I have a policy to prevent Iran from obtaining a nuclear weapon. And as I’ve made clear time and again during the course of my presidency, I will not hesitate to use force when it is necessary to defend the United States and its interests.
– U.S. President Barack Obama, Sunday, March 5, 2012, speech to the pro-Israel lobby AIPAC (American Israel Public Affairs Committee)

There are about 50 countries in the world that have the capability to produce a nuclear weapon if they chose to do so, making Iran far from unique but for its persistence as a thorn in the side of Israel and Israel’s powerful lobby in the United States.
– Philip Giraldi, Council for the National Interest

The truth is there are very few members [of the U.S. Congress] who I could even name or could think of who didn’t at some level participate in that [system of bribery and corruption in Washington D.C.].
– Jack Abramoff, professional lobbyist and onetime power broker for the elite of Washington, D.C. (during a CBS’s 60 Minutes interview, Sunday November 6, 2011)

I’m against very wealthy people attempting to or influencing elections. But as long as it’s doable, I’m going to do it.
– Sheldon Adelson, casino magnate who has donated $11 million to Newt Gringrich’s super PAC Winning Our Future, suggesting that he might give as much as $100 million to support the GOP presidential candidate

The 2012 U.S. presidential election is the first one to be held under the new electoral financing rule decreed by a majority of one by the Roberts Supreme Court on January 21, 2010. With this fateful decision, the Roberts Supreme Court really changed the meaning of the Preambule of the U.S. Constitution that says “We the People of the United States, in order to form a more perfect Union…” and decided on its own to change it for “We, the rich corporations of America…”

Under the new Supreme Court rule, indeed, any legal entity can spend as much money as it likes to control propaganda channels in order to influence and even dictate the election of the U.S. president and of the members of Congress. That’s legalized corruption. Sooner or later, this nonsensical decision will be over-ruled, but not before it may have caused irreparable damage to the U.S. political system by violating two basic democratic principles, i.e. the equality of citizens and the principle of one citizen-one vote. There is no other democratic country where the dictum of French economist Frederic Bastiat (1801-1850), applies more concretely:

“When plunder becomes a way of life for a group of men living together in society, they create for themselves, in the course of time, a legal system that authorizes it and a moral code that glorifies it.”

From now on, Americans will not have the most competent and the most dedicated politicians, but the best political hacks that money can buy. Where are the men and women of value and of independent mind who would want to run for office in such a corrupt system?

People are not fooled. They know that the quality of candidates to public office is very low and declining. Recent polls, for example, indicate that even among republican voters, a majority–58%–say they want more candidate choices, and a whopping 46% have outright negative opinions about the current field of republican presidential candidates: devout Mormon, former missionary, and vulture capitalist Mitt Romney; extremist papal Catholic Rick Santorum who wants to ban contraception methods and who thinks that having a university education in this day and age is to be a snob; twice divorced Newt Gingrich, a former House Speaker ordered in the past to pay $300,000 for Ethics Violations and a dreamer who wants to send 13,000 people to live on the moon; and finally Texas congressman Ron Paul, a libertarian who would abolish Social Security, Medicare and Medicaid for the elderly if he could, all modern programs that have lifted American retirees from poverty. And there you have it.

As of now, with the uncontrolled flow of money coming from corporations, casino owners and banks, and more specifically from defense lobbyists, from pro-Israel lobbyists and Israel Firsters, from bankers’ lobbyists, from oil lobbyists, and about 40,000 other registered paid lobbyists in Washington D.C., narrow special interests [http://www.thenewamericanempire.com/tremblay=1033.htm] have free rein to use the resources of the state as if they were their own and to threaten any individual candidate or office holder who dares to oppose them. Keep in mind that the pro-Israel lobby AIPAC, the most powerful single political lobby in Washington D. C., was the main driving force behind the 2003 military invasion of Iraq by the Bush-Cheney administration, a war of aggression based on lies and false premises.

Indeed, in such a system, the party and the candidates with the most money can be expected to prevail and place their pawns and yes-men in position of power. This is a throwback to the corrupt “Robber Barons” era when a handful of rich capitalists formed a greedy political ruling oligarchy. Undoubtedly, there will be exceptions, but money and propaganda are bound to dominate American elections in the future.

It is not the first time that the U.S. Supreme Court has intervened massively in the American political process. As recently as December 9, 2000, by a one vote majority, the U.S. Supreme Court de facto elected Republican candidate George W. Bush President of the United States, by canceling the recounting of legally cast votes in the state of Florida. Nationally, Democratic candidate Al Gore had received roughly 500,000 more votes than his adversary.

The current Republican presidential campaign has also demonstrated what can be expected in the future under the new rule. The more money a candidate can raise, often from anonymous sources, the more he can buy time on TV and radio to air negative campaigns, not to advance positive proposals of his own, but to destroy the character and credibility of his opponents.

The leading Republican presidential candidate Mitt Romney, as of now, is turning out to be the money candidate and he has outspent his competitors on negative campaigning by a wide margin. In his younger years, before becoming a corporate banker-raider, Mitt Romney was a Mormon missionary leader in France (1966-68) and, while a strong advocate of the military draft for others, he received a personal 4-D deferment from the draft exempting him from going to Vietnam because of his status as a Mormon “minister of religion”.

Unless the Republican convention in Tampa FL in August is in a deadlock, Romney, possibly with Santorum as his running mate, will be facing the incumbent Democratic ticket of President Obama and Vice-President Biden. Already, President Obama has decided to join the money game and has indicated that the political action committees (PACs) who support him will be allowed to accept unlimited donations to boost his re-election campaign, lest he be at a considerable disadvantage versus his well-financed Republican adversaries. Indeed, when there are no rules, the party that follows rules is doomed to defeat.

As a consequence, there is no doubt that the Obama-Biden ticket will have to bend to special interests to obtain money and support from wealthy donors. If re-elected, their administration will have its hands tied to special interests policies that would have been forced upon them. —Where are the common good and the public interest in all that?

[At Bain Capital] We got money from other people and we would use that to help start businesses or sometimes acquire businesses that were in trouble or not doing so well and then try and make it better or get the businesses to grow.
– Mitt Romney, Republican presidential candidate, former governor of Massachusetts and former venture capitalist and corporate raider (January 8, 2012)

I like being able to fire people who provide services to me.
– Mitt Romney, January 9, 2012)

They [the corporate raiders] apparently looted the companies, left people unemployed and walked off with millions of dollars,” Mr. Gingrich said. …“if somebody comes in, takes all the money out of your company and then leaves you bankrupt while they go off with millions, that’s not traditional capitalism.
– Newt Gingrich, Republican presidential candidate and former Speaker of the U.S. House of Representatives (January 8, 2012)

I think people who don’t serve when they could and they get three or four or even five deferments –– they have no right to send our kids off to war … I’m trying to stop the wars, but at least, you know, I went when they called me up.
– Ron Paul, U.S. Congressman and Republican presidential candidate (January 7, 2012)

In current American politics, money and wars of aggression abroad seem to rule the day. When a candidate’s fortune turns sour, the natural reflex is to spend $millions in negative ads to destroy adversaries and/or to issue hawkish policy statements with the promise to start new wars abroad and even to rekindle old ones.

The motto seems to be that “If you destroy me with your negative ads; I will destroy you with mine.” This is truly amazing.

Lobbyists have always played an important role in U.S. politics, but with the floodgates of money presently wide open, their work has been considerably facilitated. Indeed, since the U.S. Supreme Court’s (5-4) January-20-2010- decision to allow unlimited amounts of money to be spent by corporations or labor unions during elections under the specious pretext that such legal organizations are “people”, money rules unimpeded in American politics. This has the more or less unanticipated consequence of raising negative campaigning to a new level, to the delight of corporate media which rake in hundreds of $millions in political advertising or propaganda. Can democracy survive such an onslaught of money? This remains to be seen.

As for the U.S. presidential candidate Mitt Romney, for instance, during the recent primary campaign in the state of Iowa, he was confronted with a sudden surge of popularity of one of his opponents, former House Speaker Newt Gingrich. Romney’s camp and its allies went to work and pumped more than $2.8 million in a TV air deluge of negative ads against candidate Gingrich, arguing that the former Speaker had “more baggage than the airlines” and spelling out a series of flaws in Gingrich’s long political career. Sure enough, Newt Gingrich soon plummeted in the polls in Iowa and even nationally. He finished a distant fourth (13.3%) in the Iowa Republican Caucus (U.S. Presidential Primary) of January 03, 2012, while Republican candidate Romney squeezed by to finish in 1st position.

In retaliation, the Gingrich’s camp has opted to turn the tables on candidate Romney for the New Hampshire and South Carolina primaries and has tried to picture him as the Wall Street movie villain Gordon Gekko. Indeed, thanks to a “super PAC”, supposedly financed by casino billionaire Sheldon Adelson, who is reported to have poured $5 million into Mr. Romney’s campaign, it intends to pump some $3.4-million into new television ads in order to picture multi-millionaire candidate Mitt Romney as a cold-blooded capitalist raider who made his fortune on the back of workers when they were fired en masse, after Mr. Romney’s private equity firm, Bain Capital of Boston, gorged itself on financially stressed companies. Mr. Gingrich has even suggested personally that Mr. Romney’s company was comparable to “rich people figuring out clever legal ways to loot a company.”

And there you have it, negative campaigning at its best!

Negative ads, whether they are based on facts or on fabrications or on outright lies, can be very effective politically because they raise doubts in the mind of undecided or hesitant voters, even though some voters may be repulsed and turned off by them and this could translate into lower voter turnout. Nevertheless, the more distracted people are, the more they tend to remember negative information better than positive one. Therefore, for those who have no scruples in relying on such tactics and who have the means to pay for them, negative campaign ads have a triple advantage: First, they are a good way to change the subject and steer the debate away from one’s own failures; secondly, they place adversaries on the defensive, forcing them to spend time and money to try to refute the attacks; and, thirdly, they dispense the attackers from clearly spelling out their own positive political agenda beyond generalities and pious slogans. Negative ads maybe a curse for democracy but they work for those unethical politicians for whom power is the only thing that they yearn for in politics.

But negative campaigning or smear campaigns cost a lot. Indeed, they have to be researched and produced and, above all, they must to be aired in the mass media, especially on television. Historically, negative campaigning has always existed. However, modern means of communication and the concentration of national wealth in relatively fewer hands have multiplied its influence. Indeed, in the modern free-for-all electronically based U.S. politics, it can be said that those with the most money and with fewer principles have a decisive, if not an insurmountable advantage in winning elections. In the U.S., and especially with the benediction of a majority of judges on the current Supreme Court, so-called “super PACs” can accept unlimited donations for purposes of supporting or attacking candidates, thus placing the political game clearly in the hands of people or corporations or labor unions with the most money. Money has thus become the principal
deciding factor in American politics.

The current campaign is a clear demonstration.

Financial markets are driving the world towards another Great Depression with incalculable political consequences. The authorities, particularly in Europe, have lost control of the situation. They need to regain control and they need to do so now.

— George Soros, international financier, ( Does the Euro Have a Future?, New York Review of Books, September 15, 2011)

The [financial] crisis was not a failure of the free market system and the answer is not to try to reinvent that system. …Government intervention is not a cure-all.

— President George W. Bush, Thursday November 13, 2008

I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a monied aristocracy that has set the government at defiance. The issuing power (of money) should be taken away from the banks and restored to the people to whom it properly belongs.

— Thomas Jefferson (1743-1826), 3rd U.S. President

Presently, one has the net impression that today’s governments, both in Europe and in the United States, have their fingers plugging the holes in the financial dike, but fear that the entire dam could collapse in the not too distant future with dire economic consequences.

Let’s see if we can make sense of it all.

Let’s say to begin that most financial crises are the direct result of unsustainable debt levels relative to income that need to be wrung out of the economic system. It has happened in the past (notably in 1873, in 1907 and in 1931, for example), and numerous times in developing countries, and it will undoubtedly happen again in the future. The process is more often than not always the same: some large banks, corporations, consumers or governments take on too much risky debt that becomes unsustainable when economic conditions change, thus launching the entire economy into a devastating process of debt deflation.   Sometimes, it may take decades to overcome such a debt deflation and it usually creates an environment of economic stagnation when aggregate demand collapses.

What makes the current financial crisis so troublesome is not only that debt levels are historically high for some countries, but also because the usual instruments and procedures to reduce the debt burden, while doing the least damage to the real economy, have been rendered inoperative, due to a large extent, to the poisonous so-called financial “innovations” that have taken place since 1999 in the general climate of wholesale financial deregulation.  As a consequence, financial debt in many countries creates a sort of financial black hole that siphons off money income and prevents it from being re-circulated back into the economy. This creates a serious deficiency of demand (when consumers spend less, when corporations postpone investments and when governments adopt austerity programs) that translates into low output growth, economic stagnation and high unemployment.

In this short article, I will try to identify some of these financial “black holes” that starve the economy of the necessary funds to prosper. I will also attempt to explain why this financial crisis may turn out to be much more serious than previous ones and why governments should take drastic measures to avoid a devastating economic depression.  I have done this in the past, again,  in 2006, and again, in 2007, and again and again in 2010, but obviously some politicians, both in Europe and in North America, don’t seem to get it. Instead, they seem to think that fiscal austerity and lower taxes is all it takes to stimulate the economy and lower unemployment. They cannot be more wrong in the current context. Such policies in an open economy are going to make things worse, much worse, if they are applied over time.

Here is why.

Many governments had the imprudence of piling up debt upon debt over the last thirty years, but especially over the last ten years. There are four main causes for such a public binge of debt in many countries.

First, in Europe, the creation of the Euro zone in 1999 induced some imprudent member countries to go deep into debt by taking advantage of the credibility of the euro and by issuing bonds in euros at favorable interest rates. There was, indeed, a widely held belief on the part of lenders and borrowers alike that the new monetary union provided an implicit guarantee of stability to the safety of the loans.

Secondly, lenders were induced to lend large sums at low interest rates because borrowers could avail themselves of a newly created financial instrument, the Credit Default Swaps (CDS)  that allowed them to take a low cost insurance against an eventual default on their bonds. (By the way, the financial crises on both sides of the Atlantic are closely linked due to the fact that some large U.S. banks are heavily exposed to the European sovereign debt crisis as sellers of credit default swaps.)

Thirdly, the persistent large trade imbalances in the world meant that some countries, such as mainland China (which joined the World Trade Organization in December 2001), piled up tremendous external trade surpluses and their excess funds became available to foreign borrowers. Indeed, large international banks found it most profitable to channel these newly created funds to willing sovereign borrowers around the world.

Fourthly, some central banks, especially the American Greenspan Fed, thought they were obliged to provide an environment of easy money after the events of September 11, 2001 in the U.S., and they kept interest rates unduly low for too long, thus providing an additional inducement to eager borrowers to go deeper into debt. Indeed, the housing bubble  in the United States that led to the subprime mortgage crisis was a creation of the Greenspan Fed with the encouragement of the Bush-Cheney administration.

A first conclusion, therefore, is that many institutional factors and policies contributed into encouraging some governments (and also some consumers and investors) to take on more debt than was prudent, often to finance unproductive spending such as military spending. Today, for example, there are dozens of countries whose gross general government debt stands above 100 percent of their gross domestic product (GDP). Moreover, when a high proportion of this debt is foreign-owned, money to service such debt flows out and this, of course, creates a drag on the domestic economy. Servicing an unproductive foreign debt is one of the financial “black holes” I have in mind here.

But what’s even more important, the financial and banking systems have evolved in such a way over the last ten years or so that it has become very difficult, if not technically impossible, to solve a sovereign debt crisis  through the traditional means used in the past.

How come? Because debt restructuring  (a fancy term for reducing the capital owed by a debtor through debt write-downs that reflect actual market values and/or the extension of a debt’s maturity and/or a lowering of interest rates) has been made most difficult by the fact that banks and other lenders have been “insured” against a debt default and are thus expecting to receive 100 percent of a loan and interests, no matter how risky their loans turn out to be and how low their current value.

In the past, when a government faced a debt crisis, it usually did two things: (a) It petitioned its lenders for a restructuration of its debts if the latter wished to avoid a complete default; and, (b) it would devalue its currency to boost its economy’s competitiveness and stimulate its economy after an unavoidable capital outflow.

For a country like Greece,  a member of the European Union (EU) that is heavily in debt, these two options to alleviate its crushing debt burden are not easily available: it cannot coerce large international banks and other lenders to voluntarily take a loss on its so-called “insured“ debt, and, it cannot devalue the euro which is a common currency to sixteen other countries. The principal venue left is to keep borrowing at high costs from other members of the euro zone, the so-called the European financial stability fund,  (N.B.: this is equivalent to borrowing from Peter to pay Paul!), and to impose a draconian fiscal austerity program on an economy that has been declining at more than five percent over the last two years.

The paradox is that the more austerity the government applies, the more the economy contracts and the higher is its fiscal deficit and its needs to borrow even more. This is a self-reinforcing spiral down. —That’s really a true recipe to produce an economic depression. And, if many governments elsewhere follow the same foolish route for too long, this could lead to a worldwide economic depression.

There are two other major financial black holes that act to starve the economy of needed funds.

First, in the United States, it is the $1.5 trillion in excess reserves that banks hold at the Fed and find to their advantage not to lend to the economy. Some of that money came from American taxpayers when the Bush-Cheney administration put forward its TARP program to salvage large banks from bankruptcy in the fall of 2008. (N. B.: Part of it came also from the general public and from holders of U.S. dollars around the world when the Fed pushed short term interest rates to close to zero.) Secondly, also in the United States, it is another $1.5 trillion in cash that large U.S. corporations hold abroad in their subsidiary companies while parking it in tax havens where there are no taxes at all. They refuse to repatriate these funds for fear of paying taxes at home on their foreign earnings. (N. B.: The U.S. corporate income tax is imposed on all income no matter the country in which it was generated. However, the code allows for U.S. taxes to be deferred as long as the foreign earnings are kept abroad.)

Conclusion

So, don’t look elsewhere to understand why there is so much economic stagnation around and why unemployment remains so high. It is because of all these financial black holes that suck money from the economy without putting it back. The correct policies would be to close these financial black holes, and the quicker the better.  (The alternative would be even more massive government deficits!)

But don’t hold your breath before such appropriate policies are implemented. Too many politicians have been bought lock, stock and barrel by the same interests that profit greatly from the existence of these financial black holes.

If you can’t explain it simply, you don’t understand it well enough.
– Albert Einstein (1879-1955), German-born theoretical physicist and professor, Nobel Prize 1921

It is incumbent on every generation to pay its own debts as it goes. A principle which if acted on would save one-half the wars of the world.
– Thomas Jefferson (1743-1826), 3rd President of the United States (1801-09)

Having seen the people of all other nations bowed down to the earth under the wars and prodigalities of their rulers, I have cherished their opposites, peace, economy, and riddance of public debt, believing that these were the high road to public as well as private prosperity and happiness.
– Thomas Jefferson

On the 4th of July, the credit agency Standard & Poor’s called the country of Greece what it is, i.e. a country in de facto financial bankruptcy. No slight of hand, no obfuscation, no debt reorganization and no “innovative” bailouts can hide the fact that the defective rules of the 17-member Eurozone have allowed some of its members to succumb to the siren calls of excessive and unproductive indebtedness, to be followed by a default on debt payments accompanied by crushingly higher borrowing costs.

Greece (11 million inhabitants), in fact, has abused the credibility that came with its membership in the Eurozone. In 2004, for instance, the Greek Government embarked upon a massive spending spree to host the 2004 Summer Olympic Games, which cost 7 billion euros ($12.08 billion). Then, from 2005 to 2008, the same government decided to go on a spending spree, this time purchasing all types of armaments that it hardly needed from foreign suppliers. Piling up a gross foreign debt to the tune of $533 billion (2010) seemed the easy way out. But sooner or later, the piper has to be paid and the debt burden cannot be hidden anymore.

Greece’s current financial predicaments (and those of other European countries such as Spain, Portugal, Ireland and even Italy) are not dissimilar to the ones Argentina had to go through some ten years ago. In each case, an unhealthy membership in a monetary union of some sort led to excessive foreign indebtedness, followed by a capital flight and a crushing and ruinous debt deflation.

In the case of Argentina, the country had decided to adopt the U.S. dollar as its currency, even though productivity levels in Argentina were one-third those in the United States. An artificially pegged exchange rate of one peso=one U.S. dollar held for close to ten years, before the inevitable collapse.

Indeed, membership in a monetary union and the adoption of a common currency for a group of countries can be a powerful instrument to stimulate economic and productivity growth, with low inflation, when such monetary unions are well designed structurally, but they can also turn into an economic nightmare when they are not.

Unfortunately for many poorer European members of the euro monetary union, the rules for a viable monetary union were not followed, and its unraveling in the coming years, although deplorable, should be of no great surprise to anyone knowledgeable in international finance.

What are these rules for a viable and stable monetary union with a common currency?

1- First and foremost, member countries should have economic structures and labor productivity levels that are comparable, in order for the common currency not to appear persistently overvalued or persistently undervalued depending on any particular member economy. An alternative is to have a high degree of labor mobility between regional economies so that unemployment levels do not remain unduly high in the least competitive regions.

2- Secondly, if either one of the two above conditions is not met (as is usually the case, since real life monetary unions are rarely “Optimum Currency Areas”), the monetary union must be headed by a strong political entity, possibly a federal system of government, that is capable of smoothly transferring fiscal funds from surplus economies to deficit economies through some form of centrally managed fiscal equalization payments.

This is to avoid the political strains and uncertainty when the standards of living rise in surplus regional economies and drop in regional deficit economies. Indeed, since the regional exchange rates cannot be adjusted upward or downward to redress each member country’s balance of payments, and since the law of one price applies all over the monetary zone, this leaves fluctuations in income levels and employment levels as the main mechanism of adjustment to external imbalances. This can turn out to be a harsh remedy.

Indeed, such a system of income or quantity adjustment rather than price adjustment is somewhat reminiscent of the way the 19th century gold standard used to work, albeit with a deflationary bias, except that it was expected to have price and income inflation in surplus countries and price and income deflation in deficit countries, caused by money supply expansions in surplus economies and money supply contractions in deficit economies. In a more or less formal monetary union, we are left with income inflation and deflation while the central bank holds the rein on the overall price level.

3- A third condition for a smoothly functioning monetary union is to have free movements of financial and banking capital within the zone. This is to insure that interest rates are coherent within the monetary zone, adjusted for a risk factor, and that productive projects have access to finance wherever they take place.

In the U.S., for instance, the highly liquid federal funds market allows banks in temporary deficit in check clearing to borrow short-term funds from banks in a temporary surplus position. In Canada, large national banks have branches in all provinces and can easily transfer funds from surplus branches to deficit branches without affecting their credit or lending operations.

4- A fourth condition is to have a common central bank that can take account not only of inflation levels but also of real economic growth and employment levels in its monetary policy decisions. Such a central bank should be able to act as lender of last resort, not only to banks, but also to the governments of the zone.

Unfortunately for the Eurozone, it currently fails to meet some of the most fundamental conditions for a smoothly functioning monetary union.

Let’s look at them one by one.

* First, labor productivity levels (production per hour worked) vary substantially between the member states. For example, in 2009, if the index of productivity level in Germany was 100, it was only 64.4 in Greece, nearly one third lower. In Portugal and Estonia, for instance, it was even lower at 58 and 47 respectively. What this means is that the euro, as a common currency, may appear undervalued for Germany but overvalued for many other members of the Eurozone, stimulating net exports in the first case but hurting badly the competitiveness of other member countries.

* Second, and possibly an even more important requirement, the Eurozone lacks the backing of a strong and stable political and fiscal union. This leaves fiscal transfers between member states to be left to ad hoc political decisions, and this creates uncertainty. In fact, there are no permanent mechanisms of equalization payments between strong and weak economies within the Eurozone. For this reason, we can say that there is no permanent economic solidarity within the Eurozone.

* Third, the designers of the Eurozone elected to limit the European Central Bank to a narrowly defined monetary role, its central obligation being to maintain price stability, while denying it any direct responsibility in stabilizing the overall macroeconomy of the zone and preventing it from lending directly to governments through money creation, if needs be. For this reason, we can say that there is no statutory financial solidarity within the Eurozone.

* Finally, even though capital and labor mobility within the Eurozone is fairly high, historically speaking, it is far less secured, for instance, than it is the case with the American monetary union.

In retrospect, it seems that the creation of the Eurozone in 1999 was more a political gamble than a well-thought-out economic and monetary project. This is most unfortunate, because once the most estranged members of the zone begin defaulting on their debts and possibly revert to their own national currencies, the financial shock will have real economic consequences, not only in Europe, but around the world.

Many economists think that the best option for Greece and the rest of the EU should be to engineer an “orderly default” on Greece’s public debt which would allow Athens to withdraw simultaneously from the Eurozone and to reintroduce its national currency, the drachma, at a debased rate. This would avoid a prolonged economic depression in Greece.

Refusing to accept the obvious, i.e. an orderly default, would please Greece’s banking creditors but will badly hurt its economy, its workers and its citizens. That’s what bankruptcy laws are for, i.e. to liberate debtors from impossible-to-repay debts.

Of course, the most debt-ridden nation on earth is not Greece, but the United States. Let me say this as a conclusion: If American politicians do not stop playing political games with the economy, a lot of Americans are going to suffer in the coming months and years, and this will spill over to other countries.

With Europe and the United States both in an economic turmoil, this is very bad news for the world economy.

If once [the people] become inattentive to the public affairs, you and I, and Congress and Assemblies, Judges and Governors, shall all become wolves. It seems to be the law of our general nature, in spite of individual exceptions.
– Thomas Jefferson (1743-1826), 3rd US President

If the American people ever allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered.
– Thomas Jefferson

[Corruption in high places would follow as] all wealth is aggregated in a few hands and the Republic is destroyed.
– Abraham Lincoln (1809-1865), American 16th US President (1861-65)

When plunder becomes a way of life for a group of men living together in society, they create for themselves, in the course of time, a legal system that authorizes it and a moral code that glorifies it.
Frederic Bastiat (1801-1850), French economist

Inflation made here in the United States is very, very low.
– Ben Bernanke, Fed Chairman, Thursday, February 10, 2011

Let us begin with some macroeconomic indicators of reference.

In October 2010, the world value of total production (all Gross Domestic Products or GDPs) was estimated to be $61.96 trillion U.S. dollars at current nominal prices. The U.S.GDP was estimated at $16.11 trillion or 26 % of world GDP.

The two largest financial markets in terms of trading values are the global foreign exchange market (all currency markets) that has an average daily turnover in global foreign exchange transactions of about $4 trillion per day, and the privately-traded and mostly unregulated world derivatives market (all the derivatives markets) whose total world outstanding contracts has been estimated by the Bank for International Settlements in Switzerland to have a notional or face value of about $791 trillion in 2010.

In terms of real wealth, however, the two most important financial markets are the world bond market and the world stock market. In 2009, for example, the global bond market had an outstanding value of $US 91 trillion, with the U.S. bond market, at a value of $US 35.5 trillion, being the largest domestic bond market. In mid-2010, the global equity market capitalization on regulated exchanges was estimated at $US 54.9 trillion, with the U.S. stock market having a value of some $US 19.8 trillion.

With such a large amount of financial assets, it is understandable that shifts in prices and interest rates have important effects on each market. If long-term interest rates go up, the nominal value of bonds goes down, and conversely, when interest rates decline, bond prices go up. As for stocks, many factors, such as company earnings, future profit prospects and inflation expectations, as well as political and taxation considerations, can influence their value. However, in general, they tend to fare better when short-term interest rates are low rather than high.

Sometimes, these two important financial markets move up together, especially in an environment of general disinflation, when interest rates tend to decline. They also tend to decline in tandem when real interest rates are on the rise, both bond prices and stock prices are then falling.

Sometimes, however, they can move in different directions, especially in the early phase of an inflationary period, such unexpected inflation being good for the stock market but bad for the bond market. Since last fall, this has been case, with the bond market falling and the stock market rising. The question is how long this decoupling can last.

And how does the Fed’s monetary policy fit into such an environment of oncoming inflation, and what should the Fed do?

Last November 3rd, the day after the 2010 mid-term elections, the Bernanke Fed announced that it will be embarking on a second round of quantitative easing (QE2), a fancy word for printing new money in exchange for government bonds—in other words, monetizing the public debt. It seems that Chairman Bernanke and the Fed board felt that months of lending to the large American banks trillions of dollars at close to zero interest rate, while paying them 0.25 percent to keep their excess reserves on its books, was not enough. They announced that the Fed would buy $600 billion-worth of additional Treasury bonds until June 2011, while reinvesting some $300 billion of principal payments from its portfolio holdings of mortgage-backed securities.

In doing so, the Fed professed to follow two somewhat interrelated objectives: 1) to lower long-term real interest rates in order to stimulate economic activity and create employment; and 2) to simultaneously raise inflation expectations in order to avoid the effect of deflation on the U.S. debt-leveraged economy. It should be remembered that from 1913 to 1977, the Fed had only one objective to pursue, i.e. price stability. Currently, however, the Fed has officially a double mandate. As a matter of fact, since 1977, the amended Federal Reserve Act of 1913 stipulates that the U.S. central bank should set its monetary policy in order to promote employment while maintaining price stability. It says that the Fed should promote “maximum employment, stable prices, and moderate long-term interest rates.”

Of course, a central bank in a fiat currency system can always create inflation through monetary policy and its printing press, but, in a market economy, it has little direct influence on job creation and on long-term interest rates. Employment depends on investments, innovation and market opportunities at home and abroad, while long-term interest rates depend on the amount of savings available, on investment demand and on long-term inflation expectations, all factors that are more or less out of the reach of a central bank. It is easy to delude oneself into thinking otherwise, but that’s the reality.

What the Fed can do with certainty, however, is to create inflation by expanding the monetary base and the money supply; it can also reign in inflation by draining liquidity from the system. If it goes overboard one way or the other, it can also create asset price bubbles by maintaining its managed short-run interest rates too low for too long, or it can create a credit crunch by putting the brakes too hard on credit creation, usually in a haste to correct its previous mistake.

These short-term gyrations in monetary policy are very destabilizing to the real economy, sometimes creating a temporary boom; sometimes precipitating an economic downturn. They are also accompanied by massive shifts of wealth between creditors and debtors.

In the first instance, when the Fed (or any central bank for that matter) creates too much money by buying financial assets and writing checks on itself, inflation and inflation expectations ensue. This pushes short-term interest rates down and long-term interest rates up (a steepening of the yield curve) and the price of long bonds goes down, with the effect of imposing an inflation tax on all the holders of fiat dollars. This inflation tax results in a transfer of wealth between unsuspecting dollar holders and bond holders who see the real value of their holdings go down, while net debtors and stock owners see their real debt load being reduced by inflation and the value of most shares in the stock market going up.

In the second instance, the reverse can happen if the economy is starved of liquidity: the yield curve inverts with short-run interest rates moving way up as compared to long-term interest rates. A stock market crash and an economic recession generally follow.

That’s pretty much what the Fed has been doing over its nearly 100 years of existence, keeping short-run interest rates too low for too long, creating unsustainable asset bubbles, and then applying the monetary brakes to kill inflation expectations that it has created on its own. Sometimes, the Fed has maintained price stability and the value of the U.S. dollar; but at other times, it has willingly acted to destroy the purchasing power of the dollar by printing too much of it.

As a general principle, if inflation expectations increase faster than nominal long-term interest rates, real interest rates, i.e. the real cost of capital for investors and home buyers, would decline and this would, hopefully, stimulate economic activity and employment.

Unfortunately for the Fed, its Nov. 3rd announcement translated into an important loss of confidence in its ability to design and pursue an appropriate monetary policy and was immediately decried by other central banks and by America’s biggest creditor, China, as a blatant attempt to generate and export inflation. Bond prices began immediately to fall and bond yields to rise. It seems that bondholders began selling longer-term Treasuries at a faster rate than the Fed could buy them.

Chairman Ben Bernanke and his board seem to have forgotten that the United States is now a debtor nation, not a creditor nation. A creditor nation could get away with an outspoken policy of creating inflation—but not a debtor nation. In 2010 alone, the U.S. registered another half a trillion-dollar trade deficit with the rest of the world. This has to be financed, and it is done with foreign borrowings. To a large extent, foreign creditors now decide the final outcome of American monetary policy.

The 10-year Treasury yield, which hit a low at 2.40 percent in October 2010, was at 2.63 percent the day before the Fed’s announcement on November 2, 2010. As it turned out, it closed at 3.64 on Friday February 11, after hitting a high of 3.75 percent on February 8. The same is true of the 30-year Treasury yield that hit a high of 4.76 percent on February 8, thus approaching the dangerous threshold of 4.90 percent. The latter stood at 3.93 percent on Nov. 2, 2010.

Obviously, the Fed’s ultra loose monetary policy has backfired. Its intended policy of printing money in excess of what the economy demands has resulted in raising real long-term interest rates, not lowering them. Indeed, with long-term nominal rates on the rise while inflation will take many months to surface, the immediate effect of the Fed’s November announcement was to raise real long-term Treasury rates, not to lower them. Mortgage rates are also on the rise, threatening to postpone the long anticipated recovery in the housing market.

It is certainly possible that we are entering a period when the already observed rise in real interest rates can derail the stock market rally that has been in force since early March 2009. Later on, however, a slowdown in the economy coupled with fiscal compressions can be expected to push long-term rates down again. Such a roller-coaster path for interest rates is not very helpful.

The current Fed board seems to believe that the Fed is more than a central bank, that it is a sort of a government unto itself that can both control monetary conditions and solve the structural problems in the real economy at the same time, irrespective of what the rest of the world thinks. This would seem to be most unrealistic. Perhaps a dose of humility would be salutary at this time, before irreparable damage is done.

Under a paper money system, a determined government can always generate higher spending and hence positive inflation.
– Ben Bernanke, future Fed Chairman (in 2002)

My thesis here is that cooperation between the monetary and fiscal authorities in Japan could help solve the problems that each policymaker faces on its own. Consider for example a tax cut for households and businesses that is explicitly coupled with incremental BOJ purchases of government debt – so that the tax cut is in effect financed by money creation. Moreover, assume that the Bank of Japan has made a commitment, by announcing a price-level target, to reflate the economy, so that much or all of the increase in the money stock is viewed as permanent.
– Ben Bernanke, future Fed Chairman (in 2002)

The Fed, in effect, is telling the markets not to worry about our fiscal deficits, it will be the buyer of first and perhaps last resort. There is no need – as with Charles Ponzi – to find an increasing amount of future gullibles, they will just write the check themselves. I ask you: Has there ever been a Ponzi scheme so brazen? There has not.
– Bill Gross, PIMCO’s managing director

On Wednesday, November 3rd, the Bernanke Fed announced that it stands ready to resume money printing to stimulate the economy through quantitative money easing, an euphemism for printing more dollars. Indeed, it intends to buy $600-billion of longer-term Treasury securities until the end of the second quarter of 2011, plus some $300 billion of reinvestments, on top of the some $1.75 trillion of various types of securities, many of which were mortgage backed securities, that it has added in 2009 to its balance sheet, currently standing at a total of $2.3 trillion. There could even be additional increases in newly printed money as the Fed intends to “regularly review and adjust the program as needed to best foster maximum employment and price stability.”

After the election of fiscal conservatives on November 2nd, it seems that printing money is the only instrument left for the Obama administration to stimulate the economy. I fail to see, however, what is “conservative” about that. Actively debasing a currency to stimulate an economy used to be a Third-World economic recipe, a recipe for disaster. Now, the United States government feels that is the only way to get out of the economic doldrums.

But U.S. economic problems are essentially structural in nature, and are due to a bad housing mortgage policy, a bad industrial policy, a bad financial policy, a bad fiscal policy, a bad foreign investment policy, too much entitlement debt, severe demographic problems related to the aging baby-boomers, and to very costly wars abroad. Relying exclusively on monetary quick fixes to correct them misses the mark and may have serious unintended negative consequences down the road.

In fact, it is likely that in the long run, this extreme monetary policy risks exacerbating rather than correcting the problems. Economic structural problems cannot be corrected with monetary means. They rather require real economic solutions. That means correcting the housing mortgage mess and devising an industrial strategy, a fiscal strategy, and an investment strategy that can put the economy back on its tracks of economic growth.

But, for better or worse, the Federal Reserve Board (Fed) seems to be the only branch of the U.S. government left that can still function properly, that is not caught in a permanent political gridlock. As a consequence, for the time being at least, bankers are in charge of the U.S. economy. Since they are the ones who created many of the current problems, this is not very reassuring.

Let’s remind ourselves that the Fed is a semi-public, semi-private organization that has a long history of creating financial asset price bubbles in the U.S and around the world, essentially because the U.S. dollar is an international key-currency widely used around the world and is an important part of other central banks’ official reserves.

Thus, the real danger is that the Fed will again overdo it and create unmanageable financial and monetary bubbles in the coming years. It did it in the past. It did it in the late 1960′s and early ’70s, and we witnessed the same scenario unfolding with the Greenspan Fed in the late 1990s, when excessive easy money helped inflate the Internet and tech stock market bubble. We saw this again in the early 2000s, when easy Fed money helped inflate the housing bubble. And now, we’re seeing it again with the Bernanke Fed. As a general rule, a central bank should not push the monetary gas pedal to the floor and be obliged to slam on the monetary brakes later, thus placing the real economy on a roller-coaster of booms and busts. That is not the way to run a large economy.

But because of the circumstances, the Fed may be at it again. This time it is busy creating a massive bond bubble, some important currency misalignments and a massive gold and commodity price bubble. We should also not forget that abnormally low interest rates and lower bond yields increase the present value of pension liabilities of most defined benefit pension plans.

Therefore, I would not be surprised to see a pension crisis developing in the coming years under the current Fed monetary policy. Of course, all of these bubbles are interrelated but when they come crashing down, four or five years down the road, maybe sooner, the economy may then be in worse shape than it is today. My most likely scenario is for the Fed to keep the monetary gas pedal way down until the 2012 election, and then slam on the monetary brakes thereafter to salvage what will be left of the imperial dollar.

If so, this could be a partial repeat of Japan’s experience in mismanaging its economy in the early 1990′s until 2000, a period known as the lost decade.

The current Fed’s monetary policy is to flood financial markets with liquidity, i.e. newly created dollars, and, in the process, devalue the U.S. dollar, spur American exports and prevent deflationary expectations from taking hold and from making already high debt loads even heavier. For this, the Fed has been engaged since 2009 in round after round of money creation and interest rate reductions to the point of pushing short-term monetary rates close to zero and keeping short-term real rates negative. But if the economy is in a liquidity trap, [http://en.wikipedia.org/wiki/Liquidity_trap] as it is fair to assume it is, although a central bank can print all the money it wants, this is unlikely to stimulate the real economy for very long. —This is like pushing on a string. Printing money, if it is an emergency temporary measure, can help mitigate the effect of having too much debt and debt-service costs relative to income, as is the case today with many debtors in a debt liquidation mode. However, if this becomes a feature of monetary policy for too long, it can have disastrous consequences.

In general, it can be said that the Fed can manipulate short term interest rates by artificially increasing demand for short term securities, but inflation expectations are a big component of long term interest rates and are much less influenced by the Fed. Therefore, if the Fed’s intention of printing large amounts of new money raises fears of future inflation, long term interest rates may rise rather than fall, and this is bound to hurt long-term productive investments.

Moreover, make no mistake, with globalized financial markets, a large chunk of the newly created dollars is flowing out of the United States and is invested in higher interest rate countries, pushing the dollar further down and these countries’ currencies further up. Of course, some of the newly created money will immediately find its way in the stock market, but there is no certainty that this will induce already stretched banks to increase their banking loans to businesses.

Another consequence is this: The current outflow of U.S. dollars helps keep the dollar exchange rate low, but when the Fed is forced to aggressively raise interest rates, as it will inevitably be forced to do later on, the reverse will happen and the U.S. dollar will likely overshoot and then become overvalued. This is the case today with the Japanese yen which became unduly strong when the Japanese carry trade (too much cheap money invested abroad returns home) collapsed.

What counts for most people, however, is that the Fed’s zero-interest rate policy has not cured the structural housing mortgage crisis, since home foreclosures are still very high. The Fed now places most of its hopes on a currency devaluation, which is the old trick of the “beggar thy neighbor” policy, i.e., trying to export one country’s unemployment to its trading partners by devaluating the currency. This was a form of protectionism much relied upon during the 1929-39 Great Depression. This may work for a while, at least as long as other countries can absorb American exports without launching their own money printing process in order to prevent an appreciation of their currencies.

Indeed, is it likely that countries which see their currencies being revalued by the Fed will remain passive? The Fed is implicitly making the bet that these countries will not retaliate, and that the international dollar-based currency system will remain intact. But for how long? Sooner or later, some central banks around the world will have no choice but to impose capital controls in order to slow down the inflow of unwanted outside money and the onslaught of imported inflation, and prevent their exchanges rates from rising too high too fast. If they do, the entire process of economic globalization may begin to unravel.

Meanwhile, foreign central banks, for example, could accelerate their rush to dump the U.S dollar and to accumulate gold and other more stable currencies such as the euro, the Swiss franc, the British pound, the Canadian dollar and the Australian dollar. China has already begun to do just that. The share of dollar official reserves would then decline from about 60 percent presently to perhaps less than 50 percent. That may signal the beginning of the end for the “imperial dollar” which has dominated the international monetary system since the Bretton Woods conference of 1944.
This is to be followed closely.

We have discovered the most terrible bomb in the history of the world. It may be the fire destruction prophesied in the Euphrates Valley Era, after Noah and his fabulous Ark…. This weapon is to be used against Japan … [We] will use it so that military objectives and soldiers and sailors are the target and not women and children. Even if the Japs are savages, ruthless, merciless and fanatic, we as the leader of the world for the common welfare cannot drop that terrible bomb on the old capital or the new. … The target will be a purely military one… It seems to be the most terrible thing ever discovered, but it can be made the most useful.
– Harry S. Truman (1884-1972), 33rd U.S. President, (Diary, July 25, 1945)

The World will note that the first atomic bomb was dropped on Hiroshima a military base. That was because we wished in this first attack to avoid, insofar as possible, the killing of civilians.
– Harry S. Truman (1884-1972), 33rd U.S. President, (radio speech to the Nation, August 9, 1945)

In [July] 1945… Secretary of War [Henry L.] Stimson, visiting my headquarters in Germany, informed me that our government was preparing to drop an atomic bomb on Japan. I was one of those who felt that there were a number of cogent reasons to question the wisdom of such an act. …The Secretary, upon giving me the news of the successful bomb test in New Mexico, and of the plan for using it, asked for my reaction, apparently expecting a vigorous assent. …During his recitation of the relevant facts, I had been conscious of a feeling of depression and so I voiced to him my grave misgivings, first on the basis of my belief that Japan was already defeated and that dropping the bomb was completely unnecessary, and secondly because I thought that our country should avoid shocking world opinion by the use of a weapon whose employment was, I thought, no longer mandatory as a measure to save American lives.
It was my belief that Japan was, at that very moment, seeking some way to surrender with a minimum loss of ‘face’. The Secretary was deeply perturbed by my attitude.”
– General Dwight Eisenhower, Supreme Commander of the Allied Forces in Europe and 34th U.S. President from 1952 to 1960, (Mandate For Change, p. 380)

Mechanized civilization has just reached the ultimate stage of barbarism. In a near future, we will have to choose between mass suicide and intelligent use of scientific conquests [...] This can no longer be simply a prayer; it must become an order which goes upward from the peoples to the governments, an order to make a definitive choice between hell and reason.
– Albert Camus (1913-1960), French philosopher and author, August 8, 1945

As American Christians, we are deeply penitent for the irresponsible use already made of the atomic bomb. We are agreed that, whatever be one’s judgment of the war in principle, the surprise bombings of Hiroshima and Nagasaki are morally indefensible.
– The American Federal Council of Churches’ Report on Atomic Warfare and the Christian Faith, 1946

It is my opinion that the use of this barbarous weapon at Hiroshima and Nagasaki was of no material assistance in our war against Japan. ” – “The lethal possibilities of atomic warfare in the future are frightening. My own feeling was that in being the first to use it, we had adopted an ethical standard common to the barbarians of the Dark Ages.”
– William Leahy, Chief of Staff to Presidents Franklin D. Roosevelt and Harry S. Truman (I Was There, p. 441)

Completely in charge in their marble homes and granite banks from which they rob the people of the world under the pretence of bringing them culture, Watch out, for … they’ll send you out to protect their gold in wars whose weapons, rapidly developed by servile scientists, will become more and more deadly until they can with a flick of the finger tear a million of you to pieces.
– Jean Paul Marat (1743-1793), Swiss-born scientist and physician and actor in the French Revolution

When U.S. President Harry S. Truman decided on his own to use the atom bomb, a barbarous weapon of mass destruction, against the Japanese civilian populations of the cities of Hiroshima and of Nagasaki on August 6 and on August 9, 1945, the United States sided officially on the wrong side of history. General Dwight Eisenhower, Supreme Commander of the Allied Forces in Europe and 34th U.S. President from 1952 to 1960, said it in so many words: “…the Japanese were ready to surrender and it wasn’t necessary to hit them with that awful thing.” (Newsweek, November 11, 1963). Between 90,000 and 120,000 people died in Hiroshima and between 60,000 and 80,000 died in Nagasaki, for a grand total of between 150,000 and 200,000 most cruel deaths.

It seems that military man Eisenhower was more ethical than Freemason small-town politician Harry S. Truman regarding the fateful decision.

In being the first country to use nuclear weapons against civilian populations, the United States was then in direct violation of internationally accepted principles of war with respect to the wholesale and indiscriminate destruction of populations. Thus, August 1945 is a most dangerous and ominous precedent that marked a new dismal beginning in the history of humanity, a big moral step backward.

In future generations, it most certainly will be considered that the use of the atom bomb against the Japanese civilian populations of Hiroshima and Nagasaki was a historic crime against humanity that will stain the reputation of the United States for centuries to come. It can also be said that President Harry S. Truman, besides lying to the American people about the whole sordid affair (see official quotes above), has left behind him a terrible moral legacy of incalculable consequences to future generations of Americans.

Many self-serving reasons have been advanced for justifying Truman’s decision, such as the objective of saving the lives of American soldiers by shortening the war in the Pacific and avoiding a military invasion of Japan with a quick Japanese surrender. That surrender came on August 15, 1945 and it was made official on September 2 with the signing of the Japanese Instrument of Surrender, nearly one month after the bombing of the cities of Hiroshima and Nagasaki. Nazi Germany had capitulated on May 8, 1945 and World War II was already over in Europe. There was also the diplomatic fear that the Soviet Red Army could have invaded Japan, as they had done in Berlin, thus depriving the United States of a hard fought clear-cut victory against Japan.

But by the end of July 1945, according to military experts, the Japanese military apparatus had de facto been defeated. It is also true that the militarist Japanese Supreme Council for the Direction of the War was stalling with the aim of getting better capitulation terms hoping for a negotiated settlement, especially regarding the future role of their Emperor Hirohito as formal head of state.

In Europe, the allies had caused a recalcitrant Nazi Germany to accept an unconditional surrender and there were other military means to force the Japanese government to surrender. The convenient pretext of rushing a surrender carries no weight compared to the enormity of using the nuclear weapon on two civilian targets. And even if President Truman was anxious to demonstrate the power of the atom bomb and impress his Soviet friends—and possibly also assert himself as a political figure vis-à-vis previous President Franklin D. Roosevelt, who had died a few months earlier, on April 12, 1945—this could have been done while targeting remote Japanese military targets, not on targeting entire cities. It seems that there were no moral considerations in this most inhuman decision.

Since that fateful month of August 1945, humanity has embarked upon a disastrous nuclear arms race and is rushing toward oblivion with its eyes open and its mind closed.

A State divided into a small number of rich and a large number of poor will always develop a government manipulated by the rich to protect the amenities represented by their property.

– Harold Laski (1893-1950), British political theorist, 1930

Money becomes evil not when it is used to buy goods but when it is used to buy power… economic inequalities become evil when they are translated into political inequalities.

– Samuel Huntington (1927-2008), political scientist

… if financial markets are skittish and don’t have confidence in a country’s fiscal soundness, that is also going to undermine our recovery.

– President Barack Obama, June 25, 2010

Any intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius, and a lot of courage to move in the opposite direction.

– Albert Einstein (1879-1955) Physicist and Professor, Nobel Prize 1921

The bond market is telling us that there could be hard economic times ahead and that deflation, for the time being, is more of a threat than inflation. Leading indicators are also pointing to possible economic weakness ahead. -The Euro zone is being pulled apart by the economic asymmetry of its members, the less productive among them (Greece, Spain, Ireland, Portugal and Italy) being unable to keep pace with the very productive German economy. The U.S. money supply M3 is contracting. The Chinese bubble is dangerously approaching the bursting point. And, the deflation of debt all over the place threatens to plunge the world economy into a deflationary tailspin. —In this context, there is a good chance of a double-dip recession next year, in 2011.

Readers know where I stand on this issue. One year ago, on July 10, 2009, when everybody and his uncle was declaring the recession over and the return of business as usual, I wrote a piece announcing that my analysis was pointing out to ten years of economic hardship entitled “We are in the Midst of the Great Baby-Boomers Economic Stagnation of 2007-2017” [http://www.TheNewAmericanEmpire.com/tremblay=1113] I wrote then that “many observers think that ‘prosperity is around the corner’ and that this recession, like others since World War II, will end as soon as the stock market, as a leading indicator, recovers and people start spending again. This is a myopic view of the current economic big picture.”

Let us keep in mind that in May of 1930, President Herbert Hoover was also proclaiming that “the danger … is safely behind us.” This was ten years too early for such a declaration. Just as in the 1930s, the U.S. economy and many part of the world economy suffer from a debt overhang that usually takes at least ten years to correct. When overall debt is four times larger than the economy, as it is the case today and as it was close to being the case in the 1930s, a debt deflation becomes unavoidable.

Economic booms built on a mountain of debt, some of which is fraudulent and speculative debt, tend to end badly. The higher the debt mountain relative to the real economy, the more serious is the following economic meltdown. This is because an unsustainable debt level means that some of the investments and projects thus financed make no economic sense and no sufficient income can be forthcoming to service and repay the debts. The first consequence is excess capacity and falling asset prices. The second consequence is an unavoidable liquidation of debts and a debt deflation. The third consequence is economic stagnation.

The danger that accompanies a protracted period of debt-liquidation and debt deflation after a binge of over-indebtedness is well known in economics. In 1933, Yale economist Irving Fisher published his debt-deflation theory of economic depressions. The core of the theory is that over-indebtedness leads to deflation, which in turn leads to an economic contraction. Fisher summarizes the links between debt liquidation and economic contraction in nine interacting steps:

1- Debt liquidation leads to distress selling.
2- Contraction of deposit currency, as bank loans are paid off, and to a slowing down of the velocity of circulation of money.
3- A fall in the level of prices.
4- If the fall of prices is not interfered with by reflation or otherwise, this is followed by greater fall in the net worth of business, precipitating bankruptcies.
5- This leads to a like fall in profits.
6- A reduction in construction, output, trade and in employment of labor results.
7- Losses, bankruptcies and unemployment lead to pessimism and loss of confidence.
8- The result is hoarding and a contraction in bank credits, which contribute in slowing down even more the velocity of circulation of money.
9- The overall deflation causes a fall in the nominal or money interest rates accompanied by a rise in the real or commodity rates of interest as prices fall.

A similar self-reinforcing spiral-down of debt-deflation and economic contraction can be feared in the coming years as the level of debt to the economy goes from about four times the economy to a more manageable two times the economy. In other words, it should not take more than $1.50 or $2 of new debt and credit to generate one dollar of new output. When it takes more debt than that to generate new production, this is an indication that the economy is becoming over-leveraged with debt.

Judging by the pronouncements made by leaders at the recent G8 and G20 meetings in June, and their collective commitment to cut governments’ deficits in half by 2013, I don’t think that politicians fully understand the danger presently facing the world economy. In fact, any new shock hitting the world economy, economic or political, risks accelerating the collapse of the debt house of cards, with dire consequences for production and employment.

Austerity fiscal measures may raise government efficiency, but they are not what will cushion the real effects of the debt deflation. Both reflationary monetary policies and overall stabilization policies are needed, especially in the banking sector, in order to make sure that producers and employers are not frozen out of new bank credit.

This confrontation [between the forces of the Apocalypse and Israel] is willed by God, who wants to use this conflict to erase his people’s enemies before a New Age begins.

– U.S. President George W. Bush (in a 2003 conversation with French President Jacques Chirac)

Preventive war was an invention of [Adolf] Hitler. Frankly, I would not even listen to anyone seriously that came and talked about such a thing.

– Dwight D. Eisenhower

We don’t desire any nuclear proliferation in our region, and our policy is well known regardless of which country has such programs. For us it doesn’t matter whether it is Israel or Iran. I will call on the international community, which is so sensitive toward Iran, to pay attention to Israel, too.

– Recep Tayyip Erdogan, Turkey’s Prime Minister

Nothing in this Treaty shall be interpreted as affecting the inalienable right of all the Parties to the Treaty to develop research, production and use of nuclear energy for peaceful purposes without discrimination.

– The Nuclear Non-Proliferation Treaty (NPT)

By now, most everybody knows that the (2003-) Bush-Cheney Iraq War was based on fiction and on deception. There was no such thing as “weapons of mass destruction” in Iraq, the rationale for an illegal attack against that country. And Bush II and his accomplices knew that.

But incredibly, just as the Bush-Cheney administration did in order to launch a war against Iraq in 2003 by (falsely) alleging that Iraq had weapons of mass destruction, the Obama-Biden administration, in 2010, is arguing for unilateral sanctions against Iran and even beating the drums of war against Iran, alleging that its program to enrich uranium and operate nuclear power plants is posing an existential threat to Israel, to Europe and to the United States.

Besides being a blatant exaggeration, this is nevertheless most dangerous. Indeed, such an eventual military attack—which, by the way, would be illegal under international law—would also have dire economic consequences, because it would almost certainly result in the closing of the narrow Strait of Hormuz. Should we be reminded that it is through this strait that roughly 40 percent of all world traded oil transits out of the Persian Gulf to the Arabian Sea. Its closing would push the international oil price to unheard of levels.

Therefore, if the pro-Israel lobby and the pro-war neocon press were to succeed in 2010-11 in triggering a hot war against Iran, as they did in 2002-03 against Iraq, this could easily turn the current festering financial crisis into a full-fledged worldwide economic depression. Believe me, the last thing the world economy needs now is an oil-shock that would derail the present feeble economic recovery.

But the most disconcerting of all is no doubt the implicit threat recently made by President Barack Obama, on Tuesday, April 6, 2010, to launch a nuclear attack against Iran and North Korea if these countries refuse to toe Washington’s line. That sort of loose language is most dangerous because it may serve to trivialize the military use of nuclear weapons, a disaster that the world must avoid. The round of pronouncements demonizing Iran and the incessant calls for sanctions against a sovereign country by other U.S. politicians is also most unproductive, even though that may make for good domestic politics.

This is of course in addition to the use of unmanned drones to drop bombs on civilians in Pakistan and other American death squad activities in Afghanistan that the Obama administration has intensified since gaining power. There seems to be a pattern here: No law or moral decency seem to be taken into consideration when such decisions, most likely illegal, are taken, no matter who is in power in Washington D.C.

It is true that Iran’s domestic politics is not without reproach. This is a country that is run by a mixture of democratic and theocratic rules. However, compared to fundamentalist Islamic Saudi Arabia, Iran is somewhat more democratic and less oppressive of women, even though it does not satisfy all the Western criteria to be a true democratic state. But we don’t declare war on a country because we don’t like its domestic politics. That’s not what the U.N. Charter or the Nuremberg Charter, says.

Logic would have it that all the nuclear countries in that part of the world (Israel, Pakistan, India,) sign the Nuclear Non-Proliferation Treaty (NPT), just as Iran has done, because an accidental, or worse, an intentional or provoked, use of nuclear weapons is the greatest threat to the region and to the world. In the long-run, however, the world needs a new and expanded nuclear non-proliferation treaty (NPT) to prevent nuclear war but, at the same time, to make sure that no country is denied access to nuclear energy that can enhance its economic development. Every country in the world has a right to enrich uranium and operate nuclear power plants.

It is well enough that people … do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.
– Henry Ford, American industrialist

It seems to me that Europe, especially with the addition of more countries, is becoming ever-more susceptible to any asymmetric shock. Sooner or later, when the global economy hits a real bump, Europe’s internal contradictions will tear it apart.
– Milton Friedman, American economist

The normal functioning of our economy leads to financial trauma and crises, inflation, currency depreciations, unemployment and poverty in the middle of what could be virtually universal affluence-in short … financially complex capitalism is inherently flawed.
– Hyman Minsky, American economist

I have spent some fifty years studying economic cycles and teaching international finance, but I had never seen the likes of what we witnessed and experienced over the last three years. That’s because such financial crises seem to happen 60 to 75 years apart.

It is a fact that the outbreak of this severe worldwide financial crisis two years ago was a surprise to many people. For instance, it was widely thought that financial crises, and the severe economic recessions and sometimes depressions they provoked, were really a thing of the past thanks to the protective net of financial regulations that was designed in the 1930s to prevent a repeat of such financial collapses.

But here we are again, mired in the most severe economic crisis since the 1930s. We may ask why?

The main reason is that the U.S economy, but also most of the world economy, has been subjected to a financial experiment, over the last some 10 years, which has turned sour. In fact, it has turned into a financial fiasco.

Indeed, it must be understood that a completely new type of banking finance was invented; but all the risks involved had not been properly assessed. For a while, the debt pyramid was allowed to grow, but it collapsed when its shaky and unsound foundation disintegrated.

Of course, there have been similar financial collapses in the past, (notably in 1873, in 1907 and in 1931) and the overall cause is always the same: the financial sector takes too much risk and becomes overextended, creating in the process a debt load for the economy that is unsustainable.

Let’s consider a striking fact of today financial situation: The debt load imposed on the economy is even higher today than it was in the 1930s when total total debt reached the level of some 300% of the annual production or GDP.

Well, today, the ratio of total debt to the U.S. Gross Domestic Product (GDP) is close to 400 percent.

Keep in mind that it took nearly 20 years to bring this ratio down to about 140, in 1952.

What this means is that today it takes about $4.00 of debt to create one dollar of economic activity while it took only $1.40 of debt in the early 1950s to create one dollar of GDP activity. This shows how complex the financial system has become. The question that remains to be answered is whether it will take 20 years to lower the debt ratio from 400% to, say, 200%!

This all shows how this can be devastating for the real economy when financial flows are disrupted and when credit becomes difficult to obtain.

Sadly, this is our situation today: Investors and producers have a lot of problems financing their new investment projects. This is a big monkey on the back of the economy and it is an important cause of current, and possibly future, economic stagnation.

But before looking into the future, let’s review quickly the main reasons why financial crises arise. Why, in other words, the financial tail is sometime allowed to wag the economic dog.

1. First, the question of deregulation. Too much optimism, overconfidence or simple naiveté sometimes allow the development of some form of risky Ponzi-scheme finance. And, this is pretty much what we have seen over the last 10 years.

Under the old traditional financial rules, a bank or a credit union would collect deposits or borrow in the open market, lend this money to investors, keep reserves for contingencies, and would hold onto the loans until maturity.

For big banks, at least, this is no longer the model. With the merging of investment banking and commercial banking after 1999, traditional financial rules were pushed aside and they were replaced with the rules of asset securitization, through which large banks ceased being banks to become brokers, that is they ceased being lenders to become sellers of sophisticated new securities. More about that later.

Under these new rules, a bank still accepts deposits or borrows in the open market, but it does not hold on to the loans it makes. Rather, it takes a bunch of heterogeneous loans made by itself or by others, repackages and slices them up, and sells them as investment vehicles to third parties. That’s what is called the “securitization” process; it is a sort of sausage machine that takes one type of securities at one end and transforms it into another type of securities, a more risky one, at the other end. Large Banks have become large financial sausage makers!

In other words, the financial chain has been made longer, much longer; but, as with all chains, its overall strength is not better than the strength of its weakest link. And the new financial products turned out to be the weakest links. They were toxic financial products.

2. Why were such new banking rules adopted? Why were they so risky and dangerous? And how did they lead to the near complete collapse of the credit system in the fall of 2008? These are fundamental questions.

And, as for most questions, there are short answers and there are long answers.

I have four short answers:

– First, they were very profitable to the mega-banks for a while because the banks raked in large fees on the new financial products.

– Second, the politicians were persuaded to let them “innovate” with the new leverage finance by removing most regulation that would have prevented the banks from doing what they were doing.

— Third, it led to irresponsible lending because the lenders were no longer risking their own money but the money of far away investors.

– And, fourth, the moral dimension cannot be neglected. Indeed, it took a lot of corruption and a lot of greed to create such a mammoth crisis. (Greed was even glorified in the 1987 movie Wall St. in which Michael Douglas—playing the character of financier Gordon Gekko—says: “Greed is good, Greed is right. Greed Works.” This was the prevailing ideology at the time.)

[This is an issue that I explain more fully in my new book The Code for Global Ethics.]

For a financial crisis of this magnitude to occur, it takes two kinds of corruption or fraud. (I don’t delve here into the kind of intellectual corruption that supported the ideology that markets can do no wrong or that they are always “efficient”. In fact, markets are very imperfect; they are often under the control of monopolies or cartels, and sometimes, they do not function at all.)

In the first place, politicians have either to make mistakes or worse, to be in the banks’ pockets and do what people with money (who want more money) tell them what to do.

For instance, as far back as 1977, the Carter administration and the U.S. Congress prepared the ground for the future crisis: It passed the Community Reinvestment Act, by which the Federal Housing Administration loosened down-payment standards for marginal borrowers. Twenty-five years later, in 2003, President George W. Bush also signed “The American Dream Downpayment Act” into law. This reinforced the pressure on large banks to provide subprime mortgages to needy borrowers incapable of making down payments.

The public financial deregulation stampede that took place between 1999 and 2007 was therefore an extension of this philosophy that special lending rules could and should apply to housing finance.

The string of specific financial deregulation steps taken by the politicians that have paved the way for the current era of irresponsible Ponzi-scheme finance and casino-like leverage banking practices is very long, and I don’t want to burden you with too many details.

As a reminder, however, here are the most important ones:

1. In 1999, the Clinton administration and the Republican-dominated U. S. Congress passed the Gramm-Leach-Bliley Act (GLBA) that, in effect, abolished most of the 1933 Glass-Steagall Act. In the past, that law had prevented the unregulated investment banking from merging with the regulated and government-insured commercial banking sector.

2. Then, in 2000, the U. S. reintroduced legalized gambling into the financial sector, a prohibition that had been in place since after the 1907 financial crisis, when President Theodore Roosevelt (1858-1919) was in office. It adopted the Commodity Futures Modernization Act of 2000, which specifically exempted financial gambling from state gaming laws. This move paved the way for inventing new risky financial instruments.

3. In 2004, the Securities and Exchange Commission (SEC) removed the ceiling on the level of risk that the largest American investment banks (Goldman Sachs, Morgan Stanley, Lehman Brothers, Merrill Lynch, Bear Stearns) could take on so-called securitized loans and their hedge fund operations.

4. In 2005, bankruptcy laws were changed in the United States at the request of the banking industry. This made it more difficult for federal bankruptcy judges to restructure mortgages before resorting to foreclosures, under Chapter 7 of the U.S. bankruptcy code. (N.B.: According to the Center for Responsive Politics, the banking industry spent over $100 million in lobbying efforts to have bill S-256 passed.)

5. Finally, in July 2007, only weeks before the subprime financial crisis went into full gear the SEC removed the “uptick” rule for short selling stocks in a panic. (The President of CITI Group, Mr. Vikram Pandit, testified before the Congressional Oversight Committee that short-sellers played a big role in bringing his bank, the largest in the world, close to bankruptcy.)

3. The second type of irresponsibility, and even of fraud, was the one that bankers themselves committed.

First, they embraced subprime lending, by selling adjustable-rate (ARMs), or interest-only or even negative-amortization subprime mortgages, with minimal or no down payments, to borrowers they knew could not pay them back if anything went wrong.

Today, about eight million foreclosures have already taken place. And it is expected that in 2010-11, the number of foreclosure filings could rise to another 3.5 to 4 million.

Why were banks irresponsible in their lending? Essentially, besides willing to please the politicians, it’s because they thought they were not at risk for their own irresponsibility. Indeed, with the new practice of financial securitization, banks were not worried by the possible insolvency of borrowers, because they knew they could sell those risky subprime mortgages to other banks which ultimately sold them down-stream as some commercial-like paper to unaware investors. It was a form of “pass-the-buck” lending.

In the end, many of the primary and secondary mortgage lenders such as Countrywide Financial, Washington Mutual, IndyMac, and ultimately Bear Stearns and even Wachovia, collapsed. And the two largest players in the U. S. mortgage market Fannie Mae and Freddie Mac, as insurers and secondary mortgage lenders, came very near to total collapse before the U.S government came to their rescue and invested $400 billion in them.

4. A few more words about the main culprit products in this fiasco, the famous or rather infamous so-called “credit derivatives”, that disintegrated in the fall of 2008. Those were the weak links in the financial chain. And that’s where I will limit my comments.

Credit derivatives come in acronyms like an alphabet soup, but the most basic ones are:

– The synthetic subprime collateralized debt obligations (CDOs), (or slices or tranches of amalgamated pools of subprime loans based on mostly interest-only second-handed mortgages, but also on other types of debts, such as credit card debts). CDOs are basically illiquid financial products because they usually can be bought or sold only through the entity that created them.

– And, the Credit Default Swaps. CDSs are insurance credit protection contracts offering protection against default on the interest or principal payments of a loan.

More than one trillion and a half dollars ($1 500 000 000 000) of these asset-backed financial products were sold, not only in the U.S., but all over the world.

The problem was those who sold this type of financial insurance—large investment banks and above all the largest insurance company in the world, American International Group (AIG)—were not regulated and kept very little reserves behind it.

Creating CDOs (i.e., packaging different debts together) was very profitable for banks, for some insurance companies that insured them by issuing CDSs, while holding very little reserves, and for the credit agencies (Moody’s, Standard & Poor’s and Fitch) that rated them.

But CDSs are very dangerous products.

First, although they are really insurance contracts, they are not typically written by insurance companies but by financial firms or subsidiaries. This means that they are not regulated under insurance laws, state or federal.

Second, one does not need to have an insurable interest to purchase CDS insurance. (For example, it is not allowed to buy life insurance on a person with whom the buyer is not closely related. The same for a fire insurance policy on a home; one must be an owner to qualify).

But with CDSs, one may be an outsider, that is a speculator or a hedger, who has nothing to insure but is only interested in holding the CDS contract for financial gain. As a consequence, the total amount of CDS contracts issued can be much larger than the value of the insured security, four or five times larger. At that point, CDSs become casino chips whose ultimate value is only backed only by the issuer. And this has consequences. In fact, the invention of CDSs has made the debt default crisis much worse by artificially maintaining the value of debts at a high level, thus creating bankruptcies all around. It is as if a system of fire insurance had resulted in increasing the insidence of fire. This is an example of a very dangerous and bad financial innovation.

Essentially, the CDS (credit default swap) market is an opaque and thinly traded over-the-counter market that is easily open to manipulation. At any moment in time, nobody really knows who owns or owes what to everybody else. Speculators buy those CDSs as if they were put options on the underlying bonds. When their prices go up, the price of the underlying bonds goes down, and a financial crisis ensues for the bond-issuing company or government. Together, CDOs and CDSs can make for a very toxic cocktail. This is a clear case where the speculative financial tail moves everything else. Speculators are in control.

In fact, let me say that this is what drove General Motors into bankruptcy. Speculators killed General Motors, not the recession and low car sales. GM could have survived the recession as it had in the past. But this time, there were the CDSs.

Why is this so? Essentially because banks had transformed normal GM bonds into collateralized debt obligations (CDOs) by merging them with other debts, and because these bonds had been insured against default with CDSs issued mainly by the Financial Products unit of the large insurance company American International Group (AIG). Speculators bought these CDSs on the hope that the underlying CDOs that incorporated GM bonds would fall if GM were to fail. In essence, the speculators were betting that GM would fail and they were helping it to fail at the same time by selling short the very CDOs that incorporated GM debt while buying on leverage the CDSs on those CDOs.

When GM ran into financial troubles due to the recession and a drop in car sales, the value of GM bonds should have declined, allowing GM to buy them back at a lowered discount and enabling it to reduce its debt load and survive. But this time, thanks to the new securitization finance, more appropriately called “Ponzi-scheme finance”, an imprudent and possibly criminal type of finance in my opinion, things did not work out that way. GM’s debts had been placed in packaged CDOs that were impossible to untangled, just as individual housing mortgages had been merged and packaged in sausage-like mortgage CDOs that could not be untangled if something were to go wrong.

CDS holders against CDO-GM bonds, both legitimate and gambling speculators, were insured against losses by AIG. And, as I will explain later, the Bush-Paulson administration guaranteed the value of all CDSs issued by AIG against CDO bonds, so the value of those bonds could not decline as they should have, and as they have in the past during an economic downturn. Besides, there is no open market for those CDOs, so nobody could know their real value.

This is what forced General Motors to file for bankruptcy. This is the same cause that provoked eight million plus home foreclosures in the U.S. while there are much fewer foreclosures in Canada. (For example, in the first quarter of 2008, 1.6 per cent of mortgages issued by Canada’s top three sub-prime lenders were behind by at least three months. The equivalent rate was about 16 per cent in the U.S. As a consequence, house prices in Canada have been stable or rising.) In this light, the GM bankruptcy was less a normal bankruptcy than a financial assassination.

Please note that by salvaging General Motors, the U.S. government paid twice: It paid in full the banks and the speculators who held CDSs on CDO-GM bonds; and it later paid to keep GM operating.

Mind you, the same thing that the new securitization finance did to U.S. homeowners and to GM is being done these days to Greece. Greece’s government debt has been transformed into derivative products, insured with CDSs. Speculators are buying those Greek CDSs in the hope that the government of Greece will default on its debt. This is the main reason behind the drop in the euro and of pound sterling in the last few weeks. There is a fear of a domino effect, with many European countries to default if speculators begin attacking one country after another. This could even bring down the euro monetary union.

This is a crazy and immoral system. The plot thickens even more with the rumor that AIG has been a major issuer of Greek CDSs. If this were true, this would mean that the U.S. taxpayers are paying for AIG’s losses on Greek CDSs with U.S. bail-out funds, thus financing the possible collapse of the euro monetary zone! This cannot be allowed to go on. There should be an international conference to stop that madness.

This the reason I wrote on my international blog that the international financial system has been transformed nowadays into a gigantic unregulated Casino that allows all types of Ponzi schemes to go on.

5. You all know that the U. S. government, following the ideology of “too-big-to-fail” for the large banks or the large insurers, has rescued the biggest among them.

It poured trillions of dollars into AIG, Fannie Mae and Freddie Mac and the five or six largest Wall St. Banks, essentially by buying their toxic assets at full price and by underwriting their gambling losses. With this massive recapitalization of the large banks through government subsidy, the crisis has somewhat subdued, for the time being.

In the meantime, however, the larger banks have become even larger, the bonuses received by their CEOs are still in the tens of millions, their huge pensions are intact, but bank loans to the economy have declined. The biggest winners of the financial crisis are precisely those who created it. This is truly something that historians will have to explain to future generations.

(Without a doubt, the single bank that profited the most from the overall public rescue program was Lloyd Blankfein’s Goldman Sachs, a bank that Secretary Henry (Hank) Paulson led until he became Treasury Secretary in 2006. It can also be said that Treasury Secretary Henry Paulson and his deputy, investment banker Neel Kashkari, were in a mammoth financial conflict of interest when they engineered the banking bailout program, especially as $180 billion was pumped into AIG in order to pay out in full the gambling bets made by Goldman Sachs, their previous employer, and other speculators. It was a bailout of Wall Street by Wall Street while in control of the U.S. government. )

Meanwhile, and because of this bailout money, the largest American banks are getting larger. For example, in 2006, the combined assets of the U.S. six biggest banks (Citigroup, JPMorgan Chase, Bank of America, Wells Fargo, Goldman Sachs, and JP Morgan) totaled 55 percent of U.S. GDP. In 2010, this ratio stands at 63 percent (it was only 17 percent of GDP in 1995).

Consider also another measure: In 2007, the four largest U.S. banks (Citigroup, JPMorgan Chase, Bank of America and Wells Fargo) held 32 percent of all deposits in FDIC-insured institutions. As of June 30, 2009, it was 39 percent.

Therefore, since the banking structural problems have not been solved but rather made worse, the crisis could flare up again anytime, either here, as a lot of commercial loans (office buildings, malls, hotels… et.) are on the brink of default and will likely default in the coming years, or elsewhere, with many European governments having their own subprime crisis and being attacked by CDS gamblers.

I want to be clear here. It would have been better if the problem had been avoided with more prudent government policies and banking practices. However, in the fall of 2008, the U.S. government had a responsibility, especially after the failure of Lehman Brothers on September 15, 2008, to stabilize the financial system and to avoid a deeper and wider financial crisis. After all, it was a series of government policies and deregulation steps that paved the way to the housing bubble and to the meltdown, to the emergence of risky financial products and to the resulting financial crisis.

It is how this was done that borders on the scandalous, if it was not outright fraud in some cases, not the goal itself of averting the financial crisis from spiraling out of control. For example, there was no need to pay billions of dollars to banks and speculators at 100 cents on the dollar for toxic and illiquid securities that were worth much, much less.

Presently, I think that we are in the eye of the hurricane regarding financial problems. I see five additional economic threats for the near and not so near future:

• A major sovereign debt crisis in many parts of the world, especially in southern Europe;

• A major commercial debt crisis and small bank crisis in the United States;

• The historical high level of income inequality in the United States and elsewhere;

• The aging of the population in the United States and elsewhere and a concomitant slowdown in private consumption.

• The over-heating Chinese economy, its undervalued currency and a possible financial crisis in that country.

These factors and the ongoing difficulty in obtaining credit for investment will exert a drag on the economy over the coming years.

Indeed, history teaches us that a serious structural worldwide financial crisis sooner or later results in sovereign debt defaults by some countries. This has happened in 1833-37, 1870-90, 1932-1945, and it is to be expected that the number of countries that will renege on their foreign debt will increase in the coming years. A global debt bomb is hanging over Europe and other parts of the world. The euro zone itself may not survive the coming crisis. And, I would not exclude some U. S. states from this default scenario, not even the U. S. federal government, with its trillion + dollar deficits, fiscal deficits for as long as we can see, even though it has the power to print dollars which are still accepted around the world. That is the reason why I expect the other financial shoe to drop in 2011-13. A major financial crisis, a major U.S dollar crisis (and the concomitant rise in the price of gold) and major bond and stock market crashes have a good chance to unfold in that time period.

6. Conclusions

It seems to me that the U.S. financial system, and even the world financial system, have to be profoundly reformed, if they are to serve the real economy, rather than the contrary. If such a reform does not come about, however, I am afraid that we have entered a period of economic difficulties that may last many, many years. In fact, I think that the world economy stands today at the edge of a large precipice.

What type of reform? First and for all, the packaging of different debts in impossible to untangle CDOs should be outlawed. These products are financial time-bombs waiting to explode for the real economy, not only in the United States, but around the world. Second, CDS insurance products should be issued only against insurable securities and not issued as casino chips in values much larger than the value of the insured securities (i.e., no so-called naked CDSs). In order words, the entire innovation of securitization finance has to be reviewed and reigned in before it does further damage. These two reforms could be implemented immediately if politicians really understood the problems or if they were not in the banks’ pockets.

However, if the U.S. Congress feels that this is too big a problem to tackle on its own, for different reasons, my third recommendation would be for the Obama administration and the EU to call for an international finance conference, preferably a G-20 conference, to have coordinated actions and have legislation implemented to that effect.

So far, the steps taken to study the problem and to reform the system have been slow in coming and very timid. For example, House Speaker Nancy Pelosi intends to create a congressional panel (rather than an outside commission of inquiry) to investigate the causes of the US 2007-09 financial crisis. This would seem to me to be an inadequate and insufficient response to a crisis of this magnitude and severity.

Fourth, for the longer run, and regarding the toxic financial products that precipitated the crisis, one wonders why new medication pills or drugs have to be approved by the U.S. Food and Drug Administration (FDA) in order to make sure that they do not hurt the human body, while no similar requirements of the sort exist for new financial products to make sure that they are not going to be very harmful to the real economy.

There seems to be two different standards applied here. I personally think that there is a need for a Financial Products Administration (FPA) in order to make sure that possibly toxic financial products are not made available to the public before having been fully tested for their absence of toxicity. It should be mandatory that risky financial products be tested and approved before being sold to the public.

And fifth and last, as to deposit-taking banks and investment banks, I happen to believe that the Glass-Steagal law should be brought back in full. It was a wise and prudent law that stabilized financial markets for three quarters of a century. Its near complete elimination in 1999 opened the floodgates of irresponsible financial gambling that nearly brought down the demise of the entire U.S. economy. I do not think the contemplated “Volcker rule” to prevent banks from operating their own hedge funds goes far enough, considering the magnitude of the problem.

— I was amazed when the Glass-Steagal act was de facto repealed in 1999, and I am still amazed that the very economist who was most instrumental in that repeal is currently President Obama’s principal economic adviser (Larry Summers).

— As a general principle, it should be reaffirmed that finance is there to serve the needs of the real economy, and not the reverse.

— Finally, I would say that in economics, as in medicine, it is never too late to do the right thing. But if you don’t, the disease may become progressively worse and it may become irreversible. I think that is where we stand today regarding the necessity to reform the financial system.

When plunder becomes a way of life for a group of men living together in society, they create for themselves, in the course of time, a legal system that authorizes it and a moral code that glorifies it.
– Frederic Bastiat (1801-1850), French economist

Certain hierarchs of the Catholic Church in Latin America used prayer as an anesthesia to put the people to sleep. When they cannot dominate us with law, then comes prayer, and when they can’t humiliate or dominate us with prayer, then comes the gun.
– Evo Morales, President of Bolivia (July 13, 2009)

The single most important quality needed to resist evil is moral autonomy. Moral autonomy is possible only through reflection, self-determination and the courage not to cooperate.
– Immanuel Kant (1724-1804) German philosopher

Why do political leaders seem to be lying most of the time? Why is uncontrolled greed so prevalent in corporate rooms? Why do wicked men wage wars of aggression and become indifferent to the killing of innocent people? Why does materialism seem to trump everything else? Why do we have the uneasy feeling that our society is going in the wrong direction? The very fact that we have to raise such questions may be a sign of the times.

Indeed, when the stench of moral decay becomes overwhelming, bad things inevitably follow. Historically, it can be shown that when the moral environment in a society is deteriorating, problems tend to pile up.

We are presently living in one of those times, characterized by deep and entrenched political corruption, by routine abuse of power and disregard for the rule of law in high places, and by unchecked greed, fraud and deception in the economic sphere. The results are all there to see: Severe and prolonged economic and financial crises, rising social inequalities and social injustice, increasing intolerance toward individual choices, the disregard for environmental decay, the rise of religious absolutism, a return to whimsical wars of aggression (or of pre-emptive wars), to blind terrorism and to the repugnant use of torture, and even to genocide and to blatant war crimes. These are all indicators that our civilization has lost its moral compass.

With all these throwbacks to an unpalatable past, it is not surprising there is a resurgence of interest nowadays for questions of morality and of ethics.

The contradiction between modern problems, new scientific knowledge and the inadequacy of our prevalent source of morality or of ethics, which are mainly religion-based, has led a humanist like me to write a book, The Code for GLOBAL ETHICS, Ten Humanist Principles, [ISBN: 978-1616141721] prefaced by Dr. Paul Kurtz and published this year by Prometheus Books. The book is a down-to-earth discussion of ten basic humanist principles for our new global context.

Why such a renewed interest in the moral dimension of things? —First, partly because many of our problems and threats are not only severe but they have also become global in nature. —Second, the fact that we seem to be unable to solve our global problems might also be because our scientific and technological progress is advancing much faster than our moral progress, with the consequence that problems arise faster than our moral ability to face them and to solve them. —And third, this is also partly due to the fact that the old religion-based rules of morality are of little help in solving these new problems, basically because they belong to the past and because, unfortunately, they have not incorporated new scientific knowledge.

Indeed, humans’ vision of themselves in the Universe has been forever altered by three fundamental scientific breakthroughs:

• Galileo’s proof, in 1632, that the Earth and humans were not the center of the Universe, as suppposed holy books have proclaimed.
• Darwin’s discovery, in 1859, (On the Origin of Species) that humans are not some god-like creatures unique among all species, destined to live forever, but are rather the outcome of a very long natural biological evolution.
• And, the Watson-Crick-Wilkins-Franklin’s discovery, in 1953, of the structure of the double helix DNA molecule (Deoxyribo Nucleic Acid) in each of the 46 chromosomes in human cells, and the devastating knowledge that humans share more than 95 percent of the same genes with chimpanzees.

I would add, also, that ongoing research about how the human brain functions has cast new light on how some phenomena, such as different thoughts, including religious thoughts, are generated in different zones of the brain.

Therefore, nobody can claim anymore that the Earth is the center of the Universe; nobody can claim that humans are unique in the scale of things; and nobody can claim that the human body and the human mind are two unrelated entities. This knowledge has tremendous consequences for our moral stance.

My best hope is that we will avoid falling back into an age of obscurantism and of decadence, and that we will be able to build a truly humanist civilization for the future.

The price of apathy towards public affairs is to be ruled by evil men.
– Plato, ancient Greek philosopher

…The 20th century has been characterized by three developments of great political importance: The growth of democracy, the growth of corporate power, and the growth of corporate propaganda as a means of protecting corporate power against democracy.
– Alex Carey, Australian social scientist

The most effective way to restrict democracy is to transfer decision-making from the public arena to unaccountable institutions: kings and princes, priestly castes, military juntas, party dictatorships, or modern corporations.
– Noam Chomsky, M.I.T. emeritus Professor of Linguistics

On Tuesday, January 19 (2010), the Obama administration got a kick in the pants from the Massachusetts voters when they filled former Senator Ted Kennedy’s seat by electing a conservative Republican candidate. The essence of their message was: stop dithering and start governing; stop trying to satisfy the bankers and please the editors of Rupert Murdoch’s Wall Street Journal, and start caring for the ordinary people.

Two days later, President Barack Obama seemed to have understood the people’s message when he announced a “Volcker rule” that will forbid large banks from owning hedge funds that make money by placing large bets against their own clients, using information that these same clients gave them. It was about time. Such a policy should have been announced months ago, if not years ago.

On the same day, however, a nonelected body, the U.S. Supreme Court, threw a different challenge to the Obama administration. Indeed, on Thursday January 21 (2010), a Republican-appointed majority on the U.S. Supreme Court took it upon itself to profoundly change the U.S. Constitution and American democracy. Indeed, in what can be labeled a most reactionary decision, the Roberts U.S. Supreme Court, ruled that legal entities, such as corporations and labor unions, have the same purely personal rights to free speech as living individuals. Indeed, the First Amendment of the U.S. Constitution says “Congress shall make no law … abridging the freedom of speech.

The only problem with such a wide interpretation of the U.S. Bills of Rights (N.B.: The first ten amendments to the United States Constitution are known as the Bill of Rights) is that this runs contrary its letter and its spirit, since it clearly states later on that “the enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people, and reserves all powers not granted to the federal government to the citizenry or States.” The words “people” and “citizenry” clearly refer here to living human beings, not to legal or artificial entities such as business corporations, labor unions, financial organizations or political lobbies.

Such entities, for example, cannot vote in an election. Indeed, laws governing voting rights in the United States clearly establish that only “Adult citizens of the United States who are residents of one of the 50 states have the right to participate fully in the political system of the United States”. No mention is made of corporations or other legal entities.

However, with its January 19 (2010) decision, the majority on the Roberts U.S. Supreme Court is saying in effect that even if artificial entities cannot vote in an election, they can spend as much money as they like to influence the outcome of an election. Money is speech for them, and the more a legal entity has of it, the more it has a right to become powerful politically and control the political agenda.

In fact, what Chief Justice Roberts and his conservative Supreme Court majority have done is to overcome a century-old democratic tradition in the United States in granting a constitutional right to business corporations and to banks, (because they are really the ones with a lot of money), to use their enormous resources to not only participate in debates about public issues, but also, and above all, to de facto dictate the election of candidates of their choice to public office.

That’s plutocracy, not democracy!

Plutocracy is defined as a political system characterized by “the rule by the wealthy, or power provided by wealth.” Democracy, on the other hand, is defined as a political system where political power belongs to the people. This means “a political government either carried out directly by the people (direct democracy) or by means of elected representatives of the people (representative democracy). The terms “the power to the people” are derived from the words “people” and “power” in Greek.

This fundamental idea of democracy was well summarized by President Abraham Lincoln, in his 1863 Gettysburg Address, when he said that it is “a government of the people, by the people and for the people.” This is a definition that is based on the basic democratic principle of equality among human beings.

But now, the Roberts Court’s decision must have made President Lincoln turn in his grave, because that decision, in effect, transfers political power from the living “people” to artificial corporate entities, with tons of money to spend. If Congress does not act quickly to reverse this decision, legal entities will be able to spend freely in the media to support or oppose political candidates for president and Congress, and this, as far as the last moment of a political campaign. This is quite something!

By a stroke of the pen, the Roberts Court has thus abolished the laws governing American electoral financing and removed limits to how much special money interests can spend to have the elected officials they want. The government they want will largely be “a government of the corporations, by the corporations, for the corporations.” Truly amazing!

To reflect the new political philosophy of the five-member majority of the Roberts Court, the Preamble of the U.S. Constitution that says “We the People of the United States, in order to form a more perfect Union…” should, maybe, more appropriately be changed for “We, the business corporations of America…”

It is that much more ironic that the word “corporation” appears nowhere in the U.S. Constitution or in the Bill of Rights. It is scarcely conceivable that the drafters of the Constitution had anything resembling corporate entities in mind when they drafted the Bill of Rights. But the Roberts Court majority does not seem to agree with Washington, Jefferson, Franklin, Madison, Mason…etc. Because of their decision, the five conservative members of the U. S. Supreme Court of today have become the new Fathers of the U. S. Constitution.

For nearly a century, it has been assumed that the U.S. Bill of Rights protected persons, not corporations. Even if sometimes the courts have extended the rights of the14th Amendment banning the deprivation of property without due process or equal protection of the law to the property of corporations, it was never thought that the purely personal rights of the first Amendment of the Bill of Rights applied to corporate entities as well as to human beings. This is understandable. Business corporations are created through legislation that gives them potentially perpetual life and limited liability to enhance their efficiency as economic entities. While such characteristics can be beneficial in the economic sphere, they represent special dangers in the political sphere. That is the rationale for not extending constitutional rights to purely legal entities.

But now, the five-member majority of the Roberts Court have said that such legalized artificial entities have the same constitutionally protected rights to engage in political activities as living individuals.

This is clearly revolutionary or, more precisely, counter-revolutionary.

I am as intolerant of imperialistic designs on the part of other nations as I was of such designs on the part of Germany. The choice is between two ideals; on the one hand, the ideal of democracy, which represents the rights of free peoples everywhere to govern themselves, and, the ideal of imperialism which seeks to dominate by force and unjust power, an ideal which is by no means dead and which is earnestly [sought] in many quarters still.
– U.S. President Woodrow Wilson, July 1919

Fight and kill the disbelievers wherever you find them, take them captive, harass them, lie in wait and ambush them using every stratagem of war.
– The Qur’an (9:5), Islam’s holy book

We are fighting them (the terrorists) over there so that we won’t have to fight them here at home.
– Former U.S. President George W. Bush’s political slogan

I, like any head of state, reserve the right to act unilaterally if necessary to defend my nation.
– U.S. President Barack Obama, December 10, 2009

When the tyrant has disposed of foreign enemies by conquest…and there is nothing to fear from them, then he is always stirring up some war.
– Plato, ancient Greek philosopher (428/427-348/347 B.C.)

In the political movie Charlie Wilson’s War about the Soviet-Afghanistan war, the hero states, “America does not fight religious wars.” Is this possibly wrong, dead wrong?

In fact, is it not possible that since September 11, 2001, a new type of “holy war” may have begun? This time, the new crusade with strong religious overtones pits fundamentalist Christian America and its allies, against political Islam and the Islamist al Qaeda terrorist organization. On September 16, 2001, then President George W. Bush set the tone when he said: “This crusade, this war on terrorism, is gonna take awhile.”

On December 1, 2009 Nobel “Peace” laureate Barack Obama, president of the United States since January 20, 2009, decided to follow in the footsteps of his predecessor, President George W. Bush. He announced a policy of stepping up the U.S.-led war in Afghanistan-Pashtunistan. He announced an escalation in the military occupation of Afghanistan by sending extra American troops in that Muslim country, putting the number of American soldiers in Afghanistan at more than 100,000. Not satisfied in using the same vocabulary as George W. Bush, Barack Obama pushed the symbolism by adopting Bush’s practice of announcing policies surrounded by more than 4,000 students dressed as soldiers at the West Point Academy. This was all too reminiscent of President Lyndon B. Johnson’s fatal decision in 1965 to acquiesce to the request from U.S. commanders to enlarge the Vietnam war by sending scores of additional U.S. soldiers to that Asiatic country.

America seems to be in a constant need of a foreign enemy. First, it was the British. Then it was the Indigenous peoples. Then it was the Mexicans. Then it was the Spanish. Then it was the Filipinos. Then it was the Japanese. Then it was the Germans. Then it was the Italians. Then it was the Koreans. Then it was the Cubans. Then it was the Vietnamese. Then it was the Soviets. Then it was the Iraqis. Then it was the Islamists. Then it was the Taliban. And, once the current conflict in Pashtunistan-Afghanistan-Pakistan is over, it will possibly be the Iranians, the Chinese, the Russians…etc.!

The reason for such a permanent-war mentality is most likely related to the U.S. military-industrial complex, an enormous beast that must be fed regularly hundreds and hundreds of billions of dollars, if not trillions of dollars, to sustain itself.

In the months following the collapse of the Soviet Union in December 1991, the high echelons at the Pentagon were busy designing a new post-cold-war strategy designed to keep the U.S. war machine humming. Paul Wolfowitz, then Undersecretary of Defense for Policy under Secretary of Defense Dick Cheney in the George H. Bush administration, wrote a memorandum titled “The Defense Policy Guidance 1992-1994”, which was dated February 18, 1992. The new so-called Wolfowitz Doctrine was a blueprint to “set the nation’s [military] direction for the next century.” This new neocon military doctrine called for the replacement of the policy of “containment” with one of military “preemption” and international “unilateralism”, in effect, discarding the United Nations Charter that forbids such international behavior.

The Pentagon’s overall goal was to establish, through military force, a “one-Superpower World”. The more immediate objectives of the new U.S. neocon doctrine was to “…preserve U.S. and Western access to the [Middle East and Southwest Asia] region’s oil”, and, as stated in an April 16, 1992 addendum, to contribute “to the security of Israel and to maintaining the qualitative edge that is critical to Israel’s security”.

Because of some opposition within the U.S. Government, the new policy did not become immediately effective. But the objective remained.

For instance, in September 2000, under the auspices of “The Project for the New American Century”, a new strategic document was issued and was entitled “Rebuilding America’s Defenses, Strategy: Forces and Resources For a New Century”. The same goals expressed in the 1992 document were reiterated.

The belief was expressed that the kind of military transformation the (neocon) planners were considering required “some catastrophic and catalyzing event — like a new Pearl Harbor”, to make it possible to sell the plan to the American public.

They were either very prescient or very lucky, because exactly one year later, they were served with the “New Pearl Harbor” they had been openly hoping for. Indeed, the Islamist terrorist attacks of Sept. 11, 2001, turned out to have been a bonanza for the American military-industrial complex. The military planners’ wish for a “New Pearl Harbor”, was fulfilled at the right time. It is important to remember that from 2001 to 2005, Paul Wolfowitz served as U.S. Deputy Secretary of Defense in the George W. Bush administration, reporting to U.S. Secretary of Defense Donald Rumsfeld. In this capacity, he was well positioned to implement his own Wolfowitz doctrine that later morphed into the George W. Bush Doctrine.

For the time being, this is the “doctrine” that newly-elected President Barack Obama continues to implement in the Pashtunistan-Afghanistan-Pakistan corridor. As a politician, Barack Obama may be new at the job, but the policy he is being asked to implement was crafted long before he even set foot in Washington D.C.

Another possible reason why the United States is so often involved in foreign wars, besides its obvious aim of imposing a New American Empire on the world, may be due to the strong influence of religion in the United States. Just as for some aggressive Islamic countries, the U.S. is also the most religious of all first world countries. Researchers have found strong positive correlations between a nation’s religious belief and high levels of domestic stress and anxiety, and other indicators of social dysfunction such as homicides, the proportion of people incarcerated, infant mortality, drug abuse, sexually transmitted diseases, teenage births and abortions, corruption, large income inequalities, economic and social insecurity…etc.

It is possible that wars serve as an emotional outlet that allows some Americans to forget about their nation’s domestic problems. I suppose more research would be necessary on this issue. Indeed, is it possible that foreign wars, including wars of aggression, are a way for the American elites to deflect attention from domestic social problems and, as such, are a convenient pretext to direct tax money to defense expenditures rather than to social programs? The issue deserves at least to be raised. This could explain why U.S. foreign policy is so devoid of fundamental morality.

U.S. politicians who become president understand this American proclivity for war. They know that the best way to popularity is to be seen as a “war president”. A president who does not start a war abroad or who does not enlarge one already in progress is open to criticism and is likely to suffer politically. He must be seen less as a president than as “commander-in-chief”, in effect, as an emperor. How could this be, when the framers of the U.S. Constitution attempted precisely to avoid that?

Indeed, Article One (the War Powers Clause) of the U.S. Constitution gives Congress, and not the President, the authority to declare war.

Since World War II, however, this central article of the U.S. Constitution has been circumvented by having Congress give the President a blanket authorization to deploy troops abroad for euphemistically called “police actions“, without an explicit or formal congressional declaration of war. The term was first used by President Harry S. Truman to describe the Korean War.

This artifice has done a lot to trivialize the act of war. It also contributed much in the transfer of the powers of war and peace from the legislative branch to the executive branch. In doing so, it has reinforced the role of the U.S. president as a commander-in-chief or as a de facto emperor. Only a formal constitutional amendment could restore, in practice, the framers’ initial intent.

All said, it is easy to understand why when political faces change in Washington D.C., policies do not necessarily change. This push toward empire on the part of the United States can also explain why there is resentment and an anti-Americanism movement abroad.

I don’t want to just end the [Iraq] war, but I want to end the mind-set that got us into war in the first place.
– Presidential candidate Barack Obama, January 31, 2008

Behind the ostensible government sits enthroned an invisible government owing no allegiance and acknowledging no responsibility to the people.
– Theodore Roosevelt (1882-1945), 26th US president

If we are strong, our character will speak for itself. If we are weak, words will be of no help.
– John F. Kennedy (1917-1963), 35th US President

If the Nuremberg laws were applied, then every post-war American president would have been hanged.
– Noam Chomsky, linguist and political expert

Barack H. Obama was a good presidential candidate but, so far, in crucial areas, he has been a somewhat disappointing president.

In November 2008, Democratic presidential candidate Barack H. Obama, and the first black American to have that chance, got to the U.S. presidency on the coattails of a despised Bush-Cheney administration. Indeed, it was a relief for a majority of Americans to have Senator Obama replace “facts-do-not-matter” George W. Bush as president of the United States. His Republican opponent, Sen. John McCain was little more than a Bush-retread. It was therefore unavoidable that such an election would generate big expectations that things would change for the better. As a matter of fact, candidate Obama’s electoral slogans were “Yes we can” and “change we can believe in”.

Because President Obama is America’s first black President, he is symbolically the culmination of Martin Luther King’s Civil Rights movement. Because of that, many have hesitated to criticize him or his administration. But his record, so far, speaks for itself. In two central areas, defense and the economy, his performance has been, at best, lackluster. In fact, Obama’s performance in these areas has betrayed a lot of highly held expectations.

He seems to have been ill prepared for such a big time job. It is true that the function of president of the United States, as the country becomes more and more a militaristic empire and less and less a democratic republic, is most demanding. Possibly, nobody can be qualified and prepared enough for such a challenge.

In Obama’s case, he was promoted from being a junior senator with a limited staff (one secretary and a few assistants), and no real administrative experience, to running the huge U.S. government with its three trillion dollar budget. And, moreover, he had not had the time or the wisdom to build around him a strong enough “brain-trust” to intellectually control the agenda. Rather the agenda seems to have been imposed upon him. It can be said that he asked for it when, after moving into office, his first move was to keep at their job key Bush appointees to implement the all-too-important defense and economic policies. As it is said in French “Plus ça change, plus c’est pareil” (The more things change, the more they remain the same!)

In Obama’s case, the disappointment is not only a question of poor performance due to a lack of depth, formation or experience. It is a question of promises not kept and of vision betrayed. The disappointment is palpable in polls. His job approval rating hovers around 50 percent (only 45 percent of adults), while only 43 percent of Americans say they would vote to reelect him, and 48 percent say they would vote for someone else. Obama’s performance has reinforced the cynicism and disillusion felt by many voters and their uneasy feeling that most politicians are either corrupt, incompetent, deceitful or hypocrites, or all of the above. In such an environment, it appears to many that voting has become a waste of time. Voter turnout in the U.S., already one of the lowest in the world, may take a turn for the worse if confidence is not restored soon. On that score, the 2010 turnout should be watched closely, especially among young disillusioned voters.

As far as foreign wars are concerned, Obama’s record is less than positive. Although there has been a timid beginning of troop withdrawals in Iraq—notwithstanding the promises—in Afghanistan, things have taken a turn for the worse. Indeed, President Obama has only made things worse in that remote part of the world, by accelerating the killing and by illegally upgrading the killing in Pakistan with the Pentagon’s drones. This is dangerous politics because this open-ended military adventure is all too reminiscent of the Vietnam quagmire that destroyed President Johnson, mired the last days of President Nixon’s term, and tarnished America’s reputation in the world.

Similarly in financial matters. Under Obama, the causes of the 2007-2009 financial crisis have not been clearly identified, let alone corrected or eradicated. Instead, they have been swept under the rug and covered with tax money bailouts and an orgy of newly created money. In fact, just as for defense, President Obama has delegated his economic and financial policies to the troika of Bernanke-Geithner-Summers, just as President Clinton had delegated the same responsibility to the troika of Greenspan-Rubin-Summers, and just as President G. W. Bush had done with the troika of Bernanke-Paulson-Geithner. We cannot help but detecting a pattern here.

It must be recorded that the Bernanke-Geithner-Summers team was deeply involved in the financial deregulation that led to the securization banking crisis and to the subprime mortgage crisis. When one considers the trillions of dollars in public money that have been used to camouflage the large N. Y. banks’ bad debts, it is obvious that the Obama administration has adopted the old political technique of pandering to the rich with the blind support of the poor. (N.B.: The top 23 Wall Street banks and financial firms are expected to hand out a record $140 billion in bonus compensation during this year of 2009—$10 billion more than the previous record year of 2007. It has since been announced that the seven largest bailed out banks may see their bonus plans scaled down, and the Obama admistration should get the benefit of the doubt for this small and possibly symbolic step toward public morality.)

Such practically unconditional bailouts of “too-big-to-fail” banks can be seen as some plush state socialism for the rich, coupled with harsh and unregulated market capitalism for the poor, saddled as they are with unlimited home foreclosures and personal bankruptcies.

The epicenter of the unprecedented banking salvage operation has been the Federal Reserve System, sort of a parallel government with the power to impose hidden taxes. Even more than the Treasury’s generous Troubled Asset Relief Program (TARP) of purchasing preferred equity in troubled banks, and other similar Treasury plans, the bulk of the banking bailouts came from the Federal Reserve system. The list of the Fed’s bailout programs is very long and very complicated and remains mostly off screen, because it is mostly camouflaged within a super-easy monetary policy.

The U.S. Fed is a sort of semi-private central bank that often caters to private banking interests at the expense of the public good. Many Americans realize that the Fed is as much a creator of financial crises as it is an instrument to fight them. In fact, the Fed is presently busy preparing the next big financial crisis, i.e., the collapse of the bond market two or three years from now. That could explain why the remote and mysterious semi-private Fed is the least popular of all American federal institutions, and why grass roots efforts to submit it to a public audit are gaining momentum.

In fact, the U.S. Fed is an institution that has gone much further than the U.S. Treasury in socializing the large N.Y. banks’ losses and in privatizing their huge profits in the hands of profiteers, at a time, especially after the Sept. 15 (2008) demise of Lehman Brothers, when many of them were technically insolvent.

Thus, by buying large amounts of toxic and unmarketable assets from the large N.Y. banks and from large insurers, such as the huge American International Group (AIG), at close to zero cost to them, and by creating new deposits in exchange, and by paying interest on such bank deposits, the Fed has in effect transferred all or most of the seigniorage of money creation from the public to the private sector. Everybody holding U.S. dollars has paid a huge hidden tax imposed by the Fed to salvage the large “too-big-to-fail” N.Y. banks. Sooner or later, somebody will have to calculate that hidden tax and make it public. Most likely, this could only be done if the Fed were to be thoroughly audited, which it has so far staunchly refused.

All and all, and where it counts the most, in matters of wars and peace and in economic matters, things have hardly changed under the new Obama administration. It is likely that an even more pugnacious McCain administration would have been worse, considering Sen. McCain’s public declarations and pronouncements. Nevertheless, this is poor consolation to those who had high expectations and who were led to believe that President Obama’s election would really bring fundamental change.

The liberty of a democracy is not safe if the people tolerate the growth of private power to the point where it becomes stronger than the democratic state itself. That in its essence is fascism — ownership of government by an individual, by a group or any controlling private power.

Franklin D. Roosevelt (1882-1945), 32nd and longest-serving US president

This great and powerful force—the accumulated wealth of the United States—has taken over all the functions of Government, Congress, the issue of money, and banking and the army and navy in order to have a band of mercenaries to do their bidding and protect their stolen property.

Senator Richard Pettigrew, Triumphant Plutocracy, 1922

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.

Thomas Jefferson, (1743-1826), 3rd US President, 1802

The U.S. national debt clock is clicking and it is fast approaching the $12 trillion mark, all the while the Fed (less a central bank than the banks’ Bank) is printing new money like crazy and lending it to its client banks at close to zero interest rates (i.e. at negative interest rates). What is wrong with this picture? It simply means that most Americans are losing big at this game, but a handful of mega-banks and their affiliates are raking in tremendous amounts of money in easily made profits.

Indeed, the Federal Reserve’s balance sheet has more than doubled since August 2007, going from $870 billion to more than $2 trillion. It is expected to keep growing as banks avail themselves of the cheap funds the Fed made available to them. The Fed, indeed, has the unique ability to create new dollars (paper currency) for the accounts of assets (good or bad) that it buys from banks, the Treasury, or other entities. This increases the monetary base (the sum of currency plus total banking reserves), and banks through their lending can expand this money supply even further.

And the Fed has been extraordinarily generous to the banks, the largest of them are in fact owners of the twelve regional Fed banks.

In fact, the Fed has broken practically every central banking rule in order to provide cheap funds to the banks. First, it has pushed the fed funds rate to close to zero so banks could have credit at close to zero cost to them. Second, it has expanded the range and quality of assets it stood ready to accept as collateral for its loans to the banks, so much so that it can be said that the U.S. Fed is presently creating new money backed by the shakiest of assets, some being called “toxic waste.” This is reminiscent of the eighteenth century (beginning in 1789) practice of the French revolutionary government of creating new money (the assignats) backed by the seized properties of the Catholic Church.

Let’s summarize quickly the numerous ways the Fed (and to a certain extent, the U.S. Treasury) have found to channel cheap funds to the banks and to brokers. In September 2008, some investment banks, such as Goldman Sachs and J.P. Morgan, officially became commercial banks in order to profit from the Fed’s new generosity.

• The Term Auction Facility (TAF);
• The Primary Dealer Credit Facility (PDCF);
• The Foreign Exchange Swap programs (the currency swap lines);
• The Commercial Paper Funding Facility (CPFF);
• The Term Asset-Backed Securities Loan Facility (TALF);
• The Agency debt, Agency mortgage-backed securities (MBS) and Treasury purchase programs;
• The Treasury’s $700 billion Troubled Asset Relief Program (TARP);
• The payment of interest on the banks’ excess reserves at the Fed.

The last disposition is worthy of attention. Because of the easy and cheap lending to the banks, the latter piled up tremendous amounts of excess reserves at the Fed, reaching more than $700 billion. Normally, banks would quickly lend these non-interest paying excess reserves to the economy. But, in October 2008, the Fed got imaginative and obtained the authority to pay interest on the banks’ reserves, including excess reserves, at a risk-free rate (the IOER rate). Since then, the banks have been earning interest on their excess reserve holdings, and therefore had little inclination to lend those reserves out to creditworthy but nevertheless risky borrowers in the rest of the economy. With this practice, the circle has been closed, and the Fed was able to provide needed funds to the banks, at close to zero cost, and enable them to rid themselves of their bad investments, without risking creating inflation. That’s quite a banking salvage operation that will be studied by economists in detail in the future.

Indeed, it was well understood after the onset of the financial crisis in August 2007, that public capital would be needed to refinance the American banking system. Private capital was too risk adverse to do that. What was less understood was the fact that the Bush administration, and now the Obama administration that continues this policy, intended to provide this capital at close to no cost to the banks and with very scant conditions.

But who really paid and has continued to pay for this imaginative recapitalization of American banks, and who profits the most?

First of all, of course, bank profits, specially those profits by big international banks, have exploded. Bank stocks have followed suit with tremendous gains. That’s why I say the stock market rally since March 5 (2009) has been a liquidity-driven rally, engineered by the Fed.

And it is easy to see why banks raked in so much money: They have been borrowing funds at close to zero cost to themselves and either were paid by the Fed to leave these funds unused or they have used them, with leverage through their hedge fund like activities, to buy interest-paying assets in the U.S. or abroad. In essence, the large “too big to fail” have been allowed to make various trading bets with the cheap public capital provided by the Fed. They gorged themselves with near free public money and used it to enrich themselves, and very little to finance the real economy.

One profitable trade, among others, that large international banks and other operators are found to embrace is a form of arbitrage: They borrow and sell the currency of the country that has the lowest possible short-term funding costs and invest the proceeds in countries whose currency and asset markets yield the most. This has the consequence of depreciating further the currency with low interest rates and of appreciating the other currencies.

During the 1990s, the Japanese economy was in the doldrums. Its short-term interest rates, just as in the U.S. today, were close to zero. International banks and hedge funds would then borrow yens in Japan, sell them for dollars or euros and invest the proceeds in high-yielding financial assets in the U.S. or in Europe. Provided the interest rate environment does not change suddenly, this sort of “carry trade” is an easy way to make money. The result, however, is a more depressed currency than necessary for the low interest rate country and more imported inflation as the price of imported goods (oil, food, commodities…) increases.

The U.S. is presently in that predicament. The U.S. Fed and Treasury have abandoned the U.S. dollar and the large international banks have depressed it further at the same time they fill their coffers. That is why we can say that, besides the profitable carry currency trade that banks and other operators employ to dump the U.S. dollar on foreign exchange markets, this currency will remain under pressure for as long as the spread of short-term interest rates favors other currencies and as long as the spread of expected inflation rates and of expected economic growth remain stable. Paradoxically, longer-term interest rates have only increased marginally. This is because banks and other Fed borrowers, when they do not leave their low interest-paying excess reserves dormant at the Fed, can buy risk-free Treasury bonds. This has the consequence of depressing longer-term interest rates and of boosting stock market prices, even as inflation expectations are on the rise.

What is to be understood is that the weak dollar is the direct consequence of the Fed’s extraordinary cheap money policy. To summarize, the average American household is being hit from all sides with this policy. First, if it is a net creditor (as most retirees are), its savings are earning paltry returns (most likely negative after inflation and taxes). Second, the U.S. dollar keeps falling in value, raising the cost of traveling abroad and of everything that is imported. Third, real incomes fall with rising prices as the purchasing power of stable or declining money incomes contracts. Fourth, the exploding public debt will translate sooner or later into higher taxes, thus reducing private disposable incomes. All in all, the standard of living of most people falls.

Don’t get me wrong. I do not question the need to inject liquidity into the banking system after the onset of the financial crisis in August 2007. What I question is the way this was done and how the public interest was sacrificed in favor of narrow private interests. Indeed it was done in the worst possible social way, with private gains and social costs. They (the Bush and Obama administrations) recapitalized the banks to the benefit of a small class of bankers, while taxing the entire population in a multitude of ways to finance the public subsidy.

There were other ways to attain the same end without taxing the many for the benefit of a few. The U.S. Treasury and the U.S. Fed, both under the Bush administration and the Obama administration discarded these solutions. That’s where the scandal lies. But since it is likely that only a handful of senators and congressmen understand what has happened, I would not be too confident in expecting that there would ever be a public investigation of the scandal, beginning with Congress auditing the Federal Reserve’s subsidized banking loans to large banks and its lack of needed regulatory activities. Kudos, however, to the Manhattan Chief U.S. District Court Judge who has ordered the Fed to make public its lending records.

Similarly, at least, some timid steps are being taken in the U.S. and in Europe to impose some limits or restrictions on the discretionary and exorbitant bankers’ bonuses. This comes a bit late, and we shall see if this is merely some political window-dressing to deflect criticism or if it is a structural step to curb oligopolistic and abusive banking practices.

Our interest in Afghanistan is to prevent it from becoming a haven for terrorists bent on attacking us. That does not require the scale of military operations that the incoming administration is contemplating. It does not require wholesale occupation. It does not require the endless funneling of human treasure and countless billions of taxpayer dollars to the Afghan government.

– Bob Herbert, New York Times, January 6, 2009

I don’t want to just end the [Iraq] war, but I want to end the mind-set that got us into war in the first place.

– Presidential candidate Barack Obama, January 31, 2008

If we are strong, our character will speak for itself. If we are weak, words will be of no help.

– John F. Kennedy (1917-1963) 35th U.S. President

No nation ever profited from a long war.

– Sun Tzu, author of The Art of War

A solid majority of Americans (54 percent) now oppose President Obama’s Afghanistan-Pakistan War. In fact, among Democrats, only twenty-six (26) percent support such a foreign war. In other words, by enlarging this conflict, President Obama is governing as if the opinion of a majority of Americans and of his own political base did not matter. In a democracy, a politician can do that for a while, but not for very long.

This undeclared war, just like LBJ’s Vietnam War (1959–1975) and George W. Bush’s Iraq War, is an adventure with no clear objective and no clear exit strategy, but with tremendous costs in lives and money. Nobody can tell if the U.S. and NATO are killing people in Afghanistan and in Pakistan because this is an operation to stop al-Qaeda terrorists from mounting future Sept. 11-type attacks, or because it is part of a larger plan to counter a Taliban insurgency and prevent this Pashtun Islamist party to regain power. But also, it has been said that it is a war waged to protect a pipeline crossing Afghanistan. Such a pipeline would move oil from the Caspian Basin to the coast of Pakistan through Afghanistan. Nevertheless, since this is not clearly explained, the war remains a blur for most people. The reason why such a war brings fewer open protests than the Vietnam War is essentially because it is waged with mercenaries.

That may be a reason why such open-ended wars fought with mercenaries can last for so long. For its part, Great Britain, a country used to colonial occupations, says through its incoming military Chief of Staff, General Sir David Richards, that it could stay in Afghanistan for 40 years. Even Germany seems to have regained its taste for military adventures, as its Defense Minister says it could occupy Afghanistan for ten years.

With this frame of mind, the world could be back in the nineteenth century, a century characterized by the anarchy of lawless armed conflicts, with militarized empires involved in prolonged wars, if not perpetual wars, with colonial and imperial military occupations. If the collapse of the Soviet empire in 1991 has simply ended the restraining its presence imposed on other empires from being lawless and imperialistic, then the world may be on a very dangerous course. It will be back to the future. All the democratic ideals of the second part of the twentieth century would be gone.

One has the feeling that such badly designed military adventures as the Afghanistan war, with no clear objectives in sight, are primarily launched and expanded to keep the military establishment busy and the military-industrial complex prosperous.

Mired in financial scandals and plunged into a deep economic recession, many Americans suffer from war exhaustion. There seems to be too many of these endless and costly wars, even though the professional warmongers relish them. For his part, Secretary of Defense Robert Gates declares that the American public is “pretty tired” of the seemingly endless war in Afghanistan, and he believes that the situation has to be turned around in a year.

Indeed. Only a few months ago, a substantial majority of Americans thought they had kicked the Bush-Cheney neocon warmongering crowd out of power. Those who favor American-led wars of aggression had a choice in voting for Republican candidate John McCain. But, to no avail. The Obama-Biden soft-neocon crowd seems to be in the same camp as Bush and McCain. Nothing of substance has changed, or hardly.

At least in terms of foreign policy, the question can be asked if the Obama-Biden administration is anything more than a third term of the Bush-Cheney administration? The Obama-Biden administration did not arrive in power determined to take control of the government apparatus and to change its direction. In fact, the reverse seems to have happened: It was pre-empted and subdued by the entrenched governing nomenklatura. This reflects a lack of preparedness, dedication and vision.

As soon as it was sworn in, the Obama-Biden administration began planning to enlarge the Afghan conflict with more troops and more mercenaries, and, to make its intentions crystal-clear, kept in his post Bush’s Secretary of Defense (Robert Gates) while asking Congress for $109 billion more funds to finance the adventure. Then President Obama fired Gen. David McKiernan, who had been in charge in Afghanistan, and replaced him with Lt. Gen. Stanley McChrystal, a former Green Beret who lead the secretive Joint Special Operations Command, an outfit of commando teams that was involved in widespread murder and carnage in Iraq. And, what is strange, Lt. Gen. Stanley McChrystal proposed to President Obama the adoption of a Soviet Strategy of building bases and troop build-up for Afghanistan. With friends like this, Barack Obama needs no enemies.

As a matter of fact, Obama’s political enemies, beginning with Rupert Murdoch’s Wall Street Journal, but also other right-wing corporate media, are salivating at the thought. I wonder how many editorials the WSJ will write supporting candidate Obama in 2012!

But the die is cast: President Barack Obama now “owns” the Afghanistan-Pakistan (AfPak) war and he will have to live with the consequences. If the British and Soviet examples of foreign occupations in that part of the world are good indications of things to come, Commander-in-Chief Obama is going to be bogged down in this devastated mountainous land for years to come, and this may very well cost him his presidency in 2012. For a while, the Republicans and some neocon Democrats are going to cheer him. But later on, most Americans are going to turn against him.

Let’s place things in perspective here. Just as in Vietnam, the U.S. is intervening in a civil war involving Pashtuns (40% of the Afghan population), Uzbeks, Tajiks, and Hazara Shiites, among over ten minority groups sharing a traditional and often repressive and barbaric Islamic culture, in a country called Afghanistan. And it is waging guerrilla warfare in Afghan villages and towns in order to support a corrupt and illegitimate Islamist government.

The foreign soldiers are trying to “flush out the Taliban from villages” just as they were trying to flush out the Vietcong from villages. Since such wars cause many civilian deaths, sooner or later, the entire population will turn against the foreign military invaders and they are likely to be kicked out. That was the story in Vietnam and there is little doubt that this will be the story in Afghanistan-Pakistan. Sending more troops to this Asiatic region will only make matters worse. The advantage for the military establishment, besides generals getting a few stars on the shoulder, is that a prolonged conflict will keep the money flowing in their coffers and in those of their suppliers.

But wait. Now Obama is enlarging the Afghan conflict, not only by waging a drone war against tribesmen in Pakistan, but he also wants to turn the Afghanistan war into a war against Afghan drug lords. The logic here, I gather, it to multiply your enemies: the Taliban, al-Qaeda, Pakistan tribesmen, Afghan drug lords, etc. The more you have, the more likely the conflict will endure.

When you forget that the initial objective in Afghanistan, after the 9/11 attacks, was a narrow one, i.e., to prevent that country from becoming again a haven for terrorists, it is easy to widen a conflict ad nauseam. As a matter of fact, this was tried before in Afghanistan. The Soviets tried it for nine years, from December 1979 to February 1989, and despite sending in hundreds of thousand troops, they did not succeed. It was the Soviet Union’s Vietnam War, to paraphrase Zbigniew Brzezinski, President Jimmy Carter’s Security advisor.

Similarly, Obama’s war in Afghanistan-Pakistan would require hundreds of thousands of troops on the ground. Like the Soviet Union, the U.S. is building large military bases in Afghanistan and its commanders think there are never enough troops. Presently, the U.S. has some 60,000 troops in Afghanistan. Next year, it is easy to predict it will have more than 100,000 troops in that remote country, if the current policy is followed.

And under what legal basis? It is stretching quite a bit the terms of the U.N. Security Council’s resolution 1368 of September 12, 2001, to justify an open-ended war in Afghanistan and in Pakistan. That resolution was adopted under Article 51 of the U.N. Charter that affirms the inherent right of individual or collective self-defense. Since the 9/11 terrorists had trained in Afghanistan under Taliban control, such training camps had to be dismantled, either by the Afghan government or by external forces. Since the Taliban government refused to comply, the U.S. was in its right to intervene. Thus the overthrow of the Taliban government and the destruction of al-Qaeda training camps in that country. This was done in the fall of 2001.

On December 20, 2001, the U.N. Security Council (Resolution 1386) authorized the creation of a NATO-led military international force to assist the newly established Afghan Transitional Authority in creating a secure environment in and around the capital Kabul and to support the reconstruction of Afghanistan. That’s the legal reason why there are foreign soldiers in Afghanistan. They operate under the umbrella of the so-called International Security Assistance Force (ISAF), whose mission has been expanded, year after year, to cover most of Afghanistan (see U.N. Security Council Resolution 1510).

Later, the U.N. Security Council also authorized a mission of assistance in Afghanistan. In March 2002, the U.N. Security Council organized an Assistance Mission in Afghanistan’s (UNAMA) with the adoption of Resolution 1401. UNAMA’s primary mandate is “to manage all humanitarian, relief, recovery and reconstruction activities.” That mandate has been renewed in March of each year, the last time on March 23, 2009, extending it until March 23, 2010.

But now we are in 2009, eight years after 2001. Is there really a legal basis for the U.S. to drop bombs over villages in Pakistan and to occupy Afghanistan indefinitely with foreign troops? There is some play with words here. For example, the European countries participating in the NATO-U.S.-led mission in Afghanistan talk about a “police mission” to justify the presence of their soldiers in Afghanistan. In fact, this so-called police mission has turned into a permanent military occupation of Afghanistan and into a guerilla war against local militants and insurgents, in both Afghanistan and Pakistan.

Let’s keep in mind that many of the so-called “militants” or “insurgents” in Afghanistan, the Mujahideen and to a certain extent the Taliban, used to be called “Freedom fighters” by President Ronald Reagan (see the Reagan Doctrine) when they were fighting the Soviet invaders, with the help of the American C.I.A., Saudi Arabia and the Pakistani secret police (ISI). This shows how such “freedom fighters” conveniently change names when they switch camp! They have gone from being called “heroic” to being called “insurgents”. Such is the propaganda of war. —An historical fact remains: The unintended consequence of the Reagan Doctrine is the current Afghanistan-Pakistan war, and it may have played an important role in preparing the ground for the 9/11 catastrophe.

Nevertheless, let us say that this is stretching the U.N. Charter to the limit to say that it now permits the permanent military occupation of a sovereign country by foreign troops. It is true that the U.N. Charter, under Chapter VII (Action with Respect to Threats to the Peace, Breaches of the Peace and Acts of Aggression), can authorize collective action against a country for good reasons. But the intent of such a military intervention is to be short-term and not be turned into a permanent colonial occupation.

In conclusion, let us say that since the Obama administration is clearly enlarging the Afghan conflict and has authorized drone bombings in Pakistan, it would seem that the U.N. Security Council should be called to authorize or condemn such an enlargement of the conflict. It should also indicate that it favors a compromise solution to the conflict.

The empire of the dollar is crashing.

– Hugo Chavez, Venezuelan President

The U.S. dollar is a worthless piece of paper.

– Mahmoud Ahmadinejad, Iranian President

[The U.S. dollar is] losing its status as the world currency.

– Xu Jian, vice director, People’s Bank of China

It is the policy of the United States and it will remain the policy of the United States to remain committed to a strong dollar.

– Timothy Geithner, U.S. Treasury Secretary, (July 15, 2009)

[The dollar will remain the world’s dominant currency for] many years to come.

– He Yafei, China’s vice foreign minister, (July 5, 2009)

Presently, there is a vacuum in international affairs coming from the decline in the moral and economic stature of the United States. It is a vacuum because no other country or organization has the credibility, legitimacy and capability to fill the gap. This is particularly true in monetary and financial affairs. By default, the U. S. dollar is de facto the main supranational key currency used to finance international trade and investment.

Many countries deplore this quasi monopoly of the dollar, the more so since the financial crisis that originated in the U. S. has spread around the world, and it has profoundly damaged the reputation of the United States and severely undermined the confidence that this country inspired in the past. Add to that the illegal war of aggression that the Bush-Cheney launched against Iraq, a country that had not attacked the United States, and the lack of financial confidence in the USA is reinforced by a lack of political confidence.

The table is therefore set for revisiting the international monetary arrangements that were created in the aftermath of World War II. What were they?

In June 1944, during a monetary conference held in Bretton Woods, New Hampshire, an attempt was made to create a new world currency, above and beyond the national currencies of particular countries. Let’s keep in mind that many decades before, the British pound had been used as the main international currency. A first proposal for reform came from British economist John Maynard Keynes, who advanced the idea of creating a supranational currency, the bancor, to which other currencies would have been pegged and in which countries would have held their foreign exchange reserves. An alternative plan was proposed by U.S. Treasury economist Harry D. White, in view of establishing a “Gold Exchange Standard” whose main characteristics was to use the U.S. dollar as the main key currency, the only currency then that was fully convertible and which had an official value in gold, initially at a rate of one dollar for 1/35 ounce of gold, and later, at a rate of 1/38 ounce of gold. As we all know, this was the plan that was adopted. Nevertheless, Keynes’ idea was partially adopted when the International Monetary Fund (IMF) created “Special Drawing Rights” (SDRs) in 1969, to supplement the member countries’ stocks of international reserves.

On August 15 1971, however, the U.S. Government unilaterally ended its obligations to convert U.S. dollars into gold. A few years later, in the aftermath of the first oil crisis, the rates of exchange of currencies of most of the industrial world were allowed to fluctuate with the state of their balances of payments, thus reducing considerably the need to hold foreign exchange reserves, most of which were still denominated in U.S. dollars. This is the system that has prevailed until now, that is to say a flexible exchange rate system with the U.S. dollar as the main key currency.

It seems nowadays that most everybody who holds dollar-denominated assets is calling for a new international monetary system. The largest creditors, the Chinese, have initiated the debate, because they have the most to lose from the collapse of the U.S. dollar. Even the Catholic Pope has thrown in his piece of advice.

What are the chances that there could be agreement on a new supranational key currency? Close to none. Essentially, this is because there is no viable alternative to the U.S. dollar as an international currency.

It is true that the United States, as a sovereign country, has abused and is still abusing its privileged position derived from the fact that its national currency is being used as the world key currency. So much so that there is presently an oversupply of U.S. dollars around the world. Over the years, the USA has built up huge external debts without having to suffer the full economic consequences of its profligacy. Moreover, it has used it seigniorage gains to deploy troops and military equipment around the world, a move that has created much resentment.

Politically, thus, but also financially, the rest of the world finds it increasing difficult to have to rely mainly on the U.S. dollar to finance international trade and international capital movements. It is therefore understandable that many countries would like to free the world from the obligation to use the U.S. dollar.

The most natural complement or substitute to the U.S. dollar as an international key currency would be the euro. After all, this a currency backed by fourteen strong European countries; a currency that is fully convertible into other currencies and a currency that is supported by large money and capital markets.

The euro’s major weakness comes from its political base. If the entire 27-country strong European Union (EU) were backing the euro, its long-term international standing would be considerably enhanced. With only half of the E.U countries backing it, the euro zone is vulnerable in the future to a possible dissolution under the pressures of economic hardships. This is more so since the statutes of the European Central Bank are unduly rigid, not only freezing exchange rates between member states, which is OK, but also de facto freezing their fiscal policies, while the central bank itself has the goal of fighting inflation as its only objective. It seems that the objective of supporting economic growth was left out of its statutes, with the consequence that it may be unable to ride successfully future serious economic disturbances. For example, how long do you think countries like Spain are going to tolerate 17.9 percent levels of unemployment? Nevertheless, already one quarter of the world’s official reserves are in euros, as compare to a bit less than two-thirds in U.S. dollars. Baring any mishap, the dollar and the euro should share a more equal proportion of international finance in the future.

It is also said that the Chinese renminbi could be called to play the role of a global currency. Since 2005, China has adopted a managed floated exchange rate system for its currency, allowing the yuan to slowly appreciate vis-à-vis other currencies, as a partial reflection of its large foreign trade surpluses. It is pointed out that by 2020, China intends to designate the city of Shanghai as an international financial center, and that would mean that the renminbi could become fully convertible into other currencies. Already, some transactions between Hong Kong and Macau, and Mainland China, are being settled in renminbis.

Realistically, however, it is most unlikely that a Chinese currency could play a large international role, at least not for decades to come. Indeed, even though the Chinese government has some $2 trillion in official foreign reserves, China, itself as a country, has a very limited moral international stance. It is still a totalitarian, authoritarian and repressive state regime that does not recognize basic human rights, such as freedom of expression and freedom of religion, and which crushes its linguistic and religious “minority nationalities”. It is a country that imposes the death penalty, even for economic or political crimes. This is not an example to the world. Only a fundamental political revolution in China could raise this country to a world political and monetary status. This is most unlikely to happen in the foreseeable future and, therefore, no Chinese currency is likely to play a central role in financing international trade and investment.

It is one thing to wish to replace an international key currency, it is quite another to implement such a wish. It’s not that a series of bad policies has weakened the U.S. economy and the U.S. dollar, possibly for many years to come. But the requirements for a national or international currency to be used as an investment vehicle are such that there is currently no credible successor to the U.S. dollar as a key currency. There are three fundamental characteristics that a reserve currency must have: it must inspire confidence, it must be fully convertible into other currencies, and it must have a high degree of liquidity. With the possible exception of the euro, no other currency meets these criteria, although creditor countries will likely increase the share of gold in their official reserves, pushing the price of gold way up in the coming years.

Therefore, for better or for worse, the world economy needs the U.S. dollar and will keep using the U.S. dollar for the foreseeable future, before a new international monetary system can be designed many years down the road. Therefore, you may ask where do I think the U.S. dollar is heading? With $2 trillion fiscal deficits under Treasury Secretary Geithner’ watch, a zero interest rate (negative real interest rate) and an open bar printing monetary policy by the Bernanke Fed, there is currently an oversupply of U.S. dollars. This should herald a period of continued weakness for the U.S. dollar, possibly for a year or two. Then, the U.S. dollar should reach an important and secular climax low vis-a-vis the other fiat currencies, but not vis-a-vis gold whose future looks brighter by the day.

I almost went down on my knees to beg [President] Herbert Hoover to veto the asinine Hawley-Smoot Tariff. …That Act intensified nationalism all over the world.

– Thomas Lamont, banker and economic adviser, June 1930

Now is a time where we have to be very careful about any signals of protectionism.

– President Barack Obama, February 19 2009

From the purely economic point of view nothing speaks against free trade and everything against protectionism.

– Ludwig von Mises (1881-1973), Austrian economist

When the economy is booming, foreign borrowings and imports of goods and services from other countries are most welcome. They allow for more spending without inflation and they raise living standards. It is a version of having your cake and eating it too. In an economic downturn, however, the political reflex of populist politicians is to turn protectionist and to become economic isolationists by raising trade barriers. In such an environment, foreign competition becomes a convenient scapegoat for the crisis, even though the causes of such crisis are most often purely domestic in nature.

Regarding trade, the Obama administration seems to have adopted the “good cop, bad cop” routine, extolling the virtues of free trade in presidential speeches while letting Congress pass protectionist measures in series. The fear here is a repetition of the 1930s when American politicians rushed to pass the infamous Smoot-Hawley Tariff act of 1930 that triggered an international trade war and which accelerated the worldwide economic downturn. World trade plummeted into a spiral downward and domestic production for exports contracted everywhere. Normal trade links were disrupted and intricate inter-country production arrangements were dismantled.

Indeed, in a misguided attempt to fight the economic downturn, governments all over the world rushed to adopt self-destructive “beggar-thy-neighbor” policies, in a futile attempt to devalue each other’s currencies and to reduce their imports in retaliation, forgetting that one country’s imports are the other country’s exports. The consequence was that from 1929 to 1933, the value of world trade contracted by two-thirds, going from $5.3 billion to $1.8 billion.

The world economy went down with world trade and every country was worst off as a consequence. A severe recession was then turned into a worldwide economic depression. This is because trade protectionism in the modern world is the equivalent of “cutting off your nose to spite your face” and its main consequences are to spread poverty and economic dislocations.

Some seventy years later, the same mistakes risk being repeated. Most modern economies are interrelated and if politicians begin to unravel such an economic integration, the consequences may be even worst than in the 1930s, because economic integration is much more advanced and prevalent than it was then.

World trade is already contracting due to the current global financial crisis, a decline in commercial bank trade credits and a drop in private investments. According to the World Bank’s projections, total world trade in goods and services this year is expected to fall 6.1 percent. The decline will particularly hurt large export-led economies such as Mexico, Germany and Japan.

The issue of protectionism is also particularly important for Canada, the U.S.’s most important trade partner. The United States and Canada not only share this continent, but they also have a mutually beneficial trading relationship that has been enhanced with the signing of the Canada-U.S. Free Trade Agreement on October 12, 1987. This treaty was enlarged in 1994 to include Mexico with the implementation of the North American Free Trade Agreement (NAFTA). As a consequence, there are no tariffs on most goods that pass between Canada and the United States.

In 2008, Canada’s trade with the United States accounted for about 76 percent of its total international exports and 63 percent of its imports, while U.S. exports to Canada represented about 20 percent of total American exports. A lot of American jobs are tied to American exports to Canada. In fact, Canada is the leading export market for 36 of the 50 U.S. States and Canada is a larger market for U.S. goods than all 27 countries of the European Community combined.

Moreover, Canada is the single largest exporter of total petroleum to the United States, supplying the U.S. with more than 2.5 million barrels per day. What is more, this oil supply is guaranteed under Nafta. There is also an important and growing cross-border trade of electricity between Canada and the United States that links the two economies.

This does not mean, however, that trade frictions between Canada and the United States do not exist. Sometimes politicians behave as if the trade agreement between the two countries did not exist. A case in point is the routine inclusion of “buy American” provisions in spending bills voted by the U.S. Congress, which can be considered overt protectionist trade-distorting measures and contrary to the spirit and the letter of the free trade agreement.

If the lessons of the past have been learned, governments should resist the temptation to export their economic problems abroad and should work instead to stimulate their economies without resorting to protectionist measures. What is needed now is to avoid sending the world economy into a self-reinforcing contraction that would hurt everyone.

There are three kinds of lies: lies, damned lies, and statistics.

– Mark Twain, (1835-1910)

The Cost of Living [has been] replaced by the Cost of Survival. The old system told you how much you had to increase your income in order to keep buying steak. The new system promised you hamburger, and then dog food, perhaps, after that.

– John Williams, private economist

The consumer price index is being understated by at least 1 percent per year.

– Bill Gross, professional investor

… The development of credit derivatives has contributed to the stability of the banking system by allowing banks, especially the largest, systemically important banks, to measure and manage their credit risks more effectively. In particular, the largest banks have found single-name credit default swaps a highly attractive mechanism for reducing exposure concentrations in their loan books….

– Alan Greenspan, Fed Chairman, May 5, 2005

Last February 20th, the U.S. Department Of Labor Bureau of Labor Statistics announced that, on a seasonally adjusted basis, the U. S. Consumer Price Index (CPI) increased by 0.3 percent during the month of January. Some independent economists, however, think that the real inflation rate is much higher, possibly as high as 7.52 percent. Why is that so?

The CPI is a measure of how much the price level of a basket of representative consumer goods and services, adjusted for predictable seasonal shifts, is supposed to have varied during a month or a year. Such a measure has been provided by the Bureau of Labor Statistics since 1919, covering the period between 1913 and today.

For many people, the CPI is less a measure of inflation than an imperfect measure for adjusting cost of living allowances. It is a technique that plays a central role in computing increases in the Cost Of Living Allowances (COLAs) of various money disbursements, incomes and wages. Some incomes, for example, such as Social Security payments and other entitlements, are statutarily adjusted upwards when the CPI goes up, and such adjustments have a direct influence on one’s standard of living.

Economists have long debated the best methods of measuring inflation, especially as it affects the cost of living of various categories of consumers. This is a complex issue that involves statistical methods in calculating price indices, economic principles and notions of social justice. Moreover, not everyone is impacted equally by a rise in the overall level of consumer prices, depending on one’s economic and financial situation. For example, for people living in a city and who are renters, a rise in the price of cars or of houses would not have the same predictable effect on them as it would on folks living in a rural area and who own their own homes. And it is not everyone who can deflect the negative impact of a rise in the price of consumer goods on their standard of living by substituting less costly items.

For the period between 1913 and 1982, the formula for measuring consumer inflation in the U. S. was pretty much straightforward. Government statisticians would periodically collect prices in certain identified areas with which the Bureau of Labor Statistics would then construct price indexes. Over time, surveys of consumer expenditures were conducted and the weight of different goods in the index would be adjusted accordingly to reflect people’s new buying habits.

In the early 1980s, the Reagan administration feared that the standard CPI index overstated the impact of overall inflation on the cost of living of many recipients of government payments, the most important ones being Social Security outlays. The decision was then made to move away from the objective of having a general consumer price index measuring overall consumer inflation and adopt instead the policy of constructing a cost-of-living index that more closely reflected the true impact of inflation on different categories of consumers. That is why, since 1982, the CPI measurements that the Bureau of Labor Statistics publishes relates more to the cost of living, as defined and periodically revised, than to providing accurate information about the level of general inflation. [As a matter of fact, another government agency, the Bureau of Economic Analysis (BEA), has the responsibility to calculate a price deflator for consumption expenditures and other expenditures as part of the National Income and Product Accounts (NIPA).]

Indeed, in the mid-1990s, substantial changes were made to the CPI index which had the net result of lowering the official measure of consumer inflation. First, increases in asset prices, such as in housing, were only indirectly taken into account. For example, the 2002-2006 real estate bubble hardly registered at all in the CPI because only ‘imputed’ home rents for home owners were used in the index. At that time, rents were virtually stagnant in many cities due to overbuilding. Secondly, arbitrary downward adjustments were made in the prices of certain goods to reflect their enhanced quality. It is true that cars, TV sets or cellular phones are more performing today than their alternatives in the past, and this raises people’s standard of living. However, such goods cost more, and the higher prices are not fully recorded in the CPI. Thirdly, and maybe more debatably, in order to concentrate on the impact of price increases on the true cost of living, it was assumed that consumers adjust to higher prices of certain items by substituting relatively less costly goods when relative prices change. For instance, buyers would be assumed to switch from steaks to hamburgers or from beef to chicken when the price of steaks or beef increases. Similarly, people would tend to switch from high-priced stores to discount stores when their incomes do not follow inflation. It can also be assumed that such forced substitutions are not without inconveniences or hardships for the consumers, and thus could indicate a lowering in their standard of living. Nevertheless, these modifications that lowered the official measure of the CPI were incorporated into new statistics from 1982 on.

Consequently, it has become somewhat risky to rely on official CPI figures to obtain a true assessment of inflation. Because of all the changes made in the CPI index since 1982, the CPI has become less and less a true measure of consumer inflation, even though it may or may not more closely reflect the true impact of inflation on people’s cost of living. For the overall economy, it is fair to assume that the true inflation rate is substantially higher than what is reflected in official CPI announcements, and this has a compounding effect overtime.

For its part, since February 17, 2000, the Fed uses a “core” chain-type price index for personal consumption expenditures (CTPIPCE), i.e. a price measure for all items less price increases in food and energy. What is at stake here is the danger that government officials may begin to believe their own official inflation figures which are understated, maybe for good reasons as far as cost of living issues are concerned, but nevertheless severely understated as far as the true inflation rate is concerned. This has the potential for disastrous consequences, not only for the public in correctly judging inflation pressures for investment purposes, but also for public officials in framing policy, especially monetary policy.

The most recent example is provided by the pronouncements that Fed officials made during the crucial 2003-2005 period, when a dangerous housing bubble was building up speed and when financial firms were embarking upon riskier and riskier financial schemes. To a man, Fed officials denied there was any risk of inflation and, contrary to what everybody could see, declared that there was no housing bubble going on.

For instance, on March 1, 2003, the No. 2 man at the Federal Reserve, Fed Gov. Donald Kohn insisted that the extremely low short-term interest rates that the Fed was keeping down had not created a speculative bubble in real estate.

In 2004 and in 2005, Fed Chairman Alan Greenspan echoed Mr. Kohn and repeated many times that there was no inflation and that he was in no hurry to raise short-term interest rates from their 46-year low level of 1 percent. In April 2004, for example, in remarks on the economic outlook to the Joint Economic Committee, Greenspan remained unconcerned about inflation, declaring that “as yet, the protracted period of monetary accommodation has not fostered an environment in which broad-based inflation pressures appear to be building”, just at a time when the housing bubble was but one year from its final top.

At that time, the old pre-1982 CPI formula, as calculated by private economists, indicated that U.S. consumer inflation was above 8 percent and that a housing bubble and a concomitant stock market bubble were in full swing. Future Fed Chairman Ben Bernanke, then a Fed Board member, echoed his mentor in late 2005 by saying that there was no housing bubble to go bust and that the fact that U.S. house prices were rising four times faster than the economy was “largely [a reflection of] strong economic fundamentals.”

But, it is now generally agreed that from 2002 to 2004, the American central bank pursued a monetary policy that was too expansionary and that—plus the lack of government regulation of the derivative market—contributed greatly to create the conditions for a major financial crisis. Let us keep in mind that in 2004, the Fed Chairman was publicly recommending that people buy adjustable rate mortgages (ARMs), especially interest-only adjustable-rate mortgages, and other subprime loans instead of safer fixed rate loans.

As a matter of fact, most economists agree that interest rates should have been raised as early as 2002. But Mr. Greenspan implied later that he was forced to play politics with his monetary policy, when he declared on September 17, 2007, in an interview with the Financial Times, that “raising interest rates sooner and faster would not have been acceptable to the political establishment given the very low [official] rate of inflation”.

There you have it. What is suggested here is that the push to reelect President George W. Bush, in the fall of 2004, may have played an important role in letting the housing bubble become bigger, thus paving the way for a housing bubble burst in 2005-2006. This is, by the way, on top of the confession that Mr. Greenspan made in his Memoirs (The Age of Turbulence) that he had personally lobbied the Bush-Cheney administration in favor of the unprovoked 2003 U.S. war against Iraq, and that consequently, he was personally tied to the overall political agenda of the Bush-Cheney administration.

When the history of this financial and economic crisis is written, it shall be recorded that the Fed and other government agencies, such as the Securities and Exchange Commission (SEC), did little or nothing to prevent the debt pyramid from reaching the dangerous levels it attained and which is now crashing down, dragging down with it the entire U.S economy and most of the world economies.

The [financial] crisis was not a failure of the free market system and the answer is not to try to reinvent that system. …Government intervention is not a cure-all.

– President George W. Bush, Thursday November 13, 2008

There is no cause to worry. The high tide of prosperity will continue.

– Andrew W. Mellon, Hoover’s Secretary of the Treasury. September 1929

While the crash only took place six months ago, I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover. There is one certainty of the future of a people of the resources, intelligence and character of the people of the United States – that is, prosperity.

– President Herbert Hoover, May 1, 1930

Tuesday, February 10, may be the date when the U.S. economy officially entered into an economic depression. This was when President Obama’s Treasury Secretary, Timothy Geithner, announced that the Obama administration was about to expand Bush’s Secretary Paulson’s $700-billion plan to rescue large U.S. banks from insolvency, euphemistically called the Troubled Assets Relief Program (TARP). The purpose now, as it was previously, is to use public capital, loans and guarantees to remove toxic financial assets from private banks’ balance sheets and to transfer them to the Government and/or to willing private investors (hedge funds, private equity firms and other investors). One must keep in mind that Mr. Paulson and Mr. Geithner were the principal architects of last October’s original plan. This was then, and it is now, a plan designed primarily to use hundreds of billions of taxpayer dollars to prevent banks from declaring bankruptcy, while in fact doing little to accomplish its presumed primary objective of getting banks to resume normal lending. Such a cure has failed in the past and is likely to fail now. Saving insolvent banks is not the same as fixing them and making them viable.

Indeed, when Mr. Geithner announced on Tuesday, February 10, that he was expanding the Paulson plan to make it a $1.5 trillion bailout plan, financial markets saw it as simply rearranging the chairs on the deck of the Titanic, and they sold off. I believe the markets are right and the Obama-Geithner plan only makes the Bush-Paulsen plan worse. Both are misguided and do little to address the root cause of the financial crisis, which is a mountain of unsustainable bad debts that was allowed to expand recklessly over the last ten years, and which is now crumbling down, dragging the entire economy down with it.

With more public money thrown at the problem with little strings attached, large U.S. banks will only use the new cash to de-leverage themselves and pay off their debts, buyout smaller banks and find a way to reward their incompetent executives with large bonuses, but little will trickle down to the real economy. We are back to the discredited Reagan era’s economic trickle-down theory, the rich helping themselves first and the poor getting the crumbs.

Let’s look coldly at the situation. The ratio of total debt to the U.S. Gross Domestic Product (GDP) is now higher than it was in 1933, when it reached the lofty and unsustainable level of 299.8 percent. It took nearly twenty years to bring down the debt/GDP ratio to below 140 in 1952. In the second quarter of 2008, all debt records were broken when the total debt ratio in the U.S. registered at 356,7 percent of GDP. If the same process of unwinding of excessive debt level plays itself out this time, this could translate into a debt deflation process lasting possibly until 2027!

It all depends on the problem being recognized for what it is, that is to say a mountain of unsustainable and insolvable debts and bets that have to be cancelled and erased from the books. Transferring such bad debts from the banks and other entities to the government will not solve the problem. It will only displace the it from one place to another and potentially create new and even more serious problems, such as horrendous future tax increases or an onset of hyperinflation down the road.

There exists a state of denial in Washington D.C. regarding the excessive debt problem, essentially because the same people who are responsible for creating the mess are in power. It doesn’t matter whether a Republican or a Democratic administration is in place, they remain in charge and they rely on the same failed economic policies. The Geithner plan is the son of the Paulson plan. Both are destined to fail because they are based on a flawed diagnosis.

To deflate the mountain of bad debts and unclog the credit system in an orderly fashion, and to prevent a deflationary spiral from taking hold, the Obama administration should take the advice of L. William Seidman, chairman of the S&L Resolution Trust Corp. (RTC), [http://en.wikipedia.org/wiki/Resolution_Trust_Corporation] the agency created in the 1990s to manage hundreds of insolvent thrifts. At that time, the RTC seized the assets of troubled savings and loans and resold them to bargain-seeking investors. The Obama administration should bite the bullet and create a similar Banking Restructuring Trust to temporarily take over the large insolvent American banks, streamline their operations, liquidate their bad debts and bets, and reorganize them on a firmer financial basis. I myself proposed such a restructuring trust last September. This would be more efficient and less costly than throwing trillions of dollars down a black hole without even solving the structural problem at hand.

The creation of such a Trust to unify government intervention has also been proposed by former Federal Reserve Chairman Paul A. Volcker and by former Treasury Secretary Nicholas F. Brady. This would entail, of course, that many of the banks’ illiquid assets in CDOs (“Collateralized Debt Obligations”) and in CDS (“Credit Default Swaps”) and other shaky assets, would have to be written off or cancelled in a chapter 11-like process. Such a process would cleanse the banks from the excesses accumulated in previous years and prepare them to meet credit demand as the economy recovers. But, above all, it would mark an end to incremental, complicated and improvised ‘ad hoc’ government interventions to solve the banking crisis. I would bet that there would be a powerful rally of financial markets if such a take-charge and decisive approach were to be adopted.

The Geithner bank bailout plan must not be confused with the $800 billion-plus fiscal stimulus plan for the entire economy that Congress is about to adopt. The latter, contrary to the former, is designed to cushion the fall of real spending in the economy and is likely to have a net positive impact. Indeed, as households increase their savings rate and curtail their discretionary spending to compensate for the loss of housing and financial wealth, government spending has to take up the slack.

However, it should be realized that the multiplier effect on aggregate spending of each dollar of fresh public spending is not very high because national economies nowadays are globalized. Indeed, as domestic spending is being sustained, imports increase but exports may decline as world demand contracts. It is only if all governments adopt expansionary fiscal policies that all economic boats can be lifted. With European and Chinese economies weakening, this may take some time before world demand stops contracting.

All this is to say that while the Geithner bank rescue plan is misguided and should be re-engineered, Obama’s fiscal stimulus package is most likely too timid and should be enlarged, considering the scope of the problem at hand. All in all, let us hope that a prolonged economic depression can be avoided.