Chemotherapy in the Gulf of Mexico

Image via Wikipedia

Excerpted from ritholtz.com

The United States has approved and is supervising the administration of chemotherapy to the Gulf of Mexico. I have personally watched chemo too many times. It attempts to restrain the fast-growing cells by doing more damage to them than it does to the healthy cells, in a desperate attempt to keep the patient alive. There are many warnings in chemotherapy about longer-term damage and about unknowns. They are accepted because chemo for a cancer victim is viewed as a life or death option.

Dispersants in the GOM are similarly problematic. Think of them as chemotherapy to a 2000 mile coastline and to hundreds of square miles of sea.

Use them sparingly and on the surface and we have a pretty good idea what will happen – they seem to accelerate evaporation and natural processes that get rid of the oil.

Use them below the surface, however, and we have little experience and simply do not know what the longer-term effects will be. Oil on the sea floor is a naturally occurring phenomenon. There are natural processes that Mother Earth has to deal with it. Microbes eat it. And when it rises to the surface it is then broken down and evaporates. Yes, it’s toxic, and, yes, it does do damage.

Dispersants are manmade; no Mother Nature involved in this one. They are toxic chemicals that can do damage themselves.

When they are used in very cold water and a mile below the surface, we simply do not know what the outcome will be. And we do not know if the small droplets they create become an emulsion that travels for hundreds or thousands of miles. There is initial, but inconclusive, evidence that this is happening in the GOM. We will soon find out. I fear it will be the hard way.

The rest of this commentary consists of quotes from the Obama Administration’s Environmental Protection Agency and other sources. They were extracted from public documents.

During the GIC meetings in Europe last week there were several discussions on the impacts of the GOM events. We owe great thanks to Jim Lucier for sharing his insight. His database on this subject is enormous.

The quotes follow. They are sequenced and lead to the issue of the use of Corexit. Remember, about 5 million liters of dispersants, mostly Corexit, have been used in the GOM in the last two months. About one-third of that has been at the wellhead, 5000 feet below the surface, in very cold, very high-pressure water. There are numerous reports of deeper-water oil plumes that are sufficiently subsurface to avoid easy measurement and detection. We will leave the rest of this to each reader to consider for her/himself.

As you read these extracts, please note that the UK has now banned Corexit. British oil comes from the cold and deep water off its coast.

First quote: “The EPA and the U.S. Coast Guard have authorized BP to use dispersants underwater, at the source of the Deepwater Horizon leak. Preliminary testing results indicate that subsurface use of the dispersant is effective at reducing the amount of oil from reaching the surface – and can do so with the use of less dispersant than is needed when the oil does reach the surface. While BP pursues the use of subsurface dispersants, the federal government will require regular analysis of its effectiveness and impact on the environment, water and air quality, and human health through a rigorous monitoring program.” Source: US Environmental Protection Agency (EPA) website: www.epa.gov

Second quote: “On May 26th, EPA and the Coast Guard issued a directive to BP requiring them to decrease overall volume of dispersant by 75 percent and to cease use of dispersant on the surface of the water altogether unless provided prior written authorization from the Coast Guard. EPA continues to allow BP to use undersea dispersant but only at a maximum of 15,000 gallons per day.”

Third quote: “BP’s scientific analysis of alternative dispersants, in response to EPA’s May 20th Directive, was found insufficient by both EPA and the U.S. Coast Guard. Therefore, EPA and other government scientists are independently verifying the alternative dispersant data presented by BP and will be performing independent scientific verification of the data BP presented. EPA is conducting its own tests to determine the least toxic, most effective dispersant available in the volumes necessary for a crisis of this magnitude and to understand if Corexit remains the most appropriate dispersant, as supported by the science for this situation.”

Fourth quote: “EPA listed the components of Corexit 9500 and 9527 — the two brands that BP has deployed to prevent oil from reaching shore. More than 1 million gallons of the chemicals have been used so far in response to the ongoing Gulf spill, including 317,000 gallons injected directly into the leaking well nearly a mile below the water’s surface — a first-time application EPA authorized last month. Among the chemicals in the Corexit brands are 1,2-Propanediol; Ethanol, 2-butoxy-; Butanedioic acid, 2-sulfo-, 1,4-bis(2-ethylhexyl) ester, sodium salt (1:1); Sorbitan, mono-(9Z)-9-octadecenoate; Sorbitan, mono-(9Z)-9-octadecenoate, poly(oxy-1,2-ethanediyl) derivs.; Sorbitan, tri-(9Z)-9-octadecenoate, poly(oxy-1,2-ethanediyl) derivs; 2-Propanol, 1-(2-butoxy-1-methylethoxy)-; and Distillates (petroleum), hydrotreated light.” Source: INSIDEEPA.COM, June 19, 2010

Fifth quote: “People working with dispersants are strongly advised to use a half face filter mask or an air-supplied breathing apparatus to protect their noses, throats, and lungs, and they should wear nitrile or PVC gloves, coveralls, boots, and chemical splash goggles to keep dispersants off skin and out of their eyes.” Source: EPA

Sixth quote: “The harm or toxicity of dispersed oil in the environment is generally associated with the oil rather than with the dispersant alone. However, use of dispersants breaks up a slick of oil on the surface into smaller droplets that can go beneath the surface. When applied on the surface before spills reach the coastline, dispersants will potentially decrease exposure for surface-dwelling organisms (such as sea birds) and intertidal species (such as mangroves and salt marshes), while increasing exposure to a smaller population of aquatic life found deeper in the water. It is unknown if dispersed oil has toxic implications to the human population because bioaccumulation through the food chain has not been evaluated.” Source: EPA

Seventh quote: “We are currently unaware of published scientific information in the peer reviewed literature about the biodegradation of the dispersant itself. We do have information about the individual components (ingredients) of the dispersant, provided by the manufacturer’s Material Safety Data Sheets (MSDS).” Source: EPA

Eighth quote: “While dispersants have been used in previous oil spills, this is the largest application of dispersants at an oil spill response in the United States.” Source: EPA

Lastly, NOAA says that this spill seems to remain confined in the GOM for the time being. Here is the latest report (June 18):

“Recent satellite imagery analysis no longer shows the persistent patches of sheen to the S-SE of the main slick. However, non-recoverable sheens and tar balls previously observed in these regions may have been entrained into the large clockwise eddy (Eddy Franklin) that has pinched off the main Loop Current (LC). Trajectories indicate that most of these sheens will continue to move clockwise in Eddy Franklin. The connection between the spill source and Eddy Franklin has been cut off due to a change in the currents. The oil will biodegrade and photo-oxidize over the time frame of weeks to months. No recoverable oil is expected to enter the Florida current over the next 72 hours. The Loop Current is an area of warm water that comes up from the Caribbean, flowing past the Yucatan Peninsula and into the Gulf of Mexico. It generally curves east across the Gulf and then flows south parallel to the west Florida coast. An eddy is water that rotates.”

Remember: this NOAA analysis is derived from surface observations. There is no mention of subsurface movements or plumes. NOAA is now continually researching this issue of subsurface toxicity.

~~~
David R. Kotok, Chairman & Chief Investment Officer, Cumberland Advisors, www.cumber.com

Superfund Says Gold to Rise to $2,000 Amid ‘Massive’ Inflation

Kim Kyoungwha

Oct. 28 (Bloomberg) -- Gold may rise to a record $2,000 an ounce in the next three years as investors hedge against “massive” inflation sparked by governments printing money, according to Superfund Financial Singapore Pte’s Aaron Smith.

“In the next few years, after the deflation cycle, we’ll see massive inflation,” Managing Director Smith, 30, said in an interview. “Soon, when you go to buy a cup of coffee, you’ll pay $20 or $30 because the dollar won’t be worth anything.”

The company’s Superfund Green Gold A Fund, which has more than doubled since its inception in 2005, has lost 15.6 percent this year because of higher volatility, said Smith, who joined in 2002. Gold rose to an all-time high this month as governments including the U.S. boosted debt to combat the global recession.

“When the U.S. dollar crashes, all the paper currencies have to crash, otherwise if their currencies are too strong, their economies will be weak,” said Smith, who issued similar gold forecasts in May and earlier this month. “Another excellent buying opportunity for investors is silver.”

Gold for immediate delivery, which touched a high of $1,070.80 an ounce on Oct. 14, traded at $1,039.32 at midday in Singapore. The metal has strengthened 18 percent this year, while the Dollar Index, a six-currency gauge of the dollar’s strength, fell 6.4 percent.

Gold Forecasts

Smith joins investors including Shayne McGuire, director of global research at the Teacher Retirement System of Texas, and Jim Rogers in forecasting higher gold prices. Pension funds will increase gold holdings as currencies decline, McGuire said on Oct. 22. Gold will probably top $2,000 in the next decade as the dollar weakens, Rogers said Oct. 7.

Superfund, founded in 1995 and backed by $1.6 billion in assets, specializes in so-called managed futures, using its own trading system to generate buy and sell calls on stock, bond, currency and commodity futures. Still, the company’s flagship Superfund A, which gained 35.4 percent last year, has lost 24 percent this year, Smith said.

The ratio of silver to gold, currently at 62.35, will be “cut in half” in the next three to five years as millions of people in South Asia and China buy the metal as an alternative because they can no longer afford gold, Smith said. Silver has soared 46 percent this year to $16.65 an ounce.

Poll: Angry U.S. Workers Intend to Look for New Jobs in 2010

What are these people thinking! With real jobless rates nearing Great Depression levels of 25 percent, they've a got a big surprise coming to them if they believe the job market will improve in 2010. They're lucky to have jobs, period.

Reuters
Nearly two-thirds of U.S. workers intend to look for new jobs next year, according to a poll released on Thursday that could indicate workers' frustration and discontent.

Sixty percent of employees polled "intend to leave" their jobs and 21 percent said "Maybe, so I'm networking," according to the survey by Right Management, a talent and career management consulting firm.

Just 13 percent said they planned to stay in their current jobs, it found. The remaining 6 percent said changing jobs was "not likely, but I've updated my resume."

"Employees are clearly expressing their pent-up frustration with how they have been treated through the downturn," said Douglas Matthews, president of Right Management, in a statement.

"While employers may have taken the necessary steps to streamline operations to remain viable, it appears many employees may have felt neglected in the process," he said. "The result is a disengaged and disgruntled work force."

Right Management, part of Manpower Inc, surveyed 904 employees, most of them in the United States, in an online poll between October 19 and November 5.

French bank warns clients to prepare for global collapse

Société Générale has advised clients to be ready for a possible "global economic collapse" over the next two years, mapping a strategy of defensive investments to avoid wealth destruction.

Ambrose Evans-Pritchard
In a report entitled "Worst-case debt scenario", the bank's asset team said state rescue packages over the last year have merely transferred private liabilities onto sagging sovereign shoulders, creating a fresh set of problems.

Overall debt is still far too high in almost all rich economies as a share of GDP (350pc in the US), whether public or private. It must be reduced by the hard slog of "deleveraging", for years.

"As yet, nobody can say with any certainty whether we have in fact escaped the prospect of a global economic collapse," said the 68-page report, headed by asset chief Daniel Fermon. It is an exploration of the dangers, not a forecast.

Under the French bank's "Bear Case" scenario, the dollar would slide further and global equities would retest the March lows. Property prices would tumble again. Oil would fall back to $50 in 2010.

Governments have already shot their fiscal bolts. Even without fresh spending, public debt would explode within two years to 105pc of GDP in the UK, 125pc in the US and the eurozone, and 270pc in Japan. Worldwide state debt would reach $45 trillion, up two-and-a-half times in a decade.

(UK figures look low because debt started from a low base. Mr Ferman said the UK would converge with Europe at 130pc of GDP by 2015 under the bear case).

The underlying debt burden is greater than it was after the Second World War, when nominal levels looked similar. Ageing populations will make it harder to erode debt through growth. "High public debt looks entirely unsustainable in the long run. We have almost reached a point of no return for government debt," it said.

Inflating debt away might be seen by some governments as a lesser of evils.

If so, gold would go "up, and up, and up" as the only safe haven from fiat paper money. Private debt is also crippling. Even if the US savings rate stabilises at 7pc, and all of it is used to pay down debt, it will still take nine years for households to reduce debt/income ratios to the safe levels of the 1980s.

The bank said the current crisis displays "compelling similarities" with Japan during its Lost Decade (or two), with a big difference: Japan was able to stay afloat by exporting into a robust global economy and by letting the yen fall. It is not possible for half the world to pursue this strategy at the same time.

SocGen advises bears to sell the dollar and to "short" cyclical equities such as technology, auto, and travel to avoid being caught in the "inherent deflationary spiral". Emerging markets would not be spared. Paradoxically, they are more leveraged to the US growth than Wall Street itself. Farm commodities would hold up well, led by sugar.

Mr Fermon said junk bonds would lose 31pc of their value in 2010 alone. However, sovereign bonds would "generate turbo-charged returns" mimicking the secular slide in yields seen in Japan as the slump ground on. At one point Japan's 10-year yield dropped to 0.40pc. The Fed would hold down yields by purchasing more bonds. The European Central Bank would do less, for political reasons.

SocGen's case for buying sovereign bonds is controversial. A number of funds doubt whether the Japan scenario will be repeated, not least because Tokyo itself may be on the cusp of a debt compound crisis.

Mr Fermon said his report had electrified clients on both sides of the Atlantic. "Everybody wants to know what the impact will be. A lot of hedge funds and bankers are worried," he said.

World gold supply runs out - we're at "Peak Gold"

Barrick shuts hedge book as world gold supply runs out

Global gold production is in terminal decline despite record prices and Herculean efforts by mining companies to discover fresh sources of ore in remote spots, according to the world's top producer Barrick Gold.

Ambrose Evans-Pritchard
Aaron Regent, president of the Canadian gold giant, said that global output has been falling by roughly 1m ounces a year since the start of the decade. Total mine supply has dropped by 10pc as ore quality erodes, implying that the roaring bull market of the last eight years may have further to run.

"There is a strong case to be made that we are already at 'peak gold'," he told The Daily Telegraph at the RBC's annual gold conference in London.

"Production peaked around 2000 and it has been in decline ever since, and we forecast that decline to continue. It is increasingly difficult to find ore," he said.

Ore grades have fallen from around 12 grams per tonne in 1950 to nearer 3 grams in the US, Canada, and Australia. South Africa's output has halved since peaking in 1970.

The supply crunch has helped push gold to an all-time high, reaching $1,118 an ounce at one stage yesterday. The key driver over recent days has been the move by India's central bank to soak up half of the gold being sold by the International Monetary Fund. It is the latest sign that the rising powers of Asia and the commodity bloc are growing wary of Western paper money and debt.

China has quietly doubled holdings to 1,054 tonnes and is thought to be adding gradually on price dips, creating a market floor. Gold remains a tiny fraction of its $2.3 trillion in foreign reserves.

Gold exchange-traded funds (ETFs) – dubbed the "People's Central Bank" – have accumulated 1,778 tonnes, making them the fifth biggest holder after the US, Germany, France, and Italy.

Ross Norman, director of theBullionDesk.com, said exploration budgets had tripled since the start of the decade with stubbornly disappointing results so far.

Output fell a further 14pc in South Africa last year as companies were forced to dig ever deeper - at greater cost - to replace depleted reserves, not helped by "social uplift" rules and power cuts. Harmony Gold said yesterday that it may close two more mines over coming months due to poor ore grades.

Mr Norman said the "false mine of central banks" had been the only new source of gold supply this decade as they auction off reserves, but they are switching sides to become net buyers.

Barrick is moving fast to wind down the remaining 3m ounces of its infamous hedge book over the next twelve months, an implicit bet on rising gold prices over time.

Mr Regent said the company had waited too long to ditch the policy, which has made the company enemy number one among 'gold bug' enthusiasts. The hedges oblige Barrick to deliver part of its gold into futures contracts set long ago at levels far below today's spot prices.

The strategy worked well in the falling market of the 1990s, but has cost the company dear in lost profits this decade. "Hindsight is always 20/20," said Mr Regent, who was appointed from the outside earlier this year.

Barrick bit the bullet in the third quarter, taking a $5.7bn charge against earnings on hedge contracts. Liberation is at last in sight. In 2001 the hedge book topped 20m ounces.

Mr Regent said the hedge policy has weighed badly on the share price and irked investors, becoming a bone of contention at every meeting. The financial crisis brought matters to a head as markets fretted about counterparty risk. "It was clear to me that there were a significant number of institutions who wouldn't invest in Barrick because of the hedge book," he said.

Barrick produced 1.9m ounces of gold last quarter, down from 1.95m a year earlier. Costs have been "trending down" to $456 an ounce, though rising energy prices pose a fresh threat. Total reserves are 139m ounces, far ahead of rival Newmont Mining at 86m.

The hedge book venture has not been a happy one, but those who predicted that Barrick would eventually "blow up" on its contracts may owe the company an apology.

Real unemployment tops 22%

WorldNetDaily
The true rate of unemployment for October 2009 may be 22.1 percent, not the 10.2 percent reported by the Bureau of Labor Statistics, Jerome Corsi's Red Alert reports.

Unemployment at 22.1 percent, if accurate, would be at numbers not seen since peak unemployment during the 1973 to 1975 recession.

Economist John Williams, publisher of ShadowStats.com, estimates that the peak of unemployment in nonfarm unemployment in the Great Depression of the 1930s would, by his methodology, have registered at 34 to 35 percent in 1933.

So, how does the Obama administration get away with reporting the lower unemployment percentage?

Corsi explained that the Clinton administration changed the way BLS calculates unemployment statistics by excluding "discouraged workers," those who had given up looking for a job because there were no jobs to be found.

Since the Clinton years, discouraged workers looking for a job for more than one year are not counted as "unemployed" because they are considered to have dropped out of the labor force.

The BLS still includes in "U6 Unemployment" calculations short-term discouraged workers, as long as they have been looking for a job less than one year.

This definition permits the Obama administration to under-report "U3 unemployment" at 10.2 percent when real unemployment as calculated before the Clinton administration redefinition is twice that amount, Red Alert contends, and U6 unemployment lies somewhere in between.

These differences are illustrated in the following chart that Williams produces in the "Alternative Data" section of his website named "Shadow Government Statistics: Analysis Behind and Beyond Government Economic Reporting."

"The convenience is that by reporting unemployment at 10.2 percent instead of at 22.1 percent, the Obama administration can clearly continue advancing the argument the U.S. economy is in recovery and the recession is over, even if the truth belies those claims," Corsi wrote.

Williams concludes that the economy is not recovering, but has been stimulated by excess liquidity placed into the financial system by the Federal Reserve keeping federal-funds rates at the historically low rate of zero, or near zero.

"Understanding that the real level of unemployment in October 2009 was closer to 22 percent than to the officially reported 10 percent is an important corrective," Corsi wrote, "especially if we are to appreciate the extent to which a Dow at or above the 10,000 benchmark is nothing more than another Fed-created bubble."

With millions of jobs outsourced to China and India under free-trade globalism, the dollar weakness that accompanies most recessions is not stimulative, he explained, largely because the U.S. has lost so many manufacturing jobs that are never returning to its shores.

"Truly, the only way the Fed can stimulate the economy is through creating bubbles generated by keeping interest rates artificially low," Corsi wrote. "As I argued in 'America For Sale: Fighting the New World Order, Surviving a Global Recession, and Preserving USA Sovereignty,' the Bernanke stock-market bubble caused by keeping interest rates at zero is merely a repeat of the Greenspan housing bubble that was caused by keeping interest rates at 1 percent in 2003-2004."

The housing bubble burst when interest rates began rising in late 2004 and peaked at just above 5 percent in mid-2006.

"The stock-market bubble will most certainly burst when interest rates rise, as they inevitably will," Corsi wrote, "both to fight the increasing risk of hyperinflation and to maintain the needed incentive for foreign nations to lend the U.S. Treasury the hundreds of billions of dollars monthly that will be needed to float yet another $1 trillion Obama administration federal budget deficit in 2010."

The Mother of all Carry Trades

US indexes - in fact global indexes - surged on weekend news that G20 nations shall largely continue their policy of stimulate, print, and stimulate more. The irony at this point is actual strength has the potential to hurt the markets, since it would be followed by tightening measures - so instead the market is having its cake and eating it too. When positive economic data is out, that is good for stocks (for obvious reasons)...and when negative economic data is out, that is also good for stocks because it means no end in assistance from central banks and governments. Gains were broad as the NASDAQ, S&P 500, and Russell 2000 all logged returns of 2.0-2.2%. The dollar continued its downward ways... closing at a 15 month low; and all was well in the world after the hiatus experienced a few weeks ago.

• The Dow Jones industrial average stormed to its highest level in more than a year Monday as a falling dollar boosted prices for gold, oil and other commodities. Stocks also jumped as investors grew more confident that governments around the world will keep interest rates low to help the global economy.
• Investors around the world see the dollar as weaker than other currencies, and so they're using it for what's known as a "carry trade," to finance purchases of investments in other countries. That trend takes the dollar down further when those purchases are made.

We've written in depth about the carry trade here; and it has become the *only* trade in town.

While extremely crowded, so was the "long technology" trade in 1999 and "long US real estate" in 2006. It is not so much the "US dollar should go down" part that has flaws, but the idea that every asset in the world is bullet free and can be bought as long as the US dollar falters thesis that has taken on an "over the top" pretense. But until it ends, it can continue for a long time... so we might be repeating this broken record for many more days ahead. Let it be known however, that when this relationship does shred you will see massive dislocations as so many speculators try to exit the same narrow door. Nouriel Roubini had an appearance on CNBC last week calling this the "mother of all carry trades"- 9 minute video.

What will be interesting is when this trade drives up the price of commodities to a point they turn from "neutral" to a major cost impediment both for consumer and corporation. If oil starts sniffing >$100 can we still pretend everything is fine? For now, that appears to be a worry for another day (month? year?). As the dollar was crunched, gold rallied to new nominal highs, breaking the $1100 threshold to finish at $1101.40.

• Gold prices climbed to another new high Monday as the U.S. dollar sank to a 15-month low. Gold for December delivery soared as high as $1,111.70 on the New York Mercantile Exchange before settling at $1,101.40 an ounce, up $5.70, or 0.5 percent.
• The gains came as the ICE Futures US dollar index, which measures the dollar against other currencies, dropped more than 1 percent to its lowest level since August 2008.

Silver gained 9 cents to finish at $17.46 and as we predicted Friday, the weakness in oil due to a frail US economy we saw in last week's closing session was forgotten after a weekend of speculative joy... crude jumped $2.37 to finish just under $80. What horrific unemployment figures?

If you are wondering where all that liquidity is heading, aside from direct purchases of US Treasuries via quantitative easing by the Fed, another sort of Ponzi scheme is running in the background. As the banks build reserves, courtesy of 0-0.25% Federal Funds rate, much of that money is simply going into.... (wait for it)... US Treasuries. Can you find which shell the US Treasury bill is hiding under? So when you hear of "insatiable demand" for US debt... here is the reality. After all, why lend money when Ben Bernanke offers you risk free returns?

• You know an economy isn’t healthy when banks are using as much of their money to buy government debt as they are to make loans to businesses. That’s just what’s happening right now. At the end of October, business loans were down 17% from a year earlier, while Treasury and agency debt holdings were up 8%.
• ... this helps explain why yields on Treasury bonds are so low even with mammoth U.S. budget deficits. Credit-wary U.S. banks are helping to finance this deficit because they’re afraid to put their money anywhere else. They can still earn a good, low-risk return buy borrowing very cheap short-term money and parking it in higher yielding Treasury bonds. They’re not the sole factor, but they contribute.

Europe and Asia were similarly thrilled by the pledges of sustained easy money. Britain's FTSE 100 rose 1.8 percent, Germany's DAX index jumped 2.4 percent, and France's CAC-40 rose 2.1 percent. In Asia, Japan gained 0.2 percent, China 0.4 percent while Hong Kong (+1.7%) and India (+2.1%) were the standouts. Brazil gained 2.1 percent.

CIT Bankruptcy Sticks Taxpayers With $2.3 Billion Loss

John Carney
The lifeline extended by Carl Icahn to CIT on Friday may as well be a noose around the neck of taxpayers.

The company said Friday that Icahn to support its prepackaged bankruptcy plan. Icahn, who wanted to push CIT into liquidatio had attempted to persuade other bondholders to derail CIT's restructuring plan. When that attempt failed, Icahn agreed to support the prepack.

The company received $2.3 billion in taxpayer support under TARP. In exchange, the government got preferred securities and warrants for common stock.

Under the bankruptcy plan, which may be filed as early as this weekend, senior bondholders would take a 30 cent haircut on their debt, which will also have its maturity pushed out into the future. The senior bond holders will also get 92.5% of the equity in the company. Junior bondholders will get seriously crunched down the capital structure: the debt will be converted to the remaining 7.5% of the equity.

Current equity holders, including the US taxpayer will be wiped out.

Why did the US taxpayers wind up in a riskier part of the capital structure than billionaire investors like Icahn? Because the US Treasury insisted on "rescuing" financial firms without forcing the existing creditors to accept equity for debt swaps, which would have recapitalized the companies while keeping the taxpayer money in a safer senior position.

CIT was repeated turned down this summer when it sought additional bailout money. This is to the credit of Tim Geithner and the Obama administration, which must have been at least tempted to extend government aid to a company that lends to so many small and medium sized businesses. But this is a cold comfort to taxpayers looking at a $2.3 billion loss: it could have been worse.

With $71 billion in assets, CIT will be the fifth-largest bankruptcy filing in U.S. history, trailing only those of Lehman Brothers, Washington Mutual, Worldcom and General Motors. But apparently the Treasury has decided financial system can survive the CIT bankruptcy. Which raises the question: why did they get any bailout at all?

"Yes, There’s Racism in the Pentagon"

Hersh/Image via Wikipedia

Neil Offen
DURHAM — The U.S. military is not just fighting wars in Iraq and Afghanistan, America’s most renowned investigative journalist says.

The army is also “in a war against the White House — and they feel they have [President] Obama boxed in,” Pulitzer Prize-winning reporter Seymour Hersh told several hundred people in Duke University’s Page Auditorium on Tuesday night. “They think he’s weak and the wrong color. Yes, there’s racism in the Pentagon. We may not like to think that, but it’s true and we all know it.”

In a speech on Obama’s foreign policy, Hersh, who uncovered the My Lai massacre during the Vietnam War and torture at Abu Ghraib prison during the Iraqi war, said many military leaders want Obama to fail.

“A lot of people in the Pentagon would like to see him get into trouble,” he said. By leaking information that the commanding officer in Afghanistan, Gen. Stanley McChrystal, says the war would be lost without an additional 40,000 American troops, top brass have put Obama in a no-win situation, Hersh contended.

“If he gives them the extra troops they’re asking for, he loses politically,” Hersh said. “And if he doesn’t give them the troops, he also loses politically.”

The journalist criticized the president for “letting the military do that,” and suggested the only way out was for Obama to stand up to them.

“He’s either going to let the Pentagon run him or he has to run the Pentagon,” Hersh said. If he doesn’t, “this stuff is going to be the ruin of his presidency.”

Hersh called the “Af-Pak” situation — the spreading conflict in Afghanistan and Pakistan — Obama’s main challenge.

The war in Afghanistan has destabilized Pakistan, which has 80 to 100 nuclear weapons, said Hersh, who recently returned from a visit to South Asia. “And the nuclear situation [in Pakistan] is more dire than you could know. It sucks.”

The only way for the U.S. to extricate itself from the conflict, Hersh said, is to negotiate with the Taliban.

“It’s the only way out,” he said. “I know that there’s a lot of discussion in the White House about this now. But Obama is going to have to take charge, and there’s no evidence he’s going to do that.”

While critical of the president on Afghanistan, Hersh, who travels to the Middle East three or four times a year, did praise his foreign policy initiatives toward Iran.

“When it comes to Iran, he’s changed the paradigm,” he said. “[President] Bush always said we’ll negotiate with those duty Iranians about their nuclear enrichment plans when they stop enriching nuclear material. Obama understands there is some room there to maneuver. That’s a huge change.”

He also praised Obama for also changing the paradigm with his decision to shelve plans for a missile defense system in Eastern Europe. Doing that, he said, would help U.S. relations with Russia.

“It’s about time we realize we have a lot in common with the Russians, like worrying about China and global terrorism,” Hersh said.

The missiles, he added, were just a continuation of the Cold War, and “it’s about time for us to capture some of the benefit we were supposed to get from ending the Cold War.”

Nine Countries to Replace US Dollar

Nine countries of ALBA, a leftist bloc conceived by Venezuelan President Hugo Chavez, met in Bolivia where they vowed to press ahead with a new currency for intra-regional trade to replace the US dollar.

"The document is approved," said Bolivia's President Evo Morales, who is hosting the summit.

The new currency, dubbed the Sucre, would be rolled out beginning in 2010 in a non-paper form. That move echoes the European Union's introduction of the euro precursor, the ECU, an account unit designed to tie down stable exchange rates between member states before the national currencies were scraped.

ALBA's member states are Venezuela, Bolivia, Cuba, Ecuador, Nicaragua, Honduras, Dominica, Saint Vincent and Antigua and Barbuda. The currency, which was backed in April this year, is named after Jose Antonio de Sucre, who fought for independence from Spain alongside Venezuelan hero Simon Bolivar in the early 19th century.

The bloc also called for the replacement of the World Bank's International Centre for Settlement of Investment Disputes, which arbitrates international contract disputes and has probed a slew of disputes involving ALBA members and western energy firms. Most ALBA members have already withdrawn from the organization, with Ecuador announcing last July that it would pull out of the group.

On Friday Bolivian media reported the country intents to nationalize a electricity distribution firm owned by Spain's Red de Electrica de Espana. It is just the latest in a series of nationalizations in Venezuela, Ecuador and Bolivia.

In May, Venezuela nationalized 74 energy services firms operating in the oil-rich Maracaibo Lake region. Bolivia's Evo Morales has indicated that parts for his country's energy and rail sectors will be nationalized.
Source

Deflationists Can Kiss My $$$

Hours cut, wages cut, unemployment up, foreclosures up, credit card interests rates are up, oil up, energy prices up, and now for the 3rd year in a row food prices are up while the dollar goes down. There's no deflation for the working man.

Steep food price increases on way
Reuters reports U.S. food prices will rise by at least 7 percent in 2009 because of higher feed costs for chickens, hogs and cattle, said a group of food-industry economists on Thursday.

It would be the third year in a row that food prices rose faster than the overall U.S. inflation rate. Food inflation is the highest since 1990.

"The sizable increase in the cost of producing food has not been fully passed on to the consumer," said private consultant Bill Lapp. He foresaw food inflation of 7 percent-9 percent in 2009.

During a teleconference, economists from the National Chicken Council and the consultancy Farm Econ said food inflation could be 7 percent-8 percent. The teleconference was arranged by a group of major foodmakers.

Wholesale prices for items used by foodmakers have climbed more rapidly than grocery and restaurant prices, so higher consumer prices are in store, said Lapp.

Although grain prices have declined since summer, this year's corn, wheat and soybean crops are forecast to fetch prices at the farm gate that are double their 2005 levels. Corn and soybeans are major ingredients in feed rations.

"We've been losing money for more than a year," said Bill Roenigk, economist for the Chicken Council, who said producers intend to cut production by as much as 12 percent. "We need to recover these feed costs."

Thomas Elam, head of Farm Econ, said poultry, hog and cattle producers would cut production in coming months because of feed costs, meaning less meat on the retail market but at higher prices.

Menu prices are restaurants up 4.3 percent so far this year, the largest increase since 1990, said Hudson Riehle of the National Restaurant Association. He said one-third of each sales dollar goes to food purchases.

Agriculture Department forecasts also say pricey meats will drive food inflation in 2008.

Americans spend more than $1 trillion a year on groceries, snacks, carry-out foods and restaurant meals. Farmers get 20 cents of the food dollar. The rest goes to processing, labor, transportation and distribution.

Government Reports Point to Fiscal Doomsday

Martin D Weiss
When our leaders have no awareness of the disastrous consequences of their actions, they can claim ignorance and take no action.

Or when our leaders have no hard evidence as to what might happen in the future, they can at least claim uncertainty.

But when they have full knowledge of an impending disaster ... they have proof of its inevitability in ANY scenario ... and they so declare in their official reports ... but STILL don’t lift a finger to change course ... then they have only one remaining claim:

INSANITY!

And, unfortunately, that’s precisely the situation we’re in today: Three recently released government reports now point to fiscal doomsday for America; and one of the reports, issued by the Congressional Budget Office (CBO), says so explicitly:

• The CBO paints two future scenarios for the U.S. budget deficit and the national debt. But it plainly declares that fiscal disaster will strike in EITHER scenario. Furthermore ...
• The CBO states that its fiscal disaster scenarios could cause severe economic declines for decades to come, including hyperinflation and destruction of retirement savings.
• The CBO then proceeds to admit that even its worse-case scenario could be understated by a wide margin due to panic in the financial markets or vicious cycles that are beyond control.
• Separately, in its Flow of Funds Report for the second quarter, the Federal Reserve provides irrefutable data that we are already beginning to witness the first of these consequences in the United States: an unprecedented cut-off of credit to businesses and consumers.
• Meanwhile, the Treasury Department shows that America’s fate remains, as before, in the hands of foreigners, with the U.S. still owing them $7.9 trillion!
• And despite all this, neither Congress nor the Obama Administration have proposed a plan or a timetable for averting these doomsday scenarios. Their sole solution is to issue more bonds, borrow more, and print more without restraint.

That is the epitome of insanity.

Yes, the great government bailouts of 2008 and 2009 have bought us some time ... but they have promptly proceeded to sell us into bondage.

Yes, they have given us safe passage over tough seas ... but only to throw our assets onto the global auction block for the highest bidders.

The one bright spot: Unlike some governments, ours does not conceal the evidence of its folly. Quite the contrary, the proof pours forth from these three government reports in relatively blunt language and unmistakably blatant numbers ...

Report #1 Congressional Budget Office (CBO): The Long-Term Budget Outlook

The CBO opens with a chart predicting the most dramatic surge in government debt of all time.

It shows that even in proportion to the larger size of the U.S. economy today, the government debt has ALREADY surpassed the massive debt loads accumulated during World War I and the Great Depression ... and will soon surpass even the massive debt load of World War II.

“Large budget deficits,” write the authors of the CBO report, would ...

• “Reduce national saving,” leading to ...
• “More borrowing from abroad” and ...
• “Less domestic investment,” which in turn would ...
• “Depress income growth in the United States,” and ...
• “Seriously harm the economy.”

Worse, on page 14, the CBO warns that:

• “Lenders may become concerned about the financial solvency of the government and ...
• “Demand higher interest rates to compensate for the increasing riskiness of holding government debt.” Plus ...
• “Both foreign and domestic lenders may not provide enough funds for the government to meet its obligations.”

The magnitude of the problem cannot be underestimated. The CBO declares on page 15 that:

• “The systematic widening of budget shortfalls projected under CBO’s long-term scenarios has never been observed in U.S. history” and ...
• It will also be larger than the debt accumulations of any other industrialized nation in the post-World War II period, including Belgium and Italy, the two worst cases of all.

But the CBO admits that even these frightening projections may be grossly understated because:

• “The analysis omitted the pressures that a rising ratio of debt to GDP would have on real interest rates and economic growth.”
• “The growth of debt would lead to a vicious cycle in which the government had to issue ever-larger amounts of debt in order to pay ever-higher interest charges.”
• “More government borrowing would drain the nation’s pool of savings, reducing investment” and ...
• “Capital would probably flee the United States, further reducing investment.”

But none of these are factored into the analysis. On page 17 of its report, the CBO writes ...

“The analysis ... does not incorporate the financial markets’ reactions to a fiscal crisis and the actions that the government would adopt to resolve such a crisis. Because [our] textbook growth model is not forward-looking, the analysis assumes that people will not anticipate the sustainability issues facing the federal budget; as a result, the model predicts only a gradual change in the economy as federal debt rises.

“In actuality, the economic effects of rapidly growing debt would probably be much more disorderly as investors’ confidence in the nation’s fiscal solvency began to erode. If foreign investors anticipated an economic crisis, they might significantly reduce their purchases of U.S. securities, causing the exchange value of the dollar to plunge, interest rates to climb, and consumer prices to shoot up.(Bolding is mine.)

Report #2 U.S. Federal Reserve: Flow of Funds Accounts of the United States

The Fed’s data on page 12 tells it all: The impact on the U.S. credit markets is not just a future scenario. It’s happening right now.

Yes, the government is getting its money to finance its exploding deficits (for now). But it’s hogging all the available supplies, while American businesses and average consumers are getting shut out or even shoved out.

Specifically ...

• In the first half of last year, the U.S. Treasury raised funds at the annual pace of $411 billion in the first quarter and $310 billion in the second quarter.
• But if you think that was a lot, consider this: THIS year, the Treasury has stepped up its pace of borrowing to annual rates of $1.443 TRILLION in the first quarter and $1.896 TRILLION in the second quarter. That’s 3.5 times and over SIX TIMES MORE than last year’s, respectively.

Meanwhile, the private sector is getting killed ...

• Last year, banks provided new credit at the annual pace of $472.4 billion in the first quarter and $86.7 billion in the second. This year, they’re not providing ANY new credit — they’re actually LIQUIDATING loans at the rate of $857.2 billion in the first quarter and $931.3 billion in the second. So if you’re running a business, you may want to think twice before asking your bank for more money. Instead, they may decide to TAKE BACK the money they’ve already loaned you!
• Ditto for mortgages. Last year, mortgages were being created at the annual clip of $522.5 billion and $124 billion in the first and second quarters, respectively. This year, on a net basis, mortgages haven’t been created at all. Quite the contrary, the Fed reports that, on a net basis, they’ve been liquidated at an annual pace of $39.3 billion in the first quarter and $239.5 billion in the second.
• Getting cash out of credit cards and other consumer credit is even tougher. Last year, folks were able to add to their consumer credit at annual rates of $115 billion and $105 billion in the first two quarters. This year, in contrast, they’ve been forced to CUT back on their credit at annual rates of $95.3 billion in the first quarter ... and at an even faster pace in the second quarter — $166.8 billion.

Never before in my lifetime have I witnessed a more severe case of crowding out in the credit markets!

And never before has the CBO been so right in its forecasts of fiscal doomsday: One of its dire forecasts was already coming true even before it issued its report.

Report #3 U.S. Treasury Department: Treasury Bulletin

Each and every month, the Treasury reminds us of the single fact that no one in the Treasury wants to face:

The U.S. is deep in debt to the rest of the world, and on page 48, it provides the evidence: total liabilities to foreigners of $7,898,435 million (nearly $7.9 trillion)!

This isn’t a new record. It was actually slightly more last year. But the fact is NOTHING has been done to reduce our debt to foreigners. Quite the contrary, it is the deliberate policy of our government to pile up more — to sell foreign investors and central banks on the idea that they must continue to lend us money.

The fact that this could potentially put our nation into deeper jeopardy is overlooked. And the dire forecast by the CBO that foreign investors might pull the plug is pooh-poohed.

Violent implosion of large swathe of the working classes

Posted by: Felix Salmon

Jake is on fire with employment charts this morning in the wake of the atrocious payrolls report. This one in particular is new to me, and extremely sobering:

Even at the worst points of the worst recessions of the 1970s and 1980s, never has the number of hours worked per US person been lower than it is now. And this isn’t happy productive people taking time off because they don’t need to work as hard any more: this is unhappy unemployed people who desperately want and need to earn money but can’t.

What we’re seeing in this graph is, I think, the violent implosion of a large swathe of the working classes. Many of those jobs — the ones which, in the boom, were in or connected to the housing or auto industries in particular — will never come back; if they’re replaced at all it will be with lower-wage, lower-skill service-industry jobs. That bodes very ill for the US economy as a whole, and reinforces my notion that the best-case scenario right now, economically speaking, is essentially a square-root-shaped recession where we rebound from the lows but then fail to grow over the medium or long term.

That said, previous plunges in this graph have been followed by relatively sharp rebounds, so maybe we’ll see the same thing happen again. I just can’t work out what the driver of all that new employment will be.

The plan to de-dollarise oil denied by the usual suspects

Fisk Image by Marjorie Lipan via Flickr

Robert Fisk
A financial revolution with profound political implications
The plan to de-dollarise the oil market, discussed both in public and in secret for at least two years and widely denied yesterday by the usual suspects – Saudi Arabia being, as expected, the first among them – reflects a growing resentment in the Middle East, Europe and in China at America's decades-long political as well as economic world dominance.

Nowhere has this more symbolic importance than in the Middle East, where the United Arab Emirates alone holds $900bn (£566bn) of dollar reserves and where Saudi Arabia has been quietly co-ordinating its defence, armaments and oil policies with the Russians since 2007.

This does not indicate a trade war with America – not yet – but Arab Gulf regimes have been growing increasingly restive at their economic as well as political dependence on Washington for many years. Of the $7.2 trillion in international reserves, $2.1trn is held by Arab countries – China holds about $2.3trn – and the nations interested in moving away from dollar-trading in oil are believed to hold over 80 per cent of international dollar reserves.

Saudi Arabia's denials of any such ambitions were regarded by Arab bankers as a normal part of Gulf politics. The Saudis, of course, managed to deny that Iraq had invaded Kuwait in 1990 – even when Saddam Hussein's legions stood along the Saudi frontier, until the US broadcast the news of Iraq's aggression to the world.

Saudi bankers are well aware that in nine years' time – the current timeframe for a transition away from the dollar in oil trading to Japanese and Chinese currencies, the euro, gold and a possible new Gulf currency – China will have doubled its national income to $10trn (assuming a growth rate of 7 per cent), at which point the US might hold no more than 20 per cent of the world's gross income.

Such massive financial movements, encouraged by the de-dollarisation of oil, will have enormous political effects in the Middle East, especially if economic superpower rivalry between America and China comes to dominate the Arab world. Will American economic support for Israel remain as loyal in nine years' time if China and the Arabs are setting the pace in global financial markets? Indeed – perhaps with this in mind – some Israeli financiers have been expressing interest over the past two years in non-dollar Arab bank investments. Whenever a change of this magnitude takes place over a number of years, it has to be commenced in secrecy.

Nor can it be denied that the very project to take oil trading away from the dollar market has deep political roots. The collapse of the Soviet Union has allowed the US to dominate the Middle East more than any other world region, and the Arabs – who can no longer contemplate an oil boycott of the kind they imposed on the West after the 1973 Middle East war – are still anxious to prove that they can flex their economic power to bring about change.

Saudi Arabia's pan-Arab offer to recognise Israel and its security in return for an Israeli withdrawal from occupied Arab land is not – according to the Saudis themselves – indefinite. If they are ignored or rebuffed, then they can search for other allies through new financial institutions to force a new Middle East peace. China will be happy to help.

US-Israeli Hypocrisy, Lies and Imminent War

Image by cosmowidgets via Flickr

In his latest column for the New Statesman, John Pilger compares the current drum-beating for war against Iran, based on a fake "nuclear threat", with the manufacture of a sense of false crisis that led to invasion of Iraq and the deaths of 1.3 million people.

In 2001, the Observer in London published a series of reports that claimed an “Iraqi connection” to al-Qaeda, even describing the base in Iraq where the training of terrorists took place and a facility where anthrax was being manufactured as a weapon of mass destruction. It was all false. Supplied by US intelligence and Iraqi exiles, planted stories in the British and US media helped George Bush and Tony Blair to launch an illegal invasion which caused, according to the most recent study, 1.3 million deaths.

Something similar is happening over Iran: the same syncopation of government and media “revelations”, the same manufacture of a sense of crisis. “Showdown looms with Iran over secret nuclear plant”, declared the Guardian on 26 September. “Showdown” is the theme. High noon. The clock ticking. Good versus evil. Add a smooth new US president who has “put paid to the Bush years”. An immediate echo is the notorious Guardian front page of 22 May 2007: “Iran’s secret plan for summer offensive to force US out of Iraq”. Based on unsubstantiated claims by the Pentagon, the writer Simon Tisdall presented as fact an Iranian “plan” to wage war on, and defeat, US forces in Iraq by September of that year – a demonstrable falsehood for which there has been no retraction.

The official jargon for this kind of propaganda is “psy-ops”, the military term for psychological operations. In the Pentagon and Whitehall, it has become a critical component of a diplomatic and military campaign to blockade, isolate and weaken Iran by hyping its “nuclear threat”: a phrase now used incessantly by Barack Obama and Gordon Brown, and parroted by the BBC and other broadcasters as objective news. And it is fake.

On 16 September, Newsweek disclosed that the major US intelligence agencies had reported to the White House that Iran’s “nuclear status” had not changed since the National Intelligence Estimate of November 2007, which stated with “high confidence” that Iran had halted in 2003 the programme it was alleged to have developed. The International Atomic Energy Agency has backed this, time and again.

The current propaganda-as-news derives from Obama’s announcement that the US is scrapping missiles stationed on Russia’s border. This serves to cover the fact that the number of US missile sites is actually expanding in Europe and the “redundant” missiles are being redeployed on ships. The game is to mollify Russia into joining, or not obstructing, the US campaign against Iran. “President Bush was right,” said Obama, “that Iran’s ballistic missile programme poses a significant threat [to Europe and the US].” That Iran would contemplate a suicidal attack on the US is preposterous. The threat, as ever, is one-way, with the world’s superpower virtually ensconced on Iran’s borders.

Iran’s crime is its independence. Having thrown out America’s favourite tyrant, Shah Reza Pahlavi, Iran remains the only resource-rich Muslim state beyond US control. As only Israel has a “right to exist”in the Middle East, the US goal is to cripple the Islamic Republic. This will allow Israel to divide and dominate the region on Washington’s behalf, undeterred by a confident neighbour. If any country in the world has been handed urgent cause to develop a nuclear “deterrence”, it is Iran.

As one of the original signatories of the Nuclear Non-Proliferation Treaty, Iran has been a consistent advocate of a nuclear-free zone in the Middle East. In contrast, Israel has never agreed to an IAEA inspection, and its nuclear weapons plant at Dimona remains an open secret. Armed with as many as 200 active nuclear warheads, Israel “deplores” UN resolutions calling on it to sign the NPT, just as it deplored the recent UN report charging it with crimes against humanity in Gaza, just as it maintains a world record for violations of international law. It gets away with this because great power grants it immunity.

Obama’s “showdown” with Iran has another agenda. On both sides of the Atlantic the media have been tasked with preparing the public for endless war. The US/Nato commander General Stanley McChrystal says 500,000 troops will be required in Afghanistan over five years, according to America’s NBC. The goal is control of the “strategic prize” of the gas and oilfields of the Caspian Sea, central Asia, the Gulf and Iran – in other words, Eurasia. But the war is opposed by 69 per cent of the British public, 57 per cent of the US public and almost every other human being. Convincing “us” that Iran is the new demon will not be easy. McChrystal’s spurious claim that Iran “is reportedly training fighters for certain Taliban groups” is as desperate as Brown’s pathetic echo of “a line in the sand”.

During the Bush years, according to the great whistleblower Daniel Ellsberg, a military coup took place in the US, and the Pentagon is now ascendant in every area of American foreign policy. A measure of its control is the number of wars of aggression being waged simultaneously and the adoption of a “first-strike” doctrine that has lowered the threshold on nuclear weapons, together with the blurring of the distinction between nuclear and conventional weapons.

All this mocks Obama’s media rhetoric about “a world without nuclear weapons”. In fact, he is the Pentagon’s most important acquisition. His acquiescence with its demand that he keep on Bush’s secretary of “defence” and arch war-maker, Robert Gates, is unique in US history. He has proved his worth with escalated wars from south Asia to the Horn of Africa. Like Bush's America, Obama's America is run by some very dangerous people. We have a right to be warned. When will those paid to keep the record straight do their job?

Sudden Stop Event

Image via Wikipedia

Posted by: Rolfe Winkler

Alice Schroeder wrote a great column for Bloomberg yesterday that I’m just getting to. The best stuff comes at the end, where she describes why some people are buying gold even though inflation doesn’t seem to be a big risk. (Apologies in advance for block-quoting lots of stuff in this post, but I think it’s worth it…)

[Gold bugs] aren’t just betting on inflation, as is the conventional wisdom. Gold has a wicked history of being an unreliable inflation hedge. It has, though, at times been a haven against sudden currency depreciation.

In all the talk of inflation because the Treasury is printing so much money versus deflation because it may not print enough, there is one type of inflation that is rarely discussed. This is the mega-inflation caused by a sudden currency devaluation. Currency is like any financial innovation, an obligation secured by assets. When the obligation is perceived to have increased far beyond the level justifiable by the assets, which in this case make up a country’s economy, a bubble has formed.

Schroeder is describing, in much simpler terms, what economist William Buiter has called a “sudden stop” event. (I’m having trouble logging on to FT to find the right link, but the guys at Baseline Scenario have a good one here.) Let’s take a quick detour to Buiter then, writing early this year:

But as the recession deepens, and as discretionary fiscal measures in the US produce 12% to 14% of GDP general government financial deficits – figures associated historically not even with most emerging markets, but just with the basket cases among them, and with banana republics – I expect that US sovereign bond yields will begin to reflect expected inflation premia (if the markets believe that the Fed will be forced to inflate the sovereign’s way out of an unsustainable debt burden) or default risk premia….

The US is helped by the absence of ‘original sin’ – its ability to borrow abroad in securities denominated in its own currency – and the closely related status of the US dollar as the world’s leading reserve currency. But this elastic cannot be stretched indefinitely….

The only element of a classical emerging market crisis that is missing from the US and UK experiences since August 2007 is the ’sudden stop’ – the cessation of capital inflows to both the private and public sectors. . . . But that should not be taken for granted, even for the US with its extra protection layer from the status of the US dollar as the world’s leading reserve currency. A large fiscal stimulus from a government without fiscal credibility could be the trigger for a ’sudden stop’.

Most economists, using their conventional models, are looking at things like “output gaps” to rationalize additional borrowing to stimulate the economy. So long as people and capital are unemployed, cost-push inflation isn’t seen as a threat so stimulus is believed to be cost-free. The risk, of course, is that we can’t borrow to infinity. At a certain point — tough to say when — we’ll tap out the national credit line. Where economists get in trouble, IMHO, is they envision this nebulous period in the “medium term” when the economy will be growing again and debt can be paid back. As I argued in my column yesterday, this ignores the fact that growth, which is to say growth in spending, is no longer possible without incremental borrowing. We’ve gotten ourselves into a cycle of perpetual borrowing to, in Schroeder’s words, “pump the economy back to a high-water mark that was phony to begin with.”

To Schroeder’s conclusion:

As in any bubble, those who recognize this need to act well in advance. Historically, governments have taken action to prevent currency flight when the owners of a severely overvalued medium of exchange start selling so much that it adds to the pressure on its price. They make private purchases of gold illegal, or tax the exchange of currency.

Right now, the American economy is worth less than the value implied by the market value of its obligations. How much less, no one knows. But gold bugs will tell you, privately, that this is why they are buyers. Might as well stock up, they say, before gold becomes a controlled substance.

The bolded section is why I haven’t touched stocks in two years and don’t plan to for some time: The U.S. economy is underwater. The value of our obligations is greater than the value of our assets, which is to say the equity value of the economy is negative. The best proxy for that is the stock market.

Stocks aren’t going to zero. They have option value. But a 90% fall from the peak is what I see happening eventually. Either explicitly or priced in gold. Over what time frame, I haven’t a clue.

But that’s what happened during the Depression. Today we’re far more leveraged…

U.S. Beefs up Pre-Attack Media Blitz Vilifying Iran

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Now that U.S. public opinion has been shaped -- through endless media reports of Iranian government atrocities -- to be sympathetic and supportive of a "righteous" Iranian uprising, Israel has moved its warships through the Suez. "Two Israeli missile class warships have sailed through the Suez Canal ten days after a submarine capable of launching a nuclear missile strike, in preparation for a possible attack on Iran’s nuclear facilities," reported the British Times . "The deployment into the Red Sea, confirmed by Israeli officials, is a clear signal that Israel is able to put its strike force within range of Iran at short notice. It came before long-range exercises by the Israeli air force in America and the test of a missile defense shield at a US missile range in the Pacific Ocean."

The story line that dominated media coverage of the second Iranian uranium enrichment facility last week was the official assertion that U.S. intelligence had caught Iran trying to conceal a "secret" nuclear facility.

Analysis by Gareth Porter
But an analysis of the transcript of that briefing by senior administration officials that was the sole basis for the news stories and other evidence reveals damaging admissions, conflicts with the facts and unanswered questions that undermine its credibility.

Iran's notification to the International Atomic Energy Agency (IAEA) of the second enrichment facility in a letter on Sep. 21 was buried deep in most of the news stories and explained as a response to being detected by U.S. intelligence. In reporting the story in that way, journalists were relying entirely on the testimony of "senior administration officials" who briefed them at the G20 summit in Pittsburgh Friday.

U.S. intelligence had "learned that the Iranians learned that the secrecy of the facility was compromised", one of the officials said, according to the White House transcript. The Iranians had informed the IAEA, he asserted, because "they came to believe that the value of the facility as a secret facility was no longer valid..."

Later in the briefing, however, the official said "we believe", rather than "we learned", in referring to that claim, indicating that it is only an inference rather than being based on hard intelligence.

The official refused to explain how U.S. analysts had arrived at that conclusion, but an analysis by the defence intelligence consulting firm IHS Jane's of a satellite photo of the site taken Saturday said there is a surface-to-air missile system located at the site.

Since surface-to-air missiles protect many Iranian military sites, however, their presence at the Qom site doesn't necessarily mean that Iran believed that Washington had just discovered the enrichment plant.

The official said the administration had organised an intelligence briefing on the facility for the IAEA during the summer on the assumption that the Iranians might "choose to disclose the facility themselves". But he offered no explanation for the fact that there had been no briefing given to the IAEA or anyone else until Sep. 24 - three days after the Iranians disclosed the existence of the facility.

A major question surrounding the official story is why the Barack Obama administration had not done anything – and apparently had no plans to do anything - with its intelligence on the Iranian facility at Qom prior to the Iranian letter to the IAEA. When asked whether the administration had intended to keep the information in its intelligence briefing secret even after the meeting with the Iranians on Oct. 1, the senior official answered obliquely but revealingly, "I think it's impossible to turn back the clock and say what might have been otherwise."

In effect, the answer was no, there had been no plan for briefing the IAEA or anyone.

News media played up the statement by the senior administration official that U.S. intelligence had been "aware of this facility for years".

But what was not reported was that he meant only that the U.S. was aware of a possible nuclear site, not one whose function was known.

The official in question acknowledged the analysts had not been able to identify it as an enrichment facility for a long time. In the "very early stage of construction," said the official, "a facility like this could have multiple uses." Intelligence analysts had to "wait until the facility had reached the stage of construction where it was undeniably intended for use as a centrifuge facility," he explained.

The fact that the administration had made no move to brief the IAEA or other governments on the site before Iran revealed its existence suggests that site had not yet reached that stage where the evidence was unambiguous.

A former U.S. official who has seen the summary of the administration's intelligence used to brief foreign governments told IPS he doubts the intelligence community had hard evidence that the Qom site was an enrichment plant. "I think they didn't have the goods on them," he said.

Also misleading was the official briefing's characterisation of the intelligence assessment on the purpose of the enrichment plant. The briefing concluded that the Qom facility must be for production of weapons-grade enriched uranium, because it will accommodate only 3,000 centrifuges, which would be too few to provide fuel for a nuclear power plant.

According to the former U.S. official who has read the briefing paper on the intelligence assessment, however, the paper says explicitly that the Qom facility is "a possible military facility". That language indicates that intelligence analysts have suggested that the facility may be for making low-enriched rather than for high-enriched, bomb-grade uranium.

It also implies that the senior administration official briefing the press was deliberately portraying the new enrichment facility in more menacing terms than the actual intelligence assessment.

Iranian President Mahmoud Ahmadinejad's offer the day after the denunciation of the site by U.S., British and French leaders to allow IAEA monitoring of the plant will make it far more difficult to argue that it was meant to serve military purposes.

The circumstantial evidence suggests that Iran never intended to keep the Qom facility secret from the IAEA but was waiting to make it public at a moment that served its political-diplomatic objectives.

The Iranian government is well aware of U.S. capabilities for monitoring from satellite photographs any site in Iran that exhibits certain characteristics.

Iran obviously wanted to make the existence of the Qom site public before construction on the site would clearly indicate an enrichment purpose. But it gave the IAEA no details in its initial announcement, evidently hoping to find out whether and how much the United States already knew about it.

The specific timing of the Iranian letter, however, appears to be related to the upcoming talks between Iran and the P5+1 - China, France, Britain, Russia, the United States and Germany - and an emerging Iranian strategy of smaller back-up nuclear facilities that would assure continuity if Natanz were attacked.

The Iranian announcement of that decision on Sep. 14 coincided with a statement by the head of Iran's atomic energy organisation, Ali Akbar Salehi, warning against preemptive strikes against the country's nuclear facilities.

The day after the United States, Britain and France denounced the Qom facility as part of a deception, Salehi said, "Considering the threats, our organisation decided to do what is necessary to preserve and continue our nuclear activities. So we decided to build new installations which will guarantee the continuation of our nuclear activities which will never stop at any cost."

As satellite photos of the site show, the enrichment facility at Qom is being built into the side of a mountain, making it less vulnerable to destruction, even with the latest bunker-busting U.S. bombs.

The pro-administration newspaper Kayhan quoted an "informed official" as saying that Iran had told the IAEA in 2004 that it had to do something about the threat of attack on its nuclear facilities "repeatedly posed by the western countries".

The government newspaper called the existence of the second uranium enrichment plan "a winning card" that would increase Iran's bargaining power in the talks. That presumably referred to neutralising the ultimate coercive threat against Iran by the United States.

*Gareth Porter is an investigative historian and journalist specialising in U.S. national security policy. The paperback edition of his latest book, "Perils of Dominance: Imbalance of Power and the Road to War in Vietnam", was published in 2006.

Gore Vidal blames coming US dictatorship on Bush; thinks Obama may be assassinated

I have always admired Gore Vidal's intellect and political insight. Who can forget Vidal's run-in with that pseudo intellectual phony William F. Buckley?

Then I read this from Timesonline:

“One thing I have hated all my life are LIARS and I live in a nation of them. It was not always the case. I don’t demand honour, that can be lies too. I don’t say there was a golden age, but there was an age of general intelligence. We had a watchdog, the media. Would that it was. They’re busy preparing us for an Iranian war.”

Gore Vidal says of Obama “because he doesn’t lie. We know the fool from Arizona [as he calls John McCain] is a liar. We never got the real story of how McCain crashed his plane [in 1967 near Hanoi, North Vietnam] and was held captive.”

Say again! How can a man of Vidal's intellectual stature be so blind to Obama's devotion to Wall Street oligarchs, and his administration's never ending stream of lies and deception? Vidal goes on to portray Obama as a victim, a man whose decisions are controlled by domineering generals, a man who has squandered his potential, a man with no vision. One could almost confuse Vidal's characterization of Obama with a Manchurian Candidate, to which I might agree.

Vidal predicts dictatorship in the U.S. and blames it on Bush and the stupidity of the American people:

“We’ll have a military dictatorship fairly soon, on the basis that nobody else can hold everything together. Obama would have been better off focusing on educating the American people. His problem is being over-educated. He doesn’t realize how dim-witted and ignorant his audience is. Benjamin Franklin said that the system would fail because of the corruption of the people and that happened under Bush.”

Gore Vidal's belief in party politics is a huge flaw, especially considering that it's painfully clear the U.S. political landscape is and has been dominated by a two-party monopoly system in which both parties are bought and sold to the highest corporate bidder.

Tim Teeman writes: Has [Vidal] met Obama? “No,” he says quietly, “I’ve had my time with presidents.” Vidal raises his fingers to signify a gun and mutters: “Bang bang.” He is referring to the possibility of Obama being assassinated. “Just a mysterious lone gunman lurking in the shadows of the capital,” he says in a wry, dreamy way.

The CIA and "Masters of Gold"

This from ZeroHedge:

The CIA Chimes In On Gold Control; Highlights Historical Gold-To-Foreign Holdings Shortfunding

After yesterday we highlighted a declassified document by the Department of State, in which it was made clear just how critical it is for the US to remain "Masters of Gold", today we present a comparable memorandum from the same time period (December 1968) this time by the CIA, which presents comparable key high-level gold-related deliberations by the then-administration.

Some of the key points:

We lose influence in world affairs whenever:

• The dollar is weak in exchange markets
• There is a major outflow of gold; and/or
• We are obliged to pressure countries into holding dollars or giving us payments assistance

Our position can also be improved by action on the international monetary system itself to:

• Decrease vulnerability to confidence crises
• Increase world monetary reserves (liquidity); and
• Improve tools for adjusting payments surpluses and deficits

With $33 billion of foreign dollar holdings ($16 billion in official hands) and only $10.7 billion of gold in the U.S. reserve, the risk is clear. To contain these pressures our strategy is:

• To isolate official from private gold markets by obtaining a pledge from central banks that they will neither buy nor sell gold except to each other;
• To bring South Africa to sell its current production of gold in the private market, and thus keep the private price down.

And here are the seeds for the need for a fiat currency: growing an economy when monetary supply (and, by implication, currency devaluation) is limited, can only pad the growth rate for the core economic entities so much.

Increasing liquidity

Trade won't be able to grow, and the system will remain vulnerable to speculation unless there is regular growth in the international money supply.

Gold can't provide the needed increase: industrial and speculative demand is too high. U.S. payment deficits can't either: foreigners are unwilling to hold more dollars when we run large deficits and unable to increase net reserves by accumulating dollars when our deficits are small.

Our strategy is to supplement gold and dollars with a new international asset, Special Drawing Rights (SDR).

And, of course, if the SDR does not work, the fall back reserve currency can always just be printed in limitless amounts, thus allowing massive liquidity-based expansion in the trade system, which will further allow the U.S. to grow its trade deficit to record amounts. Just fast forward 41 years.

Indeed, this document was presented before the gold standard was officially abolished. However, in the very near future Zero Hedge will disclose documents that highlight how even in the post-1971 world, gold was still perceived with the same liquidity management and "strategic control" interest as ever before.

CIA 1968 Financial Crisis