Fictitious
capital
From Wikipedia, the free
encyclopedia
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
[edit] References
- ^
Marx,
Karl. Capital, volume III. http://www.marxists.org/archive/marx/works/1894-c3/.
- ^
Harvey,
David (2006). Limits to Capital. London: Verso. p. 95.
ISBN 9781844670956.
- ^
Itoh, Makoto;
Lapavitsas, Costas (1998), Political Economy of Money and Finance,
London and Basingstoke: Macmillan, ISBN 9780312211646
- ^
Marx,
Karl (1894), Capital, volume III, chapter 29, http://www.marxists.org/archive/marx/works/1894-c3/ch29.htm, retrieved 2008-06-26
- ^
Harvey,
David (2006). Limits to Capital. London: Verso.
p. 276. ISBN 9781844670956.
- ^
Marx,
Karl (1894), Capital, volume III, chapter 29, http://www.marxists.org/archive/marx/works/1894-c3/ch29.htm, retrieved 2008-06-26
- ^
Marx,
Karl (1894), Capital, volume III, chapter 29, http://www.marxists.org/archive/marx/works/1894-c3/ch29.htm, retrieved 2008-06-26
- ^
Harvey,
David (2006). Limits to Capital. London: Verso.
pp. 294–296. ISBN 9781844670956.
- ^
Harvey,
David (2006). Limits to Capital. London: Verso.
pp. 276–277. ISBN 9781844670956.
- ^
Marx,
Karl. Capital, volume III. Penguin. p. 674.
- ^
Marx,
Karl. Capital, volume III. Penguin. pp. 674–675.
- ^
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 |
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
More about AIG:
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
January 8, 2010
Op-Ed
Columnist
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.
“Homes rose
markedly in value,
especially in hot markets like Florida and New York City. Borrowers
believed
that home purchases were no-risk ventures certain to escalade, and they
went
out on a limb to buy. Lenders who had once required large down payments
now
permitted home purchasers to combine two and three loans to buy a home.
People
took out what were called “buffet” loans, which were interest-only
loans that
buyers were told they should refinance in three years or five years.
Lenders
told home buyers not to worry; homes were rising so fast in value that
it would
always be easy to refinance into another loan. Developpers built larger
houses.
Why not? Borrowers wanted larger homes. They needed the space to hold
all the
things they were buying.” --U. S. Housing market in 1928-29, in
Kristin
Downey, The Woman Behind the New Deal (Frances Perkins), 2009, p. 106, from Gail Radford, Modern
Housing for America: Policy Struggles in the New Deal,
1996, pp.10-22
“I place
economy (saving) among the first and most
important virtues, and debt as the greatest of dangers to be
feared.” --Thomas
Jefferson: 3rd US President (1801-09)
“America is
more communist than China is right now. You can see that this is
welfare of the rich, it is socialism for the rich -- it’s just bailing
out
financial institutions. This is madness; this is insanity; they have
more than
doubled the American national debt in one weekend for a bunch of crooks
and
incompetents.” --Jim Rogers, American investor
After a
decade plus of unchecked greed by money-changers, of the political
dismantling
of financial regulation, of large “too-big-to-fail” banks made larger,
of
artificial easy money by the central bank, of the risky securitization
of all
kinds of debt instruments and of leveraged buy-outs of scores of
companies with
their own debts by financial operators, it was no surprise that the
financial
house of cards came crashing down in 2007-2008. It was like a
preprogrammed
financial crisis. A perfect financial storm.
What lessons can be drawn from the recent
unhealthy and
unpalatable past? And, what is in store for the near future,
considering that
hardly anything in the financial environment has changed? A crisis
caused by a
near total absence of financial regulation, by a too easy monetary
policy and
by too much debt, has been met with no additional financial regulation,
by an
even easier monetary policy and by even more debt. In fact, the U.S.
ratio of total debt ($57 trillion)
to the economy (GDP: $14.5 trillion in 2009) is
even higher today at 3.9, then it was before the onset of the crisis in
2007-08, when it stood at 3.4.
That is why we will argue here that the problems
of U.S.
financial dysfunction have not been solved. On the contrary, they have
been
swept under the large rug of even easier money and of even larger
debts, which
is only postponing the day of reckoning. For sure, the large Wall
Street banks’
bad debts have been transferred to the public sector (the Treasury and
the Fed)
and to the quasi public sector (Fannie Mae and Freddie Mac), but the
overall
debt load of the U.S. economy has not been reduced; it has been
increased. That
is why the U.S. is condemned to continue its foreign borrowing binge
for some
time to come.
In general, too much
foreign borrowing is bad for an economy, especially if it is done to
finance an
excessive level of domestic consumption. When this happens, it is a
sign that
total domestic expenditures (government, corporations, consumers)
exceed total
incomes. The country lives beyond its means and the gap has to be
filled with
net foreign borrowings.
The principal indicator of this situation is the current
account (a broader measure than the external trade balance) of the
country.
When a country’s current account turns negative, more money for imports
and
interest payments is flowing out of the country than is coming in
through
exports and investment income. Like any individual, of course, a
country can
borrow abroad if its credit rating is good. The question is how much
and for
how long. For countries that have fully convertible currencies or,
better, for
countries like the United States whose national currency also serves as
an international key-currency, the
situation can endure for a longer period, but there is always a day of
reckoning.
In general, for a normal economy, a negative
current account
that exceeds six (6) percent of Gross Domestic Product (GDP),
especially if
this is due to a negative trade balance, usually indicates a non
sustainable
situation of foreign borrowing and foreign indebtedness that can lead
to a financial crisis. Countries like Mexico (1994-95) and Thailand (1997-98)
experienced such a financial crisis in the 1990’s. Such was the case
also with Argentina
at the turn of the century.
Since 2000, and coinciding with the arrival of the
George W.
Bush Republican administration, the United States has also embarked
upon a
policy of excessive domestic spending, resulting in larger and larger
and
persistent current account deficits and huge foreign borrowings.
Indeed, the
adoption of an imperial foreign policy of
permanent war throughout the world, financed on credit, and an
ideological
preference for large fiscal deficits, have translated into large
American
current account deficits.
In 2006, the U.S. (external) current account
deficit reached
6.5 percent of GDP. This was the apex of external debt sustainability
and a
harbinger of economic troubles to come for the U.S. economy. As a
matter of
fact, this induced me to write an article on October 16, 2006 entitled “Headwinds
for the US Economy,” in
which I warned that it was a “matter of months, not years,” before the U.S. economy and the U.S.
dollar begin to experience some downward pressures. I repeated the
warning a
few months later when I wrote on May 5, 2007, (A
Slowdown or a Recession in the U.S. in
2008?), that we could
expect “the collapse of one and possibly several major financial
institutions under the pressures of bad loans and record foreclosures .
. . The
rate of foreclosure is bound to spike in the coming months, possibly
culminating in the next two years into a financial hurricane.” This
was said
many months before the onset of the 2008-09 recession and the September
15,
2008, failure of the large investment bank Lehman Brothers.
In 2008, in the midst of the economic recession,
the U.S.
current account deficit was still estimated at –$706 billion (nearly
all caused
by a –$707.8 billion trade deficit) for a $14,441 U. S. GDP, that
translated
into a 4.9 percent current account deficit relative to the economy.
With the 2008–09 economic crisis and recession,
the US
current account deficit has since been somewhat reduced due to a drop
in
incomes and in imports, and partly due to a sharp decline in oil
prices, but it
is expected to remain above four percent of GDP. In the coming years,
this
ratio is likely to increase again as the long-term U.S. fiscal deficit
is
expected to remain at 10 percent of GDP for years to come.
The Fed’s Role in
creating asset price bubbles
The causes of a financial crisis are complex and
can vary
from one country to the next. In general, however, they usually stem
from the
central bank becoming subservient to the government when the latter
decides to
embark upon a policy of large fiscal deficits. If the central
government opts
in favor of monetizing the public deficits and keeping interest rates
low, an asset bubble is bound to emerge.
Unfortunately, that’s pretty much what the
Greenspan Fed
elected to do in maintaining an easy money policy for too long and in
keeping
interest rates too low, for too long, in the late 1990s and in the
first part
of the 2000 decade. Indeed, most economists agree that in 2003-04, the
U.S. Fed
should have raised short-term interest rates (pushed down to 1 percent
in June
2003 from 6.5 percent in December 2000). But the then Greenspan Fed
(current
Fed Chairman Ben S. Bernanke has been a Fed Board member since 2002)
was deeply
embroiled in the Bush political agenda. Chairman Alan Greenspan
publicly
acknowledged this fact when he declared on September 17, 2007, in an
interview
with the Financial Times, that “raising interest rates sooner and
faster (before
the 2004 presidential election) would not have been acceptable to
the
political establishment given the very low (official) rate of
inflation.”
In financial matters, the American central bank
(the Fed or the Federal Reserve System)
is a curious animal. It is an institution that is entrusted to regulate
banks
and other financial institutions, but it is partly owned by the large
money
center banks. It is in a perpetual conflict of interests. In fact, it
can be
said that the Fed is the banks’ own private government. In good times,
large
Wall Street banks, bank holding companies and other large integrated
financial
groups, such as AIG (American International Group), are pretty much
left alone
and allowed to build profitable but risky and shaky financial pyramids,
with
scant supervision. When things go bad, however, the Fed stands ready to
bail
them out with automatic discounting, zero-interest loans and other
goodies, the
overall cost being transferred to the general public through an
inflation tax and
a debased currency. We know since 2008 that the U.S. Treasury also
stands ready
with public money to bail out the large Wall Street banks when their
gambles go
sour. The $700 billion Troubled Assets Relief Program (TARP)
is testimony to that effect.
A central bank can always print new money. But
this is
hardly a magic recipe for prosperity. If it were so, many Third World
countries
could claim to have discovered this magic potion. The current Bernanke
Fed is
tragically wrong in its belief that it can reverse the current
over-indebtedness situation in the economy and its mismanagement of the
financial crisis by printing money. It is not true that the real
economy always
respond positively to heavy doses of monetary stimulus. In fact, the
contrary
is usually the case. If it were true, Zimbabwe, which is an African
economic basket case with an uncontrolled bout of hyperinflation, would
be
prosperous. The U.S. economy is not exempt from fundamental economic
laws. A
few years down the road, people will see why.
It is my feeling that the U.S. economy is
presently in the
eye of a powerful financial hurricane of debt
liquidation. Such systemic crisis happens no more than
twice in a century and it takes at least a decade to work itself out.
In this
environment, one should be wary of the stock market as a barometer of
the real
economy. There could be artificially created short-term “liquidity”
rallies,
when all the while the real economy remains in the doldrums. The 2009
liquidity-driven stock market rally has all the appearances of such a
bear
market rally destined to fail and trap many unwary investors. In fact,
this
rally looks like a mirror repeat of the 1930 stock market rally that
saw stocks
retrace some 50 percent of their initial 1929 losses. We know now that
this was
only a mirage, and that the worst was still to come.
In my last July
10 blog, I stated that there
is likely to be a prolonged 2007-2017 economic stagnation period in the
U.S. I
reconfirm this assessment, which is reinforced by my conviction that
the
Bernanke Fed is making matters worse by its unlimited printing press
so-called
“solution” of discounting everything but the kitchen sink. It is my
contention
that this imprudent Fed is paving the way for the mother lode of bubble
and
subsequent crash. This is because, as alluded to above, they seem to
have
forgotten that the credit cycle and the process of
debt build-up, and the subsequent debt liquidation that follows, are
the
primary driving forces in the underlying economic cycle.
This time the crash will be initiated in the huge bond
market, will spread to the commercial loan market and
ultimately to the stock market, and then will further crush the real
economy in
a way that few understand today but will learn the hard way in the
coming
years.
Let us keep in mind that in the recent past, the
Fed and the
U.S. Treasury did not see the subprime and housing crises coming. They
were
completely taken off-guard. In 2005, according to then Fed member Ben
Bernanke,
“there was no housing bubble,”
even though everybody and his uncle could see that the real estate
bubble was
about to burst.
And now, let us look at the figures. At the end of
2009,
reflecting a binge of printing new money by the Fed, the U.S. monetary base,
i.e.
money circulating through the public and banking reserves on deposit
with the
Federal Reserve, stood at more than $2,016,136,000,000, after having
increased
146 percent in three years. This is unprecedented. —Even if one
subtracts the
inactive excess bank reserves at the Fed, worth more than $1 trillion
(and
earning interest!), the U.S.’s monetary base has grown 22 percent in
three
years, from a starting point of $818 billion in early 2006.
Nevertheless, Fed Chairman Ben Bernanke said in
2009, that
he does not fear inflation and that, in fact, inflation could even go
down from
then on. He could be right for the next few months, but how about the
next few
years?
Those who listened to Chairman B. B. in 2005, and
kept
buying leveraged real estate, lost their shirt. I am of the feeling
that those
who believed Chairman B.B in 2009, and kept buying long-term U.S.
Treasury
bonds, are also going to lose their shirt. Because of the huge federal
deficits
and Fed policy to monetize a big chunk of them, U.S. long-term rates
are bound
to increase in the coming years, whether the real economy grows or not.
That
would be the next Fed-created bubble bursting, the bubble of
artificially low
interest rates, excessive money creation and artificially high asset
prices for
long-term Treasury bonds.
In the past, the big losers of this policy were
the millions
of people who lost their homes through mortgage foreclosures, the
millions of
people who lost their jobs through bankruptcies and the millions of
retirees
who saw their retirement incomes plummet with near zero interest rates.
In the
future, the principal losers will still be middle class families who
will
continue being the victims of a massive spoliation and will still have
trouble
making ends meet, plus retirees whose retirement capital will be
further
eroded. Where is AARP when we need it?
Rodrigue
Tremblay lives in Montreal and can be reached at rodrigue.tremblay@yahoo.com. He is the author of the book
“‘The New American Empire.” Check out his
new book, “The
Code for Global Ethics. Visit his blog site at thenewamericanempire.com/blog.
Copyright ©
1998-2007 Online Journal
Nouriel Roubini Predicts Gold Bubble Will Burst
Published on:
Monday,
December 21, 2009
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.
Nouriel
Roubini was "one of the few to predict the financial crisis" reckons
the Financial Times. Yet plenty of other chicken littles, amateur and
professional, had long warned of trouble ahead, too.
Hence the 150% rise in Gold even before the crisis broke in August
2007. Set against negative real interest rates, unfettered bank
leverage and runaway deficit spending, gold's rare physical persistence
looked a fair bet. And absent Armageddon or double-digit inflation, a
growing handful of people chose to store a chunk of their change in
metal, starting around 2001.
Oh sure, gold has since outstripped the S&P's best-ever run of
year-on-year gains (1982-1989). It's not fallen for more than two
consecutive months either since April '01. But clearly, back then, and
long before our present troubles showed up, these people were nuts!
At least, in Roubini's world they were. Which brings us right up to
date.
This decade's three gold-friendly trends – of sub-zero rates,
over-sized leverage and relentless state deficits – remain firmly in
place. Sadly for fixed-income investors (i.e. everyone now or soon to
be retired), the first and the third look set to blow up together,
sooner or later. Quite when, who can be sure? But the quietly
broadening move towards gold (Glenn Beck aside) rolls on as well. And
so too, oddly, does the idea that Gold only rises on the back of
runaway inflation in consumer prices...or a wipe-out Armageddon in
stocks and bonds.
Those two eventualities would likely push gold sharply higher from
here. We might just get them all at once if current trends persist for
much longer. Better to take a position ahead of time, you might guess.
But no. Not if you're smart like Roubini.
"With no near-term risk of inflation or depression, why have gold
prices started to rise sharply again in the last few months?" asks
Dr.Doom himself of his RGE Monitor clients. Without those extreme
events, this fall's rise in the gold price must be a bubble, he says.
"When inflation is high and rising, gold becomes a hedge against
inflation; and when there is a risk of a near depression and investors
fear for the security of their bank deposits, gold becomes a safe
haven."
So far, so fair. But Gold's performance from 2003-2007 – when it rose
alongside everything else except the Dollar – shows that true chicken
littles tend to move early. Inflation hedging is wasted if you wait
until inflation has struck. Safe haven hoarding comes too late once the
depression's begun. That's why, we guess, ever-more chicken littles
continue to buy gold regardless of what the latest data might say.
Because the coming collapse of the sky won't show in your rear-view
mirror. Not unless, like a good many "gold bugs", you actually crane
your neck round...and squint at history to help guide your driving
through what are proving historical times...
"Money printing typically leads to inflation; excessive leverage tends
to blow up. Governments can in fact become bankrupt. The center of
power rarely sits still for a century or more..."
The problem, of course, is that gold pays no income and earns no
quarterly cashflow. That makes it invaluable on contemporary metrics, a
fact most pundits mistake for worthless. And "Since gold has no
intrinsic value," says Dr.Doom, bounding ahead of his error, "there are
significant risks of a downward correction."
Yes, he acknowledges six basic reasons why Gold continues to rise. To
save space – and show just why they might matter – we'll summarize
Roubini's bull case as:
- money printing;
- bank leverage;
- the Dollar;
- falling mine output;
- Asian gold hoarding; and
- the ultimate "too big to save" of government itself.
Against this, however, Roubini foresees
an end to quantitative
easing and zero rates, buoying the Dollar. Or perhaps "the global
recovery may turn out to be fragile and anemic, leading
to...bullishness about the US Dollar." Or failing that, "the
Dollar-funded carry trade may unravel, crashing the global asset
bubble...together with the wave of monetary liquidity it has caused."
You will have spotted the common denominator. Massed against the six
trends Roubini himself puts in gold's favor, the US Dollar will
prevail. One way or the other. Perhaps. Either way, gold's recent rise
to $1200 an ounce – let alone its jump to fresh all-time highs vs. all
other currencies barring the Aussie Dollar and Japanese Yen – must be a
bubble.
Because Gold, unlike the Dollar, has "no intrinsic value". Or so says
Roubini.
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.
-
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.
-
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.
-
Interest
rates can only go up from zero. That should be obvious. Rising rates
are not positive for equities and multiple expansion.
-
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.
-
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!)
-
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...
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
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
Known as Dr. Doom, the NYU economics professor saw the
mortgage-related meltdown coming.
We
are in the middle of a very severe recession that's going to continue
through all of 2009 - the worst U.S. recession in the past 50 years.
It's the bursting of a huge leveraged-up credit bubble. There's no
going back, and there is no bottom to it. It was excessive in
everything from subprime to prime, from credit cards to student loans,
from corporate bonds to muni bonds. You name it. And it's all reversing
right now in a very, very massive way. At this point it's not just a
U.S. recession. All of the advanced economies are at the beginning of a
hard landing. And emerging markets, beginning with China, are in a
severe slowdown. So we're having a global recession and it's becoming
worse.
Things are going to be awful for everyday people. U.S.
GDP growth is going to be negative through the end of 2009. And the
recovery in 2010 and 2011, if there is one, is going to be so weak -
with a growth rate of 1% to 1.5% - that it's going to feel like a
recession. I see the unemployment rate peaking at around 9% by 2010.
The value of homes has already fallen 25%. In my view, home prices are
going to fall by another 15% before bottoming out in 2010.
For
the next 12 months I would stay away from risky assets. I would stay
away from the stock market. I would stay away from commodities. I would
stay away from credit, both high-yield and high-grade. I would stay in
cash or cashlike instruments such as short-term or longer-term
government bonds. It's better to stay in things with low returns rather
than to lose 50% of your wealth. You should preserve capital. It'll be
hard and challenging enough. I wish I could be more cheerful, but I was
right a year ago, and I think I'll be right this year too.
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
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Global Research, January 10,
2010
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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:
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
- Rachel Hewitt
- From:
Herald
Sun
- January 04,
2010 12:01AM
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".
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
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''.
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.