the eruption of the Second World War.

Blair also raised the damage that the crisis has done to the global credibility of American capitalism, declaring that the "widely held perception that excesses in US financial markets and inadequate regulation were responsible has increased criticism about free market policies, which may make it difficult to achieve long-time US objectives." The collapse of Wall Street, he added, "has increased questioning of US stewardship of the global economy and the international financial structure."

The threat assessment also included evaluations of potential terrorist threats, the "arc of instability" stretching from the Middle East to South Asia, conditions in Latin America and Africa and strategic challenges from both China and Russia, centering in Eurasia. It likewise dealt with the war in Afghanistan, which the Obama administration is preparing to escalate, providing a scathing assessment of the Karzai regime in Kabul and the familiar demand for an escalation of the intervention in Pakistan. Nonetheless, the report's undeniable focus was on the danger that economic turmoil will ignite revolutionary challenges on a world scale.

Blair's emphasis on the global capitalist crisis as the overriding national security concern for American imperialism seemed to leave some of the Senate intelligence panel's members taken aback. They have been accustomed over the last seven years to having all US national security issues subsumed in the "global war on terrorism," a propaganda catch-all used to justify US aggression abroad while papering over the immense contradictions underlying Washington's global position.

The committee's Republican vice chairman, Senator Christopher Bond of Missouri, expressed his concern that Blair was making the "conditions in the country" and the global economic crisis "the primary focus of the intelligence community."

Blair responded that he was "trying to act as your intelligence officer today, telling you what I thought the Senate ought to be caring about." It sounded like a rebuke and a warning to the senators that it is high time to ditch the ideological baggage of the past several years and confront the real and growing threat to capitalist rule posed by the crisis and the resulting radicalization of the masses in country after country.

It may have been lost on some of those sitting at the dais in the Senate hearing room, but when Blair referred to a return to the conditions of "violent extremism" of the 1920s and 1930s, he was warning that American and world capitalism once again faces the specter of a revolutionary challenge by the working class.

There is no doubt that behind the façade of Obama, the US national security apparatus is making its counter-revolutionary preparations accordingly.

Including Blair, Obama has named three recently retired four-star military officers to serve in his cabinet. The other two are former Marine Gen. James Jones, his national security adviser, and former Army chief of staff Gen. Erik Shinseki, his secretary of veterans affairs. This unprecedented representation of the senior officer corps within the new Democratic administration is indicative of a growth in the political power of the US military that poses a serious threat to basic democratic rights.

A report that appeared in a magazine published by the US Army War College last November, just weeks after the election, indicates that the Pentagon and the US intelligence establishment are preparing for what they see as a historic crisis of the existing order that could require the use of armed force to quell social struggles at home.

Entitled "Known Unknowns: Unconventional 'Strategic Shocks' in Defense Strategy Development," the monograph insists that one of the key contingencies for which the US military must prepare is a "violent, strategic dislocation inside the United States," which could be provoked by "unforeseen economic collapse" or "loss of functioning political and legal order."

The report states: "Widespread civil violence inside the United States would force the defense establishment to reorient priorities in extremis to defend basic domestic order... An American government and defense establishment lulled into complacency by a long-secure domestic order would be forced to rapidly divest some or most external security commitments in order to address rapidly expanding human insecurity at home."

In other words, a sharp intensification of the unfolding capitalist crisis accompanied by an eruption of class struggle and the threat of social revolution in the US itself could force the Pentagon to call back its expeditionary armies from Iraq and Afghanistan for use against American workers.

The document continues: "Under the most extreme circumstances, this might include use of military force against hostile groups inside the United States. Further, DoD [the Department of Defense] would be, by necessity, an essential enabling hub for the continuity of political authority in a multi-state or nationwide civil conflict or disturbance." The phrase - "an essential enabling hub for continuity of authority" - is a euphemism for military dictatorship...

Markets

The markets this week (to Feb 16th)

	Previous week's close	This week's close	Change	% change
Gold (USD)	914.30	942.70	28.40	3.11%
Gold (EUR)	706.51	732.59	26.08	3.69%
Oil (USD)	40.17	37.95	2.22	5.53%
Oil (EUR)	31.04	29.49	1.55	4.99%
Gold:Oil	22.76	24.84	2.08	9.14%
USD / EUR	0.7727 / 1.2941	0.7771 / 1.2868	0.0044 / 0.0073	0.57% / 0.56%
USD / GBP	0.6763 / 1.4786	0.7008 / 1.4270	0.0245 / 0.0516	3.62% / 3.49%
USD / JPY	91.893 / 0.0109	90.750/ 0.0110	1.143 / 0.0001	1.24% / 0.92%
DOW	8,281	7,850	430	5.20%
FTSE	4,292	4,190	102	2.38%
DAX	4,645	4,413	231	4.98%
NIKKEI	8,077	7,779	297	3.68%
BOVESPA	42,756	41,674	1,082	2.53%
HANG SENG	13,655	13,555	100	0.74%
US Fed Funds	0.25%	0.25%	0.00	n/a
$ 3month	0.27%	0.29%	0.02	n/a
$ 10 year	2.99%	2.89%	0.10	n/a

Africa

Nigeria is cutting spending due to sharp drops in oil revenues.

Asia

Asian stocks fell last week amid a deteriorating outlook for corporate profits and doubts over whether U.S. stimulus measures will succeed in alleviating the financial crisis.

"Investors are disappointed with the lack of clarity on the U.S. bank-rescue plan," said Daphne Roth, Singapore-based head of Asia equity research at ABN Amro Private Bank, which manages about $27 billion of Asian assets. "We will see more earnings downgrades going into the next few months and that's going to drag down Asian stocks at least till the end of the first half."

India's currency strengthened on news that it will continue offering stimulus programs.

Rupee Strengthens as India May Step Up Efforts to Boost Growth

India's rupee strengthened the most in more than two weeks on speculation the government and the central bank will announce more measures next week to revive economic growth.

[ ] The government unveiled two stimulus packages and the central bank cut its key rate four times since Oct. 20.

"The rupee is stronger as the market expects additional measures to boost growth to be announced next week," said Sudarshan Bhatt, chief currency trader at state-owned Corporation Bank in Mumbai. "Such measures look inevitable after yesterday's industrial output report. The central bank may cut rates and help restructure loans of companies."

[ ]

Industrial production fell 2 percent in December, the most since 1993, after a revised 1.7 percent gain in November, the government said yesterday. India expects the $1.2 trillion economy will expand 7.1 percent in the fiscal year to March, the slowest pace in six years.

Record Low

The rupee will weaken almost 10 percent to a record low of 54 to the dollar by the end of the year as the worldwide credit crisis curbs foreign direct investment, HSBC Holdings Plc said.

The rupee may also extend last year's 19 percent slide as employers cut jobs overseas amid a global recession, reducing remittances from Indian workers abroad, Richard Yetsenga, HSBC's Hong Kong-based strategist, wrote in a research report today. The U.K. bank revised its rupee forecast from 45, HSBC's Singapore-based economist Robert Prior-Wandesforde, who co-wrote the report, confirmed in a phone call.

"We expect the slower moving remittance and FDI [Foreign Direct Investment] flows to now start to show the strain," wrote Yetsenga. "Our estimates suggest FDI into Asia could fall to roughly zero this year. While that may be overly pessimistic, the fall in FDI should certainly be spectacular for global reasons."

Overseas direct investment in India averaged $3.1 billion a month in 2008, compared with $1.3 billion in the previous year, government data show.

"The boom in FDI is long overdue, but cannot last, given the state of corporate finances globally," Yetsenga wrote.

Renault SA, France's second-largest carmaker, may abandon a factory project in the southern Indian city of Chennai, Chief Financial Officer Thierry Moulonguet said yesterday. The French company said it is reducing capital investment by 20 percent.

John Chan puts the vulnerabilities of export dependent Asian economies in perspective:-

Asia's export economies in free fall

Staggering falls in exports across Asia have shocked economic analysts and ended all claims that the global slump may be nearing its bottom. The IMF's growth forecast for Asia this year is just 2.7 percent - less than a third of the 9 percent growth rate of 2007. The prediction is a full percentage point less than during the 1997-98 Asian financial crisis.

IMA Asia analyst Richard Martin commented in the Australian: "It's a bit like watching a train wreck in slow motion. North Asia is suffering the biggest collapse in demand since World War II." Westpac bank's Richard Franulovich said that the "speed of the decline embedded in the latest Asia data is on par with the collapse in the US during the 1930s Depression."

Japan, the world's second largest economy, is already in recession and still declining. Japanese exports fell 35 percent in December from a year earlier, as the global demand for its cars, electronics and capital goods dried up. Industrial production plunged a record 9.6 percent, month on month, in December.

Bank of Japan chief economist Kazuo Momma warned this week that the economy was facing an "unimaginable" contraction, as analysts estimated that there was an annualised rate of contraction of 10 percent in the last quarter of 2008, even worse than the US. The government warned that 125,000 irregular workers, mainly in manufacturing, will lose their jobs in the six months to March, but an industry estimate put the figure far higher at 400,000.

China, the so-called "workshop of the world," is being hit particularly hard. Exports declined for the third consecutive month in January, falling 17.5 percent from a year earlier, after a 2.8 percent decline in December. Imports plunged even further - 43.1 percent, twice as much as December's 21.3 percent year-on-year drop, the General Administration of Customs said on Wednesday.

Because many of China's imports are inputs into the country's manufacturing exports, the sharp decline in imports indicates further falls in industrial activity. Imports of machinery and high-tech goods fell by roughly 40 percent, also spelling disaster for the countries that sell such components for Chinese factories to assemble. Shipments from Japan fell by 43.5 percent from a year earlier; those from South Korea were down 46.4 percent and from Taiwan, 58 percent.

Although many economists are predicting that China will still grow at 5-6 percent this year, these figures are no more reliable than the previous claims that China would continue to expand at a near-record pace. More than 20 million migrant workers have lost their jobs so far, with some analysts warning of 50 million more job losses if the economy deteriorates further.

India, the other economy previously touted as a possible bulwark against world depression, is suffering as well. Exports fell 24 percent in January. According to official data, one million Indian workers in the export sector have lost their jobs since September, when the global financial crisis erupted in the US. Textile, gem and jewelery workers have been worst affected. Another half a million workers are expected to lose their jobs by March.

Although better known for its IT outsourcing services, India has become a major Asian exporter in recent years. Its exports increased from 16.9 percent of India's GDP in 2002-03 to 24.8 percent in 2007-08. Export industries employ 150 million workers, the second largest sector after farming. India's economic growth for the fiscal year ending in March is officially projected to be 7.1 percent - down from 9.1 percent last year.

For the next fiscal year, economists believe the Indian growth rates will be near 6 percent at best. Citigroup estimated a growth rate of just 5.5 percent. Although India is less dependent on exports than most East Asian countries, its financial position is much weaker. New Delhi's public debt stands at 75 percent of its GDP, compared to just 18.5 percent in China, leaving less room for large stimulus packages.

South Korea's plight is equally stark. Exports, the main driving force of the economy, plunged 32.8 percent in January. Finance minister Yoon Jeung-hyun warned on Tuesday that the fourth largest economy in Asia would shrink by about 2 percent this year - a sharp revision from the previous official forecast of 3 percent growth. According to Yoon, this would mean the loss of 200,000 jobs in 2009. Even this figure is too optimistic compared to the IMF's forecast of 4 percent negative growth. Credit Suisse has projected as much as a 7 percent contraction.

Taiwan, the sixth largest Asian economy, saw its exports fall 44.1 percent in January from a year earlier - the biggest fall since records began in 1972. Imports plunged 56.5 percent in the same month. For an economy where exports account for 70 percent of GDP, the impact is devastating. Morgan Stanley has sharply revised down Taiwan's growth rate this year to minus 6 percent - down from the previous positive 0.5 percent. CLSA, a Hong Kong-based brokerage house, last week predicted an even greater contraction - 11 percent.

The export-dependent economies of South East Asia are also suffering. The IMF's projection for Philippines is just 2.25 percent this year, down from 4.6 percent last year and 7.1 percent in 2007. The official predication for Singapore, the region's trade and financial hub, in 2009 is a contraction of 5 percent - the deepest recession since the city-state was founded in 1965. Malaysia's exports in December plunged 14.9 percent from a year earlier, with exports to the US falling by 30 percent. Analysts expected the Malaysian economy to grow by just 1-1.5 percent in 2009, far lower than the government's target of 3.5 percent. Indonesia's central bank predicts the country's economy will slow to 4-5 percent in 2009 compared to 6.2 percent for 2008.

High saving rates and relatively secure financial institutions have not prevented the Asian economies from suffering massive losses. After the financial crisis of 1997-98, Asian countries strove to increase their exports in order to build large foreign currency reserves as a shield against further financial shocks. As a result, however, they have merely swapped dependence on global finance for reliance on global demand.

Credit Suisse analyst Cem Karacadag has estimated that net exports account for two-thirds of GDP in Hong Kong and Singapore, almost half in Malaysia and Thailand and one-third in Taiwan and South Korea. He calculated that, even without taking into account secondary impacts, every 10 percent fall in exports would cut 2 percentage points of growth in South Korea and Taiwan, and up to 7 percentage points in Hong Kong and Singapore.

Over the past decade, the export share of Chinese GDP doubled to 40 percent. With a vast supply of heavily-policed cheap labour, combined with infrastructure developed by the state, it became a final assembly point for transnational corporations. They supplied factories in China with components, raw materials and capital goods made elsewhere in Asia, transforming the region into a giant export machine. It appeared that China had replaced the US as the growth engine for many Asian countries.

In fact, as Jong Wha-Lee of the Asian Development Bank pointed out, the intra-regional trade disguised the fact that 60 percent of the final demand for Asian goods still came from advanced capitalist countries in North America, Europe and Japan. China's exports to the United States and European Union fell by 9.8 percent and 17.4 percent, respectively, in January. As the demand in the West has collapsed, the booming intra-trade, which involved mainly components, inputs and capital goods, has quickly evaporated.

The Korea Times complained last week: "China has been emerging as the biggest threat to the Korean economy" because the "high dependence on China has made the country particularly vulnerable to the emerging China risk". Korea's exports to China, much of them for re-export, fell 33 percent in December, and 46.4 percent in January, compared to a year earlier, due to the accelerating drop in global demand for "Chinese" goods.

Chinese officials have been loudly talking up the prospect of sparking a "rebound" by stimulating infrastructure spending and ordering state banks to increase lending. But analysts are skeptical that the state spending will boost private investment. The Morgan Stanley China economist Wang Qing told the Wall Street Journal: "Profits and profitability in 2009 will be very poor, and this is the key reason why I do not expect much private investment - especially in the manufacturing sector where China suffers from an overcapacity problem." He estimated that manufacturing investment would be zero this year, with a 12 percent drop in property investment.

The Financial Times on February 10 explained: "Most of all, China cannot escape the broader global economic environment. The government's fiscal stimulus was designed to keep the economy going until Western consumers recover. Yet the recent indications are that the global economy could be in for a more prolonged slump than first thought."

The same conclusion can be applied to all the stimulus packages across Asia. Most Asian countries are largely cheap labour platforms whose exports outweigh their relatively small domestic markets. Confronted by the global slump, each is trying to export more, which means taking market share at their neighbours' expense. This is causing rising trade tensions. India has started 17 investigations into Chinese imports since October, and imposed restrictions on Chinese steel, textiles and petrochemicals. In January, India banned Chinese toys imports for six months to protect its own toy industry.

Apart from pitting their "own" workers against other workers in neighbouring countries, the Asian elites have no understanding of, let along solution for, the economic crisis. Some have turned to the gods for answers. During the Chinese New Year a senior Hong Kong official selected a fortune stick on the city's behalf. It was the unluckiest, 27. "A fortune teller at Che Kung temple, shrouded in incense and consulting the heavens for inspiration, declared it meant Hong Kong could not isolate itself from global financial turmoil," the Financial Times reported.

The world's economies are like a group of people chained together and sliding down a mountain. No one economy can de-link and save itself, the inevitable result from decades of globalisation. The Chinese are stuck holding U.S. government bonds while they watch the deficit spending of the U.S. skyrocket. And there is nowhere else for them to put their money. As the director-general of China's Banking Regulatory Commissions said to the Americans last week, "We hate you guys."

China to stick with US bonds

China will continue to buy US Treasury bonds even though it knows the dollar will depreciate because such investments remain its "only option" in a perilous world, a senior Chinese banking regulator said on Wednesday.

China has used the dollars it accumulates selling manufactured goods to US consumers to accumulate the world's largest holding of Treasuries.

However, the increasing US budget deficit and its potential impact on the dollar have raised questions about the future Chinese appetite for US debt.

Luo Ping, a director-general at the China Banking Regulatory Commission, said after a speech in New York on Wednesday that China would continue to buy Treasuries in spite of its misgivings about US finances.

"Except for US Treasuries, what can you hold?" he asked. "Gold? You don't hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option."

Mr Luo, whose English tends toward the colloquial, added: "We hate you guys. Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] . . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do."

However, Mr Luo said Chinese officials would encourage its banks to finance domestic mergers and acquisitions rather than provide rescue finance to distressed financial companies in other countries: "There will be no bottom-fishing of financial institutions, particularly in the US, because there is a lot of uncertainty about the quality of the books."

Mr Luo said China intends to maintain its separation of investment and commercial banking based on its observations of the US after repeal of the Glass-Steagall Act that enforced a similar division of banking activities.

"To some extent, Glass-Steagall has fuelled the crisis," Mr Luo said. "The separation of commercial and investment banking is likely to stay longer [in China] than before." Like senior financial officials in other developing nations - such as Mohammad Al Jasser, vice-governor of the Saudi Arabian Monetary Agency - Mr Luo also spoke out against what he called America's laissez-faire capitalism.

"Government ownership was viewed as something negative but the pendulum is swinging the other way. Perhaps banking is [no different from] public utilities where government participation is necessary," he said.

"Deregulation in the US has gone a little bit too far. The market can't be omnipotent."

Eastern Europe

In Russia, the ruble rose as the governments attempts to defend it bore fruit. Eastern European economies continued to show signs of serious trouble as Estonia and Hungary announced that their economies contracted in the 4th quarter of 2008, and growth slowed sharply in the Czech Republic and Slovakia.

"The data was all pretty grim," said Neil Shearing, an emerging Europe analyst at Capital Economics in London. "The big point is it will become worse before it gets better. The region's economy may contract 3 percent this year, while the consensus in the market still seems to be for a 1 percent growth."

In fact, it looks like Eastern Europe is shaping up to be a key determinant in the next phase of the global financial crisis:-

European governments, the European Union and international financial organizations need to act fast on risks stemming form banks' exposure in the eastern part of the continent to avert an escalation of the credit crisis, Nomura Holdings Inc. said.

East European countries are struggling to refinance foreign currency loans taken out by borrowers during years of prosperity through 2007, when economic growth averaged at more than 5 percent. The International Monetary Fund, which has bailed out Latvia, Hungary, Serbia, Ukraine and Belarus, warned on Jan. 28 that bank losses may widen as "shocks are transmitted between mature and emerging market banking systems."

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As companies and consumers [ ]sought cheap loans, denominated mainly in euros and Swiss francs, external liabilities reached about 100 percent of gross domestic product in Poland and the Czech Republic and almost twice the national output in Hungary, according to figures compiled by Nomura.

Banks' Exposure

Euro region banks' exposure totals $1.25 trillion in the region, and including U.K., Swedish and Swiss banks' liabilities it pushes the figure to $1.45 trillion, Nomura said, citing figures from the Basel, Switzerland-based Bank of International Settlements.

"We find the absolute levels and some of the risks worrying," wrote Montalto. There's "a serious risk that these exposures will have grave consequences for the central and east European economies themselves as well as for the European banks that hold the ultimate risk."

Non-performing loans in the region rose to 8 percent, from 5 percent through last year, and Standard & Poor's has forecast they may top 25 percent on average.
The risks stemming from the level of exposure are aggravated by the slump in currencies in the region and the increasing default risks on repayments as more workers lose their jobs and companies scale back production and pay, Montalto wrote. The region will have a recession this year as exports collapse, the IMF has said.

'Upside Risks'

The "upside risks" to bad loans are "very large" as wages are falling and unemployment rising, Montalto said.

A group of six banks, including Italy's UniCredit SpA and Austria's Raiffeisen International Bank Holding AG, have pressed the European Union to organize financial aid for countries on its eastern fringes like Romania and Ukraine.

Austrian banks alone have lent 230 billion euros ($294 billion) in the region, equal to about 80 percent of the country's GDP, according to data compiled by the Bank for International Settlements.

The banks, which also include Italy's Intesa SanPaolo SpA, Austria's Erste Group Bank AG, Societe Generale SA of France and KBC Groep NV in Belgium, requested a 12-point assistance program for the region ranging from foreign-exchange loans for banks to guarantees for customer deposits from organizations such as the European Bank for Reconstruction and Development, according to a Dec. 1 letter sent to the European Commission.

"There does not currently seem to be a consensus about a solution, with opinion split on whether any bailout should be at the EU or member-state level and where funding could come from," Montalto said. "With continued weakness in currencies in the region and a worsening economic picture, this issue is not going to go away on its own."

The EBRD, the World bank and euro-area governments should provide capital to banks, Montalto wrote. The EBRD is in talks about providing financial support to OTP Bank Nyrt., Hungary's largest bank.

The Ukrainian finance minister resigned as that country's credit rating and currency fell.

Hryvnia Drops After Ukraine Rating Downgraded, Minister Resigns

Ukraine's hryvnia weakened against the dollar after Fitch Ratings downgraded the country yesterday and the finance minister resigned, deepening concern the former Soviet republic won't be able to shore up the economy.

The currency, which has slumped 52 percent versus the dollar over the past six months, dropped 0.6 percent to 8.0550 per dollar by 1:46 p.m. in Kiev, paring a 0.9 percent advance this week. It lost 0.9 percent to 10.3549 per euro.

Fitch yesterday reduced Ukraine's credit rating to B, five levels below investment grade, the same day Finance Minister Viktor Pynzenyk submitted his resignation after saying the post had become "hostage" to politics. Pynzenyk objected to the parliament-endorsed budget for 2009, which plans for a budget deficit of 2.97 percent of gross domestic product in violation of the country's $16.4 billion loan agreement with the International Monetary Fund.

"It's negative news, it's unwelcome news as the situation in Ukraine is deteriorating," said Ali Al-Eyd, an emerging markets fixed-income analyst in London at Citigroup Inc. "Ukraine is going to be hit with a vicious slowdown."

The political instability in Ukraine during the worst global financial crisis since the Great Depression puts the country at risk of a banking and currency crisis, Fitch said yesterday. The outlook for the nation's ratings was kept at "negative," indicating that it may be reduced further.

Fitch predicts the economy will shrink 4.5 percent this year, and Citigroup may revise its current forecast of a 3 percent contraction "much lower," Al-Eyd said. Ukraine, dependent on exports of steel and other products as the global economic slowdown depresses demand, is struggling to fund a $12.3 billion current-account deficit amid the seizure in credit markets.

In what many might consider an upside to all this bad economic news out of Eastern Europe, the number of Russian billionaires fell by half.

Western Europe and UK

Meanwhile, at least publicly, European Central Bank officials continue to downplay the crisis.

ECB Policy Makers Signal no Rush to Start Unconventional Tools

European Central Bank policy makers signaled they are in no rush to step up their response to the credit crisis by purchasing securities and downplayed concerns about the fiscal health of some euro-region nations.

"We have already introduced a number of unconventional measures," ECB governing council member Axel Weber said in Rome today, echoing comments by President Jean-Claude Trichet, Italy's Mario Draghi and France's Christian Noyer. Trichet said "no decision has been taken yet on top of the non-standard action" announced so far.

The ECB is coming under pressure to follow the Federal Reserve and the Bank of England's policy to buy government or corporate debt as Europe faces its worst recession in decades. Investors are also increasing bets that the price of banking bailouts and stimulus packages will strain public finances and hobble governments' ability to meet bond payments.

Ireland yesterday led a surge in the perceived risk of holding European government bonds, with credit-default swaps on Irish debt rising 7.5 points to a record 355. Trichet indicated that investors' concerns may be overdone, saying that market expectations go "up and down."

"I would say that the euro area is not in question in any respect," Trichet said after meeting officials from the Group of Seven nations. "I have absolutely full confidence that the governments at stake will continue to take the appropriate decisions to have sustainable policy, particularly on the fiscal side."

ECB officials have so far resisted pledging to buy securities to increase the supply of money in the economy and grease credit markets. Unlike the U.S. and U.K., which have indemnified their central banks against any default risk, it is also unclear how the ECB could be covered.

[ ]

German Finance Minister Peer Steinbrueck said that unprecedented liquidity injections may stoke inflation pressures in the future. Earlier, ECB colleague Juergen Stark said in Tutzing, Germany that the central bank is prepared to act "but always with appropriate caution."

Less Aggressive

The ECB has also been less aggressive than the Fed and the Bank of England in reducing rates. The Fed has cut the benchmark rate to close to zero, while the Bank of England has lobbed off 400 basis points since October, bringing the key rate to 1 percent.

While the ECB lowered its benchmark down to 2 percent from 4.25 percent in the past five months, it's still the highest among the G-7 group of nations.

The ECB last year more than doubled the amount of funds offered in its longer-term refinancing operations and increased the provision of dollars and Swiss francs. In addition, it loosened its rules on the collateral it accepts when making loans.

The U.K. is projecting a 3.3% shrinkage in its economy this year, the worst since 1980.

Inevitably politicians, seeking to retain their power, are increasingly playing to their domestic audiences desire for their governments to focus their economic policies at home. Nations now find themselves in the carefully laid traps that make up the web known as the global economy. In Europe, without the ability to have any influence on their currency, politicians are reverting to old fashioned protectionism. Such measures threaten both other countries' exports and, possibly, the survival of the European Union itself.

Europe turns to protectionism as industry plummets

For some time, leading European politicians have attempted to put a positive gloss on declining figures for European production, but the results released Thursday ushered in a new tone. European Union Industry Commissioner Günter Verheugen told the Financial Times Deutschland, "The extent and speed of the crisis is completely new."

One day previously, an Ifo Institute for Economic Research survey revealed that business sentiment within the 16-country common-currency eurozone declined for the sixth consecutive quarter, plunging to its lowest point since the survey began 16 years ago. The European Central Bank (ECB) also issued a warning that the recession gripping Europe will not be short-lived. Rather, it will be a "long-lasting and clear downturn," the ECB said.

The response of the individual European nations to the growing crisis has been to embrace a raft of protectionist measures. Italian Premier Silvio Berlusconi recently warned appliance maker Indesit SpA not to transfer production and jobs to Poland, and in Britain, trade unions and politicians are demanding "British jobs for British workers."

On Wednesday, the acting EU Council president, Czech Prime Minister Mirek Topolanek, appeared before the press in Brussels and warned of a "protectionist race" in Europe, while acknowledging that national economies in the European Union were being hit hard by the international crisis and losing ground with unanticipated speed.

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After a meeting with EU Commission President José Manuel Barroso, Topolanek described the situation in Europe "as worse than it has ever been." The confidence of citizens in the economic and political system had been shaken, he said, and warned that the battening down of national markets endangered the European domestic market and the world economy.

The Süddeutsche Zeitung echoed the statements of the EU Council president, writing, "Any politician seeking to solve the economic crisis by protectionist measures only worsens the situation."

Barroso also warned against states going it alone. European heads of state and government should put an end to any "nationalist navel gazing," he said. Otherwise, there was a danger of "intensifying the powerful downward trend."

[ ]

Last Wednesday, the French automaker Peugeot announced it was shedding at least 11,000 jobs, and one day later, Renault announced its own plans to cut its workforce by 9,000. These job cuts have been agreed to by the French government and trade unions and are bound up with the announcement by French President Nicolas Sarkozy that he plans to subsidise domestic automakers with the sum of €6 billion.

Sarkozy declared that, in his opinion, it was irresponsible "to continue to manufacture French cars in the Czech Republic." He demanded a halt to the transfer of production to other countries. "If we give financial aid to the automotive industry," he said, "we do not want them to set up a factory in the Czech Republic again." He also urged the carmakers to support French industries involved in supplying parts and services to French auto companies.

Czech Prime Minister Topolanek reacted sharply to this openly protectionist policy and called for a special European summit to block it and similar policies.

German Chancellor Angela Merkel (Christian Democratic Union - CDU) also criticised the French action. The defence of free trade and the European domestic market is of crucial importance, Merkel said.

The German economy, which is heavily dependent on its export industries, would be especially vulnerable to any growth of protectionist measures in Europe.

Sarkozy defended his decision and drew attention to the fact that the German chancellor had rejected a joint European stimulus programme just a few weeks before. Now, every government was forced to take its own measures to deal with the crisis, he said. He added that the latest German stimulus programme includes many measures aimed at subsidising German enterprises.

The conflict between Berlin and Paris runs deep. In his role as EU Council president last year, Sarkozy repeatedly raised the demand for an "economic administration" for the eurozone. He made it quite clear that he regarded himself as best suited to head such an administration.

Supported by a majority of the 16 eurozone countries, Sarkozy is seeking to compel the German government to take more responsibility for financial policy. According to the Élysée Palace, Germany, as the continent's biggest national economy, must contribute much more to managing the crisis.

The German government wants precisely to prevent such a development. It regards itself better prepared for the crisis than other euro countries due to the labour market reforms introduced by the previous Social Democratic-Green government, which slashed welfare payments and opened the way for the creation of a huge low-wage sector in Germany.

Backed by the country's business federations, the Merkel government is seeking to exploit the crisis to strengthen Germany's dominant role in Europe. Berlin is vehemently opposed to taking any responsibility for Europe's "weak states" - i.e., those countries that have thus far failed to implement drastic social and welfare cuts.

Behind the German chancellor's appeals for adherence to "free trade" and rejection of protectionism lie the egoistic interests of the German business elite, which profits most from the European domestic market.

The varying economic performances of individual euro countries and the absence of a uniform financial and economic policy have led to increasing discrepancies ("spreads") between the government loans of the euro countries. In mid-January, Greece had to take out a new government loan at an interest rate well above the 3 percent levied on German government securities. Financial experts have said that the trend of rising spreads has "definitely not stopped" and warn that it could have explosive consequences for the fate of the euro as a common currency.

When the chairman of the euro group, Luxembourg Finance Minister and Prime Minister Jean-Claude Juncker, suggested introducing eurobonds to allow weaker member states access to credit on the basis of a pan-European solution, his proposal was immediately rejected by German Finance Minister Peer Steinbrück (Social Democratic Party - SPD). Instead, the German government is seeking to use its EU industry commissioner, Günter Verheugen, to force member states to implement budget cuts and strict austerity policies.

In view of increasing tensions, the EU presidency and the European Commission have announced plans for no fewer than three separate summits in the coming three months. On March 1, the heads of state and government will meet in Brussels to "coordinate national stimulus packages." The agenda is to include the struggle against protectionist tendencies, measures to revive the circulation of credit, the handling of "toxic" securities, and policies directed against the rise of unemployment. Three weeks later, the regular spring summit of the EU takes place in Brussels, which is also likely to concentrate on the economic and financial crisis. In May, the Czech council president has invited member countries to Prague for an employment summit.

Behind this summit frenzy are fears of a possible break-up of the European Union and an escalation of working class resistance to mass unemployment and growing poverty.

Latin America

Argentina Unlikely to Pay Back Paris Club During Global Slump

Argentina is unlikely to pay back $6.7 billion of defaulted debt owed to Paris Club creditors until the global recession shows signs of easing, a government official said.

It would be a mistake to drain the country's foreign reserves to pay back the debt amid the global credit crisis, said the official, who declined to be identified in accordance with government policy. He said the government is comfortable with its current foreign reserve level of $47.1 billion.

Argentina continues to negotiate with the Paris Club, an informal association of creditors that includes the U.S., Germany, Italy and Japan, the official said.

President Cristina Fernandez de Kirchner had said on Sept. 2 that the government would tap central bank reserves to pay off the Paris Club, a move that would help companies obtain financing as growth falters in South America's second-biggest economy.

Sleepwalking our way to hell

Sleepwalking our way to hell

By Simon Davies and Donald Hunt

We are at present working discreetly with all our might to wrest this mysterious force called sovereignty out of the clutches of the local nation states of the world. - Professor Arnold Toynbee, 1931 Institute for the Study of International Affairs.

What a week; world stock indexes took another serious beating while J P Morgan fired 3,000 amid speculation that total Wall Street job losses will reach 225,000 and Citibank was bailed out to the tune of $27 billion of new equity and in excess of $300 billion blanket guarantee of some of its toxic assets.

The Dow got off better than most, only falling 5% after rising 6.5% on Friday with reports that Obama would name Timothy Geithner Treasury Secretary.

Oil was down sharply again last week, falling 12% to close under $50 a barrel. Gold, on the other hand, rose more than 6.6% last week. The gold/oil ratio hit heights not seen in recent years, rising 22% to almost 16 barrels of oil per ounce of gold. The ratio has averaged less than 9 over the past four years.

This in the week after the G20 meeting in Washington.

Markets

The markets this week

	Previous week's close	This week's close	Change	% change
Gold ($)	742.50	791.80	49.30	6.64%
Gold (€)	589.01	628.96	39.96	6.78%
Oil ($)	57.04	49.93	7.11	12.46%
Oil (€)	45.25	39.66	5.59	12.35%
Gold:Oil	13.02	15.86	2.84	21.83%
$ / €	0.7933 / 1.2606	0.7943 / 1.2589	0.001 / 0.0017	0.13% / 0.13%
$ / ₤	0.6784 / 1.4741	0.6700 / 1.4925	0.0084 / 0.0185	1.24% / 1.25%
$ / ¥	97.038 / 0.0103	95.938 / 0.0104	1.100 / 0.0001	1.13% / 0.97%
DOW	8,497	8,046	451	5.31%
FTSE	4,233	3,781	452	10.68%
DAX	4,710	4,127	583	12.37%
NIKKEI	8,462	7,911	552	6.52%
BOVESPA	35,789	31,251	4,539	12.68%
HANG SENG	13,543	12,659	883	6.52%
US Fed Funds	0.25%	0.50%	0.25	100%
$ 3month	0.13%	0.01%	0.12	92.31%
$ 10 year	3.73%	3.20%	0.53	14.21%

US Recession

Consumer spending in the U.S. is dropping like a stone, fueling new fears of deflation.

Recession Probably Deepened in October: U.S. Economy Preview

Shobhana Chandra

The U.S. recession probably deepened as consumer spending plunged in October by the most since the 2001 downturn and businesses slashed investment, government reports may show this week.
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The credit crisis has forced cash-strapped consumers to pull back on purchases and companies to cut spending and step up firings. Housing and manufacturing also are deteriorating, a sign the economy is sinking further into what may be the most severe slump in decades.
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The projected decline in spending, which accounts for two- thirds of the economy, foreshadows a holiday season that may be the worst in six years, according to industry projections. A record two-decade expansion in consumer spending ended in the third quarter, causing the economy to contract.
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Inflation figures in Commerce's spending report may show price pressures have waned, giving way to the risk of deflation, or a prolonged slide in prices. The Federal Reserve's preferred gauge of inflation, which excludes food and energy costs, was unchanged in October after rising 0.2 percent in September.

........an index of home prices in 20 U.S. cities slumped in September at the fastest pace on record, the survey median shows...

Holiday retail sales figures look to be the worst in a long time, if trends from October and early November continue. Many retail sectors are seeing drops of 20% compared to the same period a year ago.

Demand is contracting so quickly worldwide that the only hope to avoid collapse is for the spender of last resorts, governments, to throw massive amounts of money into the economy. Asian governments announced their plans as did President-elect Obama. First the money went to prop up the banks, next come the industrial companies with hat in hand. Finally, laid-off workers are getting extension of unemployment benefits and, most likely, more checks. Government-funded jobs rebuilding infrastructure are also in the works. Most worrisome are hints of "military Keynsianism" as some right-wing economists are popping up in the U.S. media claiming that Roosevelt's New Deal did not pull the country out of the Great Depression, World War II did. True or not, the implication is clear.

Furthermore, there was more to public works projects in the 1930s than an attempt to restart economic growth. It was also a way to keep people productive and eating while the economy corrected itself. And, from the point of view of the elite, it kept revolutionary impulses under control. The following piece by Satyajit Das outlines what probably has to, and will, take place, but omits the human cost and the political and social cost. Given that, printing more money to pay people to build bridges and roads is better than printing money to pay them to kill each other.

De-leveraging - Fairy Tale Endings

Satyajit Das

In the "Arabian Nights," the beautiful princess Scheherazade buys one day of life at a time by recounting fantastic fables that enchant the King who has condemned her to die. Investors and traders are currently telling each other fairy tales to buy one day at a time to stave off the inevitable.

The drama and tumult of recent events are not symptoms of the disease but the cure. The "disease" is the excessive debt and leverage in the financial system, especially in the US, Great Britain, Spain and Australia. In the lyrics of the Bruce Springsteen song - many have "debts that no honest man could pay".

The "cure" is the reduction of the level of debt (the great "de-leveraging"). In 1931, Treasury Secretary Andrew Mellon explained the process to President Herbert Hoover: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. Purge the rottenness out of the system. High costs of living and high living will come down. ... enterprising people will pick up the wrecks from less competent people."

The initial phase of the cure is the reduction in debt within the financial system.
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The second phase of the cure is the higher cost and lower availability of debt to the real economy. This forces corporations to reduce leverage by selling assets, reducing investment and raising equity (for example, as GE has done). This also forces consumers to reduce debt by selling assets (where available) and reducing consumption.
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Within the financial sector, de-leveraging is well advanced. In the real economy it is in the early stages.

Fairy tales in financial markets focus on the "superhuman" abilities of regulators and governments to avoid the de-leveraging under way. Central banks and governments have taken progressively more aggressive actions to try to influence events.
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Central bank guarantees of all major borrowings and other transactions to reduce solvency risk for banks are designed to enable normal transactions between parties in the financial markets to resume. The necessary coordinated global action appears at last to be under way.

The initiatives are sensible short-term measures to stablise markets. In the longer run, they transfer the problem onto the government and taxpayer balance sheet. For example, US Government support for financial institutions in this financial crisis is already approaching 6% of GDP (compared to less than 4% for the Savings and Loans crisis). The bailout of Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) has almost doubled US national debt. This will ultimately place increasing pressure on the US sovereign debt rating and vitally the ability of US to finance its requirements from foreign creditors.

Government and central bank initiatives to date have been ineffective. Money markets remain dysfunctional and inter-bank lending rates have reached record levels relative to government rates. The failures are unsurprising.

At the height of the boom, banks used a variety of techniques to increase the velocity of money. As the system de-leverages, the velocity of money has sharply decreased.

Money being supplied to the banks is not being lent through. Banks are parking the money in short dated government securities in anticipation of their own funding requirements. Around $3-4 trillion of assets are returning to bank balance sheets from the "shadow" banking system - off-balance sheet structures - that can no longer finance themselves. In addition, banks have large amount of maturing debt (estimates suggest $1.5 trillion by the end of 2008) that they must fund.
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The risk of a severe dislocation in global capital flows remains a real risk in the present environment.
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Ultimately, "all the king's horses and king's men" cannot prevent the de-leveraging of the financial system under way. The extent of de-leveraging is substantial and likely to take time. In recent years, money was cheap and other assets were expensive. As each of the global economy's credit creation engines breaks down and systemic leverage reduces, money becomes scarce and more expensive triggering substantial adjustments in asset prices in a reversal of the process.
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Like a giant forest fire the de-leveraging process cannot be extinguished. Thoughtful actions can create firebreaks that limit preventable damage to the economy and the international financial system until the fire burns itself out.

The Arabian Nights had a happy ending. The King after 1,001 night of enchantment and three sons pardons the beautiful Princess Scheherazade who becomes his queen. Despite the fairy tales that investors are putting their faith in currently, the de-leveraging that is at the heart of the current financial crisis may not have such a happy ending.

Inflation or deflation?

The inflationary consequences of massive government deficit spending on bailouts are obvious, so why the worry about deflation? The "deleveraging" of the excessive debt of the last two decades embodied by the failure of massive financial institutions like Lehman Brothers means the disappearance of massive amounts of money; less money chasing too many goods that can't be sold equals deflation.

In some ways governments are trying to throw the exact right amount of money into the pit to counteract the loss of money from deleveraging; not an easy target to hit. If the deleveraging process is disorderly, deflation can turn into hyperinflation. In that regard Friday's sharp rise in gold prices is not reassuring.

Bizarre Gold

We and many others have commented on the obvious fact that the official gold price is a manipulated joke. This week reports of brokers being unable to fulfill physical orders only confirms what we have been saying. If the official price of gold were reflective of real supply and demand then it would be going through the roof. Another anomaly is the subdued price of gold mining company stock. The price of stock, particularly in the medium sized companies, has hardly moved these few years despite the rise in price and increasing demand of their sole product. We can only speculate as to why this might be. It did occur to us that this might be in order to limit those companies ability to mine their underground gold holdings thereby controlling the availability of physical gold in the market.

Timothy Geithner

With Obama's economic team coming together we have to return to the question of "Change" or the lack of it. Timothy Geithner has been named as Secretary of the Treasury while Lawrence Summers is likely to be the head of the National Economic Council and Peter Orszag (currently director of the Congressional Budget Office) will head the White House Office of Management and Budget.

Timothy F. Geithner started out working for Henry Kissinger's Kissinger and Associates in 1985 In 1988 he moved to the International Affairs division of the U.S. Treasury Department where he moved up the ladder with impressive speed. From 1998 to 2001 he was Under-Secretary of the Treasury for International Affairs (1998 - 2001) under Treasury Secretaries Robert Rubin and Lawrence Summers. Summers was his mentor.

As a Treasury official, he is credited with "helping manage" multiple international crises of the 1990s in Brazil, Mexico, Indonesia, South Korea and Thailand. From February to August 2001, he was a senior fellow in International Economics at the Council on Foreign Relations following which he joined the Policy Development and Review Department (PDR) of the International Monetary Fund (IMF). In 2003 he was named as president of the Federal Reserve Bank of New York. In 2006, he also became a member of the financial advisory body, the Group of Thirty. He is a trustee of the Economic Club of New York (trustee), a member of the Council on Foreign Relations, on the advisory committee of the Center for Global Development and chairman of the Committee on Payment and Settlement systems of the Bank for International Settlements.

His informal group of advisers includes E. Gerald Corrigan (also a CFR member), a managing director of Goldman Sachs and a former New York Fed president; Treasury Secretary Henry M. Paulson Jr.; John Thain, the CEO of Merrill Lynch; Paul A. Volcker, the former Fed chairman; and Peter G. Peterson, the former U.S. secretary of commerce. James "Jamie" L. Dimon, the CEO and chairman of J.P. Morgan Chase, is a Geithner ally and a member of the board of the New York Fed.

To say that Mr Geithner is an insider would be somewhat of an understatement. He is a excellent example of a man working his way upwards through the Circles of Power that we discussed a couple of weeks ago. We named six organizations as the core of the public face of world power, among them the Council on Foreign Relations and the Bank for International Settlements; Mr Geithner is a member of both.

While at the IMF, Mr Geithner was involved in the imposition of Washington Consensus polices on five countries. The standard Washington Consensus model is to ensure that a target country is able to borrow relatively liberally to finance it's growth. This debt should be in US dollars although Euro is now acceptable. The terms are reasonable so the country borrows, spends and grows. A crisis is then initiated such that the country becomes unable to pay its debts or indeed the interest on its debts. Such a crisis might be the sudden and precipitous drop in the price of its exports leading to a substantial decline in its US dollar or Euro earnings. At the same time the currency also falls, exacerbating the problem. No finance is available except from the IMF and/or World Bank which imposes severe terms including a substantial reduction in public spending with the adoption of austere budget constraints, opening of the countries markets to foreign investment without conditions, reduction or complete removal of any barrier to foreign imports and privatisation of state enterprises.

Coupled with the demand that interest rates be set at 'market' levels, the target country is set up for an explosion of unemployment coupled with a collapse in real wages leading to poverty, misery and suffering for millions. The nation's assets are essentially stolen through privatisation in a repeat of what Hannah Arendt called the "original theft" that allowed the establishment of free market capitalism in the European economies. Local products are forced out of the market which is flooded with foreign imports driving local business either into foreign arms or bankruptcy. In order to enforce this new order the target nation is required to reform its legal system to provide for stringent laws protecting private property.

The pattern has been repeated many times globally with great success for the winners, US and European banks and corporations.

The Council on Foreign Relations "sponsored" an Independent Task Force "Building Support for More Open Trade", co-chaired by Kenneth Duberstein (Reagan's Chief of Staff) & Robert Rubin (Clinton Treasury Secretary) for which Mr Geithner was Project Director. The Task Forces final report strongly endorses trade expansion, "trade expansion is not only vital to economic growth in the US and abroad, but when combined with complementary policies, can actually help address the problems cited by labor, environmentalists and others concerned with social equality" " Given the increase in employment, wages and wage equality in the 1990's, when the US expanded free trade, the Task Force holds it would be economically and socially irresponsible for the US not to pursue further trade expansion". From what we understand to be the real global effects of trade expansion it seems pretty clear where Timothy Geithner stands and for whose benefit he will be acting while Secretary of the Treasury.

You'll find that the positions held by Lawrence Summers and Peter Orszag speak of similar affiliations, associations and loyalties. We are left with a heavy heart in the acknowledgment that it looks most unlikely that there will be anything other than business as usual at the White House from 20th January 2009. The only things changing will be the bed linen and the dog.

In Mr Geithner's own words he shows the upside down way in which the current 'crisis' is presented to the world:-

The world experienced a financial boom. The boom fed demand for risk. Products were created to meet that demand, including risky, complicated mortgages.

As we discussed last week the boom was in fact engineered through the injection of massive amounts of "liquidity" (i.e. money) into the system. This money needed a home. It was this need that drove the demand for 'risk'. What Mr Geithner calls 'risk' would be better termed as money needing a home that pays as much as possible in return; wholly immoral home mortgages, excessive consumer and corporate debt packaged neatly into Mortgaged Backed Securities (MBS), Asset Backed Securities (ABS), Collateralised Debt Obligations (CDO) and Collateralised Loan Obligations (CLO) met the criteria. They created the illusion of low risk high paying investments coupled with low capital requirements.

It was the Fed that fueled the fire. No mention is made in the US of the reduced standards of what qualified as bank capital, nor the changes to the capital requirements of banks under Basel II, nor the changed accounting rules. Neither is the emasculation of large parts of the regulatory framework brought to public attention - in one department of the Securities and Exchange Commission a team of one hundred was reduced to one. Rather we are have been treated to a steady rollout of the mantra for a new programme of regulation.

UK Regulation

Similarly in the UK, Gordon Brown is receiving waves of adulation from the credulous as the saviour of the financial system when in fact he was one the chief architects of it's failure. In 1998, within days of taking office Brown changed the entire edifice of UK financial regulation removing the regulation and oversight of banks from the Bank of England to the newly formed Financial Services Authority (FSA). Having personally dealt directly with both the Bank of England and the FSA on both regulatory and product matters one of the present writers has direct experience of the effects of this change; for whatever its structural and control failing might be, the Bank of England was staffed by intelligent, experienced and shrewd people whereas the same cannot be said of the FSA which was regularly steamrolled by the banks it was charged with regulating. In fact, we would go so far as to say that the FSA was deliberately set up to fail despite Gordon Brown's statement to Parliament on 13th December 2001:-

" I propose to use my legislative powers so that we can all be satisfied that the FSA is meeting its objectives and that the accountability process works as effectively as possible.

"Now that the FSA has assumed its full powers, I and the Chairman of the FSA have set out explicitly how the FSA will keep the Government informed of regulatory cases with serious and wider implications."

The UK Government's powers within the Financial Services and Markets Act enable it to launch a statutory inquiry into possible serious regulatory failure. One wonders if such an inquiry will be launched in the UK or whether the lack of one might be reasonably construed as showing that there was no 'regulatory failure' rather, the system worked exactly as intended.

Mr Geithner's Allegances

Mr Geithner wrote in the Financial Times of the need for a new regulatory programme:-

"... we have to increase the shock absorbers ...this will require more exacting expectations on capital, liquidity and risk management for the largest institutions....we have to improve the capacity of the financial infrastructure to withstand default by a big institution. This will require taking some of the risk out of secured funding markets, ....encouraging more standardisation, automation and central clearing in the derivatives markets.

I do not believe it would be desirable or feasible to extend capital requirements to leveraged institutions such as hedge funds. But supervision has to ensure that .....supervised institutions limit the risk of a rise in overall leverage ........that could threaten the stability of the financial system. And regulatory policy has to induce higher levels of margin and collateral in normal times against derivatives and secured borrowing to cover better the risk of market illiquidity.

..... we need to streamline and simplify the US regulatory framework. Our system has evolved into a confusing mix of diffused accountability, regulatory competition and a complex web of rules that create perverse incentives and leave huge opportunities for arbitrage and evasion. The blueprint by Hank Paulson, Treasury secretary, outlines a sweeping consolidation and realignment of responsibilities.

The institutions that play a central role in money and funding markets - including the main globally active banks and investment banks - need to operate under a unified framework that provides a stronger form of consolidated supervision, with appropriate requirements for capital and liquidity. To complement this, we need to put in place a stronger framework of oversight authority over the critical parts of the payments system - not just the established payments, clearing and settlements systems, but the infrastructure that underpins the decentralised over-the-counter markets.

Because of its primary responsibility for the stability of the overall financial system, the Federal Reserve should play a central role in such a framework, working closely with supervisors in the US and in other countries. At present the Fed has broad responsibility for financial stability not matched by direct authority and the consequences of the actions we have taken in this crisis make it more important that we close that gap.

This is exactly the new regime Henry Paulson planned, as set out in the US Treasury Blueprint announced in June 2007 and further clarified in March 2008. Geithner is credited with being something of a diplomat; one wonders whether he was just toeing the party line in the above article or whether these are his beliefs. Given with whom he associates, his history and who pays his salary, it is probable that the latter is the case.

That the exact same provisions of a June 2007 paper, one that must have been a long while in the planning, now happen to be the terms of the statement issued at the end of the G20 meeting in Washington demonstrates beyond doubt the charade of the financial crisis, it's manipulated origins and purposes.

The G20 statement

It seems to us that there are three principle programmes being advanced with the necessary personnel being positioned to effect them. Under the guise of saving the system and adding sensible and prudent provisions to prevent any future crisis of this nature, a new economic world order is being imposed upon us. The G20 statement reads as if Naomi Klein had added a chapter to Shock Doctrine : The Rise of Disaster Capitalism. It is Machiavellian yet, apart from a few lone voices on the internet, there is no uproar against such audacity.

The statement reminds us that the work of the G20 will "be guided by a shared belief that market principles, open trade and investment regimes, and effectively regulated markets foster the dynamism, innovation, and entrepreneurship that are essential for economic growth, employment and poverty reduction." This, as regular readers of sott.net will understand, means "business as usual".

Regulation and oversight of the financial system.

A new regulatory regime is to be established that will separate the largest banks, global by nature, from the rest thus creating an elite group of financial institutions with oligopolitical power at the top of the global financial pyramid. These banks will be so large and so "systemically important", as politicians like to remind us regularly, that they will never be allowed to fail; they will control all global finance. The very situation that innumerable commentators including ourselves are warning against in the current crisis, the privatization of profits and the socialization of risks will become a defining feature of the new system. As the G20 have stressed, these mega-banks will continue to operate within a system "grounded in a commitment to free market principles" and thereby able to speculate freely so as to amass even greater fortunes for the financial elite while the risks they take will be borne by us, the ordinary people. The new system will have moral hazard built into it.

The new regulatory framework will be structured so as to ensure that there can be no newcomers to this elite club of banks unless specifically required by those that control the system. Smaller banks will be excluded from the core of the market, being themselves mere pawns of the elite, useful when needed, expendable when not. Banks are failing across the US already and many more will follow across the world. Their assets will be snapped up a pennies on the dollar by the mega-banks thereby further concentrating wealth and power and reducing the options that any of us have.

Of course we are being presented with a quite different story about "sound new regulation" and the need for "new clearing systems" (G20 statement) as if it is the regulators that control the banks when in fact it is the banks that control the regulators. In the case of the Fed it is through the simple fact that the banks own the Fed, nominate all its board members and finance Congress and the White House. Elsewhere variations on the same methodology apply though often more subtly. The appointment of Mr Geithner, a man trusted within the inner circles of power, chairman of a crucial committee within the Bank for International Settlements, suggests that the international cooperation and coordination of regulation referred to in the G20 statement is purely a smokescreen for the consolidation of global banking power to be exercised through the BIS by the primary member central banks. The language of the G20 statement makes it clear that there can be no dissent from the reforms.

Free Trade, the IMF and other Development Banks.

Free Trade has been the mantra by which the rapacious progress of imperialism (aka Free Market Capitalism) has been promoted to the world. In the recent Doha round of trade talks many countries baulked at what was being asked of them. These included France where governments can fall at the suggestion that a free market in agricultural products be opened to the world and Brasil. Yet without more countries opening up to free trade, the Free Market Capitalist machine will have nothing to devour so 'free trade' simply has to be forced upon the dissenters. Never mind that the true effects of 'free trade' have been the destitution, impoverishment, starvation and death of millions. Never mind that not one single shred of evidence exists to even remotely suggest that the current crisis is due to the few remaining barriers to imperial rape. Never mind any of the facts or truth whatsoever, these plans were laid long ago before the details of the crisis that would be used to justify them was known, so if the facts don't fit the 'crisis' this is to be expected. It hardly matters as the mainstream media won't be pointing out these glaring inconsistencies to the huddled masses.

The IMF has been used as a weapon of economic war since its inception. It's methods have been well documented as we discussed above in relation to Timothy Geithner and the Washington Consensus. Its sudden elevation to centre stage, along with the World Bank and other Multilateral Development Banks suggests that similar tactics will be brought to bear against those countries that are forced to borrow from them. It is a perfect set up as we noted above: encourage growth through debt, inflate the economy then suddenly withdraw access to money forcing your target country to borrow from the IMF or World Bank under onerous and rapacious terms, enforce those terms bringing said country to its knees while acquiring anything of value at a knock down price. In order to enforce this new order the target nation is required to reform its legal system to provide for stringent laws protecting private property. It is therefore worthy of note that the G20 statement stressed a "commitment to....the rule of law [and] respect for private property".

Information and Taxation.

While the big headlines have been about regulation and to some extent free trade there were, in the G20 statement, other measures that will effect each of us greatly. We may not feel the effects for some time yet and indeed when they come they will be part of incremental changes already well established and ongoing. Not only may we not feel the effects keenly for some time but for many they will be regarded as part of their moral duty to society. The issue is that of personal taxation.

Last week we talked about the fact that governments do not, for the most part, need to borrow. They can simply issue money into the system through paying for much needed infrastructure, education and health care. One effect of the system we have where, instead of this simple and economic approach, vast sums are borrowed, is that there is an immense interest bill to be paid. In his excellent film, From Freedom to Fascism Aaron Russo revealed, as have others, that US personal income tax receipts equaled interest payments on US government debt. In principle therefore, the absence of government debt in the US would negate the need for anybody to pay income tax.

There are numerous other aspects to taxation that need to be addressed. Taxation as a percentage of income sounds reasonable but is not applied reasonably. The level of income at which personal income tax starts in most countries is far too low. Everybody should be able to save a good proportion of their income and not have it taxed out of their hands. This is truer for the poor than any other members of society. A fair tax system would ensure that everybody was able to save. Not only that but the people that gained most from the provision of government, the wealthy, would pay the most. For example in matters of defense, it is the wealthy who have the greatest amount to lose so they should be paying the greatest 'insurance premium'.

A further aspect of unjust tax systems, of which the US is the prime example, is the relative burden of tax borne by the rich and super-rich. The burden of tax on these people has been dropping steadily since the 1980's as a matter of deliberate and sustained policy. This drop has been achieved by legislative changes lowering tax on capital (the greatest source of income for the rich and super-rich) relative to taxes on wages, by lack of enforcement and by the provision and tolerance of numerous 'tax shelters' (schemes by which the rich and super-rich avoid paying taxes). We hope to write more on this topic in due course; for the present however it suffices to stress that tax on personal income means that for some percentage of every working day you are working for the puppet masters.

These statements from the G20 need to be seen in this light:-

"We will promote information sharing, including with respect to jurisdictions that have yet to commit to international standards with respect to bank secrecy and transparency".

Tax authorities, drawing upon the work of relevant bodies such as the Organisation for Economic Cooperation and Development (OECD), should continue efforts to promote tax information exchange. Lack of transparency and a failure to exchange tax information should be vigorously addressed.

They aren't talking about you and I being able to see what is going in behind their walls of secrets; rather they refer to banks having to disclose all the details of their customers accounts and financial dealings to regulators abroad. This means that any of the world's major governments can see your bank records and you will never know about it. Those countries that do not agree to the disclosure of customer information are black-listed and their banks excluded from much of the choicest banking business. There is only one reason they want access to that information, to tax you and to track you. The system that is being aimed for will be all encompassing. No financial transaction will be able to take place anywhere without being recorded in their system and tax being levied against you, eventually, just like the current income tax. The tax that they deem to be due will be taken 'at source' which for any income outside your wages will mean a direct deduction from your bank account.

If you think this can't happen, think again, the laws for governments to take taxes directly from your bank account have been put in place over the last five years. All the government or any of it's departments, agencies or sub-agencies need do is inform your bank that you have a debt outstanding to them, should your bank have "reason to believe" that you may seek to withdraw any funds before that debt is paid then your account is liable to be legally frozen. In a world without cash that is a frightening prospect. In fact, in a world without cash, they can destitute you at the push of a button.

It is probably not unconnected that this week it was announced by the IRS:-

Internal Revenue Service Commissioner Douglas Shulman today announced the appointment of Terence (Terry) V. Milholland as the agency's new Chief Technology Officer (CTO).

As the CTO, Milholland will be responsible for all aspects of the systems that operate the nation's tax infrastructure. He will oversee a multi-billon dollar budget and the 7,000-person organization that maintains over 400 systems that enable the processing of over 200 million tax returns each year.

Milholland brings almost 30 years of technology leadership to the IRS. Most recently, he was the Executive Vice President and CTO for Visa International.

Control of information has always been essential for any totalitarian power as has the ability to enslave the masses. The appointment by the IRS of the man who oversaw the implementation of systems that pry into your private life (see below) while at Visa has an ominous feel to it.

We have witnessed the initially slow but now hasty removal of our liberties coupled with the establishment of a surveillance state in which we are all numbered, recorded, monitored and tracked. There are vehicle, mobile phone and GPS tracking systems that combine with credit card, gas station, subway, train and bus system data and camera systems to give those that track us every detail of our daily movements. Every electronic purchase we make is tracked and any deviation now causes us to be "red flagged", a term most people had never heard of at the turn of the millennium. In fact we are so closely watched that any one of the faceless people who exert power over us can know the most intimate details of our lives at the click of a mouse. The real situation is so far beyond anything most people have ever dreamed of - and way beyond anything that you have seen in the movies - that it boggles the mind. Back in 1977, Steve Wright a British academic was researching the means by which the state exerted covert control upon us as part of his PhD thesis. He stumbled upon the beginning of ECHELON, a system for monitoring hundreds of thousands of telephone calls all the time (now millions). His work caused what is said to be the first raid by the British political police, the Special Branch, on a British university; a raid conducted at the behest of the US National Security Agency. Ironically the motto of the university is Omnibus Patet Veritas - Truth Lies Open to All.

We strongly advise you to research ECHELON for yourselves so that you can fully appreciate the extent of the surveillance net in which you are now caught. The NSA, MI5, Mossad and countless other intelligence agencies can listen to every phone call you make, read every email and track every webpage you visit. That means they are in your head, they know how you think, they know how you construct your sentences, how you frame your speech, every inflection in your voice and everybody you know and they will use this against you. This is not how a world should be - it is just plain wrong.

Why do they need all this access to data, this unlimited ability to be inside the heads of millions of people?

They need it because they fear you and they fear you because they know that if enough of you realise how badly you've been screwed and by whom then you might just set aside your differences to challenge the puppet masters and they know that if you do that they will fall.

You're being screwed to the wall at the moment and you probably know it but you also know that there are millions out there who haven't worked it out yet which is one of the reasons why nothing changes. There is a race on between all of us and the puppet masters - pathological deviants. They are seeking to exert more control while we must seek to inform people, to give them knowledge which they then must share to generate understanding. They need to know what is happening and they need to know the real deal, that it's all about psychopaths and how they have twisted everything we take as normal into a pathological hell. We can see evidence of this race in the G20 statement.

They are not finished, they are racing towards a goal and they seem to be under some sort of time pressure; there seems to be a timetable to be met. While the puppet masters have set the world rushing headlong towards their New World Order, the vast majority of people are sleep-walking their way to Hell.