Dictatorship and Neo-Liberalism: The Tunisian People’s Uprising

December 2010 saw the beginning of a milestone in the Arab World. Protests in Tunisia started because of a lack of freedom, inflation, unemployment, and a decline in wages. They could lead to a new model in the Arab World.

The imposed leaders of the Arab World have taken notice of the Tunisian people’s uprising, which hereto is not a full revolution.

The popular uprising in Tunisia has sent cold shivers up the spines of Arab rulers and made them fear for the continuation of their own unpopular reigns. Remnants of the old regime are also working to incorporate themselves into the formation of a new government.

An Arab Uprising Against the Hand-in-Hand Couple of Dictatorship and Neo-Liberalism

The Tunisian people’s uprising is in part an answer against the vicious police state in Tunisia run by the dictator Zine Al-Abidine Bin Ali. In part, the Tunisian uprising is also an answer to the hideous neo-liberal model of economic development that was imposed by Bin Ali in Tunisia. In this regard, the U.S. and the E.U. were the primary benefactors of the harsh economic measures imposed in Tunisia by Bin Ali.

Up until 2011, Tunisia has consistently been paraded and touted as an ideal state and as a model of success and development by the U.S., the E.U., the World Bank, and the International Monetary Fund, amongst others. Never once have the human right violations, the murders, and the repression in Tunisia been criticized by any of these bodies or their officials.

Up until after Bin Ali fled (January 14, 2010), the mainstream media in North America, Western Europe, Australia, and the Arab World have mentioned nothing about the brutal repression in Tunisia. Inversely, the mainstream media has white-washed most of the Bin Ali regime’s crimes and instead talked about Tunisia as a success story. The Guardian, after Bin Ali ran away to Saudi Arabia from Tunisia, gave a overview of the type of repression Bin Ali directed against Tunisians:

Confusion reigned. For the first time in the Arab world, a people had forced out a leader by spontaneously and peacefully taking to the street. But although Zine al-Abedine Ben Ali has fled, the diehards of his brutal police force have not. During the day random yellow taxi-loads of militia loyal to the ousted leader had careered through the capital and some suburbs, firing randomly into the air. Armed gangs broke into homes and ransacked them, or fired shots in the street.

In the early morning, after the curfew that shuts down Tunis at night, some residents ventured out for coffee at the few cafes that were open, often in the shadow of tanks positioned on intersections. Later, tension ran high. By lunchtime, one hospital morgue in Tunis had registered 13 dead, including five police officers. “This is being done by Ben Ali’s old torturers, they have arms, they want to create chaos,” said an activist from one opposition party.

In residential areas across the country, locals formed vigilante groups to defend themselves against the gangs they feared were led by Ben Ali’s police. In La Marsa, a middle-class suburb to the north, streets were blockaded by old bits of broken doors, plant pots, water cans, bricks and paving slabs, to stop cars speeding through for drive-by shootings or houses being ransacked. Omar, 18, a well-dressed sixth-former who wanted to go to art college, had been standing guard until 3am as part of a hastily-formed group. “There were 30 of us, including my schoolfriends and my dad. We armed ourselves with sticks and whatever we could find, and wore white armbands so the army knew who we were.” As he stood talking outside a smart shopping centre protected by a tank, a soldier warned him to move, as there had been reports of a taxi marauding through the area containing gunmen firing from its windows.

“We’ll never forgive Ben Ali for unleashing his militia on the country,” said one elderly lady. “More than the corruption of his regime, this is what we will never, ever forgive him for.”

Meanwhile, the full horror of repression over four weeks of demonstrations is beginning to emerge. Human rights groups estimate at least 150-200 deaths since 17 December. In random roundups in poor, rural areas youths were shot in the head and dumped far from home so bodies could not be identified. Police also raped women in their houses in poor neighbourhoods in and around Kasserine in the rural interior.

Sihem Bensedrine, head of the National Council for Civil Liberties, said: “These were random, a sort of reprisal against the people. In poor areas, women who had nothing to do with anything, were raped in front of their families. Guns held back the men; the women were raped in front of them.” A handful of cases were reported in Kasserine and Thala last Monday. Rape was often used as a torture technique under the regime; opposition women report they were raped in the basement of the interior ministry, as were men, too.

Rights lawyers were also gathering information on those murdered and dumped far from their villages, thrown into cemetery grounds, or offloaded at the side of the road or outside hospitals. These shootings were believed to have taken place in the past ten days. “Lots of these bodies are yet to be identified; they were purposely dumped far from their homes. Families think their young ones have been arrested. They don’t know they are never coming back,” said Bensedrine, who herself had been beaten and forced into exile before returning in recent days. You have to understand that under Ben Ali, it was a regime of torture, with beating, harassment and intimidation but not necessarily mass killing. The past four weeks has been different; it’s a massacre, it’s something else.”

Ahlem Belhadj, a psychiatrist and women’s rights activist, said people felt robbed of the joy of Ben Ali’s departure by the chaos that had ensued. She said the spontaneous protest movement – and the unemployed undergraduate who started it by setting himself alight – had showed the desperation of a population who felt repressed, humiliated, with no chance of jobs or prospects after 23 years of despotism.

“We had become a nation of hunger strikers; there was no other political or social means of dissent.

“Then, for people to set themselves alight, was extreme: it showed there was such a fear of the ‘other’, the regime, that people could only turn the aggression on themselves. It was self-destruction as a way of fighting.”

Khelil Ezzaouia, an orthopaedic surgeon and trade union figure tipped for a post in the interim government, hoped the chaos would be brought under control, and that commissions set up into rights abuses, political reform and corruption. He said: “There will be a temporary transition government to show the page of Ben Ali has been closed, and to send out a strong signal to reassure the population.”

On national state radio, a tool of regime power until days ago, DJs spoke freely for the first time, but had to regret that the joy of a dictator’s departure had been tempered by a fear of the militia attacks.

“Ours is a difficult happiness,” sighed one music show presenter, before putting on another 1960s resistance song. [1]

Why the Silence from the U.S., France, the E.U., and the Arab Dictators?

While the U.S. and its allies were also quick to label and tout the Cedar Revolution in Lebanon, the Orange Revolution in Ukraine, the Rose Revolution in Georgia, the Tulip Revolution in Kyrgyzstan, the Twitter Revolution in Moldova, and the Green Revolution in Iran, they did not do the same in regards to the protests of the Tunisian people.

When there was election turmoil in Venezuela and in Iran, the U.S. and the E.U. were quick to make declarations about democracy and to criticize Caracas and Tehran. Yet, the same standards were not applied in regards to the 2009 Tunisian elections and the protests that started in December 2010 in Tunisia.

The French, the U.S., the House of Saud, and Israel have all been instrumental in sustaining the Bin Ali dictatorship. Bin Ali in reality served the interests of the U.S. and its allies. American and French “advisors” would call the shots for Tunis, especially in its financial, intelligence, security, and military fields. The U.S., France, and the E.U. also had no problems with the deeply rooted levels of corruption and nepotism in Tunis under Bin Ali.

The American and French governments, as well as Israel, have been complicit in the repression of the Tunisian people and the repression of the Tunisian demands for freedom. This is why there is a groundswell of Tunisian anger towards the U.S., France, and Israel. Protests outside of the American and French embassies are a demonstration of the awareness of the Tunisian people about the U.S. and French role in oppressing their freedom.

The White House and the U.S. State Department only made statements to the benefit of Bin Ali. Hillary Clinton, the U.S. Secretary of State, told Al-Arabiya News Channel that the U.S. government was “not taking sides” in regards to Bin Ali and his brutal repression of unarmed civilian protesters demanding freedom. The U.S. merely waited until Bin Ali fled to even acknowledge the Tunisian people’s rights. Doing quite the opposite over the years, the U.S. government and its officials have continuously made statements of support for Bin Ali, as is customary of their support of any dictators who submit to U.S. economic interests.

The House of Saud, which controls a substantial amount of Arabic media through personal ownership or family ties, would use all its influence to discredit the Tunisian people’s protests in an effort to manipulate Arab public opinion in favour of the dictatorial regime of Bin Ali. Later, when it was clear that there was no hope for the continuation of Bin Ali’s rule, the House of Saud would invite the Tunisian dictator to Saudi Arabia.

The Old Colonial Master: Paris offers to help Bin Ali Crush the Tunisian People

Before it became obvious that the Bin Ali regime was going to collapse, France wanted to help crush the Tunisian people’s demands for freedom. The French Defence Minister, Michèle Alliot-Marie, lied through her teeth about the offer days later.

The Guardian chronicles this:

The French foreign minister, Michèle Alliot-Marie, today defended her controversial offer to help Tunisia’s deposed president restore order days before he was ousted.

Alliot-Marie had been summoned to explain her remarks, made last week, to the Assemblée Nationale’s foreign affairs commission.

The cabinet minister had offered to share the expertise of French security forces “recognised throughout the world” to help control the uprising.

Since Zine al-Abidine Ben Ali fled Tunisia on Friday, France has attempted to distance itself from the former leader, refusing him exile and ordering a block on his family’s property and money held in France.

Today, Alliot-Marie fended off opposition calls for her resignation and told parliamentarians that France, along with other countries, had “not seen events coming”.

“Let’s face it, we were all of us – politicians, diplomats, researchers, journalists – taken by surprise by the jasmine revolution,” Alliot-Marie said.

She said her offer had been “misrepresented” and had been aimed at helping the Tunisian people, not propping up repression.

“I’d spent the night in an aeroplane, and it’s possible I did not express myself well,” she said. “I began to doubt myself, but afterwards I re-read my proposal to see that it was what actually what I thought and not what was being interpreted by certain people.”

She added that she was “scandalised” by how her comments had been distorted.

Earlier, it had appeared that Alliot-Marie was being isolated by the Élysée Palace after an adviser of the president, Nicolas Sarkozy, suggested she was expressing “her own analysis of the situation”. [2]

In reality, Paris did secretly send aid to Bin Ali. The U.S. and Israel also sent riot gear and arms.

The Mossad and Israel in Tunisia

In regards to the interests of Tel Aviv, Tunisia has been an open zone for Israeli intelligence work, killings, and data collection against Palestinian and Arab activists. Israel has helped in the repression of democratic dissent in Tunisia to keep Bin Ali in power. It has been a part of Israel’s strategic initiative to prevent any democratic states from emerging in the Arab World. The same can be said about the U.S. and the E.U. in regards to preventing the emergence of real Arab democracy. The Tunisian uprising would actually force the Israeli government to make an “emergency rescue” of so-called Israeli “visitors” in Tunisia:

A group of 20 Israelis was rescued Saturday evening from Tunisia, where a violent uprising has succeeded in overturning the government.

The complicated mission was orchestrated by a number of Israeli authorities, including the Foreign Ministry. The tourists were first transferred to a third country, from where are to continue to Israel by plane. [3]

These so-called Israeli “visitors” that the Israeli government would evacuate from Tunisia were Mossad agents.

Tunisia still in the Cross-Hairs

The neo-liberal model has brought poverty and despair to Tunisia. These facts have been ignored by the U.S., France, and those that commended and lauded Tunisian economic measures. Once again, the U.S. and French governments have also exposed their contempt’s for genuine democracy. Any talk by Paris and the U.S. about respecting and caring for the Tunisian people is merely two-face bravado.

Calls for democracy and fair elections were only made by the U.S. and France after Bin Ali fled Tunisia. If there were any sincerity in the U.S. and French calls for Arab self-determination then they would extend these calls to Saudi Arabia, the United Arab Emirates, Bahrain, Morocco, Egypt, Libya, Jordon, and Yemen. Beyond the Arab World, they would extend these calls to countries like NATO-garrisoned Afghanistan.

The mainstream media is also just starting to pick up on the events in Tunisia, but with a narrow focus that ignores the work of Bin Ali and his cronies as economic hitmen for the E.U. and America. Despite the fact that it has no connection to WikiLeaks and the fact that it is not hereto a full-blown revolution, the revolt in Tunisia has also begun to be dubbed as a “WikiLeaks Revolution.”

Tunisia is not free yet. The Tunisian national unity government is dominated and includes many of the same characters from Bin Ali’s regime. The uprising has not turned into a revolution yet.

The U.S., France, the E.U., the House of Saud, the Arab dictators, and Israel are all conspiring to ensure that a new Tunisian government that will serve their interests will take the mantle of the old Tunisian regime. The structure that kept Bin Ali in place still exists and the foreign interests that supported his rule still hold influence in Tunis. They may manage to retain power.

America and France have not forfeited their economic interests in Tunisia. Nor has the neo-liberal model been declared null and void in Tunis. In a bid to maintain the continuation of French contracts in Tunisia, the French government did not offer to Bin Ali sanctuary in France, despite the fact that he was a loyal ally of Paris until the end of his reign.

Mahdi Darius Nazemroaya is a Research Associate of the Centre for Research on Globalization (CRG).

NOTES
[1] Angelique Chrisafis, “Confusion, fear and horror in Tunisia as old regime’s militia carries on the fight,” The Guardian (U.K.), January 16, 2011.
[2] Kim Willsher, “French minister defends offer of security forces to Tunisia,” The Guardian (U.K.), January 18, 2011.
[3] Ronen Medzini, “20 Israelisrescued from Tunisia, ” Yedioth Ahronoth, January 15, 2011.

Fed Traders Buy Billions in U.S. Debt-The USA at risk of credit downgrading of triple-A rating

The Federal Reserve’s Quantitative Easing 2 traders are fast at work, ensconced in the operations room of the New York Fed’s fortress-like headquarters on Wall Street, buying billions of dollars of U.S. bonds, the New York Times reported.

The goal is to fully implement by June the Fed’s purchase of $600 billion in Treasury debt to complete the Fed’s policy of intervening into the economy in a policy known as Quantitative Easing 2.

At the same time, Moody’s and Standard & Poor’s warned the triple-A sovereign debt rating of the United States is in jeopardy of being downgraded if there continues to be a deterioration in the negative fundamentals of the United States, including the trillion-dollar federal-budget deficits President Obama has run in the last two years.

Unfortunately, this is not the first time since the current economic downturn began that the Fed has bought U.S. debt, and it may not be the last time.

Fed bought $1.7 trillion in U.S. mortgage, Treasury debt in 2009-2010

In March 2009, the Federal Reserve had announced terminating an earlier plan under which the Fed had purchased $1.25 trillion in federal government mortgage-backed securities issued by Freddie Mae and Fannie Mac.

Then, in October 2009, the Fed terminated an earlier program that had purchased an additional $300 billion in U.S. Treasury debt, making the total Fed purchase of U.S. debt in 2009 total an excess of $1.5 trillion.

All total, the Wall Street Journal estimated the Fed ended up buying $1.7 trillion in mortgage and Treasury debt in 2009 before the program was discontinued.

That was considering the first round of Quantitative Easing Round, now commonly known as QE1.

The strategy of the federal government buying its own debt involves an effort to keep interest rates low to keep the costs low in borrowing to pay interest on the debt and borrowing even more to pay for each year’s trillion-dollar federal-budget deficit under Obama.

In the process of buying federal debt, the balance sheet of the Federal Reserve has gone from under $1trillion in 2008 to approximately $2.3 trillion today, according to the Wall Street Journal.

Having the Fed buy federal debt involves a process economists typically call “monetizing the debt,” in that the Federal Reserve essentially is printing money to purchase U.S. debt in a process most Americans would understand as using the MasterCard to pay the Visa bill.

“Out of nearly $2.1 trillion of net issuance across the Treasury, Agencies and MBS [Mortgage-Backed Securities] markets from June 2008-9, the Federal Reserve has accounted for nearly 40 percent of the total demand, buying more than every foreign government combined,” Jon Harooni, a senior analyst at Glenhill Capital, a hedge fund in New York City, and Ravi Tanuku, a research analyst at Fred Alger Management, an investment firm in New York City, wrote in October 2009, criticizing the policy being implemented by Fed Chairman Ben Bernanke and Treasury Secretary Tim Geithner.

“It is not much of a stretch to say the Fed has become the entire mortgage market; it has purchased nearly $500 billion of MBS securities during a period where there was only $350 billion issued,” they continued.

“Looking at the first seven calendar months of 2009 yields similarly startling results: Of the total $1.1 trillion of net issuance across these markets, the Fed has purchased $861 billion or almost 80 percent.”

China irate

International Business Editor Ambrose Evans-Pritchard, writing in the Telegraph in London, reported that China was irate because the Fed’s QE2 policy “risks accelerating the demise of the dollar-based currency system, perhaps leading to an unstable tripod with the euro and yuan, or a hybrid gold standard, or a multi-metal ‘bancor’ along the lines proposed by John Maynard Keynes in the 1940s.”

“The continued and drastic U.S. dollar depreciation recently has led countries including Japan, South Korea and Thailand to intervene in the currency market, intensifying a ‘currency war,’” China’s commerce ministry said Monday. “In the mid-term, the U.S. dollar will continue to weaken and gaming between major currencies will escalate.”

The G20 summit meeting in London in April 2009 took an important step to create a new one-world currency through the International Monetary Fund that is designed to replace the dollar as the world’s foreign-exchange reserve currency of choice.

Point 19 of the final communique from the G20 summit in London on April 2, 2009, specified that, “We have agreed to support a general SDR which will inject $250 billion into the world economy and increase global liquidity,” taking the first steps forward to implement China’s proposal that Special Drawing Rights at the International Monetary Fund should be created as a foreign-exchange currency to replace the dollar.

SDRs are international reserve assets that are calculated by the IMF in a basket of major currencies that are allocated to the IMF 185 member nation-states in relation to the capital, largely in gold or widely accepted foreign currencies that the IMF member nation-states have on deposit with the IMF.

In the short-run, the Fed’s QE2 policy has boosted the Dow to a two-year high, trading last week over 11,500.

Unfortunately, any stimulus to the stock market will be temporary as QE2 merely creates a new bubble, much as the Fed helped create the mortgage bubble by keeping interest rates at 1 percent during 2003-2004.

Inevitably, the Fed will follow QE2 with QE3. Still, at some point the ability of the Fed to purchase U.S. debt will have to come to an end. So far, neither QE2 nor QE3 has done much to improve either employment prospects or the housing market.

Jerome R. Corsi received a Ph.D. from Harvard University in political science in 1972. He is the author of the #1 New York Times bestselling books THE OBAMA NATION: LEFTIST POLITICS AND THE CULT OF PERSONALITY and the co-author of UNFIT FOR COMMAND: SWIFT BOAT VETERANS SPEAK OUT AGAINST JOHN KERRY. He is also the author of AMERICA FOR SALE, THE LATE GREAT U.S.A., and WHY ISRAEL CAN’T WAIT. Currently, Dr. Corsi is a Senior Managing Director in the Financial Services Group at Gilford Securities as well as a senior staff writer for WorldNetDaily.com.

The views, opinions, positions or strategies expressed by the authors and those providing comments are theirs alone, and do not necessarily reflect Gilford Securities Incorporated’s views, opinions, positions or strategies. Gilford Securities Incorporated makes no representations as to accuracy, completeness, currentness, suitability, or validity of any information expressed herein and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use.

The Doomsday Project, Deep Events, and the Shrinking of American Democracy

by Prof Peter Dale Scott

Global Research, January 22, 2011
Asia-Pacific Journal Vol 9, Issue 4 No 2, January 24, 2011.

I know the capacity that is there to make tyranny total in America, and we must see to it that this agency [the National Security Agency] and all agencies that possess this technology operate within the law and under proper supervision, so that we never cross over that abyss. That is the abyss from which there is no return.”– Senator Frank Church (1975)

In recent years I have become more and more concerned with the interactions between three important and alarming trends in recent American history. The first is America’s increasing militarization, and above all its inclination, even obsession, to involve itself in needless and pernicious wars. The second, closely related, is the progressive shrinking of public politics and the rule of law as they are subordinated, even domestically, to the requirements of covert U.S. operations abroad.

The third, also closely related, is the important and increasingly deleterious impact on American history and the global extension of American power, of what I have called deep events. These events, like the JFK assassination, the Watergate break-in, or 9/11, which repeatedly involve law-breaking or violence, are mysterious to begin with, are embedded in ongoing covert processes, have consequences that enlarge covert government, and are subsequently covered up by systematic falsifications in media and internal government records.

One factor linking Dallas, Watergate, and 9/11, has been the involvement in all three deep events of personnel involved in America’s highest-level emergency planning, known since the 1980s as Continuity of Government (COG) planning, or more colloquially as “the Doomsday Project.” The implementation of COG plans on 9/11, or what I call Doomsday Power, was the culmination of three decades of such planning, and has resulted in the permanent militarization of the domestic United States, and the imposition at home of institutions and processes designed for domination abroad.

Writing about these deep events as they occurred over the decades, I have been interested in the interrelations among them. It is now possible to show how each was related both to those preceding it, and those which followed.

I would like in this essay to go further and propose a framework to analyze the on-going forces underlying all of the most important deep events, and how they have contributed to the political ascendance of what used to be called the military-industrial complex. I hope to describe certain impersonal governing laws that determine the socio-dynamics of all large-scale societies (often called empires) that deploy their surplus of power to expand beyond their own borders and force their will on other peoples. This process of expansion generates predictable trends of behavior in the institutions of all such societies, and also in the individuals competing for advancement in those institutions. In America it has converted the military-industrial complex from a threat at the margins of the established civil order, to a pervasive force dominating that order.

President Eisenhower in his farewell address in 1961 warned that “We must guard against the unwarranted influence, whether sought or unsought, by the Military Industrial Complex.”

With this framework I hope to persuade readers that in some respects our recent history is simpler than it appears on the surface and in the media. Our society, by its very economic successes and consequent expansion, has been breeding impersonal forces both outside and within itself that are changing it from a bottom-up elective democracy into a top-down empire. And among these forces are those that produce deep events.

I am far from alone in seeing this degradation of America’s policies and political processes. A similar pattern, reflecting the degradation of earlier empires, was described at length by the late Chalmers Johnson:

The evidence is building up that in the decade following the end of the Cold War, the United States largely abandoned a reliance on diplomacy, economic aid, international law, and multilateral institutions in carrying out its foreign policies and resorted much of the time to bluster, military force, and financial manipulation.

But my analysis goes beyond that of Johnson, Kevin Phillips, Andrew Bacevich, and other analysts, in proposing that three major deep events – Dallas, Watergate, and 9/11 – were not just part of this degradation of American democracy, but played a significant role in shaping it.

As author Michael Lind has observed, there have for a long time been two prevailing and different political cultures in America, underlying political differences in the American public, and even dividing different sectors of the American government. One culture is predominantly egalitarian and democratic, working for the legal consolidation of human rights both at home and abroad. The other, less recognized but with deep historical roots, prioritizes and teaches the use of repressive violence against both domestic and Third World populations to maintain “order.”

To some extent these two mindsets are found in all societies. They correspond to two opposing modes of power and governance that were defined by Hannah Arendt as “persuasion through arguments” versus “coercion by force.” Arendt, following Thucydides, traced these to the common Greek way of handling domestic affairs, which was persuasion (πείθειν) as well as the common way of handling foreign affairs, which was force and violence (βία).”

Hannah Arendt

Writing amid the protests and riots of the 1960s, Arendt feared that traditional authority was at risk, threatened (in her eyes) by the contemporary “loss of tradition and of religion.” A half century later, I would argue that a far greater danger to social equilibrium comes now from those on the right who invoke authority in the name of tradition and religion. With America’s huge expansion into the enterprise of covertly dominating and exploiting the rest of the world, the open processes of persuasion, which have been America’s traditional ideal for handling domestic affairs, have increasingly tilted towards top-down violence.

This tilt towards violent or repressive power is defended rhetorically as a means to preserve social stability, but in fact it threatens it. As Kevin Phillips and others have demonstrated, empires built on violent or repressive power tend to rise and then fall, often with surprising rapidity. Underlying the discussion in this essay is the thesis that repressive power is unstable, creating dialectical forces both within and outside its system. Externally, repressive power helps create its own enemies, as happened with Britain (in India), France (in Indochina) and the Netherlands (in Indonesia).

The Socio-dynamics of Repressive Power in Large-scale Societies

But more dangerous and destabilizing has been the conversion of those empires themselves, into hubristic mechanisms of war. The fall of Periclean Athens, which inspired Thucydides’ reflections, is a case in point. Thucydides described how Athens was undone by the overreaching greed (pleonexia) of its unnecessary Sicilian expedition, a folly presaging America’s follies in Vietnam and Iraq. Thucydides attributed the rise of this folly in the rapid change in Athens after the death of Pericles, and in particular to the rise of a rapacious oligarchy. Paul Kennedy, Kevin Phillips, and Chalmers Johnson have described the recreation of this process in the Roman, Spanish, Portuguese, Dutch, and British empires. Its recurrence again in recent American history corroborates that there is a self-propelling dynamic of power that becomes repressive.

It is useful to be reminded of the historical division between two cultures in America, which both underlay and predated the Civil War. But these two cultures have evolved and been reinforced by many factors. For example urbanization in America’s South and West worked for most of the 20th century to meld the two cultures, but after about 1980 the increasing disparity of wealth in America tended to separate them to an extent recalling the Gilded Age of the 19th century.

More importantly, postwar U.S. history has seen the institutions of domestic self-government steadily displaced by an array of new institutions, like the CIA and Pentagon, adapted first to the repressive dominance and control of foreign populations abroad, and now increasingly dominant domestically. The manipulative ethos of this repressive bureaucracy promotes and corrupts those who, in order to be promoted, internalize the culture of repressive dominance into a mindset.

The egalitarian mindset is widely shared among Americans. But Washington today is securely in the hands of the global repressive dominance mindset, and a deepening of the military-industrial complex into what in my most recent book I call the American war machine. This transformation of America represents a major change in our society. When Eisenhower warned against the military-industrial complex in 1961 it was still a minority element in our political economy. Today it finances and dominates both parties, and indeed is now also financing threats to both parties from the right, as well as dominating our international policy. As a result, liberal Republicans are as scarce in the Republican Party today as Goldwater Republicans were scarce in that party back in 1960.

That change has been achieved partly by money, but partly as a result of deep events like the JFK assassination, the Watergate break-in, and 9/11. As a rule, each of these deep events is attributed by our government and media to marginal outsiders, like Lee Harvey Oswald, or the nineteen alleged plane hijackers.

I have long been skeptical of these “lone nut” explanations, but recently my skepticism has advanced to another level. My research over four decades points to the conclusion that each of these deep events

1) was carried out, at least in part, by individuals in and out of government who shared and sought to promote this repressive mindset;

2) enhanced the power of the repressive mindset within the U.S. government;

3) formed another stage in a continuous narrative whose result has been a transformation of America, into a social system dominated from above, rather than governed from below.

Please note that I am talking about the result of this continuous narrative, not about its purpose. In saying that these deep events have contributed collectively to a major change in American society, I am not attributing them all to a single manipulative “secret team.” Rather I see them as flowing from the workings of repressive power itself, which (as history has shown many times) transforms both societies with surplus power and also the individuals exercising that surplus power.

We are conditioned to think that the open institutions of American governance could not possibly provide a milieu for plots like 9/11 against public order. But since World War Two covert U.S. agencies like the CIA have helped create an alternative world where power is exercised with minimal oversight, often at odds with public agencies’ proclaimed policy objectives of law and order, and often in conjunction with lawless and even criminal foreign and domestic elements.

The expansion of this covert world has occurred principally in Asia. There covert U.S. decisions were made to build up drug-financed armies in Burma, Thailand, and Laos, in a series of aggressive actions that by the 1960s involved America in a hot Indochina War. This war, like the related wars that ensued later in Kuwait, Iraq, and Afghanistan, was initiated by America for a mix of geostrategic and economic reasons, above all the desire to establish a dominant U.S. presence an important region of petroleum reserves.

Air America at Sam Thong, Laos, 1961

The country most deeply affected by the succession of Asian Wars has been America itself. Its expansive forces, backed by powerful interest groups, are now out of control, as our managers, like other empire managers before them, have “come to believe that there is nowhere within their domain – in our case, nowhere on earth – in which their presence is not crucial.”7

To illustrate this, loss of control, let us look for a moment at a milieu which I believe to have been an important factor in all of America’s major domestic deep events: the CIA’s ongoing interactions with the global drug connection.

Unaccountable Power: The CIA and the Return of the Global Drug Connection

Since World War Two the CIA has made systematic use of drug trafficking forces to increase its covert influence — first in Thailand and Burma, then in Laos and Vietnam, and most recently in Afghanistan.8 With America’s expansion overseas, we have seen more and more covert programs and agencies, all using drug traffickers to different and opposing ends.

In 2004 Time and USA Today ran major stories about two of the chief Afghan drug traffickers, Haji Juma Khan and Haji Bashir Noorzai, alleging that each was supporting al-Qaeda, and that Khan in particular “has helped al-Qaeda establish a smuggling network that is peddling Afghan heroin to buyers across the Middle East, Asia and Europe.”9 Later it was revealed that both traffickers were simultaneously CIA assets, and that Khan in particular was “paid a large amount of cash by the United States,” even while he was reportedly helping al-Qaeda to establish smuggling networks.10

There is no longer anything surprising in the news that large U.S. payments were made to a drug trafficker who was himself funding the Taliban and al-Qaeda. The arrangement is no more bizarre than the CIA’s performance during the U.S. “war on drugs” in Venezuela in the 1990s, when the CIA first set up an anti-drug unit in Venezuela, and then helped its chief, Gen. Ramon Guillén Davila, smuggle at least one ton of pure cocaine into Miami International Airport.11

It would be easy to conclude from these reports that the CIA and Pentagon intentionally use drugs to help finance the enemy networks that justify their overseas operations. Yet I doubt that such a cynical Machiavellian objective is ever consciously voiced by those responsible in Washington.

More likely, it is an inevitable consequence of the U.S. repressive style of conducting covert operations. Great emphasis is put on recruiting covert assets; and in unstable areas with weak governance, drug traffickers with their own ample funds and repressive networks are the most obvious candidates for recruitment by the CIA. The traffickers in turn are happy to become U.S. assets, because this status affords them at least a temporary immunity from U.S. prosecution.12

In a nutshell: I am describing a development that is not so much intentional, as a consequence of repressive dynamics. A related example would be the CIA’s recurring use of double agents, again for the reason just suggested. In the 1998 bombing of the U.S. Embassy in Kenya, the chief planner was a double agent, Ali Mohammed, who surveyed the Embassy and reported to Osama bin Laden in 1993, just months after the FBI had ordered the Canadian RCMP to release him from detention.13 In the Mumbai terrorist attack of 2008, the scene was initially surveyed for the attackers by a DEA double agent, David Headley (alias Daood Sayed Gilani) whom “U.S. authorities sent … to work for them in Pakistan…despite a warning that he sympathized with radical Islamic groups.”14

David Headley in court

The central point is that expansion beyond a nation’s borders engenders a pattern of repressive power with predictable results — results that transcend the conscious intentions of anyone within that repressive power system. Newly formed and ill-supervised agencies spawn contradictory policies abroad, the net effect of which is usually both expansive and deleterious – not just to the targeted nation but also to America.

This is especially true of covert agencies, whose practice of secrecy means that controversial policies proliferate without either coordination or review. Asia in particular has been since 1945 the chief area where the CIA has ignored or overridden the policy directives of the State Department. As I document in American War Machine, CIA interventions in Asia, especially those that escalated into the Laotian, Vietnam, and Afghan wars, fostered an ongoing global CIA drug connection, or what I have called elsewhere a dark quadrant of unaccountable power.

This drug connection, richly endowed with huge resources and its own resources of illegal violence, has a major stake in both American interventions and above all unwinnable wars to aggravate the conditions of regional lawlessness that are needed for drug trafficking. Thus it makes perfect sense that the global drug connection has, as I believe, been an ongoing factor in the creation of an overseas American empire that most U.S. citizens never asked for. More specifically, the dark quadrant has contributed to all the major deep events – including Dallas, Watergate, and 9/11, that have helped militarize America and overshadow its public institutions.

Doomsday Power and the Military Occupation of America

I have said that, underlying the surface of America’s major deep events, there has been a pattern of conflict between two mindsets – that of openness and that of repressive dominance – dating back to the Civil War and the Indian wars of the mid-nineteenth century (and before that to the American Revolution).15 But it would be wrong to conclude from this on-going pattern of conflict that there is nothing new in our current situation. On the contrary, America is in the midst of a new crisis arising from this very old antagonism.

Since World War Two, secrecy has been used to accumulate new covert bureaucratic powers under the guise of emergency planning for disasters, planning known inside and outside the government as the “Doomsday Project.” Known more recently (and misleadingly) as “Continuity of Government” (COG) planning, the Doomsday Project, under the guiding hands in the 1980s of Oliver North, Donald Rumsfeld, Dick Cheney, and others, became the vehicle on 9/11 for a significant change of government. This package of extreme repressive power accumulated under the guise of the Doomsday Project can be referred to as Doomsday Power. In concrete terms, the repressive power developed to control the rest of the world is now, to an unprecedented extent, treating America itself as an occupied territory.

What I mean by “doomsday power” is the package of repressive mechanisms (which I have discussed elsewhere under their official name of “continuity of government” or COG plans), that was prepared over two decades by the elite COG planning group, and then implemented beginning on 9/11. The package includes 1) warrantless surveillance, 2) warrantless detention, (including unprecedented abridgments of the right to habeas corpus), and 3) unprecedented steps towards the militarization of domestic security enforcement and shrinking of the posse comitatus acts.

One recent development of Doomsday power, for example, has been the deployment since 2008 of a U.S. Army Brigade Combat Team to be stationed permanently in the United States. A major part of its dedicated assignment is to be “called upon to help with civil unrest and crowd control.”16 Many people seem to be unaware that Americans, together with this Brigade, have lived since 2002 under a U.S. Army Command called NORTHCOM.17 Yet if nothing is done to change the present course of events, historians may come some day to compare the stationing of this brigade in 2008 CE to the date, in 49 BCE, when Caesar, along with his legion, crossed the Rubicon.

And I believe that the forces that have worked for decades to create Doomsday power have, like the global drug connection, been involved in every one of the deep events, from Dallas to 9/11, that have helped bring us here.

Peter Dale Scott, a former Canadian diplomat and English Professor at the University of California, Berkeley, is the author of Drugs Oil and War, The Road to 9/11, The War Conspiracy: JFK, 9/11, and the Deep Politics of War. His most recent book is American War Machine: Deep Politics, the CIA Global Drug Connection and the Road to Afghanistan. Peter Dale Scott is a Research Associate of the Centre for Research on Globalization (CRG).

His website, which contains a wealth of his writings, is here.

Notes

1 Chalmers Johnson, Blowback: The Costs and Consequences of American Empire (New York: Henry Holt, 2000), 217. Cf. Chalmers Johnson, The Sorrows of Empire: Militarism, Secrecy and the End of the Republic (New York: Metropolitan/Henry Holt, 2004).

2 Michael Lind, Made in Texas: George W. Bush and the Southern Takeover of American Politics (New York: Basic Books, 2003), 143.

3 Hannah Arendt, Between Past and Future: Eight Exercises in Political Thought (New York: Penguin Books, 1993), 93. Adapting Arendt’s distinction, Jonathan Schell made a Gandhian case in support of nonviolent persuasive or community power as a means of challenging top-down violent power and thus reforming the world. I developed this case myself in The Road to 9/11 (Jonathan Schell, The Unconquerable World: Power, Nonviolence, and the Will of the People [New York: Metropolitan Books/Henry Holt, 2003], 227-31; Peter Dale Scott, Road to 9/11, 249-66, 269).

4 Kevin Phillips, Wealth and Democracy: A Political History of the American Rich (New York: Broadway Books, 2002), 171-200.

5 Carl A. Huffman, Archytas of Tarentum: Pythagorean, philosopher, and mathematician king (Cambridge: Cambridge University Press, 2005), 207: “In Diodotus’ speech in the Mytilenian debate, wealth is particularly identified as producing arrogant “overreaching” (pleonexia –iii.45.4). Thus pleonexia seems to be associated with the abuse of power by either a tyrant or a wealthy oligarchy.”

6 Paul M. Kennedy, The Rise and Fall of the Great Powers (New York: Random House, 1987); Phillips, Wealth and Democracy; Johnson, The Sorrows of Empire.

7 Johnson, Blowback, 221.

8 Scott, American War Machine, 63-142, 239-53. The Karzai regime in Afghanistan is only the latest of CIA client governments to struggle to maintain itself with support from drug traffickers. Cf. Peter Dale Scott, “Can the US Pacify the Drug-Addicted War in Afghanistan? Opium, the CIA and the Karzai Administration”, The Asia-Pacific Journal: Japan Focus, April 5, 2010; Ryan Grim, “Karzai Releasing Scores Of Drug Traffickers In Afghanistan, WikiLeaks Cables Show,” Huffington Post, December 31, 2010.

9 Tim McGurk, Time, August 2, 2004; cf. USA Today, October 26, 2004.

10 James Risen, New York Times, December 11, 2010. Both traffickers were ultimately arrested by DEA officials: Noorzai in 2005, and Khan in 2008. The U.S. probably came to prefer Khan over Noorzai, because he was more closely allied to Abdul Wali Karzai, another drug trafficker and CIA asset, as well as a central figure in the power apparatus of his brother Hamid Karzai, the U.S. client president of Afghanistan.

11 Time, November 29, 1993; Scott, American War Machine, 14-15; Tim Weiner, New York Times, November 23, 1996.

12 It is too early to report the ultimate fate of Noorzai and Khan after their arrest and indictment by the United States. But it is clear that Guillén Davila’s arrest and indictment never led to conviction or imprisonment. On the contrary, he appears to have continued to enjoy CIA favor in Venezuela. (Scott, American War Conspiracy, 14-15).

13 Scott, Road to 9/11, 152-58.

14 “D.E.A. Deployed Mumbai Plotter Despite Warning,” New York Times, November 8, 2009; cf. Scott, American War Machine, 246-47. In another essay I will develop the thesis that what I call surplus repressive power – power developed exclusively by one society for the repressive dominance of others — is doomed, in this and other ways, to encourage the proliferation of its enemies. My point here is a more modest and general one. Maybe save the sentence for the later work?

15 Cf. Peter Dale Scott, “Atrocity and its Discontents: U.S. Double-Mindedness About Massacre,” in Adam Jones, ed. Genocide, War Crimes and the West: Ending the Culture of Impunity (London: Zed Press, 2004).

16 “Brigade homeland tours start Oct. 1,” Army Times, September 30, 2008.

17 Scott, Road to 9/11, 241-42.

Peter Dale Scott is a frequent contributor to Global Research. Global Research Articles by Peter Dale Scott

Great Depression, Debt and Economic Decline: Ireland, Portugal, Greece, US, UK

As of Wednesday we have seen the euro rise 7 straight days, which caused the USDX to fall to 78.14, this in spite of having 10-year rates in Spain, Portugal and Ireland rising 3 bps.

Both food and energy prices have risen at double-digit rates. This is an inflation reflection of 1979-80, 1996 and 2008. In the 1979 and 1980 and in the 2008 period our inflation gauge measured real inflation of 14-1/4%. Both occurred in recessions similar to today’s inflationary depression.

Today’s energy prices will reflect a loss in buying power of more than $60 billion in the US alone. Higher grain and meat prices will add $40 billion to total, a loss in buying power of $100 billion. By the looks of it costs and inflation will rise further causing further cuts in GDP consumption. These costs will affect 70% of the stimulus and QE2. That means very little consumption gains and stagnant unemployment.

The Consumer Sentiment Index fell from 74.5 in December to 72.7 in January, which does not instill confidence in the economy. Current conditions fell from 85.3 to 79.8, a 3-month low. Large household goods purchases fell to 129 from 140. The auto purchase outlook was fair to poor as well.

Real wages based on a phony 1.2% CPI, fell 0.4% when in reality the loss in buying power was much higher. Every indicator is in the minus column. This is reflected in income expectations for the year that fell from 125 to 116. Real expectations dropped from 64 to 55, the lowest level in almost 60 years. There is no recovery and there will be no recovery. The numbers are staring you right in your face. 2011 will be lucky to see 2% to 2-1/4% growth, as government spends $862 billion on pork and the Fed buys $1.6 trillion in Treasuries, Agencies and toxic waste.

We have two economic and financial Americas, one of poverty and advancing poverty and one of sumptuous wealth. The top 20% own 93% of financial assets, which could be the seeds of upheaval. The average family is one or two weeks away from starvation and debt collapse. How do you make up the difference working 34.3 hours a week as gasoline rises from $2.50 to $3.50 a gallon and the price of food advances 50%? If you do not own gold and silver related assets to offset these increases you are just plain screwed. If QE2 isn’t translating into recovery then QE3 is fast on the way. It will be kicked off later this year or in 2012. It won’t work either. Throwing money at a problem never has a positive desired result. Even though other nations have problems the dollar will remain under pressure. The gauge should not be the USDX. It should be every currency versus gold and silver, which are the only meaningful yardsticks. For two years gold and silver have been propelled by a flight to quality. A primary fight between gold and the dollar, which obviously gold has won hands down and will continue to do so. Inflation hasn’t even entered the equation yet, but it will this year and next. That will cause gold and silver to roar to the upside along with gold and silver shares. The elitists who control government are about to lose another battle and in the end the war against gold and silver.

Since 2000, when we began recommending gold and silver related assets after having exited the stock market in early April, the market is down about 80% versus gold. That means the only reliable guide to value is gold, not the dollar. The dollar has dropped from 13.80 Mexican pesos to 12.00 in a year. Mexico is considered a second world nation and its currency is appreciating versus the dollar. That is becoming typical and will continue to be so. The Mexican economy will grow 4% in 2011, and will have 4% inflation, far better results than in the US, and Mexico has not stimulated its economy. Not only do we have the dollar falling 20% versus gold annually, but also we have the dollar falling versus inferior currencies. That means creditors of US Treasuries are receiving a negative return of over 6%. What can they be thinking of? This is a form of default. Even with these conditions the stock market reflected by the Dow will probably trade between 10,000 and 13,500, while gold and silver again gain a real 20% plus, year after year, as long as budget deficits climb.

It is almost as though the Fed, the White House and the House and Senate had planned to do just about everything wrong. All we hear from the illegal alien who is President is that we must have shared sacrifice. That is why we have no win wars to keep the economy going and government loots social Security and Medicare. Have no fear the double dip is on the way even though it spends 60% more than incoming revenues. Neither party has any intention of changing this situation. This year we will experience a decline in all personal purchase categories contrary to what the Fed and the Treasury would like. That means revenues will fall again and debt will increase.

Investors are not only bypassing municipals, but Treasuries and agency securities as well. In funds there has been nine straight weeks of redemptions of $16.5 billion of municipals that should have been liquidated three years ago at much higher prices. That is when we recommended selling.

Inflation is rising in spite of the government’s bogus statistics. How do you reconcile CPI at 1.2% and PPI at 13-1/2%? Price increases are coming from all sectors. That means profit margins are going to be reduced and sales are going to fall. The bedrock of the economy consumption will fall, which is the exact opposite of what the Fed and the administration want. Major inflation is underway. In 2012 we will slip into QE3 and the chance for hyperinflation is excellent. We all know what happens after that – deflationary depression.

The financial and economic situation continues to deteriorate in the euro zone. Both Greece and Ireland stand at the edge of the abyss. Unbeknownst to most the Federal Reserve started pouring funds into Irish banks in 2008 to stabilize the system. AIB, Anglo Irish Bank, borrowed $3.3 billion in the summer of 2009, which was the largest loan. The ECB has provided $175 billion in direct support, which forced the ECB to recapitalize.

Just last month the Irish government via the Irish Central Bank arbitrarily injected billions of euros into its economy without collateralization.

In parallel in part the Irish bailout is being funded via retirement savings, which has not been approved by the Irish parliament. A spring election is looming and a vote may not come until then and there is a possibility that Fianna Fail, the party in power since 1987, will not succeed. The No Confidence votes will prevail as the current PM refuses to step down. That means ratification of current policy will fail.

In this process the central bank has printed up about 25% of GDP in euros and deposited them in the banks. This is uncollateralized by bonds and will prove to be very inflationary, if not hyperinflationary. This euro increase has not gone unnoticed, particularly in Germany. If you remember for years Germans have refused to accept euros printed in other euro zone countries. It is not going to take long for Germany to react. They won’t and can’t accept Irish euros and that should lead to a crisis in the euro zone as well as in the EU. We are about to discover that all euros are not equal and that Germany will not be held hostage by a group of euro-elitists. What is to stop Greece, Portugal, Belgium, Spain and Italy from doing the same thing? This has to put downward pressure on the euro. This may be why the euro has been allowed to appreciate recently to offset the coming weakness in the euro caused by Ireland’s euro printing.

It should also be noted that Greece has asked for extended loan maturities. That could lead to interest only loans and eventually default.

Both Ireland and Greece and the others are fraught with pitfalls for mainly Germany and the other solvent euro zone members. This is why Germany is discussing, behind closed doors, leaving the euro zone and reintroducing the D-Mark. We believe that will happen and in the process they will leave the EU as well.

The Irish story is huge yet it is virtually out of the news. Great damage is being done to the euro, but for that matter no currency is safe. The only safe havens are gold and silver related assets.

In Ireland the situation worsens as PM Brian Cowen, who sold Ireland out to the elitist bankers, announces an earlier-than-expected general election on Friday, March 11, 2011. Cowen has been bombed in the polls since the $114 billion bank bailout, which will bring about his political demise. It will also spell the end of the reign of Fianna Fail, and the reemergence of Fine Gael. It’s another fine mess the compromisers have gotten Ireland into. Like in so many countries politicians have been bought from all parties and that has created a total disconnect between the leadership of the parties and their constituents.

The nation’s top credit card issuers said the number of accounts that slipped into default fell to the lowest point of 2010 in December, and signs point to continued improvement. Five of the six biggest card issuers posted their lowest rates for charge-offs, or accounts written off as uncollectible.

While the rates of balances that companies wrote off remained high by historical standards, they fell consistently throughout the year.

Importantly, rates for payments late by 30 days or more also reached lows. That figure, known as the delinquency rate, is considered an indicator of what’s to come, which means charge-offs can be expected to keep falling through the first few months 2011.

The November TIC data shows China’s Treasury holdings decline $11.2B. UK buying surged a surreal $34.2B. The mysterious UK buying continues. Is it the Fed or China?

Systemic Global Economic Crisis At the Crossroads of Three Roads of Global Chaos

 

 

Economics / Global Debt Crisis Jan 20, 2011 – 06:41 AM

By: Global_Research

 

This GEAB issue marks the fifth anniversary of the publication of the Global Europe Anticipation Bulletin. In January 2006, on the occasion of the first issue, the LEAP/E2020 team indicated that a period of four to seven years was opening up which would be characterized by the “Fall of the Dollar Wall”, an event similar to the fall of the Berlin Wall which resulted, in the following years, in the collapse of the communist bloc then that of the USSR. Today, in this GEAB issue, which presents our thirty-two anticipations for 2011, we believe that the coming year will be a pivotal year in the roll out of this process between 2010 and 2013. It will be, in any case, a ruthless year because it will mark the entry into the terminal phase of the world before the crisis (1).

// //

Since September 2008, when the evidence of the global and systemic nature of the crisis became clear to all, the United States, and behind it the Western countries, were content with palliative measures that have merely hidden the undermining effects of the crisis on the foundations of the present-day international system. 2011 will, according to our team, mark the crucial moment when, on the one hand, these palliative measures see their anesthetic effect fade away whilst, in contrast, the consequences of systemic dislocation in recent years will dramatically surge to the forefront (2).

In summary, 2011 will be marked by a series of violent shocks that will explode the faulty safety devices put in place since 2008 (3) and will carry off, one by one, the “pillars” on which the “Dollar Wall” has rested for decades. Only the countries, communities, organizations and individuals which, over the last three years, have actually undertaken to learn the lessons from the current crisis to distance themselves as quickly as possible from the pre-crisis patterns, values and behavior will get through this year unscathed; the others will be carried away in the procession of monetary, financial, economic, social and political difficulties that 2011 holds.

Thus, as we believe that 2011 will, globally, be the most chaotic year since 2006, the date of the beginning of our work on the crisis, in this GEAB issue our team has focused on 32 anticipations for 2011, which also include a number of recommendations to deal with future shocks. Thus, this GEAB issue offers a kind of map forecasting financial, monetary, political, economic and social shocks for the next twelve months.

If our team believes that 2011 will be the worst year since 2006, the beginning of our anticipation work on the systemic crisis, it’s because it’s at the crossroads of three paths to global chaos. Absent fundamental treatment of the causes of the crisis, since 2008 the world has only gone back to take a better jump forward.

A bloodless international system

The first path that the crisis can take to cause world chaos is simply a violent and unpredictable shock. The dilapidated state of the international system is now so advanced that its cohesion is at the mercy of any large-scale disaster (4). Just look at the inability of the international community to effectively help Haiti over the past year (5), the United States to rebuild New Orleans for six years, the United Nations to resolve the problems in Darfur, Côte d’Ivoire for a decade, the United States to progress peace in the Middle East, NATO to beat the Taliban in Afghanistan, the Security Council to control the Korean and Iranian issues, the West to stabilize Lebanon, the G20 to end the global crisis be it financial, food, economic, social, monetary, … to see that over the whole range of climatic and humanitarian disasters, like economic and social crises, the international system is now powerless.

In fact, since the mid-2000s at least, all the major global players, at their head of course the United States and its cortege of Western countries, do no more than give out information, or gesticulate. In reality, all bets are off: The crisis ball rolls and everyone holds their breath so it doesn’t fall on their square. But gradually the increasing risks and issues of the crisis have changed the casino’s roulette wheel into Russian roulette. For LEAP/E2020, the whole world has begun to play Russian roulette (6), or rather its 2011 version, “American Roulette” with five bullets in the barrel.

Monthly progression of the FAO food index (2010) and the price of principal foodstuffs (2009/2010) (base 100: averaged over 2002-2004) – Source: FAO/Crikey, 01/2011

Soaring commodity prices (food, energy (7),…) should remind us of 2008 (8). It was indeed in the six months preceding Lehman Brothers and Wall Street’s collapse that the previous episode of sharp increases in commodity prices was set. And the actual causes are the same as before: a flight from financial and monetary assets in favour of “concrete” investments. Last time the big players fled the mortgage market and everything that depended on it, as well as the U.S. Dollar; today they are fleeing all financial stocks, Treasury bonds (9) and other public debts. Therefore, we have to wait for a time between Spring and Autumn 2011 for the explosion of the quadruple bubble of Treasury bonds, public debt (10), bank balance sheets (11) and real estate (American, Chinese, British, Spanish,… and commercial (12)), all taking place against a backdrop of a heightened currency war (13).

The inflation induced by US, British and Japanese Quantitative Easing and similar stimulus measures of the Europeans and Chinese will be one of the destabilizing factors in 2011 (14). We will come back to this in more detail in this issue. But what is now clear with respect to what is happening in Tunisia (15), is that this global context, especially the rise in food and energy prices, now leads on to radical social and political shocks (16). The other reality that the Tunisian case reveals is the impotence of the French, Italian or American “godfathers” to prevent the collapse of a “friendly regime” (17).

Impotence of the major global geopolitical players

And this impotence of the major global geopolitical players is the other path that the crisis can use to produce world chaos in 2011. In effect, one can place the major G20 powers in two groups whose only point in common is that they are unable to influence events decisively.

On one side we haves a moribund West with, on the one hand, the United States, for whom 2011 will show that its leadership is no more than fiction (see this issue) and which is trying to freeze the entire international system in its configuration of the early 2000s (18), and on the other hand we have Euroland, “sovereign” in the pipeline, which is currently mainly focused on adapting to its new environment (19) and new status as an emerging geopolitical entity (20), and which, therefore, has neither the energy nor the vision necessary to influence world events (21).

And on the other side are the BRIC countries (with China and Russia in particular) who are, at the moment, proving to be incapable of taking control of all or part of the international system and whose only action is therefore limited to quietly undermine what remains of the foundations of the pre-crisis order (22).

Ultimately, impotence is widespread (23) at the international community level, increasing not only the risk of major shocks, but also the significance of the consequences of these shocks. The world of 2008 was taken by surprise by the violent impact of the crisis, but paradoxically the international system was better equipped to respond being organized around an undisputed leader (24). In 2011, this is no longer the case: not only is there no undisputed leader, but the system is bloodless as we have seen above. And the situation is aggravated further by the fact that the societies of many countries in the world are on the verge of socio-economic break-up.

US petrol prices (2009-2011) – Source: GasBuddy, 01/2011

Societies on the edge of socio-economic break-up

This is particularly the case in the United States and Europe where three years of crisis are beginning to weigh very heavily on the socio-economic and therefore political balance. US households, now insolvent in their tens of millions, oscillate between sustained poverty (25) and rage against the system. European citizens, trapped between unemployment and the dismantling of the welfare state (26), are starting to refuse to pay the bills for financial and budget crises and are beginning to look for culprits (banks, the Euro, government political parties…).

But amongst the emerging powers too, the violent transition which constitutes the crisis is leading societies towards situations of break-up: in China, the need to control expanding financial bubbles is hampered by the desire to improve the lot of whole sectors of society such as the need for employment for tens of millions of casual workers; in Russia, the weakness of the social security system fits badly with the enrichment of the elite, just as in Algeria shaken by riots. In Turkey, Brazil and India, everywhere the rapid change these countries are seeing is triggering riots, protests and terrorist attacks. For reasons that are sometimes contradictory, growth for some, penury for others, across the globe our diverse societies tackle 2011 in a context of strong tensions and socio-economic break-up, which have the making of political time bombs.

It’s its position at the crossroads of three paths which thus makes 2011 a ruthless year. And ruthless it will be for the States (and local authorities) which have chosen not to draw hard conclusions from the three years of crisis which have gone before and / or who have contented themselves with cosmetic changes not altering their fundamental imbalances at all. It will also be so for businesses (and States (27)) who believed that the improvement in 2010 was a sign of a return to “normal” of the global economy. And finally it will be so for investors who have not understood that yesterday’s investments (securities, currencies,…) couldn’t be those of tomorrow (in any case for several years). History is usually a “good girl”. She often gives a warning shot before sweeping away the past. This time, it gave the warning shot in 2008. We estimate that in 2011, it will do the sweeping. Only players who have undertaken, even painstakingly, even partially, to adapt to the new conditions generated by the crisis will be able to hang on; for the others, chaos is at the end of the road.

Notes:

(1) Or of the world that we have known since 1945 to repeat our 2006 description.

(2) The recent decision by the US Department of Labor to extend the inclusion of the measure of long-term unemployment in the US employment statistics to five years instead of the maximum of two years until now, is a good indicator of the entry into a new stage of the crisis, a step that has seen the disappearance of the “practices” of the world before. As a matter of fact, the US government cites “the unprecedented rise” of long-term unemployment to justify this decision. Source: The Hill, 12/28/2010

(3) These measures (monetary, financial, economic, budgetary, strategic) are now closely linked. That’s why they will be carried away in a series of successive shocks.

(4) Source: The Independent, 01/13/2011

(5) It’s even worse because it was international aid that brought cholera to the island, causing thousands of deaths.

(6) Moreover Timothy Geithner, US Treasury Secretary, little known for his overactive imagination, has just indicated that “the US government could once again have to do exceptional things”, referring to the bank bailout in 2008. Source: MarketWatch, 01/13/2011

(7) Moreover, India and Iran are in the course of establishing a system of exchange “gold for oil” to try and avoid supply disruptions. Source: Times of India, 01/08/2011

(8) In January 2011 the FAO food price index (at 215) has just exceeded its previous record set in May 2008 (at 214).

(9) Wall Street banks are currently unloading their US Treasury bonds as fast as possible (unseen since 2004). Their official explanation is “the remarkable improvement in the US economy which no longer requires us to seek refuge in Treasury Bonds”. Of course, you are free to believe it, like Bloomberg ’s journalist on 01/10/2011.

(10) Thus Euroland is already taking big steps forward along the path described in the GEAB N°50 with a discount in the case of refinancing the debts of a member state, whilst Japanese and US debt are now about to enter the storm. Sources: Bloomberg, 01/07/2011; Telegraph, 01/05/2011

(11) We believe that, in general, global banks’ balance sheets contain at least 50% ghost assets which in the coming year will require to be discounted by between 20% to 40% due to the return of the global recession combined with austerity, the rise in defaults on household, business, community and state loans, currency wars and a pickup in the fall of real estate prices. The American, European, Chinese, Japanese and others “stress-tests” can still continue to try and reassure markets with “Care Bears” scenarios except that this year it’s “Alien against Predator ” which is on the banks’ agenda. Source: Forbes, 01/12/2011

(12) Each of these real estate markets will fall sharply again in 2011 in the case of those which have already started falling in recent years, or in the case of China, which will begin its sharp deflation amid economic slowdown and monetary tightening.

(13) The Japanese economy is, moreover, one of the first victims of this currency war, with 76% of the CEOs of 110 major Japanese companies surveyed by Kyodo News now reported being pessimistic about Japanese growth in 2011 following the rise in the yen. Source: JapanTimes, 01/04/2011

(14) Here are several instructive examples put together by the excellent John Rubino. Source: DollarCollapse, 01/08/2011

(15) By way of reminder, in the GEAB N°48 we had classified Tunisia in the category of countries “with significant risks” in 2011.

(16) No doubt, moreover, that the Tunisian example is generating a round of reassessment amongst the rating agencies and the “experts in geopolitics”, who, as usual, didn’t see anything coming. The Tunisian case also illustrates the fact that it’s now the satellite countries of the West in general and the US in particular, who are on the way to shocks in 2011 and in the years to come. And it confirms what we regularly repeat: a crisis accelerates all the historical processes. The Ben Ali regime, twenty-three years old, collapsed in a few weeks. When political obsolescence is involved everything changes quickly. Now it’s all the pro-Western Arab regimes which are obsolete in the light of events in Tunisia.

(17) No doubt this « Western godfather » paralysis will be carefully analyzed in Rabat, Cairo, Jeddah and Amman, for example.

(18) A configuration that was all the more favorable because it was without a counterweight to their influence.

(19) We will return in more detail in this GEAB issue, but seen from China we are not mistaken. Source: Xinhua, 01/02/2011

(20) Little by little Europeans are discovering that they are dependent on centres of power other than Washington. Beijing, Moscow, Brazilia, New Dehli,… Source: La Tribune, 01/05/2011; Libération, 12/24/2010; El Pais, 01/05/2011

(21) All Japan’s energy is focused on its desperate attempt to resist the attraction of China. As for other Western countries, they are not able to significantly influence global trends.

(22) The US Dollar’s place in the global system is a part of these last foundations that the BRIC countries are actively eroding day after day.

(23) As regards deficit, the US case is textbook. Beyond the speeches, everything continues as before the crisis with a deficit swelling exponentially. However, even the IMF is now ringing the alarm. Source: Reuters, 01/08/2011

(24) Moreover, even the Wall Street Journal on 01/12/2011, echoing the Davos Forum, is concerned over the lack of international coordination, which is in itself a major risk to the global economy.

(25) Millions of Americans are discovering food banks for the first time in their lives, whilst in California, as in many other states, the education system is disintegrating fast. In Illinois, studies on the state deficit are now comparing it to the Titanic. 2010 broke the record for real estate foreclosures. Sources: Alternet, 12/27/2010; CNN, 01/08/2011; IGPA-Illinois, 01/2011; LADailyNews, 01/13/2011

(26) Ireland, which is facing, purely and simply, a reconstruction of its economy, is a good example of situations to come. But even Germany, with remarkable current economic results however can’t escape this development as shown by the funding crisis for cultural activities. Whilst in the United Kingdom, millions of retirees are seeing their incomes cut for the third year running. Sources : Irish Times, 12/31/2010; Deutsche Welle, 01/03/2011; Telegraph, 01/13/2011

(27) In this regard, US leaders confirm that they are rushing straight into the wall of public debt, failing to anticipate the problems. Indeed, the recent statement by Ben Bernanke, the Fed chairman, that the Fed will not help the States (30% fall in 2009 tax revenues according to the Washington Post on 01/05/2011) and the cities collapsing under their debts, just as Congress decides to stop issuing “Build America Bonds” which enabled States to avoid bankruptcy these last few years, shows a Washington blindness only equal to that which Washington demonstrated in 2007/2008 in the face of the mounting consequences of the “subprime” crisis. Sources: Bloomberg, 01/07/2011; WashingtonBlog, 01/13/2011

Economic Collapse Scenarios That We Could Potentially See In 2011

Economics / Great Depression II
Jan 20, 2011 – 03:25 PM

What could cause an economic collapse in 2011? Well, unfortunately there are quite a few “nightmare scenarios” that could plunge the entire globe into another massive financial crisis. The United States, Japan and most of the nations in Europe are absolutely drowning in debt. The Federal Reserve continues to play reckless games with the U.S. dollar. The price of oil is skyrocketing and the global price of food just hit a new record high. Food riots are already breaking out all over the world. Meanwhile, the rampant fraud and corruption going on in world financial markets is starting to be exposed and the whole house of cards could come crashing down at any time. Most Americans have no idea that a horrific economic collapse could happen at literally any time. There is no way that all of this debt and all of this financial corruption is sustainable. At some point we are going to reach a moment of “total system failure”.

So will it be soon? Let’s hope not. Let’s certainly hope that it does not happen in 2011. Many of us need more time to prepare. Most of our families and friends need more time to prepare. Once this thing implodes there isn’t going to be an opportunity to have a “do over”. We simply will not be able to put the toothpaste back into the tube again.

So we had all better be getting prepared for hard times. The following are 12 economic collapse scenarios that we could potentially see in 2011….

#1 U.S. debt could become a massive crisis at any moment. China is saying all of the right things at the moment, but many analysts are openly worried about what could happen if China suddenly decides to start dumping all of the U.S. debt that they have accumulated. Right now about the only thing keeping U.S. government finances going is the ability to borrow gigantic amounts of money at extremely low interest rates. If anything upsets that paradigm, it could potentially have enormous consequences for the entire world financial system.

#2 Speaking of threats to the global financial system, it turns out that “quantitative easing 2″ has had the exact opposite effect that Ben Bernanke planned for it to have. Bernanke insisted that the main goal of QE2 was to lower interest rates, but instead all it has done is cause interest rates to go up substantially. If Bernanke this incompetent or is he trying to mess everything up on purpose?

#3 The debt bubble that the entire global economy is based on could burst at any time and throw the whole planet into chaos. According to a new report from the World Economic Forum, the total amount of credit in the world increased from $57 trillion in 2000 to $109 trillion in 2009. The WEF says that now the world is going to need another $100 trillion in credit to support projected “economic growth” over the next decade. So is this how the new “global economy” works? We just keep doubling the total amount of debt every decade?

#4 As the U.S. government and the Federal Reserve continue to pump massive amounts of new dollars into the system, the floor could fall out from underneath the U.S. dollar at any time. The truth is that we are already starting to see inflation really accelerate and everyone pretty much acknowledges that official U.S. governments figures for inflation are an absolute joke. According to one new study, the cost of college tuition has risen 286% over the last 20 years, and the cost of “hospital, nursing-home and adult-day-care services” rose 269% during those same two decades. All of this happened during a period of supposedly “low” inflation. So what are price increases going to look like when we actually have “high” inflation?

#5 One of the primary drivers of global inflation during 2011 could be the price of oil. A large number of economists are now projecting that the price of oil could surge well past $100 dollars a barrel in 2011. If that happens, it is going to put significant pressure on the price of almost everything else in the entire global economy. In fact, as I have explained previously, the higher the price of oil goes, the faster the U.S. economy will decline.

#6 Food inflation is already so bad in some areas of the globe that it is setting off massive food riots in nations such as Tunisia and Algeria. In fact, there have been reports of people setting themselves on fire all over the Middle East as a way to draw attention to how desperate they are. So what is going to happen if global food prices go up another 10 or 20 percent and food riots spread literally all over the globe during 2011?

#7 There are persistent rumors that simply will not go away of massive physical gold and silver shortages. Demand for precious metals has never been higher. So what is going to happen when many investors begin to absolutely insist on physical delivery of their precious metals? What is going to happen when the fact that far, far, far more “paper gold” and “paper silver” has been sold than has ever actually physically existed in the history of the planet starts to come out? What would that do to the price of gold and silver?

#8 The U.S. housing industry could plunge the U.S. economy into another recession at any time. The real estate market is absolutely flooded with homes and virtually nobody is buying. This massive oversupply of homes means that the construction of new homes has fallen off a cliff. In 2010, only 703,000 single family, multi-family and manufactured homes were completed. This was a new record low, and it was down 17% from the previous all-time record which had just been set in 2009.

#9 A combination of extreme weather and disease could make this an absolutely brutal year for U.S. farmers. This winter we have already seen thousands of new cold weather and snowfall records set across the United States. Now there is some very disturbing news emerging out of Florida of an “incurable bacteria” that is ravaging citrus crops all over Florida. Is there a reason why so many bad things are happening all of a sudden?

#10 The municipal bond crisis could go “supernova” at any time. Already, investors are bailing out of bonds at a frightening pace. State and local government debt is now sitting at an all-time high of 22 percent of U.S. GDP. According to Meredith Whitney, the municipal bond crisis that we are facing is a gigantic threat to our financial system….

“It has tentacles as wide as anything I’ve seen. I think next to housing this is the single most important issue in the United States and certainly the largest threat to the U.S. economy.”

Former Los Angeles mayor Richard Riordan is convinced that things are so bad that literally 90% of our states and cities could go bankrupt over the next five years….

#11 Of course on top of everything else, the quadrillion dollar derivatives bubble could burst at any time. Right now we are watching the greatest financial casino in the history of the globe spin around and around and around and everyone is hoping that at some point it doesn’t stop. Today, most money on Wall Street is not made by investing in good business ideas. Rather, most money on Wall Street is now made by making the best bets. Unfortunately, at some point the casino is going to come crashing down and the game will be over.

#12 The biggest wildcard of all is war. The Korean peninsula came closer to war in 2010 than it had in decades. The Middle East could literally explode at any time. We live in a world where a single weapon can take out an entire city in an instant. All it would take is a mid-size war or a couple of weapons of mass destruction to throw the entire global economy into absolute turmoil.

Once again, let us hope that none of these economic collapse scenarios happens in 2011.

However, we have got to realize that we can’t keep dodging these bullets forever.

As bad as 2010 was, the truth is that it went about as good as any of us could have hoped. Things are still pretty stable and times are still pretty good right now.

But instead of using these times to “party”, we should be using them to prepare.

A really, really vicious economic storm is coming and it is going to be a complete and total nightmare. Get ready, hold on tight, and say your prayers.

The Value Case for Silver

The prices for commodities can change quickly and wildly, and in many cases, investors can hold commodities for years without any realization of profits.

The wild cyclicality is what has kept many out of the commodities markets, and it is the reason why so many value investors choose to ignore commodities as a broad investment alternative. In respectful disagreement, making the case for a value investment in silver is a cakewalk at worst.

Securities and Commodities

Stocks and commodities are nothing alike, except when they are. The world’s most popular and most highly regarded value investors (many of whom don’t have a favorable opinion of commodities) have laid down investment traits that, contrary to their viewpoints on silver, make it a very attractive value investment.

Among the basic tenets of value investing are that companies are boring and operate in boring industries. Ideally, value investing companies are those that many people take objection to, and that very few investors own.

Rumors are excellent, even preferred, and it would be best if the investment were in a low-growth industry. It has to be a product that people will keep buying indefinitely, and under the best case scenario, the company is buying itself back through share purchases.

Drawing Comparisons

Compare the above commonly adopted value-investing tenets to silver.

Silver is not only boring, but mining silver is a pretty dull exercise. Most investors still take objection to silver, and few, despite the recent surge, own physical metals. There isn’t a single industry with more rumors than metals production, and in fact, several organizations are dedicated to uncovering such hidden evidence of backroom deals and price manipulation.

People will continue to buy silver indefinitely, as it is in every electronic known to man, as well as prized for its beauty. While silver ounces cannot buy back other silver ounces, it is safe to say that the supply of silver is being depleted, just as shares of stock are depleted in buybacks.

Silver is the ultimate value investment because it always has intrinsic value, even if it has no intrinsic price. And where even the most unlevered companies can go belly up when the markets turn, silver can’t go to zero, nor can it disappear. Where executives, auditors, and others have violated the public’s trust in making their companies appear more valuable, all evidence in the silver market points to lies intended to make silver less valuable.

Commodity Similarities and Differences

Silver’s commodity cousins are what keep it in check. While the world can produce a near infinite amount of corn, wheat, sugar, etc., all the silver (and gold…don’t forget about gold!) is already on earth. No more can be produced, and eventually, the only silver that will be left is that which we can economically recover.

The take home here is that silver is a value play. The metal virtually defines what the world “intrinsic” really means, both in and out of the financial world. Very few own it, everyone uses it, and it is very, very limited in supply. Whether it goes to $5,000 or $25,000 per ounce isn’t important. Understanding that it will not lose value in the long-term is what is important.

More Determined Bear Raids on Gold and Silver

 

 

Commodities / Gold and Silver 2011 Jan 21, 2011 – 02:47 AM

More determined bear raids today, winnowing out the weak hands, the overleveraged, and the speculators. Look for silver to hold the most resilience and snapback on the shorts, as the shortage in wholesale supply continues to deepen.

Remember that January 26th is the option expiration at the Comex.

// //

 

” You have to choose between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the Government. And, with due respect for these gentlemen, I advise you, as long as the Capitalist system lasts, to vote for gold.” – George Bernard Shaw

Win-Win with Silver!

A win-win situation, as we all know, occurs when opposing parties both gain from a certain outcome. Perhaps both don’t always get all that they want but both ‘win’ something in the bargain. It’s the best outcome that can be expected for both parties. With silver there is a lose-lose and a win-win scenario.

The Lose-Lose Scenario

While owning silver outright is a win-win situation, it will be a lose-lose situation for all those large banks around the world such as JPMorgan and HSBC who are reported to be short silver to the tune of 3.3 BILLION ounces! That figure is a multiple of all known above-ground silver in tradable bullion form – and a multiple of annual world silver production. The saying ‘He who sells what isn’t “hisin” gives it back or goes to prison’ comes to mind. These shorts may need to deliver more silver than can possibly be delivered in any reasonable timeframe and once they begin (and there are reports that some have already begun) to cover their positions it will have major bullish implications for the price of silver.

The Win-Win Scenario

How do you orchestrate a win-win in silver for yourself? It’s really very simple. Because there is not enough physical silver to go around at today’s price (or the price would not be on the rise), all you need to do is to purchase physical silver. This has the dual effect of 1) taking available silver off the market, meaning silver then becomes all the more scarce, and 2) it bids up the price. Any time a commodity is bought, it puts upward pressure on the price. Any time it is sold, it puts downward pressure. See how simple this stuff is? It’s a perpetual motion machine.

The more physical silver people buy and take off the market, the higher the price goes. The higher the price goes, the more investors buy in. It has a self fulfilling effect. Silver and gold are unique in that trait. With most commodities, buyers try to get the lowest price possible because they intend to use that commodity. With the money metals, the reason most investors are buying is to protect themselves from the loss of purchasing power of the currency through inflation of the money supply. They intend to store the metal for sale at a much higher price at a time when the currency stabilizes.

You must remember that silver and gold are the anti-dollar. Theoretically, you are simply retaining your wealth by holding them even though the dollar value is increasing. The more the dollar value is increasing, the greater the debasement, and the more the need to protect oneself. At some point this will turn into a panic and today’s dollar price will seem ridiculously low.

Owning Silver Is a Win-Win in Numerous Ways

You win by holding an asset that is no one else’s liability. You do not have to depend on a counter party.
You win by taking physical metal off the market which helps increase its price.
You win by having a valuable commodity that is money itself and outside of the faltering banking system.
You win because you are protecting your wealth from the ravages of inflation.
You win because you are showing others, by your actions, that you believe in the worth and value of holding real money.
You win again if they follow your lead. The further we go in time and price in the silver bull market, the more people will realize what they are missing out on, and the quicker and higher the dollar price will rise.
Conclusion

Owning silver is a win-win all around. The only way you can lose by holding physical silver at this point is via theft, or confiscation, which is the same as theft. I’ll take my chances. I’d rather have someone try to take what I already have in my possession than have someone fail to deliver to me what is rightfully mine. In the former, I’m in control. In the latter, someone else is calling the shots.

Got physical silver yet? Panic first before the herd and win-win!

By Jerry Western and Lorimer Wilson

The Moral and Prudential Algebra of Gold in 2011

 

We were pleased with our estimate for gold in 2010, having predicted gold between $900 and $1,200 with the potential to reach $1,500 should some catalyst present itself.  On average gold traded over the high end of this range, but stalled there due to a sluggish economic recovery and a strong dollar.  But late in the year, with Fed Chairman Ben Bernanke pursuing deflation like Moby Dick, wielding a second quantitative easing program of $600 billion to harpoon falling prices, gold scaled up short of our upside outlier estimate.  Since the beginning of 2011, gold has corrected to the pleasure of sharp traders, while we maintain a longer view for higher gold prices beyond the near term.

Investment demand for gold may have pushed aside increased seasonal demand by gold fabricators in the fall of 2010.  Rather than waiting for gold prices to correct in the spring due to changes in seasonal supply and demand, it would appear metal prices faded in the first week of 2011 due to investor year-end rebalancing, profit taking, and possibly, computerized trading. These non-fundamental influences may have added to the metal’s volatility, and even more so for that of mining and metal stocks.  Even with this correction, we stand behind our recent estimate for 2011, of gold trading between $1,300 and $1,500 with potential to see $1,600 by the end of the year.  As in 2010, we remain bullish on gold for 2011 (well above cost of production for many gold producers; essential for keeping mining stocks interesting) and are again comfortable with not offering an outlier at a lower price.

Gold is a Constant, a Useful Measure of Value, and a Mirror of Societal Progress

The basis for our outlook is aligned with Friedrich von Hayek’s The Use of Knowledge in Society, which recognizes that markets are both perplexing and dynamic, and so maintain a bias toward “day to day knowledge,” over scientific knowledge that may be useful only for contrived econometric modeling.  We have more confidence offering an opinion beyond the near term, taking into account the general factors that from time to time have shown to be reflected in the gold price. This process is not unlike how the early scientist and philosopher Benjamin Franklin developed and tested a hypothesis. Franklin utilized a Moral or Prudential Algebra, listing the arguments for and against, and by identifying offsetting factors and a process of elimination, produced a reasoned position to test.

Gold is useful as a constant in a relative world and a measure of investor’s expectations relative to other assets.  It is said that all the gold mined would fill two Olympic-size swimming pools or equal one third the size of the Washington Monument. While gold continues to be mined, production is not excessive, and relative to industrial and other uses, the supply is reasonably constant with the price moving up and down in relation to demand. The demand for gold may move lower as supply of competing assets decline, becoming rarer, and/or the relative demand for these other assets increases. Likewise, the demand of gold may move higher as the supply of competing assets increase and/or the relative demand for these assets decline.  As world finance moved away from gold as money as a medium of exchange, and the important attribute of money (currency) as a store of value has since weakened, the price of gold may be the best unbiased indicator of the relative strength of global currencies, non-tangible assets, and the character of nations in general.

Pertinent Factors Influencing Demand for Gold Beyond the Near Term

Higher demand for gold would be paramount in its use as a store of value for feared worst case cataclysms. In an apocalypse, holding physical gold may not be enough. This brings to mind the old Far Side cartoon of two curmudgeons fishing, with a mushroom cloud billowing in the background, reasoning that “this means size doesn’t matter and screw the limit!”  In a more practical setting, ownership of gold is seen as the best hedge against uncertainty, financial and otherwise. This article, admittedly from a U.S. perspective, hopes to identify economic trends, which, influenced by U.S. fiscal and monetary policies, may have a significant influence on the average price and trend for gold in 2011. As the U.S. dollar is the world’s reserve currency, this article may be of use from a global perspective.

Gold bears may be looking for gold to decline in demand relative to increased demand for dollar-denominated non-tangible assets such as stocks, bonds and even currencies.  This would suggest that the assets underlying those dollar-denominated investment instruments would be increasing in value. Fundamentally, this would imply that these instruments would represent assets with increased market share, expanding margins, profitability and purchasing power. Increased demand for these assets may also result from the expected cash flows produced by these assets being discounted, potentially at stable or lower rates. Discount rates incorporate both specific and general risk, including the risk of inflation of the currency for which these cash flows are denominated. Clearly, investors demand a real return on their investment.

The argument against gold seems to view gold as one asset class among many, as opposed to an asset against which all other dollar-denominated assets may be measured. This point of view makes it difficult to see past the illusion of nominal value, as opposed to where all other dollar-denominated intangible asset classes are actually declining relative to gold. This perspective can eventually lead to observing gold as in some form of “bubble.” We do not see gold in this light.

Source: Laffer Associates

We are intrigued by the movement of gold prices. Our interest over a decade ago was based on the predictive ability of gold movements foretelling the direction of interest rates. Gold has been seen as a hedge against inflation, and interest rates can be understood to encapsulate some form of inflation. With the low interest and inflation rates over the last ten years, based upon earlier conventional wisdom, one might not have expected gold to have risen to current levels. 

It may be useful to pull out old analyst reports and economic studies with their backward looking metal price assumptions to see how far we have come. For both inflation and interest rates, at least as we understand them today, we are clearly in new territory. It is interesting to ponder why the price of gold has decoupled from inflation and interest rates.  It may be that these alternative monetary measures may not be calculated using an appropriately consistent “basket of goods” or have been potentially managed by monetary policy leaders.

We again suspect that the rise of gold prices reflects the increased supply and declining demand for competitive assets. Our primary focus is for sustained expectations of an increasing money supply, which, in our opinion, may include both the monetary base and debt. If the level of gold may be assumed constant, the same cannot be said for the monetary base or the federal debt, both of which have increased over the last decade, and even more so since the financial crisis. This may be exacerbated in the coming year with an economic recovery increasing the leverage of the monetary base and velocity of currency in circulation as lending increases.  In addition, with deficits as far as the eye can see, federal debt should increase even with exceptional increases in tax revenues, and even more so should interest rates move higher. This perspective anchors our perspective for gold prices in 2011.

Source: Federal Reserve Bank of St. Louis

The Case for Higher Gold Prices in 2011

The Federal Reserve was originally established in order to transfer the responsibility for avoiding financial panics from one individual, J.P. Morgan in this case, to the people, or the U.S. government through a national banking system. That was a time in U.S. history when the government was weak and banks were strong, as opposed to the current era where government is strong and banks are weak. The recent excesses, at a minimum including loose monetary policy, fraudulent loan originations, and excessive leverage, led to the financial panic of 2008 – just over one hundred years since J.P. Morgan stepped in during the Panic of 1907.

Source: Laffer Associates

Fed Chairman Ben Bernanke, seeing a seizing up of credit markets, was quick to respond by expanding liquidity by expanding the monetary base. This response was similar to successful Fed actions during the Asian Contagion in 1998 or in anticipation of Y2K. It was significantly different due to both the size of the action and its duration.  By definition, this suggests that the current financial situation may be increasingly viewed by monetary policy makers, not as a temporary “crisis” or “panic,” but a sustained downturn of prices and economic activity, with the risk of deflation morphing from recession to depression.

Source: Laffer Associates

The immense increase in the monetary base would have led to inflation, if not for the seizure of capital markets, followed by deleveraging and subsequent reduction of economic activity.  We again look to Irving Fisher’s Equation of Exchange which may provide some helpful insights. The Equation of Exchange is M times V equals P times Q (MV=PQ), where M represents the current monetary base and V represents velocity, or the rate at which money circulates through the economy.  The product of M and V quite simply must equal Q, or economic output, which is the sum of all goods and services transacted in the economy adjusted for the price of money, denoted by the letter P. 

Source: Federal Reserve Bank of St. Louis

The increase in the monetary base appears to have roughly offset the decline in velocity, though we may have experienced a brief period of deflation. It would also appear that the monetary base substituted for leverage provided in the banking system as seen by the retraction of the M1 Money Multiplier. Quite possibly, while liquidity was made available for banks identified as Too Big To Fail, credit and cash contracted for those smaller banks and commercial enterprises lacking deep pockets and a political lobby.

Following the Money Equation, the increased monetary base offset the decline in velocity, but was insufficient to offset a broad decline in economic output leading to a temporary period of deflation. The increased and sustained monetary base may have led to financial misallocations or distortions. We would argue both the cause, and the cure, for the most recent financial crisis is reflected in the paradoxical increase in the gold price and unemployment; with low inflation and nominal short-term interest rates.

Source: Federal Reserve Bank of St. Louis

The increasing money supply on the left side of the Money Equation should balance with the increase in economic output and/or prices on the right side. To the casual observer, it would appear that the economy has moved beyond the risk of deflation. If this is the case, a sustained monetary base with increasing velocity may be inflationary if not accompanied by economic growth. This is the classic situation where there may be “too much money chasing too few goods” and paradoxically we see excess liquidity without a commensurate increase in economic activity. This is also referred to as a Liquidity Trap.

Source: Federal Reserve Bank of St. Louis

The product of an increased monetary base and declining velocity was insufficient for keeping the money supply from contracting from 2008 through 2010.  While the economy appears to have bounced off the bottom, Fed Chair Bernanke remains quite concerned about the high level of unemployment, especially as it may include a greater number of the long-term unemployed.  In recent comments, he remains unconcerned about inflation, and having previously listed his ongoing aversion for deflation, he is proceeding unimpeded with an additional $600 billion stimulus program.

No Direction Home: What to do about unemployment?

Setting aside the Money Equation for the moment, Fed Chairman Ben Bernanke, while subject to the laws of nature, is also subject to the law of the land. The Federal Reserve is governed by the Full Employment and Balanced Growth Act, also referred to as the Humphrey-Hawkins Full Employment Act. The law presumes the relationship exhibited by the Phillips curve that there is an inverse relationship between unemployment (slow growth) and inflation (high growth).  Since Fed Chairman Ben Bernanke has recently stated that he has a “100%” level of confidence that inflation can be contained by available monetary tools, for his purposes, any increase in the money supply should translate into an increase in economic growth.  In other words, don’t worry, be happy.

Source: Federal Reserve Bank of St. Louis

It is difficult to imagine the economy growing while the labor force is declining in the aggregate or the labor force is declining as a percentage of the GDP.  More alarming is the increasing level of unemployed for longer durations. Fed Chair Ben Bernanke is rightly worried.  He stated, “The aspect of the unemployment rate that really concerns me is that more than 40% of the unemployed have been unemployed for six months or more, and that’s unusually high. And people who are unemployed for such a long time – their skills erode, their attachment to the labor force diminishes, and it may be a very, very long time before they find themselves back in normal working position.”  While payrolls increased about 103,000 in December, 2010, this was less than the 200,000 needed for sustaining growth. Worse yet, the decline in the unemployment rate was attributed not to the increase in payrolls, but to the 260,000 unemployed believed to be giving up seeking employment and no longer counted in the unemployment rate.

Source: Federal Reserve Bank of St. Louis/Bureau of Labor Statistics (seasonally adjusted)

The increase in duration of the unemployed, those seeking employment, is leading the nation into uncharted territory. While concerns are raised regarding the independence of the Federal Reserve, presumably by those who may be concerned about loose monetary policies leading to inflation, the Humphrey-Hawkins Full Employment Act eliminates any true independence. The Act requires consideration of a number of economic issues that may lead to policies in opposition to monetary stability, which is an important characteristic of money as a medium of exchange and store of value.  In any event, Fed Chairman Ben Bernanke has a perspective grounded in the belief that the Depression was due to a tight monetary policy and he may personally hold an aversion to being left holding the bag should the economy double dip into a lengthy economic decline linked to deflation. From this perspective, the Fed Chairman is legally, academically and personally predisposed to carry out the purchase of $600 billion in Treasuries.

Gold Outlook for 2011: the glass half full

There seem to be hints of a new fiscal conservative wind blowing in the U.S. for federal, state and local government. The extension of the Bush tax cuts may only help head off a decline in the national economy, but even a change in the U.S. House of Representatives may be insufficient to reduce spending or regulations which may retard economic growth. This situation is likely to persist beyond 2011. According to the Money Equation, should the money supply increase faster than a growth in output, inflation should ensue. This suggests that a period of stagflation with both high unemployment and inflation is ahead.

Source: Federal Reserve Bank of St. Louis

To stimulate the economy, the Fed Chairman Ben Bernanke is well disposed to hold down short-term interest rates through open market policies. This helps banks to borrow short term on the cheap and realize higher margins to build capital, leading to a healthier banking system.  In addition, the loose monetary policy and low rates may buoy the real estate markets, helping banks with large real estate exposure move more solidly into the solvent category. Consequently, it is likely that loose monetary policies, combined with the other excesses such as leverage and fraudulent lending practices, led to a “bubble” in real estate values from 2005 to 2007.  With the collapse of leverage in 2007 and 2008, real estate values collapsed but gold continued to move higher. While the Fed Funds and 3-Month Treasury rates have been flat and near zero, 10-Year Treasury rates, along with 15 and 30-year mortgage rates are moving higher from record lows.

Source: Laffer Associates

Near zero Fed Funds rates seem to explain the recent price increases in commodities such as gold.  This relationship appears consistent over the last decade and one may easily conclude that the extended periods of low interest rates may lead to higher commodity prices. Given our read on Fed Chairman Ben Bernanke, and calls for Federal Reserve independence during a political period still dominated by legislative proponents of additional stimulus programs, we don’t see a change of course in 2011. Gold bugs should be very wary if Fed Chairman Ben Bernanke acts upon his threat to increase interest rates (including foreign buyers of U.S. debt). Knowing that higher interest rates may derail an economic recovery, the question investors should concern themselves with, is will he (or does he have the nerve to) pull the trigger on higher interest rates?

Higher interest rates are important in a functioning economy for efficient capital markets to discipline borrowers and reward investors and savers. Our fear for the economy is that the longer interest rates are artificially suppressed, the greater the likelihood of inflation, and more painful the remedy. Higher interest rates were necessary to drive inflation out of the economy in the early1980s. Recently, the U.S. has enjoyed the best of both worlds – a strong dollar to the Euro, and a cheap source of products from Asia. The odds of this temporary happy state of being to change over the long run are very good.

The Moral and Prudential Algebra for Gold in 2011

It is reasonable to assume that the aggregate supply of gold should remain relatively constant in 2011. Having increased the monetary base, the Federal Reserve plans to continue its program of buying Treasuries to stimulate growth. With some improvement in consumer confidence and bank lending, the velocity of money is increasing. Combining the monetary base with the velocity of money, the money supply is likely to expand in 2011. The uncertainty of government regulations may retard economic growth for all but the largest of companies and, with an increasing level of long term unemployed, may place a drag on the economy. The level of government debt is likely to increase, absorbing cash stimulus by the Federal Reserve. The sum total of these proceedings should increase the total amount of dollar denominated assets, which could lead to even higher gold prices in 2011.