Tuesday, December 02, 2008

State Sanctioned Theft - When Immorality is Law and Resistance is Crime

By Simon Davies and Donald Hunt
SOTT.net

World stock indexes rebounded strongly last week. The Dow and the Hang Seng were up nearly 10%, the FTSE and DAX were up 13% and the Brazilian Bovespa was up a whopping 17%. Gold pushed passed $800.

In the U.S. retailers reported a better than feared "Black Friday," with sales rising 3% compared to the previous year, although discounts were deep and profit margins low. Black Friday refers to the Friday after the Thanksgiving holiday. It is both the traditional start of the Christmas shopping season and the day that retailers start to make their profits for the year. In recent years it has become a bigger and bigger thing, with families waiting in line outside big box stores and malls the night before waiting to get let in at five in the morning, lured by steep discounts on a few big ticket items. This year with the bad economy it got completely out of hand as a Walmart employee was trampled to death in Long Island when the crowds were let in.

These reports contrast with the predicament of one in ten Americans in nearly half the states who are now relying on food stamps.

The people of Iceland are also in dire straits. The entire banking system has collapsed, Britain has used anti-terror laws to freeze assets and force restitution; the currency has devalued by half, the economy shrunk by 15% causing companies to go bust everyday with thousands of job losses. Naturally the people are calling for a revolution.

In a notionally "free market" system, banks that find themselves in trouble should not be bailed out but allowed to fail - that is what happens to ordinary people, we are never bailed out we become bankrupt with all the attendant horrors of that status. So why is there so much government hand wringing when banks hits the wall? There is a simple solution to this, that there are banks and other corporations that are deemed "too big to fail" which in fact should be allowed to fail and then be broken up and never allowed to rise again. If there were no banks or companies "too big to fail" then bankers would be forced to retain the risk they accumulate as well as the profits. In the current situation that would mean that banks would fail or at least be taken into managed liquidation or administration. This could be achieved and the citizen protected at costs certainly no greater than the current bailouts. But don't expect to see anything so radical on the agenda anytime soon.

Yet, as we discussed last week, it seems that exactly the contrary is likely to arise from the New Bretton Woods system of mega-banks. Many commentators and certainly many US voters have high hopes that Barack Obama is a man who can bring change, who perhaps might even be a "New Dealer" treading in the footsteps of FDR. If Obama really was to implement changes then, like FDR, he will have to break up the 'Great Trusts" starting with the banks.

According to Michael Hudson, all the bailouts to date have been designed to protect claims by the super-wealthy on the surpluses generated by the rest of us. Bad debts are being kept on the books, but they are being transferred in the U.S. to the Treasury and the Fed. Meanwhile, the government's pension fund that insures what private pensions are left, is not being bailed out; and the auto industry is being pushed into bankruptcy precisely so that it can renege on its pension commitments to its workers. Someone is clearly out to get us.

Reality had to raise its ugly head. Barack Obama was elected with overwhelming approval to inaugurate an era of change. And at his November 25th press conference, he said that his decisive victory gave him a mandate to change the direction in which America is moving. But his recent economic and foreign policy appointments make it clear that when he chose "change" as his campaign slogan, he was NOT referring to the financial, insurance and real estate (FIRE) sectors, nor to foreign policy. These are where the vested interests concentrate their wealth and power. And change already has been accelerating here. Unfortunately, its direction has been for the top 1% of America's population to raise their share of the returns to wealth from 37% ten years ago to 57% five years ago and an estimated nearly 70% today.

The change that Mr. Obama is talking about is largely marginal to this wealth, not touching its economic substance - or its direction. No doubt he will bring about a welcome change in race relations, environmental regulations, and a more civil rule of law. And he probably will give wage earners an income-tax break (thereby enabling them to keep on paying their bank debts, incidentally). As for the rich, they prefer not to earn income in the first place. Taxes need to be paid on income, so they take their returns in the form of capital gains. And simply avoiding losses is the order of the day in the present meltdown.

Where losses cannot be avoided, the government will bail out the rich on their financial investments, but not wage earners on their debts...

If you are a billionaire, your first concern is simply to preserve your wealth, to avoid having to take a loss in the value of your financial claims on the economy - claims for repayment of loans and investment, as well as interest and dividends, and enough capital gains to compensate for the price inflation that erodes the spending power of more lowly income-earners.

This year has changed the typical fate of financial wealth in the face of bursting financial bubbles. Traditionally, business booms culminate in a wave of bankruptcies that wipe out bad debts - and the savings that have been invested on the "asset" side of the balance sheet. This year has changed all that. The bad debts are being kept on the books - but transferred from the banks to the federal government, mainly the Federal Reserve and Treasury. The bank bailouts have aimed not so much to protect the banks themselves, but to enable them to pay off on the bad bets they made vis-à-vis the nation's hedge funds and other institutional investors in the derivatives market.

To participate in a hedge fund, one needs to prove that one can afford to lose their money and not be much the worse off for it in terms of actual living conditions. So the $306 billion in federal guarantees of the junk mortgage packages sold by Citibank, and the $135 billion bailout of the insurance contracts written by A.I.G. to protect swap contracts from loss, could have been avoided without much impact on the "real" economy.

In fact, writing down these financial claims ON the economy would have paved the way for writing down its debt burden. If the subprime and other mortgage debts had been permitted to decline to the neighborhood of 22 cents on a dollar they were trading for, this would have made it possible to write down debts to match the price at which mortgage holders had bought these loans for. But the financial overhead of American wealth "saved" in the form of creditor claims on indebted homeowners, industrial companies and junk-insurance companies such as A.I.G. has been protected against erosion by this year's federal bailout program.

Bloomberg has added up these programs and finds that they $7.7 trillion dollars - nearly half an entire year's GDP. By acting to support the market for bad-mortgage loans (but not for real estate itself), the seemingly endless series of Paulson bailouts seeks to keep today's debt overhead intact rather than writing it down. Service charges on this indebtedness will divert peoples' income from consumption to paying creditors. It will help financial investors, not labor or industry. It will keep the cost of living and doing business high, preventing the U.S. economy from working its way out of debt by becoming competitive once again.

With all these trillions of dollars of bailing out the wealthy, one might easily forget to ask what is being left out. For one thing, the government's Pension Benefit Guarantee Corp, whose $25 billion deficit is not bailed out. This year, underfunded corporate pension plans are supposed to "catch up" to full funding so as to protect the PBGC, in accordance with a law passed by Congress two years ago. If underfunded plans don't meet the scheduled 92% coverage for this year, they have to bring their set-asides fully up to the 100% funding level. The stock market plunge has dashed their hopes to do this. The result will be to force many industrial companies into a financial bind.

On the auto front, the Bush Administration has brought pressure to force the big three Detroit companies into bankruptcy as a way to annul their defined-benefit pension plans - with no plans at all bail out money owed to labor by restoring the PBGC to solvency. State and local pension plans are almost entirely unfunded, and are at even more risk as their tax revenues plunge and property tax payments are stopped on housing and commercial buildings that have foreclosed.
All this bailing out of the owners of the FIRE (Finance, Insurance, and Real Estate) sector will most likely effectively bankrupt governments under the current system. Indeed, this is probably one of the main reasons it is being done. Governments will be bankrupt and the biggest financial institutions, those "too big to fail", will have even more control; currencies will collapse from accelerating inflation all conveniently paving the way for the introduction of a new monetary system and a new form of money. As Rob Lee writes,
By the end of next year the US may have near zero interest rates, a fiscal deficit of 8% of GDP or more, and a chronically weak currency. This is a classic recipe for inflation. It is a myth that a weak economy necessarily means low inflation, especially if the size and role of government are expanding. Company failures and low investment weaken the supply side of the economy but improve pricing power for the survivors. Once the credibility of the currency and policy has gone people and businesses seek to protect themselves in real assets. Inflation can rise then very rapidly even in a weak economy.
It may be no coincidence that the only major country not preparing a massive bailout is the one most scarred by memories of hyperinflation, Germany. With banking economists calling for dramatic fiscal stimuli throughout the OECD, "China has announced a stimulus package worth 4 trillion yuan, or roughly $586 billion; Tokyo plans a stimulus worth 5 trillion yen ($53 billion), though it plans only to submit the extra budget to parliament in the new year; Washington has spent or committed trillions of dollars and is expected to come up with another big package -- some economists believe it may be worth upwards of $400 billion -- as soon as President-elect Barack Obama takes over in January and the European Commission has proposed that the 27-country European Union come up with an EU-wide package worth 200 billion euros, or 1.5 percent of EU gross domestic product.

German resistance

German resistance is of course being portrayed by the media as Chancellor Angela Merkel making a big mistake. Merkel says she does not want to get into a "race for billions", but is being accused of not "pulling its weight", a "lack of vision, lack of leadership, and a temptation to free-ride that, if widely mimicked, would truly condemn the world economy to a new great depression"

What is fascinating is to see the economists trying to drive Germany into a corner; Jim O'Neill, chief economist at Goldman Sachs, notes that domestic consumption in export-dependent Germany has barely budged in what will soon be 20 years since the fall of the Berlin Wall. And that is something that should change. "Europe's largest economy should do itself and the rest of the world a favor by raising wages, reducing sales tax, and thereby supporting higher levels of consumption", O'Neill argued in an article in the London Financial Times. O'Neill is of course pressing the Wall Street line that wishes to see every country fall within the trap of a rescue and stimulus package of the type slowly closing around other nations. Maybe Germany has learned from its experiences, not the least of which was the Weimar Republic, and is trying to chart an independent course.

In the United States, much of the bailout activity has been out of the news lately. Remember early in the process where the U.S. Federal Reserve announced that it would lend to institutions besides the banks it usually lent to? We haven't heard much about that lately. But Bill Buckler in his Privateer newsletter reminds us of what has been happening:

We live in astonishing financial times. In its latest reports, the US Fed has let it be known that total Fed lending has climbed above $2 trillion for the first time. That is a rise of 140 percent - or $1.172 trillion - in seven weeks!! The total includes a $788 Billion increase in loans to banks through the Fed and another $474 Billion in other lending, mostly through the central bank's purchase of Fannie and Freddie bonds. Here comes the problem. The Fed has refused to identify the recipients of almost $2 trillion of emergency loans and what the Fed has accepted as collateral!

Bloomberg has sued the Fed under the US Freedom of Information Act, trying to get this information, but the issue is stuck in Federal Court. Somebody out there got this $2 trillion from the Fed but they are not talking. The Fed, in turn, got some financial paper as collateral, but it won't say what it is.
Amid all the money flying around the near collapse of the settlement system for US Treasuries has hardly merited a comment, yet it does not auger well for the future. It is certainly an interesting development when we consider that Timothy Geithner, the next US Treasury Secretary, is chairman of the Bank for International Settlements Committee on Payment and Settlement systems.

The Markets

The markets this week
Previous week's close This week's close Change% change
Gold ($) 791.80819.0027.203.44%
Gold (€)628.96645.5916.632.64%
Oil ($) 49.9354.434.509.01%
Oil (€)39.6642.913.248.18%
Gold:Oil15.8615.050.815.12%
$ / €0.7943 / 1.25890.7883 / 1.2686 0.006 / 0.00970.76% / 0.77%
$ / ₤0.6700 / 1.49250.6507 / 1.5368 0.0193 / 0.0443 2.88% / 2.97%
$ / ¥95.938 / 0.0104 95.400 / 0.0105 0.538 / 0.00010.56% / 0.56%
DOW8,0468,8297839.73%
FTSE3,7814,28850713.41%
DAX4,1274,66954213.13%
NIKKEI7,9118,5126017.60%
BOVESPA31,25136,5965,34517.10%
HANG SENG 12,65913,8881,2299.71%
US Fed Funds 0.50%0.50%0.000.00%
$ 3month 0.01%0.04%0.03300%
$ 10 year 3.20%2.92%0.288.75%


Equality and Freedom

We've been harping on about Capitalism or rather Free Market Capitalism for a while now yet there is more ground to cover. We have all known nothing but two dominant creeds our entire lives, Capitalism and the other charade Soviet 'Communism'. Both are hollow lies, both concentrate wealth and power in the hands of a small minority, both are fundamentally based on theft.

Let us now go back to some roots, to some basic ideas and to some history. Unless you are an adherent of an elitist or racist creed you will agree that we are all born equal, at least in terms of our civil rights. You will also agree that all people should be free. Quite what we mean by "equal" and "free" has been a matter of debate since before Plato. We have broad conceptions that arise within us of "equality" and "freedom" yet when we seek to define how this "equality" or "freedom" might manifest in the material world we encounter disagreement in understanding and precious little implementation. We regard ourselves as being born equal while we are also born with differing attributes which lead us to wish for different 'things' in life, we are born with differing skills that determine what we can put into life. We are born with differences that will determine what we can do with life but these differences do not detract from the fundamental principle that we are all equally entitled to civil and human rights.

When we look around us however, we find precious little evidence to suggest any true equality. We don't mean the fallacious 'equality' that so many organisations campaign for today for what is the benefit of gaining the rights to be a wage slave, to be taxed or to have a meaningless vote. "Freedom" has become a sick joke for we are all prisoners while our jailers laugh all the way to the bank, literally.

We have fine phrases such as "equal before the law" yet we have ample evidence that we are certainly not equal before the law, for otherwise George Bush, Dick Cheney, Tony Blair and thousands of others would be on trial for crimes against humanity. The reality is that we are subject to innumerable laws that restrict us, fine us and otherwise impose upon us for simply trying to live.

In the UK there are fines for leaving the lid of a trash can open, for putting that trash can in the wrong place or leaving it too early for collection, there are speed cameras everywhere, parking fines abound, whatever a resident of that island seeks to do they will find themselves bound by laws at every turn. Yet the people of Britain believe themselves to be free.

Douglas Reed was a noted British journalist and author who became the subject of a vicious smear campaign because he had the temerity to point out the obvious; that there are dark forces at work in the affairs of man who have as their avowed aims the destruction of all that people of conscience hold dear, the enslavement of the planet and all who dwell upon it and the imposition of their godless and faceless rule. He wrote extensively of what he saw taking place around him in the 1930s, 40s and 50s and told it as he saw it in his books, Insanity Fair, From Smoke to Smother, Lest We Regret and Controversy of Zion to name but four. In 1943 in Lest We Regret he described freedom:-
Freedom is a thing of innumerable facets, but split it, and it has but two halves. The first , ...though not the greatest of all, is a man's freedom to roam and know his own country, to enjoy and use a part of [his] native land. The second half is the greater half, because the first half rests on it. It is, freedom from wrongful arrest and wrongful imprisonment.
So it is to Britain, or rather England the "mother of parliaments", that we would like to turn because the roots of much of what we see around the world originated in that small country.

A brief history of resistance

In 1215 England was subject to an uprising among the nobles in a direct challenge to the absolute authority of the king. The upshot was the Magna Carta. The original document was significantly watered down in the years following its signing by King John with the notable exception of the writ of Habeas Corpus ("the fundamental instrument for safeguarding individual freedom against arbitrary and lawless state action."[1] ) which provided in due time the bedrock for that second half of freedom spoken of by Douglas Reed, "freedom from wrongful arrest and wrongful imprisonment". In the decades following Magna Carta the church and the nobility cemented certain freedoms for themselves while leaving the peasantry unrepresented and repressed; most often by the church and nobility themselves. Across Europe, on numerous occasions the peasantry, the common people, sought to wrest elements of freedom from their monarchs, the church and the nobility. The uprisings of the 14th, 15th and early 16th centuries arose from the unremitting pressure upon the poor who were excluded from any share in society or its wealth.

The reasons for these uprisings were those that have driven men to desperation throughout history for they speak of a desire for equality and freedom while labouring under conditions of great economic and social inequality. They are remarkably familiar:-

- The increasing gap between the wealthy and the poor due in great part to the wealth retained by the landed class, the nobility, and the new class of proto-capitalist, the merchant.

- Inflation driven by wars and currency devaluation [2] put pressure on the nobility who resorted to rent rises, theft and thuggery to steal more money from the poor.

- The monarchs and nobility raised taxes and tithes to finance both war and their own expenses.

- Amid this abuse of power there also arose the idea that inequality in property and wealth was against god, that there should be greater equality in society.
One of the most famous of the numerous revolts was the Peasants Revolt or Great Rising in England in 1381. Following the plagues of 1348/49 that ravaged England the shortage of labour gave the peasants some bargaining power which they endeavoured to use to improve their very poor lot. The response of the ruling elite of the time was to enact a law (Statute of Labourers, 1351) fixing wages at the pre-plague level and restricting the ability of peasants to travel. These laws were enforced with widespread severity which, combined with the wealth gap, inflation, taxation and the awakening of ideas of equality, led to the uprising in 1381.

The uprising was ended by the murder of its leaders who were meeting the King and his advisors for negotiations and were therefore subject to the ancient protections afforded to men in such situations and the tricking of the peasants through the outright lies of the King. The surviving leaders were executed.

The structure of land use and holding in England was based on ancient systems that neither the Romans nor the Normans had changed. The idea of title as we know it today did not exist; instead each person has rights and responsibilities relating to the land and those upon it whether they were the lord, the freeholder, the cottager, tenant farmer or squatter. The system gave men the ability to house and feed themselves and their family.

Despite all the inequality within England and the history of the separation of the ruling and ruled, there remained some elements of life based upon the concept of equality for all people had access to common land where they were free to gather wood, forage for food for their animals, and game for their own bellies. Think about that, a man born into poverty had an absolute right to live on common land, to gather fuel from that land and to gather food for himself and his animals and by extension for his family. He had no need to labour for somebody else nor for money for everything that he needed to survive could be found on the common land.

The taking of land through Enclosure prior to the English Civil War was open theft, the primary impediment to which was, strangely, the Star Chamber Court of the King. As the land was steadily stolen the ordinary people often resisted. History records their resistance as rebellion. In all cases the people failed in protection of their rights. The laws of England were used as the means by which theft was enforced, for resistance was grounds for violence against the resisters who were routinely killed while their leaders were hanged and quartered[3].

The merchant class were the first to accumulate capital in England until the Civil War (1642 - 1651) through trade, both domestic and foreign. A key commodity in this wealth creating trade was wool, the price of which rose steeply until the middle of the 17th century. It was this rise in wool prices that drove much of the theft of land so that the land could be used for raising sheep. Thus began an unholy alliance of greed between the ruling elite of the countryside and the merchants. During the war many rural communities took advantage of the weakening of the established order, particularly the fall of the estates of royalists, catholics and the church to recover what was rightfully theirs, namely access to and use of land and its resources of timber, grazing and food[4].

Following the Civil War, despite the illusion that men had fought for greater freedoms, the form of the modern repressive state, particularly the creation of a standing army, took shape and the repression of the ordinary people recommenced as land was steadily expropriated from the ordinary people to the ruling elite.

Two ideas

Two groups of ideas that shape our world today were coalescing during The Enlightenment. One set saw a grand vision of humanity while the other, in two parts, has proven to be absolute evil The former held that, "human beings are perfectible; the right structures of society, at the heart of which is representational government whose power derives from the consent of the governed, facilitate this continual evolution; reason is the means by which ordinary people can successfully rule themselves and attain liberty; the right to liberty is universal, God given, and part of a natural cosmic order, or "natural law"; as more and more people around the world claim their God-given right to liberty, tyranny and oppression will be pushed aside."[5]

The other group of ideas had two parts which were and remain bedfellows, Political Zionism and Communism, together better described by Douglas Reed as the Destructive Principle. The Destructive Prinicpal became publicly manifest in Adam Weishaupt, a German who founded the secret society the Order of the Illuminati in 1776; its avowed aim was the destruction of all nations, monarchs, religions, private property and marriage to bring a New World Order into existence. The creed of the Illuminati is pure psychopathology, a pure, unadulterated pathological evil promoted by a man who was undoubtedly a psychopath. We will be discussing this aspect further next week.

Enclosure - Grand Theft

At the very moment in history when some men's minds were turning to the potential for a better world, and others were turning to evil domination, the expropriation of land, through Enclosure, accelerated in England with arguments of this kind advanced to support the theft of land, "The use of common land by labourers operates upon the mind as a sort of independence ... when the commons are enclosed, the labourers will work every day in the year, their children will be put out to work early, and that subordination of the lower ranks, of society which in the present times is so much wanted, would be thereby considerably secured." More than half the cultivated land of England, before Enclosure, was farmed on the common-field system, and the landless farm labourer was hardly known in the villages of England.[6]

"About a fifth of the total acreage of England was enclosed between 1760 and 1840, and the old village community ... was broken up. Until that time, any man might hope, by his own labour, to acquire property and rise in his village. From that time, we inherit the most unhappy of beings, the landless farm labourer".[7] It is this landless labourer and his family, often then evicted as a further consequence of Enclosure, who became the factory workers of the Industrial Revolution, the men, women and children on whose immense suffering industrial capitalism was built.

Enclosure was justified as a means to improvement. The English countryside and the agriculture practiced on it was said to be in need of reform. The truth was that the expropriation of land from the ordinary people enabled a new form of industrialized agriculture to be practiced which greatly increased the profitability of farming and therefore the wealth of the ruling elite. The ordinary people were reduced to slaves on the land to which they held rights dating from the time of the Druids.

Not only was the theft justified but it was also legal. The process was simple, Douglas Reed again:-

...a petition to Parliament was made bearing the signature of one big landowner for authority to put a fence round some piece of land until then shared by all. The smallholder's only hope of succour was to reach and move the heart of a Parliament packed with great landowners and as distant from and daunting to himself as the Court of the Last Judgment.

In Parliament these petitions were laid before Committees of Members from the districts where Enclosure was proposed - the cronies of the petitioner! Often, petitions affecting the enclosure of thousands of acres, and the fate of hundreds of freemen, were rushed through in a week or two.

The manner in which a large part of England was taken from the many and enclosed by the few was simple and is staggering to look back on. Recent history contains nothing to compare with it. A petition was 'accepted'; that is, the petitioner's friends in Parliament passed it for him. Then, Commissioners, who were appointed by the Enclosers even before they presented their petition to Parliament and were often the lord of the manor's own bailiffs, arrived to put a fence round that 'certain proportion of the land which has been assigned to the lord of the manor in virtue of his rights and the owner of the tithes'. The power of the Commissioners was absolute. This happened in the England in which Pitt was Prime Minister, who declared 'it is the boast of the law of England that it affords equal security and protection to the high and low, the rich and poor'.
That last sentence quoting an English Prime Minister of 200 years ago might just as well have been made today for the same mendacity walks the corridors of power today as walked it then.

The Parliament of the day was a parliament of landlords elected in a corrupt system, many of them being 'elected' through the rotten and pocket boroughs under which, at one point, half (about 200) the members of the House of Commons were elected by just 153 voters (yes, some voters could elect more than one member). Under such a system it is no wonder that the petitions of the ordinary people against the theft of their land rights were buried. Those that resisted were treated as common criminals. Many emigrated while those that stayed became subject to increasingly severe laws against trespass and poaching. At the time when Englishmen, told that they would be enslaved if Napoleon landed in England, fought at Waterloo, "Parliament fixed the penalties for poaching at hard labour, flogging, or transportation. In the year following Waterloo ... a Bill went through Parliament, without debate, which imposed the maximum penalty of transportation for seven years on any person found unarmed but with a net for poaching in enclosed land; and in some of the subsequent years one in seven of all criminal convictions in England were convictions under these Game Laws!"[8]

Not only were the elected members of the House of Commons the landlords and merchants benefiting from the system of legalised robbery but the second house of parliament, the House of Lords, was the shrine of entrenched rights of nobility while the civil administration officials pocketed about £120,000 in fees in fourteen years for assisting the Enclosure Bills through the "legal process". What hope did the ordinary people have?

William Cobbett

There was spirited resistance. William Cobbett was a political activist and journalist who campaigned for political reform in England. Way before his time, he was man who understood the terrible condition of "dense dependent populations incapable of finding their own food, the toppling triumph of machines over men, the sprawling omnipotence of financiers over patriots, the herding of humanity in nomadic masses whose very homes are homeless, the terrible necessity of peace and the terrible probability of war, all the loading up of our little island like a sinking ship; the wealth that may mean famine, and the culture that may mean despair; the bread of Midas and the sword of Damocles. In a word, he saw what we see, but he saw it before it had arrived. Many today cannot see it - even when it is all around them."[9]

The life of William Cobbett is instructive for it exemplifies many aspects of oppression which we seek to shine a light upon today. Cobbett was a moral man who gave his whole life to the battle for those two vital objectives: the freedom of the land, and freedom from wrongful imprisonment. It may not mean much to a modern city dweller, or even perhaps to those who live in the countryside but do not work the land, what an immense loss the loss of ones land is. It is the removal of everything in one go; home, possession, security, income, inheritance and culture. For these English men, women and children dispossessed of everything they knew there was no choice other than to become a member of the new proletariat, depending for subsistence on selling their labour for wages, whether in the city or on the land.

Douglas Reed said this about William Cobbett, "He fought for [freedom] in England, in France during the French Revolution, in America just after the American Revolution, and again in England. ..... he was wooed by a Tory government and offered the editorship of a government newspaper so that he might, for a comfortable salary, laud all that was done by authority and lampoon all who protested."

"He refused, and began to publish the weekly Political Register [in 1802], the most famous independent journal of the next thirty-five years. Sometimes the politicians, sometimes the mob, attacked him. He was fined for criticizing the Government's treatment of Ireland. His windows were smashed."

By 1806 he was a Radical, a vocal proponent of political reform. In 1810 he "angrily protested against the public flogging of British soldiers under a guard of German mercenaries."[10] He was found guilty of treasonous libel, fined a thousand pounds and imprisoned for two years in the infamous Newgate Gaol. In prison, and after he came out, he continued to write, for another seven years, as a fierce and independent critic who could neither be corrupted nor cowed. Notably, he wrote the pamphlet, Paper against Gold warning of the dangers of paper money.

The government, seeking to limit the access of people to news and radical opinion and to generally suppress independent newspapers, heavily taxed all newspapers. This limited circulation of the Political Register so Cobbett changed it from a newspaper to a pamphlet to avoid these taxes. Circulation jumped from just over a thousand to about forty thousand copies a week thus becoming the main journal of the educated working class.

The government, frightened of this voice for change, schemed to charge him with sedition[11] by passing the Power of Imprisonment Act 1817. This act suspended the Habeas Corpus Act of 1679, itself based upon rights enshrined in the Magna Carta. Cobbett fled to America.

England's fight for supremacy against Napoleon in the years leading up to the Battle of Waterloo (1815) had left its finances in a parlous state; Enclosure was proceeding apace, cities and the attendant factories were expanding, the condition of the ordinary people, those people that had "fought for freedom" against Napoleon, was abysmal. The Corn Laws, a tax on imported food, kept food prices high with the inevitable consequences on the ordinary people. In this climate grew an increasing clamour for change, known then as the Radical Movement. The Radicals sought electoral reform and universal sufferage. This made them the enemies of the entrenched order, of the ruling elite, who reacted with ever increasing repression.

The Peterloo Massacre

In August 1819, between sixty thousand and eighty thousand workers, well dressed, highly disciplined and orderly gathered for a meeting in St Peter's Field in Manchester. The authorities arrayed against these peaceful workers 600 elite cavalry, 800 infantrymen, 2 six-pounder artillery guns, 400 militiamen, 400 special police and 120 militia cavalry.

In an attempt to stop the speech of Henry Hunt a famous radical speaker, the militia cavalry rode into the crowd. The ensuing confusion has been used to excuse what happened next but the simple truth is that the crowd was attacked from two sides simultaneously. On one side they were charged by the 600 elite cavalry with sabers drawn while on another by the infantry militia, their only escape route was blocked by the 800 infantrymen.

It is remarkable that only 11 to 15 people died with up to 700 injured. Not content with the slaughter many factory owners fired anybody associated with the meeting while stories abound of the wounded being refused treatment. Women were not spared despite often being dressed in white; of the official 658 casulaties, 168 were women of whom 4 died. The rioting that followed the massacre was used to justify the carnage.

However, unlike other confrontations in this era, there were professional reporters present who faithfully recorded what they saw, they called the event the Peterloo Massacre. This meant that the government was unable to effect a cover up. Despite this, in familiar fashion, the government reaction was even more repression. The speakers and organizers were tried for sedition and jailed. None of the professional soldiers were tried with just four of the militia men tried all of whom were acquitted.

Within one month of reconvening after the massacre parliament passed the Six Acts which treated any political meeting not approved of by the established order as an overt act of treasonable conspiracy. These Acts made meetings of 50 or more subject to license if the meeting was to discuss matters of "church or state" and limited attendees to locals only, thus preventing radical speakers from touring; seditious writing became punishable by fourteen years transportation, essentially a life sentence in Australia; newspaper taxes were increased and broadened to include pamphlets expressing opinions, publishers were required to post a bond; ownership of weapons by the working classes was banned, powers of search, seizure and arrest were granted to magistrates.

As we discussed with regard to the modern Circles of Power, Tony Bunyan summarised with respect to similar circles then, "the ruling class was not monolithic, but comprised several competing and complementary factions. These factions were the merchants, the agricultural capitalists, the small manufacturers and the new industrial [capitalists]. In this period of competitive capitalism it was the merchants and the landed aristocracy who effectively controlled parliament and the state."

"Only later, in the 1830s, when industrial capital became dominant in the economic field, did the [industrial capitalists] begin to challenge the other factions for state power. It was during this struggle between the competing [capitalists] in the 18th and 19th centuries that the foundations of liberal democracy emerged (well prior to an equal voice being accorded to labour). The ideas of neutrality of the state and its institutions were fashioned in this period, less for reasons of democracy than as a means of arbitrating between the warring capitalist factions and combating working class demands."

"In the latter part of the [19th century] capitalism began to move from competitive to the monopoly stage and the twin pillars of its current foundation emerged. One was monopolistic industrial capital and the other centralized bank capital." [12]

Lessons from History

The dreadful history of the ordinary Englishman up until today stands as a testament to the true condition of ordinary people on this planet. The story, which we must leave for the moment, continues with a slow rise in the relative power of ordinary people in England. But it was a rise that was quickly ponerised and misdirected by the same forces that Adam Weishaupt gathered together in his Order of the Illuminati. The ordinary people realised in due course that they held real power but by the time they came to exercise it they themselves had become subject to the thrall and dominance of that great evil, the psychopath, and its attended destruction of good and propagation of evil.

As ordinary people approached the time when they might gain real power under the existing systems the systems changed to move the seats of power always away from them. The outward appearance has remained in the form of parliaments, of Congress, of the judiciary, the police, the military and the other institutions but these have been steadily corrupted and the real seats of power moved ever deeper into the shadows. The role of the intelligence agencies in this move is not to be underestimated.

One aspect of the modern story that we should mention now is the continuation of the great theft that we have described above, Privatisation. Exactly the same argument was put forward for privatisation as for Enclosure, efficiency and improvement. We were told that it was impossible for state enterprises to make the changes necessary to 'modernise'. The fact that within a few short years private ownership achieved many great improvements is held out as proof of the original claim. But nothing could be further from the truth.

Either through their direct labour or indirectly through taxation, generations of our forebears had built the infrastructure, the assets and the systems that made the companies and corporations that provided transport, telephones, water, electricity and numerous other services and resources, many essential to life. With the arrival of Margaret Thatcher in the UK and Ronald Reagan in the US a wave of theft swept the economy. State owned enterprises, many natural monopolies providing essential public services, were packaged up and sold off.

The public were limited to acquiring a small percentage of each company while "professional investors" took the bulk. These professionals were of course the financial powerhouses of the world's financial centers who acquired these essential service companies for their own and their clients gain. Many companies have changed hands, some a number of times, since the original sale, often at many multiples of the original privatization price.

The services that are delivered have in some cases shown a marked improvement while in others they have steadily worsened. The simple truth is that governments could successfully have restructured the companies and made the much needed investments while retaining public ownership. It doesn't matter where you look, whether it is the sale of state housing or of state telecommunications, the tale is the same; the workers and public are far worse off in social as well as monetary terms as a result of privatization while the capitalist elite have made out like the bandits they are.

So you see, dear reader, that there is nothing new under the sun. The theft of our national heritage, our future and the future of our children through 25 years of the privatisation of the infrastructure that was built by our forebears and today through the pillaging of our governments in the form of bank and other corporate bailouts is just another page in the sad annals of history that record, for those prepared to look, the gradual theft of our property, our equality and our liberty. Our rulers have always justified their actions as "improvements" or for our own good while the moral crimes they have committed have been sanctified by the laws that they themselves enact all the while criminalizing resistance to them.

The economic situation we see around us today is no different from the theft of land under the Enclosures. We are bound by laws written by people whose principle motives have been and remain the continuation of the current order from which they and their masters profit; these laws therefore stand not as the bedrock of a just society but as the walls of our prison. Modern law seeks to protect the ruling elites as much today as the laws of historical England, many of which remain in place, protected the thieves of Enclosure. These laws protect our modern thieves and abusers because they have been written by them.

The myriad laws passed under the modern banner of terrorism are not aimed at real terrorists but at us, the ordinary people, while being written by those very forces that we know control and direct the terrorism that they claim to be protecting us from. Just as at 'Peterloo' when we take our displeasure on to the streets we are attacked by armed police for the simple act of holding and expressing views contrary to the established order. In fact we can easily be attacked by the thugs of state in simply going about our daily lives; a fact especially true the poorer a person is.

Today we find ourselves surrounded by the institutions of states built upon principles of theft standing on pillars of law enacted for our repression. We are surrounded by intelligence agencies that track us, watch us and listen to us. We are ensnared in a web of laws that encroach upon our communications and our thoughts. Resistance to the established order, just as in the time of transportation for protecting ones land rights, is punishable with the full weight of the law; a law that is as despotic today as the law of transportation was in the 18th and 19th centuries.

Since 1969 just three clauses of the Magna Carta remain in force in Britain.

Habeas Corpus has been suspended in the US for those that resist the empire, under the Military Commissions Act of 2006. The Habeas Corpus Restoration Act of 2007 which aimed to overturn the Military Commissions Act 2006 was filibustered by Republicans in the Senate and therefore never became law.

Habeas Corpus has been suspended in the UK, as in the US, under the guise of protecting us from terrorism. There is unrelenting pressure in Britain to allow the government to detain anyone it chooses for increasingly long periods without trial and without representation. It should not be forgotten that Britain and the US both have ignominious histories of detaining people without trial for long periods; in the US, the Japanese, in the UK, the Irish.

Whenever Habeas Corpus is suspended we should see it for what it is - the tolling of the bell for freedom. We find ourselves today much as those hapless English found themselves centuries ago; we have been disenfranchised; we are having our "land" in the form of homes, jobs, security, income and inheritance taken from us even as you read this; and we have lost our rights to privacy and to protection from wrongful arrest and imprisonment. We face forces arrayed against us as formidable as any known in history; forces that are preparing, just as those who have come before, to use every tool of repression available to keep us subservient, to keep us ignorant, divided and confused, thereby ensuring our political and economic impotence.

To be continued....

*******

1. Harris v. Nelson, 394 U.S. 286, 290-91 (1969).
2. eg. The Great Debasement of English coin by Henry VIII coupled with inflows of bullion from the New World.
3. Newton Rebellion, June 8th 1608
4. One aspect of the war that has remained cloaked form public attention is the horror visited upon Ireland where Cromwell's New Model Army, the first professional army of modern European history, and those friends of all wars, disease and starvation, were responsible for the death of forty percent of the population.
5. Naomi Wolf, Give me Liberty, 2008
6. Douglas Reed, Lest We Regret, 1943
7. Douglas Reed, op cit
8. Douglas Reed, op cit
9. G.K. Chesterton, William Cobbett, 1925
10. Douglas Reed, Lest We Regret
11. Conduct or language inciting rebellion against the authority of a state (American Heritage Dictionary)
12. Tony Bunyan, The Political Police in Britain, 1976

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Monday, July 21, 2008

Signs of the Economic Apocalypse, 7-21-08

From SOTT.net:

Gold closed at 958.00 dollars an ounce Friday, down 0.3% from $960.60 for the week. The dollar closed at 0.6312 euros Friday, up 0.6% from 0.6276 at the close of the previous week. That put the euro at 1.5842 dollars compared to 1.5934 the week before. Gold in euros would be 604.72 euros an ounce, up 0.3% from 602.86 at the close of the previous week. Oil closed at 128.82 dollars a barrel Friday, down 12.5% from $144.98 for the week. Oil in euros would be 81.32 euros a barrel, down 11.9% from 90.99 at the close of the Friday before. The gold/oil ratio closed at 7.44, up 12.2% from 6.63 for the week. In U.S. stocks, the Dow closed at 11,496.57 Friday, up 3.6% from 11,100.54 at the close of the previous Friday. The NASDAQ closed at 2,282.78 Friday, up 1.7% from 2,245.38 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.09% Friday, up 14 basis points from 3.95 for the week.

Oil prices fell sharply last week on fears of serious recession as well as signs that the U.S. is prepared to cut a deal with Iran. The media gave lots of coverage to the former and very little to the latter. After years of saber rattling, the Bush administration sent its third-ranking diplomat to Geneva to meet with the Iranian diplomat in charge of the nuclear program negotiations. It was also revealed that the U.S. is setting up an “interest section” in Teheran for the first time since 1979. That is an office that represents a country’s interests when that country doesn’t officially recognize the other.

What seems to be happening is that the old U.S. establishment has decided to cut its losses in Iraq by arranging a face-saving force reduction with help from Iran so that it can shift military resources to the war in Afghanistan. The war against the Taliban is going badly. Note also that the Taliban is an enemy of Iran. The fact that the establishment has forced Bush to do this will provide cover for Obama who has been attacked by Neocons and Zionists for advocating talking with Iran. Now he can say that the process was started by Bush, the best friend the Ziocons ever had.

The good news for the economy in all this is that we have a chance of having only a severe recession/depression instead of a complete collapse. If the United States can behave itself a bit more internationally and the banks and consumers ease up on some of the more obscene excesses, they might let Americans keep eating. As the International Herald Tribune put it, the U.S. may be too big to fail:

Is America too big to fail?

Peter S. Goodman

Sunday, July 20, 2008

NEW YORK: In the narrative that has governed American commercial life for the last quarter-century, saving companies from their own mistakes was not supposed to be part of the government's job description. Economic policymakers in the United States took swaggering pride in the cutthroat but lucrative form of capitalism that was supposedly indigenous to their frontier nation.

Through this uniquely American lens, saving businesses from collapse was the sort of thing that happened on other shores, where sentimental commitments to social welfare trumped sharp-edged competition. Weak-kneed European and Asian leaders were too frightened to endure the animal instincts of a real market, the story went. So they intervened time and again, using government largess to lift inefficient firms to safety, sparing jobs and limiting pain but keeping their economies from reaching full potential.

There have been recent interventions in America, of course - the taxpayer-backed bailout of Chrysler in 1979, and the savings and loan rescue of 1989. But the first happened under Jimmy Carter, a year before Americans embraced Ronald Reagan and his passion for unfettered markets. And the second was under George H.W. Bush, who did not share that passion.

So it made for a strange spectacle last weekend as the current Bush administration, which does cast itself in the Reagan mold, hastily prepared a bailout package to offer the government-sponsored mortgage companies, Fannie Mae and Freddie Mac. The reasoning behind this rescue effort - like the reasoning behind the government-induced takeover of Bear Stearns by JPMorgan Chase just a month before - sounded no different from that offered in defense of many a bailout in Japan and Europe:

The mortgage giants were too big to be allowed to fail.

Big indeed. Together, Fannie and Freddie own or guarantee nearly half of the nation's $12 trillion worth of home mortgages. If they collapse, so may the whole system of finance for American housing, threatening a most unfortunate string of events: First, an already plummeting real estate market might crater. Then the banks that have sunk capital into American homes would slip deeper into trouble. And the virus might spread globally.

The central banks of China and Japan are on the hook for hundreds of billions of dollars worth of Fannie's and Freddie's bonds - debts they took on assuming that the two companies enjoyed the backing of the American government, argues Brad Setser, an economist at the Council on Foreign Relations.


Commercial banks from South Korea to Sweden hold investments linked to American mortgages. Their losses would mount if American homeowners suddenly couldn't borrow. The global financial system could find itself short of capital and paralyzed by fear, hobbling economic growth in many lands.

Nobody with a meaningful office in Washington was in the mood for any of that, so the rescue nets were readied. The U.S. Treasury secretary, Henry Paulson Jr., announced that the government was willing to use taxpayer funds to buy shares in Fannie and Freddie. The chairman of the Federal Reserve, Ben Bernanke, said the central bank would lend them money.

The details were up in the air as the week ended, but some sort of bailout offer was on the table - one that could ultimately cost hundreds of billions of dollars. Whatever the dent to national bravado, or to the free-enterprise ideology, the phrase "too big to fail" suddenly carried an American accent.

"Some institutions really are too big to fail, and that's the way it is," said Douglas Elmendorf, a former Treasury and Federal Reserve economist who is now at the Brookings Institution in Washington. "There are no good options."

Still, there are ironies. Since World War II, the United States has been the center of global finance, and it has used that position to virtually dictate the conditions under which many other nations - particularly developing countries - can get access to capital. Letting weak companies fail has been high on the list.

Paulson, who announced the bailout, made his name as chief executive of Goldman Sachs, the Wall Street investment giant, where he pried open new markets to foreign investment. As Treasury secretary, he has served as chief proselytizer for American-style capitalism, counseling the tough love of laissez-faire. In particular, he has leaned on China to let the value of its currency float freely, and has criticized its banks for shoveling money to companies favored by the Communist Party in order to limit joblessness and social instability.

…Today, among strict adherents of laissez-faire economics, the offer to bail out Fannie and Freddie is already being criticized as a trip down the Japanese path of putting off immediate pain while loading up the costs further along.

For one thing, this argument goes, taxpayers - who now confront plunging house prices, a drop on Wall Street and soaring costs for food and fuel - will ultimately pay the costs. To finance a bailout, the government can either pull more money from citizens directly, or the Fed can print more money - a step that encourages further inflation.

"They are going to raise the cost of living for every American," said Peter Schiff, president of Euro Pacific Capital, a Connecticut-based brokerage house that focuses on international investments. "The government is debasing the value of our money. Freddie and Fannie need to fail. They are too big to save."

Using public money to spare Fannie and Freddie would increase the public debt, which now exceeds $9.4 trillion. The United States has been financing itself by leaning heavily on foreigners, particularly China, Japan and the oil-rich nations of the Persian Gulf. Were they to become worried that the United States might not be able to pay up, that would force the Treasury to offer higher rates of interest for its next tranche of bonds. And that would increase the interest rates that Americans must pay for houses and cars, putting a drag on economic growth.

Meanwhile, as American debts swell and foreigners hold more of it, nervousness grows that, someday, this arrangement will end badly. The dollar has been declining in value against other currencies. Some foreigners have begun to hedge their bets by buying more euros.

"Obviously, this is going to come to an end," Schiff said. "Foreigners are not charitable organizations, and they're going to demand that we pay them back."

No single country owning large amounts of dollar-based investments is inclined to dump them abruptly; nobody aims to start a panic. But fears have begun to grow that one day a country may get spooked that another is about to dump its dollars - and that could trigger pre-emptive panic selling.

"Foreigners could decide it's just not worth the risk and sell," says Andrew Tilton, an economist at Goldman Sachs. "The really dire scenarios have become a lot more likely than they were a year or two ago."

Still, as Tilton and others are aware, one fundamental reality continues to offer assurances that foreigners will still buy American debt: In the global economy of the moment, the United States itself is too big to fail.

The logic for that assurance goes like this: The American consumer has for decades served as the engine of world commerce, using borrowed cash to snap up the accouterments of modern living - clothes and computers and cars now manufactured, in whole or in part, in factories from Asia to Latin America. Eliminate the American wherewithal to shop, and the pain would ripple out to multiple shores.


Globalization, in other words, allowed China and Japan to amass the fortunes they have been lending to the United States.

But globalization also emboldened American capitalists to take huge risks they might have otherwise avoided - like borrowing to erect forests of unsold homes from California to Florida, delivering the speculative disaster of the day. They were operating with bedrock confidence that money would never run out. Someone would always buy American debt, delivering more cash for the next go.

And this same interconnectedness appears to have reassured regulators in Washington about the health of the American financial system, as they declined to intervene against highly speculative lending during the real estate boom. Mortgages were being distributed to investors around the globe, and so were the risks, the regulators reasoned. Anyone who bought into that risk would have a strong interest in seeing that the American financial system stayed upright.

In other words, in the estimation of people in control of money, the United States cannot be allowed to collapse, just as Fannie and Freddie cannot be allowed to fail. Too much is riding on their survival.

The central truth of that logic still seems to be apparent as the Treasury keeps finding takers for American debt.

So the government offers its rescue of the mortgage companies, and foreigners keep stocking the government's coffers. "They don't want the U.S. to go into the worst downturn since the Depression," Tilton says.


But all the while, the debt mounts along with the costs of an ultimate day of reckoning. Debate grows about the wisdom of leaning on foreign credit, and about how much longer Americans will retain the privilege of spending and investing money that isn't really theirs.

Bailouts amount to mortgaging the future to stave off the wolf howling at the door. The likelihood of a painful reckoning is diminished, while the costs of a reckoning - should one come - are increased.

The costs are getting big.


So while world money has an interest in keeping the United States’ financial system afloat with just enough consumer spending to keep global production from completely collapsing, hard times are still ahead for people in the United States. The New York Times tells us so:

Uncomfortable Answers to Questions on the Economy

Peter S. Goodman

July 19, 2008

You have heard that Fannie and Freddie, their gentle names notwithstanding, may cripple the financial system without a large infusion of taxpayer money. You have gleaned that jobs are disappearing, housing prices are plummeting, and paychecks are effectively shrinking as food and energy prices soar. You have noted the disturbing talk of crisis hovering over Wall Street.

Something has clearly gone wrong with the economy. But how bad are things, really? And how bad might they get before better days return? Even to many economists who recently thought the gloom was overblown, the situation looks grim. The economy is in the midst of a very rough patch. The worst is probably still ahead.

Job losses will probably accelerate through this year and into 2009, and the job market will probably stay weak even longer. Home prices will probably keep falling, shrinking household wealth and eroding spending power.

“The open question is whether we’re in for a bad couple of years, or a bad decade,” said Kenneth S. Rogoff, a former chief economist at the International Monetary Fund, now a professor at Harvard.

Is this a recession?

Officially, no. The economy is not in recession until a panel at a private institution called the National Bureau of Economic Research says so. Unofficially, many economists think a recession started six or seven months ago, even as the economy has continued to expand — albeit at a tepid pace.

Many assume that if the economy expands at all, then it isn’t a recession, but that’s not true. The bureau defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months.” If enough people lose their jobs, factories stop making things, stores stop selling things, and less money lands in people’s pockets, it is probably a recession.

Whatever it is called, it is a painful time for tens of millions of people. Indeed, this may turn out to be the most wrenching downturn since the two recessions in the early 1980s; almost surely worse than the recession that ended the technology bubble at the beginning of this decade; perhaps worse than the downturn of the early 1990s that followed the last dip in real estate prices.

But, despite what some doomsayers now proclaim, this is not the Great Depression, when unemployment spiked to 25 percent and millions of previously working people woke up in shantytowns. Not by any measure, even as your neighbors make cryptic remarks above dusting off lessons passed down from grandparents about how to turn a can of beans into a family meal.

How bad is housing?

Bad in many markets, awful in some, and still O.K. in a few.

The downturn has its roots in the real estate frenzy that turned lonely Nevada ranches into suburban ranch homes and swampland in Florida into condominiums. Speculators drove home prices beyond any historical connection to incomes. Gravity did the rest. After roughly doubling in value from 2000 to 2005, home prices have fallen about 17 percent — and more like 25 percent in inflation-adjusted terms — according to the widely watched Case-Shiller index.

Even so, most economists think house prices must fall an additional 10 to 15 percent to get back to reality. One useful measure is the relationship between the costs of buying and renting a home. From 1985 to 2002, the average American home sold for about 14 times the annual rent for a similar home, according to Moody’s Economy.com. By early 2006, home prices ballooned to 25 times rental prices. Since then, the ratio has dipped back to about 20 — still far above the historical norm.

With mortgages now hard to obtain and speculation no longer attractive, arithmetic has replaced momentum as the guiding force for housing prices. The fundamental equation points down: Even as construction grinds down, there are still many more houses on the market than there are people to buy them, and more on the way as more homeowners slip into foreclosure.

By the reckoning of Economy.com, enough houses are on the market to satisfy demand for the next two-and-a-half years without building a single new one.

The time it takes to sell a newly completed house has expanded from an average of four months in 2005 to about nine months, according to analysis by Dean Baker, co-director of the Center for Economic and Policy Research.

And many sales are falling through — more than 30 percent in some parts of California and Florida — as buyers fail to secure financing, exacerbating the glut of homes, Mr. Baker said.

No wonder that in Los Angeles, San Francisco, Phoenix and Las Vegas, house prices have in recent months declined at annual rates of more than 33 percent.

When will banks revive?

So far, they have written off more than $300 billion in loans. Many experts now predict the toll will rise to $1 trillion or more — a staggering sum that could cripple many institutions for years.

Back when home prices were multiplying, banks poured oceans of borrowed money into real estate loans. Unlike the dot-com companies at the heart of the last speculative investment bubble, the new gold rush was centered on something that seemed unimpeachably solid — the American home.

But the whole thing worked only as long as housing prices rose. Falling prices landed like a bomb. Homeowners fell behind on their loans and could not qualify for new ones: There was no value left in their house to borrow against. As millions of people defaulted, the banks confronted enormous losses in a bloody period of reckoning.

In March, the Federal Reserve helped engineer a deal for JPMorgan Chase to buy troubled investment bank Bear Stearns. Many assumed the worst was over. But, this month, the open distress of Fannie Mae and Freddie Mac — two huge, government sponsored institutions that together own or guarantee nearly half of the nation’s $12 trillion in outstanding mortgages — sent a signal that more ugly surprises may lie in wait.

To calm markets, the government last weekend hurriedly put together a rescue package for Fannie and Freddie that, if used, could cost as much as $300 billion. The urgent need for a rescue — together with another round of billion-dollar write-offs on Wall Street — has unnerved economists and investors.

“I was a relative optimist, but I’ve certainly become more pessimistic,” said Alan S. Blinder, an economist at Princeton, and a former vice chairman of the board of governors at the Federal Reserve. “The financial system looks substantially worse now than it did a month ago. If the Freddie and Fannie bailout were to fail, it could get a hell of a lot worse. If we get more bank failures, we have the possibility of seeing more of these pictures of people standing in line to pull their money out. That could really scare consumers.”

In one respect, Mr. Blinder added, this is like the Great Depression. “We haven’t seen this kind of travail in the financial markets since the 1930s,” he said.

More than two years ago, Nouriel Roubini, an economist at the Stern School of Business at New York University, said that the housing bubble would give way to a financial crisis and a recession. He was widely dismissed as an attention-seeking Chicken Little. Now, Mr. Roubini says the worst is yet to come, because the account-squaring has so far been confined mostly to bad mortgages, leaving other areas remaining — credit cards, auto loans, corporate and municipal debt.

Mr. Roubini says the cost of the financial system’s losses could reach $2 trillion. Even if it’s closer to $1 trillion, he adds, “we’re not even a third of the way there.”

Where will the banks raise the huge sums needed to replenish the capital they have apparently lost? And what will happen if they cannot?

The answers to these questions are unknown, an unsettling void that holds much of the economy at a standstill.

“We’re in a dangerous spot,” said Andrew Tilton, an economist at Goldman Sachs. “The big threat is more capital losses.”

Banks are a crucial piece of the economy’s arterial system, steering capital where it is needed to fuel spending and power growth. Now, they are holding tight to their dollars, starving businesses of loans they might use to expand, and depriving families of money they might use to buy houses and fill them with furniture and appliances.

From last June to this June, commercial bank lending declined more than 9 percent, according to an analysis of Federal Reserve data by Goldman Sachs.

“You have another wave of anxiety, another tightening of credit,” said Robert Barbera, chief economist at the research and trading firm ITG. “The idea that we’ll have a second half of the year recovery has gone by the boards.”

Is my job safe?

Economic slowdowns always mean job losses. Unemployment already has risen, and almost certainly will increase more.

The first signs of distress emerged in housing. Construction companies, real estate agencies, mortgage brokers and banks began laying people off. Next, jobs started being cut at factories making products linked to housing, from carpets and furniture to lighting and flooring.

But as the real estate bust spilled over into the broader economy, depleting household wealth, the impacts rippled out to retailers, beauty parlors, law offices and trucking companies, inflicting cutbacks throughout the economy, save for health care, farming and energy. Over the last six months, the economy has shed 485,000 private sector jobs, according to the Labor Department. Many people have seen hours reduced.

The unemployment rate still remains low by historical standards, at 5.5 percent. And so far, the job losses — about 65,000 a month this year — do not approach the magnitude of those seen in past downturns, particularly the twin recessions at the beginning of the 1980s, when the economy shed upward of 140,000 jobs a month and the unemployment rate exceeded 10 percent.

But Goldman Sachs assumes unemployment will reach 6.5 percent by the end of 2009, which translates into several hundred thousand more Americans out of work.

These losses are landing on top of what was, for most Americans, a remarkably weak period of expansion. From 1992 to 2000 — as the technology boom catalyzed spending and hiring — the economy added more than 22 million private sector jobs. Over the last eight years, only 5 million new jobs have been added.

The loss of work is hitting Americans along with an assortment of troubles — gasoline prices in excess of $4 a gallon, over all inflation of about 5 percent, and declining wages.

“In every dimension, people are worse off than they were,” said Mr. Roubini, the New York University economist.

Are consumers done?

That is a major worry.

The fate of the economy now rests on the shoulders of the American consumer, whose spending amounts to 70 percent of all economic activity.

When people go to the mall and buy televisions and eat out, their money circulates through the economy. When they tighten their belts, austerity ripples out and chokes growth.

Through the years of the housing boom, many Americans came to treat their homes like automated teller machines that never required a deposit. They harvested cash through sales, second mortgages and home equity lines of credit — an artery of finance that reached $840 billion a year from 2004 to 2006, according to work by the economists James Kennedy and Alan Greenspan, the former Federal Reserve chairman. That allowed Americans to live far in excess of what they brought home from work.

But by the first three months of this year, that flow had constricted to an annual rate of about $200 billion.

Average household debt has swelled to 120 percent of annual income, up from 60 percent in 1984, according to the Federal Reserve.

And now the banks are turning off the credit taps.


“Credit is going to remain tight for a time potentially measured in years,” said Mr. Tilton, the Goldman Sachs economist.

This is the landscape that has so many economists convinced that consumer spending must dip, putting the squeeze on the economy for several years.

“The question is, will it get as bad as the 1970s?” asked Mr. Rogoff, recalling an era of spiking gas prices and double-digit inflation.

Long term, Americans may have no choice but to spend less, save more and reduce debts — in short, to live within their means.

“We’re getting a lot of the adjustment and it hurts,” said Kristin Forbes, a former member of the Council of Economic Advisers under President George W. Bush, and now a scholar at M.I.T.’s Sloan School of Management. “But it’s an adjustment we’re going to have to make.”

Who’s to blame?

There is plenty to go around.

In the estimation of many economists, it starts with the Federal Reserve. The central bank lowered interest rates following the calamitous end of the technology bubble in 2000, lowered them more after the terrorist attacks of Sept. 11, 2001, and then kept them low, even as speculators began to trade homes like dot-com stocks.

Meanwhile, the Fed sat back and watched as Wall Street’s financial wizards engineered diabolically complicated investments linked to mortgages, generating huge amounts of speculative capital that turned real estate into a conflagration.

“At the end of this movie, it’s clear that the Fed will have to care about excesses,” Mr. Barbera said.

Prices multiplied as many homeowners took on more property than they could afford, lured by low introductory interest rates that eventually reset higher, sending many people into foreclosure.

Mortgage brokers netted commissions as they lent almost indiscriminately, offering exotically lenient terms — no money down, no income or job required. Wall Street banks earned billions selling risky mortgage-linked securities around the world, aided by ratings agencies that branded them solid.

Through it all, a lot of ordinary Americans borrowed a lot more money then they could afford to pay back, running up enormous credit card bills and borrowing against the value of their homes. Now comes the day of reckoning.


So I guess it’s the fault of “ordinary Americans” and Alan Greenspan. And the “painful adjustments” will have to be made by “us” says Kristin Forbes of Bush’s Council of Economic Advisors and MIT’s Sloan School. Somehow, I don’t think people named Forbes will find it as painful as us ordinary types.

People want to know what to do. Where to put their money, how to arrange their lives, etc. There are many websites with plans for how you can “profit from the coming collapse.” Nice. Similarly, the survivalist method, while containing some good suggestions, always seemed a bit unrealistic, not to mention selfish. In contrast, Charles Hugh Smith outlines the Taoist method, one that actually takes into account real human nature and social bonds:

The Art of Survival, Taoism and the Warring States

Charles Hugh Smith

June 27, 2008

I'm not trying to be difficult, but I can't help cutting against the grain on topics like surviving the coming bad times when my experience runs counter to the standard received wisdom.

A common thread within most discussions of surviving bad times--especially really bad times--runs more or less like this: stockpile a bunch of canned/dried food and other valuable accoutrements of civilized life (generators, tools, canned goods, firearms, etc.) in a remote area far from urban centers, and then wait out the bad times, all the while protecting your stash with an array of weaponry and technology (night vision binocs, etc.)


Now while I respect and admire the goal, I must respectfully disagree with just about every assumption behind this strategy. Once again, this isn't because I enjoy being ornery (please don't check on that with my wife) but because everything in this strategy runs counter to my own experience in rural, remote settings.

You see, when I was a young teen my family lived in the mountains. To the urban sophisticates who came up as tourists, we were "hicks" (or worse), and to us they were "flatlanders" (derisive snort).

Now the first thing you have to realize is that we know the flatlanders, but they don't know us. They come up to their cabin, and since we live here year round, we soon recognize their vehicles and know about how often they come up, what they look like, if they own a boat, how many in their family, and just about everything else which can be learned by simple observation.

The second thing you have to consider is that after school and chores (remember there are lots of kids who are too young to have a legal job, and many older teens with no jobs, which are scarce), boys and girls have a lot of time on their hands. We're not taking piano lessons and all that urban busywork. And while there are plenty of pudgy kids spending all afternoon or summer in front of the TV or videogame console, not every kid is like that.

So we're out riding around. On a scooter or motorcycle if we have one, (and if there's gasoline, of course), but if not then on bicycles, or we're hoofing it. Since we have time, and we're wandering all over this valley or mountain or plain, one way or another, then somebody will spot that trail of dust rising behind your pickup when you go to your remote hideaway. Or we'll run across the new road or driveway you cut, and wander up to see what's going on. Not when you're around, of course, but after you've gone back down to wherever you live. There's plenty of time; since you picked a remote spot, nobody's around.

Your hideaway isn't remote to us; this is our valley, mountain, desert, etc., all 20 miles of it, or what have you. We've hiked around all the peaks, because there's no reason not to and we have a lot of energy. Fences and gates are no big deal, (if you triple-padlock your gate, then we'll just climb over it) and any dirt road, no matter how rough, is just an open invitation to see what's up there. Remember, if you can drive to your hideaway, so can we. Even a small pickup truck can easily drive right through most gates (don't ask how, but I can assure you this is true). If nobody's around, we have all the time in the world to lift up or snip your barbed wire and sneak into your haven. Its remoteness makes it easy for us to poke around and explore without fear of being seen.

What flatlanders think of as remote, we think of as home. If you packed in everything on your back, and there was no road, then you'd have a very small hideaway--more a tent than a cabin. You'd think it was safely hidden, but we'd eventually find it anyway, because we wander all over this area, maybe hunting rabbits, or climbing rocks, or doing a little fishing if there are any creeks or lakes in the area. Or we'd spot the wisp of smoke rising from your fire one crisp morning, or hear your generator, and wonder who's up there. We don't need much of a reason to walk miles over rough country, or ride miles on our bikes.

…All of which is to say that the locals will know where your hideaway is because they have lots of time to poke around. Any road, no matter how rough, might as well be lit with neon lights which read, "Come on up and check this out!" If a teen doesn't spot your road, then somebody will: a county or utility employee out doing his/her job, a hunter, somebody. As I said, the only slim chance you have of being undetected is if you hump every item in your stash on your pack through trailess, roadless wilderness. But if you ever start a fire, or make much noise, then you're sending a beacon somebody will eventually notice.

The Taoists developed their philosophy during an extended era of turmoil known as the Warring States period of Chinese history. One of their main principles runs something like this: if you're tall and stout and strong, then you'll call attention to yourself. And because you're rigid--that is, what looks like strength at first glance--then when the wind rises, it snaps you right in half.

If you're thin and ordinary and flexible, like a willow reed, then you'll bend in the wind, and nobody will notice you. You'll survive while the "strong" will be broken, either by unwanted attention or by being brittle.


…The flatlander protecting his valuable depot is on the defensive, and anyone seeking to take it away (by negotiation, threat or force) is on the offensive. The defense can select the site for proximity to water, clear fields of fire, or what have you, but one or two defenders have numerous disadvantages. Perhaps most importantly, they need to sleep. Secondly, just about anyone who's plinked cans with a rifle and who's done a little hunting can sneak up and put away an unwary human. Unless you remain in an underground bunker 24/7, at some point you'll be vulnerable. And that's really not much of a life--especially when your food supplies finally run out, which they eventually will. Or you run out of water, or your sewage system overflows, or some other situation requires you to emerge.

So let's line it all up. Isn't a flatlander who piles up a high-value stash in a remote area with no neighbors within earshort or line of sight kind of like a big, tall brittle tree? All those chains and locks and barbed-wire fencing and bolted doors just shout out that the flatlander has something valuable inside that cabin/bunker/RV etc.


Now if he doesn't know any better, then the flatlander reckons his stash is safe. But what he's not realizing if that we know about his stash and his vehicle and whatever else can be observed. If some locals want that stash, then they'll wait for the flatlander to leave and then they'll tow the RV off or break into the cabin, or if it's small enough, disassemble it and haul it clean off. There's plenty of time, and nobody's around. That's pretty much the ideal setting for leisurely thieving: a high-value stash of goodies in a remote area accessible by road is just about perfect.

Let's say things have gotten bad, and the flatlander is burrowed into his cabin. Eventually some locals will come up to visit; in a truck if there's gas, on foot if there isn't. We won't be armed; we're not interested in taking the flatlander's life or goodies. We just want to know what kind of person he is. So maybe we'll ask to borrow his generator for a town dance, or tell him about the church food drive, or maybe ask if he's seen so-and-so around.

Now what's the flatlander going to do when several unarmed men approach? Gun them down? Once he's faced with regular unarmed guys, he can't very well conclude they're a threat and warn them off. But if he does, then we'll know he's just another selfish flatlander. He won't get any help later when he needs it; or it will be minimal and grudging. He just counted himself out.


…So creating a high-value horde in a remote setting is looking like just about the worst possible strategy in the sense that the flatlander has provided a huge incentive to theft/robbery and also provided a setting advantageous to the thief or hunter.

If someone were to ask this "hick" for a less risky survival strategy, I would suggest moving into town and start showing a little generosity rather than a lot of hoarding. If not in town, then on the edge of town, where you can be seen and heard.

I'd suggest attending church, if you've a mind to, even if your faith isn't as strong as others. Or join the Lions Club, Kiwanis or Rotary International, if you can get an invitation. I'd volunteer to help with the pancake breakfast fundraiser, and buy a couple tickets to other fundraisers in town. I'd mow the old lady's lawn next door for free, and pony up a dollar if the elderly gentleman in line ahead of me at the grocery store finds himself a dollar light on his purchase.

If I had a parcel outside town that was suitable for an orchard or other crop, I'd plant it, and spend plenty of time in the local hardware store and farm supply, asking questions and spreading a little money around the local merchants. I'd invite my neighbors into my little plain house so they could see I don't own diddly-squat except some second-hand furniture and a crappy old TV. And I'd leave my door open so anyone could see for themselves I've got very little worth taking.

I'd have my tools, of course; but they're scattered around and old and battered by use; they're not shiny and new and expensive-looking, and they're not stored all nice and clean in a box some thief could lift. They're hung on old nails, or in the closet, and in the shed; a thief would have to spend a lot of time searching the entire place, and with my neighbors looking out for me, the thief is short of the most important advantage he has, which is time.

If somebody's desperate enough or dumb enough to steal my old handsaw, I'll buy another old one at a local swap meet. (Since I own three anyway, it's unlikely anyone would steal all three because they're not kept together.)

My valuable things, like the water filter, are kept hidden amidst all the low-value junk I keep around to send the message there's nothing worth looking at. The safest things to own are those which are visibly low-value, surrounded by lots of other mostly worthless stuff.

I'd claim a spot in the community garden, or hire a neighbor to till up my back yard, and I'd plant chard and beans and whatever else my neighbors suggested grew well locally. I'd give away most of what I grew, or barter it, or maybe sell some at the farmer's market. It wouldn't matter how little I had to sell, or how much I sold; what mattered was meeting other like-minded souls and swapping tips and edibles.

If I didn't have a practical skill, I'd devote myself to learning one. If anyone asked me, I'd suggest saw sharpening and beer-making. You're legally entitled to make quite a bit of beer for yourself, and a decent homebrew is always welcome by those who drink beer. It's tricky, and your first batches may blow up or go flat, but when you finally get a good batch you'll be very popular and well-appreciated if you're of the mind to share.

Saw-sharpening just takes patience and a simple jig; you don't need to learn a lot, like a craftsman, but you'll have a skill you can swap with craftsmen/women. As a carpenter, I need sharp saws, and while I can do it myself, I find it tedious and would rather rebuild your front porch handrail or a chicken coop in exchange for the saw-sharpening.

Pickles are always welcome in winter, or when rations get boring; the Germans and Japanese of old lived on black bread or brown rice and pickled vegetables, with an occasional piece of dried meat or fish. Learning how to pickle is a useful and easy-to-learn craft. There are many others. If you're a techie, then volunteer to keep the network up at the local school; do it for free, and do a good job. Show you care.

Because the best protection isn't owning 30 guns; it's having 30 people who care about you. Since those 30 have other people who care about them, you actually have 300 people who are looking out for each other, including you. The second best protection isn't a big stash of stuff others want to steal; it's sharing what you have and owning little of value. That's being flexible, and common, the very opposite of creating a big fat highly visible, high-value target and trying to defend it yourself in a remote setting.

I know this runs counter to just about everything that's being recommended by others, but if you're a "hick" like me, then you know it rings true. The flatlanders are scared because they're alone and isolated; we're not scared. We've endured bad times before, and we don't need much to get by. We're not saints, but we will reciprocate to those who extend their good spirit and generosity to the community in which they live and in which they produce something of value.

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Monday, April 16, 2007

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.

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