Shobhit Mathur’s Home Page

Paul Joseph Watson
Prison Planet
Wednesday, August 29, 2007

Texas Congressman and presidential candidate Ron Paul says that attempts to rescue an ailing stock market last week, during which the Fed pumped in billions in liquidity, were merely a stop gap measure – and that an economic collapse is all but inevitable.

“They think that they can control it but eventually they can’t, as powerful as they are eventually the markets are more powerful,” the Congressman told the Alex Jones Show yesterday.

“The dollar can’t be kept in check because eventually it will come unwound,” he added. “But I think the most significant figure we’ve heard in the last few weeks is the measurement between 2000 – 2005, the clear cut admission that real income has gone down, which is a reflection of the dollar.”

Paul explained that recent attempts to pump liquidity into the markets are only a temporary fix and that the long-term effects of doing so spell disaster for the economy.

“The dollar is plunging no matter what you read and hear about and no matter how hard they work to keep the bubble going the only way they can do that is creating more money….causing the dollar to go down even faster, the market seems to be reassured – there’s a contrivance to try to hold this together….but it won’t last, eventually it’s going to collapse,” said Paul.

The Texas Congressman cited the repeal of the Insurrection Act as opening the door to a declaration of national emergency and martial law which could be instituted for any number of reasons, including civil disobedience in the event of an economic downturn and a run on the banks.

“If in 6 months or a year there is total chaos who knows what they might try to do,” said Paul.

The presidential candidate also slammed the abolition of Habeas Corpus as a “very dangerous sign” that plans were being laid for martial law.

“Why would they change them (the laws) if they didn’t plan to use them,” concluded Paul.

Suspicions were raised last week when a mystery trader risked billions of dollars after buying 245,000 put options on the Dow Jones Eurostoxx 50 index, in effect a speculation that the market would crash by a third before September 21st.

by Michael A. Nystrom
BullNotBull.com
August 23, 2007

Regular reader Rich writes:

I’ve read in a couple of places on the internet that if all outstanding debt was repaid, there would be no ‘money’ left in our debt money system. Is this true? If so, what happens to the interest that the bankers earn?

This is unbelievable to most people, but it is absolutely true. If all outstanding debts were repaid under our current debt-based monetary system, there would be no money left in existence. I stress our current debt-based monetary system because other types of monetary systems are possible. Most people never stop to think about this (usually because they’re too worried about paying their bills), but our current system (which is controlled by the Federal Reserve) is just one of many possible money systems. There are in fact a variety of different kinds of monetary systems. The following illustration of a simple commodity-based monetary system will help us understand just exactly what money is.

I. The Commodity-based Money System of Prison X

It is well known that in prison, cigarettes often take on the role of what we traditionally think of as ‘money.’ In fact, given the circumstances, they are money. Inmates may not be free, but free markets can spontaneously arise in prison.

Imagine that the warden gives all prisoners at Prison X a ration of one pack of cigarettes per week. Many prisoners don’t smoke, but the cigarettes they receive are not worthless. This is because many more prisoners do smoke, and they value those excess cigarettes. This gives the cigarettes an intrinsic value. Even if you don’t smoke, you will still value the cigarette because it has value to someone else. Furthermore, cigarettes are small, uniform, easily stored, hidden and traded. In the absence of what we traditionally think of as ‘money,’ they become money. As a commodity in constant demand, they make a perfect medium of exchange. In fact, this is one part of the definition of money: Money is a medium of exchange.

Money is also a unit of measure: If you find yourself in Prison X, you might discover that a large metal file (a vital tool in your plan to escape) will cost you 500 cigarettes. At a pack a week, it will take you 25 weeks to save enough to get your file (assuming you don’t smoke). Whatever you’re looking to obtain in Prison X, you’ll find that its value can be measured – i.e. priced – in cigarettes.

It is also worthwhile to note that different kinds and brands of cigarettes would undoubtedly have different values, because they taste different (as a smoker for over 10 years, I know this to be true!). American Spirits might be worth the most, and menthols might be worth more or less, depending on the preference of the smoking population. The raspy generic brands would no doubt be worth the least. An internal exchange rate between the different kinds of cigarettes would spontaneously arise, based on their intrinsic qualities (taste), and how those qualities were subjectively valued. This exchange rate would be equivalent to the different denominations of bills that we have in our system.

Finally – money is a store of value. As long as the number of cigarettes in circulation remains stable, the monetary value of each cigarette should remain stable over time. If the ration of cigarettes were to suddenly jump – say the warden increased rations from a pack a week to two packs a week – each cigarette would now be worth less. This is inflation. Simply put, inflation means more money in the system. As a result of this sudden inflation, that big metal file you were saving up for would now cost twice as much. As should be clear from this example, higher prices are not the cause of inflation they are the result.

Conversely, if prisoners suddenly began smoking cigarettes faster than they were being issued, the cigarettes that remained in circulation would increase in value. This is the definition of deflation. Deflation just means less money in the system.

II. Our Debt Based Monetary System

The purpose of the brief illustration above is to outline the essence of money. Some key points are: 1) Nearly anything can serve money, as long as it has intrinsic value and is therefore in demand by some members of the population. 2) Money doesn’t have to be issued by the government – it will arise spontaneously as it is needed. 3) Sound money must serve three basic functions. It must be: a unit of measurement (serve a pricing function), a medium of exchange, and a reliable store of value. With this in mind, we can now take a fresh look at our Federal Reserve controlled debt-based monetary system.

Under our debt based monetary system, money is backed not by a commodity that is in demand like cigarettes or gold, but by debt. Ultimately it is the debt of the United States government that backs our currency. Since we are the government in the United States, or at least that is how it is supposed to work, it is our own debts that back our currency. Our paper currency has no intrinsic value other than that we need it to pay back our own debts.

Confused? This is how it works:

If you look at the green bills in your wallet, you’ll notice two things. First, across the top, they all say ‘Federal Reserve Note.’ These are FRNs. Also, somewhere on the right side – depending on the bill – it says in small print, ‘This note is legal tender for all debts, public and private.’ In other words, this is the government’s way of telling you that FRNs must be respected as a medium of exchange. If someone says he wants his debt to be paid off in FRNs, you must comply. This is the law, by fiat decree. This is what is meant by ‘fiat’ money.
This is extremely important, as we shall see later.

Where do FRNs Come From?

FRNs are created in an exceedingly simple transaction between the US Treasury and the Federal Reserve. The US Treasury (the government) creates a bond, and the Federal Reserve (a private bank) creates some money. The Fed loans the Treasury the money it just created and the Treasury gives the Fed the T-bond it just created as collateral. The bond is an IOU that serves as backing for the money that was just created.

I know. It sounds circular, confusing and insane, because it is. It is meant to be so that you don’t understand it. It was this understanding that led Henry Ford to proclaim, ‘It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.’ The great economist John Kenneth Galbraith put is even more succinctly: ‘The process by which banks create money is so simple that the mind is repelled.’

The Similarities and Differences

At this point, lets take a moment to examine the similarities and differences between our debt money and the prison’s commodity-based cigarette money.

First, the prison warden did not stamp ‘this cigarette is legal tender for all prison debts’ on each cigarette. He didn’t have to, because under the circumstances, cigarettes had intrinsic value. People could smoke them. There is always demand. The reason the fiat declaration is stamped on each FRN is because these pieces of paper are otherwise worthless. Who would want this crap? They were created from thin air, there is an unlimited supply, and they don’t hold their value.

But given that this is true, why do people continue to use them? Why doesn’t another monetary system spontaneously arise, the way it did in Prison X?

Here is the rub: Since there is no intrinsic demand for worthless FRNs, the government – specifically the Treasury, which is on the hook to pay the interest back to the Fed on those bonds – created one. You have to pay your taxes in FRNs. Nothing else is accepted.

The income tax is the mechanism by which the government creates artificial demand for an otherwise worthless currency. Is it a coincidence that the income tax and the Federal Reserve were both created in the same year – 1913? Emphatically I say, it is not. As Ron Paul says, ‘1913 was a bad year. We need to repeal that entire year!’ (see the video)

Some Answers

So, to get back to the questions that began this piece: In Prison X, if all the cigarettes were smoked, there would be no more cigarette money. Likewise, if all debts were repaid under our current monetary system – all the credit card debt, auto loans, and mortgages, all the way up to the national debt – there would be no more debt money, either. I have explained how the Fed and Treasury create money from thin air. It is by this same process that money is created by the banking system throughout the economy. Your debt is the bank’s asset. The interest you pay them is their income stream. The more assets it has, the more loans it can make. More loans means and increase in the money supply, and therefore inflation.

Our Competitive World

As for the interest that the bankers earn…first, the bankers don’t ‘earn’ it. They collect it. There is a huge difference. ‘Earning’ refers to obtaining money by doing useful work. The banks, like the Fed, create money from thin air and ‘loan’ it to you. However, in creating the principal amount to loan you (from thin air), they never create the interest that you are to repay. So where are you supposed to get this extra interest amount to pay them back?

The answer is that you have to get it from someone else’s principal that they borrowed. This is why it is such a competitive, dog-eat-dog world out there – not because of human nature. It is because the monetary system requires it of us. Everyone is scratching and clawing at one another, collectively trying to get their hands on more money than exists in the system. The system itself ensures that a certain number of people will go broke and lose everything. They have to so that others can repay their loans to the bankers.

The final thought that I would like to leave you with is this: If we change our money system, we will change the world. Are you ready for a revolution?

By DAN SEYMOUR, AP Business WriterSat Aug 25, 12:16 AM ET

Bad credit has supplanted terrorism as the gravest immediate risk threatening the economy, a key national research group reported Monday.

Borrowers’ withering ability to pay their bills and the subsequent fallout in the credit markets this summer topped the list of short-term risks on peoples’ minds, according to a survey of 258 members conducted by the National Association of Business Economics.

NABE, a Washington-based association, said 32 percent of its surveyed members cited loan defaults and excessive debt as their biggest near-term concern.

Only 20 percent of members cited defense and terrorism as their biggest immediate worry, down from 35 percent when the survey was last conducted in March. Credit risk also topped gas prices, inflation and government spending.

“Financial market turmoil has shifted the focus away from terrorism and toward subprime and other credit problems as the most important near-term threats to the U.S. economy,” said Carl Tannenbaum, president of NABE and the chief economist at LaSalle Bank/ABN-Amro.

The market turmoil began earlier this year, when mortgage lenders like New Century Financial Corp. and H&R Block Inc.’s Option One Mortgage Corp. unit reported their clients were missing payments on their home loans more frequently.

This led the Wall Street banks that finance the mortgage market to ultimately pull much of their money out. With cash draining rapidly from the industry, more than 50 lenders have gone bankrupt and a number of investment funds have gone under.

Victims of this flare-up include two of the 10 biggest mortgage lenders in the country and two hedge funds managed by Bear Stearns Cos.

Loan brokers say it has become more difficult for some people to line up mortgages. Subprime loans, or loans to people with spotty credit histories, have all but disappeared as lenders scale back or shut down completely.

The shakeout in the subprime mortgage market forced investors around the world to reassess how much risk they were willing to stomach. This led to an exodus of cash from investments like securities backed by home loans, short-term corporate bonds and stocks whose values were inflated because they were perceived as takeover targets.

In the past five weeks, the stock market has lost 5 percent. The dollar fell to an all-time low versus the euro. A number of companies have had to cancel bond sales because of an absence of buyers.

And, the Federal Reserve has lent billions of dollars to banks from its “discount window,” normally associated with bailouts for struggling financial institutions. The Fed this month issued a statement that the risks to the economy have risen considerably and traders ramped up their expectations the Fed would cut targets for interest rates this year.

The tumult in the financial markets has led businesses to revisit their interpretation of the housing boom earlier this decade and the easy credit that fueled it, NABE said. The proportion of surveyed members who call it a “serious national bubble” more than doubled from two years ago to 29 percent, the group said.

NABE said the market turmoil is considered a short-term risk because the five-year outlook for housing is still strong. More surveyed members expect home values to appreciate in the next five years than fall. Very few expect a serious drop in home prices in the next five years.

The greatest long-term risk facing the economy is still health care costs and the medical needs of an aging population, NABE said.

http://www.ft.com/cms/s/a204ced6-4ac7-11dc-95b5-0000779fd2ac.html

“At particular times a great deal of stupid people have a great deal of stupid money . . . At intervals . . . the money of these people – the blind capital, as we call it, of the country – is particularly large and craving; it seeks for someone to devour it, and there is a ‘plethora’; it finds someone, and there is ’speculation’; it is devoured, and there is ‘panic’.”Walter Bagehot.*

Panic follows mania as night follows day. The great 19th-century economist and journalist, Walter Bagehot, knew this better than anybody. Lombard Street, his masterpiece, is dedicated to the phenomenon. It is devoted, too, to how central banks should deal with its results.

Ours has been a world of the “no income, no job, no assets” 100 per cent mortgage; of the “do what you like with our money, as long as you pay the fees” covenant-light loan; and of the “in go poor credits and out comes a triple A-rated security” financial alchemist. It has been a world of confidence, cleverness and too much cheap credit.

This is not new. It is as old as financial capitalism itself. The late Hyman Minsky, who taught at the University of California, Berkeley, laid down the canonical model. The process starts with “displacement”, some event that changes people’s perceptions of the future. Then come rising prices in the affected sector. The third stage is easy credit and its handmaiden, financial innovation.

The fourth stage is over-trading, when markets depend on a fresh supply of “greater fools”. The fifth stage is euphoria, when the ignorant hope to enjoy the wealth gained by those who came before them. The warnings of those who cry “bubble” are ridiculed, because these Cassandras have been wrong for so long. In the sixth stage comes insider profit-taking. Finally, comes revulsion.

In the latest cycle, displacement began with the huge cuts in interest rates in the early 2000s, which drove up prices in housing. The easy credit was stimulated by innovations that allowed those making the loans to regard their service as somebody else’s problem. Then people started to buy dwellings to resell them, not live in them. Subprime lending was a symptom of euphoria. So, in a different way, was the rush of bankers into hedge funds and of the wealthy and big institutions into financing them. Then came profit-taking, falling prices and, last week, true revulsion.

This was what George Magnus of UBS bank calls a “Minsky moment”. It was the moment when credit dried up even to sound borrowers. Panic had arrived.

The correct policy response is also well known. It was laid down by Bagehot himself from his observation of the evolution of the Bank of England. The central bank must save not specific institutions, but the market itself. It must advance money freely, at a penal rate, on good security.

In providing money to the markets last week and this, the European Central Bank, the Federal Reserve, the Bank of Japan and other central banks have been doing their jobs. Whether the terms on which they have done this were sufficiently penal is another matter.

Financial markets, and particularly the big players within them, need fear. Without it, they go crazy. Moreover, it is impossible for outsiders to regulate a global financial system riddled with conflicts of interest and dominated by huge derivatives markets, massive trading by highly leveraged hedge funds and reliance on abstruse mathematics and questionable statistical models. These markets must regulate themselves. The only thing likely to persuade them to do so is the certainty that the players will be allowed to go bust.

When William Poole, chairman of the St Louis Federal Reserve, said that “the Fed should respond to market upsets only when it has become clear that they threaten to undermine achievement of fundamental objectives of price stability and high employment or when financial market developments threaten market processes themselves”, I gave a cheer.

Not so Jim Cramer, hedge fund manager and television pundit, who declared last Friday that chairman of the Federal Reserve, Ben Bernanke, “is being an academic!…My people have been in this game for 25 years. And they are losing their jobs and these firms are going to go out of business, and he’s nuts! They’re nuts! They know nothing! . . . The Fed is asleep.”

So capitalism is for poor people and socialism is for capitalists. This view is not just offensive. It is catastrophic.

The world has witnessed four great bubbles over the past two decades – in Japanese stocks in the late 1980s, in east Asia’s stocks and property in the mid-1990s, in the US (and European) stock markets in the late 1990s and, finally, in the housing markets of much of the advanced world in the 2000s. There has been too much imprudent finance worldwide, with central bankers and ministries of finance providing rescue at virtually every stage.

Unfortunately, there is every chance of repeating mistakes. A bail-out has already occurred in Germany, far from the epicentre. More are likely. US legislators want Fannie Mae and Freddie Mac to bail out the mortgage markets.

The pressure on the Federal Reserve to cut interest rates will also grow. As Larry Hathaway and Mr Magnus of UBS note, this looks a much more significant event than the implosion of Long-Term Capital Management in the aftermath of the Russian default of August 1998. The consequences cannot be “ring-fenced”, as those of LTCM were. Trust in counterparties and financial instruments has fled. The likelihood is a period of recognising losses, tightening credit conditions and deleveraging.

Such a period, desirable in itself, will lead to strong pressure for swift declines in interest rates, at least in the US, and so for another partial bail-out of a crisis-prone system. This pressure should be resisted as long as possible.

Yet the underlying challenge confronting the world’s central banks remains: huge surplus savings in important parts of the world; corporate sectors that do not need to borrow and so limited categories of creditworthy and willing borrowers, households in rich countries foremost among them. The epoch of the US housing bubble is over. The pressure for repeated injections of cheap finance is not.

*Cited in Manias, Panics and Crashes: a History of Financial Crises, fifth edition. Charles P. Kindleberger and Robert Z. Aliber (Basingstoke: Palgrave Macmillan, 2005)

http://www.ft.com/

By Jeremy Grant in Washington

Published: August 14 2007 00:06 | Last updated: August 14 2007 00:06

The US government is on a ‘burning platform’ of unsustainable policies and practices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon, the country’s top government inspector has warned.

David Walker, comptroller general of the US, issued the unusually downbeat assessment of his country’s future in a report that lays out what he called “chilling long-term simulations”.

These include “dramatic” tax rises, slashed government services and the large-scale dumping by foreign governments of holdings of US debt.

Drawing parallels with the end of the Roman empire, Mr Walker warned there were “striking similarities” between America’s current situation and the factors that brought down Rome, including “declining moral values and political civility at home, an over-confident and over-extended military in foreign lands and fiscal irresponsibility by the central government”.

“Sound familiar?” Mr Walker said. “In my view, it’s time to learn from history and take steps to ensure the American Republic is the first to stand the test of time.”

Mr Walker’s views carry weight because he is a non-partisan figure in charge of the Government Accountability Office, often described as the investigative arm of the US Congress.

While most of its studies are commissioned by legislators, about 10 per cent – such as the one containing his latest warnings – are initiated by the comptroller general himself.

In an interview with the Financial Times, Mr Walker said he had mentioned some of the issues before but now wanted to “turn up the volume”. Some of them were too sensitive for others in government to “have their name associated with”.

“I’m trying to sound an alarm and issue a wake-up call,” he said. “As comptroller general I’ve got an ability to look longer-range and take on issues that others may be hesitant, and in many cases may not be in a position, to take on.

“One of the concerns is obviously we are a great country but we face major sustainability challenges that we are not taking seriously enough,” said Mr Walker, who was appointed during the Clinton administration to the post, which carries a 15-year term.

The fiscal imbalance meant the US was “on a path toward an explosion of debt”.

“With the looming retirement of baby boomers, spiralling healthcare costs, plummeting savings rates and increasing reliance on foreign lenders, we face unprecedented fiscal risks,” said Mr Walker, a former senior executive at PwC auditing firm.

Current US policy on education, energy, the environment, immigration and Iraq also was on an “unsustainable path”.

“Our very prosperity is placing greater demands on our physical infrastructure. Billions of dollars will be needed to modernise everything from highways and airports to water and sewage systems. The recent bridge collapse in Minneapolis was a sobering wake-up call.”

Mr Walker said he would offer to brief the would-be presidential candidates next spring.

“They need to make fiscal responsibility and inter-generational equity one of their top priorities. If they do, I think we have a chance to turn this around but if they don’t, I think the risk of a serious crisis rises considerably”.

From Reuters

By Kristin Roberts

PETERSON AIR FORCE BASE, Colo. (Reuters) – Russian bombers are flying more missions than normal near U.S. territory, including Alaska, demonstrating their long-range strike capability, U.S. and Canadian officials said on Monday.

Russian aircraft carrying cruise missiles ran an aviation exercise near Alaska two weeks ago, according to Canadian Col. Andre Dupuis, an officer at the North American Aerospace Defense Command (NORAD), a U.S.-Canadian operation responsible for protecting both countries’ airspace.

“They didn’t do it to practice alone. They’re making a point, doing it outside of their normal training cycle,” he told Reuters. “They maintain capability.”

Russian bombers were also tracked last week flying a course toward Guam, a U.S. territory in the Pacific.

Some analysts and defense officials say the flights likely reflect Moscow’s desire to display its military muscle to remind Washington of Russia’s capabilities and express dismay over U.S. plans to build a missile shield in Eastern Europe.

One defense official called the Russian flights “a little bit of chest pounding, trying to let people know Russia’s back in the game.”

“Over the last probably three months or so the Russians have been flying their bomber force maybe a little bit more than we’ve seen in the past, certainly they’re ranging farther than they have in the past,” said U.S. Air Force Gen. Gene Renuart, commander of NORAD and U.S. Northern Command.

“We’ve had a couple times where we’ve intercepted them out over international waters, near Alaska.”

Relations between Washington and Moscow have been strained, partly by U.S. plans to put missile defense assets in former Soviet-allied territory.

Since meeting with U.S. officials to discuss the missile shield plans earlier this year, Moscow has issued a series of statements about building its military power.

In July, President Vladimir Putin told his top military and security officials that Russia needed to boost its armed forces and intelligence potential in the face of new security threats, including U.S. military plans in Europe.

Russia’s navy chief has also said his country should have a permanent naval presence in the Mediterranean, mirroring the Soviet Union’s military ambitions.

The head of long-range aviation in Russia’s air force last week described the bomber flight over Guam as a revival of the long-haul missions to U.S.-patrolled areas common during the Cold War.

But Renuart downplayed concern about the increase in Russian military flights.

“I think clearly there’s a political dynamic that’s occurring right now with Russia. They’re exercising I think some of their military capabilities coincident with some of the statements that have been made in the government,” he said.

“But it’s not provocative in any way. They follow the international rules. They’ve been very professional in how they’ve flown the flights, so I don’t see anything reckless in it.”

Renuart also said Russia’s military generally warns its U.S. counterparts in advance of training exercises.

“A couple times, it’s been a bit of a surprise,” he said.

by J. R. Nyquist

http://www.financialsense.com/stormwatch/geo/pastanalysis/2007/0810.html

A financial crash is more than an economic glitch. It leads into dangerous political territory. It can trigger revolutions. Financial distress in the 1780s led to the French Revolution. Financial distress brought the Nazis and Japanese militarists to power before World War II. A financial earthquake may cause a political earthquake. A political earthquake, in turn, can set off a revolution, civil war, or even a world war. This is what history teaches.

It is economic distress that drives the average man to despair. Financial calamity changes his political outlook from cool detachment to naked fear. This signals opportunity to the political opportunist, the fanatic and the demagogue. These will always play on fear. America is a country that has enjoyed prosperity, and this has contributed to political moderation. The center holds as long as the economy runs smoothly. We do not know, however, what the effect of a major crash would have on an ethnically divided welfare society with an aging population supplemented by a rapidly growing foreign work force.

Then there are international and geopolitical consequences: Europe is economically tied to America. Money flows from one country to another, and so does financial trouble. This week the European Central Bank reached for $130 billion in emergency funds. The markets are jittery. Europe is nervous. American real estate prices are falling. There are growing losses connected with U.S. mortgages. The solution of lower U.S. interest rates is not an option because of Chinese threats to sink the dollar.

Ambrose Evans-Prichard’s recent piece, China threatens ‘nuclear option’ of dollar sales, sounded a further alarm. The foolishness of trading with Communist China now comes into sharp focus. The same can be said for free trade with all those countries that are not truly free. According to Prichard, “The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of U.S. treasuries if Washington imposes trade sanctions to force a yuan revaluation.” This would almost certainly crash the dollar, with devastating consequences for the global economy. The Chinese can effectively dictate U.S. economic policy. “We can destroy your currency,” they are saying. “We have this option.”

The Chinese threat reminds us of Russian President Vladimir Putin’s recent braggadocio. Speaking in Munich earlier this year, Putin seemed to dismiss the economic power of the United States and Europe, pointing to the rise of a new economic bloc associated with China. According to Putin, “The combined GDP measured in purchasing power parity of countries such as India and China is already greater than that of the United States. And a similar calculation with the GDP of the BRIC countries – Brazil, Russia, India and China – surpasses the cumulative GDP of the EU. And according to experts this gap will only increase in the future.”

Putin is undoubtedly feels the growing strength of his position, in league with China. The financial crisis in the United States has geopolitical implications. Military power is built on an economic foundation. Therefore, the balance of power may soon be knocked off balance. It is no accident that Russia has reduced its dollar holdings. The Russian aren’t stupid. They know the dollar could unravel at any moment. A large terrorist attack, a rotten hedge fund, a bad month on the New York Stock Exchange – name whatever trigger you can think of. The financial position of the United States is fragile. And this fragility must eventually lead to dislocations.

The West doesn’t seem to understand, as yet, that the emerging financial crisis isn’t merely a financial crisis. In Beijing and Moscow it is seen as something more. It is seen as part of a strategic sequence in which U.S. power is eclipsed. It is a sequence that leads to massive global changes. The Russians and Chinese want to replace America as the world’s dominant military and economic power. They want to transform the global economic system, but the transformation won’t be a friendly one. Their game is not to build an inclusive system in which “a rising tide lifts all boats.” Theirs is a zero sum game in which their triumph comes at other’s expense.

By comparing the sentiments of Putin and the Chinese leaders with those of former Soviet and Chinese leaders, we see that little has changed. Consider the text of Soviet Military Strategy, published in 1963, which put forward the view: “[that] American monopoly capital has seized the basic sources of raw material, the markets and spheres of capital investment: It has created a surreptitious colonial empire and has become the biggest international exploiter. American imperialism today plays the role of world gendarme, opposing democratic and revolutionary changes and launching aggression against peoples fighting for independence.” [Soviet Military Strategy, p. 279 of the Rand translation.] We hear this old Marxist-Leninist line from Putin’s Kremlin today.

Many who oppose the war in Iraq have fallen in with an updated version of Soviet rhetoric. They do not apprehend the essential falseness of this totalitarian perspective, or the danger in advancing it now that the Soviet Union has supposedly expired. It was the Communists who said that a global revolution would begin with a financial crisis in the capitalist world. This idea is imbedded in totalitarian thought (including fascist thinking). A financial crisis quickly becomes a political crisis, and a political crisis calls the existing order into question. This leaves the door open to a new order, based on fanaticism and hatred. This, in turn, leads to a shift in the global balance of power.

In an age of mass destruction weaponry we have to use our imaginations to understand what all this signifies. It is not a peaceful process, but a passionate process of compounded error and disruption. Violence naturally flows from such a process. If the U.S. dollar collapses it will seem as if the world has gone insane. Perhaps it is too late. Perhaps the insanity is on its way and there is nothing we can do to stop it.

by Peter Schiff
Euro Pacific Capital
August 11, 2007

For years, Americans have been able to pay for enormous trade deficits by exchanging IOU’s for imported consumer goods. Unfortunately for foreign creditors, a substantial percentage of those IOU’s have recently taken the form of mortgaged backed securities.

Sporting higher yields than Treasury bonds, investment grade ratings from reputable agencies, and juicy commissions for the investment banks that packaged them, these structured mortgage bonds have quickly become America’s greatest export. Ironically, amid all the recent hoopla about defective Chinese exports, America has proved that when it comes to flooding the world with shoddy merchandise, nobody beats the good old USA.

This week, several of Wall Street’s best foreign customers announced staggering losses on the American mortgaged backed securities they had been sold. The fundamental issue underlying these losses is that Americans borrowed more money than they can afford to repay. As initially low teaser rates expire and mortgage defaults increase, foreign lenders are discovering that the residential properties that collateralize the mortgage bonds are not worth anywhere near the loan amounts.

It will not be long before American borrowers come to a similar realization. When they do they will be faced with the shocking reality that all of their home equity is gone — having disappeared just as quickly as did the paper profits of the Internet stock mania. However, this time around the situation is more dire. Although paper profits have vanished much as they did in 2001, all the mortgage debt, much of it about to get much more expensive to service, still remains.

When American homeowners come to grips with their diminished net worth, the excess consumption that has been the rule over much of the past decade will grind to a halt. If any money is left after making higher ARM payments, homeowners may actually decide to save some to repair their personal balance sheets. As consumer spending collapses, the U.S. economy will plunge into a severe recession, compounding the problems in the housing market and exacerbating the recession.

The last straw will be the value of the U.S. dollar. Already teetering on a precipice, a recession will push it over the edge. As the dollar falls, interest rates and consumer prices will rise even more sharply, compounding the problems for both housing and the economy. In fact, the fear of further dollar declines has been the most important factor in restraining the Fed’s ability to cut interest rates. Rather than admit its concern over the dollar, the Fed justifies current policy with assurances that the economy is strong and is not in need of stimulative rate cuts. In Jack Nicholson fashion, since Bernanke feels investors can not handle the truth he feeds them a lie instead.

As more of our nation’s creditors finally realize that they have been duped, the credit well fueling American consumption will run dry. Foreign lenders will simply refuse to accept our IOU’s as payment for their merchandise. Lacking in savings and productive capacity, we will be forced to accept dramatic reductions in our standard of living as a result.

Though our creditors will finally be forced to realize some losses on their prior investments, they will no longer bear the burden of subsidizing the U.S. economy. With diminished competition from Americans, foreign consumers will finally gain the upper hand. Goods previously too expensive for citizens of non-dollar economies will suddenly become affordable. Savings currently squandered on American consumption will be freed up to finance productive investment at home.

Though these positive aspects may be lost in the recent synchronized sell off in global stocks, foreign markets will soon diverge from ours. As the American caboose is decoupled from the global economic gravy train, the rest of the cars will move that much faster without all that dead weight slowing them down.

http://optuszoo.news.ninemsn.com.au/article.aspx?id=285202&rss=yes&_cobr=optus

Russia’s strategic bombers have resumed their Cold War practice of flying long-haul missions to areas patrolled by NATO and the United States, a Russian general says.

On Wednesday a Russian bomber flew over a US military base on the Pacific island of Guam and “exchanged smiles” with US pilots scrambled to track it, said Major-General Pavel Androsov, head of long-range aviation in the Russian air force.

“It has always been the tradition of our long-range aviation to fly far into the ocean, to meet (US) aircraft carriers and greet (US pilots) visually,” Androsov told a news conference.

“Yesterday we revived this tradition, and two of our young crews paid a visit to the area of the (US Pacific Naval Activities) base of Guam.

“I think the result was good. We met our colleagues – fighter jet pilots from (US) aircraft carriers. We exchanged smiles and returned home,” Androsov said.

Russia is growing more assertive on the international stage and has been trying to project its military power far beyond its borders.

Its navy said this week it wanted to revive its Soviet-era presence in the Mediterranean Sea.

Last month, Britain’s Royal Air Force scrambled fighter jets to intercept Russian bombers heading towards British airspace.

Russia’s military said that was a routine flight.

http://www.financialsense.com/stormwatch/geo/pastanalysis/2007/0803.html

by J. R. Nyquist

The dollar is on top. Every other currency is below. Having the dollar on top gives the United States decisive international advantages. Charles de Gaulle once said that the dollar was the most “insidious” form of American imperialism. He once complained, “Western Europe has become, without even being aware of it, a protectorate of the Americans.” European economic integration and Europe’s new currency, the Euro, might be seen as an attempt to break free of the dollar’s dominant international position. But the Euro has yet to replace the dollar, perhaps because the dollar’s rejection as the world’s reserve currency would unleash chaos. And nobody wants chaos. Even if everyone agreed that a return to an international gold standard would be best, the passage from here to there would take us through the fires of tribulation. Everything around us has grown up on the basis of certain assumptions, and the dollar may be the most fundamental assumption of all.

And so, the dollar is on top. Every other currency is below. The dollar’s dominant position is obviously unfair, if one assumes that all currencies should be “created equal” and endowed with certain “rights.” Of course, such assumptions are ridiculous. Currencies are not created equal. Countries are not equal. History is not in the business of parceling out advantages in equal measure to each and every nation. As it happens, the United States is the most unequal of all countries, blessed with the ability to export its inflation and, as some would claim, to levy an indirect tax on other countries. It can thereby finance its wars on behalf of a peaceable international order despite possessing a hollowed-out consumer economy with an attached welfare state.

There are those who wonder how long this situation can continue. Princeton Professor Harold James has written a book touching on this question. His book is titled The Roman Predicament: How the Rules of International Order Create the Politics of Empire. Of course, the American empire isn’t bloody or coercive. It isn’t the empire of the gun. It is the empire of the dollar, of blue jeans, McDonalds and Coca-Cola. It was the failure of fascism and the rise of individual choice that has made the United States and its dollar supreme in the world. The cultural traditionalists and would-be aristocrats may sneer at American culture, but how many nuclear rockets are in a sneer? Short of leveling the United States, the American idea of “the pursuit of happiness” has proven resilient – however corrupt, stupid or inane the country’s cultural artifacts may be. Even people who hate so-called American imperialism love American freedom with its shopping malls and lifestyle choices.

According to Professor James, America’s economic dynamism locks Asia and Europe into a system of buying and selling and investing that everyone benefits from. This system continues because of American domestic stability, and because America’s sustained growth rates are consistently better than other developed countries. “The question about sustainability then turns into one about the probability of continued growth rates that are higher than those of the rest of the industrialized world,” noted James. “For much of the 1990s, foreign capital inflows reflected a foreign view that the peace dividend, fiscal prudence, and technological dynamism represented an ideal environment. In the years after 2001, this environment clearly deteriorated.”

The U.S. economic position – the position of the dollar itself – is threatened by what James calls “long-term fiscal problems arising both out of military commitments and the burdens of ensuring social security for an aging population.” We have seen the erosion of the dollar since 2001. It has been steady and apparent to all. But the biggest threat to the dollar is in Asia. According to James, increasing financial turbulence could bring about an end to the dollar’s reign. “The world economic environment is … clearly not made by the United States alone,” he wrote. The United States cannot shield itself from financial turbulence abroad. High growth in China and India is likely to result in bubbles, and the bursting of these bubbles will send shockwaves across the Pacific. James wrote, “it is likely that the world financial system will become more vulnerable than at any time since 1945. The United States will be unable to isolate itself from this general financial volatility. Historically, eras of financial volatility have tended to tip the balance against globalization.”

Chaos will come, whether we want it or not. Nobody can smooth all the wrinkles out of the world economy, and the reign of the dollar cannot last forever. America’s enemies abroad, and those whose envy leads them to an uncharitable assessment of the United States and its motives, will grasp at any opportunity to knock the dollar off its perch. This opportunity is sure to come, and it will probably come in the next few years. Globalization, led by the United States, will be reversed. The world is not destined to become a global village because man is a tribal animal. His trust of others, especially his trust of foreign peoples, is limited. Consequently, the U.S. economy will be shaken to its foundations, and the patterns of consumption known to Americans will finally prove unsustainable. The integration of the various national economies into a global economy is a utopian project, and those most invested in this project will be most hurt. The integration of country with country cannot advance beyond a certain phase. Globalization will be stopped by ethnic, national and religious antagonisms. James calls this process “the victory of Mars.” All previous globalization attempts in history, he explained, “almost always end with wars.”

According to Professor James, the world can be viewed in two ways: “as a system of rules, or as a series of exercises or applications of power.” Well, we know what Machiavelli would say. He would say that the world is predicated on power and power relationships. The rules, at any given time, merely result from an application of power (e.g., the U.S. victory in World War II). Globalization and peace depend on rules, but the rules depend on power. In the present instance, the rules are challenged when lesser powers threaten to break free of their “containment.” The Cold War was a kind of containment, and that containment ended almost two decades ago. Ever since, the Russians and Chinese have been developing mechanisms for breaking American power. The politics of oil and the politics of Islam are being manipulated to this end. Trade and currency wars are looming on the horizon, and rising anti-Americanism will accompany these phenomena.

There is a natural human proclivity for violence, says James. Civilization applies various solutions. But no complete or final solution exists. The pirates and plunderers of history will use whatever opportunity is at hand to upset the system of civilization itself. They can be counted upon to attack the leading institutions of civilization as “unfair.” It is not that they intend to replace these with something better. They simply want to inflict death and destruction without fear of retaliation or defeat. They want to use war and terror as a means to dominate. They do not intend to dominate through products, like Coca-Cola, or currencies that they have always been incompetent at using. Genghis Khan was not a finance man. “Political power flows out of the barrel of a gun,” said Mao. “We will build our new missiles and break out of the CFE Treaty,” says Putin.

The dollar is on top, but the atom bomb destroys top and bottom at one blow.

© 2007 Jeffrey R. Nyquist