May 08, 2008

Triangulating Financial Armageddon

"Cross your fingers, knock on wood: it’s possible, though by no means certain, that the worst of the financial crisis is over. That’s the good news...[however] if we don’t fix the system now, there’s every reason to believe that the next crisis will be bigger still — and that the Fed won’t have enough duct tape to hold things together." Paul Krugman writing in the New York Times, May 5, 2008.

"The U.S. economy is in an intensifying inflationary recession that eventually will evolve into a hyperinflationary great depression. Hyperinflation could be experienced as early as 2010, if not before, and likely no more than a decade down the road. The U.S. government and Federal Reserve already have committed the system to this course through the easy politics of a bottomless pocketbook, the servicing of big-moneyed special interests, and gross mismanagement...The U.S. has no way of avoiding a financial Armageddon. Bankrupt sovereign states most commonly use the currency printing press as a solution to not having enough money to cover their obligations. The alternative would be for the U.S. to renege on its existing debt and obligations, a solution for modern sovereign states rarely seen outside of governments overthrown in revolution, and a solution with no happier ending than simply printing the needed money. With the creation of massive amounts of new fiat (not backed by gold) dollars will come the eventual complete collapse of the value of the U.S. dollar and related dollar-denominated paper assets." John Williams writing in his "Shadow Statistics" newsletter.

Maybe the reason that such disparate statements of essentially the same problem can exist side by side, one in the highly-modulated, business-as-usual language of an Establishment economist, Paul Krugman; and the other in the inflammatory, sky-is-falling style of a maverick outsider (Williams), owes to the hallucinatory nature of the subject in question. That is, to the unreal basis of the American monetary system. This seems to be Williams's underlying thesis; once the United States abandoned the gold standard under Franklin D. Roosevelt, the fiat system provided an open invitation to the federal government to monetize its way out of all difficulties. As the national debt exploded; as foreign sovereign wealth funds acquired huge stakes in debt instruments such as T-bills; as the trade deficits incurred through mass importations of oil and foreign-manufactured goods ranged out of control, the United States has been left only with the option of default on its internal (Social Security & Medicare) and external (obligations to domestic and foreign bond holders) debts, or running the printing presses full time to create the cash to handle its finances. It is Williams's contention, of course, that the second option leads inexorably to Weimar-style runaway inflation where the dollar becomes essentially worthless.

A precipitating event for financial meltdown could be the decision by a critical mass of foreign governments to replace the dollar as the world's reserve currency. In essence, this would break the trance of the dollar's dominance, and the U.S. would experience the collapse presaged by Germany in the 1920's and Russia after the break-up of the Soviet Union. Certainly it's difficult to argue that the preconditions are not already here. The government publishes an artificially low inflation rate in order to keep Social Security CPI increases within the realm of plausibility, but this masks the reality that the inflation-adjusted GNP is already in recession and has been for about two years. It stopped publishing the M-3 money supply figures in 2006 to hide the 17% annual increase in newly-printed cash, a figure which far exceeds any increase rationally based on growth in the GNP. Basic expenses, such as fuel, are becoming unaffordable in large part because the pricing of oil is in a currency (the dollar) which is rapidly losing its value. Airlines are going out of business because fuel is too expensive. Independent truckers can't afford long-haul routes. Residential foreclosures are at an all-time high rate. We lose sight, often, of how extraordinary all these changes are, and attribute them to a "cyclical" problem that will simply resolve as all recessions have before it. I can't tell if Krugman is saying that needed "reforms" in U.S. financial regulation could right the ship and avoid a catastrophe. It may be that he is, but he isn't very insistent. His reluctance reminds me of an old cartoon I saw long ago which stands in for a lot of things that would take too much time. Two archaeologists are standing by the exposed tip of a pyramid, shovels in hand. One says to the other: "What do you say we cover the whole thing up and just forget about it?"

Yet Krugman's approach dominates in discussions of the problem because it is "reasonable." The preference is for worldwide collusion in the faith that all is actually okay with the doughty greenback. To undermine the dollar is seen as some sort of global financial Jonestown; why would the Chinese, and the Russians, and the Saudis want to bring the house down around their own ears by destroying the American economy and its workhorse consumers?

I think that's probably how it always works. It accounts for the reluctance of many Jews in Germany to leave even after passage of the Nuremberg Laws and Kristallnacht. For the French and Russian aristocrats to await their fate in 1789 and 1917. The psychology of inertia lulls us into a complacent belief that even if obvious calculations show no way out, we will cling to an irrational belief in the survivability of the status quo, and, as part of our unconscious defense of that very irrationality, will shout down those who refuse to express fealty to the same delusion.

May 07, 2008

As Other Options Close, Hillary Seeks Elimination of Basic Laws of Mathematics

Indianapolis (AP) - Senator Hillary Clinton (D-NY) admitted to some concern today about her deteriorating chances for overtaking Barack Obama, although her face appeared calm and relaxed as she announced her latest initiative (insiders, speaking on condition of anonymity because Hillary would kill them if she found out, indicated that she is no longer able to move any muscle group above her neck). Mrs. Clinton indicated that in light of the uselessness of even the "nuclear option" (her previously preferred route of cheating by including the votes of Michigan and Florida, despite an explicit agreement to forgo their inclusion), she would seek the repeal of the basic laws of mathematics.

"Addition, subtraction, multiplication and division need to go first," she said, referring to the four basic math operations. "I represent the American people, not a bunch of egghead professors or elitists who use 'theories' and 'concepts.' My campaign is about kitchen table issues that affect real folks, and if that means championing them instead of a bunch of dead Greeks and Arabs, then so be it."

Academics in the mathematical fields were stunned. "We need math," said Dr. Samuel Linworth, Professor of Applied Mathematics at Pasadena's Cal Tech. "Without it, it's really hard to do something like count or keep track of anything. I don't think we could have gotten to the moon without calculating stuff."

Other professionals who rely on math concurred. "I think it's a bad idea," said Fed Chairman Ben Bernanke. "If we can't count, then we don't even know how much money we have or whether we need more."

Senator Clinton was unmoved by these criticisms, which she deemed "the usual sniping from the groves of academe." "I'm not in this thing to make life nicer for those who already have so much, who have money they have the luxury of counting. The people counting on me to take this thing all the way to the White House aren't concerned with stuff like 'sums' or 'difference' or, God knows, 'subtrahends.'"

Even Bill Clinton seemed perplexed by his wife's sudden decision to eliminate arithmetic, but he quickly recovered and rallied to her defense. "What the folks in the media just don't get is how much my wife wants to serve this country, and how determined she is to win this thing for the people. If that means doing away with counting delegates, or counting anything else, for that matter, then so be it. It's just a good ol' fashioned fight to the finish."

Political observers said that Clinton's novel approach to winning the nomination would leave the Democrats at the convention in August unable to tell who won. Hillary had a quick rejoinder to this criticism: "Then I win," she said. It also promised to alleviate her campaign's mounting financial difficulties.

"No one can say I owe them money," she crowed. "Let 'em try. I'll just say, 'how much?'."

May 06, 2008

Hillary, Leader of the Know-Nothing Wing of Her Party

It's distressing to see Hillary Clinton, as part of her maniacal quest to seize the nomination at any cost, descend to the level of anti-intellectualism. She's a very bright woman, yet when confronted with the true consensus that practically no reputable economist in America thinks her gas-tax holiday scheme makes any sense, she retreated into a dumb vs. smart routine, deciding to cast her lot with dumb people. All the economists in the country, including Paul Krugman (who obviously was trying to develop a crush on her), were suddenly "elitists" who just didn't care about the plight of the ordinary American the way she does. Anyway, her plan was not like that stupid, identical idea of John McCain. She was going to tax the oil companies to make up for the lost tax revenue because of their "windfall" profits.

Ah yes, the windfall profits. The windfall, of course, refers to the astonishing profits companies like ExxonMobil and Chevron have posted over the last few years. While my own populist sympathies would like to buy into this idea, I'm not sure it's correct to do so. Now I'm sure there have been price gouging, manipulated supply and other ploys from the monopolistic bag of tricks which have marginally boosted Big Oil's profits; yet the larger picture suggests that American oil companies, the remaining cohort of the once majestic Seven Sisters, are kind of hanging on for dear life and making hay while the sun shines and the oil flows. American oil companies now control about 7% of the world's known reserves. Far, far larger and more powerful than ExxonMobil & Co. are the state-owned oil companies like Gazprom in Russia, Saudi Arabia's Aramco and Mexico's Pemex. The day of the great American "concessions" in the Middle East and elsewhere are over, that halcyon period when Standard Oil and British Petroleum carved up the stupendous fields in Iran, Iraq and the Gulf States and paid the owners of the sand dunes a stipend to take away the petroleum underneath.

The big American oil companies are just buyers on the market, and they're paying a ton for the raw product. If they hold their profits at a steady 8-9%, of course the numbers swell simply because of the high price of gasoline, which in turn is attributable to the $120+ price they are now paying for light sweet crude. If you sell a billion dollars worth of gasoline at 8% profit, you make $80 million. If you sell the same quantity of gasoline at a higher price and gross $2 billion, your profit goes to $160 million. But the underlying price is set by a different group of gouging monopolists, OPEC and other national oil companies, who are concerned that peak oil has arrived and that from here on out, they are going to be selling dwindling amounts of their "patrimony," as GWB calls it, probably without knowing what the word actually means. So is Hillary suggesting that Exxon lower its profit margin because it doesn't need all that money? What is she, a Communist who happened to make $109 million over the last 7 years? Whye doesn't Bill cut his hourly rate on his speeches to the Colombia free trade people?

Trying to get our mitts on Iraq's patrimony, in fact, is why Bush won't commit, now or ever, to leaving Iraq, and probably explains the otherwise unexplained reluctance of the Democratically-controlled Congress to stop funding the war (indeed, they're about to shovel out another $200 billion or so to keep it going well into the next presidency). What is always going behind the scenes in Iraq, behind the exploding buildings and the heads rolling in the gutters of Sadr City, behind the rockets landing in the Green Zone and the firefights between militias, is that simple, immutable fact of commerce: America's oil companies are trying to work out the terms of extracting all that precious Iraqi oil from those virgin fields. It's our one oily ace in the hole. What a bonanza! And all those oppressed Democratic voters in Indiana, worrying how to fill up that 8,000 lb. Yukon Denali to get the kids to the soccer game in Terre Haute at an affordable price: help could be on the way! If we don't cut and run from Iraq, that is, before we check the last box on Freedom's Agenda, that freedom being ours to fill the 20-gal. tank in the Escalade for less than a C note.

After all we've been through in Iraq, we kind of owe it to ourselves. You think that little orangutan in Venezuela, Hugo Chavez, is going to cut us any slack on selling his stuff to us? Iran won't even deal with us; their new best friends are China and Russia. Mexico's Cantarell field is sputtering out. We've got to have Iraqi oil, the second known largest reserves in the world, and mostly untouched. Our whole lifestyle depends on it! And we've earned it, dammit, we've blown a whole country apart, turned Iraq over to Iranian sympathizers, destroyed our reputation in the eyes of the world, killed hundreds of thousands of Iraqis and a lot of Americans too, but like a crazed junkie with an empty needle and pupils swelling wide, we see that oil and we know we've just got to have it.

That's all I'm saying, Hillary. Step back and let Exxon and Chevron feed the monkey. Don't start messing with the pusher-man, and keep the street price up where it belongs.

May 05, 2008

Hillary's obliteration of Iran

"The Lord's my shepherd
says the Psalm,
but just in case...
we better get a bomb."
-- Tom Lehrer, "Who's Next?"

The new rules of sound-bite campaigning require a candidate to answer all questions which pertain to war with responses that meet two criteria: (1) They must sound decisive when replayed, and (2) they must be blood-drenched and Neanderthal. Anything else just doesn't sound American enough.

By this standard Hillary Clinton's promise to obliterate Iran if Iran launched a nuclear attack on Israel was clearly appropriate. A few muted bleats were heard from Iranians, who objected to a suggestion that 75 million people should be vaporized without at least a more nuanced discussion of the point. This is a silly cavil; the whole point of campaigning is that it doesn't allow any kind of nuanced discussion. Barack Obama tried that with his "we would respond appropriately" stuff. Barry, Barry. You just don't get it.

There are, to be sure, nuances to the subject. For example, I would be willing to bet, and have so wagered in saloons and other gaming establishments, that Israel would not need our help. Israel has on hair-trigger alert "The Samson Option," which has been described at great length by Seymour Hersh in his book of the same name and by Israeli historian Avner Cohen. (Samson, rather than endure humiliation at the hands of his Philistine captors, yanked on his chains and pulled the whole temple down on himself and thousands of his tormentors.) Some estimates of Israel's nuclear arsenal run as high as 400 nuclear weapons, which can be delivered by bomber, submarine and Jericho missile. No country with a rudimentary nuclear capacity could possibly disable an Israeli retaliatory strike, meaning: Israel would obliterate Iran. And could they do this with thermonuclear weapons? One must tread delicately here to avoid cultural stereotyping, but what do you think? Hint: of the Nobel Prizes for Physics, 47 have been received by scientists of Jewish ancestry, including Albert Einstein, Wolfgang Pauli, Niels Bohr, Max Born, Richard Feynman, and Emilio Segre, and this does not include non-Prize winners Robert Oppenheimer, who ran the Manhattan Project, and Edward Teller, the father of the H-bomb.

Further, while I'm plunking down good money on the bar, I would bet the following: the Israeli government's arsenal of nuclear weapons is superior to that of the United States, in terms of accuracy and speed of deployment. Why do I surmise this? Because they have to be. Let's face it, for all its vaunted power and self-adulation, the USA has an amazing capacity for building things that don't work. Recall the performance of the Patriot missile during Gulf War I. These missiles constituted our "fail-safe" umbrella over Israel and Saudi Arabia against Saddam's rickety old Scud missiles. The Pentagon claimed at the time that the Patriots were "94% successful." This was successively scaled down until the General Accounting Office admitted the "success rate" was probably 9%. The Israeli Defense Force estimated the rate at 2%; indeed, in one incident in Tel Aviv, 3 Patriots misfired, fell back to earth and destroyed 4,156 apartments, killing one Israeli and injuring 44. The IDF tactfully suggested that less damage would have been done to Israel if the Scuds had simply been allowed to land where they would, but thanks, you meant well, and mazeltov on your missile system.

Thus, if you were an Israeli strategic planner, how much would you rely on the USA as your main line of deterrence? For all its fulminating, the USA remains a country whose president made a paper airplane out of a specific, written threat of a terrorist attack a month before it happened. I have no doubt that Hillary Clinton would have done a much better job than that, but Israel is not counting on America to dissuade Iran from nuclear attack. And as for Iran, one must wonder what suicidal notion would have to seize the leadership before it patched together an A-bomb and wheeled it over to Israel to explode.

"Nuclear opacity" is the official name for deniability in Israel. Hillary is following their lead in assuming a maternal role in deterring Iran. The ayatollah, meanwhile, knows what the real score is.

May 04, 2008

Time to start holding our breath...

It's May now, and January, 2009, seems to be coming slowly into view around that far bend. It's a nervous time. I can think of historical antecedents -- concentration camp prisoners in Eastern Europe in March, 1945, waiting for the arrival of the Allies. Will they get here before the SS turn their guns on us? Dare we hope?

I think we've been very lucky since January, 2001, that an authentic crisis never faced the United States during W's shaky tenure as head of state. I'm aware of what happened on September 11, 2001, of course; it's not as if the President would ever let anyone forget. I'm thinking of a truly dangerous situation, one involving nuclear weapons, the kind of Cold War scenario depicted in "Dr. Strangelove." My mind recoils from picturing George W. Bush presiding over such a crisis. There is no doubt that he fell completely apart in the immediate aftermath of 9/11; he froze up, panicked, fled the scene aboard Air Force One. He didn't know what to do.

He didn't know what to do before it happened, either. Americans should be proud of the job their intelligence agencies did before the jets were hijacked and crashed into buildings. The CIA was on to al-Qaeda; its plot was part of the CIA's daily briefing to the new president in August, 2001, when Bush had already been on the job for about seven months. The FBI was piecing together the basic plot lines by observing what was going on with young Arabs taking strangely abbreviated courses in piloting jumbo jets in midflight. A smart, diligent, coherent president would have used that month's lead time to coordinate his intelligence services. Reading a headline like "Al-Qaeda Determined to Strike Within U.S.," Bush would have wanted to know every last piece of evidence and data supporting this conclusion; that is, he would have followed it up if he had been serious about his job.

Bush choked; it's that simple. Both before and after 9/11. I was thinking about that while leafing through Herman Kahn's "On Thermonuclear War" recently. One of the pleasures of living near a University of California library, and paying that yearly alumni fee, is that I can delve into the enormous repository of information in those endless stacks of books. Kahn, of course, was the prototype for Stanley Kubrick's "Dr. Strangelove," brought to life in Peter Sellers's masterful portrayal of the crazy genius of the apocalypse. Kahn, in reality, wasn't crazy or bloodthirsty; he was simply thinking about things other people didn't want to think about: what happens after a thermonuclear war? Is that it? Will the living envy the dead? Kahn did in fact (as George C. Scott, in a another unforgettable performance as General Buck Turgidson, recreates) present a chart showing "regrettable, but nevertheless distinguishable, post-war environments, one in which you've got 20 million people killed and another in which you've got 150 million people killed." Kahn was mordantly witty about some of the heat he took; in a later preface to the original 1960 book, he wrote that his critics almost made it sound as if a nuclear war was something Kahn found "desirable." Reportedly, he asked Stanley Kubrick for royalties from the wildly successful movie ("that's not the way it works, Herman," is what Kubrick allegedly answered). In his chart, actually called "Tragic But Distinguishable Postwar States," Kahn estimated that full economic recovery from a thermonuclear attack in which 2 million Americans were killed would take about one year. Compare this to 9/11, in which about 3,000 Americans were killed without any radioactive fallout, and the mediocre American economy wobbled back to its pre-attack state in relatively short order. Very, very sad, if you were one of those killed, or if you loved one of those who died. The attack has no other significance. The World Trade Center was attacked in 1993, and with nothing special done for the next eight years, it didn't happen again until Bush decided to ignore the threat, which is what he accused Clinton of doing with respect to the 1993 attack and the bombing of the Cole. Then the same building was attacked again, and Bush, with way, way too much enthusiasm, proclaimed that America had found "its mission and its moment." Well, he did, anway. He would ride that hobby horse all the way to Kabul and Baghdad, without making the slightest dent in the "existential" threat of terrorism. The great irony is that terrorism, by its very nature, is so random and unpredictable that a free society will never eradicate it; but Bush was presented with an incipient plot which was so gaudy and elaborate that it could have been predicted and stopped. He was just absolutely the wrong guy to do it.

Herman Kahn wrote about a very serious problem, the most serious problem humans have yet devised for themselves. Then the Cold War ended and for awhile, at least, we have breathed a little more easily, thinking that at least the two behemoths of nuclear holocaust, the U.S. and Russia, are not going to do anything suicidal. Terrorism, meanwhile, will continue as the byproduct of economic disparity, religious intolerance and the general cussedness in the human heart. George W. Bush can play in his Arab sand boxes all he wants and it won't change that. He's been doing it for nearly two terms in office. Spending vast amounts of money, getting more Americans killed to pile on top of the dead from 9/11, of course, but not engaged in any sort of serious endeavor. The war on terror is a hoax. Something like 8 months to go, and then perhaps an adult can take charge. We've really been pressing our luck.