Archive for May, 2009

Paul Krugman is Wrong on Inflation

May 31st, 2009 Comments off
In an Alice in Wonderland column published in The New York Times on May 29, economist Paul Krugman launched an attack on those such as myself who have expressed concern that the profligate budget deficits being enacted by the Obama administration are laying the foundation for high inflation. In my piece published in the Huffington Post, “U.S. Economy Risks Dire Prospect of Hyperinflation,” I made specific reference to the possibility that the Obama economic team may be pursuing an inflationary course as a strategy to reduce the real value of the exploding national debt. It seems that this point in particular caught the ire of Professor Krugman.
There is one point in Krugman’s piece that I concur with; we are enduring an unprecedented economic crisis. This calls for thoughtful debate and deliberative argumentation. Unfortunately, even as distinguished an economist as Paul Krugman can at times slip into a mode of petty banalities. As such, his New York Times polemic adds nothing consequential to the discourse on critical issues such as the risks as well as benefits of massive fiscal and monetary intervention on the part of the Obama administration and Federal Reserve. There are, however, a number of points raised by Krugman that warrant a response.
One point promulgated by Professor Krugman is that the unprecedented level of quantitative easing by the Fed is not inflationary, and that those such as myself who have raised this concern are “just wrong.” This is what Krugman had to say on this matter, “Now, it’s true that the Fed has taken unprecedented actions lately. More specifically, it has been buying lots of debt both from the government and from the private sector, and paying for these purchases by crediting banks with extra reserves. And in ordinary times, this would be highly inflationary: banks, flush with reserves, would increase loans, which would drive up demand, which would push up prices. But these aren’t ordinary times. Banks aren’t lending out their extra reserves. They’re just sitting on them.”
So, Krugman agrees that quantitative easing in ordinary times is “highly inflationary” but in our present predicament those rules are suspended. What is left out of Paul Krugman’s rationalization is that banks are sitting on the infusion of liquidity they have received from the Fed because of their chronic need to shore up their balance sheets, which are saturated with toxic assets. However, it is the intention of the Fed to facilitate credit easing on the part of financial institutions through its quantitative easing, which leads to the possibility of future inflation, unless the Federal Reserve is a model of perfection in tightening up on the money supply when the credit crunch abates. Based on the overall performance of the Federal Reserve since the initial stages of the subprime mortgage meltdown, I would not be sanguine about their ability to inhibit the expansion of the money supply when inflationary pressures return.
Professor Krugman also adds that the primary concern currently is deflation, which I agree with in my Huffington Post piece, however, I disagree when he claims that there are currently no inflationary pressures. Due in large part to the falling value of the U.S. dollar, we have recently witnessed a substantial increase in the price of oil, despite weak demand due to the ongoing synchronized global recession. What appears to be an anomaly is actually a harbinger of future trends, in my view. Excessive deficit spending is contributing to the weakening of the dollar, which has price consequences for an economy as dependent on imported goods and commodities as is the case with the United States.

A major point made by others and me is that a high ratio of national debt to GDP creates a substantially elevated risk of inflation. Furthermore, I suggest that this may lead to a conclusion by decision-makers that the only policy response that can reduce this dangerous ratio of public indebtedness is to allow high levels of inflation, which in turn “grows” the nominal GDP not through higher output of goods and services, but through reduction of the constant value of the currency. Professor Krugman is dismissive of this point, making reference to the United States having a level of public debt that exceeded the GDP right after World War II, without severe consequences.

Let us look at the facts. The United States ended World War II with a labor force, including a substantial military, which was fully employed but had been restricted in the opportunities to spend disposable income. This was due to rationing on basic commodities such as foodstuffs, and the termination of production of major consumer durables such as automobiles owing to industrial mobilization in support of the war effort. After VJ day the pent-up consumer demand exploded, while consumer goods remained in short supply in the immediate post-war period. The result was a combination of real growth and high inflation, both dynamics contributing to the attenuation of the public debt to GDP ratio. Thus in 1946, the national debt ratio reached its highest level, 121%. By 1948, that ratio had declined significantly, at 93.7%. Now, let us observe the inflation rate during this period: 8.3% in 1946, a staggering 14.4% in 1947 and 8.1% in 1948. These figures clearly demonstrate that having a level of public debt exceeding 100% of the GDP does have inflationary consequences, and suggests that inflation in turn reduces the real value of the nominal public debt as a proportion of national GDP.

Perhaps the most disturbing aspect of Paul Krugman’s piece, beyond superficial and trivializing dismissal of those he disagrees with on the question of high levels of deficit spending, is his marginalization of those he disputes by resorting to rhetorical generalizations. Thus, he issues this inexplicable diagnosis of those who hold economic views that are contrary to his own: “But it’s hard to escape the sense that the current inflation fear-mongering is partly political, coming largely from economists who had no problem with deficits caused by tax cuts but suddenly became fiscal scolds when the government started spending money to rescue the economy. And their goal seems to be to bully the Obama administration into abandoning those rescue efforts.”

One of the inflation fear mongers is a supporter of President Obama’s stimulus spending program, NYU economics professor Nouriel Roubini. This is what he had to say at a recent symposium on the economic crisis, which Professor Krugman also participated in: “…we have to worry about the long run. If we’re going to finance budget deficits by printing money, we may have high inflation, even risk of hyperinflation in some countries. That’s what happened in Germany in the 1920s during the Weimar Republic. We are having large budget deficits and increasing the public debt, we don’t know whether it’s going to be $5 trillion or $10 trillion of more debt. But there are only a few ways of resolving that debt problem: either you default on it as countries like Argentina did; or you use the inflation tax to wipe out the real value of the debt; or you have to raise taxes and cut government spending. And given the size of the deficits, over time that’s going to be a painful political choice to make. So we need the stimulus in the short run, but we need to restore medium-term fiscal sustainability.”

Another supporter of President Obama’s economic policies, who also opposed George W. Bush’s deficit-financed tax cuts, is billionaire investor Warren Buffet. This is what the oracle of Omaha had to say about the linkage between high public debt to GDP ratios and the risk of inflation: “A country that continuously expands its debt as a percentage of GDP and raises much of the money abroad to finance that, at some point, it’s going to inflate its way out of the burden of that debt.”

In writing off those observers who are concerned about the inflationary dangers emerging from the exploding national debt, Paul Krugman resorts to paraphrasing Franklin Roosevelt, claiming the only thing we have to fear about inflation is the fear of inflation itself. It seems, however, that there is one authority that is of like mind with Professor Krugman. In December 2002, Treasury Secretary Paul O’Neill, about to be fired for opposing the Bush tax cuts, had a meeting with Vice President Dick Cheney. In response to O’Neill’s warning of the long-term implications for the nation’s economic health of escalating federal deficits, Cheney told the soon-to-be but prescient ex-Treasury Secretary, “You know, Paul, Reagan proved deficits don’t matter.”

I never thought I would witness the day when Paul Krugman and Dick Cheney agree on economic policy.


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North Korea Weighs Nuclear Option as Solution to its Economic Crisis

May 28th, 2009 Comments off
North Korea’s underground detonation of a nuclear device on May 25 has rattled the global community. It seems every so often that the regime in Pyongyang engages in provocative behavior, so as to bind world attention. “We are unpredictable and dangerous, so world, you better pay attention to us,” appears to be the radioactive clarion call being uttered from North Korea. In the past, these unorthodox tactics on the part of the “Democratic People’s Republic of Korea,” or DPRK, have been employed as an effective means of blackmail. In the wake of the DPRK’s first nuclear test, in October 2006, then U.S. President George W. Bush agreed to American concessions to North Korea that seemed inconceivable based on his prior rhetoric. Many of these concessions involved economic support for the ailing North Korean economy, especially with regard to the supply of energy and foodstuffs.
The latest nuclear escapade by North Korea is being interpreted as continuity with its longstanding policy of using its possession of weapons of mass destruction as a means to creatively employ economic blackmail. However, the North Korean political economy is so dysfunctional, I think there may be a much more radical calculation emanating from Pyongyang.

There are few countries on the planet that have economies as shattered as North Korea’s. Officially a Marxist-Communist state, its reality is in fact much different. Peculiar for a nation supposedly based on Marxism, North Korea is ruled by a family dynasty. The founder of North Korea, Kim Il-Sung, is worshipped as a God, and his lifeless corpse is constitutionally still the president-for-life of the DPRK. The son of Kim Il-Sung, Kim Jong-il, is the current ruler of North Korea and it is rumored that one of his sons is also being groomed for political succession. Like his father, Kim Jong-il is also deified, and referred to in every proclamation as “the Great Leader.” However, despite his exalted status, his people have endured repeated famines that have snuffed out the lives of millions, according to international relief organizations. Furthermore, with the demise of the Soviet Union and the termination of its subsidies to North Korea, the nation’s industrial infrastructure has essentially collapsed. Men still show up for work in the factories, but nothing is produced, for the most part, and the pay is a pittance. It is the women who actually run the economy of North Korea, largely through the black market. Though theoretically illegal, this otherwise draconian police state largely tolerates the female-dominated black market, estimated by some observers to represent 80% of the DPRK’s meager economic output. The women of North Korea are the breadwinners in that society, having rediscovered entrepreneurial skills and are engaged in craft production and trading goods smuggled into the DPRK from China.

Having a national economy largely based on the black market is actually in conformity with other aspects of North Korea’s unique political culture. Another example is how its communist-indoctrinated diplomats are expected to engage in profitable capitalism while posted abroad, so as not to bother Pyongyang with inconsequential and mundane matters, such as paying the rent on their embassies. For that reason, numerous North Korean diplomats have been expelled by their foreign hosts for engaging in activity “incompatible with their status.” That term usually means espionage; in the case of the DPRK, the diplomats were expelled for engaging in narcotics trafficking.

In this basket-case of an economy, North Korea has had only one export commodity that has consistently been a strong earner of foreign exchange; armaments. In the past, ballistic missiles have been a hot export commodity for the rulers in Pyongyang. However, many of North Korea’s traditional missile buyers, including Iran, now manufacture their own rockets. With demand for its medium range missiles potentially drying up, North Korea must look at new products that will stimulate demand. Long range ballistic missiles that can strike targets in the United States are one example of product diversification that may explain the DPRK’s recent test of a supposed satellite launch. However, the crown jewel in North Korea’s product portfolio is its nuclear weapons capability.

Though most analysts believe that the recent detonation of a nuclear device by North Korea was just its traditional blackmail-driven saber rattling, I think there may be a far more dangerous motive behind the atomic weapons test. North Korea’s first nuclear test in 2006 is widely viewed as being a dude. While the basic concept of creating a nuclear blast is relatively simple-bringing together a critical mass of fissile materials-the means of achieving full yield requires sophisticated physics and engineering. The small yield of the blast in 2006 revealed that the DPRK had not yet mastered the technique of “extending the generation,” meaning prolonging the natural onset of a nuclear explosion by a ten millionth of a second. What seems like an insignificant time factor makes all the difference between an explosion that is in the same category as a large conventional bomb, and a blast on par with the bomb that destroyed Hiroshima in 1945. Until the DPRK had demonstrated its ability to “extend the generation,” potential foreign buyers of nuclear weapons would have little faith in North Korean nuclear weapons technology.

The May 25 nuclear test by the DPRK was, by all accounts, successful. The Russians estimate that the device detonated by the DPRK had a yield of between 10 and 20 kilotons, on par with the bombs dropped on Hiroshima and Nagasaki. Potential customers, including both rogue nations and non-state actors such as Al-Qaeda, have now received a “product demonstration” that is convincing.

While my theory that North Korea’s recent actions are based on a policy decision to begin surreptitiously marketing nuclear weapons technology, and possibly fully assembled nuclear weapons to the highest bidder, may seem far-fetched, there are signs that key decision-makers in the U.S. national security establishment have adopted a similar viewpoint. Recently, the Department of Homeland Security has abandoned plans to place radiation detectors in most ports of entry to the United States. This decision was based on the conclusion that technology does not exists that would reliably detect a well-planned attempt to smuggle a nuclear weapon or its components into the United States. However, there is another area that the Department of Energy, in particular, is aggressively moving forward on. A new field has been invented, called “nuclear forensics.” It is based on the belief that a nuclear detonation is so unique, post-blast analysis can reveal the origin of the fissile materials that were used in the weapon. This seems to be the new deterrent doctrine; if a country such as North Korea sells a nuclear weapon to a terrorist organization that then used it to destroy an American city, the U.S. will be able to scientifically determine the point of origin of the nuclear device, and launch a retaliatory response against the offending nation.

As if the Global Economic Crisis was not enough to worry about, we now may be witnessing the emergence of nuclear proliferation as an export-based strategy for capital formation. It makes one hope that nuclear blackmail is all that North Korea is truly interested in.


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U.S. Economy Risks Hellish Prospect of Hyperinflation

May 24th, 2009 Comments off
The global financial and economic crisis arose out of radical deflation in the U.S. housing market, as the real estate asset bubble split asunder. With the collapse in housing prices came the contraction of another asset bubble; equities. The ongoing demand destruction has also deflated commodity prices from their recent peaks, giving rise to a collective view among economic policymakers that deflation represents the single greatest risk to the global economy.
In itself, deflation is a dangerous economic phenomenon. Historians of the Great Depression often refer to deflation in the 1930s as a contributing factor to the prolongation of that epochal downturn in the world’s economy. Looking closely at the dynamics of deflation, it is not difficult to see why this is a dangerous economic state to be in. When prices of major durable goods, especially homes, continue to decline, this inserts a strong dose of uncertainty into the human decision-making process. Not many consumers are likely to take out a mortgage on a home that they believe will actually decline in value right after the legal papers are signed. Or so the classical economic theory goes.
However, though not downgrading the danger of deflation, I believe policymakers are ignoring other factors regarding this economic and financial condition. Furthermore, the U.S. government and Federal Reserve in particular, are taking steps to “cure” deflation that will inevitably lead to hyperinflation, which in the long-term may prove far more destructive to the long-term health of the U.S. economy.
History demonstrates that deflation is not a permanent condition. Market forces, unencumbered by fiscal and monetary intervention, eventually restore pricing equilibrium. At a certain point prices of major durables such as homes are low enough to encourage new categories of consumers to enter the marketplace. As demand is restored, prices stabilize and then resume their upward ascent. It is all a question of time. However, key decision-makers in the United States are not paragons of patience. They want deflation cured immediately, which explains why the U.S. Treasury and Federal Reserve are hell-bent on policies that are guaranteed to be inflationary. The question is how bad will inflation ultimately be.
Massive quantitative easing by the Fed is pouring trillions of fiat U.S. dollars into the money supply, essentially conjured out of thin air. This is being done without transparency, the rationale being that frozen credit markets require a vast expansion of the money supply in an attempt to get the arteries of commerce flowing again. Similarly, the U.S. government is spending vast amounts of money it does not have, with the Treasury Department selling unprecedented levels of government debt in a frantic effort to fund the wildly expanding U.S. deficit. These two forces, quantitative easing and multi-trillion dollar deficits, are the core ingredients of an explosive fiscal cocktail that I believe will ultimately lead to hyperinflation.
What exactly is hyperinflation? Economists disagree on a common definition, so I will offer one myself. Double-digit inflation extending over a period of at least two years would arguably be a hyperinflationary period. It can get much worse, witness Weimar Germany in the early 1920’s and Zimbabwe at present. The most recent experience the United States had with this unstable economic condition was in 1981, when the annual CPI rate exceeded 13%. The cure was draconian; Federal Reserve Chairman Paul Volcker engineered a severe economic recession that created the highest level of U.S. unemployment since the Great Depression-until now. The federal funds rate, currently near zero, rose to above 20% under Volcker’s harsh discipline. Eventually high inflation was purged out of the system and economic growth was restored, however the monetary regimen was punitive for several years.

The current monetary and fiscal policies being enacted by the key economic decision-makers in the United States are laying the groundwork for a far more dangerous inflationary environment than anything encountered by Paul Volcker. The explosive growth in the money supply and government debt is simply unsustainable without severe inflation. It must be kept in mind that the Federal government is not the only public authority engaged in massive deficit spending. Throughout America, state, county and municipal governments are faced with imploding tax revenues and lack the ability or political flexibility to cut services to a level commensurate with revenue flows. Both the Fed and the public sector are engaging in a reckless gamble; borrow like crazy in the hope that this overdose of economic stimulation will restore growth to the economy and normal tax revenues, leading to a decreased and sustainable level of public sector indebtedness.

If one believes that the policymakers running the Federal Reserve, Treasury and Federal government, the same architects of the Global Economic Crisis, are smart enough to now get everything right, perhaps we may escape the worst consequences of their turbo-charged fiscal and monetary policies. However, there are growing indications that global investors and the broader market are beginning to reach a far more sobering assessment.

In an interview with Bloomberg News, Bill Gross, co-chief investment officer of PIMCO (Pacific Investment Management Company) suggested that the coveted AAA credit rating U.S. government debt now benefits from will eventually be downgraded. “The markets are beginning to anticipate the possibility of a downgrade,” Gross said.

China, the major purchaser of Treasuries and holder of $1 trillion of U.S. government debt, is already on record as expressing concern for the integrity of its American investments, and has begun actively exploring alternatives to the U.S. dollar as the primary global reserve currency. These moves by China are not based on fears of expropriation of its U.S. assets, but focuses on the specter of hyperinflation destroying much of the value of assets denominated in U.S. dollars. No doubt China’s economic experts are well aware of the growing number of economists who are convinced that the U.S. will be unable to service its rapidly expanding debt burden without significant inflation. Inflation in monetary terms means the erosion of the intrinsic value of the American dollar.

What is most frightening about the policy moves being enacted by the Fed and Treasury is that their actions may not be a reckless gamble after all. They may have come to the conclusion that only hyperinflation will enable the United Sates to avoid national insolvency. In effect, they may be pursuing the exact opposite course undertaken by Paul Volcker in the early 1980’s. If that is their prescription for the dire economic crisis confronting the U.S., then one must conclude that Ben Bernanke, Timothy Geithner and Larry Summers have learned nothing from history Once the spigot of hyperinflation is tuned on, it becomes a cascading torrent that is almost impossible to switch off, and which in its wake inflicts inconceivable levels of economic, political and social devastation. Before it is too late, President Obama should put the brakes on his economic team’s dangerous gamble with the haunting specter of hyperinflation. If he fails to act in time, a hellish prospect may be his economic and political legacy.


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Why Barack Obama Cannot Prevent America’s Next Great Depression

May 19th, 2009 Comments off
Barack Obama, America’s 44th President, is one of the most brilliant, hard working and innovative politicians to occupy the White House. If the current economic crisis were a typical post-war cyclical recession, there is no doubt that President Obama would be up to the challenge, and lead the United States to renewed growth and prosperity. Alas, we are in different times, with a uniquely devastating and dangerous economic disaster of worldwide scope. Not even as gifted a leader as Barack Obama, I fear, will prove sufficient in arresting the rampaging Global Economic Crisis.

No one can accuse Obama of not recognizing that the U.S. faces a severe economic recession. Most of his administration’s initial activity has centered around crafting policy responses to the recession, primarily involving the unprecedented expenditure of borrowed money in an attempt to revive growth. However, the very character and essence of his administration’s economic policymaking reveals the lack of comprehension of how dire and unique the Global Economic Crisis is on the part of President Obama. At his core, Obama believes that the American economic system is basically sound, but slid into a severe recession because of irresponsible behavior on the part of some actors within the financial oligarchy. Hence, by restoring growth through deficit spending and enacting a new regulatory regime to restrict the destructive greed of some Wall Street tycoons and bankers, we can return to the happy economic days of yore. In effect, Obama is acting like a nostalgia buff, hoping that the correct policies will recapture the solid economic model of pre-George W. Bush America. Unfortunately, this view of America’s political economy is mythological. The U.S. economy was unhinged under the presidency of Bill Clinton as much as it has been under Bush, yet Obama has chosen Clintonites to serve in the most important economic policymaking positions in his administration. Cheerleaders for a failed model will not lead America to a new economic Jerusalem.

A major part of the problem Obama is facing is philosophical. He is following a conventional view of counter-cyclical economics; when a recession occurs, the sovereign can go into debt and use borrowed money to artificially increase demand and thus arrest the decline in growth. Once the recession is arrested, government fiscal policy can return to a more prudent policy of balanced budgets, as restored economic growth eliminates the need for the government to maintain demand. Sounds simple, as this has been enshrined as the recession-fighting bible created by economist Maynard Keynes. The only difference, the Obama administration would argue, is that this recession is much bigger than previous economic downturns, and therefore requires much more significant deficit spending. Otherwise, the Keynesian model remains unaltered.

This perspective by the Obama administration, in my view, is myopic. Like many contemporary politicians and economists, President Obama and his senior economic advisors have misread Maynard Keynes. Contrary to public perception, Keynes was no economic radical, but a centrist in dealing with the challenge of managing economic cycles within a capitalist system. Though Keynes did believe deficit spending was justified as a means to stimulate economies in deep recession, he also advocated budget surpluses during times of relative prosperity. In effect, Keynes believed in “rainy day” economics; in times of plenty you put away a little fiscal cushion that can then be spent during a recessionary period to enable the sovereign to maintain economic demand during a time of private sector contraction and declining tax revenues. This is actually a conservative philosophy that many farmers are familiar with.

In the United States, even during times of sustained economic growth, massive government deficits have been de rigeur during the past nine years, in the process doubling the national debt. There is no rainy day fund to speak of, so the staggering deficits that are now being enacted by the Obama administration are, in my judgement, fiscally unsustainable. Already, the projection for the current fiscal year’s deficit has risen by $200 billion to a stratospheric $1.8 trillion; my own estimate is that it will top $2 trillion. Looking into the future, the current Obama fiscal agenda foresees annual deficits of $1 trillion or more for several years into the future, gambling that the recession will be short-lived, with growth returning as early as the last quarter of 2009, leading to increased tax revenue and declining deficits.

But are we in a recession? The current downturn is already the most protracted and destructive since World War II. However, there is another ingredient that has been added into this toxic economic stew: globalization. We are in a Global Economic Crisis in which synchronized contractions across the world create multiple negative feedback loops that reinforce the underlying negative causation. The subprime collapse in the United States crippled banks in the U.K. and devastated Japan’s export machine; the Eurozone economic contraction is now impacting America’s export driven manufacturers. When China’s exports to America decline, commodity exporters and peripheral economies that supply value-added components to China’s export goods get whipsawed. This phenomenon is occurring at an accelerating pace, despite attempts by the Obama administration to portray minor statistical anomalies to the prevailing trend as “rays of hope” and “green shoots.” Reading tealeaves is no substitute for critical analysis.

The ongoing Global Economic Crisis has proven to be so severe, sustained and virulent that if it is not yet a global depression, it is embarked on that dangerous trajectory. However, another flaw in the Obama administration’s approach is its failure to recognize that a substantial part of the financial system is rotten to the core, and not merely a fundamentally sound system with a few bad applies populating it, who can be restrained by improved regulation. More importantly, the Obama economic team seems to have convinced themselves that “mind over matter” is the best palliative for the nation’s stricken banking system. When a sovereign’s private banks are essentially insolvent and not engaged in normal loan activities, this is another manifestation of an economic depression. Rather than admit the truth, the Obama administration cobbled together a make-believe series of bank stress tests, which supposedly show that America’s banking system, with a few minor problems, is essentially sound and fiscally healthy. This conclusion is an utter fraud, designed to artificially create a climate of economic confidence. It won’t work, and by delaying an honest approach towards the nation’s crippling level of bank insolvency, the policymakers are insuring that the final cost of the inevitable day of reckoning will be far more costly to the taxpayers.

The economist Hernando de Soto has captured the essence of the Global Economic Crisis as few others have. In his view, the Western world, and principally the United States, who have for so long railed against Third World inefficiency and corruption, have created the largest, most toxic shadow economy in the history of human civilization. More than one quadrillion dollars in unregulated financial derivatives paper, according to de Soto, has destroyed inter-bank and financial counterparty trust to such an extent, credit flows have largely frozen despite unprecedented levels of taxpayer-funded borrowing to bailout the global financial system. Nothing short of an honest accounting of the true value of the toxic assets underlying these colossal derivatives products, which equal twenty times the entire world’s GDP, can put the global economy on the road to recovery. Until these unregulated “unknown unknowns” become fully transparent, all other government interventions, including Obama’s massive borrowing binge, are doomed to failure. Sadly, as the bogus bank stress tests reveal, President Barack Obama and his Clinton-era economic advisors have financial transparency as the least important objective on their agenda.

It seems that President Obama, despite his obvious leadership gifts and towering intellect, has chosen to place his faith in a team of advisors who are tied to the Wall Street oligarchy by an umbilical chord than cannot be severed. In a sense, Obama is following the path of the last Soviet leader, Mikhail Gorbachev, who also sincerely wished to resolve his country’s economic problems, but believed that the system was fundamentally sound and only required a modicum of reform to correct its distortions. Only after the collapse of the USSR did Gorbachev conclude that the system itself was unsustainable. Now it appears to this observer that President Obama may be fated to travel the same path as Gorbachev, and like him end up as a valiant failure.

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GM Is Toast

May 16th, 2009 Comments off
During the Texas oil bust of the 1980s, a major real estate developer told me, “I thought I was in the real estate business, only to discover I was really in the oil business.” His comment was made as the collapse in the price of a barrel of oil inflicted massive collateral damage on all segments of the Texas economy. Similarly, the executives running the world’s major automobile companies, including those based in Detroit, have learned that they were actually in the subprime mortgages, credit default swaps and financial derivatives business.
In previous posts I have commented on the strategic miscalculations and erroneous management decisions made by General Motors and its domestic competitors as contributing factors towards their imminent demise. However, it is the Global Economic Crisis, driven by financial chicanery engineered largely on Wall Street, that is sending GM, Chrysler and possibly Ford to a rendezvous with the undertaker. While U.S. politicians, who have shoveled trillions of taxpayer dollars into the hands of reckless Wall Street firms and banks with virtually no strings attached, enjoy lambasting Detroit and the auto unions for their supposed misdeeds, a recent statistic adds ambiguity to this generalization. In April, Toyota, considered to be the best run auto company in the world, actually had a sharper drop in U.S. auto sales than GM, which is teetering on the edge of bankruptcy.

In desperation, GM has announced it will dump 1,600 domestic dealerships in the short-term, and ultimately eliminate 2,600, reducing its total dealership franchises by more than 40%. This is only part of an array of measures designed to reduce operating costs. More auto assembly plants will be shut down; additional layoffs will be undertaken while remaining employees will see their wages and benefits shrink further. However, in the wake of the financial storm that is wrecking the global economy, these last ditch and desperate stratagems are almost certainly doomed to failure. In the next several weeks GM will file for bankruptcy protection, shed several of its brands, and accelerate the death spiral that it is now locked in. With unemployment surging, not only in the United States but throughout the world where GM has significant market share, and credit essential for auto purchases being denied to consumers-macroeconomic factors that are far more relevant to the auto industry than brand elimination and dealership disposal-the extinction of General Motors as an industrial corporation seems all but certain. Possibly brands such as Cadillac or Chevrolet may survive independently or be absorbed by other auto manufacturers, but the behemoth known as GM is destined for the scrapyard of history.

While Teddy Roosevelt was completing his second term as U.S. president in 1908,the first GM automobile was manufactured. In 1954, General Motors saw its 50 millionth car roll off the Detroit assembly lines, at a time when more than half a million Americans worked for GM. Now, at death’s door, GM has announced that its dwindling workforce will shrink by a further 38%, reaching a planned level of 38,000. That represents a reduction of 93% from the 1954 employment figures!

The financial and political elites who dominate policymaking in America seem unperturbed. They apparently prefer having companies exist that engineer exotic financial derivatives than a manufactured product that is assembled by a skilled, well-compensated workforce. However, even with this melancholy certainty in front of us, I will always imagine a ride in a 1957 Chevrolet convertible as being infinitely more romantic than cruising the lanes on foot with a pocketful of securitized subprime mortgages. So, America, where does the economic road ahead lead us?

Rest in peace, General Motors.


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Will Al-Qaeda Nuke America?

May 14th, 2009 Comments off

It has been nearly eight years since Al-Qaeda struck the United States on September 11, 2001. In the aftermath of that transformational event, some have speculated that a future strike on the U.S. by Osama bin Laden would be more devastating, involving perhaps a nuclear weapon. This apocalyptic scenario has been the plot of various novels, including my own nuclear terrorism thriller, “King of Bombs” (information at However, the passage of nearly a decade has lulled some into a state of complacency. Could it be that George W. Bush and Dick Cheney were right in deciding to invade Iraq? After all, it was their rationale (after no weapons of mass destruction were found) that fighting in Iraq meant the United States did not have to fight Al-Qaeda in the homeland. Could that be why Al-Qaeda has not launched a second attack on the homeland, after eight years?


In evaluating the possibility of future Al-Qaeda operations in the United States, it is useful to look back at an earlier plot that predated 9/11. On February 26, 1993 an Islamist radical cell linked to what would eventually be known as Al-Qaeda detonated 1,500 pounds of explosive material, consisting of oil and nitrates, in the underground parking garage at the World Trade Center. The resulting explosion killed six and injured more than 1,000. As destructive as this attack was, it did not fulfill the tactical and strategic objectives of the perpetrators.


The intention of the attackers was to bring down one of the Twin Towers in such as manner that it would topple over its twin, resulting in mass casualties and destruction. However, many mistakes were made by the plotters, ensuring that the detonation would not bring about the collapse of the building, while leaving a trail of forensic clues which would lead to the eventual apprehension of most of the plotters of the attack.


It would be more than eight years before Al-Qaeda struck again, with vastly more devastating results. Until 9/11, there was a level of complacency that inhibited American policymakers from correctly evaluating the threat of a jihadist cell striking at the American homeland, despite repeated and successful Al-Qaeda attacks directed at American targets overseas. This intellectual myopia on the part of U.S. decision-makers would be described in the official report of the bipartisan 9/11 Commission as a “failure of imagination.” Could history be repeating itself?


The American government, during the Clinton and subsequent Bush administrations, failed to recognize that Al-Qaeda was a transnational terrorist organization unlike any other. Furthermore, policymakers ignored clear threats by the leadership of Al-Qaeda to attack the American homeland. Several of these warning were issued personally by Osama bin-Laden to international journalists.

Since 9/11, Al-Qaeda has launched dozens of attacks throughout the world. This figure does not include Iraq and Afghanistan, where the number certainly runs into the hundreds, if not thousands. The jihadist followers of Osama bin-Laden have struck targets in diverse regions including Europe, North and East Africa, Turkey, the Philippines and Indonesia. On October 12, 2002 a jihadist group linked to Al-Qaeda attacked three targets on the Indonesian Island of Bali, including a bar frequented by European and Australian tourists, killing more than 200. On March 11, 2004 Al-Qaeda set off multiple bombs on Spanish trains in Madrid, killing nearly 200. On July 7, 2005 Al-Qaeda operatives trained in Pakistan detonated bombs that struck London’s transit system, resulting in 52 fatalities and hundreds of injuries. These are but a few of a long list of murderous terrorist operations successfully carried out by Al-Qaeda since 9/11.

Based solely on operational tempo, Al-Qaeda’s capability to mount attacks worldwide appears intact. There are indications that it may even have grown substantially. Experts who monitor Al-Qaeda believe two factors have contributed to the enhancement of this terrorist organization’s capacity. In the first place, Al-Qaeda has developed a sophisticated capability to utilize the Internet as a recruitment tool as well as an operational asset. Thousands of jihadist websites spread the message of Osama bin-Laden’s Islamist ideology to a large segment of disaffected Muslims, especially among immigrants in Europe. Secondly, the Iraq war is believed by many to have energized Al-Qaeda, and attracted support and sympathy throughout the Islamic world.

Some defenders of the Bush administration’s decision to invade and occupy Iraq maintain that the war has made America safer, by attracting jihadists who would otherwise come to America to wage warfare. However, in testimony before the Senate Select Committee on Intelligence in 2005, then CIA Director Porter J. Goss stated that, “these jihadists who survive will leave Iraq experienced and focused on acts of urban terrorism. They represent a potential pool of contacts to build transnational terrorist cells, groups and networks.”

In 2007 the National Intelligence Estimate, reflecting the consensus view of America’s intelligence gathering agencies, concluded that Al-Qaeda had reconstituted its command and control infrastructure in sanctuary areas inside Pakistan, astride the border with Afghanistan. Ominously, the NIE concluded that:


“We assess that Al-Qaeda’s homeland plotting is likely to continue to focus on prominent political, economic, and infrastructure targets with the goal of producing mass casualties, visually dramatic destruction, significant economic aftershocks, and/or fear among the U.S. population. The group is proficient with conventional small arms and improvised explosive devices, and is innovative in creating new capabilities and overcoming security obstacles. We assess that Al-Qaeda will continue to try to acquire and employ chemical, biological, radiological, or nuclear material in attacks and would not hesitate to use them if it develops what it deems is sufficient capability.”

Looking back at the 8-year interval between the attacks on the World Trade Center and the subsequent eight years, we observe a number of key characteristics about Al-Qaeda and its leadership. Osama bin-Laden and his deputy, Ayman al-Zawahiri, are utterly committed to the victory of their interpretation of Islam, which means the reestablishment of a united Islamic caliphate ruled under strict shariah law. An essential preliminary to achieving this historic triumph, in their view, is the expulsion of all “infidel” influence within the Islamic world, meaning principally the United States, and the emasculation of America’s economic power. While this goal seems preposterous to an American mind, within the context of Islamist radicalism Osama bin-Laden has articulated a rational and cogent strategy for achieving his aims.

Al-Qaeda and its senior leadership think in terms of a long timeframe for achieving their goals. Patience characterizes their operational planning, particularly involving major targets. Thus, in their mode of thinking, eight years was a reasonable period of time to improve upon their first attack on the World Trade Center mounted in 1993.

The 9/11 attack displayed ruthless execution and bold planning. It also established a benchmark for future attacks on America, with a far higher threshold of destruction required then what Al-Qaeda customarily inflicts during its attacks in Europe, Africa, the Middle East and Indonesia. Anytime since 9/11, Al-Qaeda could have attacked transit systems, shopping malls and other “soft targets” in the United States. However, such terrorist incidents would be purely tactical, lacking any strategic consequences. Al-Qaeda has probably determined that any future attack on America, to be viewed as successful and strategic, must exceed the level of carnage inflicted on 9/11 by a significant degree. That is probably why the National Intelligence Estimate released in 2007 emphasized the likelihood that Al-Qaeda is planning to hit the American homeland again, possibly with a weapon of mass destruction.

When Osama bin-Laden attacked the World Trade Center and Pentagon on 9/11, he had a strategic objective clearly in mind. Mass casualties were the means to his goal, rather then the ends. By inflicting a shock on the American psyche of such dramatic proportions, he sought to induce the United States to militarily intervene in Afghanistan, repeating the experience of the former Soviet Union. He anticipated that a long, drawn-out war of attrition would demoralize the United States, cripple her economy and lead to its collapse, replicating what occurred to the Soviet Union. What he did not anticipate was that the U.S. would only send a small expeditionary force to Afghanistan, while devoting the bulk of its military resources towards the subjugation of Iraq, whose ruling regime had no connection with the events of September 11, 2001. In that sense, the strategic value of the consequences of 9/11 for Al-Qaeda probably exceeded their highest expectations.

In planning for its next attack on the United States, Al-Qaeda would seek to inflict a loss of such staggering proportions that it would again impel the United States into behaviors that would serve its ultimate existential goals. To achieve such an aim with conventional means, such as ordinary explosives or airplanes (as on 9/11) is probably an unlikely scenario. As suggested by the NIE on Al-Qaeda planning for a future operation on U.S. soil, it is likely that Osama bin-Laden is exploring ways of utilizing a weapon of mass destruction in a future attack.

The NIE speculates on the means of WMD that Al-Qaeda may be focusing on. Though biological and chemical weapons are possibilities, they are unlikely to be used by Al-Qaeda. These weapons are notoriously difficult to employ, as demonstrated in a terrorist attack on the Tokyo subway involving nerve gas. More importantly, while such weapons may, under certain circumstances, be deadly, they limit their effect to people, while leaving property intact. Al-Qaeda’s methodology and doctrine stresses physical damage along with loss of human life. The iconic image of the twin towers dissolving on 9/11 was more valuable to Al-Qaeda then the actual number of fatalities. For those same reasons, a radiological weapon, commonly dubbed a “dirty bomb,” also would not be of much interest to Al-Qaeda.

If Al-Qaeda is planning a future attack on America that will exceed 9/11 in its impact, there is a high probability that this operation would involve the detonation of a nuclear weapon in a major urban center within the continental United States. The capacity for even a crude nuclear weapon to inflict vast carnage and destruction within a densely populated city is unmatched by any other weapon or scenario that Al-Qaeda could conceivably employ. Captured documents and other anecdotal information point to a very high level of longstanding interest by Osama bin Laden in nuclear weapons.

In recent years, both Osama bin-Laden and Ayman al-Zawahiri have issued repeated warnings that America would face attacks worse than 9/11, unless it fulfilled all of Al-Qaeda’s demands, including withdrawal of its physical presence from anywhere defined as Islamic territory. In an Internet broadcast message, al-Zawahiri warned, “You are facing the Islamic rage … what awaits you, should you press on, is far worse than anything you have seen.”

In a macabre video marking the sixth anniversary of 9/11, Osama bin Laden offered a chilling message. Warning the American people that they were responsible for the continuation of the Iraq war by virtue of having reelected President Bush, he went on to propose two alternatives for ending America’s involvement in Iraq: “The first is from our side, and it is to continue to escalate the killing and fighting against you. The second way is to reject America’s democratic system and convert to Islam…I invite you to embrace Islam.”

By fulfilling all of the theological requirements for a future attack on America, it appears that Osama bin-Laden is laying the groundwork for something “far worse” than 9/11. While his call for Americans to “embrace Islam” seems irrational to a Western mindset, in the context of Osama bin-Laden’s world this is a supremely rational act for a jihadist warrior to undertake. Having provided fair warning and an opportunity to convert to his enemy, he no longer feels any moral restraint on inflicting the ultimate destruction on the American homeland.

As reflected in the NIE referred to earlier, the American intelligence community has high confidence that if Al-Qaeda ever acquired a nuclear weapon, they would unquestionably use it against an American target. Those within leadership circles who downplay the threat of nuclear terrorism from Al-Qaeda claim that it is beyond the capability of Al-Qaeda to manufacture or otherwise obtain such weapons. Unfortunately, there is much expert opinion that holds a contrary view.

It may be difficult for Al-Qaeda to acquire an intact nuclear weapon, though not inconceivable. It is known that during the break-up of the former Soviet Union, much of that nation’s nuclear arsenal was insecure. Rumors have circulated for many years that during that chaotic period, Al-Qaeda obtained several Soviet nuclear weapons through the black market. It is impossible to know if that in fact happened, though another possible source of intact nuclear weapons is Pakistan, a nuclear-armed state that happens to be where the top Al-Qaeda leadership is believed to be in hiding. At present, a radical Islamist uprising is underway in significant parts of Pakistan, eroding the stability of the nation’s fledgling civilian government.

A more likely scenario involves Al-Qaeda making its own nuclear bombs. Though challenging, this would be within the capability of an organization with the proven sophistication of Al-Qaeda. Much of the information on making nuclear devices is within the public domain, and it is known that Osama bin-Laden met personally with two senior scientists involved with Pakistan’s nuclear weapons establishment, prior to 9/11. The barrier to building a nuclear bomb is not technical know-how but materials. Atomic weapons require fissile materials, either uranium 235 or plutonium. These materials require a national industrial infrastructure to create, so Al-Qaeda cannot fabricate fissile materials on its own.

Unfortunately, with the collapse of the Soviet Union, a vast quantity of fissile materials became dangerously insecure, vulnerable to theft or being sold by the Russian Mafia. The U.S. Congress recognized the danger, and provided funding for a program that assists the Russians in improving security at facilities that store nuclear weapons and fissile materials. In the many years that this program has been in existence, only half of the insecure Russian nuclear sites have had their security upgraded. At the present rate of funding and implementation, it may be another 10 years before the remaining nuclear sites are secure, though the Obama administration has demonstrated a far higher level of concern on this issue than the previous Bush presidency. In addition, there are many other sites throughout the world, including the United States, which store fissile materials under less than optimum security. It would be an act of extreme optimism to believe that Al-Qaeda will sit and wait ten years until all these nuclear sites have upgraded their security arrangements. Possibly, Al-Qaeda might already have such materials in its possession. Depending on the design of the bomb, as little as 35 pounds of uranium 235 would be needed to build a device with a yield similar to the weapon that destroyed Hiroshima in 1945. Should Al-Qaeda actually build such a weapon, it is highly unlikely that it would be detected by present security protocols and technology, should a jihadist cell seek to surreptitiously insert it into the United States. Contrary to public perception, nuclear weapons emit little radiation, which can be easily shielded. Once inside American borders, Al-Qaeda could deliver a nuclear bomb to any city by van or SUV.

Should a nuclear bomb ever be detonated in an American city, the carnage would defy our imagination. It is estimated that a ten-kiloton device, less powerful than the Hiroshima bomb, detonated in mid-town Manhattan during the workday, would immediately kill approximately 500,000 people. A similar number would be fated to die in the following days and weeks from the effects of radiation poisoning. Beyond the immensity of the carnage and destruction, America would be irreversibly transformed. Fear would dominate the country, with tens of millions of Americans contemplating the evacuation of their cities, uncertain if other bombs exist and would be detonated. Economic paralysis would ensue as the borders closed, while the financial markets, already weakened by the current Global Economic Crisis, would completely collapse. Civil liberties would be largely suspended, as the nation entered a new Dark Age, in which survival would take precedence over liberty. Likely, America’s relationship with the world would be radically transformed in manner that suited Al-Qaeda’s ultimate agenda.

In an interview conducted with the journalist Robert Fisk in 1997, Osama bin-Laden made his ultimate objective regarding the United States unambiguously clear. “I pray to God that He permits us to turn America into a shadow of itself,” the Al-Qaeda leader told Fisk.

While knowledgeable national security specialists take seriously the threat of weapons of mass destruction being employed in any future Al-Qaeda atrocity on American soil, outside their small circle this vital issue of national survival has barely seeped into the public consciousness Yet, should Al-Qaeda actually detonate a nuclear weapon in an American city, the entire world as we know it would cease to exist.


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Stress Test for U.S. Banks Are a Complete Fraud

May 12th, 2009 Comments off

The ancient Greek philosopher, Plato, constructed a political theory based on the royal lie or myth. As described in Plato’s Republic, the ruling elites of a political entity have the right to lie to their citizens-but not vice versa. The rationalization is that a royal lie and deception maintains social cohesion and prevents the collapse of the state. Thus platonic logic gives rise to the so-called stress test for American banks, the royal myth conceived by Treasury Secretary Timothy Geithner and Fed Chairman Ben Bernanke, in order to deceive investors, market sentiment and the American people as to the true state of the nation’s financial institutions.

When Congress approved the massive $700 billion bailout of U.S. banks and Wall Street firms last October, the justification was that without this massive indebtedness being incurred by the American taxpayer, the U.S. and even global financial system would collapse. Yet, from this perilous state of only a few months ago, a stress test is concocted by the Obama administration to “prove” that these same banks are relatively healthy, well capitalized, with only a few banks requiring a collective total of $75 billion to cover probable losses that can be anticipated during the months ahead as unemployment continues to rise. Furthermore, this $75 billion capital infusion can be generated directly from private investors, without the injection of additional taxpayer support, so says Geithner & Company.

What is going on here? I think the prophet of doom of this unprecedented global financial and economic crisis, NYU economics professor Nouriel Roubini, summed it up best when he wrote recently, “Geithner’s hope is that he can subsidize banks long enough for them to earn their way back to health. But the public isn’t keen on more bailouts, so Geithner’s challenge is to convince us that banks are solvent.”

However, as Roubini and other economists and financial analysts have pointed out, much of the U.S. banking sector is functionally insolvent, stress test or no stress test. Roubini himself estimated that U.S. financial institutions will incur $3.6 trillion in losses from the ongoing economic crisis, while the IMF calculates that global exposure to toxic assets is over $4 trillion, more than half this sum related to losses in the United States. These figures far surpass the current capitalization of U.S. banks, making Geithner’s $75 billion figure a fantasy number, unrelated to actual economic and financial realities. In other words, a royal lie, straight out of Plato’s Republic, with suitable accoutrements customized for the Global Economic Crisis.

The stress test is a public relations exercise on a grand scale. Originally, word “leaked” out that all the major U.S. banks would pass the stress test. Markets reacted skeptically, leading Treasury and the Federal Reserve to come up with a compromise number; big enough to look credible yet not so large as to suggest there is an insolvency danger afflicting the nation’s banks.

A mythological approach towards the Global Economic Crisis, especially as it relates to financial institutions, will insure that an already dire situation becomes inevitably calamitous. The most dangerous flaws in the U.S. and global banking system are not even hinted at with Treasury’s stress test. They have to do with a volatile man-made financial toxin, otherwise known as derivatives.

The oracle of Omaha, billionaire investor Warren Buffet, once described derivatives as “financial weapons of mass destruction.” As regards the world of credit and finance, he is absolutely correct. What exactly are these nefarious derivatives? Though conceived of as complex financial instruments, in essence they are private contracts between financial counterparties, which have the characteristics of a bet, in effect gambling on a range of financial and economic activity. This can include price direction of commodities, equity markets and global currencies, among many other “derivatives” of financial and economic activity. Banks, investment firms and insurance companies loaded up on derivatives until their balance sheets choked on them, driven by what was seen as an easy way to generate cash flow-and significant cash bonuses for the supposed geniuses who devised these monstrosities. Then came the collapse of the subprime mortgage market in the United States, and the fragile derivatives empire began to unravel.

AIG was the first demonstration of how dangerous derivatives had become to the global financial system. A small branch of the insurance giant, based in London, bet heavily on a form of derivatives paper known as a credit default swap, in effect insurance based on gambling about the stability of securitized mortgages. When the U.S. housing market collapsed, AIG lacked the capital to pay off the bets it had lost heavily on with its CDS paper, forcing the U.S. government to come to the rescue. The tab so far, just for this one company, is nearly $200 billion. I would not be surprised if AIG’s credit default swap losses ultimately top half a trillion dollars, all of which the American taxpayer will be expected to make whole. And by no means is AIG the only derivatives bomb waiting to explode, a terrifying truth completely veiled by the mythology of the stress test.

How dangerous is the derivatives toxin to the U.S. and global banking system? To give just one example, Geithner’s stress test claims that Citigroup, the country’s third largest bank, only requires a mere $5 billion in additional capitalization to maintain its financial health under the worst anticipated economic storms that may still arise. However, Citigroup has a derivatives exposure equal to nearly three times its total assets

of $1.2 trillion. Most of the other U.S. banks have equally threatening levels of derivatives exposure; in the case of J.P. Morgan Chase its exposure is nearly four times its assets of $1.7 trillion.


What makes derivatives so frighteningly dangerous is that they are almost totally devoid of government regulation. Their opacity makes it virtually impossible to gauge the exposure of U.S. and foreign banks to these destructive financial instruments with any degree of precision. However, it is currently estimated that the combined value of all derivatives contracts in the world equals a sum of money that seems impossible to fathom: $1.2 quadrillion! That number exceeds the total GDP of the entire planet by many dozens of times. In effect, the developed world, led by the United States, has created a vast, unregulated shadow economy based entirely on risky paper and exotic casino-style capitalism, with actual bets being placed by the major actors within the U.S. and global banking system as though they were roulette wheel patrons in Las Vegas.

It is the fear of the derivatives toxin that has frozen credit markets, leading to the Global Economic Crisis. Geithner’s stress test, along with the phony Q1 “profits” reported by these same insolvent U.S. banks, can in no way alter the darkening truth about the calamitous state of the U.S. banking sector.

It appears, unfortunately, that the Obama administration has bought into the royal lie as the best solution to the nation’s perilous financial and economic crisis. They are desperately playing for time, hoping somehow that markets will be fooled into regaining confidence, and that things will revert to some level of normalcy, without the added expense of further bank bailouts and nationalization of key financial institutions. Sadly, by taking what appears to be the easy way out, I fear that the economic policymakers in Washington have embarked on path that can only offer a financial and economic apocalypse that may defy our worst nightmares.


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Russian Economy Faces Disastrous Free Fall Contraction

May 10th, 2009 Comments off
In 1987 I visited the Soviet Union with Republican Congressman Tom DeLay (who has since moved on to bigger-but not necessarily better-things), and observed firsthand how a society with bright, well-educated people can still undergo a profound economic collapse when the elites running the nation are infused with corruption, fossilized dogmas and misplaced priorities. Four years after my visit, the USSR of old imploded under the weight of its own colossal economic mismanagement and contradictions.Will history repeat itself? The Russia of today is far from immune to the ramifications of the Global Economic Crisis. Though I would not argue that the Russia being ruled by the duality of President Dmitry Medvedev and Prime Minister Vladimir Putin is on the same trajectory as Gorbachev’s Soviet Union, there has already emerged a sustained trend of harsh macroeconomic data that attests to a severe economic crisis gripping the Russian nation. The country’s stock market has sustained losses from its peak in the range of 70%, while the prices for Russia’s commodity exports, the major source of foreign exchange earnings, have plummeted at a staggering rate, especially with regards to oil and natural gas.
Perhaps more alarming, the latest projection by the European Bank of Reconstruction and Development reveals a dire forecast of negative 7.5 % growth in Russia’s GDP for 2009. Though some believe that the EBRD projection may be too pessimistic, only four months ago this same institution was predicting that the Russian economy would contract by a mere negative 1%. Recent indicators point to a national economy going south at an accelerating pace, reflected in official Russian government statistics which reveal that the national economy contracted by a staggering negative 9.5%. in Q1 of 2009. At the very least, Moscow faces a crippling recession.
The Medvedev/Putin regime has initiated a host of policy responses to mitigate the impact of the Global Economic Crisis on the nation’s fragile economy. Time will determine their long-term effectiveness; however, in the short-term some measures have proven more efficacious than others. A major goal of Moscow’s economic technocrats has been to stabilize the country’s banking system, and for the time being a degree of success has been achieved through government provision of liquidity to financial institutions. However, this complex geopolitical space that is Russia is now facing a vast array of complex challenges that other members of the G8 are spared, despite the destructive impact of the global synchronized recession facing all major industrialized countries.

In Russia historically, economic health and political stability are intertwined to a degree that is rarely encountered in other major industrialized economies. It was the economic stagnation of the former Soviet Union that led to its political downfall. Similarly, Medvedev and Putin, both intimately acquainted with their nation’s history, are unquestionably alarmed at the prospect that Russia’s economic crisis will endanger the nation’s political stability, achieved at great cost after years of chaos following the demise of the Soviet Union. Already, strikes and protests are occurring among rank and file workers facing unemployment or non-payment of their salaries. Recent polling demonstrates that the once supreme popularity ratings of Putin and Medvedev are eroding rapidly. Beyond the political elites are the financial oligarchs, who have been forced to deleverage, even unloading their yachts and executive jets in a desperate attempt to raise cash.

Should the Russian economy deteriorate to the point where economic collapse is not out of the question, the impact will go far beyond the obvious accelerant such an outcome would be for the Global Economic Crisis. There is a geopolitical dimension that is even more relevant then the economic context. Despite its economic vulnerabilities and perceived decline from superpower status, Russia remains one of only two nations on earth with a nuclear arsenal of sufficient scope and capability to destroy the world as we know it. For that reason, it is not only President Medvedev and Prime Minister Putin who will be lying awake at nights over the prospect that a national economic crisis can transform itself into a virulent and destabilizing social and political upheaval. It just may be possible that U.S. President Barack Obama’s national security team has already briefed him about the consequences of a major economic meltdown in Russia for the peace of the world. After all, the most recent national intelligence estimates put out by the U.S. intelligence community have already concluded that the Global Economic Crisis represents the greatest national security threat to the United States, due to its facilitating political instability in the world.

During the years Boris Yeltsin ruled Russia, security forces responsible for guarding the nation’s nuclear arsenal went without pay for months at a time, leading to fears that desperate personnel would illicitly sell nuclear weapons to terrorist organizations. If the current economic crisis in Russia were to deteriorate much further, how secure would the Russian nuclear arsenal remain? It may be that the financial impact of the Global Economic Crisis is its least dangerous consequence.
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Carrie Prejean and Her Breast Obsession

May 7th, 2009 Comments off
Maybe I’m just Miss California dreaming, but it seems to me that Carrie Prejean is afflicted with a terminal case of breast envy. Just as some men may feel inadequate if they perceive a certain part of their anatomy doesn’t “measure up,” it could be that the actions, thoughts and words of the 21 year old beauty queen and runner up at the Miss USA pageant are merely a disguise for her own sense of not “measuring up” to her beauty queen peers in the natural state God endowed her with.
There is a reason why I inserted God into this narrative. The whole premise of Ms. Prejean’s political antics has been predicated on the claim that she is a devout, Bible-believing Christian woman and her outspoken posture on the issue of same sex-marriage is an act of pious conscience. Whether or not I agree with Carrie Prejean’s decision to place her celebrity persona in the service of the anti-Gay marriage organization known as the National Organization for Marriage, I could respect her decision if it was based on consistency. However, it strikes me that this devout Bible-believing Christian woman missed one verse in the Bible, no doubt unintentionally. Allow me to quote from Chapter 4, Verse 5 of the Song of Solomon: “Thy two breasts are like young roes that are twins, which feed among the lilies.”

If you are a conservative Christian who believes that the entire Bible, chapter and verse, is the inalterable word of God almighty, then it appears clear that God thought female breasts were quite important, or otherwise the Lord of the universe would not have bothered to reveal what is essentially an erotic ode to the bosoms of women. My interpretation of this biblical verse is that God thought breasts as they exist on each woman are beautiful, “like young roes that are twins, which feed among the lilies.” And for the record, young roes are somewhat on the small size.

So, it is obvious that God adores female breasts (kind of like me, or maybe it is vice versa). But more importantly, God created female breasts, along with everything else in the universe. So the essence of that verse from the Song of Solomon is that God thought his creation of the bosoms of women was perfection. Furthermore, it is a principal of conservative Christians such as Carrie Prejean that everything God created in its natural state is perfect and should never be altered, such as the institution of marriage being solely a union for a man and a woman. So Ms. Prejean, what about hiring a cosmetic surgeon to alter your breasts, and undo God’s perfect creation?

According to Keith Lewis, the co-Director of the Miss California Pageant, Carrie Prejean approached his organization, and they acceded to her request to arrange the surgical insertion of implants into her breasts, so that she would be more “competitive” as she came to blows with her rival beauty queens. This may be calculating and even cynical, but is hardly a reflection of Christian values, unless I’m missing something Ms. Prejean is more attuned to.

Statistics from the American Society for Aesthetic Plastic Surgery indicate that in an average year, more than 300,000 American women have their breasts surgically enlarged. As someone who has been involved in extensive fine art photography of the female nude, this strikes me as tragic. Medical science confirms what my own eyes have observed; 60% of women in the United States have breasts that fit into bras with an A or B cup. Most breasts at maturity are of modest or small size, and historically most artists have preferred female models with bosoms on the small size as the ideal manifestation of feminine beauty.

In my book on the aesthetics of female sensuality, entitled “Erotic Book,” (information available at I explored the reasons why so many women have been seduced into believing that external perceptions of their state of beauty and feminine allure are solely determined by the quantity of fatty tissue contained within their mammary glands. Not only is size the least important aesthetic component of breasts; the consequences of surgical implants have often led to dire results for women.

In my opinion, Carrie Prejean did not set a sterling example by succumbing to superficial and vulgar definitions of feminine beauty and going the implant route, in a crass attempt to win a contest based on factors that have nothing to do with her character or innate human qualities. For that reason, her awkward attempt to now transition from the woman with the implants to a virtuous moral crusader lacks all credibility. A veneer of pseudo-Christian hypocrisy will not camouflage Ms. Prejean’s vapid breast obsession, no matter how tightly she wraps herself with it.


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Ben Bernanke and his Terrifying Toolkit

May 6th, 2009 Comments off
In his testimony before the congressional Joint Economic Committee, Federal Reserve Chairman Ben Bernanke repeated an earlier prediction that the severe recession in the U.S. economy would end in the current year. Typically, Bernanke offered all kinds of qualifications, just so he would not be seen as too optimistic, thereby eroding all credibility. Nevertheless, the Fed Chairman is now firmly on record as forecasting that the worst impact of the Global Economic Crisis upon the American economy will recede in 2009. And as the foremost expert on monetary policy and economics in all the land, this self-proclaimed genius (as witnessed on the CBS 60 Minutes propaganda segment on Bernanke) is someone we should all pay attention to; that goes for every parsed word flowing from his lips.
Before becoming overly indulgent in the gospel of Ben Bernanke, let us take a brief trip down memory lane, to the year 2007. Then, too, the Fed Chairman testified before the Joint Economic Committee. And this is what he had to say, just as the first inklings of a subprime mortgage crisis were percolating. Bernanke, when asked about the ramifications of this threatening disaster to the overall health of the nation’s economy, replied that it was “likely to be contained.”

Likely to be contained? No economic forecast has ever been so catastrophically flawed as Ben Bernanke’s utterance before the Joint Economic Committee. And that was by no means the only wrong prediction uttered by Ben Bernanke, as the subprime crisis morphed into a full-blown financial meltdown, leading to the Global Economic Crisis. The track record established by Ben Bernanke in predicting the consequences of an unfolding economic crisis of unprecedented global ferocity has been downright calamitous. Yet this same deficient analyzer of economic phenomena remains as chairman of the Fed, with unchallenged powers to set monetary policy.

As the subprime crisis became something much worse, Bernanke adopted a slightly different tack in his public posture. Rather than rosy forecasts, he boasted about the lavish toolkit that the Fed possessed. “We have many tools in our toolkit,” boasted Bernanke on more than occasion, cheerfully promising to use all the tools he felt were necessary.

The vocabulary that the Fed Chairman has succumbed to I find absolutely fascinating. Massive monetary decisions that are risky in the extreme, and will likely have intergenerational consequences, become mere “tools.” The consequential becomes the ubiquitous.

Bernanke and the Federal Reserve have been in panic mode, as the financial system became unglued. Massive quantitative easing has flooded fiat liquidity into America’s battered economy, buying a short-term respite at best, and at the cost of hyperinflation down the road. Most troubling, and often in total secrecy, the Fed has been bailing out Wall Street, above and beyond the TARP program being managed by the Treasury Department. Since last September and the bankruptcy of Lehman Brothers, the Fed’s balance sheet has doubled to more than $2 trillion. Most troubling is the quality of that balance sheet, which has historically been composed primarily of Treasuries. Now, however, at least 75% of the Federal Reserve’s balance is in the form of questionable assets, such as mortgage backed securities. In effect, Ben Bernanke has transformed the Federal Reserve’s balance sheet into the nation’s largest toxic dump. It may be only a matter of time before the Fed approaches Congress-and U.S. taxpayers- for a bailout of its own.

While Bernanke may still inspire confidence from President Obama, he frankly scares the hell out of me. Isn’t it time we took away the toolkit from this disaster-prone Fed Chairman, before it is too late?

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