Signs of the Economic Apocalypse, 7-2-07

From Signs of the Times:

Gold closed at 650.90 dollars an ounce Friday, down 0.9% from $657.00 at the close of the previous Friday. The dollar closed at 0.7384 euros Friday, down 0.6% from 0.7426 at the previous week’s close. That put the euro at 1.3542 dollars compared to 1.3466 the Friday before. Gold in euros would be 480.65 an ounce, down 1.5% from 487.90 for the week. Oil closed at 70.68 dollars a barrel Friday, up 1.0% from $69.14 at the close of the week before. Oil in euros would be 52.19 euros a barrel, up 1.7% from 51.34 for the week. The gold/oil ratio closed at 9.21 Friday, down 3.1% from 9.50 the Friday before. In U.S. stocks, the Dow closed at 13,408.62 Friday, up 0.4% from 13,360.26 at the close of the week before. The NASDAQ closed at 2,603.23 Friday, up 0.6% from 2,588.96 for the week. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 5.03%, down ten basis points from 5.13 at the end of the previous week.

Since Friday was the end of the second quarter of 2007, let’s look at the numbers for the quarter and the year to date. Gold rose 1.9% from 638.80 dollars an ounce for the year so far but fell 2.8% from 669.00 for the second quarter. The dollar fell 2.6% from 0.7576 euros for the year and fell 1.4% from 0.7487 for the quarter. Gold in euros fell 0.7% from 483.98 for the year and 4.2% from 500.86 for the quarter. Oil rose 15.8% from 61.05 for the year and rose 7.3% from 65.87 for the second quarter. Oil in euros rose 12.8% from 46.25 for the year and 5.8% from 49.31 for the quarter. The gold/oil ratio fell 13.6% from 10.46 for the year to date and fell 10.3% from 10.16 for the second quarter. In U.S. stocks, the Dow Jones Industrial Average rose 7.6% from 12,463.15 in the first half of 2007, and rose 8.5% from 12,354.35 during the second quarter. The NASDAQ rose 7.8% from 2,415.29 for the year and rose 7.5% from 2,421.64 for the quarter. In U.S. interest rates, the yield on the ten-year U.S. Treasury note rose 33 basis points from 4.70 for the year to date and 39 basis points from 4.64 for the quarter.

Here are charts of some of the numbers we have been following for the past two and a half years.

The price of oil has been rising steadily and fairly steeply in 2007, rising nearly 16% for the year in dollars. U.S stocks rose 7.6% so far this year and U.S. interest rates have risen significantly, with the 10-year U.S. T-Note gaining 39 basis point during the second quarter of 2007. Gold has treaded water lately, rising about 2% for the year in dollars but down about 3% for the second quarter.

The rise in U.S. interest rates may be the most significant change during the past quarter. The United States and indeed the world has been enjoying a low interest rate environment for more than a decade. Low interest rates have propped up property values world-wide and have alleviated the burden of lower pay in developed countries. With all the debt out there, higher interest rates could easily send the world into a deep recession.

Looking back over two and a half years, nothing cataclysmic has happened in the economy. That conforms to the new paradigm in the derivative era where crises are avoided until… they’re not. And because of the way they were avoided, the correction, when it does come, becomes a cataclysm. The push off the cliff may happen due to forces internal to the economy or through an external shock. It is hard to imagine that we will be as lucky during the next quarter-decade, but in a non-linear environment, predictions are difficult.

Two questions to ask. How long can assets be turned into debt for short-term gain (this is happening at a personal, corporate and governmental level)? How much of the outstanding debt can ever be paid off?

Here are Mike Whitney’s answers:

A Subprime Chernobyl?

The Fed's Role in the Bear Stearns Meltdown

Mike Whitney

The Bank for International Settlements issued a warning last week that the Federal Reserve's monetary policies have created an enormous equity bubble which could lead to another "Great Depression". The UK Telegraph says that, "The BIS--the ultimate bank of central bankers--pointed to a confluence a worrying signs, citing mass issuance of new-fangled credit instruments, soaring levels of household debt, extreme appetite for risk shown by investors, and entrenched imbalances in the world currency system."

The IMF and the UN have issued similar warnings, but they've all been ignored by the Bush administration. Neither Bush nor the Federal Reserve is interested in "course correction". They plan to stick with the same harebrained policies until the end.

The "easy credit" which created the subprime crisis in mortgage lending has now spread to the hedge fund industry. The troubles at Bear Stearns prove that Secretary of the Treasury Henry Paulson's assurance that the problem is "contained" is pure baloney. The contagion is swiftly moving through the entire system taking down home owners, mortgage lenders, banks, rating agencies, and hedge funds. We are just at the beginning of a system-wide breakdown.

The problem originated at the Federal Reserve when Fed-chief Alan Greenspan lowered the Feds Fund Rate to 1% in June 2003 and kept rates perilously low for more than 2 years. Trillions of dollars flowed into the economy through low interest loans creating a massive equity bubble in real estate which drove up housing prices and triggered a speculative frenzy.

The Feds' "easy money" policy has disrupted the "debt-to-GDP" balance which maintains the integrity of the currency. By expanding circulation debt via low interest rates; Greenspan put the country on the path to hyperinflation and, very likely, the collapse of the monetary system.

The problems at Bear Stearns are the logical upshot of Greenspan's policies. The over-leveraged hedge funds are a good example of what happens during a "credit boom". Liquidity flows into the markets and raises the nominal value of all asset classes but, at the same time, GDP continues to shrink. That's because the wages of working class people have stagnated and not kept pace with productivity.
When workers have less discretionary income, consumer spending"which accounts for 70% of GDP"begins to decline. That's why this quarters earnings reports have fallen short of expectations. The American consumer is "tapped out".

The current rise in stock prices does not indicate a healthy economy. It simply proves that the market is awash in cheap credit resulting from the Fed's increases in the money supply. Consumer spending is a better indicator of the real state of the economy than stocks. When consumer spending drops off; it is a sign of overcapacity, which is deflationary. That means that growth will continue to shrivel because maxed-out workers can no longer purchase the things they are making.

The underlying problem is not simply the Fed's reckless increases to the money supply, but the growing "wealth gap" which is undermining solid economic growth. If wages don't keep pace with productivity; the middle class loses its ability to buy consumer items and the economy slows.

The reason that hasn't happened yet in the US is because of the extraordinary opportunities to expand personal debt. The Fed's low interest rates have created a culture of borrowing which has convinced many people that debt equals wealth. It's not; and the collapse in the housing market will prove how lethal that theory really is.
To large extent, the housing bubble has concealed the systematic destruction of America's industrial and manufacturing base. Low interest rates have lulled the public to sleep while millions of high-paying jobs have been outsourced. The rise in housing prices has created the illusion of prosperity but, in truth, we are only selling houses to each other and are not making anything that the rest of the world wants. The $11 trillion dollars that was pumped into the real estate market is probably the greatest waste of capital investment in the nations' history. It hasn't produced a single asset that will add to our collective wealth or industrial competitiveness. It's been a total bust.

The Federal Reserve produces all the facts and figures related to the housing industry. They knew that trillions of dollars were being diverted into a speculative bubble, but they did nothing to stop it. Instead, they kept interest rates low and endorsed the lax lending standards which paved the way for millions of defaults. Now the effects of their "cheap money" policies have spread to the hedge fund industry where hundreds of billions of dollars in pensions and savings are in jeopardy.

Alan Greenspan played a major role in the housing boondoggle. On February 26, 2004, he said, "American consumers might benefit if lenders provide greater mortgage product alternatives to the traditional fixed rate mortgage. To the degree that households are driven by fears of payment shocks but willing to manage their own interest-rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home."

Greenspan tacitly approved the whacky financing which produced all manner of untested loans"including ARMs, piggyback loans, "no doc" loans, "interest only" loans etc. These loans are a break from traditional financing and have contributed to the increase in bankruptcies.

Millions of people who were hoodwinked into buying homes with "interest-only", "no down" loans will now either lose their homes or be shackled to an asset of decreasing value for the next 30 years. They've been tricked into a life of indentured servitude.

A recent article in the Wall Street Journal revealed the extent of Greenspan's involvement in the housing fiasco. Here's an excerpt from the article:

"Edward Gramlich, who was Fed governor from 1997 to 2005, said he proposed to Mr. Greenspan in or around 2000, when predatory lending was a growing concern, that the Fed use its discretionary authority to send examiners into the offices of consumer-finance lenders that were units of Fed-regulated bank holding companies.

"I would have liked the Fed to be a leader" in cracking down on predatory lending, Mr. Gramlich, now a scholar at the Urban Institute, said in an interview this past week. Knowing it would be controversial with Mr. Greenspan, whose deregulatory philosophy is well known, Mr. Gramlich broached it to him personally rather than take it to the full board.

"He was opposed to it, so I didn't really pursue it," says Mr. Gramlich.

"Still, Mr. Greenspan's views did color the regulatory environment, facilitating growing concentration in banking and a hands-off approach to derivatives and hedge funds. That approach, broadly shared by both the Clinton and Bush administrations, is coming under increased scrutiny". (Wall Street Journal)

So, Greenspan had the chance to "crack down on predatory lending" and he refused. Now millions of low income people are saddled with payments they have no reasonable prospect of paying off. How much of the present carnage could have been avoided if he had Greenspan done the right thing?

The "Not So Great" Depression

An article appeared this week in the UK Telegraph by Ambrose Evans-Pritchard which supports the theory that Greenspan's "loose monetary policy" fueled a huge credit bubble, which is pushing the global economy towards a "1930s-style slump."

The article quotes from a statement made by The Bank for International Settlements:"Virtually nobody foresaw the Great Depression of the 1930s, or the crises which affected Japan and Southeast Asia in the early and late 1990s. In fact, each downturn was preceded by a period of non-inflationary growth exuberant enough to lead many commentators to suggest that a 'new era' had arrived".

But today we face "worrying signs" of another economic meltdown.

The BIS said that they were "starting to doubt the wisdom of letting asset bubbles build up on the assumption that they could safely be cleaned up' afterwards". (Greenspan's method) and that, "while cutting interest rates in such a crisis may help, it has the effect of transferring wealth from creditors to debtors and sowing the seeds for more serious problems further ahead.'"

"The bank said it was far from clear whether the US would be able to ignore the consequences of its latest imbalances, ($800 billion per year) citing a current account deficit running at 6.5% of GDP, a rise in US external liabilities by over $4 trillion from 2001 to 2005, and an unprecedented drop in the savings rate. The dollar clearly remains vulnerable to a sudden loss of private sector confidence."'

The BIS referred to the toxic effect of the "$470 billion in collateralized debt obligations (CDO), and a further $524 billion in "synthetic" CDOs which have spread through hedge funds industry. These CDOs are the loans (many sub primes) which were bundled off to Wall Street and turned into securities which are highly leveraged in hedge funds for maximum profitability. As Bear Stearns is discovering, these CDOs are like roadside bombs; exploding without notice whenever the stock market suddenly dips.

The BIS also cautioned about the excess of "leveraged buy-outs (mergers) which touched $753bn, with an average debt/cash flow ratio hitting a record 5.4--. Sooner or later the credit cycle will turn and default rates will begin to rise.'"

The central banks around the world are increasingly worried that the Bush administration's profligate spending and irrational monetary policies will trigger a global depression. The recent volatility in the stock market suggests that the credit boom is just about over. Once the liquidity dries up---stocks will fall sharply.

The Housing Slump

Yesterday's housing data, shows that sales are still weak while inventory continues to grow. Existing home sales dropped 3% while prices dropped another 2.1%. Falling prices mean that cash-strapped home owners will not be able to tap into their home's equity for other expenses. Last year, mortgage equity withdrawals (MEWs) accounted for $600 billion of consumer spending. This year, the amount will be negligible at best.

The media and the Fed continue to mislead the public about the magnitude of the housing bubble. Fed chief Bernanke assures us that the sub prime calamity hasn't "spread to other parts of the economy" (tell that to Bear Stearns) and the media keeps cheerily reiterating that a "turnaround" or "soft landing" is just ahead.

These claims are ridiculous. Apart from the 80 or more sub-prime lenders that have gone "belly-up" in the last few months, the rickety collateralized debt obligations (CDOs) and mortgage backed securities (MBSs) are steamrolling their way through the stock market bowling down everything their path. Bear Stearns is just the first on the casualties list. There'll be many more before the storm is over.

Fed-chairman Bernanke knows what's going on. He was given a full rundown by "John Burns Real Estate Consulting that the national sales information for both new and existing homes, is "misleading and covering up a deep plunge of the housing sector." The housing market is freefalling. Existing-home sales are down 22% in May and mortgage applications have fallen a whopping 18%....In Florida home sales are down 34%, not 28% as NAR reported; Arizona sales are down 38%, not 28%; and California's down 37%, not 24% as NAR reports."

Down 37% in California!?! It's a landslide.

As the defaults continue to pile up; the hedge funds will take a bigger and bigger pounding. It can't be avoided. That's what happens when bankers abandon traditional lending standards and lend trillions of thousands of dollars to people who have bad credit and lie on their loan applications.

Thousands of these same shaky sub primes loans have been wrapped up like the Crown Jewels and sold off to Wall Street as CDOs. Now they are ripping through the hedge fund industry like a tornado in a trailer park. The media has tried to downplay the damage, but its not hard to see what is really going on. According to Reuters:

"Banks doubled the amount of CDOs outstanding in the past two years to $2.6 trillion, including a record $769 billion sold last year, according to J.P. Morgan. These figures include funded and unfunded issuance. Pimco's Bill Gross said there are hundreds of billions of dollars of subprime residential mortgage-backed securities (RMBS), derivatives on subprime RMBS and collateralized debt obligations (CDOs) that buy subprime RMBS and/or the derivatives on the RMBS -- all of which he considers "toxic waste."'

"$2.6 trillion"! That's enough to bring down the whole economy. And, as Bear Stearns proves, the whole mess is beginning to unwind pretty quickly.

"Foreign investors have been the dominant buyers of these exotic debt instruments in recent years, owing to their insatiable demand for yield. If investors start dumping them, oh boy, watch out for some massive credit widening," said Dan Fuss, Vice Chairman at Loomis Sayles. (Reuters)

If the hedge fund industry follows the downward slide of the housing bubble, foreign investors will run for the exits. In fact, this may already being happening.

China sold $5.8 billion in US Treasuries in May; the first time they have dumped USTs on the market. This may be the first sign of "capital flight"---foreign investment fleeing the US for more promising markets in Asia and Europe. The greenback's survival now depends on the generosity of foreign bankers. If they refuse to recycle our $800 billion current account deficit by purchasing US bonds and securities, then the dollar will sink like a stone and lose its place as the world's reserve currency.

More Housing Blowdown

Last Friday, the stock market took a 185-point nosedive on the news that Bear Stearns was trying to raise $3.2 billion to rescue its battered hedge fund.

According to the New York Times, however, Bear was only able to came up with "$1.6 billion in secured loans to bail out one of the 2 hedge funds".

The funds are the latest victim of the sub-prime meltdown which Bernanke and Paulson assured us was "largely contained". In fact, Paulson even said, "We have had a major housing correction in this country," and "I do believe we are at or near the bottom."

Anyone who believes Paulson should take a look this chart It illustrates that how loan "resets" will continue to pound the housing market for at least another year and a half getting steadily worse as inventory grows.

The disaster is so bad that even the realtors are beginning to tell the truth. As one agent noted, "It's a bloodbath."

But the debacle in housing is only the first part of a much larger problem"a global liquidity crisis. Banks and mortgage lenders have already begun to tighten up their lending practices and many have abandoned sub prime loans altogether. (20% of the housing market in 2006 was sub prime) Now the focus has shifted to the stock market, where banks are beginning to see that "risk" has not been properly calculated. That means that if more hedge funds collapse, the banks may not be able to cover the losses.

The Bear Stearns fiasco has had a chilling affect on lending. In fact, the New York Times reported on 6-26-07 that "After years of supersize private equity deals--the buyout boom may be about to hit a bump--Rising interest rates and tougher terms from investors may signal that private equity players will soon be struggling to continue reaping the outsize returns that have made the buyout business so lucrative." (Private Equity Investors Hint at Cool Down" NY Times)

Liquidity is drying up in the private equity business. The troubles at Bear Stearns has changed the credit-landscape overnight. Bankers are nervous, money is getting tighter, and liquidity is vanishing.

"We know that these holdings are not unique to Bear Stearns," said Professor Joseph R. Mason, co-author of a recent study warning of dangers in securities backed by home loans to high-risk borrowers. "It would be hard to find a Wall Street firm that hasn't created similar funds."

That's right; the industry is waist-deep in these sub-prime time-bombs. Shaky loans and rising foreclosures threaten to knock the foundation blocks out from under the stock market and set off a wave of panic selling.

Could it have been avoided?

Perhaps, if there were better regulations on rating bonds and restricting leverage.
Consider this: one of Bear Stearns hedge funds took a $600 million investment and leveraged it 10 times its value to $7 billion. Their portfolio was chock-full of dicey CDOs and "illiquid assets" such as timber holdings in foreign countries and toll roads. These assets are difficult to price and nearly impossible to quickly auction off if the market suddenly takes a downturn.

It looked like Merrill Lynch & Co., was going to auction off $850 million of Bear Stearns CDOs this week, but backed off at the last minute. (They were reportedly only offered 30 cents on the dollar!) Once the hedge funds start selling these CDOs, then everyone will know how little they're worth. That could trigger a wave of selling that could bring down the stock market. Even if that scenario doesn't play out, the Bear Stearns incident ensures that CDOs in other hedge funds will be face a substantial downgrading that could take a big chunk out of their bottom line.

And, there's a bigger fear on Wall Street than the fact that 2 hedge funds are headed into bankruptcy, that is, that a sudden tightening of credit will send the over-leveraged stock market into a downward spiral.

The market is particularly sensitive to any rise in interest rates or tougher lending standards. It's become addicted to cheap credit and any break in the chain will cause equities to plummet.

Economist Henry C K Liu sums it up like this:

"The liquidity boom has been delivering strong growth through asset inflation without adding commensurate substantive expansion of the real economy. --. Unlike real physical assets, virtual financial mirages that arise out of thin air can evaporate again into thin air without warning. As inflation picks up, the liquidity boom and asset inflation will draw to a close, leaving a hollowed economy devoid of substance. --A global financial crisis is inevitable". (Henry C K Liu "Liquidity boom and looming crisis" Asia Times)

In other words, the "virtual" wealth of Wall Street is a chimera which was created by the Fed's inexorable expansion of debt. It can vanish in a flash if the sources of liquidity are cut off.

Puru Saxena draws the same conclusion in his article "A Gradual Transition":

"Thanks to the Federal Reserve's expansionary monetary policies over the past 5 years, US asset-prices have risen considerably; also known as the "wealth effect". At the end of last year, the market capitalization of the US stock market rose to a record-high of US$20.6 trillion, matching the value of household real-estate, which also rose to a record-high at the same time. On the surface, this may seem like brilliant news, however you must realize that this "wealth illusion" achieved by an ocean of money and record-high indebtedness is only a consequence of inflation.

Code Red: Subprime Chernobyl

We expect that the mounting losses in CDOs and the continuing defaults in the housing industry will precipitate a "severe credit crunch" which will end in a stock market crash. A report which appeared yesterday in the UK Telegraph appears to agree with this analysis. Lombard Street Research predicted that:

"Excess liquidity in the global system will be slashed. Banks Capital is about to be decimated, which will require calling in a swathe of loans. This is going to aggravate the US hard landing"' ("Banks set to call in swathe of loans" UK Telegraph 6-26-07)

Three of the main hoses which provide liquidity for the market, have either been cut off or severely damaged. These are "securatized" subprime CDOs, corporate mega-mergers and hedge fund leveraging. Without these instruments for expanding debt; liquidity will dry up and stocks will fall. The period of "easy credit" will end in disaster.

We should now be able to see the straight line that connects the Fed's low interest rates to the impending stock market meltdown. The problems began at the central bank.

Presidential candidate Rep. Ron Paul (R-Texas) summed it up best when he said:

"From the Great Depression, to the stagflation of the seventies, to the burst of the dot.com bubble; every economic downturn suffered by the country over the last 80 years can be traced to Federal Reserve policy. The Fed has followed a consistent policy of flooding the economy with easy money, leading to a misallocation of resources and artificial "boom" followed by recession or depression when the Fed-created bubble bursts".

Signs of the Economic Apocalypse, 4-13-07

From Signs of the Times:

Gold closed at 689.90 dollars an ounce on Friday, up 1.5% from $679.40 at the close of the previous Friday. The dollar closed at 0.7390 euros Friday, down 1.2% from 0.7475 at the previous week’s close. That put the euro at 1.3532 dollars compared to 1.3378 the Friday before. Gold in euros would be 509.83 euros an ounce, up 0.4% from 507.85 for the week. Oil closed at 63.41 dollars a barrel Friday, down 1.3% from $64.25 at the close of the Friday before. Oil in euros would be 46.86 euros a barrel, down 2.5% from 48.03 for the week. The gold/oil ratio closed at 10.88 Friday, up 2.9% from 10.57 at the close of the previous Friday. In U.S. stocks, the Dow Jones Industrial Average closed at 12,612.13 Friday, up 0.4% from 12,560.20 at the close of the week before. The NASDAQ closed at 2,491.94 Friday, up 0.8% from 2,471.34 for the week. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.76%, up one basis point from 4.75 at the end of the previous week.

The dollar was under pressure last week, falling against the euro and gold.

Euro rallies strongly at dollar's expense

By Neil Dennis

Fri Apr 13, 5:10 PM ET

The euro rallied strongly this week as the dollar was battered from all sides and expectations about global interest rates shifted.

Expectations of further monetary tightening supported the euro and sterling while the dollar was stung by the growing perception that the next move in US interest rates will be lower.

US producer prices data on Friday added to this sentiment - core output prices were flat in March.

Wednesday's minutes from the Federal Reserve's last open market committee meeting contrasted with the hawkish language used this week by Jean-Claude Trichet, president of the European Central Bank.

The mixed tone of the Fed's statement led economists to conclude that US interest rates will either be cut later in the year or stay on hold at 5.25 per cent for the foreseeable future.

"We still expect the Fed to cut rates to 4.5 per cent by the end of the year," said Paul Ashworth, US economist for Capital Economics.

In a press conference after Thursday's ECB policy meeting, at which eurozone rates were left at 3.75 per cent, Mr Trichet said the bank would monitor inflation risks and act in a "firm and timely manner".

Although the central bank omitted the term "strong vigilance", which indicates a rate increase at the next policy meeting, the language was hawkish enough to indicate a June rise at least.

"The Fed is clearly on hold and could be lowering rates this year, while growth outside the US, particularly in Europe and the UK, gives a differing direction in monetary policy," said Michael Wool­folk, senior currency strategist at the Bank of New York.

Tensions between the US and China also weighed on the dollar this week after the US trade department complained to the World Trade Organisation over what was described as Beijing's failure to protect intellectual property rights.

A "strongly displeased" Beijing subsequently declined Germany's invitation to attend this weekend's G7 meeting in Washington.

Selling pressure on the US currency sent the euro to a two-year high of $1.3554 on Friday.

A late dollar rally pushed the euro back to $1.3509 but the single currency remained 1 per cent higher on the week.

Sterling was also up on expectations of near-term rate rises as house price inflation picked up unexpectedly while robust consumer spending and strong wage growth lent support.

The pound was up 0.8 per cent over the week to $1.9818 against the dollar.
Against the euro, sterling fell 0.1 per cent to £0.6812.

…The dollar fell 0.1 per cent over the week to Y119.10 against the yen.

The danger is not a weaker dollar but a complete collapse of the dollar. Or, if interest rates are raised to prevent the dollar from collapsing, a complete collapse of the U.S. economy. In the past, a collapse of the domestic U.S. economy would have been seen as a problem by those profiting from the economy. Now, however, those who own don’t need those who work to actually do much consuming. As Joe Bageant put it:

Free market capitalism may have been a fraud from the git-go, but at least there was once a version which accepted the notion that any market needed customers. Once upon a time business in the industrialized world needed its citizen laborers as customers, as consumers, which implied they be paid at least enough to buy the products of the businesses and corporations that beat their asses into submission along America's assembly lines and hog slaughtering plants. That was called American opportunity and prosperity and it looked pretty damned good to millions of war ravaged Urpeen furiners trying to decide whether to eat a wharf rat or the neighbor's cat for dinner. As for the Third World, they could eat dirt and do native dances for what few tourists existed then (otherwise called the rich), but mainly they should stay out of the way of "our" natural resources in their countries.

At any rate, when the citizen labor force, by their sheer numbers, held most of the dough in their calloused mitts, there was no avoiding them by the business classes. But now that so much of not just this nation's, but the world's wealth, has become concentrated in the hands of so few, that is no longer a problem for the rich. People are cheaper than ever and getting more plentiful by the minute. So work'em to death, kill'em, eat'em if you want to. Who the f*** cares? The international rich, the managers and controllers of the new financial globalism and the world's resources and the planet's labor forces, whether they be Asian "Confucian capitalists," masters of Colombian Narco state fortunes or Chinese Tongs, New York or London brokerage and media barons, or Russian oligarchs, hold increasing and previously unimaginable concentrated wealth. They look to be a replacement for the mass market, indeed even a better one with fewer mass distribution problems, higher grade demand and at top prices.

The chances of avoiding the collapse of the economy or the collapse of the dollar (which will collapse the economy, too, until the U.S. starts making things again) are slim since indebtedness at all levels are at previously unimaginably high levels. That we have reached this point is no accident of poor policy making, human nature, or unintended consequences. It was all done for a reason, according to Mike Whitney, to put all the wealth in the hands of a few:

Doomsday for the Greenback?
Dollar Madness

Mike Whitney

April 10, 2007

The American people are in La-la land. If they had any idea of what the Federal Reserve was up to they'd be out on the streets waving fists and pitchforks. Instead, we go our business like nothing is wrong.

Are we really that stupid?

What is it that people don't understand about the trade deficit? It's not rocket science. The Current Account Deficit is over $800 billion a year. That means that we are spending more than we are making and savaging the dollar in the process. Presently, we need more than $2 billion of foreign investment per day just to keep the wheels from coming off the cart.

Everyone agrees that the current trade imbalances are unsustainable and will probably trigger major economic disruptions that will thrust us towards a global recession. Still, Washington and the Fed stubbornly resist any change in policy that might reduce over-consumption or reverse present trends.

It's madness.

The investor class loves big deficits because they provide cheap credit for Bush's lavish tax cuts and war. The recycling of dollars into US Treasuries and dollar-based securities is a neat way of covering government expenses and propping up the stock market with foreign cash. It's a "win-win" situation for political elites and Wall Street. For the rest of us it's a dead-loss.

The trade deficit puts downward pressure on the dollar and acts as a hidden tax. In fact, that's what it is--a tax! Every day the deficit grows, more money is stolen from the retirements and life savings of working class Americans. It's an inflation bombshell obscured by the bland rhetoric of "free markets" and deregulation.

Consider this: In 2002 the euro was $.87 on the dollar. Last Friday (4-6-07) it closed at $1.34-- a better than 50% gain for the euro in just 4 years. The same is true of gold. In April 2000, gold was selling for $279 per ounce. Last Friday, at the close of the market it skyrocketed to $679.50---more than double the price.

Gold isn't going up; it's simply a meter on the waning value of the dollar. The reality is that the dollar is tanking big-time, and the main culprit is the widening trade deficit.

The demolition of the dollar isn't accidental. It's part of a plan to shift wealth from one class to another and concentrate political power in the hands of a permanent ruling elite. There's nothing particularly new about this and Bush and Greenspan have done nothing to conceal what they are doing. The massive expansion of the Federal government, the unfunded tax cuts, the low interest rates and the steep increases in the money supply have all been carried out in full-view of the American people. Nothing has been hidden. Neither the administration nor the Fed seem to care whether or not we know that we're getting screwed --it's just our tough luck. What they care about is the $3 trillion in wealth that has been transferred from wage slaves and pensioners to brandy-drooling plutocrats like Greenspan and his n'er-do-well friend, Bush.

These policies have had a devastating effect on the dollar which has been slumping since Bush took office in 2000. Now that foreign purchases of US debt are dropping off, the greenback could plunge to even greater depths. There's really no way of knowing how far the dollar will fall.

That puts us at a crossroads. We are so utterly dependent on the "charity of strangers" (foreign investment) that a 9% blip in the Chinese stock market (or even a .25 basis point up-tick in the yen) sends Wall Street into a downward spiral. As the housing market continues to unwind, the stock market (which is loaded with collateralized mortgage debt) will naturally edge lower and foreign investment in US Treasuries and securities will dry up. That'll be doomsday for the greenback as central banks across the planet will try to unload their stockpiles of dollars for gold or foreign currencies.

That day appears to be quickly approaching as the 3 powerhouse economies are overheating and need to raise interest rates to stifle inflation. This will make their bonds and currencies all the more attractive for foreign investment; diverting much needed credit from American markets.

Just imagine the effect on the already-hobbled housing market if interest rates were suddenly to climb higher to maintain the flow of foreign capital?

The ECB (European Central Bank), Japan and China are all cooperating in an effort to "gradually" deflate the dollar while minimizing its effects on the world economy. In fact, China even waited until the markets had closed on Good Friday to announce another interest rate increase. Clearly, the Chinese are trying to avoid a repeat of the 400 point one-day bloodbath on Wall Street in late February 07.

Japan has also tried to keep a lid on interest rates (and allowed the carry trade to persist) even though commercial property in Tokyo is "red hot" and liable to spark a ruinous cycle of speculation.

But how long can these booming economies avoid the interest rate hikes that are needed for curbing inflation in their own countries? The problem is, of course, that by fighting inflation at home they will ignite inflation in the US. In other words, by strengthening their own currencies they weaken the dollar--it's unavoidable.

This is bound to hurt consumer spending in the US which will ripple through the entire global economy.

The problems presented by the falling dollar can't be resolved by micromanaging or jawboning. In truth, there's no more chance of a "soft landing" for the dollar than there is for the over-bloated real estate market. Greenspan's bubble economy is headed for disaster and there's not much that anyone can do to lessen the damage. As housing prices fall and homeowners are no longer able to tap into their equity, consumer spending will slow, the economy will shrink and the Fed will be forced to lower interest rates.

Unfortunately, at that point, lowering rates won't be enough. Interest rates need at least 6 months to take hold and, by then, the steady drumbeat of foreclosures and falling real estate prices will have soured the public on an entire "asset class" for years to come. Many will see their life savings dribble away month by month as prices continue to nose-dive and equity vanishes into the ether. These are the real victims of Greenspan's low interest rate swindle.

The Federal Reserve is fully aware of the harm they have inflicted with their low interest rate boondoggle. In a 2006 statement the Fed even acknowledged that they knew that trillions of dollars in speculation was being funneled into the real estate market:

"Like other asset prices, house prices are influenced by interest rates, and in some countries, the housing market is a key channel of monetary policy transmission."

"Monetary transmission" indeed?!? Trillions of dollars in mortgages were issued to people who have no chance of paying them back. It was a shameless scam. Still, the policy persisted in a desperate attempt to keep the US economy from collapsing into recession. The upshot of this misguided policy was "the largest equity bubble in history" which now threatens America's economic solvency.
Author Benjamin Wallace commented on the Fed's activities in an article in the Atlantic Monthly, "There Goes the Neighborhood: Why home prices are about to plummet"and take the recovery with them":

"Let's assume for a moment that enough people get fooled, and the refinancing boom gets extended for another year. Then what? The real problem hits. Because if you think Greenspan's being cagey on refinancing, the truth he's really avoiding talking about is that we're in the midst of a huge housing bubble, on a scale only seen once before since the Depression. Worse, the inflated housing market is now in an historically unique position, as the motor of the rest of the economy. Within the next year or two, that bubble is likely to burst, and when it does, it very well may take the American economy down with it."

Or this from Robert Shiller in his "Irrational Exuberance":

"People in much of the world are still overconfident that the stock market, and in many places the housing market, will do extremely well, and this overconfidence can lead to instability. Significant further rises in these markets could lead, eventually, to even more significant declines. The bad outcome could be that eventual declines would result in a substantial increase in the rate of personal bankruptcies, which could lead to a secondary string of bankruptcies of financial institutions as well. Another long-run consequence could be a decline in consumer and business confidence, and another, possibly worldwide, recession".

If it is not handled properly, the housing collapse could result in another Great Depression. America no longer has the (manufacturing) capacity to work its way out of a deep recession. While the Fed was sluicing $11 trillion into the real estate market via low interest loans; America's manufacturing sector was being carted off to China and India in the name of globalization. Without capital investment and increased factory production, economic recovery will be difficult if not impossible. The so-called "rebound" from the 2001 recession was due to artificially low interest rates and easy credit which inflated the housing market. It had nothing to do with increases in productivity, exports, or paying off old debts. In other words, the "recovery" was not real wealth creation but simply credit expansion. There's a vast chasm between "productivity" and "consumption" although Greenspan never seemed to grasp the difference.

A penny borrowed is not the same as a penny earned"although both may cause a slight bump in GDP. Greenspan's attitude was aptly summarized by The Daily Reckoning's Addison Wiggin who said, "GDP measures debt-fueled consumption--it really only measures the rate at which America is going broke".

Bingo.

America's biggest export is its fiat-currency which foreigners are increasingly hesitant to accept.
Can you blame them?

They have begun to figure out that we have no way of repaying them and that the "full faith and credit" of the United States is about as reliable as a Ken Lay-managed 401-K retirement plan.

The fragility of the US economy will become more apparent as Greenspan's housing bubble continues to lose air and consumer spending remains flat. As we noted earlier, home equity withdrawals are drying up which will slow growth and discourage foreign investment. The meltdown in subprime loans has drawn more attention to the maneuverings of the banks and mortgage lenders and many people are getting a clearer understanding of the Federal Reserve's role in creating this economy-busting monster-bubble.

The 10% to 20% yearly increases in property values are unprecedented. They are "pure bubble" and have nothing to do with increases in wages, demand, productivity, capital investment or GDP. It was all "froth" generated by the world's greatest Frothmeister, Alan Greenspan.

As Addison Wiggin notes, "There is only one real source of wealth: a healthy and competitive environment involving the exchange of goods coupled with control over deficit spending."

Elites at the Federal Reserve and in the Bush administration have steered us away from this "tried and true" course and put us on the path to debt and catastrophe. It won't be easy to restore our manufacturing base and compete again in the open market, but it must be done. Strong economies require that their people produce things that other people want. This is a fundamental truism that has been lost in the smoke and mirrors of Greenspan's shenanigans at the Fed.

Regrettably, we are probably facing a decades-long economic downturn in which the dollar will weaken, stocks will fall, GDP will shrivel, and traditional standards of living will decline.

The trend-lines in the real estate market will most likely be the inverse of what they have been for the last 10 years. This will dramatically affect consumer spending (70% of GDP) and put additional pressure on the dollar.

The dollar is already in big trouble--the only thing keeping it afloat is foreign purchases of US debt by creditors who don't want to be left holding trillions in worthless paper.(US debt is Japan's single greatest asset!) These "net inflows" have created a false demand for the dollar which will inevitably dissipate as central banks continue to diversify.

Last week the IMF issued a warning that there would have to be a "substantial" decline in the dollar to bring the trade deficit to sustainable levels. That, of course, is the intention of the Fed and Team Bush"to reduce the debt-load by deflating the currency. It's a crazy idea. No one destroys the buying power of their currency to pay off their debts. It just illustrates the recklessness of the people in charge.

Also, on March 20, 2007 the Governor of China's Central Bank Zhou Xiaochuan announced "that China will not accumulate more foreign reserves and will cut a small amount of current reserves for the formulation of a new currency agency". Zhou's statement is a hammer-blow to the dollar. The US needs roughly $70 billion in foreign investment per month to cover its current trade deficit. China is one of the largest purchasers of US debt. If China diversifies, then the dollar will fall and the aftershocks will ripple through markets across the world.

The Chinese are very careful about how they word their economic statements. That's why we should take Zhou's comments seriously. Three weeks ago he issued an equally ominous statement saying, "China will diversify its $1 trillion foreign exchange reserves, the largest in the world, across different currencies and investment instruments, including in emerging markets." (Reuters)

This should have been a red flag for currency traders, but the media buried the story and the markets dutifully shrugged it off. The truth is that our relationship with the Chinese is changing very quickly and the days of cheap credit and a "high-flying" dollar are coming to an end.

70% of China's currency reserves are in US dollars. The effect of "diversification" will be devastating for the US economy. It increases the likelihood of hyperinflation at the same time the housing market is in its steepest decline in 80 years. When currency crises arise at the same time as economic crises; the problems are much more difficult to resolve.

Doomsday for the Greenback

It is impossible to fully anticipate the effects of the falling dollar. The dollar is a currency unlike any other and it is the cornerstone of American power"political, economic and military. As the internationally-accepted reserve currency, it allows the Federal Reserve to control the global economic system by creating credit out of "thin air" and using fiat-scrip in the purchase of valuable manufactured goods and resources. This puts an unelected body of private bankers in charge of setting interest rates which directly affect the entire world.

Iraq has proven that the US military can no longer enforce dollar-hegemony through force of arms. New alliances are forming that are reshaping the geopolitical landscape and signal the emergence of a multi-polar world. The decline of the superpower-model can be directly attributed to the denominating of vital resources and commodities in foreign currencies. America is simply losing its grip on the sources of energy upon which all industrial economies depend. Iraq is the tipping point for America's global dominance.

When foreign central banks abandon the greenback the present system will unwind and the "unitary" model of world order will abruptly end.

This may be a painful experience for Americans who will undoubtedly see a sharp fall in current living standards. But it also presents an opportunity to disband the Federal Reserve and restore control of the nation's currency to the people's legitimate representatives in the US Congress.

This is the first step towards removing the cabal of powerbrokers in both political parties who solely represent the narrow ambitions of private interests.

The War on Terror is a public relations ploy that is intended to disguise the use of military and covert operations to secure dwindling resources to maintain dollar supremacy. It is a futile attempt to control the rise of China, India, Russia and the developing world while preserving the authority of western white elites.

The strength of the euro portends increasing competition for the dollar and a steady decline in America's influence around the world. This should be seen as a positive development. Greater parity between the currencies suggests greater balance between the states--hence, more democracy. Again, the superpower model has only increased terrorism, militarism, human rights violations and war. By any objective standard, Washington has been a poor steward of global security.

The falling dollar also suggests growing political upheaval at home brought on by economic distress. We should welcome this. America needs to remake itself"to recommit to its original principles of personal freedom, civil liberties and social justice--to reject the demagoguery and warmongering of the Bush regime"to reestablish our belief in habeas corpus, the presumption of innocence and the rule of law. Most important, we need to reclaim our honor.

Big changes are coming for the dollar; it's just a matter of whether we allow those changes to bog us down in recriminations and pessimism or use them to create a new vision of America and restore the principles of republican government. It's up to us.

The collapse will most likely be far worse than the Great Depression that Mike Whitney compares it to. During the Great Depression of the 1930s a far greater percentage of the world’s population grew their own food. The entire world economy has reached “cliff risk” status, according to Michael Panzer, and the consequences are unimaginable. We cannot depend on historical parallels:

Cliff-Risk Nation

Michael J. Panzner

April 10, 2007

In the credit derivatives market, certain instruments are exposed to what is known as “cliff risk.” This ominous sounding phrase describes a situation where the last in a series of adverse developments obliterates the value of what was only recently viewed as a triple-A-rated security. Up until that point, however, rating agencies, investors, and bankers assume that circumstances will eventually right themselves and that the principal will be paid in full, in spite of whatever bad news might have come along beforehand.

This latter way of thinking is not confined to the nether world of complex securities with tongue-twisting names like CDOs-squared. In many respects, it describes a point-of-view that permeates many aspects of modern financial life. Increasingly, Americans have taken it for granted that good times beget more of the same and they have acted accordingly. If bad news comes along, the damage is absorbed. Unlike with some toxic derivatives, however, many believe that if circumstances do manage to take a turn for the worse, something can always be done about it.The massive build-up of public and private debts, unfunded pension promises, and other obligations underscores this perspective. Rather than coming to terms with untenable liabilities taken on because of past miscalculations, the mindset has been “don’t worry about it now.” If financial problems don’t disappear of their own accord, they can be restructured, rolled over, refinanced, or even renamed. One way or another, the thinking goes, the situation will be resolved, because there are any number of options that are readily available.

This mindset probably explains why we haven’t seen the type of response to a growing list of negatives that wizened old-timers would have expected. In the past, significant trade deficits and other unstable imbalances, myriad signs of a looming recession, talk of a subprime meltdown-inspired credit crunch, and the inevitability of down cycles following periods of historically high profit-margins and overextended uptrends would have had money managers scrambling to batten down the hatches by now.

Instead, mutual fund cash levels are near record lows, margin debt and leverage-based speculation are at euphoric extremes, and risk spreads reflect an extraordinary degree of complacency. Every data point, whether good or bad, is seen as another reason for heads-I-win, tails-you-lose optimism.

Nowadays, many would probably argue that it makes little sense to worry or even plan ahead for disaster, because there are numerous escape routes available if things do actually come to a head. Liquid markets, electronic trading and other modern technology, innovative financial products, hedging and stop-losses, and an unfailingly supportive Federal Reserve are seemingly permanent fixtures of today’s financial landscape that will no doubt counteract any unwelcome adversity.

At the same time, the belief exists that there is still big money to be made from taking out-sized risks, and incentives remain heavily skewed to the upside. Practically speaking, current performance is all that matters, with nary a thought given to longer-term returns — or concerns. What might be lost through aggressively geared-up bets on repeated rolls of the dice seems to pale in comparison to what can be realized if everything goes exactly according to plan
Many Americans have adopted a somewhat similar perspective in their day-to-day financial lives. Don’t make enough to keep up with the Joneses? Just charge the credit card. Don’t have enough to buy a home? Borrow 100% of what you need — higher property prices in future will make the extravagance worthwhile. Interest rates are too high? Sign up for adjustable-rate financing with ultra-low up-front teaser rates. Can’t afford to make all your monthly payments, or even survive on your paycheck? Refinance what you owe or simply borrow what you need.

In fact, the mantra seems to be: “Why be defensive at all?” With a support system supposedly in place that can theoretically postpone the day of reckoning more-or-less indefinitely, the rational response is to push the envelope to its extremes. Combine that with the constant bullish squawking and tom-tom thumping by banks and other financial institutions, retailers, policymakers, politicians, and the media, and it adds up a siren song of short-sightedness and self-indulgence that is hard to resist.

Governments at all levels are in the same thrall. How else can you explain politicians who talk, talk, talk about fiscal responsibility, but who continue to advocate ever-escalating spending and borrowing nonetheless? Or who insist on using almost Dickensian pay-as-you-go accounting systems that ignore mind-boggling financial obligations that our children — and our children’s children — will ultimately be responsible for? One problem, of course, is that many have drunk the Kool-Aid that says we can grow our way out of each and every mess. In that delusory state, they carry on as before.

Corporate America is also mired in the here and now, with little apparent trepidation about any challenges that lie ahead. Managers seem mainly focused on slashing costs and paring back investment, instead of longer-term planning, when they are not feathering their nests, of course. Corporate policies, including executive compensation plans, are strongly aligned with short-term performance goals. Even in economically sensitive industries, borrowing levels are going up while reserves are kept to a minimum. You would have thought the best and the brightest would know better.

Yet everywhere you look, people are unwilling or unable to stop what they’ve been doing, especially in recent years, because it seems to have worked so far and for so long and everyone else is playing along, too. Many economic and financial squalls have passed without causing serious disruptions, at least in the aggregate, and it’s hard to refute the optimists when they argue that the times are as good as they’ve every been.

And yet, one day, as is likely to happen ever more frequently with CDOs-Squared and other toxic new age monstrosities, the “event” that really matters will come along. A paradigm-killer that sets in motion a chain reaction that completely undermines the apparently never-ending stability that everyone has gotten used to. By then, people will realize very quickly that America, once viewed as the world’s foremost economic superpower, is nothing more than a cliff-risk nation.

Signs of the Economic Apocalypse, 2-19-07

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

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

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

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

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

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

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

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

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

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

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

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

The US and Israel: The Real Failed States

By Paul Craig Roberts

February 5, 2007

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Imbalance and Privilege: Hedge Fund America

Max Fraad Wolf

February 15, 2007

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

February 14th, 2007

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

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

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

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

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

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

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

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

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

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

…With the caveat that critical components will be maintained.

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

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

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

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

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

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

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

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

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

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

Remember what I said about that astonishing Brzezinski episode?

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

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

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

It’s impossible to know for sure…

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

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