Fictitious capital

From Wikipedia, the free encyclopedia

Part of a series on
Marxist theory
Theoretical works[show] The Communist Manifesto A Contribution to the Critique of Political Economy Das Kapital The Eighteenth Brumaire of Louis Napoleon Grundrisse The German Ideology Economic and Philosophical Manuscripts of 1844 Theses on Feuerbach
Social sciences[show] Alienation · Marx's theory of the state · Bourgeoisie Base and superstructure Class consciousness Commodity fetishism Communism · Socialism Exploitation · Human nature Ideology · Proletariat Reification · Cultural hegemony Relations of production
Economics[show] Marxian economics Scientific socialism Economic determinism Labour power · Law of value Means of production Mode of production Productive forces Surplus labour · Surplus value Transformation problem Wage labour
History[show] Marx's theory of history Historical materialism Historical determinism Anarchism and Marxism Capitalist production Class struggle Dictatorship of the proletariat Primitive capital accumulation Proletarian revolution Proletarian internationalism World revolution Stateless communism
Philosophy[show] Marxist philosophy Dialectical materialism Historical materialism Philosophy in the Soviet Union Marxist philosophy of nature Marxist humanism Marxist feminism Western Marxism Analytical Marxism Libertarian Marxism Marxist autonomism Marxist geography Marxist literary criticism Structural Marxism Post-Marxism Young Marx
People[show] Karl Marx  · Friedrich Engels Karl Kautsky  · Eduard Bernstein Georgi Plekhanov · Rosa Luxemburg Vladimir Lenin  · Joseph Stalin Leon Trotsky  · Mao Zedong Frankfurt School  · Louis Althusser Georg Lukács  · Karl Korsch Antonio Gramsci  · Antonie Pannekoek Guy Debord more
Criticism[show] Criticisms of Marxism
Categories[show] All categorised articles
Communism portal
v • d • e

Fictitious capital is a concept used by Karl Marx in his critique of political economy. It is introduced in the third volume of Capital.^[1]

Fictitious capital could be defined as a capitalisation on property ownership. Such ownership is real and legally enforced, as are the profits made from it. But the capital involved is fictitious; it is "money that is thrown into circulation as capital without any material basis in commodities or productive activity".^[2] Fictitious capital could also be defined as "tradeable paper claims to wealth", although tangible assets may themselves under certain conditions also be vastly inflated in price.^[3]

[edit] Uses of the term

Marx saw the origin of fictitious capital in the development of the credit system and the joint-stock system.

"The formation of a fictitious capital is called capitalisation."^[4] It represents a claim on property rights. Such claims can take many forms, for example, a claim on future government tax revenue or a claim issued against a commodity that remains, as yet, unsold. The stocks, shares and bonds issued by companies and traded on stock markets are also fictitious capital.

A company may raise (non-fictitious) capital by issuing stocks, shares and bonds. This capital may then be used to generate surplus value. But once this capital is set in motion, the claims held by the owners of the share certificate, etc, are simply "marketable claims to a share in future surplus value production". The stock market "is a market for fictitious capital. It is a market for the circulation of property rights as such".^[5]

Because the value of these claims does not function as capital, merely a claim on future surplus, "the capital-value of such paper is...wholly illusory... The paper serves as title of ownership which represents this capital. The stocks of railways, mines, navigation companies, and the like, represent actual capital, namely, the capital invested and functioning in such enterprises, or the amount of money advanced by the stockholders for the purpose of being used as capital in such enterprises... But this capital does not exist twice, once as the capital-value of titles of ownership (stocks) on the one hand and on the other hand as the actual capital invested, or to be invested, in those enterprises." The capital "exists only in the latter form", while the stock or share "is merely a title of ownership to a corresponding portion of the surplus-value to be realised by it".^[6]

The formation of fictitious capital is, for Marx, linked to the wider contradiction between the financial system in capitalism and its monetary basis. Marx writes: "With the development of interest-bearing capital and the credit system, all capital seems to double itself, and sometimes treble itself, by the various modes in which the same capital, or perhaps even the same claim on a debt, appears in different forms in different hands. The greater portion of this 'money-capital' is purely fictitious. All the deposits, with the exception of the reserve fund, are merely claims on the banker, which, however, never exist as deposits."^[7] The expansion of the credit system can, in periods of capitalist expansion, be beneficial for the system. But in periods of economic crisis and uncertainty, capitalists tend, Marx argues, to look to the security of the "money-commodity" (gold) as the ultimate measure of value. Marx tends to assume the convertibility of paper money into gold. However, the modern system of inconvertible paper money, backed by the authority of states, poses greater problems. Here, in periods of crisis, "the capitalist class appears to have a choice between devaluing money or commodities, between inflation or depression. In the event that monetary policy is dedicated to avoiding both, it will merely end up incurring both".^[8]

[edit] Speculation and fictitious capital

Profit can be made purely from trading in a variety of financial claims existing only on paper. This is an extreme form of the fetishism of commodities in which the underlying source of surplus-value in exploitation of labour power is disguised. Indeed, profit can be made by using only borrowed capital to engage in (speculative) trade, not backed up by any tangible asset.

The price of fictitious capital is governed by a series of complex determinants. In the first instance they are governed by the "present and anticipated future incomes to which ownership entitles the holder, capitalised at the going rate of interest".^[9] But fictitious capital is also the object of speculation. The market value of such assets can be driven up and artificially inflated, purely as a result of supply and demand factors which can themselves be manipulated for profit. The inflated value can just as rapidly be punctured if large amounts of capital are withdrawn.

[edit] Illustrations

[edit] Banking

Marx cites the case of a Mr Chapman who testified before the British Bank Acts Committee in 1857:

"though in 1857 he was himself still a magnate on the money market, [Chapman] complained bitterly that there were several large money capitalists in London who were strong enough to bring the entire money market into disorder at a given moment and in this way fleece the smaller money dealers most shamelessly. There were supposed to be several great sharks of this kind who could significantly intensify a difficult situation by selling one or two million pounds worth of Consols and in this way taking an equivalent sum of banknotes (and thereby available loan capital) out of the market. The collaboration of three big banks in such a manoeuvre would suffice to turn a pressure into a panic." ^[10]

Marx added that:

"The biggest capital power in London is of course the Bank of England, but its position as a semi-state institution makes it impossible for it to assert its domination in so brutal a fashion. Nonetheless, it too is sufficiently capable of looking after itself... Inasmuch as the Bank issues notes that are not backed by the metal reserve in its vaults, it creates tokens of value that are not only means of circulation, but also forms additional - even if fictitious - capital for it, to the nominal value of these fiduciary notes. And this extra capital yields it an extra profit."^[11]

[edit] Public stocks

Marx writes:

"To the extent that the depreciation or increase in value of this paper is independent of the movement of value of the actual capital that it represents, the wealth of the nation is just as great before as after its depreciation or increase in value.

" 'The public stocks and canal and railway shares had already by the 23rd of October, 1847, been depreciated in the aggregate to the amount of £114,752,225." (Morris, Governor of the Bank of England, testimony in the Report on Commercial Distress, 1847-48 [No. 3800].)'

"Unless this depreciation reflected an actual stoppage of production and of traffic on canals and railways, or a suspension of already initiated enterprises, or squandering capital in positively worthless ventures, the nation did not grow one cent poorer by the bursting of this soap bubble of nominal money-capital."^[12]

[edit] See also

• Capital (economics)
• Capital accumulation
• Economic bubble
• Economic crisis
• Money creation
• Speculation
• Stock market bubble

[edit] References

1. ^ Marx, Karl. Capital, volume III. http://www.marxists.org/archive/marx/works/1894-c3/. 
2. ^ Harvey, David (2006). Limits to Capital. London: Verso. p. 95. ISBN 9781844670956. 
3. ^ Itoh, Makoto; Lapavitsas, Costas (1998), Political Economy of Money and Finance, London and Basingstoke: Macmillan, ISBN 9780312211646 
4. ^ Marx, Karl (1894), Capital, volume III, chapter 29, http://www.marxists.org/archive/marx/works/1894-c3/ch29.htm, retrieved 2008-06-26 
5. ^ Harvey, David (2006). Limits to Capital. London: Verso. p. 276. ISBN 9781844670956. 
6. ^ Marx, Karl (1894), Capital, volume III, chapter 29, http://www.marxists.org/archive/marx/works/1894-c3/ch29.htm, retrieved 2008-06-26 
7. ^ Marx, Karl (1894), Capital, volume III, chapter 29, http://www.marxists.org/archive/marx/works/1894-c3/ch29.htm, retrieved 2008-06-26 
8. ^ Harvey, David (2006). Limits to Capital. London: Verso. pp. 294–296. ISBN 9781844670956. 
9. ^ Harvey, David (2006). Limits to Capital. London: Verso. pp. 276–277. ISBN 9781844670956. 
10. ^ Marx, Karl. Capital, volume III. Penguin. p. 674. 
11. ^ Marx, Karl. Capital, volume III. Penguin. pp. 674–675. 
12. ^ Marx, Karl (1894), Capital, volume III, chapter 29, http://www.marxists.org/archive/marx/works/1894-c3/ch29.htm, retrieved 2008-06-26

The Next Bubble

By Rex Moore
December 4, 2009 | Comments (8)

• Email
• Share
• Print

Disney Buys Marvel!

David Gardner called it. He’s up 1,334%! See what David’s recommending that you buy NEXT.

• Click Here Now

The always entertaining HowStuffWorks asks the question, "Which economic bubble will be next to burst?"

From tulips to dot-coms to housing, the prices investors pay for some things occasionally get totally out of whack with their intrinsic value. When the bubble pops, blue chips can suddenly turn red. Cisco (Nasdaq: CSCO) and Amazon.com (Nasdaq: AMZN) lost far more than 60% of their value in the post-2000 tech wreck. The entire financial landscape turned upside-down last year, and Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) (among others) will never be the same.

So what might be the next asset to suffer an Icarus-like crash? Among the candidates: higher education, in the form of plummeting enrollment. HSW notes that the cost of a college education has soared 440% over the past 25 years, quadrupling the rate of inflation.

"What this means is that millions of college students are entering an extremely tight job market saddled with tens of thousands of dollars in high-interest debt," HSW writes. "That's not the way to start any career. Even graduate and professional degree earners find themselves saddled with debt that they can't possibly repay."

Next year I'll have two kids in college, and I'm certainly feeling the pinch. I don't think we'll see enrollment rates plummet like the market has in the past, down 50% or more -- but I think the costs of a higher education have to level off, or even drop, at some point in the future.

The Higher Education Bubble

Over the past 25 years, the average price of a four-year college education has risen 440 percent -- more than four times the rate of inflation [source: Cronin]. At the same time, more and more Americans have lined up to pay these skyrocketing tuitions. From 1987 to 1997, undergraduate college enrollment increased 14 percent. From 1997 to 2007, the increase was 26 percent [source: NCES].

But where is all of that tuition money coming from? The short answer is financial aid. The federal government offers both low-interest Stafford loans and Pell Grants, which do not have to be repaid. But even those loans and grants aren't enough to cover the four-year cost of tuition, books, room and board at four-year colleges: nearly $47,000 for public schools and $100,000 for private colleges and universities [source: Kristof]. Pell grants, for example, max out at $5,035 a year [source: Cronin].

For many students, the only option left is a private student loan. These loans are largely unregulated and carry much higher interest rates than Federal loans. In fact, commentator Kathy Kristof of Forbes magazine actually compares the tactics of private college lenders to those employed by the subprime lending market. Kristof accuses private lenders -- and college admissions offices -- of tricking naïve students into signing up for loans that they don't fully understand. Some of these loans have "teaser" interest rates that "adjust" after graduation to levels as high as 18 percent [source: Kristof]. Compare that to the highest Stafford loan rate of 6.8 percent [source: Stafford].

What this means is that millions of college students are entering an extremely tight job market saddled with tens of thousands of dollars in high-interest debt. That's not the way to start any career.

Even graduate and professional degree earners find themselves saddled with debt that they can't possibly repay. According to the Law School Admission Council, the average law school debt is $100,000 [source: LSAC]. Multiply that by a double-digit interest rate and that debt becomes very big, very fast.

There is evidence that the college enrollment bubble is already bursting. Two-thirds of private U.S. colleges expect lower enrollment in 2009 than 2008. They've been forced to freeze employee salaries and cut some benefits [sources: Hass and Fain].

Jacob Wolinsky

• Profile & More Articles
• Author Website
• 

More about AIG:

• Guru Trades
• 10-Year Financials
• DCF Calculation
• 10-Year Valuations
• Insider Buys

Writers Compensation Program - Writers Wanted

Columnists Wanted

Submit Articles

I have been doing a series of book reviews on the financial crisis. The latest book that I have read is The Subprime Solution by Robert Shiller. I was attracted to the book, after reading Irrational Exuberance by Dr. Shiller several years ago, which is still one of my favorite books. The Subprime solution is not a new book. It was released in 2008 well before the financial crisis reached its peak. When I asked Dr Shiller for the book, he told me “Subprime Solution seems to be slipping from public attention, but it is all the more relevant now I think.” I could not agree more.

The book can be divided into three parts:

In the first segment of the book, Shiller describes what lead to the subprime solution. While to most investors this may seem like a review it is useful to read Shiller’s account of what led to the subprime problem. In addition, this section is valuable to the layman who is unfamiliar with the course of events that lead us to the situation we are in now. What I love about Shiller’s writing style is despite being an academic he is able to communicate on a simple level that most Americans would understand.

The second half of the book deals with the short term to the subprime mess. Much of the short term fix entails essentially a bailout. Dr. Shiller argues that these bailouts are necessary. He foresaw what would unfold if the Government failed to act. Shiller writes “bailouts of some sort are a necessary part of the subprime solution. To avoid an economic crisis that would destroy public confidence and possibly lead to systemic failure”. I only wish the Government had heeded this warning before the collapse of Lehman Brothers. Had the Government acted earlier it would have cost far less, and the damage to the US and global economy would likely not have been as severe.

The third part of the book contain Dr. Shiller’s long term solutions to avoid problems that lead to reckless subprime lending in the future. Dr Shiller describes this as "democratization" of the financial market.

Some of these solutions include

1. Providing lower income, and less educated people with financial information. Shiller believes that this would have prevented many subprime borrowers from taking out loans.

2. Specifically Shiller calls for a new financial Watchdog which would provide people with financial information. This agency would be similar to the consumer protection agency which protects people from unsafe products.

3. Creating new instruments to provide people insurance in case of their personal economic problems such as home price declines and unemployment

The ideas contained in third part of the book, are why I believe Shiller described the book as more relevant than ever. As the debate in Washington about financial reform continues many ideas have been proposed. While Shiller’s ideas might be controversial and would not solve all the problems that led to the current financial crisis they definitely deserve an examination. While Shiller was not the first person to propose a financial protection agency, I believe his endorsement of the idea may be a reason why it has become a key platform of President Obama’s financial reform proposal.

The best part about Dr Shiller’s book is his understanding of human psychology and how it affects the economy and can produce bubbles. As a value investor/ contrarian, I believe human psychology plays an important role in figuring out what investments to buy or to avoid. Dr Shiller foresaw the subprime problems and the housing bubble long before the full brunt of it unraveled. This is not the first time Shiller has predicted a bubble. Robert Shiller called the stock market bubble in the late 1990s several years before it burst.

Many people now are playing Monday morning quarterback and claiming that the dot com bubble and housing bubbles were obvious in hindsight. Yet, most experts including the nation’s most prestigious financial institutions, Government agencies, academics, and investors did not foresee either bubble. I wonder where all those people were while the bubbles were building up- maybe buying AOL or Citigroup stock. Dr Shiller is one of the only individuals who predicted both bubbles before they burst. My advice is next time Dr shiller says we are in a bubble; to take note.

For anyone following my book reviews on the financial crisis, my next book reviews will be, Too Big to Fail By Andrew Sorkin and This Time is Different By Kenneth Rogoff. Stay tun

Bubbles and the Banks

Health care reform is almost (knock on wood) a done deal. Next up: fixing the financial system. I’ll be writing a lot about financial reform in the weeks ahead. Let me begin by asking a basic question: What should reformers try to accomplish?

A lot of the public debate has been about protecting borrowers. Indeed, a new Consumer Financial Protection Agency to help stop deceptive lending practices is a very good idea. And better consumer protection might have limited the overall size of the housing bubble.

But consumer protection, while it might have blocked many subprime loans, wouldn’t have prevented the sharply rising rate of delinquency on conventional, plain-vanilla mortgages. And it certainly wouldn’t have prevented the monstrous boom and bust in commercial real estate.

Reform, in other words, probably can’t prevent either bad loans or bubbles. But it can do a great deal to ensure that bubbles don’t collapse the financial system when they burst.

Bear in mind that the implosion of the 1990s stock bubble, while nasty — households took a $5 trillion hit — didn’t provoke a financial crisis. So what was different about the housing bubble that followed?

The short answer is that while the stock bubble created a lot of risk, that risk was fairly widely diffused across the economy. By contrast, the risks created by the housing bubble were strongly concentrated in the financial sector. As a result, the collapse of the housing bubble threatened to bring down the nation’s banks. And banks play a special role in the economy. If they can’t function, the wheels of commerce as a whole grind to a halt.

Why did the bankers take on so much risk? Because it was in their self-interest to do so. By increasing leverage — that is, by making risky investments with borrowed money — banks could increase their short-term profits. And these short-term profits, in turn, were reflected in immense personal bonuses. If the concentration of risk in the banking sector increased the danger of a systemwide financial crisis, well, that wasn’t the bankers’ problem.

Of course, that conflict of interest is the reason we have bank regulation. But in the years before the crisis, the rules were relaxed — and, even more important, regulators failed to expand the rules to cover the growing “shadow” banking system, consisting of institutions like Lehman Brothers that performed banklike functions even though they didn’t offer conventional bank deposits.

The result was a financial industry that was hugely profitable as long as housing prices were going up — finance accounted for more than a third of total U.S. profits as the bubble was inflating — but was brought to the edge of collapse once the bubble burst. It took government aid on an immense scale, and the promise of even more aid if needed, to pull the industry back from the brink.

And here’s the thing: Since that aid came with few strings — in particular, no major banks were nationalized even though some clearly wouldn’t have survived without government help — there’s every incentive for bankers to engage in a repeat performance. After all, it’s now clear that they’re living in a heads-they-win, tails-taxpayers-lose world.

The test for reform, then, is whether it reduces bankers’ incentives and ability to concentrate risk going forward.

Transparency is part of the answer. Before the crisis, hardly anyone realized just how much risk the banks were taking on. More disclosure, especially with regard to complex financial derivatives, would clearly help.

Beyond that, an important aspect of reform should be new rules limiting bank leverage. I’ll be delving into proposed legislation in future columns, but here’s what I can say about the financial reform bill the House passed — with zero Republican votes — last month: Its limits on leverage look O.K. Not great, but O.K. It would, however, be all too easy for those rules to get weakened to the point where they wouldn’t do the job. A few tweaks in the fine print and banks would be free to play the same game all over again.

And reform really should take on the financial industry’s compensation practices. If Congress can’t legislate away the financial rewards for excessive risk-taking, it can at least try to tax them.

Let me conclude with a political note. The main reason for reform is to serve the nation. If we don’t get major financial reform now, we’re laying the foundations for the next crisis. But there are also political reasons to act.

For there’s a populist rage building in this country, and President Obama’s kid-gloves treatment of the bankers has put Democrats on the wrong side of this rage. If Congressional Democrats don’t take a tough line with the banks in the months ahead, they will pay a big price in November.

Copyright © 1998-2007 Online Journal

Low interest rates, over-sized leverage and increased deficit spending have all contributed to the continued rise of gold prices. Still, some experts believe that the current gold bubble will collapse as the global economy starts to slowly recover, and the US dollar comes back into favor. For more on this, see the following article from Bullion Vault.

• money printing;
• bank leverage;
• the Dollar;
• falling mine output;
• Asian gold hoarding; and
• the ultimate "too big to save" of government itself.

I don't know how much clearer it gets than this:

By Scott Lanman and Craig Torres
Jan. 7 (Bloomberg) -- U.S. regulators including the Federal
Reserve warned banks to guard against possible losses from an
end to low interest rates and reduce exposure or raise capital
if needed.

“In the current environment of historically low short-term
interest rates, it is important for institutions to have robust
processes for measuring and, where necessary, mitigating their
exposure to potential increases in interest rates,” the Federal
Financial Institutions Examination Council, which includes the
Fed, Federal Deposit Insurance Corp. and other agencies, said in
a statement today.

Let me point out a few things.

1. We have never seen a crash and rebound in US stock market history like what we have just experienced, except once. That "once" was 1929/1930. What followed next was a grueling grind - not a crash, but a grind that never ended, and in which the market lost more than 80% of its value. Those who argue "the bigger the dive the bigger the bounce" forget that the only true comparison against what we have just seen was in fact the prelude to a grinding 90%+ overall decline.
2. If you believe in "long wave" cycles - that is, Kondratieff cycles, we have precisely followed the several-hundred-year long pattern though its latest incarnation, with the 1982-2000ish period being "Autumn." Winter follows fall. These cycles seem to happen mostly because all (or essentially all) of the people who lived through the last cycle's horrors are dead. Unless we have found a way to break a cycle that has endured far longer than our nation, we're right where we should be - which incidentally aligns with what happened in 1929/30 as well. This means that while there may be ups and downs we have not bottomed - not by a long shot - no matter what people tell you.
3. Interest rates can only go up from zero. That should be obvious. Rising rates are not positive for equities and multiple expansion.
4. The Financials are getting a tremendous bid the last few days, presumably on the premise that "employment is at least somewhat stabilizing." With zero short rates and a steep yield curve, this means they make a lot of money. But rates cannot stay where they are if in fact the economy is recovering, and if the long end rises it will choke off housing.
   
5. At the same time people are rotating into a sector The Fed and regulators just said will be forced to constrain its profits people are fleeing the stocks (tech) that have been on a tear. This is exactly backward based on the news flow. Are The Fed and Regulators lying or is the "optimism" incredibly misplaced (and even stupid if they're rotating out of winners for what were just announced would be losers!)
6. P/Es are at record levels. Yes, that's on "as reported" 12 month trailing, and it is down materially since one of the two "disaster quarters" is now gone. But even with the other gone (which it will be in another month) we will be trading at somewhere around 40 or 50x earnings, an utterly unsupportable level and above where we were in 1999 - just before the entire market fell apart. Even on "operating earnings" we're trading at 24 times - outrageously overvalued from a historical perspective.

We also have the BIS calling in bankers to warn them that they've changed nothing in their behavior (gee, really?) and China making a serious attempt to pop their property bubble (must be nice to actually pay attention to such things, eh?).

For today, "party on Garth" in equities.

Let me simply remind people that what got me writing The Market Ticker was this event - something that I missed the signs of because I was overly complacent, just as people are being right now.

That was 2006 and into 2007, remember?

Straight up - right up until it wasn't, and 60 SPX points came off in one day. That warning (and mine when I started writing) was ignored by a whole lot of people too who thought it was a "blip."

Uh, no, it was a warning and those who failed to heed it got their heads handed to them.

Don't worry folks, it can't happen again. Remember, The Fed has our back, just as they did in 2006 when they told us there was nothing to worry about in the summer when we got the swoon (remember that? I do - and bought into it!).

The picture now is actually worse than it was in early 2007. In early 2007 we had solid employment, we still had a reasonable housing market although it had slowed some, GDP was positive and we had just come off a GREAT Christmas season with extraordinary profits and sales. In addition we were running ~350 billion in deficits, not $1.6 trillion (estimated for FY10) nor did we have to roll and issue over $2 trillion of treasury debt (to someone!) in the next 12 months.

Now we have the regulators issuing formal warnings about bank liquidity and interest rate risk (no really, you think that might be an issue with that sort of issue behavior?) while at the same time formal liquidity support in the form of monetization along with stimulus spending is slipping away - the source of the liquidity that fueled the rally from March.

Ignore all this if you're brave - or stupid.

PIMCO isn't. Bill Gross sees the same thing I see.

Nouriel Roubini Was Wrong, Again, and Again and Again...

Previous | Next
 

Update 10/30/09: Oil has climbed above $80 per barrel this month so Roubini's January prediction that it would stay below $40 for all of 2009 ain't lookin too sharp just now. And, nothwithstanding this past week's correction, stocks have been strong since late winter...so Roubini's prognostication that this is a sucker's rally also isn't looking too sharp right now. The S&P 500, which he predicted would sag to 600 has surged above 1000.
 

Update 3/23/09: Last fall, I kept hearing about economist Nouriel Roubini, who supposedly predicted the financial crisis. He was all over the cable television circuit claiming that he had predicted the myriad horrible things that were happening. I wrote the following piece on October 24th because his prediction that hedge fund selling would force regulators to close world stock markets for one to two weeks was absurd. It was indeed absurd and of course, never happened. Roubini was wrong. In researching his past predictions over preceding years, I was struck by how many were wrong. If the economy continues to improve as the year goes on, it will be interesting to see how Roubini will try to explain the myriad negative predictions he has continued to make in recent weeks and months.

(Here's another recent Roubini prediction: in mid-January, Roubini predicted oil prices would stay below $40 per barrel for all of 2009. Oil has now gone back above $50 per barrel - wrong, again!)



Some additional recent Roubini predictions which are quite likely to be wrong are his early March, 2009 predictions that the recession will last through late 2010 and his other prediction that the S&P 500 Index was highly likely to fall below 600 (at the time he said this in early March, it was at 676 and rallied strongly since). He has been widely quoted as referring to the stock market rally as a sucker's rally. 



"Panic over hedge funds could close markets," says the bold headline in The Times, a large London newspaper on Friday October 24, 2008. The article states that Nouriel Roubini, a professor at New York University, told a London investment conference audience that "...hundreds of hedge funds are poised to fail as frantic investors rush to redeem their assets and force managers into a fire sale of assets...We've reached a situation of sheer panic. Don't be surprised if policymakers need to close down markets for a week or two in coming days." Roubini went on to say, "Things will get much worse before they get better. I fear the worst is ahead of us." Those are pretty bold and scary predictions. Telling investors that the worst is yet to come after global stock markets have been hammered down by about half since late 2007 is pretty amazing.



Roubini has been getting tons of press of late for having supposedly predicted the financial mess that unfolded in 2008. A recent Bloomberg article said, "Roubini predicted in July 2006 that the U.S. would enter an economic recession. In February this year, he forecast a ‘catastrophic' financial meltdown that central bankers would fail to prevent, leading to the bankruptcy of large banks exposed to mortgages and a ‘sharp drop' in equities."

Before I listen to or follow the advice of anyone making predictions, I want to know that person's track record and background. So I researched Roubini's background and his actual economic forecasts (not his claims) and here's what I found.

Roubini earned his undergraduate degree at Bocconi University in Milan, Italy in 1982. He grew up in Italy after his Iranian parents moved around to Istanbul, Tehran and Tel Aviv.

According to his consulting firm's web site, "Professor Roubini served as a senior adviser to the White House Council of Economic Advisers and the U.S. Treasury Department"

That sounds impressive but on the web site for the NYU Stern School of Business (where he teaches) it says, "He was also the Senior Economist for International Affairs at the White House Council of Economic Advisers from 1998-1999; then, the Senior Advisor to the Under Secretary for International Affairs and the Director of the Office of Policy Development and Review at the U.S. Treasury Department from 1999- 2000." That sounds a lot less impressive.

As for Bloomberg crediting Roubini for predicting the current financial meltdown, stock market plunge and recession, some perspective is in order. Back in the summer of 2006, Roubini spoke at an International Monetary Fund event and predicted an imminent U.S. recession according to economist Anirvan Banerji who participated with Roubini in a panel discussion. A transcript of that event shows that Roubini did not predict a market meltdown or any of the other problems he now claims to have predicted as quoted by Bloomberg. Banerji says that Roubini predicted a recession in 2004 caused by U.S. trade deficits, federal reserve interest rate hikes and high oil prices. (His recession calls dating back to at least 2004 is verified by a Business Week article I'll get to in a moment).

In 2005, Roubini saw Hurricane Katrina and high oil prices causing a U.S. economic slowdown. "This is a very delicate moment. The economy is already very imbalanced. On top of that, we've had a massive oil shock and now we have a natural disaster that might be something of a tipping point."

Here's another quote with Roubini's poor predictions from an article on his own business school's web site: "Among those sporting a red face at Christmas dinner was Nouriel Roubini...Roubini was featured in The Enigmatic Greenback, specifically suggesting the US dollar was in an "anti-gravity" phase that was about to reverse. He has kicked off 2006 with a mea culpa, admitting that he had indeed called 2005 incorrectly. Dispirited? No way. Roubini is back and he's not taking a backward step. 2006 will be the year of the US economic slowdown, and thus the global economy will hit slowdown as well."

And, then there's this article from Business Week, which states, "Nouriel Roubini, an economist at New York University who was worried about a global recession in 2004, is now predicting that "the U.S. is heading toward a sharp recession by early 2007."

So there you have it. Roubini predicted a recession in 2004, 2005, 2006, and 2007. He was wrong four years in a row. So, in 2008, his prediction appears to be finally coming true. Well, a stopped clock is correct twice each day and as Banerji says, "Roubini is the Boy Who Cried Wolf."

So, let's now return to the alarming headline in The Times publication which rattled markets on Friday October 24th with Roubini predicting further plunging stock prices from already low levels and panic so bad that regulators would close stock markets for one to two weeks. Let's think about the premise of his prediction that "...hundreds of hedge funds are poised to fail as frantic investors rush to redeem their assets and force managers into a fire sale of assets..."

Consider who invests in hedge funds and how hedge funds invest money. Hedge fund assets primarily come from institutional investors (e.g. large university endowments, corporate pension plans) and wealthy individuals who typically invest one million dollars or more. Hedge fund investors aren't stupid and aren't going to head for the exits in unison. Also consider the fact that many hedge funds sell stocks and other assets short so that when prices fall, as they have in 2008, they profit.

Are investors pulling money out of some hedge funds with which they are dissatisfied with performance? Of course that's happening as it does with other investment vehicles such as mutual funds or exchange-traded funds. That's not going to lead to a further collapse in already highly depressed stock prices.

Money management is a highly competitive business and chronically poor performing firms get punished with redemptions and better performing companies get rewarded with more money to manage. For sure, some hedge are liquidating assets which adds to the selling pressure in various marketplaces (or buying pressure if they are covering short positions) as particular hedge funds are closing up shop while some others are seeing assets go out the door. All assets have to go somewhere and smart money managers buy sound investments that are selling at favorable valuations.

The sad part about hyped articles with hyped predictions is that it causes some individual investors to panic and do the wrong thing - selling good assets like stocks at depressed prices. The media shouldn't irresponsibly publicize hyped predictions, especially without clearly and accurately disclosing the predictor's track record. Don't fall victim to such hype.

Richard Bernstein's 10 Predictions For 2010

Richard Bernstein | Dec. 16, 2009, 3:08 PM | 23,167 | 45

Print

Tags: Investing, Economy, S&P 500, Stock Market

Here are my 10 guesses for how the financial markets will shape up in 2010.

1. Stock and bond market returns in the US will again be positive.

2. The US dollar is likely to meaningfully appreciate once market-driven short-term rates begin to rise.

3. US dollar “carry trades” could get killed as 2010 progresses and the US dollar appreciates.  Once accounting for leverage, hedge fund performance will likely trail long-only equity performance.

4. The Fed will spend the second half of the year trying to catch up to, and flatten, the yield curve.  Short-term rates could increase more than investors currently think.  Long-term rates could rise quite a bit in the first part of the year as inflation finally begins to appear, but are likely to fall during the second half of the year when the markets realize the Fed is serious about fighting inflation.  The curve is likely to be much flatter one year from today than it is currently.

5. Corporate profits are likely to explode to the upside during 2010.  Trailing four-quarter S&P 500 reported earnings growth could exceed 100%.  Investors still seem to be under-estimating the operating and financial leverage that is built into corporate profits.

6. Employment in the US will probably continue to improve.  Consumer Discretionary stocks will likely be among the best performing sectors.

7. Treasuries will probably underperform stocks.  That underperformance is unfortunately likely to reinforce both individual and institutional investors’ views that it is wise to be under-diversified.

8. Small cap value, I think, will be the US’s best performing size/style segment.  Small banks outperformance might be the biggest surprise for 2010.

9. Financial regulation will progress, but the bull market will probably aid politicians’ “forgetfulness”.  As a result, new regulation could be relatively meaningless.  In my opinion, serious regulation won’t occur until after the next downturn, which could be worse if no meaningful new regulation is implemented in 2010.

10. I think the Democrats will do better in the 2010 mid-term elections than people currently think they will.  It seems very likely to me that in December 2010, investors will look back on the year and realize that monetary and fiscal policy stimulus still works.

Motley Fool Says Ignore Stock Market Forecasts and Predictions for 2010, But...

Stock-Markets / Financial Markets 2010 Dec 24, 2009 - 12:57 PM

By: Nadeem_Walayat

A recent email titled "3 Reasons You Should Ignore Predictions for 2010" from the popular UK personal finance website Motley Fool perked my interest. My immediate thought was wow are they going to state that the real secret of successful trading is to react to price movements in real time, and if so what are the other 2 reasons?

Leaving aside for the moment the contradiction in the preceding day's email also an from Motley Fool titled "6 predictions for 2010", and several more subsequent emails along the same lines.

Firstly, I don't like the word PREDICTION as no one can PREDICT the future, all one can attempt to do by means of in depth analysis is to arrive at a scenario that projects / forecasts trends based on probabilities.

Motley Fools Reasons of why you should ignore predictions for 2010 and What you should do instead. Motley Fool

1. No one -- no analyst, no economist, no politician, no academic, and no investor -- predicted with precision the 22% drop in the FTSE 100 from 1 January 2009 to 9 March 2009.

FTSE 100 Index Stock Market Forecast 2009 - 22nd January 2009

FTSE 100 Index Mid 2009 Low 3400 - 70% Confidence; End 2009 at 4,600 (During December 2009) - 70% Confidence

2. The second reason you shouldn't give much heed to predictions for 2010 is that the forecasters will alter their predictions as the year unfolds.

They are correct, forecasts have to be revised, but not for the reasons alluded to for the fulfillment of a target i.e. in this case for the FTSE low of 3,400 being fulfilled in March 2009 DID call for an update.

17 Mar 2009 - FTSE 100 Index Stealth Bull Market as Bear Market Bottoms at 3,460

This article is a quick update which includes summaries of recent analysis and the initial FTSE buy triggers for what I expect will turn out to become a multi-year bull market whilst the vast majority of market participants (small investors / analysts) FAIL to recognise the stealth bull market now underway until many months and a good 30% rally has already taken place as the perma bears that have enjoyed much press coverage as the bear market raged WILL continue to convince most investors from failing to participate, leaving only the smart money, i.e. hedge funds, fund money pools and yours truly to accumulate.

3. The final reason you shouldn't give much heed to predictions for 2010 is that the forecasters have no accountability for their predictions.

Yes, no one wants to be reminded of wrong market calls, for at the end of the day the future is unwritten and events that some call black swans can change subsequent market trends (though black swans are more often used to explain away poor analysis) which DOES mean one needs to continuously analyse the markets one trades or invests in. It is never a case of fire and forget, but more along the lines of creating a scenario and then performing periodic in depth updates as targets are achieved and triggers are hit.

However clearly, not all analysis and hence forecasts are of the same caliber, therefore IT IS important that past market calls ARE evaluated on subsequent price action as we at the market oracle are undertaking through exercise of allowing all site visitors to VOTE on the Accurate Forecast Articles Published between Sept 2008 to Sept 2009. As those that did get it right during 2009 have a greater probability of getting it right for 2010. I say probability for at the end of the day that is all a forecast can be, i.e. NOT a PREDICION OF AN EVENT, But a % probability of an scenario transpiring.

Now after the Motley Fools discrediting of ALL future Predictions / Forecasts for 2010 (presumably including their own), what do they advise readers should do ?

Pay £29.50 for their 10 share picks of 2010 (predicting these stocks will rise in price).

As for where I think the stock market is headed during 2010?

The analysis has been underway that will culminate in final conclusions / forecast trends in the following sequence - Inflation, economy, interest rates, housing, stocks, other markets. To receive the analysis in your email box on completion, ensure you are subscribed to my always FREE newsletter.

By Nadeem Walayat
http://www.marketoracle.co.uk

Copyright © 2005-09 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 400 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Motley Fool Says Ignore Stock Market Forecasts and Predictions for 2010, But...

Stock-Markets / Financial Markets 2010 Dec 24, 2009 - 12:57 PM

By: Nadeem_Walayat

A recent email titled "3 Reasons You Should Ignore Predictions for 2010" from the popular UK personal finance website Motley Fool perked my interest. My immediate thought was wow are they going to state that the real secret of successful trading is to react to price movements in real time, and if so what are the other 2 reasons?

Leaving aside for the moment the contradiction in the preceding day's email also an from Motley Fool titled "6 predictions for 2010", and several more subsequent emails along the same lines.

Firstly, I don't like the word PREDICTION as no one can PREDICT the future, all one can attempt to do by means of in depth analysis is to arrive at a scenario that projects / forecasts trends based on probabilities.

Motley Fools Reasons of why you should ignore predictions for 2010 and What you should do instead. Motley Fool

1. No one -- no analyst, no economist, no politician, no academic, and no investor -- predicted with precision the 22% drop in the FTSE 100 from 1 January 2009 to 9 March 2009.

FTSE 100 Index Stock Market Forecast 2009 - 22nd January 2009

FTSE 100 Index Mid 2009 Low 3400 - 70% Confidence; End 2009 at 4,600 (During December 2009) - 70% Confidence

2. The second reason you shouldn't give much heed to predictions for 2010 is that the forecasters will alter their predictions as the year unfolds.

They are correct, forecasts have to be revised, but not for the reasons alluded to for the fulfillment of a target i.e. in this case for the FTSE low of 3,400 being fulfilled in March 2009 DID call for an update.

17 Mar 2009 - FTSE 100 Index Stealth Bull Market as Bear Market Bottoms at 3,460

This article is a quick update which includes summaries of recent analysis and the initial FTSE buy triggers for what I expect will turn out to become a multi-year bull market whilst the vast majority of market participants (small investors / analysts) FAIL to recognise the stealth bull market now underway until many months and a good 30% rally has already taken place as the perma bears that have enjoyed much press coverage as the bear market raged WILL continue to convince most investors from failing to participate, leaving only the smart money, i.e. hedge funds, fund money pools and yours truly to accumulate.

3. The final reason you shouldn't give much heed to predictions for 2010 is that the forecasters have no accountability for their predictions.

Yes, no one wants to be reminded of wrong market calls, for at the end of the day the future is unwritten and events that some call black swans can change subsequent market trends (though black swans are more often used to explain away poor analysis) which DOES mean one needs to continuously analyse the markets one trades or invests in. It is never a case of fire and forget, but more along the lines of creating a scenario and then performing periodic in depth updates as targets are achieved and triggers are hit.

However clearly, not all analysis and hence forecasts are of the same caliber, therefore IT IS important that past market calls ARE evaluated on subsequent price action as we at the market oracle are undertaking through exercise of allowing all site visitors to VOTE on the Accurate Forecast Articles Published between Sept 2008 to Sept 2009. As those that did get it right during 2009 have a greater probability of getting it right for 2010. I say probability for at the end of the day that is all a forecast can be, i.e. NOT a PREDICION OF AN EVENT, But a % probability of an scenario transpiring.

Now after the Motley Fools discrediting of ALL future Predictions / Forecasts for 2010 (presumably including their own), what do they advise readers should do ?

Pay £29.50 for their 10 share picks of 2010 (predicting these stocks will rise in price).

As for where I think the stock market is headed during 2010?

The analysis has been underway that will culminate in final conclusions / forecast trends in the following sequence - Inflation, economy, interest rates, housing, stocks, other markets. To receive the analysis in your email box on completion, ensure you are subscribed to my always FREE newsletter.

By Nadeem Walayat
http://www.marketoracle.co.uk

Copyright © 2005-09 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 400 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Entering the Greatest Economic Depression in History, More Bubbles Waiting to Burst

By: Global_Research

Andrew G. Marshall writes: While there is much talk of a recovery on the horizon, commentators are forgetting some crucial aspects of the financial crisis. The crisis is not simply composed of one bubble, the housing real estate bubble, which has already burst. The crisis has many bubbles, all of which dwarf the housing bubble burst of 2008. Indicators show that the next possible burst is the commercial real estate bubble. However, the main event on the horizon is the “bailout bubble” and the general world debt bubble, which will plunge the world into a Great Depression the likes of which have never before been seen.

Housing Crash Still Not Over

The housing real estate market, despite numbers indicating an upward trend, is still in trouble, as, “Houses are taking months to sell. Many buyers are having trouble getting financing as lenders and appraisers struggle to figure out what houses are really worth in the wake of the collapse.” Further, “the overall market remains very soft [...] aside from speculators and first-time buyers.” Dean Baker, co-director of the Center for Economic and Policy Research in Washington said, “It would be wrong to imagine that we have hit a turning point in the market,” as “There is still an enormous oversupply of housing, which means that the direction of house prices will almost certainly continue to be downward.” Foreclosures are still rising in many states “such as Nevada, Georgia and Utah, and economists say rising unemployment may push foreclosures higher into next year.” Clearly, the housing crisis is still not at an end.[1]

The Commercial Real Estate Bubble

In May, Bloomberg quoted Deutsche Bank CEO Josef Ackermann as saying, “It's either the beginning of the end or the end of the beginning.” Bloomberg further pointed out that, “A piece of the puzzle that must be calculated into any determination of the depth of our economic doldrums is the condition of commercial real estate -- the shopping malls, hotels, and office buildings that tend to go along with real- estate expansions.” Residential investment went down 28.9 % from 2006 to 2007, and at the same time, nonresidential investment grew 24.9%, thus, commercial real estate was “serving as a buffer against the declining housing market.”

Commercial real estate lags behind housing trends, and so too, will the crisis, as “commercial construction projects are losing their appeal.” Further, “there are lots of reasons to suspect that commercial real estate was subject to some of the loose lending practices that afflicted the residential market. The Office of the Comptroller of the Currency's Survey of Credit Underwriting Practices found that whereas in 2003 just 2 percent of banks were easing their underwriting standards on commercial construction loans, by 2006 almost a third of them were relaxing.” In May it was reported that, “Almost 80 percent of domestic banks are tightening their lending standards for commercial real-estate loans,” and that, “we may face double-bubble trouble for real estate and the economy.”[2]

In late July of 2009, it was reported that, “Commercial real estate’s decline is a significant issue facing the economy because it may result in more losses for the financial industry than residential real estate.  This category includes apartment buildings, hotels, office towers, and shopping malls.” Worth noting is that, “As the economy has struggled, developers and landlords have had to rely on a helping hand from the US Federal Reserve in order to try to get credit flowing so that they can refinance existing buildings or even to complete partially constructed projects.” So again, the Fed is delaying the inevitable by providing more liquidity to an already inflated bubble. As the Financial Post pointed out, “From Vancouver to Manhattan, we are seeing rising office vacancies and declines in office rents.”[3]

In April of 2009, it was reported that, “Office vacancies in U.S. downtowns increased to 12.5 percent in the first quarter, the highest in three years, as companies cut jobs and new buildings came onto the market,” and, “Downtown office vacancies nationwide could come close to 15 percent by the end of this year, approaching the 10-year high of 15.5 percent in 2003.”[4]

In the same month it was reported that, “Strip malls, neighborhood centers and regional malls are losing stores at the fastest pace in at least a decade, as a spending slump forces retailers to trim down to stay afloat.” In the first quarter of 2009, retail tenants “have vacated 8.7 million square feet of commercial space,” which “exceeds the 8.6 million square feet of retail space that was vacated in all of 2008.” Further, as CNN reported, “vacancy rates at malls rose 9.5% in the first quarter, outpacing the 8.9% vacancy rate registered in all of 2008.” Of significance for those that think and claim the crisis will be over by 2010, “mall vacancies [are expected] to exceed historical levels through 2011,” as for retailers, “it's only going to get worse.”[5] Two days after the previous report, “General Growth Properties Inc, the second-largest U.S. mall owner, declared bankruptcy on [April 16] in the biggest real estate failure in U.S. history.”[6]

In April, the Financial Times reported that, “Property prices in China are likely to halve over the next two years, a top government researcher has predicted in a powerful signal that the country’s economic downturn faces further challenges despite recent positive data.” This is of enormous significance, as “The property market, along with exports, were leading drivers of the booming Chinese economy over the past decade.” Further, “an apparent rebound in the property market was unsustainable over the medium term and being driven by a flood of liquidity and fraudulent activity rather than real demand.” A researcher at a leading Chinese government think tank reported that, “he expected average urban residential property prices to fall by 40 to 50 per cent over the next two years from their levels at the end of 2008.”[7]

In April, it was reported that, “The Federal Reserve is considering offering longer loans to investors in commercial mortgage-backed securities as part of a plan to help jump-start the market for commercial real estate debt.” Since February the Fed “has been analyzing appropriate terms and conditions for accepting commercial mortgage-backed securities (CMBS) and other mortgage assets as collateral for its Term Asset-Backed Securities Lending Facility (TALF).”[8]

In late July, the Financial Times reported that, “Two of America’s biggest banks, Morgan Stanley and Wells Fargo ... threw into sharp relief the mounting woes of the US commercial property market when they reported large losses and surging bad loan,” as “The disappointing second-quarter results for two of the largest lenders and investors in office, retail and industrial property across the US confirmed investors’ fears that commercial real estate would be the next front in the financial crisis after the collapse of the housing market.” The commercial property market, worth $6.7 trillion, “which accounts for more than 10 per cent of US gross domestic product, could be a significant hurdle on the road to recovery.”[9]

The Bailout Bubble

While the bailout, or the “stimulus package” as it is often referred to, is getting good coverage in terms of being portrayed as having revived the economy and is leading the way to the light at the end of the tunnel, key factors are again misrepresented in this situation.

At the end of March of 2009, Bloomberg reported that, “The U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year.” This amount “works out to $42,105 for every man, woman and child in the U.S. and 14 times the $899.8 billion of currency in circulation. The nation’s gross domestic product was $14.2 trillion in 2008.”[10]

Gerald Celente, the head of the Trends Research Institute, the major trend-forecasting agency in the world, wrote in May of 2009 of the “bailout bubble.” Celente’s forecasts are not to be taken lightly, as he accurately predicted the 1987 stock market crash, the fall of the Soviet Union, the 1998 Russian economic collapse, the 1997 East Asian economic crisis, the 2000 Dot-Com bubble burst, the 2001 recession, the start of a recession in 2007 and the housing market collapse of 2008, among other things.

On May 13, 2009, Celente released a Trend Alert, reporting that, “The biggest financial bubble in history is being inflated in plain sight,” and that, “This is the Mother of All Bubbles, and when it explodes [...] it will signal the end to the boom/bust cycle that has characterized economic activity throughout the developed world.” Further, “This is much bigger than the Dot-com and Real Estate bubbles which hit speculators, investors and financiers the hardest. However destructive the effects of these busts on employment, savings and productivity, the Free Market Capitalist framework was left intact. But when the 'Bailout Bubble' explodes, the system goes with it.”

Celente further explained that, “Phantom dollars, printed out of thin air, backed by nothing ... and producing next to nothing ... defines the ‘Bailout Bubble.’ Just as with the other bubbles, so too will this one burst. But unlike Dot-com and Real Estate, when the "Bailout Bubble" pops, neither the President nor the Federal Reserve will have the fiscal fixes or monetary policies available to inflate another.” Celente elaborated, “Given the pattern of governments to parlay egregious failures into mega-failures, the classic trend they follow, when all else fails, is to take their nation to war,” and that, “While we cannot pinpoint precisely when the 'Bailout Bubble' will burst, we are certain it will. When it does, it should be understood that a major war could follow.”[11]

However, this “bailout bubble” that Celente was referring to at the time was the $12.8 trillion reported by Bloomberg. As of July, estimates put this bubble at nearly double the previous estimate.

As the Financial Times reported in late July of 2009, while the Fed and Treasury hail the efforts and impact of the bailouts, “Neil Barofsky, special inspector-general for the troubled asset relief programme, [TARP] said that the various US schemes to shore up banks and restart lending exposed federal agencies to a risk of $23,700bn  [$23.7 trillion] – a vast estimate that was immediately dismissed by the Treasury.” The inspector-general of the TARP program stated that there were “fundamental vulnerabilities . . . relating to conflicts of interest and collusion, transparency, performance measures, and anti-money laundering.”

Barofsky also reports on the “considerable stress” in commercial real estate, as “The Fed has begun to open up Talf to commercial mortgage-backed securities to try to influence credit conditions in the commercial real estate market. The report draws attention to a new potential credit crunch when $500bn worth of real estate mortgages need to be refinanced by the end of the year.” Ben Bernanke, the Chairman of the Fed, and Timothy Geithner, the Treasury Secretary and former President of the New York Fed, are seriously discussing extending TALF (Term Asset-Backed Securities Lending Facility) into “CMBS [Commercial Mortgage-Backed Securities] and other assets such as small business loans and whether to increase the size of the programme.” It is the “expansion of the various programmes into new and riskier asset classes is one of the main bones of contention between the Treasury and Mr Barofsky.”[12]

Testifying before Congress, Barofsky said, “From programs involving large capital infusions into hundreds of banks and other financial institutions, to a mortgage modification program designed to modify millions of mortgages, to public-private partnerships using tens of billions of taxpayer dollars to purchase 'toxic' assets from banks, TARP has evolved into a program of unprecedented scope, scale, and complexity.” He explained that, “The total potential federal government support could reach up to 23.7 trillion dollars.”[13]

Is a Future Bailout Possible?

In early July of 2009, billionaire investor Warren Buffet said that, “unemployment could hit 11 percent and a second stimulus package might be needed as the economy struggles to recover from recession,” and he further stated that, “we're not in a recovery.”[14] Also in early July, an economic adviser to President Obama stated that, “The United States should be planning for a possible second round of fiscal stimulus to further prop up the economy.”[15]

In August of 2009, it was reported that, “THE Obama administration will consider dishing out more money to rein in unemployment despite signs the recession is ending,” and that, “Treasury secretary Tim Geithner also conceded tax hikes could be on the agenda as the government worked to bring its huge recovery-related deficits under control.” Geithner said, “we will do what it takes,” and that, “more federal cash could be tipped into the recovery as unemployment benefits amid projections the benefits extended to 1.5 million jobless Americans will expire without Congress' intervention.” However, any future injection of money could be viewed as “a second stimulus package.”[16]

The Washington Post reported in early July of a Treasury Department initiative known as “Plan C.” The Plan C team was assembled “to examine what could yet bring [the economy] down and has identified several trouble spots that could threaten the still-fragile lending industry,” and “the internal project is focused on vexing problems such as the distressed commercial real estate markets, the high rate of delinquencies among homeowners, and the struggles of community and regional banks.”

Further, “The team is also responsible for considering potential government responses, but top officials within the Obama administration are wary of rolling out initiatives that would commit massive amounts of federal resources.” The article elaborated in saying that, “The creation of Plan C is a sign that the government has moved into a new phase of its response, acting preemptively rather than reacting to emerging crises.” In particular, the near-term challenge they are facing is commercial real estate lending, as “Banks and other firms that provided such loans in the past have sharply curtailed lending,” leaving “many developers and construction companies out in the cold.” Within the next couple years, “these groups face a tidal wave of commercial real estate debt -- some estimates peg the total at more than $3 trillion -- that they will need to refinance. These loans were issued during this decade's construction boom with the mistaken expectation that they would be refinanced on the same generous terms after a few years.”

However, as a result of the credit crisis, “few developers can find anyone to refinance their debt, endangering healthy and distressed properties.” Kim Diamond, a managing director at Standard & Poor's, stated that, “It's not a degree to which people are willing to lend,” but rather, “The question is whether a loan can be made at all.” Important to note is that, “Financial analysts said losses on commercial real estate loans are now the single largest cause of bank failures,” and that none of the bailout efforts enacted “is big enough to address the size of the problem.”[17]

So the question must be asked: what is Plan C contemplating in terms of a possible government “solution”? Another bailout? The effect that this would have would be to further inflate the already monumental bailout bubble.

The Great European Bubble

In October of 2008, Germany and France led a European Union bailout of 1 trillion Euros, and “World markets initially soared as European governments pumped billions into crippled banks. Central banks in Europe also mounted a new offensive to restart lending by supplying unlimited amounts of dollars to commercial banks in a joint operation.”[18]

The American bailouts even went to European banks, as it was reported in March of 2009 that, “European banks declined to discuss a report that they were beneficiaries of the $173 billion bail-out of insurer AIG,” as “Goldman Sachs, Morgan Stanley and a host of other U.S. and European banks had been paid roughly $50 billion since the Federal Reserve first extended aid to AIG.” Among the European banks, “French banks Societe Generale and Calyon on Sunday declined to comment on the story, as did Deutsche Bank, Britain's Barclays and unlisted Dutch group Rabobank.” Other banks that got money from the US bailout include HSBC, Wachovia, Merrill Lynch, Banco Santander and Royal Bank of Scotland. Because AIG was essentially insolvent, “the bailout enabled AIG to pay its counterparty banks for extra collateral,” with “Goldman Sachs and Deutsche bank each receiving $6 billion in payments between mid-September and December.”[19]

In April of 2009, it was reported that, “EU governments have committed 3 trillion Euros [or $4 trillion dollars] to bail out banks with guarantees or cash injections in the wake of the global financial crisis, the European Commission.”[20]

In early February of 2009, the Telegraph published a story with a startling headline, “European banks may need 16.3 trillion pound bail-out, EC document warns.” Type this headline into google, and the link to the Telegraph appears. However, click on the link, and the title has changed to “European bank bail-out could push EU into crisis.” Further, they removed any mention of the amount of money that may be required for a bank bailout. The amount in dollars, however, nears $25 trillion. The amount is the cumulative total of the troubled assets on bank balance sheets, a staggering number derived from the derivatives trade.

The Telegraph reported that, “National leaders and EU officials share fears that a second bank bail-out in Europe will raise government borrowing at a time when investors - particularly those who lend money to European governments - have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain to pay it back.”[21]

When Eastern European countries were in desperate need of financial aid, and discussion was heated on the possibility of an EU bailout of Eastern Europe, the EU, at the behest of Angela Merkel of Germany, denied the East European bailout. However, this was more a public relations stunt than an actual policy position.

While the EU refused money to Eastern Europe in the form of a bailout, in late March European leaders “doubled the emergency funding for the fragile economies of central and eastern Europe and pledged to deliver another doubling of International Monetary Fund lending facilities by putting up 75bn Euros (70bn pounds).” EU leaders “agreed to increase funding for balance of payments support available for mainly eastern European member states from 25bn Euros to 50bn Euros.”[22]

As explained in a Times article in June of 2009, Germany has been deceitful in its public stance versus its actual policy decisions. The article, worth quoting in large part, first explained that:

Europe is now in the middle of a perfect storm - a confluence of three separate, but interconnected economic crises which threaten far greater devastation than Britain or America have suffered from the credit crunch: the collapse of German industry and employment, the impending bankruptcy of Central European homeowners and businesses; and the threat of government debt defaults from loss of monetary control by the Irish Republic, Greece and Portugal, for instance on the eurozone periphery.

Taking the case of Latvia, the author asks, “If the crisis expands, other EU governments - and especially Germany's - will face an existential question. Do they commit hundreds of billions of euros to guarantee the debts of fellow EU countries? Or do they allow government defaults and devaluations that may ultimately break up the single currency and further cripple German industry, as well as the country's domestic banks?” While addressing that, “Publicly, German politicians have insisted that any bailouts or guarantees are out of the question,” however, “the pass has been quietly sold in Brussels, while politicians loudly protested their unshakeable commitment to defend it.”

The author addressed how in October of 2008:

[...] a previously unused regulation was discovered, allowing the creation of a 25 billion Euros “balance of payments facility” and authorising the EU to borrow substantial sums under its own “legal personality” for the first time. This facility was doubled again to 50 billion Euros in March. If Latvia's financial problems turn into a full-scale crisis, these guarantees and cross-subsidies between EU governments will increase to hundreds of billions in the months ahead and will certainly mutate into large-scale centralised EU borrowing, jointly guaranteed by all the taxpayers of the EU.

[...] The new EU borrowing, for example, is legally an ‘off-budget’ and ‘back-to-back’ arrangement, which allows Germany to maintain the legal fiction that it is not guaranteeing the debts of Latvia et al. The EU's bond prospectus to investors, however, makes quite clear where the financial burden truly lies: “From an investor's point of view the bond is fully guaranteed by the EU budget and, ultimately, by the EU Member States.”[23]

So Eastern Europe is getting, or presumably will get bailed out. Whether this is in the form of EU federalism, providing loans of its own accord, paid for by European taxpayers, or through the IMF, which will attach any loans with its stringent Structural Adjustment Program (SAP) conditionalities, or both. It turned out that the joint partnership of the IMF and EU is what provided the loans and continues to provide such loans.

As the Financial Times pointed out in August of 2009, “Bank failures or plunging currencies in the three Baltic nations – Latvia, Lithuania and Estonia – could threaten the fragile prospect of recovery in the rest of Europe. These countries also sit on one of the world’s most sensitive political fault-lines. They are the European Union’s frontier states, bordering Russia.” In July, Latvia “agreed its second loan in eight months from the IMF and the EU,” following the first one in December. Lithuania is reported to be following suit. However, as the Financial Times noted, the loans came with the IMF conditionalities: “The injection of cash is the good news. The bad news is that, in return for shoring up state finances, the new IMF deal will require the Latvian government to impose yet more pain on its suffering population. Public-sector wages have already been cut by about a third this year. Pensions have been sliced. Now the IMF requires Latvia to cut another 10 per cent from the state budget this autumn.”[24]

If we are to believe the brief Telegraph report pertaining to nearly $25 trillion in bad bank assets, which was removed from the original article for undisclosed reasons, not citing a factual retraction, the question is, does this potential bailout still stand? These banks haven’t been rescued financially from the EU, so, presumably, these bad assets are still sitting on the bank balance sheets. This bubble has yet to blow. Combine this with the $23.7 trillion US bailout bubble, and there is nearly $50 trillion between the EU and the US waiting to burst.

An Oil Bubble

In early July of 2009, the New York Times reported that, “The extreme volatility that has gripped oil markets for the last 18 months has shown no signs of slowing down, with oil prices more than doubling since the beginning of the year despite an exceptionally weak economy.” Instability in the oil and gas prices has led many to “fear it could jeopardize a global recovery.” Further, “It is also hobbling businesses and consumers,” as “A wild run on the oil markets has occurred in the last 12 months.” Oil prices reached a record high last summer at $145/barrel, and with the economic crisis they fell to $33/barrel in December. However, since the start of 2009, oil has risen 55% to $70/barrel.

As the Times article points out, “the recent rise in oil prices is reprising the debate from last year over the role of investors — or speculators — in the commodity markets.” Energy officials from the EU and OPEC met in June and concluded that, “the speculation issue had not been resolved yet and that the 2008 bubble could be repeated.”[25]

In June of 2009, Hedge Fund manager Michael Masters told the US Senate that, “Congress has not done enough to curb excessive speculation in the oil markets, leaving the country vulnerable to another price run-up in 2009.” He explained that, “oil prices are largely not determined by supply and demand but the trading desks of large Wall Street firms.” Because “Nothing was actually done by Congress to put an end to the problem of excessive speculation” in 2008, Masters explained, “there is nothing to prevent another bubble in oil prices in 2009. In fact, signs of another possible bubble are already beginning to appear.”[26]

In May of 2008, Goldman Sachs warned that oil could reach as much as $200/barrel within the next 12-24 months [up to May 2010]. Interestingly, “Goldman Sachs is one of the largest Wall Street investment banks trading oil and it could profit from an increase in prices.”[27] However, this is missing the key point. Not only would Goldman Sachs profit, but Goldman Sachs plays a major role in sending oil prices up in the first place.

As Ed Wallace pointed out in an article in Business Week in May of 2008, Goldman Sachs’ report placed the blame for such price hikes on “soaring demand” from China and the Middle East, combined with the contention that the Middle East has or would soon peak in its oil reserves. Wallace pointed out that:

Goldman Sachs was one of the founding partners of online commodities and futures marketplace Intercontinental Exchange (ICE). And ICE has been a primary focus of recent congressional investigations; it was named both in the Senate's Permanent Subcommittee on Investigations' June 27, 2006, Staff Report and in the House Committee on Energy & Commerce's hearing last December. Those investigations looked into the unregulated trading in energy futures, and both concluded that energy prices' climb to stratospheric heights has been driven by the billions of dollars' worth of oil and natural gas futures contracts being placed on the ICE—which is not regulated by the Commodities Futures Trading Commission.[28]

Essentially, Goldman Sachs is one of the key speculators in the oil market, and thus, plays a major role in driving oil prices up on speculation. This must be reconsidered in light of the resurgent rise in oil prices in 2009. In July of 2009, “Goldman Sachs Group Inc. posted record earnings as revenue from trading and stock underwriting reached all-time highs less than a year after the firm took $10 billion in U.S. rescue funds.”[29] Could one be related to the other?

Bailouts Used in Speculation

In November of 2008, the Chinese government injected an “$849 billion stimulus package aimed at keeping the emerging economic superpower growing.”[30] China then recorded a rebound in the growth rate of the economy, and underwent a stock market boom. However, as the Wall Street Journal pointed out in July of 2009, “Its growth is now fuelled by cheap debt rather than corporate profits and retained earnings, and this shift in the medium term threatens to undermine China’s economic decoupling from the global slump.” Further, “overseas money has been piling into China, inflating foreign exchange reserves and domestic liquidity. So perhaps it is not surprising that outstanding bank loans have doubled in the last few years, or that there is much talk of a shadow banking system. Then there is China’s reputation for building overcapacity in its industrial sector, a notoriety it won even before the crash in global demand. This showed a disregard for returns that is always a tell-tale sign of cheap money.”

China’s economy primarily relies upon the United States as a consumption market for its cheap products. However, “The slowdown in U.S. consumption amid a credit crunch has exposed the weaknesses in this export-led financing model. So now China is turning instead to cheap debt for funding, a shift suggested by this year’s 35% or so rise in bank loans.”[31]

 In August of 2009, it was reported that China is experiencing a “stimulus-fueled stock market boom.” However, this has caused many leaders to “worry that too much of the $1-trillion lending binge by state banks that paid for China's nascent revival was diverted into stocks and real estate, raising the danger of a boom and bust cycle and higher inflation less than two years after an earlier stock market bubble burst.”[32]

The same reasoning needs to be applied to the US stock market surge. Something is inherently and structurally wrong with a financial system in which nothing is being produced, 600,000 jobs are lost monthly, and yet, the stock market goes up. Why is the stock market going up?

The Troubled Asset Relief Program (TARP), which provided $700 billion in bank bailouts, started under Bush and expanded under Obama, entails that the US Treasury purchases $700 billion worth of “troubled assets” from banks, and in turn, “that banks cannot be asked to account for their use of taxpayer money.”[33]

So if banks don’t have to account for where the money goes, where did it go? They claim it went back into lending. However, bank lending continues to go down.[34] Stock market speculation is the likely answer. Why else would stocks go up, lending continue downwards, and the bailout money be unaccounted for?

What Does the Bank for International Settlements (BIS) Have to Say?

In late June, the Bank for International Settlements (BIS), the central bank of the world’s central banks, the most prestigious and powerful financial organization in the world, delivered an important warning. It stated that, “fiscal stimulus packages may provide no more than a temporary boost to growth, and be followed by an extended period of economic stagnation.”

The BIS, “The only international body to correctly predict the financial crisis ... has warned the biggest risk is that governments might be forced by world bond investors to abandon their stimulus packages, and instead slash spending while lifting taxes and interest rates,” as the annual report of the BIS “has for the past three years been warning of the dangers of a repeat of the depression.” Further, “Its latest annual report warned that countries such as Australia faced the possibility of a run on the currency, which would force interest rates to rise.” The BIS warned that, “a temporary respite may make it more difficult for authorities to take the actions that are necessary, if unpopular, to restore the health of the financial system, and may thus ultimately prolong the period of slow growth.”

Of immense import is the BIS warning that, “At the same time, government guarantees and asset insurance have exposed taxpayers to potentially large losses,” and explaining how fiscal packages posed significant risks, it said that, “There is a danger that fiscal policy-makers will exhaust their debt capacity before finishing the costly job of repairing the financial system,” and that, “There is the definite possibility that stimulus programs will drive up real interest rates and inflation expectations.” Inflation “would intensify as the downturn abated,” and the BIS “expressed doubt about the bank rescue package adopted in the US.”[35]

The BIS further warned of inflation, saying that, “The big and justifiable worry is that, before it can be reversed, the dramatic easing in monetary policy will translate into growth in the broader monetary and credit aggregates,” the BIS said. That will “lead to inflation that feeds inflation expectations or it may fuel yet another asset-price bubble, sowing the seeds of the next financial boom-bust cycle.”[36]

Major investors have also been warning about the dangers of inflation. Legendary investor Jim Rogers has warned of “a massive inflation holocaust.”[37] Investor Marc Faber has warned that, “The U.S. economy will enter ‘hyperinflation’ approaching the levels in Zimbabwe,” and he stated that he is “100 percent sure that the U.S. will go into hyperinflation.” Further, “The problem with government debt growing so much is that when the time will come and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate.”[38]

Are We Entering A New Great Depression?

In 2007, it was reported that, “The Bank for International Settlements, the world's most prestigious financial body, has warned that years of loose monetary policy has fuelled a dangerous credit bubble, leaving the global economy more vulnerable to another 1930s-style slump than generally understood.” Further:

The BIS, the ultimate bank of central bankers, pointed to a confluence a worrying signs, citing mass issuance of new-fangled credit instruments, soaring levels of household debt, extreme appetite for risk shown by investors, and entrenched imbalances in the world currency system.

[...] In a thinly-veiled rebuke to the US Federal Reserve, the BIS said central banks were starting to doubt the wisdom of letting asset bubbles build up on the assumption that they could safely be "cleaned up" afterwards - which was more or less the strategy pursued by former Fed chief Alan Greenspan after the dotcom bust.[39]

In 2008, the BIS again warned of the potential of another Great Depression, as “complex credit instruments, a strong appetite for risk, rising levels of household debt and long-term imbalances in the world currency system, all form part of the loose monetarist policy that could result in another Great Depression.”[40]

In 2008, the BIS also said that, “The current market turmoil is without precedent in the postwar period. With a significant risk of recession in the US, compounded by sharply rising inflation in many countries, fears are building that the global economy might be at some kind of tipping point,” and that all central banks have done “has been to put off the day of reckoning.”[41]

In late June of 2009, the BIS reported that as a result of stimulus packages, it has only seen “limited progress” and that, “the prospects for growth are at risk,” and further “stimulus measures won't be able to gain traction, and may only lead to a temporary pickup in growth.” Ultimately, “A fleeting recovery could well make matters worse.”[42]

The BIS has said, in softened language, that the stimulus packages are ultimately going to cause more damage than they prevented, simply delaying the inevitable and making the inevitable that much worse. Given the previous BIS warnings of a Great Depression, the stimulus packages around the world have simply delayed the coming depression, and by adding significant numbers to the massive debt bubbles of the world’s nations, will ultimately make the depression worse than had governments not injected massive amounts of money into the economy.

After the last Great Depression, Keynesian economists emerged victorious in proposing that a nation must spend its way out of crisis. This time around, they will be proven wrong. The world is a very different place now. Loose credit, easy spending and massive debt is what has led the world to the current economic crisis, spending is not the way out. The world has been functioning on a debt based global economy. This debt based monetary system, controlled and operated by the global central banking system, of which the apex is the Bank for International Settlements, is unsustainable. This is the real bubble, the debt bubble. When it bursts, and it will burst, the world will enter into the Greatest Depression in world history.

Notes

The Military-Industrial Complex is Ruining the Economy by Washington's Blog
Global Research, January 10, 2010
Washington's Blog - 2010-01-09
Email this article to a friend Print this article
Everyone knows that the too big to fails and their dishonest and footsy-playing regulators and politicians are largely responsible for trashing the economy. But the military-industrial complex shares much of the blame. Nobel prize winning economist Joseph Stiglitz says that the Iraq war will cost $3-5 trillion dollars. Sure, experts say that the Iraq war has increased the threat of terrorism. See this, this, this, this, this, this and this. And we launched the Iraq war based on the false linkage of Saddam and 9/11, and knowingly false claims that Saddam had WMDs. And top British officials, former CIA director George Tenet, former Treasury Secretary Paul O'Neill and many others say that the Iraq war was planned before 9/11. But this essay is about dollars and cents. America is also spending a pretty penny in Afghanistan. The U.S. admits there are only a small handful of Al Qaeda in Afghanistan. As ABC notes: U.S. intelligence officials have concluded there are only about 100 al Qaeda fighters in the entire country. With 100,000 troops in Afghanistan at an estimated yearly cost of $30 billion, it means that for every one al Qaeda fighter, the U.S. will commit 1,000 troops and $300 million a year. Sure, the government apparently planned the Afghanistan war before 9/11 (see this and this). And the Taliban offered to turn over Bin Laden (see this and this). And we could have easily killed Bin Laden in 2001 and again in 2007, but chose not to, even though that would have saved the U.S. hundreds of billions of dollars in costs in prosecuting the Afghanistan war. But this essay is about dollars and cents. Increasing the Debt Burden of a Nation Sinking In Debt All of the spending on unnecessary wars adds up. The U.S. is adding trillions to its debt burden to finance its multiple wars in Iraq, Afghanistan, Yemen, etc. Two top American economists - Carmen Reinhart and Kenneth Rogoff - show that the more indebted a country is, with a government debt/GDP ratio of 0.9, and external debt/GDP of 0.6 being critical thresholds, the more GDP growth drops materially. Specifically, Reinhart and Rogoff write: The relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more. We find that the threshold for public debt is similar in advanced and emerging economies... Indeed, it should be obvious to anyone who looks at the issue that deficits do matter. A PhD economist told me: War always causes recession. Well, if it is a very short war, then it may stimulate the economy in the short-run. But if there is not a quick victory and it drags on, then wars always put the nation waging war into a recession and hurt its economy. You know about America's unemployment problem. You may have even heard that the U.S. may very well have suffered a permanent destruction of jobs. But did you know that the defense employment sector is booming? As I pointed out in August, public sector spending - and mainly defense spending - has accounted for virtually all of the new job creation in the past 10 years: The U.S. has largely been financing job creation for ten years. Specifically, as the chief economist for Business Week, Michael Mandel, points out, public spending has accounted for virtually all new job creation in the past 1o years: Private sector job growth was almost non-existent over the past ten years. Take a look at this horrifying chart: Between May 1999 and May 2009, employment in the private sector sector only rose by 1.1%, by far the lowest 10-year increase in the post-depression period. It’s impossible to overstate how bad this is. Basically speaking, the private sector job machine has almost completely stalled over the past ten years. Take a look at this chart: Over the past 10 years, the private sector has generated roughly 1.1 million additional jobs, or about 100K per year. The public sector created about 2.4 million jobs. But even that gives the private sector too much credit. Remember that the private sector includes health care, social assistance, and education, all areas which receive a lot of government support. *** Most of the industries which had positive job growth over the past ten years were in the HealthEdGov sector. In fact, financial job growth was nearly nonexistent once we take out the health insurers. Let me finish with a final chart. Without a decade of growing government support from rising health and education spending and soaring budget deficits, the labor market would have been flat on its back. [120] Raw Story argues that the U.S. is building a largely military economy: The use of the military-industrial complex as a quick, if dubious, way of jump-starting the economy is nothing new, but what is amazing is the divergence between the military economy and the civilian economy, as shown by this New York Times chart. In the past nine years, non-industrial production in the US has declined by some 19 percent. It took about four years for manufacturing to return to levels seen before the 2001 recession -- and all those gains were wiped out in the current recession. By contrast, military manufacturing is now 123 percent greater than it was in 2000 -- it has more than doubled while the rest of the manufacturing sector has been shrinking... It's important to note the trajectory -- the military economy is nearly three times as large, proportionally to the rest of the economy, as it was at the beginning of the Bush administration. And it is the only manufacturing sector showing any growth. Extrapolate that trend, and what do you get? The change in leadership in Washington does not appear to be abating that trend...[121] So most of the job creation has been by the public sector. But because the job creation has been financed with loans from China and private banks, trillions in unnecessary interest charges have been incurred by the U.S.So we're running up our debt (which will eventually decrease economic growth), but the only jobs we're creating are military and other public sector jobs. PhD economist Dean Baker points out that America's massive military spending on unnecessary and unpopular wars lowers economic growth and increases unemployment: Defense spending means that the government is pulling away resources from the uses determined by the market and instead using them to buy weapons and supplies and to pay for soldiers and other military personnel. In standard economic models, defense spending is a direct drain on the economy, reducing efficiency, slowing growth and costing jobs. A few years ago, the Center for Economic and Policy Research commissioned Global Insight, one of the leading economic modeling firms, to project the impact of a sustained increase in defense spending equal to 1.0 percentage point of GDP. This was roughly equal to the cost of the Iraq War. Global Insight’s model projected that after 20 years the economy would be about 0.6 percentage points smaller as a result of the additional defense spending. Slower growth would imply a loss of almost 700,000 jobs compared to a situation in which defense spending had not been increased. Construction and manufacturing were especially big job losers in the projections, losing 210,000 and 90,000 jobs, respectively. The scenario we asked Global Insight [recognized as the most consistently accurate forecasting company in the world] to model turned out to have vastly underestimated the increase in defense spending associated with current policy. In the most recent quarter, defense spending was equal to 5.6 percent of GDP. By comparison, before the September 11th attacks, the Congressional Budget Office projected that defense spending in 2009 would be equal to just 2.4 percent of GDP. Our post-September 11th build-up was equal to 3.2 percentage points of GDP compared to the pre-attack baseline. This means that the Global Insight projections of job loss are far too low... The projected job loss from this increase in defense spending would be close to 2 million. In other words, the standard economic models that project job loss from efforts to stem global warming also project that the increase in defense spending since 2000 will cost the economy close to 2 million jobs in the long run. The Political Economy Research Institute at the University of Massachusetts, Amherst has also shown that non-military spending creates more jobs than military spending. So we're running up our debt - which will eventually decrease economic growth - and creating many fewer jobs than if we spent the money on non-military purposes. But the War on Terror is Urgent for Our National Security, Isn't It? For those who still think that the Iraq and Afghanistan wars are necessary to fight terrorism, remember that a leading advisor to the U.S. military - the very hawkish and pro-war Rand Corporation - released a study in 2008 called "How Terrorist Groups End: Lessons for Countering al Qa'ida". The report confirms that the war on terror is actually weakening national security. As a press release about the study states: "Terrorists should be perceived and described as criminals, not holy warriors, and our analysis suggests that there is no battlefield solution to terrorism." Former U.S. National Security Adviser Zbigniew Brzezinski told the Senate that the war on terror is "a mythical historical narrative". And Newsweek has now admitted that the war on terror is wholly unnecessary. In fact, starting right after 9/11 -- at the latest -- the goal has always been to create "regime change" and instability in Iraq, Iran, Syria, Libya, Sudan, Somalia and Lebanon; the goal was never really to destroy Al Qaeda. As American reporter Gareth Porter writes in Asia Times: Three weeks after the September 11, 2001, terror attacks, former US defense secretary Donald Rumsfeld established an official military objective of not only removing the Saddam Hussein regime by force but overturning the regime in Iran, as well as in Syria and four other countries in the Middle East, according to a document quoted extensively in then-under secretary of defense for policy Douglas Feith's recently published account of the Iraq war decisions. Feith's account further indicates that this aggressive aim of remaking the map of the Middle East by military force and the threat of force was supported explicitly by the country's top military leaders. Feith's book, War and Decision, released last month, provides excerpts of the paper Rumsfeld sent to President George W Bush on September 30, 2001, calling for the administration to focus not on taking down Osama bin Laden's al-Qaeda network but on the aim of establishing "new regimes" in a series of states... *** General Wesley Clark, who commanded the North Atlantic Treaty Organization bombing campaign in the Kosovo war, recalls in his 2003 book Winning Modern Wars being told by a friend in the Pentagon in November 2001 that the list of states that Rumsfeld and deputy secretary of defense Paul Wolfowitz wanted to take down included Iraq, Iran, Syria, Libya, Sudan and Somalia [and Lebanon]. *** When this writer asked Feith . . . which of the six regimes on the Clark list were included in the Rumsfeld paper, he replied, "All of them." *** The Defense Department guidance document made it clear that US military aims in regard to those states would go well beyond any ties to terrorism. The document said the Defense Department would also seek to isolate and weaken those states and to "disrupt, damage or destroy" their military capacities - not necessarily limited to weapons of mass destruction (WMD)... Rumsfeld's paper was given to the White House only two weeks after Bush had approved a US military operation in Afghanistan directed against bin Laden and the Taliban regime. Despite that decision, Rumsfeld's proposal called explicitly for postponing indefinitely US airstrikes and the use of ground forces in support of the anti-Taliban Northern Alliance in order to try to catch bin Laden. Instead, the Rumsfeld paper argued that the US should target states that had supported anti-Israel forces such as Hezbollah and Hamas. *** After the bombing of two US embassies in East Africa [in 1988] by al-Qaeda operatives, State Department counter-terrorism official Michael Sheehan proposed supporting the anti-Taliban Northern Alliance in Afghanistan against bin Laden's sponsor, the Taliban regime. However, senior US military leaders "refused to consider it", according to a 2004 account by Richard H Shultz, Junior, a military specialist at Tufts University. A senior officer on the Joint Staff told State Department counter-terrorism director Sheehan he had heard terrorist strikes characterized more than once by colleagues as a "small price to pay for being a superpower". If you still believe that the war on terror is necessary, please read this. Torture is Bad for the Economy For those who still think torture is a necessary evil, you might be interested to learn that top experts in interrogation say that, actually: Torture doesn't work in providing information which will keep us safe Torture actually reduces our national security and creates new terrorists Most of those tortured were innocent Indeed, historians tell us that torture has been used throughout history - not to gain information - but as a form of intimidation, to terrorize people into obedience. In other words, at its core, torture is a form of terrorism. Moreover, the type of torture used by the U.S. in the last 10 years is of a special type. Senator Levin revealed that the the U.S. used torture techniques aimed at extracting false confessions. McClatchy subsequently filled in some of the details: Former senior U.S. intelligence official familiar with the interrogation issue said that Cheney and former Defense Secretary Donald H. Rumsfeld demanded that the interrogators find evidence of al Qaida-Iraq collaboration... For most of 2002 and into 2003, Cheney and Rumsfeld, especially, were also demanding proof of the links between al Qaida and Iraq that (former Iraqi exile leader Ahmed) Chalabi and others had told them were there." It was during this period that CIA interrogators waterboarded two alleged top al Qaida detainees repeatedly — Abu Zubaydah at least 83 times in August 2002 and Khalid Sheik Muhammed 183 times in March 2003 — according to a newly released Justice Department document... When people kept coming up empty, they were told by Cheney's and Rumsfeld's people to push harder," he continued."Cheney's and Rumsfeld's people were told repeatedly, by CIA . . . and by others, that there wasn't any reliable intelligence that pointed to operational ties between bin Laden and Saddam . . . A former U.S. Army psychiatrist, Maj. Charles Burney, told Army investigators in 2006 that interrogators at the Guantanamo Bay, Cuba, detention facility were under "pressure" to produce evidence of ties between al Qaida and Iraq. "While we were there a large part of the time we were focused on trying to establish a link between al Qaida and Iraq and we were not successful in establishing a link between al Qaida and Iraq," Burney told staff of the Army Inspector General. "The more frustrated people got in not being able to establish that link . . . there was more and more pressure to resort to measures that might produce more immediate results." "I think it's obvious that the administration was scrambling then to try to find a connection, a link (between al Qaida and Iraq)," [Senator] Levin said in a conference call with reporters. "They made out links where they didn't exist." Levin recalled Cheney's assertions that a senior Iraqi intelligence officer had met Mohammad Atta, the leader of the 9/11 hijackers, in the Czech Republic capital of Prague just months before the attacks on the World Trade Center and the Pentagon. The FBI and CIA found that no such meeting occurred. In other words, top Bush administration officials not only knowingly lied about a non-existent connection between Al Qaida and Iraq, but they pushed and insisted that interrogators use special torture methods aimed at extracting false confessions to attempt to create such a false linkage. See also this and this. Paul Krugman eloquently summarized the truth about the type of torture used: Let’s say this slowly: the Bush administration wanted to use 9/11 as a pretext to invade Iraq, even though Iraq had nothing to do with 9/11. So it tortured people to make them confess to the nonexistent link. There’s a word for this: it’s evil. But since this essay in on dollars and cents, the important point is that terrorism is bad for the economy. Specifically, a study by Harvard and NBER points out: From an economic standpoint, terrorism has been described to have four main effects (see, e.g., US Congress, Joint Economic Committee, 2002). First, the capital stock (human and physical) of a country is reduced as a result of terrorist attacks. Second, the terrorist threat induces higher levels of uncertainty. Third, terrorism promotes increases in counter-terrorism expenditures, drawing resources from productive sectors for use in security. Fourth, terrorism is known to affect negatively specific industries such as tourism. The Harvard/NBER concludes: In accordance with the predictions of the model, higher levels of terrorist risks are associated with lower levels of net foreign direct investment positions, even after controlling for other types of country risks. On average, a standard deviation increase in the terrorist risk is associated with a fall in the net foreign direct investment position of about 5 percent of GDP. So the more unnecessary wars American launches, the more innocent civilians we kill, and the more people we torture, the less foreign investment in America, the more destruction to our capital stock, the higher the level of uncertainty, the more counter-terrorism expenditures and the less expenditures in more productive sectors, and the greater the hit to tourism and some other industries. Moreover: Terrorism has contributed to a decline in the global economy (for example, European Commission, 2001). So military adventurism and torture, which increase terrorism, hurt the world economy. And see this. For the foregoing reasons, the military-industrial complex is ruining the economy.

Stiglitz says economists partly to blame for GFC

To blame: Joseph Stiglitz says that "economists should be included in the list of those to 'blame' for the (global financial) crisis." Picture: Daniel Acker/Bloomberg Source: Bloomberg

NOBEL prize-winner Joseph Stiglitz says economists are partially to blame for the financial crisis.

The former World Bank chief economist said the housing bubble that sparked the US recession had been driven by the belief that prices would rise forever.

Prof. Stiglitz said the crisis, which began when the bubble burst, uncovered "major flaws" in widespread ideas such as the belief that economic participants act rationally, Bloomberg reported.

In a slide presentation to a US conference, he said homeowners, investors and "probably" financial executives may have "bought into their own false arguments".

"Economists should be included in the list of those to 'blame' for the crisis," Prof. Stiglitz said.

But there was now the chance to develop new ideas "based on more plausible accounts of individual and firm behaviour".

Start of sidebar. Skip to end of sidebar.

Related Coverage

• 'End US dollar dominance', urges France Herald Sun, 3 days ago
• US economy seen as sluggish for a decade The Australian, 7 days ago
• Fed debates new role: bubble fighter The Australian, 2 Dec 2009
• Price of a policy narrative The Australian, 16 Nov 2009
• Tax carbon rather than trade in it The Australian, 16 Oct 2009

End of sidebar. Return to start of sidebar.

His comments came ahead of the release of key economic data this week which will give a clearer picture of recovery in the US.

The main focus will be on Friday's release of official US jobs data.

"The November figures surprised on the upside and overall economists are looking for a flat result in December," said CommSec chief economist Craig James.

Wall Street ended 2009 with a fizzle when it last traded on Thursday amid thin volumes and concerns interest rates may rise as the US economy recovers.

As a result, the Australian sharemarket is expected to start its first trading session for 2010 this morning on a downer.

But Mr James said the market could rally later today as investors shake off the negative US lead.

'End US dollar dominance', urges France

• From: AFP
• January 08, 2010 9:01AM

• Increase Text Size
• Decrease Text Size
• Print
• Email
• Share
  • Add to Digg
  • Add to del.icio.us
  • Add to Facebook
  • Add to Kwoff
  • Add to Myspace
  • Add to Newsvine
  • What are these?

FRENCH President Nicolas Sarkozy urged an end to the US dollar's global dominance, warning that its weakness poses an "unacceptable'' threat to European competitiveness.

"The monetary disorder has become unacceptable,'' said Mr Sarkozy, who later this month is due to address the world economic forum in Davos.

"The world is multipolar, the monetary system must become multi-monetary,'' he said in an apparent call for other currencies to be promoted over the greenback.

The dollar has weakened considerably against the euro in the past year, making euro-priced exports more expensive and putting eurozone producers at a competitive disadvantage.

Mr Sarkozy said on Wednesday that the dollar's weakness posed a "considerable'' problem for French businesses and should be "at the centre of international debate''.

Overnight he told a Paris conference on new approaches to capitalism that ``we cannot fight in Europe to improve the competitiveness of our businesses ... and have a dollar that is losing half of its value''.

Start of sidebar. Skip to end of sidebar.

Related Coverage

• Sarkozy's henchmen 'threatened rival' The Australian, 6 Dec 2009
• Tax carbon rather than trade in it The Australian, 16 Oct 2009
• Sarkozy junior embroiled in row Herald Sun, 12 Oct 2009
• Doctors tell Sarkozy to slow down The Australian, 28 Jul 2009
• Sarkozy suffers private jet envy The Australian, 21 Apr 2009

End of sidebar. Return to start of sidebar.

Mr Sarkozy's office has said he is due on January 27 to give the inaugural speech at the annual forum of world political and business leaders in the Swiss resort of Davos, becoming the first French president to attend the gathering.

He took a harsh stance during the global crisis against freewheeling capitalist practices and pushed hard for a stricter line on bank regulation and tax evasion, taking a vocal role among leaders of the G20 grouping.

He has said he wants to transform the international monetary system when France takes over the leadership of the G20 in 2011.

Mr Sarkozy's view gained the backing of the Nobel Prize-winning US economist Joseph Stiglitz, who was taking part in the Paris conference.

The French president "articulated ... some of the problems with the global financial system, the currency and how it is putting Europe at a disadvantage,'' said Prof Stiglitz, who was an adviser to former US president Bill Clinton.

"A dollar-based system ... might have made sense in the 20th century but doesn't make sense in the 21th century.''

Overnight, the euro fell to $US1.4353, having traded late last year around $US1.50 levels.