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| FHL(C)
User ID: 716
1/7/2005 11:04 PM
Report abusive post | Watch, Its happening ,the global economic change.
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Fair use:
Part 1: Why the Emperor Has No Clothes
January 6, 2005
By Andre Gunder Frank
Asia Times
Uncle Sam has reneged and defaulted on up to 40% of its trillion-dollar foreign debt, and nobody has said a word except for a line in The Economist. In plain English that means Uncle Sam runs a worldwide confidence racket with his self-made dollar based on the confidence that he has elicited and received from others around the world, and he is a also a deadbeat in that he does not honor and return the money he has received.
How much of our dollar stake we have lost depends on how much we originally paid for it. Uncle Sam let his dollar fall, or rather through his deliberate political economic policies drove it down, by 40%, from 80 cents to the euro to 133 cents. The dollar is down by a similar factor against the yen, yuan and other currencies. And it is still declining, indeed is apt to plummet altogether.
There was also a spate of competitive devaluations in the 1930s, called the "beggar thy neighbor policy" of shifting the costs for the neighbors to bear. True, as the dollar has declined, so has the real value that foreigners pay to service their debt to Uncle Sam. But that works only if they can themselves earn in currencies that have increased in value against the dollar. Otherwise, foreigners earn and pay in the same devalued dollars, and even then with some loss from devaluation between the time they got their dollars and the time they repay them to Uncle Sam. China and other East Asian nations do earn in dollars, to which they have pegged their currencies, so they have already lost a substantial portion of their dollar stake, by far the world´s largest.
And they, like all others, will also lose the rest. For Uncle Sam´s debt to the rest of the world already amounts to more than a third of his annual domestic production and is still growing. That alone already makes his debt economically and politically never repayable, even if he wanted to, which he does not. Uncle Sam´s domestic, eg credit-card, debt is almost 100% of gross domestic product (GDP) and consumption, including that from China. Uncle Sam´s federal debt is now US$7.5 trillion, of which all but $1 trillion was built up in the past three decades, the last $2 trillion in the past eight years, and the last $1 trillion in the past two years. Alas, that costs more than $300 billion a year in interest, compared with, for example, the $15 billion spent annually on the National Aeronautics and Space Administration (NASA). But no worries: Congress just raised the debt ceiling to $8.2 trillion. To help us visualize, $1 trillion tightly packed up in $1,000 bills would create a pile 100km high.
But nearly half is owed to foreigners. All Uncle Sam´s debt, including private household consumer credit-card, mortgage etc debt of about $10 trillion, plus corporate and financial, with options, derivatives and the like, and state and local government debt comes to an unvisualizable, indeed unimaginable, $37 trillion, which is nearly four times Uncle Sam´s GDP. Only some of that can be managed domestically, but with dangerous limitations for Uncle Sam noted below. That is only one reason I want you to meet Uncle Sam, the deadbeat confidence man, who may remind you of the film Meet Joe Black; for as we get to know him better below, we will find that he is also a Shylock, and a corrupt one at that.
The United States is the world´s most privileged nation for having the monopoly privilege of printing the world´s reserve currency at will and at a cost of nothing but the paper and ink it is printed on. Moreover, by doing so, Uncle Sam can export abroad the inflation he generates by the extra dollars he prints, of which there are already at least three times as many floating around the world as at Uncle Sam´s home. Additionally, his is also the only country whose "foreign" debt is mostly denominated in his own world-currency dollars that he can print at will; while most foreigners´ debt is also denominated in the same dollar, but they have to buy it from Uncle Sam with their own currency and real goods. So he simply pays the Chinese and others in essence with these dollars that already to begin with have no real worth beyond their paper and ink. So especially poor China gives away for nothing at all to rich Uncle Sam hundreds of billions of dollars´ worth of real goods produced at home and consumed by Uncle Sam. Then China turns around and trades these same paper dollar bills in for more of Uncle Sam´s paper called Treasury Certificate bonds, which are even more worthless, except that they pay a percent of interest. For as we already noted, they will never be able to be cashed in and redeemed in full or even in part, and anyway have the lost much of their value to Uncle Sam already.
In an earlier essay, I argued that Uncle Sam´s power rests on two pillars only, the paper dollar and the Pentagon. Each supports the other, but the vulnerability of each is also an Achilles´ heel that threatens the viability of the other. Since then, Iraq, not to mention Afghanistan, has shown confidence in the Pentagon not to be what it was cracked up to be; and with the in-part-consequent decline in the dollar, so has confidence in it and Uncle Sam´s ability to use it to finance his Pentagon´s foreign adventures (See Coup d´Etat and Paper Tiger in Washington, Fiery Dragon in the Pacific, which also conjures up the productive growth of China). Additionally we must realize that Uncle Sam´s numbers above and below are also all literally relative. So far relations with other countries, in particular with China, still favor Uncle Sam, but they also help maintain an image that is deceptive. Consider the following:
A $2 toy leaving a US-owned factory in China is a $3 shipment arriving at San Diego. By the time a US consumer buys it for $10 at Wal-Mart, the US economy registers $10 in final sales, less $3 import cost, for a $7 addition to the US GDP. (Blaming ´undervalued´ yuan wins votes, Asia Times Online, February 26, 2004)
Moreover, ever-clever Uncle Sam has arranged matters so as to earn 9% from his economic and financial holdings abroad, while foreigners earn only 3% on theirs, and among them on their Treasury Certificates only 1% real return. Note that this difference of 6 percentage points is already double what Uncle Sam pays out, and his total 9% take is triple the 3% he gives back. Therefore, although foreign holdings and Uncle Sam´s are now about equal, Uncle Sam is still the big net interested winner, just like any Shylock, but no other ever did so grand a business.
But Uncle Sam also earns quite well, thank you, from other holdings abroad, eg from service payments by mostly poor foreign debtors. The sums involved are not peanuts or even small potatoes. For from his direct investments in foreign property alone, Uncle Sam´s profits now equal 50%, and including his receipts from other holdings abroad now are a full 100% of profits derived from all of his own domestic activities combined. These foreign receipts add more than 4% to Uncle Sam´s national domestic product. That helps nicely to compensate for the failure of domestic profits as yet to recover even their 1972 level, because Uncle Sam has failed to boost productivity sufficiently at home.
The productivity hype of president Bill Clinton´s "new economy" in the 1990s was limited to computers and information technology (IT), and even that proved to be a sham when the dot-com bubble burst. Also, not only the apparent increase in "profits" but also that of "productivity" were, at the bottom, on the backs of shop-floor, office and sales-floor workers working harder and longer hours and, at the top, the result of innovative accounting shams by Enron and the like. Such factors still compensate for and permit much of Uncle Sam´s $600-billion-and-still-rising trade deficit from excess home consumption over what he himself produces. That is what has resulted in the multitrillion-dollar debt. Exactly how large that debt is Uncle Sam is reluctant to reveal, but what is sure is that it is by far the world´s largest, even as net debt to foreigners, after their debt to him is deducted.
How has all this come about?
The simple answer is that Uncle Sam, who is increasingly hooked on consumption, not to mention harder drugs, saves no more than 0.2% of his own income. The Federal Reserve´s guru and now you see it, now you don´t doctor of magic, Alan Greenspan, recently observed that this is so because the richest 20% of Americans, who are the only ones who do save, have reduced their savings to 2%. Yet even these measly savings (other, poorer countries save and even invest 20%, 30%, even 40% of their income) are more than counterbalanced by the 6% deficit spending of the government. That is what brings the average saving rate to 0.2%. To maintain that $400-plus-billion budget deficit (more than 3% of national domestic product), which is really more the $600 billion if we count, as we should, the more than $200 billion Uncle Sam "borrows" from the temporary surplus in his own Federal Social Security fund, which he is also bankrupting. (But never mind, President George W Bush just promised to privatize much of that and let people buy their own old-age "security" in the ever-insecure market).
So with this $600-billion-plus budget deficit and the above-mentioned related $600-billion-plus deficit, rich Uncle Sam, and primarily his highest earners and biggest consumers, as well as of course the Big Uncle himself, live off the fat of the rest of the world´s land. Uncle Sam absorbs the savings of others who themselves are often much poorer, particularly when their central banks put many of their reserves in world-currency dollars and hence into the hands of Uncle Sam in Washington, and some also in dollars at home. Their private investors send dollars to or buy dollar assets on Wall Street, all with the confidence that they are putting their wherewithal in the world´s safest haven (and that, of course, is part of the above-mentioned confidence racket). From the central banks alone, we are looking at yearly sums of more than $100 billion from Europe, more than $100 billion from poor China, $140 billion from super-saver Japan, and many 10s of billions from many others around the globe, including the Third World. But in addition, Uncle Sam obliges them, through the good offices of their own states, to send their thus literally forced savings to Uncle Sam as well in the form of their "service" of their predominantly dollar debt to him.
His treasury secretary and his International Monetary Fund (IMF) handmaiden blithely continue to strut around the world insisting that the Third - and ex-Second, now also Third - World of course continue to service their foreign debts, especially to him. No matter that with interest rates multiplied several times over by Uncle Sam himself after the Fed´s Paul Volcker´s coup in October 1979, most have already paid off their original borrowings three to five times over. For to pay at all at interest rates that Volcker boosted to 20%, they had to borrow still more at still higher rates until thereby their outstanding foreign debt doubled and tripled, not to mention their domestic debt from which part of the foreign payments were raised, particularly in Brazil. Privatization is the name of the game there and elsewhere, except for the debt. The debt was socialized after it had been incurred mostly by private business, but only the state had enough power to squeeze the greatest bulk of back payments out of the hides of its poor and middle-class people and transfer them as "invisible service payments" to Uncle Sam.
When Mexicans were told to tighten their belts still further, they answered that they couldn´t because they had already had to eat their belts. Only Argentina and for a while Russia declared an effective moratorium on debt "service", and that only after political economic policies had destroyed their societies, thanks to Uncle Sam´s advisers and his IMF strong arm. Since then, Uncle Sam himself has been blithely defaulting on his own foreign debt, as he already had several times before in the 19th century.
Speaking of that, it may be well to recall at least two pieces of advice from that time: Lord Cromer, who administered Egypt for then-dominant British imperial interests, said his most important instrument for doing so was Egypt´s debts to Britain. These had just multiplied when Egypt was obliged to sell its Suez Canal shares to Britain in order to pay off earlier debts and British prime minister Benjamin Disraeli explained and justified his purchase of the same on the grounds that it would strengthen British imperial interests. Today, that is called "debt-for-equity swaps", which is one of Uncle Sam´s latter-day favorite policies to use the debt to acquire profitable and/or strategically important real resources, as of course also was the canal as the way to the jewel of the British Empire, India.
Another piece of practical advice came from the premier military strategist Carl von Clausewitz: make the lands you conquer pay for their own conquest and administration. That is of course exactly what Britain did in and with India through the infamous "Home Charges" remitted to London in payment for Britain administering India, which even the British themselves recognized as "tribute" and responsible for much of "The Drain" from India to Britain. How much more efficient yet to let foreign countries´ own states administer themselves but by rules set and imposed by Uncle Sam´s IMF and then effect a drain of debt service anyway. Actually, the British therein also set the 19th-century precedent of relying on the "imperialism of free trade" with "independent" states as far and as long as possible, using gunboat diplomacy to make it work (which Uncle Sam had already learned to copy by early in the 20th century); and if that was not enough, simply to invade, and if necessary to occupy - and then rely on the Clausewitz rule.
We shall note several recent instances thereof, and especially the Iraqi one, in the second article in this series.
Last but not least, oil producers also put their savings in Uncle Sam. With the "shock" of oil that restored its real price after the dollar valuation had fallen in 1973, ever-cleverer-by-half Henry Kissinger made a deal with the world´s largest oil exporter, Saudi Arabia, that it would continue to price oil in dollars, and these earnings would be deposited with Uncle Sam and partly compensated by military hardware. That deal de facto extended to all of the Organization of Petroleum Exporting Countries (OPEC) and still stands, except that before the war against Iraq that country suddenly opted out by switching to pricing its oil in euros, and Iran threatened do the same. North Korea, the third member of the "axis of evil", has no oil but trades entirely in euros. (Venezuela is a major oil supplier to Uncle Sam and also supplies some at preferential rates as non-dollar trade swaps to poor countries such as Cuba. So Uncle Sam sponsored and financed military commandos from its Plan Colombia next door, promoted an illegal coup and, when that failed, pushed a referendum in his attempt at yet another "regime change"; and now along with Brazil all three are being baptized as yet another "axis of evil").
To return to the main issue and call a spade a huge spade, all of the above is part and parcel of the world´s biggest-ever Ponzi-scheme confidence racket. Like all others, its most essential characteristic is that it can only continue to pay off dollars and be maintained at the top as long as it continues to receive new dollars at the bottom, voluntarily through confidence if possible and by force if not. (Of course, the Clausewitz and Cromer formulas result in the poorest paying the most, since they are also the most defenseless: so that the ones sitting on/above them pass much of the cost and pain down to them.)
What if confidence in the dollar runs out?
Things are already getting shakier in the House of Uncle Sam. The declining dollar reduces the necessary dollar inflows, so Greenspan needs to raise interest rates to maintain some attraction for the foreign dollars he needs to fill the trade gap. As a quid pro quo for being reappointed by President George W Bush, he promised to do that only after the election. That time has now arrived, but doing so threatens to collapse the housing bubble that was built on low interest and mortgage - and remortgage - rates.
But it is in their house values that most Americans have their savings, if they have any at all. They and this imaginary wealth effect supported over-consumption and the nearly as-high-as-GDP household debt, and a collapse of the housing price bubble with increased interest and mortgage rates would not only drastically undercut house prices, it would thereby have a domino effect on their owners´ enormous second and third remortgages and credit-card and other debt, their consumption, corporate debt and profit, and investment. In fact, these factors would be enough to plummet Uncle Sam into a deep recession, if not depression, and another Big Bear deflation on stock and de facto on other prices, rendering debt service even more onerous. (If the dollar declines, even domestic price inflation is de facto deflationary against other currencies, which Russians and Latin Americans discovered to their peril, and which we observe below.)
Still lower real US investment would reduce its industrial productivity and competitiveness even more - probably to a degree lower than can compensated for by further devaluing the dollar and making US exports cheaper, as is the confident hope of many, probably including the good Doctor. Until now, the apparent inflation of prices abroad in rubles and pesos and their consequent devaluations have been a de facto deflation in terms of the dollar world currency. Uncle Sam then printed dollars to buy up at bargain-basement fire-sale prices natural resources in Russia (whose economy was then run on $100 bills), and companies and even banks, as in South Korea. True, now Greenspan and Uncle Sam are trying again to get other central banks to raise their own interest rates and otherwise plunge their own people into even deeper depression.
But even if he can, thereby also canceling out the relative attractiveness of his own interest-rate hike, how could that save Uncle Sam? What remains the great unknown and perhaps still unknowable is how a more wounded, Ponzi-less Uncle Sam would react with more "Patriotic" acts at home and abroad with the weapons - including the now almost ready "small" nukes - he would still have, even if his foreign victims no longer paid for new ones. So, to compensate for less bread and civil rights at home, an even more patriotic, nay chauvinist, circus at the cost of others abroad is the real danger of the current policies to "defend freedom and civilization".
So, far beyond Osama bin Laden, al-Qaeda and all the terrorists put together, the greatest real-world threat to Uncle Sam is that the inflow of dollars dries up. For instance, foreign central banks and private investors (it is said that "overseas Chinese" have a tidy trillion dollars) could any day decide to place more of their money elsewhere than in the declining dollar and abandon poor ol´ Uncle Sam to his destiny. China could double its per capita income very quickly if it made real investments at home instead of financial ones with Uncle Sam. Central banks, European and others, can now put their reserves in (rising!) euros or even soon-to-be-revalued Chinese yuan. Not so far down the road, there may be an East Asian currency, eg a basket first of ASEAN + 3 (China, Japan, South Korea) - and then + 4 (India). While India´s total exports in the past five years rose by 73%, those to the Association of Southeast Asian Nations (ASEAN) rose at double that rate and sixfold to China. India has become an ASEAN summit partner, and its ambitions stretch still further to an economic zone stretching from India to Japan. Not for nothing, in the 1997 East Asian currency and then full economic crisis, Uncle Sam strong-armed Japan not to start a proposed East Asian currency fund that would have prevented at least the worst of the crisis. Uncle Sam then benefited from it by buying devalued East Asian currencies and using them to buy up East Asian real resources, and in South Korea also banks, at bargain-basement reduced-price fire sales. But now, China is already taking steps toward such an arrangement, only on a much grander financial and now also economic scale.
A day after writing the above, I read in The Economist (December 11-17, 2004) a report on the previous week´s summit meeting of ASEAN + 3 in Malaysia. That country´s prime minister announced that this summit should lay the groundwork for an East Asian Community (EAC) that "should build a free-trade area, cooperate on finance, and sign a security pact ... that would transform East Asia into a cohesive economic block ... In fact, some of these schemes are already in motion ... China, as the region´s pre-eminent economic and military power, will doubtless dominate ... and host the second East Asia Summit." The report went on to recall that in 1990, Uncle Sam shot down a similar initiative for fear of losing influence in the region. Now it is a case of "Yankee Stay Home".
Or what if, long before that comes to pass, exporters of oil simply cease to price it in ever-devaluing dollars, and instead make a mint by switching to the rising euro and/or a basket of East Asian currencies? That would at one stroke vastly diminish the world demand for and price of dollars by obliging anyone who wants to buy oil to purchase and increase the demand price of the euro or yen/yuan instead of the dollar. That would crash the dollar and tumble Uncle Sam in one fell swoop, as foreign - and even domestic - owners of dollars would sell off as many of them as fast as they could, and other countries´ central banks would switch their reserves out of dollars and away from Uncle Sam´s no-longer-safe haven. That would drive the dollar down even more, and of course halt any more dollar inflow to Uncle Sam from the foreigners who have been financing his consumption spree. Since selling oil for falling dollars instead of rising euros is evidently bad business, the world´s largest oil exporters in Russia and OPEC have been considering doing just that. In the meantime, they have only raised the dollar price of oil, so that in euro terms it has remained approximately stable since 2000. So far, many oil exporters and others still place their increased amount of dollars with Uncle Sam, even though he now offers an ever less attractive and less safe haven, but Russia is now buying more euros with some of its dollars.
So also many countries´ central banks have begun to put ever more of their reserves into the euro and currencies other than Uncle Sam´s dollar. Now even the Central Bank of China, the greatest friend of Uncle Sam in need, has begun to buy some euros. China itself has also begun to use some of its dollars - as long as they are still accepted by them - to buy real goods from other Asians and thousands of tons of iron ore and steel from Brazil, etc. (Brazil´s president recently took a huge business delegation to China, and a Chinese one just went to Argentina. They are going after South African minerals too.)
So what will happen to the rich on top of Uncle Sam´s Ponzi scheme when the confidence of poorer central banks and oil exporters in the middle runs out, and the more destitute around the world, confident or not, can no longer make their in-payments at the bottom? The Uncle Sam Ponzi Scheme Confidence Racket would - or will? - come crashing down, like all other such schemes before, only this time with a worldwide bang. It would cut the present US consumer demand down to realistic size and hurt many exporters and producers elsewhere in the world. In fact, it may involve a wholesale fundamental reorganization of the world political economy now run by Uncle Sam.
[link to www.atimes.com]
[link to freewordofgod.yuku.com] |
| Anonymous Coward
User ID: 2549
1/7/2005 11:07 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
Thx, |
| Paladin
User ID: 4892
1/7/2005 11:13 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
thanks for the post...great.
I get the same all over the web.
321gold.com
kitco.com |
| Sandalaphon
User ID: 3038
1/7/2005 11:20 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
DOOM and GLOOM on the world economy.
Wallah here it is!
[link to www.tldm.org]
Whenever she hits whatever the catalyst maybe!
BOOM BOOM BOOM
it´s inevitable just keeps being delayed...
Got Gold and Silver?
Will definetly happen before 2009.
Love and Light
 |
| ShadowDancer
User ID: 101
1/7/2005 11:26 PM
 | | Re: Watch, Its happening ,the global economic change. | Quote |
Thx. Lots of people will confounded by the read,but worth it.
All choices have consequences, choose wisely, CHOOSE WISELY. |
| FHL(C)
User ID: 716
1/8/2005 12:11 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Fair use and fair warning:
The Dollar Is Poised for Moderate Lift
DEBKAfile Special Financial Analysis
January 5, 2005, 11:53 PM (GMT+02:00)
No longer in free fall?
The US dollar steadied Wednesday, January 5, after its biggest surge since mid-2004 began to correct the year’s end weak performance against the Japanese yen and the euro. Still, most big banks and investment houses are predicting its continuing slide in 2005 too. DEBKAfile’s financial expert is cautiously optimistic. In his view, the decline may have hit bottom and a slow recovery is in store over the next two or three months.
The causes of the dollar’s 8% slump against the euro (23% accumulated weakness last 2 years); 4% against the Japanese yen, are well known, primarily America’s huge trade and current accounts deficits. Some experts are predicting a further 20-30 % plunge in the dollar’s value this year to balance out the trade deficit (a weak dollar equals greater American exports). Another contributing cause was the action of some central banks, notably in China, Korea, India, Taiwan and also Russia, to diversify some of their reserves, switching part of their dollar holdings...
Key quote IMO
"The causes of the dollar’s 8% slump against the euro (23% accumulated weakness last 2 years); 4% against the Japanese yen, are well known, primarily America’s huge trade and current accounts deficits. Some experts are predicting a further 20-30 % plunge in the dollar’s value this year to balance out the trade deficit "
[link to freewordofgod.yuku.com] |
| FHL(C)
User ID: 10650
1/10/2005 3:34 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
FU&FW:
World on Brink of Ruin
January 7, 2005
Dan Ackman
Forbes Magazine
NEW YORK - Alan Greenspan, that Matador of the Money Supply, the esteemed Impresario of Interest Rates, has suffered precious few slings or arrows over his many years as chairman of the Federal Reserve. Even the White House has had to offer its critiques off the record for fear of roiling the markets or upsetting the chairman´s Elvis-in-Vegas-like following. So when the chief economist of one of the world´s most prestigious banks calls Greenspan a bum, that´s a big deal.
And yesterday it happened. Stephen Roach, the chief economist for Morgan Stanley & Co. (nyse: MWD - news - people ), one of the most powerful investment banks and one of the 50 largest companies in the world, says Greenspan has "driven the world to the economic brink."
Writing in an upcoming issue of Foreign Policy, Roach says that when Greenspan steps down as chairman of the Federal Reserve next year, he will leave behind a record foreign deficit and a generation of Americans with little savings and mountains of debt. Americans, Roach says, are far too dependent on the value of their assets, especially their homes, rather than on income-based savings; they are running a huge current-account deficit; and much of the resulting debt is now held by foreign countries, especially in Asia, which permits low interest rates and entices Americans into more debt.
The "economic brink" line is from the headline of a press release sent by Foreign Policy. In an interview this morning, Roach said, "That´s a little extreme." He does admit the nation has prospered on Greenspan´s watch. Still, he does not disavow the haymakers he directs at the chairman´s chin.
"This is no way to run the global economy," Roach says. So far, the Fed has bucked the odds, Roach adds. But the longer the situation exists, the more chance there is that it will spell danger for the United States and the world.
Roach lays the blame for the peril at Greenspan´s door. But first he takes out after his outsized reputation. Greenspan is not responsible for defeating inflation in the 1980s; Paul Volcker, his "tough and courageous predecessor," deserves more of the credit, Roach says. Greenspan´s monetary policy deserves some accolades for the 1990s boom, but former President Bill Clinton´s fiscal policy and other factors were equally responsible, Roach says. Greenspan may deserve some praise for softening the recession that followed the stock market meltdown, Roach concedes, but the chairman´s cure may result in "bigger problems down the road" and "the biggest bubble of all: residential property."
Many have credited Greenspan with saving the world following the 1997-98 Asian financial crisis. Time magazine went so far as to put the gnome of Constitution Avenue on its cover, under the headline "Committee to Save the World." Though it is the case that the world did not end, "In truth, the world weathered the Asian financial storm only to chart increasingly dangerous waters in the years that followed," Roach writes. "Global economic imbalances have intensified dramatically since 1999."
A good chunk of the U.S. prosperity is owed to these imbalances, Roach says: "Asian countries holding enormous stocks of U.S. dollars recycle this cash back into the United States by buying U.S. [Treasury bills]. This process effectively subsidizes U.S. interest rates, thus propping up U.S. asset markets and enticing American consumers into even more debt. Awash in newfound purchasing power, Americans then turn around and buy everything from Chinese-made DVD players to Japanese cars."
While the economist has nothing against DVD players, he does say, "Asia and Europe are increasingly dependent on overly indebted U.S. consumers, while those consumers are increasingly dependent on Asia´s interest-rate subsidy. The longer these imbalances persist, the greater the likelihood of a sharp adjustment. A safer world? Not on your life."
Roach even questions Greenspan´s political independence. He does not claim the chairman is a partisan Republican, but he does fault him for being a "cheerleader for policies such as tax cuts...that could make the endgame all the more treacherous."
Greenspan is to central banking what J. Edgar Hoover was to fighting crime. He will soon surpass the fondly forgotten William McChesney Martin as the longest-serving Fed chairman. But his term as a member of the Federal Reserve Board of Governors expires in just over a year from now, and America will have to do without. Roach says, "Greenspan will be a tough act to follow." But the difficulty may not be living up to the chairman´s reputation so much as cleaning up his mess.
[link to www.forbes.com]
[link to freewordofgod.yuku.com] |
| Anonymous Coward
User ID: 4841
1/10/2005 3:44 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
Well...I guess we can only hope for the demise of the U.S.A.´s financial system in God´s name! |
| Nibiru
User ID: 2133
1/10/2005 4:01 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
But..but... it says on the $ "In God We Trust"?
Hope he/she never goes broke! |
| Anonymous Coward
User ID: 523
1/10/2005 6:10 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
a great read. who would be the next candidate of a regime change?
day of reckoning comes... blood on the streets? |
| Anonymous Coward
User ID: 2954
1/10/2005 8:29 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
thank you. bump |
| John Gault
User ID: 2113
1/10/2005 9:19 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
Thanks!
John Gault
"Who is John Gault?" |
| Anonymous Coward
User ID: 956
1/10/2005 9:23 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
Why do you so stubbornly think the stock markets are some kind of natural forces?
Not so. They are controlled and manipulated by those who have the power to do so. |
| Paladin
User ID: 2985
1/10/2005 9:30 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
do any of you know how much the Fed increased the M1 money supply in the last few weeks in 2004....the number is huge.....
Run as fast as you can....them boys on the Hill are out of breath.....game over
 |
| Earth420
User ID: 197
1/10/2005 9:32 PM
 | | Re: Watch, Its happening ,the global economic change. | Quote |
Peace
"while pensive poets painful vigils keep" |
| Anonymous Coward
User ID: 1476
1/10/2005 10:01 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
"Why do you so stubbornly think the stock markets are some kind of natural forces?
Not so. They are controlled and manipulated by those who have the power to do so."
True dat! The markets will be propped up until our S Sucrity money is put in the market and then the great "crash" will come.
People are going to lose everything, even their SS retirement money.
Then they´ll have us where they want us, greased up and bent over a barrel. |
| FHL(C)
User ID: 5571
1/11/2005 12:04 AM | | FHL(C)
User ID: 3899
1/11/2005 10:00 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
Fair use:
Dollar Drops After Snow Suggests U.S. Won´t Try to Halt Decline
January 7, 2005
Bloomberg
The dollar dropped the most in more than two weeks against the euro after Treasury Secretary John Snow suggested the U.S. won´t strengthen its currency.
Exchange rates are best set by markets, Snow said late yesterday, failing to repeat a Jan. 7 remark that the Bush administration wants to ``sustain the strength´´ of the dollar. Last week´s comment helped spur the currency´s second-biggest weekly gain ever against the euro. The dollar fell for a third straight year in 2004.
``The administration´s position remains the same; they favor a strong dollar but a dollar determined by the markets,´´ said Hugh Walsh, a currency trader in New York at Fortis (USA) Financial Markets, a unit of Belgium´s biggest financial- services company.
Against the euro, the dollar declined to $1.3164 at 9:32 a.m. in New York, from $1.3073 late yesterday, the biggest drop since Dec. 23, according to currency-trading system EBS. It also fell to a one-week low of 103.76 yen, from 104.34. The dollar may trade between $1.3050 and $1.32 today, Walsh said.
The dollar extended its loss after an industry report showed rising investor confidence in Germany, Europe´s biggest economy. The figures eased concern growth in the 12-nation euro region may be stagnating. The ZEW Center for European Economic Research´s index of institutional and analyst sentiment rose to 26.9 in January, beating the median forecast of 18 in a Bloomberg survey.
Not Deliberate
``We have a confirmation that there will be an expansion of growth in 2005 and this data is supporting the euro,´´ said Benedikt Germanier, a currency strategist at UBS AG in Zurich. UBS forecasts the euro will gain to $1.34 in a month.
Snow told CNBC on Jan. 7 that ``we want to do things that sustain the strength of the dollar,´´ including trimming the budget deficit. He didn´t highlight previous remarks favoring market forces setting currency values. Snow yesterday told Reuters in a television interview that ``just because I don´t say something doesn´t mean it´s not part of our policy.´´
``There was a little uncertainty as to whether Snow´s comments last week deliberately left out that exchange rates should be determined by the market,´´ said Jens Nordvig, a currency strategist in New York at Goldman Sachs Group Inc. ``We didn´t think that it was deliberate so we´re not surprised that the dollar is trading lower.´´
He forecasts a dollar fall to a record $1.40 by the end of the year. The current record low is $1.3666, reached Dec. 30.
Trade Gap
European Central Bank President Jean-Claude Trichet said yesterday he ``appreciated´´ Snow´s Jan. 7 comment. ``Global observers have taken that mention very, very seriously,´´ Trichet also said at a press conference after central bank governors from the Group of 10 nations met in Basel, Switzerland.
A government report tomorrow may show the U.S. November trade deficit was $54 billion, down from a record $55.5 billion in October, though still the third-biggest on record, according to the median forecast in a Bloomberg survey. The deficit in the current account, the broadest measure of trade, was a record $164.7 billion in the third quarter.
``I don´t think that´s any reason for optimism´´ given the limited degree of narrowing expected, said Walsh at Fortis. ``People are a bit concerned about that.´´
The dollar dropped last year on concern record U.S. current- account and budget deficits would lower demand for the currency. It also fell on speculation U.S. policy makers favor a weaker dollar to help shrink the gap in the current account by reducing the cost of exports and making imports more expensive.
Current-Account Gap
``If our current-account deficit continues to grow, foreign investors can´t be counted on to keep lending to the United States on the same terms as in the past,´´ Federal Reserve Bank of Atlanta President Jack Guynn said in a speech in Atlanta yesterday.
The current-account deficit helps explain last year´s decline in the dollar, said Guynn, a voting member of the Fed´s interest-rate setting committee for the February and March meetings this year. The dollar fell 7.1 percent against the euro and 4.3 percent versus the yen last year.
``The dollar will weaken to about $1.40´´ per euro in 2005 as the deficit saps demand for the U.S. currency, said Michael Mewes, who helps manage the equivalent of $8.5 billion at J.P. Morgan Fleming Asset Management in Frankfurt.
Today´s gain in the ZEW index comes after government figures last week showed German unemployment rose to a seven-year high in December and the French economy failed to expand in the third quarter. Expectations faster growth in the U.S. will widen the interest-rate gap between the U.S. and the euro region helped spur a 3.8 percent gain in the dollar last week.
Dollar May Gain
The ECB has kept its benchmark rate at 2 percent since June 2003. The Fed raised its target rate for overnight loans between banks five times last year, to 2.25 percent. Minutes from the Fed´s Dec. 14 meeting said the rate is ``below the level´´ needed to damp inflation.
``Interest-rate differentials do matter,´´ said David Durrant, chief currency strategist in New York at Bank Julius Baer & Co. ``The U.S. will keep raising interest rates´´ this year while the ECB may even cut rates, he said.
Durrant projects the U.S. currency will advance to $1.28 per euro later this year.
Alcoa Inc., the world´s biggest aluminum maker, said yesterday that fourth-quarter profit fell 7.9 percent in part because of a weaker dollar. A falling dollar increases costs in Australia and other countries where the company makes aluminum.
``U.S. dollar weakness and higher input costs continue to pressure margins,´´ Chief Executive Officer Alain Belda said in a statement. Currency costs may reach $130 million this year for the Pittsburgh-based company, he said.
[link to quote.bloomberg.com]
[link to freewordofgod.yuku.com] |
| The Real Anti-Christ
User ID: 6394
1/11/2005 10:40 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
Oh please, what a fucking crock of shit. |
| The Real Anti-Christ
User ID: 6394
1/11/2005 10:45 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
"China, as the region´s pre-eminent economic and military power, will doubtless dominate"
You would be interested to know that the pre-eminent military power in the region is still the United States. Like it even matters.
Question for you dumb-as-rock posters like FHC or whatever your avatar is; name one country in the world that does not sell bonds to other countries to capitalize it´s currency production? If you can answer that question without your google degree, I´ll respect your opinions from now. |
| Anonymous Coward
User ID: 1199
1/11/2005 10:57 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
The game of monopoly is coming to an end, for sure because its dragged on far too long and is too ridiculous and insane.
The whole concept of the marketplace and how it is ran is a joke, many companies do insider trading, all sorts of frauds, CEOs can liquidate their shares before to unknowing shareholders, chapter 11 and start new company up with a ´new´ name/image and same set up with the money from their thievery... ITS ALL A FAKE!
Eventually their will have to be a change of the structure of the marketplace and money, where as, its either rendered a casino like worldwide game, or debt is wiped and everyone is equal opportunity.
Which would be TOTAL chaos but if not changes are made there will be big trouble soon anyways! |
| Anonymous Coward
User ID: 1199
1/11/2005 11:15 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
 |
| FHL(C)
User ID: 10866
1/12/2005 1:01 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
fair use:
Game Over?
January 7, 2005
Stephen Roach (New York)
The unraveling of the Asset Economy could well be at hand. America’s Federal Reserve has finally woken up to the perils of the risk culture that its reckless accommodation has spawned. The Fed has sounded simultaneous alarms on two fronts -- inflation and excesses in asset markets. Such explicit warnings from the US monetary authority are rare and should be taken seriously. This has important implications for the interest rate outlook, as well as for the asset-dependent US economy.
As many have already noted, the recently-released minutes of the December 14, 2004 Federal Reserve policy meeting were an eye-opener. The tone of the discussion was far more important than the policy action itself -- a fifth 25 basis point rate hike in the past five months. While the stilted language of the policy action, itself, made reference to balanced risks with respect to growth and inflation, the debate was laced with a very different distribution of concerns. The Fed made special note of inflation risks, citing recent weakness in the dollar, still-elevated oil prices, a cyclical slowing of productivity, and signs of deteriorating inflationary implications signaled in the TIPS market. At the same time, the Fed’s newfound concerns over “excessive risk taking” focused on unusually narrow credit spreads, a notable pick-up in corporate finance activity (both IPOs and M&A deals), and what the policy minutes referred to as “anecdotal reports” of excess speculation in residential property markets. Better late than never, I guess.
Rarely does the US central bank cast aside the rhetorical shackles of Fedspeak and express its concerns with such candor and fervor. Two earlier instances in the recent past stand out as intriguing precedents -- late 1993 and early 2000. In the second half of 1993, the Fed warned repeatedly of excess speculation in the bond market and the coming normalization of monetary policy. Market participants all but ignored the warnings until the Fed finally delivered in the form of a 300 bp rate hike over a 12-month time-frame beginning in February 1994. The result was the worst year of performance in modern bond market history. A similar, albeit belated, warning was sounded in early 2000, when the stock market was still bubbling to excess. At the time, the Fed couched its concerns in a framework that worried about potential imbalances between the excesses in demand and the growth in potential supply. But the 100 bp of monetary tightening in the first half of 2000 was more than enough for the equity bubble and the excess demand growth it spawned. In my view, the minutes of the December 2004 FOMC meeting follow these earlier precedents quite closely -- especially that of 1993-94. The Federal Reserve is sending a clear warning to speculators that should not be ignored.
And yet, as was precisely the case in the immediate aftermath of the two earlier warnings, an ominous persistence of denial is evident today. Financial markets have barely flinched in response to this sea-change in Fed risk assessment. Yields on 10-year Treasuries are up only about 7 basis points. Moreover, the bubble in risk products remains very much intact: While emerging market-debt spreads have widened by 9 bps, they remain extraordinarily tight by historical standards; the same can be said for investment-grade corporate spreads, which haven’t budged at an unusually low 94 bps; moreover, spreads on already tight high-yield debt have actually narrowed a bit in the immediate aftermath of the release of the FOMC minutes. A similar pattern is evident for bank credit spreads and equity market volatility -- a persistence of minimal risk aversion. And the real estate market remains red-hot, riding a national home-price inflation wave that hit 13% y-o-y in 3Q04, with double-digit appreciation in 25 states plus the District of Columbia.
As always, it takes more than words to crack investor denial -- especially with return-starved fund managers seeking refuge in the ever-present “carry-trades” on riskier assets. The Fed has attempted to be disciplined (e.g. “measured”) in its tightening efforts thus far. But that approach -- as was the case in the early stages of its 1994 normalization campaign -- has done little to alter the risk appetite of investors and the Fed’s perception of inflation risks. Such a response leaves the central bank with little choice other than to up the ante on its tightening strategy. That’s what it will take to cope with looming inflationary pressures. And that’s what it will take to challenge the economics of the carry trade. Today’s Fed -- which has kept the real federal funds rate in negative territory for longer than at any point since the late 1970s -- is wildly behind the risk curve, in my view. Only after the 25 bp tightening of last December did the nominal funds rate match the core CPI inflation rate of 2.2%. For a central bank that has suddenly gotten religion in its concerns over inflation and speculative activity, there’s something very reckless about “zero” real short-term interest rates. Monetary policy must now move decisively into the restrictive zone if the Fed is serious about its newfound concerns. In my view, that could spell as much as another 200 bp of monetary tightening, requiring much larger incremental moves than the measured dosage of 25 bp per pop that has been applied so far.
The big question in all this is whether the Fed is tough enough to face up to the task at hand. Unfortunately, that’s a close call -- a sad comment on America’s so-called independent central bank. In large part, that’s because the US monetary authority is very much a part of the problem that it is now trying to address. By condoning the excesses of the equity bubble in the late 1990s, the Fed set the stage for the near-brush with deflation that was to follow in the post-bubble shakeout. The Fed fought the valiant fight during this period by slashing its policy rate by 550 bps to a 46-year low of 1%. But that then gave rise to the climate of costless short-term financing -- a degree of extreme monetary accommodation that has sparked the very concerns over inflation and speculation that made news in the December FOMC minutes. Unfortunately, this is all emblematic of the biggest shortcoming of modern-day central banking -- an inability to cope with asset bubbles. The Fed has put itself into a tough corner from which there is no easy exit.
Assuming that the Fed sticks to its guns, all this spells tough times ahead for the asset-dependent US economy. That’s especially the case for the income-short, saving-depleted American consumer. Lacking in wage-income-generated purchasing power, US households have relied on a combination of aggressive tax cuts and equity extraction from now-overvalued homes to support their open-ended profligacy. Both of those sources of support seem destined to dry up. The odds of any additional near-term fiscal stimulus are low, with the odds suggesting that the thrust of budgetary policy could, in fact, swing the other way. And a sharp increase in US interest rates spells game over for a now-over-extended US housing market and a related drying up of the equity extraction from this asset class -- a wealth effect that has played such an important role in powering the US consumption dynamic in recent years. All this points to a diminished growth impetus from US personal consumption expenditures -- an outcome that should lead to slower GDP growth in the US and weaker external demand conditions faced by America’s trading partners. There is a silver lining to such a scenario -- a reduced growth rate of US domestic demand, which should be helpful in providing some relief to America’s current-account dilemma. And America’s saving-rich trading partners will be hit with the combined impacts of stronger currencies and reduced demand for exports by US consumers -- impacts that could leave countries in Asia and Europe with little choice other than to implement pro-consumption strategies. In other words, Fed-induced pressures on the Asset Economy could well be an important catalyst for global rebalancing.
Many believe that the Fed would be over-reaching its mandate by squeezing carry trades. I don’t share that view. Unlike many central banks, America’s Federal Reserve is not a one-dimensional inflation targeter. Instead, it is charged by the US Congress with promoting price stability, full employment, and sustained economic growth. To the extent that speculative excesses jeopardize the stability of the US economy, the Fed is well within its purview of addressing financial market imbalances. It did so in 1994 and belatedly again in 2000. Given the current state of excess in the US economy -- the saving shortfall, debt overhang, and twin deficits -- in conjunction with mounting excesses in asset markets -- property and fixed income markets, alike -- aggressive Fed action is entirely appropriate, in my view. Investors won’t love the outcome, especially high-yield borrowers at home and abroad (i.e., emerging markets). But this was always the ultimate pitfall of the post-bubble shakeout. The Asset Economy has gone to excess, and it is high time to face the endgame before it’s too late. The Fed deserves credit for finally bringing these critical concerns to a head.
[link to www.morganstanley.com]
[link to freewordofgod.yuku.com] |
| FHL(C)
User ID: 8702
1/16/2005 4:38 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Fair use:
The Fed Again Falls Flat on Bubble Analysis
By Doug Noland
January 13 – Bloomberg (Alison Fitzgerald and Vivien Lou Chen): “Identifying asset price bubbles as they occur is ‘arguably impossible’ and there’s no appropriate way for central bankers to respond by altering monetary policy, Federal Reserve Vice Chairman Roger Ferguson said. ‘Current statistical methods are simply not up to the task of ‘detecting’ asset-price bubbles, especially not in real time, when it matters most,’ Ferguson said in the text of a speech to the Stanford Institute for Economic Policy Research… Therefore, ‘a clear-cut policy response to suspected waves of exuberance cannot be suggested.’ Recessions preceded or accompanied by a bust in asset prices are not necessarily more costly or longer than ones in which securities or real estate retain their value… ‘Each recession and recovery episode would seem to call for its own tailor-made policy response.’”
The Greenspan Fed undertook the study of asset Bubbles nearly a decade ago. There is no doubt that this effort has been a disappointing failure. And the pathetic state of understanding with regard to the nature of asset inflation and Bubble dynamics is an indictment of our central bank as much as it is of contemporary economics. I found Mr. Ferguson’s paper and discussion especially discouraging. Not only does the Federal Reserve today possess a dismal appreciation for the underlying dynamics that fueled the telecom/tech Bubble, they are seemingly oblivious to the reality that Credit and asset Bubbles have taken full command of global asset markets and economies. Somehow the Fed insists – and is intent on celebratory self-congratulations – that we are in a healthy post-Bubble environment. How can this be?
I will begin with an interesting exchange from Mr. Ferguson’s Q&A session:
Question: “During the asset Bubble the extension of debt – whether it was margin debt, corporate debt and so forth - my anecdotal experience was that the amount of debt that was being raised based on the inflated asset values versus cash flow generating ability expanded very erratically. Margin debt being an example of that. So the question is: what effect does that have on accelerating the Bubble effect? And, secondly, is there a way that policymakers – even if they are not going to make a call that we are in a Bubble – if there’s a certain rate of asset value accretion in certain time periods (when the Fed would) institute some type of Credit controls which (would) dampen the acceleration.”
Vice Chairman Ferguson: “First thing, during some of this period there was some call on the Federal Reserve to move margin requirements, for example. And the literature and the research that we’ve managed to do – and there have been a few episodes in history when margin requirements were moved – does not show that it has any impact on that kind of extension of Credit. The second thing to observe is that the source of this Credit may matter. And one of the things that made the U.S.’s situation different from the Japanese in this study, was the point that I made (in the paper), was that risk management was much better in the U.S., so that the extension of Credit that was going into some of these activities was not purely from banks. There were some venture capitalists and others… Undoubtedly some people in this room (at Stanford University) will understand that the Credit was not coming from banks it was coming from venture capitalists, who are obviously extraordinarily important in this part of the country. But what you don’t find is the propagation of weak financial systems, which is one of the reasons why – why I say one of the important conclusions here – is at least with respect to the banks that play a unique risk-taking and risk conversion role – it’s extremely important when we are not in these periods for us as regulators to enforce or to encourage the best kinds of risk management practices. Because you can avoid the kind of propagation that seems to have occurred with the Japanese.”
“The other thing I think that happened is – the theoreticians in the room would do this better than I will – but one of the points I was trying to make in the talk was that it’s fair to say the academic literature has had a difficult time identifying Bubbles retrospectively. I think it’s impossible to identify – almost impossible to identify them in real time. Just as the academic literature doesn’t do that very well, I would argue that many of the individuals involved don’t necessarily do that very well either. And so what you end up, yes some stories, and yes is in hindsight you can say “well, gee why would one have extended Credit on that kind of story versus a real income statement.” But the reality was, at the time, the expectations which turned out in hindsight to have been faulty, weren’t necessarily viewed as being faulty at the moment. There were very smart, very credible people, who had had a great deal of success, say, in the world of venture capital who continued to buy into some of these stories. Some of them true, some of them not true. And so I think the same problem that the academic literature has in terms of defining a real Bubble – where fundamentals and prices are dramatically disconnected – I think the reality is that the individuals involved at the time have the same problem. All the more reason to think about having, if you will, a strong, resilient and successful economy and good policy to offset some of the changes that might occur.”
My comment: The Fed should not mistake “a strong, resilient and successful economy” for the perpetuation of a Bubble economy. And to focus on “venture capitalists” as the commanding source of Credit for the telecom/tech Bubble is poor analysis. What about the late-nineties’ surge in junk bond issuance, rapid corporate debt growth, unprecedented syndicated bank lending (fodder for collateralized debt obligations and other “structured products”) - all part of the estimated Trillion dollar global telecom debt debacle? Let’s also not forget the underlying speculative leveraging in tech/telecom related instruments – stocks, junk debt, CDOs, “special purpose vehicles,” etc. – that played an instrumental role in the tech sector liquidity onslaught. What about the hedge funds and proprietary trading operations that placed big speculative tech bets? The derivatives markets were directly instrumental in fostering leveraging – hence liquidity creation – that inundated the marketplace. And, importantly, there were indirect sources of Credit creation – mortgage debt in particular and MBS/agency securities leveraging – that were the underlying source of liquidity for the purchase of equities and mutual fund shares that also directed liquidity straight to the Bubbling technology sector.
And I do not believe that superior “risk management,” per se, has spared the U.S. financial sector from a Japanese-style bust. Rather, a significant portion of tech Bubble Credit exposure had been shifted to non-traditional, market-based non-bank entities (CDOs, derivatives, hedge funds, off-balance sheet entities, etc.). And while some huge losses were suffered, the Fed-orchestrated collapse in yields (spike in fixed-income prices) and ultra-low borrowing costs mitigated the impact of these (largely isolated) losses for most players. The tech/telecom Bubble had burst, but the progenitor Credit Bubble was empowered to nurture the bond, mortgage finance, and leveraged speculating Bubbles to blow-off extremes. Contemporary finance provided the Fed with the extraordinary capacity to perpetuate asset Bubbles – hence Credit and liquidity excess - and the greater the securities and real estate Bubbles expanded, the more inconsequential became tech and telecom. The tech bust was “monetized,” a process that will work only for as long as a new larger Bubble can inflate sufficiently to supplant the one deflating.
From Dow Jones: “The groundwork of prudent bank regulation, price-restraining monetary policy and fiscal health was essential to the U.S. economy’s quick recovery from the 2001 recession, a top Federal Reserve policymaker said… ‘Relative to other recessions, this recession was shallow and did not appear to impart an unusual drag on investment, despite the sharp asset-price correction’ in the stock market, Fed Vice Chairman Roger Ferguson said… The Fed vice chairman said the advance measures of U.S. banking regulation, anti-inflationary monetary policy and balanced government budgets insulated the economy from the effects of a recession preceded by a severe equity-market correction. By comparison Japan still hasn’t recovered fully from three recessions beginning in 1992, when the country went through an asset-price correction following a sharp climb in equity and real estate prices in the 1980s. The Japanese recoveries have been incomplete largely because of insufficient monetary policy measures and inadequate regulation of the country’s troubled banks, Ferguson said. In the U.S., the savings and loan crisis, the international debt crisis and the Basel I capital standards agreement during the 1980s put banking regulation on a solid footing by the mid-1990s, he said. ‘Prudential regulation coupled with good risk management meant that financial firms limited their exposure to risk during the boom years of the 1990s,’ he said. ‘Despite the recession, banks remained well capitalized, and their strength eliminated the threat of a vicious credit crunch or the risk of fragility in the system.’”
My comment: In an effort to garner asset Bubble insights from historical experience, Mr. Ferguson’s paper compares three post-asset boom economic downturns: the 1974 recession in the U.K., Japan in 1992, and the U.S.’s 2002 recession. While I don’t profess expertise with respect to the U.K. economy during the seventies, I find comparing 1992 Japan to 2002 United States essentially Fruitless Apples vs. Oranges. Collapsing real estate values were forcing the entire Japanese Credit system to its knees, while Japanese consumers were retrenching and increasing their already sizable pool of savings. The U.S. in 2002? Well, it is worth recalling that Total (financial and non-financial) Credit market borrowings increased by $2.16 Trillion (21% of GDP) during 2002. This was record Total Credit Growth, and up 7.4% for the year (an increase from 2001’s 7.2% and 2000’s 6.7% growth). Non-financial sector debt expanded a record $1.32 Trillion (up from 2001’s $1.12TN, 2000’s $850bn, and 1999’s $1.07TN). The year’s 6.8% increase in non-financial borrowings was the strongest since 1999’s 6.9%. Financial sector borrowings expanded a robust 9.0%, down only somewhat from 2001’s 10.8%. GSE assets increased 10% during the year to $2.55 Trillion. Residential mortgage debt increased 12% during 2002, with total mortgage debt growth of $678 billion, up 32% from 2001’s record (annual mortgage debt growth averaged $286 billion during the preceding 10 years). U.S. Retail Sales were up 3.7% during 2002. And examining the household balance sheet, Tangible Assets actually increased $1.4 Trillion (8.5%) during the year to $18.2 Trillion, offsetting much of the decline in stock prices. That the U.S. corporate bond market was faltering in the autumn of 2002 - in the face of robust (albeit unbalanced) system Credit expansion - is indicative of underlying acute financial fragility.
The fact of the matter is that 2002 was not a post-Bubble environment at all. Indeed, the bursting of the tech/telecom Bubble proved an instrumental development for the blow-off stage of myriad Bubbles – most notably the Mortgage Finance Bubble and the Bubble of Leveraged Speculation - a process that is still very much in play. And to credit prudent regulation, anti-inflationary monetary policy and balanced government budgets is dangerously inaccurate analysis. Ironically, Bubbles are today perpetuated only by imprudent regulation, inflationary monetary policy, and unprecedented fiscal and current account deficits.
Excerpts from Mr. Ferguson’s “Recessions and Recoveries Associated with
Asset-Price Movements.”
“The word bubble is sometimes employed to describe any quick and large increase in asset prices, but a more precise definition would associate bubbles with only those increases in asset prices that are not due to economic fundamentals. Under such a definition, a bubble is present when investors buy assets at prices above their fundamental values in the expectation of being able to sell them at even higher prices in the future. To be sure, such departures from fundamentals may start small, but over time they could grow explosively. The fundamental price of an asset typically is defined in terms of the discounted present value of the income stream or equivalent services that the asset is expected to provide over time. For stock prices, for example, this is the present discounted value of dividends; for real estate, it is the discounted value of the rents or services that are expected to accrue to the owner over time. In theory, the existence of bubbles, defined in this way, is possible in standard asset-pricing models and may even be consistent with rational, profit-maximizing behavior.”
My comment: Any definition of a Bubble that relies on “economic fundamentals” or “fundamental values” will prove worthless in practice and worse for developing a sound analytical framework. The focus must be on underlying Credit growth and speculation. What are the monetary sources for the price gains, and are they sustainable? What are the broader influences from price inflation on the nature of spending, investing, speculating? To what extent is price inflation inciting Credit and speculative excess? And to what degree is this Credit expansion impacting/distorting “fundamentals” (i.e. industry cash flow and profits, personal income growth, Credit Availability, Credit losses, lending margins, trading profits, government revenues, liquidity, etc.), thereby fostering self-reinforcing lending, asset inflation, spending and speculation?
Ferguson: “Ascertaining the existence of bubbles in practice is a very different matter. An immediate difficulty is that the theoretical notion of the fundamental price does not have an easily measured empirical counterpart. In part as a result of this measurement problem, statistical tests using historical data cannot easily distinguish bubbles from failures of the standard asset-pricing model in some other dimensions, or no failure of the model at all. Indeed, for every study of historical data that finds evidence of a bubble, often another shows that the findings could be explained by an alternative specification of the fundamentals in the absence of bubbles. That is, even with the benefit of hindsight, statistical tests attempting to confirm the existence of bubbles in historical episodes can remain inconclusive.”
“Of greater relevance for policy discussions, however, is not whether economists can identify a bubble long after it occurs, but whether the presence of a bubble could be detected in real time, when the information might be useful for policy decisions. Unfortunately, detection of a bubble, which is problematic even ex-post, is an even more formidable task and arguably becomes virtually impossible in real time. Indeed, in real time, it is not uncommon for economists and market participants to fail to recognize important shifts in underlying trends that may subsequently be viewed as the source of significant changes in market fundamentals. Current statistical methods are simply not up to the task of ‘detecting’ asset-price bubbles, especially not in real time, when it matters most. ‘Detecting’ a bubble appears to require judgment based on scant evidence. It entails asserting knowledge of the fundamental value of the assets in question. Unsurprisingly, central bankers are not comfortable making such a judgment call. Inevitably, a central bank claiming to detect a bubble would be asked to explain why it was willing to trust its own judgment over that of investors with perhaps many billions of dollars on the line.”
My comment: The notion that it becomes virtually impossible to identify a Bubble in real time is Fed Fallacy. While it may be virtually impossible to forecast the scope and life of a Bubble, it is possible to identify evidence and characteristics of Bubble development. “Scant evidence”? The tech/telecom Bubble was conspicuous at the time, and today’s Mortgage Finance and Leveraged Speculation Bubbles are even more so. As for mortgage finance, total Mortgage Debt has almost doubled in only 7 years. Home equity lending has exploded, as has subprime. Bank real estate lending increased 14% during the past 12 months, with three-year gains of 44%. Prudent regulation in real estate lending? There are now spectacular housing Bubbles in California, along the East Coast (including our nation’s capital!) and elsewhere, while national average prices are surging.
We are witnessing a proliferation of no down-payment, interest only, adjustable-rate, no-documentation, and teaser-rate loans. There are tens of thousands of mortgage brokers extending Credit with little concern for the long-term soundness of the mortgage. Credit standards have never been easier. Many are borrowing against 401k plans to make down payments. More borrow against inflated home equity for consumption and to acquire financial assets. Housing sales and construction are easily at all-time records. Speculative buying is unparalleled – second homes, rentals, vacation condos and time-share units. On the financial side, there are highly leveraged holdings of mortgage-backed and agency securities. There is a huge boom in related derivative positions. Various types of institutions have become enamored with lending, investing, and speculating in mortgage securities and instruments. REITs are booming. And, importantly, the Wall Street structured finance machine is working overtime to transform risky mortgage loans into enticing high-yield structured products, just as it did with tech/telecom debt in the late nineties. Identifying Bubbles “requires judgment based on scant evidence”? That is simply not accurate.
“The Japanese economy saw rapidly increasing equity and real estate prices during the 1980s, a remarkably long period of stability and prosperity.”
My comment: The Fed must be able to distinguish an unsound Bubble environment from “a remarkably long period of stability and prosperity,” at least in hindsight.
“The bursting of the bubble importantly shaped subsequent developments in this case. The asset-price collapse hit the Japanese banking system hard, eroding bank capital. The ensuing disintermediation subsequently proved an important impediment to the economy´s recovery. However, the extent of the problem was not fully appreciated at the time by policymakers. Despite steps toward an expansionary policy, the monetary easing of the early 1990s was insufficient to mitigate the underlying weakness during the expansion from 1994 to 1996. The continued fragility of the financial system arguably left the Japanese economy especially vulnerable to additional disturbances that could have otherwise been easily weathered. An economic crisis in Southeast Asia, coupled with a previously planned increase in consumption taxes, resulted in a larger-than-anticipated drag on domestic demand and set the stage for the recession that started in 1997. Following a brief recovery, monetary policy was tightened in 2000, and the third recession in a decade followed soon after.”
“The Japanese experience offers a reminder of the importance of monitoring the health of the financial system and the need to be especially wary of signs of fragility following a period of sharp asset-price declines. It also serves to highlight how the behavior of the banking system during the asset-price run-up may influence subsequent outcomes. Lastly, it points to the potentially crucial role played by fiscal and monetary policies in recoveries following asset-price-bust recessions.”
“Why was the 2001 recession relatively short and shallow even though the preceding swing in asset prices was so severe? In my opinion, two reasons stand out. The first regards the health of the financial sector. During the 1980s and early 1990s, the U.S. banking sector faced a succession of challenges: the savings and loan crisis of the early 1980s, the international debt crisis of the mid-1980s, waves of bank failures and consolidation, and the need to build capital in response to the adoption of the Basel I standards in 1988. But by the mid-1990s the banking sector had regained a solid footing, and regulators were careful to keep it that way. Prudential regulation coupled with good risk management meant that financial firms limited their exposure to risk during the boom years of the late 1990s. This approach paid off handsomely when the asset-price break occurred. Despite the recession, banks remained well capitalized, and their strength eliminated the threat of a vicious credit crunch or the risk of fragility in the system.”
“As a result, the elements that appear to have been so detrimental for the recovery of the Japanese economy during the 1990s were absent during this episode. Following the ‘bursting of the bubble’ in Japan, the banking system found itself holding a substantial amount of bad loans. And, as already seen, the woes of the banking system turned into a recessionary force in itself, curtailing the recovery. This comparison points to a useful policy lesson: A healthy financial sector and strong prudential regulation during an asset-price boom offer valuable insurance in case the boom turns to bust with an asset-price break.”
“The second, and perhaps equally important, reason that the recent U.S. episode was unusually benign was, in my view, the quick response of policy. Both fiscal and monetary policy were eased quickly and effectively in this episode. The Federal Reserve cut the federal funds rate rapidly to create monetary accommodation and maintained conditions of substantial monetary policy ease for a considerable period well into the expansion. As well, the Administration and the Congress took quick steps early in the recession to provide fiscal stimulus that helped to prop up aggregate demand.”
Placing the policy response in its proper historical context may be critical for drawing the appropriate policy lessons for the future. Countercyclical fiscal and monetary policies are unlikely to have been as swift and strong during 2001 had earlier policies not set the stage for such action. On the fiscal side, the budgetary prudence of the 1990s yielded comfortable surpluses at the onset of the 2001 recession that facilitated the large fiscal policy easing. And on the monetary side, the successful completion of the last stage on the long path to price stability during the 1990s allowed substantial easing in response to the downturn. As policymakers stressed repeatedly, the prevalence of low- and well-anchored inflation expectations ultimately facilitates pursuit of such countercyclical policy. A clear lesson emerges from this experience for policy over the long haul. By pursuing fiscal prudence and price stability during booms, policymakers greatly enhance their ability to take swift, effective countercyclical action when it is needed most.”
My concluding comments: The nature of contemporary finance dictates that central banks must be especially on guard and ready to ward off Credit excess, non-traditional inflation and Bubbles. The backdrop beckons for central banker diligence and caution. Free-wheeling Credit systems are unconstrained in their capacity to create inexpensive and abundant liquidity, while financial systems have a strong predilection toward asset-based lending. A massive global pool of vacillating speculative finance has evolved. Meanwhile, central bankers have relegated themselves to the only line of defense against asset inflation, destabilizing speculation, and Bubbles. Yet they have no sound analytical framework for discharging this most important responsibility.
Amazingly, the Fed has learned exactly the wrong lessons from the Japanese experience. Rather than moving early to quell lending and speculating impulses before Bubbles become unwieldy and a great risk to the financial system and economy, the Fed has convinced itself to move immediately and aggressively to ensure the avoidance of post-Bubble fallout. No good will come from Bubble Perpetuation, Evolution and Dispersion. Today’s paramount issue for monetary policymaking is to be able to differentiate stimulation/stabilization in a post-Bubble environment from nurturing and supporting unsustainable/destabilizing asset inflation and Bubble dynamics. This is a most challenging endeavor, one made insurmountable by the Fed’s misguided analytical framework.
[link to www.prudentbear.com]
[link to freewordofgod.yuku.com] |
| Anonymous Coward
User ID: 855
1/18/2005 11:23 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
SO I should take out of my 401K, and sell all my stocks now? |
| Anonymous Coward
User ID: 283
1/18/2005 11:43 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
If FHL(C) knows as much about the stock market as he knows about paleontology, investors can be mighty confident. |
| Anonymous Coward
User ID: 7954
1/18/2005 2:40 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
 |
| FHL(C)
User ID: 1202
1/23/2005 11:22 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Fair use:
BUY IT
The Book
Here´s the dirty little secret that neither George W. Bush nor Congress is willing to confront -- that America´s reckless spending, disastrous deficits, and exploding debt are speeding our great nation to financial ruin.
Imagine a world in which you lose your job because your company goes under, your retirement money disappears, the value of your home tumbles overnight, your bank account stops allowing cash withdrawals, and your ATM card is cancelled. The price of groceries has risen so fast that you don´t have the money to pay for them at the checkout counter . . . and the country is bankrupt.
That is exactly the future that economist Gerald J. Swanson sees America hurtling toward -- unless we rein in our country´s reckless spending. In America The Broke, Swanson, coauthor of the runaway New York Times bestseller Bankruptcy 1995, argues that the United States is on the brink of financial collapse. Thanks to George W. Bush´s two tax cuts, the White House and Congress´s escalation of domestic spending, two wars, and an economic recession, what was a $200 billion annual surplus three years ago under Bill Clinton has become a river of red ink.
The White House´s official projection for 2004 is $521 billion -- the largest deficit in U.S. history. With a national debt spiraling upward of $7.3 trillion, a huge trade deficit, and personal debt at an all-time high, we are standing at the edge of a financial abyss that could undermine the financial security of our families and our children.
"Deficits don´t matter," claim Vice President Dick Cheney and other members of the Bush administration. But the facts revealed in America The Broke paint an alarming picture.
Next year´s projected deficit will exceed the amount all our cities spend on police, fire protection, medical care, and every other civil service in an entire year. It is more than we could save from abolishing Medicare and Medicaid completely.
The real deficit -- the deficit the government doesn´t want you to know about -- including the hidden funds we "borrow" from Social Security, is nearly $1 trillion.
Rising interest rates alone could trigger staggering payments on our skyrocketing debt, soaking up every dollar the government takes in, leaving America bankrupt.
What does this mean for you and me? If the dollar goes into free fall, banks could close, businesses go bankrupt, real estate values crumble, and middle-class families lose everything they own.
But there is hope. We can save ourselves -- if we demand that our political leaders act now to eliminate the deficit and reduce the debt. In a year of deficit denial, America The Broke is a critical wake-up call regarding our government´s reckless deficit spending -- as well as a blueprint for rescuing our economy and saving our country.
[link to www.americathebroke.com]
[link to freewordofgod.yuku.com] |
| .
User ID: 4773
1/24/2005 5:37 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
I place this here with thanks to the aussie.
Look at your Social Security folks, this is alarming!!!, sorry about long thread, but worth it.
This article appears in the January 28, 2005 issue of Executive Intelligence Review.
Cato Institute: Anti-Capitalist Clique
Leads the Attack on Social Security
by Richard Freeman
No organization is more responsible for the forced-march drive to privatize Social Security—stealing trillions of dollars of its funds for Wall Street accounts—than the Cato Institute, a multi-million dollar Washington, D.C. think tank. During the past 20 years, Cato has had more than a quarter of a billion dollars lavished on it in contributions by the most powerful Wall Street banks, and largest right-wing think tanks—led by the ultra-right-wing Koch group of foundations. Cato has spent this money on a host of projects intended to destroy the sovereign nation-state and implement fascist economic austerity. But the lion´s share has gone into the privatization of Social Security.
Since its founding in 1977 by Ed Crane, currently its President, and Charles G. Koch, the heir of an oil and energy fortune who is a leading figure of the Mont Pelerin Society, Cato has methodically built up a far-flung network to propagandize for, and enact privatization. Some of that network is hidden, just out of public view; some is public, but the average observer would not know it belonged to Cato—which designed it that way.
A Commission To Steal
Take, for example, President Bush´s misnamed Commission to Strengthen Social Security (CSSS), formed in 2001. Its December 2001 final report called for Wall Street-administered individual accounts outside traditional Social Security, and for Social Security retiree benefit cuts ranging from 10-45%. Cato ran the Commission, staffed it, and wrote some of its worst recommendations. But the CSSS was presented to the public as a bipartisan, independent commission acting on behalf of the President. Or consider the "constituency groups" clamoring for privatization: the Alliance for Retirement Worker Security; For Our Grandchildren; the United Seniors Association, etc. These were all directly created by Cato; and members of their boards of directors, and their senior staff, are Cato members or alumni.
There is not a single major policy statement or strategic decision of the pro-privatization forces that is not made by Cato and a small coterie of closely interlinked groups: Freedomworks; the Club for Growth; the Hoover Institution; the Institute for Policy Initiatives; and the Americans for Tax Reform. It is a single coordinated apparatus, with interchangeable personnel—all funded by the same sources, all reading from the same script. Take Peter Ferrara, who for a long time directed and wrote extensively on Social Security policy for the Cato Institute. Ferrara was farmed out, holding the title either of director or senior policy advisor on Social Security for the Club of Growth, the Americans for Tax Reform, and the Institute for Policy Innovation. Same person, four different hats.
EIR has called this network Draculas from a common crypt. But among them, Cato is primus inter pares.
Cato and its sister organization, the Institute for Policy Innovation, have written legislation introduced into Congress, calling for the diversion into an Individual Account of the full 6.2% payroll tax that a worker now pays into the Social Security Trust Fund. This Individual Account would provide (millionsof dollars) that Wall Street could use to save its endangered position. The world financial system is an advanced phase of disintegration, with crises in the derivatives market, Fannie Mae- and Freddie Mac-issued housing paper, the stock market, and so on. Bankers whose power relies on this failing financial system, are desperate to get their hands on a large stream of money to prop it up. The largest steady stream of cash is the U.S. Social Security system. The bankers´ problem is that the money is not theirs, and legally, they can not get their hands onto a penny of it. Hence the "privatization" of Social Security, on a crash basis. Their strategy is to tell whatever lie is necessary, but get the money.
The whole Cato Institute network is now thrown into this fight; and that is quite a bit.
Mont Pelerin Society and Cato´s History
To understand what Cato is, and what it can do, it is necessary to understand how and why it was formed. The commonly told tale is that Edward Crane and Charles Koch were active in Libertarian politics in California, and decided in 1977 that a new organization was needed. But that leaves out most of the real story, of its creation by the anti-American System and pro-feudalist Mont Pelerin Society.
For this we take a trip to Mont Pelerin, near Vevey on the far side of Lake Geneva, Switzerland. In April, 1947, at the Hotel du Parc, a group of 36 men gathered. They included Friedrich A. von Hayek, the head of the reductionist Austrian School of Economics; Ludwig von Mises, another member of the Austrian School; monetarist Milton Friedman; radical Aristotelian philosopher Karl Popper; and the slavishly pro-British American "liberal" journalist Walter Lippmann. Most of the 36 were fanatical ideologues. But representatives of the higher layers of the wealthy oligarchical families, for whom these ideologues served as "Leporellos," were there, including Sir John Clapham, long time official, and official historian of the Bank of England, who had served as President of Britain´s oligarchical power center, the Royal Society. Not present at the first meeting, but asserting themselves at subsequent meetings were Otto von Hapsburg, pretender to the throne of the Hapsburg empire, and Max von Thurn, of the immensely wealthy, Bavarian-based Thurn und Taxis family. Bankers of the City of London and Wall Street would soon appear.
The ideology of Mont Pelerin was that of radical free-trade, unrestricted free-market speculation, monetarism (financial aggregates, not men, rule society), deregulation, and so on. This witches brew was called "liberty." They reacted in fear and loathing against the General Welfare clause of the United States Constitution and Alexander Hamilton´s American System of Economics. They rejected the Common Good, preferring the rats´ nest of pleasure/pain-based radical "individual self-interest." The 1947 meeting occurred just two years after the death of U.S. President Franklin Roosevelt. The Mont Pelerinites viscerally hated Roosevelt´s towering General Welfare achievements, the pro-development Bretton Woods fixed exchange-rate international monetary system, and among his notable domestic accomplishments, the Social Security system. This, they vowed, they would tear down.
The wealthy oligarchical families that had directed the Synarchist/Nazi movement from 1921-45—and were defeated by Roosevelt—saw in the Mont Pelerin Society the instrument to re-establish that program internationally. The Mont Pelerin Society´s economics was no different than that of the Bank for International Settlements, Hitler, or Mussolini.
Take the case of Friedrich von Hayek. In the 1920s, von Hayek concocted a theory of "maladjustments" in production, which was extended into inflation and monetary quantities as well. Based on this wacko theory, in the 1930s, Von Hayek assessed that the ongoing 1929-32 Depression had been caused by a "maladjustment in production," and the collapse had to run its "natural free-market course." The evidence showed that this caused destruction of production, the labor force, and the fabric of society. But Von Hayek denounced those who would use monetary expansion or deficit spending to halt the slide. Von Hayek´s only recommended program was to "bring labor into balance," which was his term for further gouging living standards. But this was Hitler´s program too. In fact, Von Hayek´s shrill demand that the collapse be allowed to hit rock bottom, was fulfilled in the social dislocation and impoverishment which created the recruiting ground for Hitler´s Nazis.
Von Hayek was the first President of the Mont Pelerin Society, from 1947-61. The Society realized that it needed to create "satellite think-tanks" to do its work. It created the Institute for Economic Affairs in London in 1955, directed by Lord Harris and Sir Anthony Fisher. In 1977, it supervised the creation of the Cato Institute.
Cato is merely an operational arm of Mont Pelerin. The Cato Institute´s headquarters at 1000 Massachusetts Avenue in Washington, D.C., is a virtual shrine to Friedrich Von Hayek. The main gathering center is the Friedrich Hayek auditorium, and the walls are festooned with von Hayek´s grim, soulless visage. Fourteen members of the Mont Pelerin Society serve in core positions at the Cato Institute, either as members of Cato´s Board of Directors, as Cato Adjunct Scholars or Fellows, or as members of the editorial board of The Cato Journal (see box). The Cato Institute carries out the fascist policies of the Mont Pelerin Society.
Cato promotes radical globalization (it helped sponsor NAFTA), extreme speculation (Theodore Frostmann, a Cato board member, is one of america´s biggest Leveraged Buy-Out pirates), deregulation, drug legalization, and economic austerity.
"Economic hit-man" George Shultz, because of his direction of the Mont Pelerin Society´s Chicago Boys, has special oversight over the Cato Institute. In 1995, Shultz´s network made his protected asset, the fascist José Piñera who privatized Chile´s Social Security system, the co-chairman of Cato´s Project on Social Security Privatization. Its goal was nothing less than imposing the fascist Chilean model upon the United States.
Building Up the Network
Immediately after its creation, the Cato Institute began fulfilling Mont Pelerin´s special purpose of assailing Social Security. By the early 1990s, Cato would be Wall Street´s command-and-control center for privatization. The think-tank worked from a template with three principal points. First, claim that the Social Security faces an alleged imminent financing crisis, to spur action; second, claim the solution to the crisis is setting up private accounts managed by Wall Street, to be invested into the stock and other financial markets; and third, claim the government is not legally bound to honor Social Security obligations.
Already in 1980, Cato issued a 484-page book, Social Security: the Inherent Contradiction by Peter Ferrara.
At that time, the Social Security Trust Fund (formally, the Old-Age Survivors and Disability Insurance [OASDI] funds), did have a shortfall in incoming pay-ins (one that its 1935 designers had foreseen for approximately 1980), but not a crisis. In 1983, the enactmen of a payroll tax increase corrected that shortfall, and the basis was set into motion for the Social Security Trust Fund to build up a surplus. According to the 2003 report of the Board of Trustees of the Social Security Administration, following that 1983 payroll tax rise, there would not be a Social Security financing problem until 2042; the Congressional Budget Office says that that problem would not occur until 2052. Despite this undeniable reality, Cato has never ceased to shriek about a "Social Security crisis."
But what jumps out about the Cato Institute 1980 study is this striking assertion: "Under traditional principles of equity, therefore, the Social Security pact ... is unfair, immoral, fraudulent, and voidable" (emphasis added). While clearly rejecting Social Security in principle, it signals Cato´s belief that the Social Security system does not have the force of law, and the system does not have to pay its retirees their benefits. Cato "analysts" have frequently made this statement during the past five years, and officials from the Bush Administration insinuated the point during the past few months, but Cato was asserting this 25 years ago!
During the 1980s, Cato published books with such titles as Social Security: Averting the Crisis (1982). In March, 1992, it released Cato Policy Report 14, with the provocative title, "Will the Social Security System Survive till 2001?"
In 1995, Cato went into a higher gear, establishing the Project for Social Security Privatization. It brought in George Shultz´s protected asset, the butcher of Chile´s Social Security system, José Piñera, to be its co-chairman. In 1973, Shultz´s network had installed General Pinochet as dictator of Chile in a coup-massacre; and in 1981, under this condition, Piñera had privatized the nation´s Social Security system, which (see EIR, Jan. 21) banks have since looted. Cato called on Piñera to replicate that in the United States. Showing the bankers´ strong hand, Cato appointed as the Project´s other co-chairman William Shipman, who has for many decades been a top officer of the Boston-based aristocratic State Street Bank, which is part of what is called the "Boston Vault" power structure.
The Privatization Project´s 20-member "Advisory Committee," dominated by bankers and speculators, has a prominent Chilean connection. Conspicuous is Arnold Harberger, one of the capos of George Shultz´s Chicago Boys, who regularly flew to and periodically lived in Chile during the 1970s, to give direction to the economic policy of Augusto Pinochet´s dictatorship. In 1981, Harberger personally oversaw the privatization of Chile´s Social Security system implemented by Piñera.
Wall Street´s claim that it has no vested interest in privatization is shattered merely by the "Who´s Who" list of elite financial institutions which, during the past decade, have poured big bucks into the Cato Institute, and more especially, its Project on Social Security Privatization: J.P. Morgan Chase; Citicorp/Salomon Brothers; Fidelity Investments (mutual funds); the American International Insurance group of dirty money-linked Maurice "Hank" Greenberg; American Express; Prudential Securities; the Chicago Mercantile Exchange; the Bond Market Association; the Economist of London; and others. According to a 2004 study by University of Chicago Business School Professor Austan Goolsbee, financial firms that manage the workers´ Individual Accounts that would be set up by privatization, could rip off management and other fees equal to 15-25% of the value of the accounts—an immense windfall.
The Bush-Cheney Trojan Horse
In November 2000, the U.S. Supreme Court had hardly decided by a 5-4 vote to declare George W. Bush the winner of the Presidential election, when the network of the Mont Pelerin Society and Wall Street firms backing the Cato Privatization Project descended on the White House. They told Bush he needed to set up a Presidential Commission on Social Security, because the system was in crisis. Bush was compliant. In the first months of 2001, he announced the President´s Commission to Strengthen Social Security.
Cato made the President´s Commission a springboard for its own agenda. The Commission would have 16 members, two of whom—former New York Sen. Patrick Moynihan, and AOL Chief Operating Officer Richard Parsons—were co-chairman. Three members of the Cato Institute were made Commission members: two members of Cato´s Project on Social Security Privatization, Sam Beard and Tim Penny; and Leanne Abdnor who had been the Cato Institute´s Director of External Affairs. This gave Cato nearly 20% of the membership, but its influence was greatly amplified because some Commission members, like Social Security guru Estelle James of the World Bank, had worked on joint ventures with Cato for years.
But that was just the start. Much of the research and drafting for the Commission was done by its staff, and its leading staff member was Andrew Biggs, who happened to be the Cato Institute´s lead Social Security analyst. Randy Clerihue, another Cato Institute member, was made the spokesman for the Commission to Strengthen Social Security. During 2001, according to a Cato Institute report, Cato´s Privatization Project distributed pro-privatization "briefing books to members of the President´s Commission to Strengthen Social Security."
Should anyone be surprised that in its December 2001 final report, the President´s Commission, so stacked with Cato members, warned of a dangerous crisis, and came out recommending privatization? All 16 members of the Commission favored some form of privatization going in; but some members were less aggressive than Cato, which created some friction. The Commission´s Model 2 plan (the principal plan) recommended that 2%, roughly one-third of the 6.2% payroll tax paid to the Social Security system, should instead be diverted into Individual Accounts managed by Wall Street (there would be a $1,000/year investment limit for each Account). This money would be stuffed into the collapsing stock and other financial markets.
The Commission´s other notable proposal is austerity, and has become notorious: It recommended a change in the indexing of initial Social Security benefits from the wage-based system currently in use (consistently replacing just under 40% of a retiree´s career-average wage), to a consumer-price index-based system, which change would slash retiree benefits over several decades down to about 20% of that average wage. Such deep cuts would be necessary to compensate for the shortfall in the Social Security system´s funds caused by diversion of a portion of payroll taxes out of the fund, and into Wall Street.
For the first time in the 70-year history of Social Security, the Cato Institute had gotten a sitting Presidential Commission on that subject to endorse privatization.
But the onrushing financial collapse left Wall Street needing, and demanding more. On Feb. 17, 2004, the Cato Institute´s Michael Tanner, executive director of the Privatization Project headed by Piñera, released the Cato report entitled, "The 6.2 Percent Solution: A Plan for Reforming Social Security." This presents Cato´s maximalist demands. The report asserted that all of the 6.2% workers´ payroll tax should be diverted into workers´ Individual Accounts, rather than into the Social Security system, and thence into the stock market.
The Cato "6.2%" plan is premised on a sharp reduction of benefits that the Social Security system would itself pay out to retirees, although for deceptive reasons, the plan doesn´t go into detail.
Finally, the plan drops the bomb of default. Tanner states that according to his reading of the law, under Social Security, "workers have no legally binding contractual or property right to their Social Security benefits, and those benefits can be changed, cut, or even taken away at any time" (emphasis added). Tanner is cold-bloodedly arguing that the government can default on the $1.5 trillion in Treasury bonds held by the Social Security Trust Fund (Treasuries securities are the way that the Trust Fund holds its surplus), and that the U.S. government can severely cut or repudiate its Social Security benefit obligations to millions of elderly citizens. Immediately after Bush´s re-election, Bush Administration officials started regurgitating Tanner´s treacherous argument. Tanner et al. are rabidly fighting to get the Bush Administration to adopt Cato´s maximalist policy of diverting the full 6.2% of a worker´s payroll tax into Individual Accounts.
Cato Gestapo Operations
In preparation to ram Social Security through during the Bush Administration, Cato recognized that it needed to create a string of captive front organizations, staffed and run by the same shop-worn crew of privatizers, to claim "grassroots support." Cato has poured big money into these fronts, and spread them outwards. This is "popular support" a mile wide, and a millimeter deep, and one can see how some of the widely cited grassroots groups really operate. As well, Cato made a power grab to take over the Social Security Administration itself, so that it could radiate its lies from inside.
Of the many cases of this, two examples are sufficent to make the point: Leanne Abdnor and Andrew Biggs.
Leanne Abdnor should be called the Madame of Cato´s stringers. From 1995 through 1998, Abdnor, as Cato Institute´s Vice President for External Affairs, ran the campaign to try to shove Social Security privatization through Congress, or as Cato put it, "she educated Congressional members and staff on the virtues of personal retirement accounts in Social Security reform."
In 1998-99, Cato launched Operation Front Group, and deployed Abdnor to set up the Alliance for Worker Retirement Security (AWRS), an umbrella group that drew on money and office space from the National Association of Manufacturers (NAM), and had approximately 35 other groups as participants. To push Cato´s perspective, Abdnor was made AWRS´s Executive Director. While campaigning for President Clinton´s removal from office, on Sept. 27, 1999, AWRS director Abdnor shrieked, "President Clinton knows as well as anyone that the Social Security Trust Fund is a fraud, a pile of IOUs that amounts to nothing more than a claim on the income taxes of the future" (emphasis added).
The Social Security Trust Fund, in fact, holds Special Obligation Treasury Bonds of the United States. A fraud? Would one want to publish that statement today in Chinese and Japanese, perhaps, and speculate on the reaction in U.S. Treasury debt?
In 2001, Abdnor was selected as one of the members of the Cato Institute contingent, on the President´s Commission on Strengthening SociaOBl Security.
In 2001-02, Cato deployed Abdnor again, this time to manufacture the For Our Grandchildren (FOG) organization, where she is President. This group parades as a "grass roots organization" of grandparents who are concerned that their grandchildren won´t get Social Security, and targets propaganda at young workers. FOG uses the buzz-slogan, "Strip power away from Washington and return it to the individuals where it belongs." In addition to Abdnor´s presidency, the chairman of FOG is Tim Penny, a Cato Institute Senior Fellow, and member of the Advisory Committee member of Cato´s Privatization Project (and of President Bush´s Commission). Hilariously, among the more than half-dozen Cato members who serve on FOG´s National Advisory Council is that venerable American grandfather, Jose Piñera, the privatizer of butchered Chile.
Abdnor is naturally an Advisory Committee member of Cato´s Privatization Project. Dorcas Hardy, former Commissioner of Social Security, a speculator who sits on the board of the Options Clearing Corporation, is also an Advisor to Cato´s Privatization Project. Hardy is one of the chief organizers and leaders of United Seniors Association, Cato´s main elderly "constituency group" for privatization.
The second example is the shocking scandal of Andrew Biggs. The 37-year old Biggs, a graduate of the London School of Economics, was the Cato Institute´s senior Social Security analyst. In 2001, Cato made Biggs the lead researcher for the President´s official Commission. In May 2003, Biggs was promoted to Associate Commissioner for Retirement Policy at the U.S. Social Security Administration (SSA), part of Cato´s coup-effort to take over the whole agency. Biggs sits just below the Deputy Commissioner who runs the Office of Policy, who "is responsible for major activities in the areas of strategic policy planning, policy research, and evaluation," as well as all statistical analysis, according to the SSA.
Biggs is running a Gestapo operation inside the SSA. Last year, Biggs wrote a "policy brief" internal document that mandates that all Social Security managers are required to present the idea "that Social Security faces dire financial problems requiring immediate action," in the words of the Jan. 15, 2004 New York Times. It would require the SSA to "insert solvency messages in all Social Security publications"; that is, to say that Social Security is in crisis. It would make Social Security managers spread Wall Street-lies in every public forum, as well as at non-traditional sites like farmers´ markets and "big box retail stores." Biggs is illegally using money from the Social Security Trust for this campaign.
This is but a small sampling of the myriad ways by which Cato mingles manufactured crisis, and manufactured "grassroots" support, to spread its campaign.
The Guiding Role of George Shultz
The oligarchy finds Cato Institute an indispensable instrument to "intelligently handle" many of its other major designs to tear down the nation-state.
One example is drug legalization. On Oct. 5, 1999, at its von Hayek auditorium, the Cato Institute held a major drug policy conference, entitled, "Beyond Prohibition: an Adult Approach to Drug Policies in the 21st Century," that carried the themes that drugs should be decriminalized, and that the War on Drugs was a "$50 billion waste of money." The 100 attendees featured the pro-dope denizens of the drug world: Kevin Zeese, the 1980s head of the National Organization for Reform of Marijuana Laws (NORML) and Ethan Nadelman, the head of the George Soros-funded Lindesmith Center, a leading coordinating point for decriminalization; partisans of High Times magazine, among others.
Cato was in its element. Since its inception, Cato has pushed to create a legal market for marijuana, cocaine, and heroin. Representative of this, long-time Cato Adjunct Scholar Thomas Szasz wrote Our Right to Drugs: the Case for a Free-Market in 1992, and Ceremonial Chemistry in 1974. Richard Dennis, long-standing member of Cato Institute´s board of directors and a wealthy derivatives speculator, is board member and funder of the pro-drugs Drug Policy Foundation.
Ed Crane, Cato´s President, speaking at Cato´s Oct. 5, 1999 conference, stated, "There are reasons ... why some of the most prominent critics of the War on Drugs come from libertarian and conservative backgrounds. People like William F. Buckley, George Shultz ... Milton Friedman.... They understand what the great Nobel Laureate F.A. Hayek called the fatal conceit.... They understand the powerful forces of supply and demand."
For those Mont Pelerin Society oligarchics, George Shultz directs the drive toward Social Security privatization, and broader fascist looting of the economy´s and the labor force´s funds. Shultz, with Henry Kissinger, authored Pinochet´s Chile dictatorship in 1973, and oversaw that country´s Social Security privatization in 1981, through the Chicago Boys networks that he controlled. He tried to bring the "Chile model" into the United States as early as 1981, in the Ronald Reagan Administration (see EIR, Jan. 21).
From August 1971 to 1974, Shultz was the key figure in the Nixon Administration who blew up Franklin Roosevelt´s Bretton Woods monetary system, and brought in globalization, "free-floating currency exchange rates."
Ed Crane´s praise of Shultz at the October 1999 Cato pro-drug legalization conference, merely reflects Shultz´s long-time broad oversight and influence over Cato. When Cato celebrated its 25th anniversary at a 2,000-person black-tie gala at the Washington Hilton Hotel in 2002, Shultz was one of the luminaries selected to give Cato congratulations on a special video tape, stating: "Keep doing what you´re doing."
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| Anonymous Coward
User ID: 1488
1/24/2005 5:55 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Makes one´s stomach churn that EIR article, wow!! |
| Anonymous Coward
User ID: 7421
1/24/2005 11:06 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Central banks shift reserves away from US
By Chris Giles
Published: January 24 2005 00:03 | Last updated: January 24 2005 00:03
Euro and dollarCentral banks are shifting reserves away from the US and towards the eurozone in a move that looks set to deepen the Bush administration´s difficulties in financing its ballooning current account deficit.
In actions likely to undermine the dollar´s value on currency markets, 70 per cent of central bank reserve managers said they had increased their exposure to the euro over the past two years. The majority thought eurozone money and debt markets were as attractive a destination for investment as the US.
The findings emerge from a survey of central bank reserve managers published today and conducted between September and December of last year. About 65 central banks, controlling assets worth $1,700bn, took part and the results showed a marked change in attitude over the past two years.
Any rebalancing of central bank reserve portfolios has serious implications for the global financial system as the US has become increasingly dependent on official flows of funds to finance its current account deficit, estimated at $650bn in 2004.
At the end of 2003, central banks held 70 per cent of their official reserves in dollar- denominated assets and central bank purchases of US securities had financed more than 80 per cent of the the US current account deficit in 2003.
Any reluctance to increase exposure to dollar assets further could cause the greenback to plunge on currency markets.
"The US cannot take support for the dollar for granted," said Nick Carver, one of the authors of the study conducted by Central Banking Publications, a company that specialises in reporting on central banks.
"Central banks´ enthusiasm for the dollar seem to be cooling off."
In a further worrying sign for the greenback, 47 per cent of reserve managers surveyed said they expected the growth of official reserves to slow to less than 20 per cent over the next four years. Between the end of 2000 and mid-2004, official reserves had increased by 66 per cent.
Slower reserve accumulation growth implies the supply of official finance is likely to become more limited but few expect the demand from the US for finance to slow. The consensus among economists is that the US current account deficit will increase to $694bn in 2005.
More than 90 per cent of central bank reserve managers said that the income from reserve management was "important" or "very important".
In the two years since a similar survey was conducted, reserve managers had begun to seek higher returns for the money under management.
For these managers, dollar assets have become less attractive because the fall in the dollar since 2002 has reduced the yield they received and, in some cases, has led to negative real returns.
Alan Greenspan, the chairman of the Federal Reserve, warned in November that there was a limit to the willingness of foreign governments to finance the US current account deficit.
The survey was conducted on the guarantee of anonymity for the banks involved. The 65 central banks that participated control 45 per cent of global official reserves. Individually, they had up to $250bn under management. |
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