Economic Warfare [Archive] - Small Wars Council

Watcher In The Middle

11-10-2007, 03:17 AM

Originally posted by Brian Hanley:

The idea China is going to side with Iran is not credible to me on its face. China is in a deadly embrace with us economically. Trade ties and they hold a huge amount of our debt. There isn't room enough in the world for that amount of debt to be dumped. That's one of the benefits of being the biggest game in town with everyone else bit players.

The PRC has their own sets of issues that make any idea of a mass dump of their accumulated economic assets rather unlikely. There's been sustained coverage by the WSJ over a number of these issues, and China has some rather serious issues that they are trying to manage.

First off, Iran likes $100 a Bbl. oil. But the PRC has real problems with $100 Bbl. oil - even bigger problems that we & the EU have. China subsidizes fuel, to the point where the WSJ recently noted that per gal. diesel prices in China run about $2.40 a gal., vrs. at least $3.15 a gal. here in the US, and much higher in the EU. And it appears they subsidize all types of fuel. Plus they have to buy most of their oil in dollars, which is why they need that vast (One Trillion+) liquid pool of dollar denominated assets.

Now, Iran has made noises about only accepting the Euro for oil, but this is even less helpful not just for the EU (raises their currency value even higher, which is literally the last thing they want right now - makes their exports even more expensive), but also for China, that just kills them, because it's a triple hit - (a) Buy more imported oil, (b) At increased subsidy costs for each liter sold, and (c) they have to spend cheap dollars to buy more expensive Euros to pay for each Bbl. of oil.

And there's a real wild card out there that only the financial types are seemingly paying attention to - Most people don't realize that over the past several years, China's domestic stock market (which outsiders cannot invest in) has had more IPO (Initial Public Offering) activity than anywhere else in the world, including in the US. The Chinese stock market currently has an uncanny resemblance to the 1999-2000 Internet/IPO market which melted down into what became known as the "Dot.Com Bust". If their internal stock market blows up, it's going to be interesting times indeed.

Hard to believe, but that trillion dollars piggy bank can shrink pretty rapidly.

Norfolk

11-10-2007, 03:19 AM

While the West has tended to view war as something normally separate from the rest of life, many of the Rest have tended to view war as the normal state of life, and therefore, war is waged against one's enemies in every aspect of life. That Iran sees fit to wage economic war upon the U.S. simply fits in that regard.

After all, Iran doesn't have anything that can take on Mickey Mouse at the cultural level - in a rather extended sense something that seems to be one of Iran's chief beefs with the U.S. - so Iran has to make an end-run around Mickey and Minnie and Donald Duck et al and hit the U.S. where it can still try to hurt them most, especially at the strategic level. At said level, the U.S. is vulnerable economically, and the weaknesses most exposed to Iranian attack are the price of petroleum and the value of the dollar.

That said, the U.S. waged a very effective economic campaign against the U.S.S.R. in the 1980's, and, combined with a comprehensive set of proxy wars, information warfare, cultural warfare, diplomatic pressures, alliances, support of dissidents and subversion, etc., took advantage of the weaknesses within the Soviet system to help to bring about its downfall. And without a single US Battalion having to be sent into battle against the Red Army. This sort of warfare was somewhat more in line with that of ancient Chinese military theory, for example, than with 20th Century Western military theory.

Nevertheless, US strategists of the 1980's clearly saw that to defeat the Soviets by military means was simply not worth the candle; other means were required, and in the circumstances, worked. At the risk of over-simplification, the US simply spent the USSR into the ground on military technology and procurement, knowing that the US could afford such expense, but the USSR would succumb to its own internal weaknesses in attempting to follow the US.

Nor is the US an amateur at economic warfare: that is how the US won during the Recent Unpleasantness, albeit in tandem with actual military force. The US Army pillaged, tore up, and burned out the economic heartland of the South in late 1864-early 1865; the US Army fighting in the Lower South deliberately avoided giving battle in most cases, and simply manoeuvered the Confederates out of their positions. Both World Wars involved the economic blockade and attempted strangulation of each others economies by both sides. In World War I, the Germany economy finally collapsed and the population starved; military collapse followed within months. Germany nearly accomplished the same thing with Britain in the spring of 1943.

Chinese strategic and military thought does not make a modern Western-style distinction between war on the one hand, and the life of society/civilization on the other. The use of military force is theoretically and ideally the final phase of a given war between enemies; prior to that, the war is waged by all other means, including economics. Only when the enemy is sufficiently weak, or is anticipated to become stronger later, is then directly struck with military force. But it is all war, the struggle for survival, growth, and supremacy, and from such perspectives, that's what life is about. A grim, red-in-tooth-and-claw neverending struggle for dominance.

It is only logical then that (sadly) many business types have long been devotees of Chinese strategic and military thought (amongst others).

goesh

11-10-2007, 03:23 AM

bismark17

11-10-2007, 03:55 AM

Norfolk

11-10-2007, 04:09 AM

Tonight's evening news had an interesting story on how Canadians are sweeping down into Washington to take advantage of our sliding dollar and the State Patrol is expecting huge traffic issues due to the increases from them during the upcoming Christmas Shopping...(or should I say "Holiday Shopping?")...:D

I must say these are interesting times to be around. I'm not a FOREX or arbitrage guy but I think China has so much tied up in our dollar that any moves against it would cause them devasting losses. It appears to be a bit of a catch-22 since they hold so much of our debt. If we do get into it with them I am more concerned with their Information Warfare capabilities in the cyber/SCADA realms. That is my cents worth....

Agreed bismark. China in many ways is so dependent upon US economic growth and stability that disrupting the US economy is like cutting off one (at least) of their own limbs. Pretty soon, US pressure on China to allow the Yuan to reach its true value may be quite unnecessary. China has no interest in, and a lot to lose from, continued US dollar devaluation.

For that matter Iran can have little impact through straight economic means upon the US. Only blocking the flow of oil (direct military means) could seriously affect the US economy. And Iran has no economic interest (to say the least) in doing that.

Them Canajuns, though, I tell ya', I'd be keepin' a close eye on them.;) They think they can just blend in and not be spotted while they implement their nefarious schemes of economic subversion of the US...well, I say take out all the Molson and Labatt breweries, and proceed to drown them in Miller and Bud - I drink Guinness by the way, so I should still be okay.:D

Fabius Maximus

11-10-2007, 04:16 AM

It's a hot topic by email among some working with military theory, and I've exchanged many dozen notes on the subject. I think this is the very edge of new thinking about war/conflict. But it seems to have a small audience.

As I said on my blognote yesterday: A brief note on the US Dollar. Is this like August 1914? (http://fabiusmaximus.wordpress.com/2007/11/08/a-brief-note-on-the-us-dollar-is-this-like-august-1914/)
"In an age of nukes & 4GW, conventional war between major powers is unlikely — perhaps obsolete. But political stresses remain a fact of life and must be expressed. Perhaps money has replaced bullets as the new form of combat. WWII was as much a war between competing economies as between armies. Modern financial systems allow us to eliminate bombs as the intermediate step, for pure economic warfare."

The first and perhaps most important work in this area was Unrestricted Warfare (http://ftp.die.net/mirror/cryptome/cuw01.htm) (1999), written by two PLA Air Force Colonels. They say, in effect, the first war of the new era was the attack by speculators on the SE Asian currencies. This damaged their economies for several years; many of their people were eating bark. If these hedge funds and other traders were based in, for example, Singapore they would have been politely invited to stop. Now. If they declined, the next measures taken would have been less pleasant.

But they were based in New York and London, attacking behind the shield of western military power. Notice has been taken.

Tom Clancey's Debt of Honor describes commercial aircraft being flown as weapons into buildings. Fiction then, fact now. Will the earlier events in that book -- a geopolitical attack on US stocks and the US dollar -- also become fact?

selil

11-10-2007, 04:27 AM

The economy of the world has moved from soley industrial to information based. I've been thinking that fourth generation warfare is about information and not insurgency. Cyber infrastructures and economics are intrinsically linked. Need proof look up the Chicago Board of Trade Outage and some the costs that may have initiated. By the way that was a Y2K outage for those who didn't know. I'm no economic scholar but I remember the Dot Bomb and that was based on what? An idea? Well funded companies? I've read articles in the same paper saying dollar diving bad, and dollar diving good. The United States doesn't have the vast manufacturing that would seem to be tied to a diving dollar and benefitting. One interesting tidbit is that this devaluation will make the United States more competitive in closed economies and protectionist environments. But, who gets rich with that?

At to Tom Clancy and his discussion of an attack on the dollar isnt' that based on stuff that happened in the 70's repackaged?

Fabius Maximus

11-10-2007, 04:31 AM

China is following the trajectory of by W Germany, Japan and the SE Asian Tigers. Overlaying the growth charts shows that China is at an early stage in the process. It's easy to forget how long China's predecessors sustained their rapid growth rates. And China is much larger.

Ian Flemming wrote Dr No in 1955. In the opening Bond was musing about a fellow 00 agent sent to Singapore, feeling happy it was not him. In 1955 James Bond was afraid to visit Singapore. Look at it now.

China is still in the export-driven growth stage. Despite its rapid export growth, its share of global exports is slightly less than Japan (both roughly 9%). Of course, China is potentially a much larger economy than Japan. The next stage is rapid growth driven by domestic demand; given China's incredible high savings rate, that phase could also be long and powerful.

As for dependence on the US, only 20% of Chine's merchandise exports go to US. Our share of their total exports is even lower (they export other things, like coal). To whom are their exports growing fastest? The EU.

China will participate in any global downturn, but its fate is not linked to the US. But is the reverse true? They hold almost $2 trillion in US IOU's (including Hong Kong and Macao), and we borrow tens of billions more every month.

America seems to have forgotten that creditors make the rules, not debtors. Creditors are masters of their fate, not debtors.

China's US dollar holdings are assets in the same sense as bullets, valuable only in what they can do. They can use them to exert pressure on the US or to buy our tangible assets. And they will use them at some point.

The fall of the US dollar, as your read this breaking through long-term lows, is potentially a historical event -- the end of the post-WWII global financial order. None can say how it will play out, or what lies on the other side.

Fabius Maximus

11-10-2007, 04:37 AM

At to Tom Clancy and his discussion of an attack on the dollar isnt' that based on stuff that happened in the 70's repackaged?

Great point! The 1970's saw the forequakes of global peak oil production; the real thing will likely occur sometime in the next 20 years (today, perhaps). The 1970's saw the first great US dollar crisis, foreshadowing the real thing which lies in our future (today, perhaps).

The 1970's were a difficult decade for America. And the next few years...

The geopolitical implications of this could be immense. The great emerging powers will certainly take advantage of any weaknesses in America's power.

Fabius Maximus

11-10-2007, 04:51 AM

That said, the U.S. waged a very effective economic campaign against the U.S.S.R. in the 1980's...
Alternative view: the Saudi Princes waged one of the great economic wars of the post-WWII era against the USSR for control of the oil industry. They opened their spigots, crashed the price of oil, and bankrupted the USSR.

We take credit for defeating the USSR just as we often take credit for defeating NAZI Germany. Perhaps neither is fully deserved.

Rex Brynen

11-10-2007, 06:00 AM

Alternative view: the Saudi Princes waged one of the great economic wars of the post-WWII era against the USSR for control of the oil industry. They opened their spigots, crashed the price of oil, and bankrupted the USSR.

I'm not sure the oil price lows of the mid- 1980s had anything to do with such lofty strategic aims. Rather, they were a combination of an increase in supplies and stocks due to high prices following the Iranian Revolution; a slowdown in demand due to these same high prices; and ambitious Gulf development expenditures (and hence pressures for larger OPEC quotas). When the price started to drop, the Saudis eventually tired of being the swing producer, and instead for a while sought to maintain revenues by offsetting price declines with production increases.

At most the (secondary) strategic aim was to reduce the market share of high-marginal-cost oil producers (with North Sea, older-well North American producers, and new explorations being more vulnerable by this time than the Soviets were).

Norfolk

11-10-2007, 06:15 AM

Alternative view: the Saudi Princes waged one of the great economic wars of the post-WWII era against the USSR for control of the oil industry. They opened their spigots, crashed the price of oil, and bankrupted the USSR.

We take credit for defeating the USSR just as we often take credit for defeating NAZI Germany. Perhaps neither is fully deserved.

As to the role of Saudi oil in bankrupting the USSR, it was contributatory, but insufficient even in tandem with other factors. Additionally, the USSR was the largest producer of petroleum on the planet, and its reserves considerably outweighed those of Saudi. Not only was it quite self-sufficient for its own needs, but it could earn a pretty penny in foreign hard currency with its exports.

And considering the price of oil after 1973 compared to the price of oil prior to late 1973, even with the Saudis in effect generously subsidizing the West by keeping oil prices artificially low, such prices were still historically high; WWII was fought on $3 a barrel oil. Under no circumstances was the price of oil at any time post-1973 a major problem for the USSR, one way or the other. Even at only 6 times the 1940's price, the Soviets were making out pretty good.

As far back as the early 1970s, Kissinger had arrived at the conclusion that the Soviet economy would be unable to sustain its military strength much past 1984-5. The Soviet system was cracking internally, and the sheer burden of trying to keep up with US military equipment and R&D spending created unbearable stresses on a system that was dealing with general disillusionment at home, dissent within the populations of its satellites, and its own faltering economy - so badly mismanaged that it had to buy large quanitities of cereals from Western countries for years. The Soviet Union was crumbling under its own weight while its subjects were chipping away at it from within; the US pile-on in the 1980's forced an issue that could otherwise have dragged on for a few more decades had a rather less aggressive policy been pursued.

I'll grant you partially the comment about the defeat of Germany in WWII; but as to "we", I'm not American, and can assure you that the Commonwealth view of the outcome of WWII that it was won by British Brains, Russian Blood, and American Muscle differs substantially from the more popular US view. But the Commonwealth view is in no doubt that American Muscle was utterly essential to the defeat of Germany. No American muscle = no Nazi defeat.

Chinese investments (such as in US T-Bills) are being hurt by the devaluation of the US dollar, not only because even interest rate hikes (which are not occurring at the moment) are unlikely to be able to make up for the dollar's loss of value, but also because to convert cheaper US dollars into more expensive currencies entails additional loss. China is stuck holding the bag until the US dollar stabilizes - and the PLA's pay increases and equipment purchases are funded in no small part by hard currency earned from exports to the US.

In any event, economic warfare has long been a civilized way of taking the fight to the enemy, particularly for nation-states. It is but one of many ways war is waged by the state against its enemies, whether military force is directly applied or not: "Learning from the Stones: A Go Approach to Mastering China's Strategic Concept, Shi," by David Lai.

http://www.strategicstudiesinstitute.army.mil/Pubs/display.cfm?PubID=378

This article on Chinese strategic thought is for the most part easily assimilated, and this is assisted by the essential simplicity of Sinic conceptions of strategy. It is not complex, merely subtle and thoroughly comprehensive. Although this article is hardly comprehensive, and is fairly fundamental, taken with the Chinese strategic classics, there is little that subsequent theories of war do much other than add commentary or technology.

kehenry1

11-10-2007, 11:59 AM

Necessity is the Mother of invention...

I believe it was 2006 when the Saudi representative to OPEC said that contrary to popular belief, Saudi Arabia had no interest in unstable and steeply rising oil prices. At that time, he Saudi's had promised to increase production by 900k. His reasoning was very simple. If oil prices continued to rise uncontrollably, eventually, it would effect the world economy and crash the supply demand in world wide recession or depression. Thus, destabilizing their own economy, causing unrest and potentially to internal unpleasantness.

However, this year the Saudi OPEC rep said that they could do no more to increase supply and stabilize the price. Thus, I believe the Saudi's are doing what we are doing and that is waiting to see what the market will do.

Their other fear is that, if the price hits the "pain threshold" for the US and Europe, we will do what we did in the late 70's and 80's like revamp our automobile manufacturing for improved fuel economy or possibly drive towards the invention of alternative energy. I don't think biofuels is a sustainable or long term answer. I believe the answer will return as solar or other energy sources with the advancement of nano-technology and anti-matter. But, that's for another discussion.

Suffice it to say, even with emerging economies and China's growth, if the US was able to develop other energy resources or, if oil finds in other nations (like the recent find in Brazil) can come onto the market quickly, the oil surplus that would be created would cause the oil market to crash. Not only is that bad for Saudi Arabia, its bad for Russia whose economy is also 50% reliant on energy exports. It's why they are in a rush to complete a transnational pipeline for gas and oil to China. They want to take advantage of a long term market growth when there is a possibility of stagnation or loss of market in other regions. Also the reason Iran was interested in pipelines with China. Problems with that to follow.

kehenry1

11-10-2007, 12:01 PM

In regards to economic warfare and Iran, I noted here (http://themiddleground.blogspot.com/2007/09/iran-and-syria-brinkmanship-in-middle.html) (scroll down and to bottom for additional links on Economic Warfare and Iran), whether Iran survives economically or not is not just linked to their oil and natural gas income, though it plays a major part, both good and bad.

For instance, Iran is now talking about building eight additional refineries for oil. Right now, they only have one. They are still rationing gasoline, though at a subsidized rate. The problem here is that, however much they are raking in on a bbl of oil, as a net importer of refined oil and gasoline, they are putting out a very large chunk of their income to buy it. It might sound good on paper, but it causes other issues.

Second, Iran is suffering from record inflation to go along with its "growth" period. Inflation is, in fact outstripping economic growth about 4 to 1. Housing prices have tripled. Food prices have quadrupled. This is in relation to both the incredible inflation of oil and the sanctions which have denied credit to even the basic importers. Some have sought an end run by working through third party nations like Dubai and Germany where they set up what appears to be other national companies. Yet, the price to import these food stuffs has increased along with the necessity to use huge, upfront cash deposits.

At the same time, Iran has been busy trying to repress their labor movements that are demanding a pay raise after over a decade of the same pay (most are making about $2/day). These people are having to work two or three jobs just to feed their families, buy gasoline and pay for heating, much less housing now that the rates are increasing so drastically. For the last two years, parts of Iran have had to institute heating rations because the nation is so dependent on exporting their energy resources to sustain their economy. Besides oil and natural gas, the third largest export from Iran is Hydro-electricity to Afghanistan and Iraq.

I posited a theory once that the unrest in Iraq and Afghanistan benefited Iran, not just politically, but economically since it keeps infrastructure from being developed in these nations to offset that export as well as the somewhat limited income from export of manufactured goods.

This need is created by their Soviet style economic system. More than 70% of all working Iranians are employed in a state run business. appx 50% are in the oil and natural gas industry which is just about the only money making industry out of Iran. Another 30% work in the service industry that is largely controlled by the IRGC, but have limited "money making" capabilities since it simply funnels internal funds from one hand to another. They do control certain textile and other manufacturing plants as well as mineral extraction.

At this time, neither their manufacturing nor mineral extraction nor even export of some food stuffs (another reason that food prices are high in Iran) is anywhere near being able to produce the amount of revenue necessary to create a diverse economy. Neither are the only 10% of private entrepreneurs in Iran capable of producing much in the way of export. While the Iranian Islamic Revolutionary dream is to create a self sustaining economy (as was once the Soviet model), it is impossible with the existing business and economic structure.

Their manufacturing and mineral extraction is in bad shape. Earlier this year, one of the showdowns that was happening in the Iranian cabinet was an argument between these two industries and the oil and natural gas industries over revenues produced as well as the amount of money being invested. They were accusing each other of being the cause of the economic problems in Iran. Even with all that energy export revenue, inflation is seriously damaging their capabilities to continue running the nation.

The mineral and manufacturing industries fought back stating that, if they had the infusion of cash that the oil and gas industry had to improve their infrastructure (including machines, transportation and even roads), they could be in a better place to produce revenue. Ahmadenijad settled that by replacing the mining and manufacturing industry ministers.

If you are truly familiar with the economic woes experienced by the USSR pre-collapse, you'd know that they suffered similar problems. Like the USSR, Iran has many price controls in place which means that these industries cannot even make money internally to help improve the situation.

Agriculture is equally damaged from lack of investment and expansion along with orders to export most of the food stuffs that created the net import of grains and other food staples like vegetables and fruit.

All of Iran's economic growth is in oil and natural gas. It is unsustainable. Unless, of course, they can get nuclear weapons and improve their regional hegemony, holding other regional suppliers "hostage" and forging alliances with countries like Venezuela, keeping oil supplies down and the price high by artificial reductions or limits. (Something that would be of some benefit to Russia as well since their economy is so heavily invested in the energy sector).

Other problems that Iran has is that the threats of potential strikes by the US have forced them to spend more on defense, though not much, it is still damaging. In fact, besides the probability of nuclear proliferation by Korea to Syria that precipitated a recent strike against Syria, the fact that Israel was able to easily circumvent Syria's Russian bought air defense system has caused Iran to have to invest in upgrades, further stressing their budget, along with other military equipment and preparation.

This juggling of funds and budgets is also apparent in their continuing inability to pay full monthly fees for the building of the Bushehr nuclear facility. Which has caused Russia to state they will continue to build the facility, but there will obviously be a slow down. In the meantime, Iran is putting a lot of money into buying and making centrifuges and other equipment for creating nuclear technology.

the long and short of it is, all of the money is staying at the top end, within major government structures, one major industry and being spent on imports of equipment and basic necessities outside the country. That is what is fueling inflation and keeping government run entities from increasing pay to workers. Money is not filtering down in the economy to allow for improved internal economic growth. Of course, corruption and Ahmadenijad's insistence on putting old IRGC cronies in position of power over these industries is creating a whole new economic class paradigm in Iran.

It's a point that we should be exploiting in our information warfare. Particularly, as the previous high separation of the economic classes was part of the original causes for the Islamic Revolution. The Islamists promised at that time to institute a more equitable "Islamic" system that had its roots in socialist economics learned in the universities of France and other European nations. the reason, of course, that the leftward, labor movements of Iran originally supported the revolution.

kehenry1

11-10-2007, 12:12 PM

Back to the China-Iran oil and gas pipelines. These two inked a deal in 2004 for a ten year plan to create these pipelines that sought to by pass certain nations and the pipeline fees they would have to pay by planning to build these pipelines under the ocean, through the Straits of Malaca and the China Sea. ONe of the reasons that China has been making threatening noises towards Taiwan and arguing with Japan over control of long disputed Islands. They want to extend their international waters to protect these potential pipelines and work towards extracting resources that are just outside of their current boundaries.

Also one of the reasons that China has been working hard to improve their littoral navy and seeking possible aircraft carriers. They would have to protect this pipeline. It's very position through international waters would make it vulnerable to interdiction.

The problem with the pipelines are not just international borders. Neither China nor Iran at this time has the funds currently to invest in developing this pipeline. Plus, Russia's offer of an overland pipeline is much more feasible and possibly less expensive since it would be a major spur off of existing lines in the east and through the Caucus nations. Making the Iranian pipelines not quite the necessity they might have been if Russia simply maintained its focus on European markets.

Finally, sanctions that limit the amount of investment into Iran by any American corporation keeps Iran's ability to update its infrastructure limited and this pipeline a dream for the near future. which makes the proposition for eight new oil refineries interesting. Exactly how are they planning to build these refineries without huge foreign investment? Is China interested in that deal? Is the need for cash to spend on these investments and to offset inflation in China the reason that China is seeking to divest itself of some of its US assets. They need the cash for other projects and subsidizing their own gasoline.

One of the other things to look at is China's reluctance to support Iran as a full fledged member of the SCO. The SCO pact insists that an attack on one country is an attack on all like the NATO agreement. I think China sees that risk as too high considering their relationship with the US and their own desire to avoid conflict at this time (being without more than a littoral navy and their blue navy not anywhere near full strength). They are after long term economic growth and power, not war today.

Will China be enough of an investor for Iran or will Russia or Europe step up to invest? Would Russia do so at all considering their own interests in producing and exporting oil and refined products? is there an offering for a Russia/Iran pipeline that would allow oil to be refined and transported out of Iran through the Hormuz Straits? For Russia, a third or fourth port for exporting would be helpful, particularly one that bypassed the Dagestan, Igushetia and Chechen region. A long part of the Caspian Sea to port transportation system runs through this highly volatile region.

ON the other hand, the ME is highly unstable and risky for Russia unless they can help steer Iran towards more sane policies or offer more protection (a reason why they are upgrading their military besides their desire to hold sway over the Caucuses?)

Of course, Iran sees that Afghanistan and Iraq, developing nations with limited capabilities, as potential economic gold mines. Iran had also inked a deal with the new Iraqi government to refine oil for gasoline and pipe it back into Iraq. The problem, again, is that Iran has one refinery. Any utilization for export puts a strain on their own resources and increases the amount of net imported gasoline it requires for the state to function. Of course, this agreement put the Iranian oil minister in hot water with Ahmadenijad since it put further pressure on Iran's internal shortages.

They may be looking for Iraq to invest in the development of these refineries. Unsure on the possibilities. It is also unsure of the amount that European companies want to put into these additional refineries. To date, they have been pretty hesitant in investing large amounts in existing infrastructure. largely because it is so costly and secondly because Iran has been unable to or reluctant to put their share in, leaving these companies to shoulder most of the burden.

An additional problem is that investors see Iran as a high risk investment. Not just because of sanctions, but because of their internal economic structure. They don't want to risk what they are unsure of getting back. Not to mention that Iran in the previous decade and a half has taken considerable advancements against their oil revenues and has a tendency to nationalize certain industries.

According to current reports, Iran is only trading approximately 15% of their oil in US dollars right now. More than 50% is in Euros. The rest are in other denominations. This also presents a possible opportunity undermine their economy. Another factor in the demise of the USSR was the development of a large blackmarket that operated on the US dollar. The decrease in the value of the dollar could be somewhat helpful in this matter, allowing Iranians to purchase more black market commodities. Not only would this put another drain on the government run economy, reducing money returned into their economic system, but possibly devaluing their own currency against a black market currency.

The one problem with that is the IRGC controls the black market and smuggling in Iran (one of the reasons why we know they were complicit in the smuggling of EFP components and other arms into Iraq and Afghanistan). This might put more money in their hands. We would have to have a way to bypass it or make them complicit in their own economic downfall. Corruption in other states is sometimes good for us.

kehenry1

11-10-2007, 12:15 PM

In regards to the devaluing of the US dollar. It is not always a bad thing. We have been running a significant trade deficit for years. At the same time, this administration has signed a significant number of free trade agreements with nations in South America, Eastern Europe and Caucus nations among the many. In order to make that a real, viable interest of our economy, these nations have to be able to afford to buy our goods. That means that their currency has to be somewhat competitive with ours.

We don't just want to put money in their economies buying cheap goods (thus reducing our trade with China and some of our economic risk), we want them to put it back into ours. As this report indicates (http://www.tcsdaily.com/article.aspx?id=110907A), exports to Europe, where the Euro is strong against the dollar, has increased significantly and probably lent a 1 point increase in growth. that is actually good in the long term in creating US manufacturing mobs and staving off severe recession.

Our vulnerability though is the risk of a over extended credit lines and the price of oil. continued economic growth could off set the extended credit problems. the price of oil, on the other hand, can be offset by either a serious down turn in economy, thus oil utilization, an increase in availability through additional drilling either within the states or in new deposits or in old deposits with new technology or a new technology all together when we hit the "pain point".

I am hoping we work on the new technology. Not because I believe we will be totally oil independent, but because it would give us again the upper hand on energy development and control and create a new economic paradigm for the west. The potential income from both small and large markets would be a serious economic boon, not to mention the impact on many other industries like transportation and housing.

so, dollar down turn is not totally a bad thing as long as it is in small increments, over a measured time and stabilizes early enough. Improved economies in this hemisphere would provide a fairly protected market for us and diversify away from the East and the control of our markets by China and the ME.

Wow, hope that was coherent enough. You can visit the other links provided for additional information and reporting on the economic war. Just remember, high oil prices aren't necessarily good for even our most virulent enemies. They have to buy gas, support business, transport goods and maintain their military, too. all with not even a one hundredth of our income or budget.

Think of them as an octopus trying to put their tentacles all over the middle east. Everywhere they seek to expand, they expose themselves economically, politically, and even physically. a country with a 300 bil budget is hard pressed to compete on that level even regionally.

Pardon the length of this post. I hope it is coherent though I know there are many more issues that could be included in this analysis.

Shek

11-10-2007, 03:36 PM

The fall of the US dollar, as your read this breaking through long-term lows, is potentially a historical event -- the end of the post-WWII global financial order. None can say how it will play out, or what lies on the other side.

A little bit of hyperbole. The post-WWII global financial order based on Bretton Woods was ended back in 1972. The question is whether the implicit "Bretton Woods II" that emerged over the past decade will remain in effect or disintegrate. The fall of the US dollar is a market reaction to the global imbalances that have been created by the lack of saving in the US, and it is not a bad thing. It is better to see the correction take place in the form of bits and pieces as opposed to a sudden change.

Shek

11-10-2007, 03:53 PM

Great point! The 1970's saw the forequakes of global peak oil production; the real thing will likely occur sometime in the next 20 years (today, perhaps). The 1970's saw the first great US dollar crisis, foreshadowing the real thing which lies in our future (today, perhaps).

The 1970's were a difficult decade for America. And the next few years...

The geopolitical implications of this could be immense. The great emerging powers will certainly take advantage of any weaknesses in America's power.

Peak oil is a doomsayer's tool (http://www.econlib.org/library/Enc/NaturalResources.html). As the price of oil increases and settles at a higher level, the profitability of extracting oil from non-low hanging fruit reservoirs will arrive. While the absolute amount of oil will decrease, the relative amount will continue to increase. As the price goes higher and higher, it will also provide the profit incentive for more serious research on alternatives (and better alternatives than the fallacy of ethanol, which has served to drive up food prices and beer prices :mad:).

Also, let us not forget that some of the pain of the 70s was due to poor fiscal policy choices in the 60s coupled with the fallacy of price controls and a weak Fed response. In some sense, years of inflationary policy along with supply shocks created a perfect storm, and ship captains bungled the response. While there may be some parallels to a "perfect storm" scenario now, you have a Fed that is much wiser as well as much more credible, so I'd be careful in drawing too much off of the experiences in the 70s. Besides, you can look at the rapid rise of the price of oil in the past few years, we have already allowed an oil "shock" to transmit through the economy without seeing the same adverse effects of the 70s.

Fabius Maximus

11-10-2007, 03:59 PM

Is the fall of the US dollar good or bad? Both, neither. It's the wrong question. Is a fever good or bad?

Both are symptoms. The US consumes more than it produces, the difference met by foreign borrowing -- seen in the current account (c/a) deficit. The gap has grown worse since 2000, with the c/a running over 6%.

How bad is that? The saying goes: when they see a nation running a 3% c/a deficit the IMF staff prepare the bailout plan; at 3 1/2% they buy their airplane tickets. We're at 6%, a level seen only before by 3rd world states and (briefly) Ireland and Greece (during their dark days).

It is an ugly combo, a large c/a deficit and large foreign debt. Hence private lenders have largely abandoned us, with the c/a deficit funded by a small number of central banks (loosely defined as State buyers of foreign exchange). Mostly Asians (esp China) and oil exporters (mostly Saudi).

Over the past 5 years this situation has been extensively modeled by academic, ngo, commercial, and government agencies. The consensus is that it is not stable. As the debtor at the center, "rebalancing" will hurt us the most.

As kenenry1 and shek both not, economics is largely about rates of change. If this resolves itself slowly, we can pleasantly adjust. Not so good if done rapidly. As I said on my blog, "currency flight" means nothing to most Americans -- unlike those of nations that have experienced it. We too may have this interesting experience.

Shek, it is not hyperbole to say this is "potentially a regime changing event". Most major experts in the field have said so, in one form or another. The BWII system assumes accellerating debt accumulation in the US, matched with US dollar reserve accumulation by foreign central banks.

That system is ending now. Russia is opting out. The Middle East oil exports are talking about opting out, as pegging their currencies to the USD means rising inflation. And China over the past year has made it increasingly clear that their policies are changing. Cheng Siwei's comments on Nov 8 (vice chairman of the National People’s Congress in China), which hit the dollar hard, we probably another signal of this slow policy change.

In a different way, so are the creation of Soverign Wealth Funds. Instead of t-bills, our creditors want something more useful in exchange for the goods they give us.

slapout9

11-10-2007, 04:32 PM

Fabius Maximus

11-10-2007, 05:28 PM

Peak oil is a doomsayer's tool (http://www.econlib.org/library/Enc/NaturalResources.html). ... Also, let us not forget that some of the pain of the 70s was due to poor fiscal policy choices in the 60s coupled with the fallacy of price controls and a weak Fed response.
I am not aware of any major energy-related institution that says global oil production will not peak. It's like death, the question is when. Due to lack of knowledge about reserves in the Middle East and Former Soviet Union, there is a wide range of estimates -- from now thru 30+ years, clustering in the 15 year range. Since a crash adaptation program will take roughly 20 years, we're already on the clock. The major agencies -- us DOE and the International Energy Agency -- have been clear on this challenge, esp this year. I recommend reading the IEA's World Energy Outlook 2007 (here's the free Executive Summary (http://www.iea.org/Textbase/npsum/WEO2007SUM.pdf))

Which is why the 1970's period tells us so much. As Shek notes, some nations adopted wise policies and did quite well -- global growth was strong for the full decade -- while some (e.g., the US) acted foolishly and suffered.

For more on this see my blognotes:
What's needed to adapt to Peak Oil - part I (http://fabiusmaximus.wordpress.com/2007/11/01/when-will-global-oil-production-peak-here-is-the-answer/)
Peak Oil - part II (http://fabiusmaximus.wordpress.com/2007/11/05/more-answers-about-peak-oil-or-just-better-phrased-questions/)

11-10-2007, 06:11 PM

Originally Posted by Norfolk
It is only logical then that (sadly) many business types have long been devotees of Chinese strategic and military thought (amongst others).

Indeed. And wisely so. Entrepreneurs are the terrorists of the business world. One does well to look carefully at them to see how they rise from one or two guys with an idea into a global juggernaut.

Concur. Microsoft remembers its roots and therefore spends a lot of time and money squashing other IT entrepreneurs. And of course there's Larry Ellison over at Oracle.

Rex Brynen

11-10-2007, 06:18 PM

Proxy wars - Muslim Brotherhood, PIJ, Hezbollah, the insurgency in Kazakhstan, etcetera, most insurgencies (http://www.tkb.org/Home.jsp) are also proxy wars. (Proxy war meaning they are supported from outside by a nation or a tolerated financial support system for political ends.)

The Muslim Brotherhood is hardly anyone's "proxy warrior."

Cultural warfare - In this area exclusively we excel. MTV, Disney, our movies, to a mild degree our news media. All of that undercuts them. It is one of their motivators, to fight us by indoctrinating their children in madrassas. Their defense is madrassas, and it has worked pretty well.

Madrassas (and I assume by this you mean Islamist madrassas, since the word itself is simply Arabic for "school") are relevant in some areas--and completely irrelevant in others, where education is overwhelming state-run.

I'm not sure how effective Disney or MTV is in undercutting anything. After all, a fondness for video games and sports bars (http://www.washingtonpost.com/ac2/wp-dyn?pagename=article&node=&contentId=A6745-2001Sep21&notFound=true) didn't stop the 9/11 hijackers.

support of dissidents and subversion - See what Walid Shoebat, former Palestinian terrorist, has to say about this. ( http://www.shoebat.com/ ) I watched a protest when he spoke, and it required serious security.

Oddly, Shoebat claims:

As a young man, he became a member of the Palestinian Liberation Organization, and participated in acts of terror and violence against Israel, and was later imprisoned in the Russian Compound, Jerusalem's central prison for incitement and violence against Israel.

Actually, the PLO doesn't have "members" --its possible to be an employee (which he wasn't) or a member of a constituent organization (Fateh, PFLP, etc).

The Russian Compound, among other things, houses a police headquarters and an interrogation center. While individuals may be detained there for limited periods, it generally isn't used as a prison for extended detentions.

If I am banned for this post, you will know why, and you will understand that the information/cultural warfare's tentacles extend right into this "Small Wars Journal", where simple discussion of facts not allowed.

They were highly stereotyped non-facts, Brian, which is why Jedburgh called you on them.

However, you may have a point--I've always wondered if he might be a really, really, really deep cover AQ sleeper.

kehenry1

11-10-2007, 06:22 PM

I am not aware of any major energy-related institution that says global oil production will not peak. It's like death, the question is when. Due to lack of knowledge about reserves in the Middle East and Former Soviet Union, there is a wide range of estimates -- from now thru 30+ years, clustering in the 15 year range. Since a crash adaptation program will take roughly 20 years, we're already on the clock. The major agencies -- us DOE and the International Energy Agency -- have been clear on this challenge, esp this year. I recommend reading the IEA's World Energy Outlook 2007 (here's the free Executive Summary)

Actually, the immediate problem is not necessarily "oil peak" in regards to reduced oil deposits for extraction, but the eventual "peak" of extraction and production capabilities. On any given oil field there are only so many points of extraction and so much oil producing infrastructure. It's this in the short term that is being outstripped by demand and will continue so.

Silver lining? Maybe force us to move into other energy resources sooner or risk a severe recession caused by inflated oil prices due to increasing demands.

and, yes, I fear a shift in economic power if we do not have a significant change in trading practices.

One reason why I have been torn on the immigration situation in the US. The only way to keep us viable is to be able to compete in the labor market. We need significant immigration of low skilled workers to re-invent our manufacturing capabilities. We also need to watch artificially increasing wages with minimum wage hikes. We also need to reduce federal spending significantly. We have to be able to survive our own economic war devices.

Right now, I sometimes feel like we are calling the bombs down on top of our position so to speak.

Fabius Maximus

11-10-2007, 06:24 PM

I don't know the protocol of this, but anyway...I just posted this on my blog (http://fabiusmaximus.wordpress.com/2007/11/10/economic-warfare/), stimulated by this excellent discussion!

1. 4GW war is a conceptual tool. Debates like these show its power, generating new perspectives. Look at the comments posted at SWC {here}. Note how they assume that States are the only significant actors. 4GW suggests that this is not so. {as the discussion has continued, this is less so, note the previous comment!}

Major states, the important ones in global finance, tend to be reactive, incrementalist, slow, and conservative. For example, it is as likely that the head of the People’s Bank of China will push the red button on his desk – instantly selling a trillion+ dollars of US bonds – as President Bush firing off ICBMs at China.

But private actors are major players in global finance.

a. Asian and European institutional bond investors hold hundreds of billions of US bonds. Their losses as the USD loses value, esp. the EU investors, have been horrific.

b. Hedge funds wield over a trillion dollars in assets, far more than when they wrecked Europe’s Exchange Rate Mechanism on Black Wednesday 1992, or initiated a depression in SE Asia in 1997.

c. US investors in foreign bonds, esp. in Canadian, Australian, and Euro bonds, have had large returns.

Relatively small moves by US or international investors could destabilize the dollar – currency flight. Or a massive move against the dollar by speculators could do so.

2. We would know if we were on the brink of a crisis, wouldn’t we?

WWI was inevitable and obvious, the result of growing tensions in Europe. Or so the standard history reads. William Lind says…

One pebble touched off an avalanche. It did so because it occurred, not as an isolated incident, but as one more in a series of crises that rocked Europe in its last ten years of peace, 1904-1914. Each of those crises had the potential to touch off a general European war, and each further de-stabilized the region, making the next incident all the more dangerous. 1905-06 witnessed the First Moroccan Crisis, when the German Foreign Office (whose motto, after Bismarck, might well be, "Clowns unto ages of ages") compelled a very reluctant Kaiser Wilhelm II to land at Tangier as a challenge to France. 1908 brought the Bosnian Annexation Crisis, where Austria humiliated Russia and left her anxious for revenge. Then came the Second Moroccan Crisis of 1911, the Tripolitan War of 1911-1912 (a war Italy actually won, against the tottering Ottoman Empire) and the Balkan Wars of 1912-13. By 1914, it had become a question more of which crisis would finally set all Europe ablaze than of whether peace would endure. This was true despite the fact that, in the abstract, no major European state wanted war.
But this was not obvious to people at that time! Harvard historian Niall Ferguson looks at the prices of UK government bonds (gilts). These show complacency right up to the brink. City investors read of the mobilization orders, panicked, and the markets imploded.

Of course, we are much smarter than they. We would know if the world was on the brink of a crisis…

(I do not have a link to the Ferguson article. Will post when I find it).

slapout9

11-10-2007, 06:34 PM

Right now, I sometimes feel like we are calling the bombs down on top of our position so to speak.

Couldn't agree more. A big reason for this is under the US Constitution Congress has the power to print and coin money........until they gave it away to the Federal Reserve Board which most people don't realize is a PRIVATE Corporation not a government agency.

This one act set the conditions for private players to enter the seen which in the long run can transfer power to private groups or individuals not Governments. If you can control interest rates and loan policy you pretty much can run the show no matter who gets elected.

Global Scout

11-10-2007, 06:49 PM

With crude oil prices nearing $100 a barrel, there is no end in sight to the redistribution of more than 1 percent of the world's gross domestic product. Earlier oil shocks generated giant shifts in wealth and pools of petrodollars, but they eventually faded and economies adjusted. This new high point in petroleum prices has arrived over four years, and many believe it will represent a new plateau even if prices drop back somewhat in coming months.

"There's never been anything like this on a sustained basis the way we've seen the last couple of years," said Kenneth Rogoff, a Harvard University economics professor and former chief economist at the International Monetary Fund. Oil prices "are not spiking; they're just rising," he added.

http://www.msnbc.msn.com/id/21718926/

By way of introduction, this first post may appear to have a liberal slant to some, but only if you view our national security issues from a political party perspective, where the facts are too often confused with agendas. I have always been an independent with a slight lean to the right, but in the end equally despise both parties and pray for a viable third party.

The enclosed article has little to do with economic warfare directly, but everything to do with your facts and assumptions if you’re a strategic planner looking at future threats to our national security, and as we all know there are other than military threats. Any political party in office would attempt to deny that we are experiencing an energy crisis on their watch, so you’ll start seeing so called experts come out of the woodwork saying there is no such thing as peak oil, or increased demand, and that our infrastructure if sufficient, etc., which is another case of facts being confused with agendas. However, the government is taking steps behind the scenes to address these very real problems.

Our national level instruments for waging war, shaping behavior, however we want to phrase it are diplomatic, information, military and economic (DIME). Unfortunately, all of these instruments have been weakened since our invasion of Iraq. We can overcome this setback with a strong economy, because the bottom line is that money is still king and enables all the other instruments, and our adversaries know this, so it only makes sense that they would wage economic warfare against us to weaken our center of gravity, which is our economy.

We’re definitely vulnerable now with our national debt, foreign investment keeping us afloat, an increased demand for energy resources worldwide, and to top it off our excessive credit based economy is starting to bite us in the butt with the real estate correction and its second order effects. Add to that the costs of the long war, Hurricane Katrina, and the other disasters that are normal drains on any nation and you can see the challenge. It isn’t a disaster if we develop appropriate responses and fiscal policies, but if an adversary wants to influence our economy now with a few hostile acts (informational, military, terrorist, economic policy, etc.) it very well could be, and the way to address it isn’t by being in a state of denial.

Global Scout

11-10-2007, 06:58 PM

Fabius: Excellent post on empowered individuals, I remember when the Asians were blaming on international investor for the fairly recent economic down turn in Asia. Very few investors are putting their money into the U.S. now, I even recently read that they preferred Egypt of all places for "safe" investments!

Kehenry 1: I second slapout's comments, you couldn't have phrased it better, we are dropping bombs on our own position.

What's nice about a democracy and free press is we can educate the people and throw the rascals out and create new polices.

Norfolk

11-10-2007, 11:09 PM

Quote - Slapout:

I remember Nixon's comment after leaving BW "We are all Keynesian now" (reference to the UK economist John Maynard Keynes). The separation of the dollar from a gold standard to a "production standard" meaning if your country can expand it's productive capabilities it can expand it's money supply.

If your country adopts a policy of exporting it's "productive capacity" to other countries you will be in deep trouble because your currency will end up being worthless!

-Unquote

And add to that how the "production standard" is so often replaced in practice by a "speculation standard", and the divorce between apparent economic performance and real production output is not so much an indicator of real economic performance as it is an indicator of how much creation of wealth there has been for an absolute minority.

Fabius: Excellent post on empowered individuals, I remember when the Asians were blaming on international investor for the fairly recent economic down turn in Asia. Very few investors are putting their money into the U.S. now, I even recently read that they preferred Egypt of all places for "safe" investments!

Kehenry 1: I second slapout's comments, you couldn't have phrased it better, we are dropping bombs on our own position.

Agreed on practically all counts here, with all parties mentioned. Just to remind though, the events of the Asian Currency Crisis were not the result of a deliberate attempt to subvert the economic order of South-East Asia, but of a speculator handed too much rope by his own superiors trying to disguise bad investments. A deliberate plot by an individual, group, or state, could not have done a better job of disrupting the economy of entire region.

The potential of economic warfare along the lines of 4GW Theory is demonstrated here, but it is a way of war no more exclusive to 4GW actors than it is to state actors and the like. It is a capability afforded to all who possess the means at hand.

Fabius Maximus

11-11-2007, 12:06 AM

Is it war when speculators from western nations damage a foreign nation for their personal profit? It's not conventional war, as we know it in the post-Westphalian order. Perhaps more like Drake and Hawkins raiding Spanish treasure ships, licensed pirates who dutifully split their take with the Crown/IRS.

For another perspective, we should ask the people of SE Asia who were reduced to poverty -- by their standards, far far below the US poverty line. I wonder what they would have deemed an appropriate response, had their nations had sufficient strength.

Have SE Asians forgotten 1997-98? If not, they might prove less-than-helpful when America hits hard times.

I strongly recommend anyone interested in modern warfare read Unrestricted Warfare (http://conflictwiki.org/files/unrestricted_warfare.pdf). {The link I gave below no longer works}. Note these quotes:

During the 1990's, and concurrent with the series of military actions launched by nonprofessional warriors and non-state organizations, we began to get an inkling of a non-military type of war which is prosecuted by yet another type of non-professional warrior. ... Judging by this kind of standard, who can say that George Soros is not a financial terrorist? ...

We believe that before long, "financial warfare" will undoubtedly be an entry in the various types of dictionaries of official military jargon. Moreover, when people revise the history books on twentieth-century warfare in the early 21st century, the section on financial warfare will command the reader's utmost attention. The main protagonist in this section of the history book will not be a statesman or a military strategist; rather, it will be George Soros. …In addition, we have yet to mention the crowd of large and small speculators who have come en masse to this huge dinner party for money gluttons, ...

slapout9

11-11-2007, 12:38 AM

And add to that how the "production standard" is so often replaced in practice by a "speculation standard", and the divorce between apparent economic performance and real production output is not so much an indicator of real economic performance as it is an indicator of how much creation of wealth there has been for an absolute minority. Quote by Norfolk

Hi Norfolk, agree absolutely and this is done through the separation of economic policy form what is called monetary policy. It is done intentionally, this not a phenomenon of nature and it allows people to make money instead of creating wealth (useful life support as opposed to changing numbers on a piece of paper) and power will accrue to a concentrated few again regardless of who is elected. It is not called war but it can create the same effect as war because you can most certainly impose your will upon them.

Global Scout

11-11-2007, 12:48 AM

We believe that before long, "financial warfare" will undoubtedly be an entry in the various types of dictionaries of official military jargon.

Whose military? Perhaps the Chinese who have some thinkers who may approach war in more holisticly than simply massing their forces on so called decisive points. I can't help but wonder if when the Department of Defense was called the War Department, if it was as restricted to what we commonly call conventional warfare, or if it was more holisitic in its approach? Obviously an area I need to study more, but DoD is not capable (primarily due to authorities) to address financial warfare, so the response would have to come from another, or combination of, other government agencies, orchistrated by the National Security Advisor. DoD could help facilitate blockades, use special operations forces to conduct economic sabotage, or simply seize valuable territory such as the oil fields in Nigeria (or Iraq), but I don't think they would take the lead in developing a response. Where do we develop the strategic thinkers to address these challenges? What is their authorities?

Far out of my area of expertise, but I wonder what type of response is even possible against a non-state actor manipulating the economy through various acts of physical sabotage, subversion, etc.? If a state engages in economic warfare we should have some options, unless that state holds a power card like providing a substantial amount of energy to the emerging world economies, then our options are fewer. Does it really matter anymore if we boycott a product from country X, when every other nation in the world will pay market price for it? 4GW or not, globalism has changed the economy's dynamics and thus the potential responses to economic warfare and to deny that would be, well, to be in a state of denial.

Norfolk

11-11-2007, 01:15 AM

It depends upon intentions, means, and consequences as to whether speculators are engaged in war or not. After all, the U.S. Air Force has an unfortunate predilection for friendly-fire, as not only the U.S. Army but also Allied Armies can attest to over the last 60 years or so. The means and consequences were the same for Allied troops as for Axis troops - both died in U.S. Air Force air strikes, but the intentions were much different needless to say. Furthermore, had Allied troops been so disposed, they may have mistakenly considered such repeated incidents for casus belli. But they were not so disposed, and correctly granted the U.S. Air Force the benefit of the doubt, and did not impute an intention to them that they did not have.

Similarly, no such attempt at economic warfare was ever intended by the British financial institution at the heart of the Asian Currency Crisis, though the means and the consequences were much the same as a real economic strike would have been. Utter economic ruin for many, and general economic disruption and lasting damage to lives, not to mention economies. But the intention to do such was completely lacking. That there are those that may have perceived in it either an attempt or an act of war in it reflects on their disposition towards those involved in the means and consequences, not that a war was in fact waged upon the victims by the guilty party(ies).

Fabius Maximus, the work you cite by the two PLA officers was the subject of a discussion on another board. Some of the contributors were experts or at least learned and sensible, although many were not exactly so. But the work in question reveals at least as much about the intentions of some in Asia as it does upon actual means and consequences. Where there is intention together with means and consequences, there is war, in whatever form it is waged.

Similarly, there is a difference in gravity of intentions, means, and consequences between an armed robber on the one hand, who takes down a bank and kills a few people in the attempt, or a brigand who raids towns and kills dozens, even hundreds of people, and an army that conducts wholesale pillage of a country. An armed robbery affects a relatively few people directly, and entails no substantial loss to the society as a whole, and so does not constitute war. Brigandage and piracy are more serious, being as it were organized criminal gangs, but normally amount to little more than glorified irritants to general society and as such do not rise to the level of war; where they do constitute serious threats is to small or weak societies or in striking vital targets, and they can amount to low-level warfare. An army is something with real capacity to do grave harm to a society, and when it is engaged in such, it is war.

And so to return to Hedge Funds, Private Equity Companies, and their ilk: do they wage war? They can, provided they have intention, means, and consequences that are grave, and all simultaneously. But that does not mean that they automatically are engaged in war whenever they cause serious, even grave damage, but rather crime; it does mean that they are criminals when they do so without full intention of causing such damage, rather than "warriors" deliberately engaged in inflicting such damage upon their enemies (I use the term "warriors" in an extended sense of the term that frankly sickens me to hear it used). So no, Hedge Funds do not wage war when they seriously damage economies, when they have no intention of doing so in order to deliberately harm their victims - they are engaged in crime; they are often nonethless criminals in doing so when what they do they know will cause harm, but not out of deliberate malice towards their victims.

War can be waged by anyone who simultaneously has the intention, using means, that result in serious or even grave consequences to a society or civilization, be they an individual, a group, or a state, or either of those in the service of another.

Fabius Maximus

11-11-2007, 01:51 AM

selil

11-11-2007, 01:53 AM

One thing to mention is that Keynsian economic theory is not the only theory associated with capitalism. Buddist economics also applies to capitalism quite nicely, but is often mistakenly considered a communist ideology.

Economic warfare is not new (there were early attempts in the thread to link it (http://council.smallwarsjournal.com/showpost.php?p=30836&postcount=8) to 4GW). Nation states have used proxies for economic warfare since long before the "East India Trading Company (http://en.wikipedia.org/wiki/British_East_India_Company)" in US colonial times. Domestic United States treaties, policies, and as example NAFTA could be considered to create hostile and protectionist policies if you are standing on the wrong side of them. Favored nation status for China, and embargo of Cuba are examples of a similar policies that could be considered equally hostile.

Economic warfare is the "E" in DIME (I guess there's something called MIDLIFE Arghhh). What is likely new is the position the United States is finding itself in with declining dollar. Whether that is totally good or bad is not an answered question and likely will be decided by historians. A declining dollar, receding industrial capability, exploding debtor status, critical energy needs, and a polarized political environment would all be considered the harbingers of societal upheavel. The US consumer though is pretty happy and not reacting from fear. The mortgage foreclosure crisis is hitting the basic consumer fairly hard but from the numbers I've seen it isn't nearly as bad as the early 80's.

The energy crisis of the 70's led to major construction projects in energy development and the last big bang (pun intended) in nuclear energy. The end of the cold war in the 80's included absolute financial recession, the savings and loan fiasco, and substantial changes in economic theory with the creating of the information economy replacing the last vestiges of the industrial economy. There are some suggestions that the replacement of the information economy (transitional actually) will be a bio-engineering economic model which the US lags seriously behind due to internal politics (see the mention of polarization above).

I'm not an expert at these things but this is what I've gleaned from my reading and it seems to make sense.

Shek

11-11-2007, 02:02 AM

I remember Nixon's comment after leaving BW "We are all Keynesian now" (reference to the UK economist John Maynard Keynes). The separation of the dollar from a gold standard to a "production standard" meaning if your country can expand it's productive capabilities it can expand it's money supply.

Slap,

A clarification here - the gold standard doesn't refer to a rigid exchange rate between gold and fiat currency. Instead, it refers to the fact that one could trade in their fiat currency in exchange for gold. The exchange rate between gold and the fiat currency isn't fixed, and in fact, it shouldn't be fixed. Otherwise, you'd suffer from deflation and price instability, which is a dampener on economic growth. We only need to look back a little over a century to see how a rigid money supply (at the time, tied to the amount of gold) results in severe boom/bust cycles.

Thus, the idea of the dollar (or any other currency) not being fixed fixed to gold was nothing new at time of the Nixon Administration's decision to pull out of the Bretton Woods framework. Money supply could grow to meet production growth to prevent deflation and price instability - the difference became that you could go turn in your dollars for gold.

Fabius Maximus

11-11-2007, 02:06 AM

selil correctly reports that the consensus of economists is that the housing crisis will be a normal cyclical event. This is beyond the scope of this thread, but somewhat relevent. There is a minority opinion that this is the end of the post-WWII "debt supercycle" (coined by the people at Bank Credit Analyst)

Each US economic cycle since 1960 has ended with increased household debt. At some point we reach our maximum carrying capacity of debt. That might be now. The housing credit crisis may be the precipitating event. This is known as the Minsky Cycle (http://en.wikipedia.org/wiki/Hyman_Minsky), and we're at the Minsky moment.

For more on the housing down cycle I strongly recommend this analysis and forecast:
"The Recessionary Macro Effect of the Worst U.S. Housing Bust Ever (http://www.rgemonitor.com/blog/roubini/223214/)" by Prof Nouriel Roubini (Economist, NYU). Brief and clear.

Shek

11-11-2007, 02:18 AM

Shek, it is not hyperbole to say this is "potentially a regime changing event". Most major experts in the field have said so, in one form or another. The BWII system assumes accellerating debt accumulation in the US, matched with US dollar reserve accumulation by foreign central banks.

FM,

My "hyperbole" comment is how you described the potential realignments as the end of the post-WWII financial order. The end of the post-WWII financial order was the end of Bretton Woods and the fixed exchange rate regime around the nth currency, the dollar, and its peg to gold. There have been financial crises that have come and gone since the collapse of Bretton Woods. If you were to describe the ongoing events as the potential for dollar hegemony to end, then your statement would be on the mark.

Given that, however, it is still not a big fundamental issue. There would be some rebalancing pain, but not a long-term impact. While I'm not a fan of Paul Krugman's NYT columns or his inequality crusade, he is a solid international economist, and I offer up the following two pieces written by him on the impact of the end of dollar hegemony.

http://web.mit.edu/krugman/www/seignor.html
http://www.ecn.wfu.edu/~cottrell/ope/archive/0407/0079.html

Norfolk

11-11-2007, 02:23 AM

Hedge funds are not criminal under our system of laws, no matter how much harm they cause. When they collapse companies or even nations, they are considered agents of the "invisible hand" (Adam Smith) spurring "creative destruction" (Joseph Schumpeter) in the interest of greater economic efficiency.

As we perhaps approach "regime change" (in the economic sense), the rules might change -- as the folks making the rules change. Creditors make the rules, probably over time becoming Asian (in a broad sense) and Middle Eastern elites. They might have different views of speculators, and enforce them.

On the other hand, history shows many instances of societies at first condemning weapons, then adopting them. Like the crossbow and strategic bombing. Perhaps other nations will adopt our methods of (in their eyes) economic warfare, but now wielded by the State (not investors) for national (not private) ends.

Whether our laws formally codify the gravely harmful actions of Hedge Funds and the like as criminal or not, they are not the less criminal for lack of it. Slavery was not legally defined as a crime in much of the U.S. until the end of the Civil War, but it was not less any less criminal. Crime is not unlike pornography, you may not be able to define it, but you know it when you see it. The victims of the Asian Currency Crisis would not disagree that they had been the victims of a crime.

"Crimes Against Humanity" did not exist in any body of law when War Criminals were tried for such crimes at Nuremberg. "Crimes Against Humanity" was a legal term invented for the Trials; but what the War Criminals did were not less crimes by virtue of the absene of any such legal codification of such actions as formal crimes at the time that they were committed.

The actions of Hedge Funds and their kind, when they result in grave harm without deliberate malice towards societies, are not less crimes for the lack of a legal definition somewhere that they are such.

selil

11-11-2007, 02:55 AM

There is a minority opinion that this is the end of the post-WWII "debt supercycle" (coined by the people at Bank Credit Analyst).....Each US economic cycle since 1960 has ended with increased household debt. At some point we reach our maximum carrying capacity of debt. That might be now.

I looked for a citation and thought Minsky had wrote it, but wasn't the GI Bill and VA home buying loan programs at the end of World War 2 what kicked the debt cycle off? Before WW2 most homes were bought on a cash basis or through family help?

slapout9

11-11-2007, 03:02 AM

Hi Shek, I am not advocating that we return to a gold standard as you say there were certainly problems with it. But I think you are missing the point of a gold standard. A paper note for 5$ could be turned in for 5$ gold coin measured by weight!!! that is why it is a universal standard of value and you buy and sell it by the weight!!! the difference in fiat money(called currency) is reflected by the price (an accounting store of value set by policy...which makes it subject to manipulation) but five ounces of gold is five ounces of gold no matter where you are and that cannot be changed (by man) because it is a physical quantity.

The problem as Keynes pointed out is that is not a very good way to run a modern economy so if you have sound economic policies (tied to physical production of life support) linked with sound monetary policy you can manage large modern economies. But if you have unscrupulous people that manipulate monetary policy mainly divorcing it from physical economic policy you can cause your own country serious problems not to mention use it as a weapon against other countries.

Fabius Maximus

11-11-2007, 03:30 AM

For a description of this see "Are We at The Peak of a Minsky Credit Cycle?" (http://www.rgemonitor.com/blog/roubini/208166)by Roubini (July 30, 2007). He explains the 3 stages:

First, sound or “hedge borrowers” who can meet both interest and principal payments out of their own cash flows.
Second, “speculative borrowers” who can only service interest payments out of their cash flows. These speculative borrowers need liquid capital markets that allow them to refinance and roll over their debts as they would not otherwise be able to service the principal of their debts.
Finally, there are “Ponzi borrowers” cannot service neither interest or principal payments. They are called “Ponzi borrowers” as they need persistently increasing prices of the assets they invested in to keep on refinancing their debt obligations.

America delevered from 1929 thru (guessing) the late 1940's. Our re-leveraging proceeded slowly until the great expansion which began in 1982. Since 2000 debt by US households has skyrocketed.

The only ways to delever are inflation, defaults, or economic growth with no new debt (the last is almost impossible in our current economy). The first two work fine, albeit with considerable pain.

In the 1930's we defaulted away our excess debt. For more on the inflationary option see Is the Government deliberately understanding inflation? (http://fabiusmaximus.wordpress.com/2007/11/08/is-the-us-government-deliberately-underestimating-inflation/).

If the US is ending a long Minsky cycle, its resulting economic weakness will probably have large effects on the world geopolitical order. For more on this, read Paul Kennedy's Rise and Fall of the Great Powers (http://en.wikipedia.org/wiki/The_Rise_and_Fall_of_the_Great_Powers) (1987).

Fabius Maximus

11-11-2007, 03:46 AM

Shek: "Given that, however, it is still not a big fundamental issue."

It's a subject on which I'm not competent to have an opinion, but "a potential regime changing event" is in my opinion the current expert consensus.

Whether it will actually be regime changing is something the big guns in economics and global finance have debated over the last decade, with strong opinions on both sides. Since the result will determined as much by political as economic factors, it is imho unknowable in advance.

As for the post-WWII order, I suspect that few non-experts can explain how the system changed functionally (not conceptually) after the end of BWI. To future generations the shift will be considered trivial imho, perhaps like the differences between the component wars of the Hundred Years War, between Marlborough's various wars, or between WWI and WWII.

On the other hand, I'll bet the end of the US dollar based order (1945 - ????) will be in the history books.

slapout9

11-11-2007, 05:39 AM

Hi FM, just started reading Unrestricted Warfare. I am on page 50 and I see why you are recommending it so highly.

kehenry1

11-11-2007, 11:05 AM

4GW non-state actors are already committing economic warfare against us and other states. They have been for over a decade. Most of their attacks are formulated on "strategic convergence" that centers around meeting several strategic concerns. Three basic "convergences" include economic, highly public and casualty saturated. Whether that is two attacks on the WTC (1993 and 9/11/2001), the Madrid trains (full of commuters on their way to work), the London Bombings (full of commuters on their way to work), Bali night clubs (tourism), Sharm El Sheikh (tourism), Moroccan Synagogue (tourism), Saudi Arabian oil refinery, Oil pipelines in Iraq, blowing up markets in Iraq, kidnapping people from businesses, taking over the western Anbar smuggling crime rings (one of the reasons the Anbar tribes were getting ticked off; they were interfering with their hereditary business that had sustained them even through Saddam's reign), Piracy of the coast of Somali (interdicting shipping through the suez) and on and on and on.

One of my previous posts from two years ago was about Al Qaida's War for Oil and other things (http://themiddleground.blogspot.com/2005/11/al-qaidas-war-for-oil-and-other-things.html):

This is a map of the Ottoman Empire (caliphate)[see link for maps] at the height of its power from the 15th to early 18th century. It's power was not derived simply by military might. As you can see by the map to the left of the legendary "silk road", it controlled major maritime and land routes, vast amounts of raw resources including base metals, precious metals, precious and semi-precious gems, grain, rice, cotton or muslin, ink, silk, precious woods, papyrus (for making paper), tea and even part of the opium trade (just to name a few). The wealth of the empire helped to produce some of the major changes in medicine, engineering, literature, basic science and philosophy. All this long before the discovery of petroleum.[snip]

Today, Islamist organizations are attempting to regain power in many of these states. And, just like centuries past, these states sit on top of some of the world's largest natural resources and straddles the world's busiest maritime routes. The map on the right shows modern maritime routes that follow the same path as the "silk road" routes with the exception that the Suez Canal has greatly reduced the number of days that it takes to bring products and energy resources to Europe, Russia, Australia, Japan, China and the United States to name a few.

The long term goals of this movement is known. They seek to create an Islamic Caliphate or state that would encompass the original area of the caliphate at the height of its power. They seek to accomplish this goal by supporting Islamist movements through out these areas with the intent of creating slow (or quick) erosion and take over of the most vulnerable states. Even if all of the states within the area do not "flip" to Islamism, the creation of Islamic states in key areas would drastically change the control of key materials, production and maritime routes. If these Islamic states make economic and security compacts with one another, it would formulate the seeds of a wider "caliphate" and potentially dominate neighboring states, not to mention create whole new paradigms for inter-state and international conflict. Any and all movements in this direction could and would be used to damage or control world economics, specifically western economics.[snip]

In the short term, reviewing the contested areas, maritime routes, materials and production, the strategy to "vex and exhaust" the United States, its allies and other target states, does not require the actual take over of any one state and does include a wider economic strategy beyond "military" or "political" cost. Generally, these movements only require that the area or country stays in turmoil, thus increasing the cost of production, exporting, importing and transporting goods as well as securing ports. For instance, 18 of 20 highest volume container ports are in South East Asia. Basically, the strategy of "a thousand cuts".

Check the link for much more including a list of over ten basic resources like steel, cotton, rubber, grains, rice and a multitude of technology that is transported through these routes or come from nations within the scope of the hoped for "caliphate". I address the Suez Canal later in the piece. Sharm El Sheikh in the Sinai could have equally been a destabilizing attack to try to provide room for operations or just cause enough insecurity to have nations shipping things through a much longer (additional ten days) around South Africa. In a JIT (just in time inventory) world, 10 days is a life time. The costs of shipping would be increased by higher insurance rates and much higher diesel fuel utilization, thus higher costs. Along with rising oil prices, this could be extremely detrimental to the world economy.

This is 4GW Economic Warfare at its base. Additional thoughts on North Africa and the "levant" here (http://themiddleground.blogspot.com/2005/11/al-qaidas-war-for-oil-and-other-things.html)

Attacks on stock markets can occur by non-state actors with ease. A number of huge trades on the stock market just prior to the 9/11 attacks were traced back to front companies with ties to Islamic terrorist organizations. Whether these trades were simply meant to remove money from a possible crashing market post attacks and preserve funds for operations or the trades were meant to destabilize the market is a good question. Either way, it's non-state actors practicing economic war at the individual or micro-level.

It can be devastating if we let it.

Fabius Maximus

11-11-2007, 04:23 PM

Also, thanks for the link to your other work. This is one of the clearest explanations of the threat that I've seen.

Question: do you have any references or links about pre-9/11 trading by probably terrorists? I've heard the rumors. There were investigations, but I recall (just from memory) that their official reports denied this theory.

bourbon

11-11-2007, 05:27 PM

Question: do you have any references or links about pre-9/11 trading by probably terrorists? I've heard the rumors. There were investigations, but I recall (just from memory) that their official reports denied this theory.

Poteshman, Allen M., 2006, Unusual Option Market Activity and the Terrorist Attacks of September 11, 2001 (http://www.business.uiuc.edu/poteshma/research/poteshman2006.pdf), Journal of Business 79, 1703-1726. (PDF)

Abstract:
After the terrorist attacks of September 11, 2001 there was a great deal of speculation that the terrorists or their associates had traded in the option market on advanced knowledge of the impending events. It is nearly impossible, however, to assess the option market trading leading up to this or any other event in the absence of systematic information about the characteristics of option market activity. This paper provides this information by computing the distributions of option market volume statistics both unconditionally and when conditioning on the overall level of option activity, the return and trading volume on the underlying stocks, and the return on the overall market. When the option market activity in the days leading up to the terrorist attacks is compared to the benchmark distributions, volume ratio statistics are seen to be at typical levels. An indicator of long put volume, however, appears to be unusually high which is consistent with informed investors having traded in the option market in advance of the attacks.

The insider trading case of Amr "Tony" Elgindy (http://www.asensioexposed.com/elgindytrial.htm) is also interesting.

Fabius Maximus

11-11-2007, 06:03 PM

Speaking as an amateur in all aspects of this (esp forensic security trading analysis), I find Poteshman's article more compelling than the official government verdict. For unknown reason I cannot copy from the pdf of 9-11 Commissions report, but you can see it on page 499, note 130 to Chapter Five: "The SEC and the FBI, aided by other agencies and the securities industry, devoted enormous resources to investigating this issue ... These investigators have found the apparently suspicious consistently proved innocuous."

You can see their full explanation (one paragraph!) here: Report of the National Commission on Terrorist Attacks upon the United States (http://www.9-11commission.gov/report/index.htm) (you can scroll down to download just the notes section, as the full report is 7.4 meg).

bourbon

11-11-2007, 08:48 PM

Oystein Noreng is a professor and petroleum economist at the Norwegian School of Management. After the '91 the Norwegian government tasked Professor Noreng to study to the relationship between Islamist movements and the oil industry in the Middle East and North Africa. This resulted in the publication of his book Oil and Islam: Social and Economic Issues in 1997. While I have not read the book, I have read a speech of his on some of the findings, and consider this an appropriate thread to share it.

OIL AND ISLAM: MISUSE OF MONEY CAUSING SOCIAL AND POLITICAL TENSIONS (http://www.worlddialogue.org/pdf/speech9.pdf)
http://www.worlddialogue.org/pdf/speech9.pdf

Noreng also recently gave a speech at Flynt Leverett's Geopolitics of Energy Initiative at the New America Foundation titled: Restructuring World Economic Power Relations through High Oil Prices (http://www.newamerica.net/events/2007/restructuring_world_economic_power_relations_throu gh_high_oil_prices). I think it is particularly relevant to this thread.

Finally, I have come across two particularly good newpaper items:
Oil's Recent Rise Not as Familiar as It Looks: Traders, Not Political or Supply Concerns, May Be Pushing Fuel Toward $100 (http://www.washingtonpost.com/wp-dyn/content/article/2007/11/04/AR2007110401753_pf.html), By Steven Mufson. Washington Post, November 5, 2007

Transcript: Interview with IEA chief economist (http://www.ft.com/cms/s/0/3c8940ca-8d46-11dc-a398-0000779fd2ac.html?nclick_check=1), Financial Times, Published: November 7 2007.
Fatih Birol, chief economist of the International Energy Agency, interviewed by Ed Crooks and Javier Blas of the FT

Perhaps oil/gas deserves it's own thread? I some connections to small wars in the past, and in the foreseeable future. Albeit a particularly sensitive topic imho.

Fabius Maximus

11-11-2007, 09:25 PM

Here is a note giving links (http://fabiusmaximus.wordpress.com/2007/11/11/links-to-articles-and-presentations-of-some-a-team-energy-experts/) to valuable presentations about Peak Oil, and how to prepare for it.

As a followup to the link bourbon gave to the FT interview with the IEA Chief Economist, I recommend close attention to the comments of the International Energy Agency's officials (I posted a link to their 2007 Outlook below). They are being increasingly alarmed by developments in the world's oil supply.

In the next chapter or so in my series of blognotes about Peak Oil, I'll discuss the theory that oil prices are rising as the Saudi's keep the tap tight. For the past two years they have said that world commercial oil stockpiles are too large. Perhaps they have taken action to "fix" this problem. OECD stockpiles (as of, I believe, July) are just now down aprox to their five year average.

Firestaller

11-11-2007, 10:55 PM

Well, I bought gold some time ago, that's all I know. The housing slump I think took everyone by surprise and the whole world has known about us running in the red for a long time but Iran has huge energy contracts with China. Israel is the wild card from China's point of view and with the falling DOW, they have to be extremely worried on both counts. The world's economy can tolerate an attack on Iran better than it can a nuclear armed Iran IMO. I think even Boscoe (FM) would agree with that.

The housing slump and the inbalanced trade due to easy access to credit by US consumers (in which money was created to stimulate consumption and the housing industry rather than creating and/or stimulating industry) was predicted by many respected financial players years ago (Warren Buffet warned about the housing bubble, dollar decline and trade deficit as early as 2005 link (http://money.cnn.com/2005/05/01/news/fortune500/buffett_talks).

As far as Iran, neither China, Russia ... or Europe for that matter wants the US to have hegenomy over the top 3 oil producing states: Saudi Arabia, Iraq and Iran if they are to go along with US position on Iran. Strategically, China and Russia want the US to guarantee that they have a stake in the production of oil in both Iraq and Iran. China would seem to automatically get action in all these countries as leverage to US influence (and China has to be perceived by these states to be able to stand up against any US interests that runs counter to Iran, Iraq or Suadi interests) so China doesn't really feel the need to submit to US pressure.

But neither China, Russia, the EU or the US would want any of these major oil producing states to have too much power .... and it's not in the interest of any of these countries to have a nuclear armed oil producing state (Russia's only source of power now is oil and it's nuclear arsenal and countries are already nervous about that.)

bourbon

11-19-2007, 03:58 AM

Political crack opens at rare OPEC meeting (http://www.iht.com/bin/printfriendly.php?id=8383307), By Jad Mouawad. International Herald Tribune, November 18, 2007.

While the Saudis wanted to reassure the world that OPEC is a reliable oil supplier, the leaders of Venezuela and Iran, who have traditionally been more hawkish members of the oil cartel, sought to score political points, saying prices were not too high and criticizing the decline of the dollar.

The polished meeting was a study in contrast that underscored OPEC's schizophrenic nature. It is too early to say whether it signaled a rift in the exceptional consensus that has sustained OPEC's success in recent years, or whether it was merely an example of conference theatrics by countries at odds with the American government.

bourbon

11-19-2007, 08:04 PM

Seven Questions: The Price of Fear (http://www.foreignpolicy.com/story/cms.php?story_id=4045&print=1), Foreign Policy Online, November 2007

Something funny has happened to the price of oil: It no longer reflects reality. The reason, according to Fadel Gheit, one of Wall Street's top energy analysts, is that “financial players have seized control of the oil markets”. Find out how they did it in this week’s Seven Questions.

Imho, what he is saying is pretty shocking and important.
Bold emphasis is mine.

FP: So what about derivatives trading—

FG: That’s exactly what I’m focusing on. I truly believe that major investment banks and a large number of very high-risk-taking financial players have seized control of the oil markets, especially in the last six months. During that time, oil prices moved in one direction and market fundamentals really moved sideways or even lowered. Demand has slowed down significantly. We have seen all kinds of indications that we are reaching a breaking point here. We’ve seen what happened to gasoline margins on the West Coast; they’ve dropped to an almost 18-year low. All this is an indication that something is wrong with the system, that supply and demand fundamentals do not justify the current price. But if the current price is based on speculation, there is no limit to how high oil prices can go. Basically, as long as there is somebody willing to bid higher, the price of the commodity will move higher.

FP: So, in other words, our own fear is driving up the price of oil?

FG: Well, if you are a commodity trader, you want to do your best to push the commodity price in the direction that you forecast. And obviously, when you have a lot of financial players making bets on much higher oil prices, they would like to see a self-fulfilling prophecy. They want to see oil prices reach the level that they put the bet on. So, they can spread rumors. And if the glass is half empty or half full, they will say it’s empty.

To my knowledge, there is no oil shortage. Any willing buyers will not have a problem finding oil. Global inventories are over 4 billion barrels. In simple math, that is the equivalent of all the oil produced in the Middle East for six months. So, the fear premium, in my view, is totally exaggerated; it’s not justified by logic or market fundamentals. Again, it’s very difficult to quantify fear. But that is the psychological factor, in my view, that is bringing oil prices to these unprecedented levels. For instance, I don’t believe that Iran is going to cut oil exports, because Iran needs the revenue more than the world needs Iran’s oil. We have to be logical in assessing the risk. And obviously, financial players want to exaggerate the situation so that the risk premium increases and they make more money.

The concept of "super-empowered" individuals and groups is a little beyond me. But as I am learning more about futures markets and oil speculation, it is becoming increasingly clear to me that there are powerful incentives for instability, that are shared by a myriad of interests.

kehenry1

11-19-2007, 09:08 PM

I was thinking about the above post when I was reading about these instances:

Venezuela calls for energy alliance (http://news.yahoo.com/s/nm/20071109/wl_nm/chile_summit_dc_6;_ylt=AqIgkTk.Jv1AYDboxrMFYY9g.3Q A)

Chavez Declares End to the rule of the US Dollar (http://news.yahoo.com/s/nm/20071119/pl_nm/iran_chavez_dollar_dc;_ylt=AtayDi5AVNx3iRJFCH_cogA Gw_IE)

Americans to spend less over holidays over fuel price concerns (http://news.yahoo.com/s/nm/20071119/us_nm/holiday_survey_dc)

My first thoughts were that oil speculators are helping these entities commit economic war on the US. I try not to be paranoid or reactionary, but I also thought that the idea that the oil moguls were behind the wars in Iraq and Afghanistan was too funny by far when, in fact, peace time allowed them to drill and search at a much lower cost. Thus, my somewhat paranoid, speculative self wonders if it isn't more likely that speculating oil costs beyond their reality is a way for "empowered individuals" to have their say on US policy? Seems much more likely and cost effective than someone dropping 100k into a campaign and demanding war that interrupts oil exploration and extraction.

Just a thought.

Of course, it could be simply the reaction of the market to continued "economic warfare" from these outside nations coupled with our own internal economic issues. I don't want to get beyond any possible realities here. In which case, oil speculation is simply a symptom and an unwitting assistant to the cause.

Finally, isn't it interesting that our enemies have learned economic warfare from our Cold War policies? Then again, history shows that our enemies have always coupled economic warfare with actual combat. counterfeit currency, interrupted resources, etc, etc, etc...

Ski

11-19-2007, 09:18 PM

kehenry1

11-19-2007, 10:24 PM

Just to keep up with realities of Venezuela, though authored by an obvious, anti-chavista, Daniel in Venezuela (http://daniel-venezuela.blogspot.com/) is a great place to track the internal issues.

He makes an excellent point about what the OPEC members may have thought of Chavez (http://daniel-venezuela.blogspot.com/2007/11/chavez-campaigns-overseas-and-gets-told.html) trying to use OPEC as a force for social change when it is imminently an organization bent on economic power.

And this little gem about the reality of "commodities" in Venezuela where everything is price controls and soviet style economics that results in the same: basic goods are missing from grocery shelves (http://daniel-venezuela.blogspot.com/2007/11/christmas-shelves-in-venezuela.html).

It's not a one time thing. He and others he has linked to have been reporting on the lack of basic staples for some time. Where is all that oil revenue going? In the pockets of thieves and into projects that have no economic return. Like buying soviet..er...Russian arms and other interesting things.

Cold war revisited.

11-20-2007, 12:27 AM

Rather than dig up some international conspiracy to jack up oil prices, there may be a simpler answer here. Oil is, I believe, traded in US dollars. The US dollar is at an all time low in the international currency market. If I have to buy a lot of my stuff in Euros or Yen, then don't I need to sell my oil for a whole lot more $$ these days? Or am I just being simple minded?

selil

11-20-2007, 12:32 AM

bourbon

11-20-2007, 01:00 AM

Oil specualtion has been a main driver of the price of crude for some time now, but I don't see any maliciousness behind them other than trying to squeeze as many greenbacks out of the market as possible. That leads to the price flucuating higher when there's a storm brewing in the Gulf, or when a small pipeline is severed in Yemen, or the rebels in Nigeria attack a refinery.

Capitalism at its finest.

But I do believe the intent could be there if some smart trader wanted to screw with the West.

Finally, I agree with those who say economic warfare has been around since the beginning of mankind...
I realize how alarmist I sounded in that last post; I just found it….alarming. The concept and practice of oil speculation is not alarming to me, but the numbers today are. A 60% price increase over six-months, how is that justified by market fundamentals? Gheit is saying there is $40 of risk premium in a barrel; I can understand $15-20, but $40? That’s doing some serious restructuring to the global economic order, and having a significant impact on our balance of payments.

tequila

11-20-2007, 01:57 AM

Our balance of payments have been way out of whack for years now, and the high price of oil has little or nothing to do with it. Much of both have much more to do with the rapid pace of East Asian recovery and Chinese industrialization over the past decade than various crises in the Middle East.

bourbon

11-20-2007, 02:09 AM

My first thoughts were that oil speculators are helping these entities commit economic war on the US. I try not to be paranoid or reactionary, but I also thought that the idea that the oil moguls were behind the wars in Iraq and Afghanistan was too funny by far when, in fact, peace time allowed them to drill and search at a much lower cost.
When the going gets paranoid and reactionary, the paranoid and reactionary go pro. When paranoid and reactionary go pro, they go LaRouche:

Bankrupt Speculators With $25 Per Barrel Oil (http://www.larouchepub.com/other/2004/3123oil_speculation.html), by Richard Freeman and John Hoefle. Executive Intelligence Review, June 11, 2004.

If you can handle the inevitable crap that comes with reading anything put out by the ‘Rouchies*, then I think this is a pretty good article. I think it illustrates some of the market dynamics at play.

Rather than dig up some international conspiracy to jack up oil prices, there may be a simpler answer here. Oil is, I believe, traded in US dollars. The US dollar is at an all time low in the international currency market. If I have to buy a lot of my stuff in Euros or Yen, then don't I need to sell my oil for a whole lot more $$ these days? Or am I just being simple minded?

"Simple minded" is harsh. But you write off the role of oil speculators in setting the price and assign the role to producer nation's. Oil producing nations ability to influence price is derived from their ability to control production (supply). OPEC is a cartel of producers who seek to pool their influence. As a result of embargoes in '70's, petroleum exchanges were established to undercut OPEC power by abandoning fixed long-term bilateral trades for more fluid "spot" trades. In the Foreign Policy interview with Gheit, he is saying that the supply (where the producer nations price influence lay), and the demand does not explain the high prices. Rather, it is the result of speculators.

You do bring up an interesting subject about petrodollars** Here is some food for thought:

From Petrodollars to Petroeuros: Are the Dollar's Days as an International Reserve Currency Drawing to an End? (http://www.ccc.nps.navy.mil/si/nov03/middleEast.asp) by Robert Looney. Strategic Insights, Volume II, Issue 11 (November 2003)

Are 'Petroeuros' the future? (http://www.oxan.com/worldnextweek/2007-11-01/ArePetroeurosthefuture.aspx?WT.mc_id=TWNWsubs5&), Oxford Analytica

*Good article (http://www2.washingtonmonthly.com/features/2007/0711.klein.html) about the LaRouche bunch in the latest Washington Monthly
** I've exercised to ghost of Howard Beale here, and am obligated to post this (http://video.google.com/videoplay?docid=-287600801875510842&q=Arthur+Jensen&total=18&start=0&num=10&so=0&type=search&plindex=0)

Watcher In The Middle

11-20-2007, 03:06 AM

...Back to when the establishment of the Euro was first being voted on.

If you go back & look real hard, there were just a few (I mean, a very few) thinkers who really put on their thinking caps and did some interesting speculation about "What If...", and specifically with the creation of the Euro as the international currency replacing the dollar for oil/petro based purchases.

Their overall conclusion seemed to be that this wouldn't necessarily be a good thing, certainly not for Europe as a whole. Their base logic was that such an occurrence would dramatically strengthen the Euro, but an unavoidable direct result would end up having to be a major transformation of a number of different European nation's governing structures, in particular economically related.

Logic being that in their viewpoint (can't find the material on the web, at the time these guys were looked at as being "way out there"...HA!), the Euro is by nature a "statist/evolutionary" currency, whereas the dollar is to a much greater degree a "activist/creative" currency. Both currencies represent the respective aspects of each society.

The EU is a substantial trading economy, but a strengthening national currency such as the Euro is not good for international trade. The stronger it gets, the more their trade markets become unfavorable. Making it the primary currency component for oil purchases (Petroeuro) does the EU no favors.

The EU economy is substantially based upon trade. But if their currency becomes so expensive (because of the demand for Petroeuros) that many parts of their trade market are unsustainable, what are they going to do to maintain their standards of living? Innovate?? New technologies and new growth markets? Develop new Entrepreneurial markets??

The "Thinkers" back then were very pessimistic over the EU's ability to adjust (not to adjust quickly, but just to adjust, period) to take into account a situation where the oil cartel has just hijacked the Euro, and in effect, turned the entire EU into their own currency exchange, while crippling the EU's main economic driver, which is their export markets.

And then they posed the big question. If this (then, unthinkable) situation really did occur, what would be the impact on the political structures in the different EU national governments, not to mention Brussels?

tequila

11-20-2007, 10:24 AM

Logic being that in their viewpoint (can't find the material on the web, at the time these guys were looked at as being "way out there"...HA!), the Euro is by nature a "statist/evolutionary" currency, whereas the dollar is to a much greater degree a "activist/creative" currency. Both currencies represent the respective aspects of each society.

Ummm ... okay. I will just say that no one who works in forex thinks like this. I'd really like to know the names of these thinkers you are quoting, and what banks or institutions they work for.

The "Thinkers" back then were very pessimistic over the EU's ability to adjust (not to adjust quickly, but just to adjust, period) to take into account a situation where the oil cartel has just hijacked the Euro, and in effect, turned the entire EU into their own currency exchange, while crippling the EU's main economic driver, which is their export markets.

What's the euro zone's current balance of trade? Compared to the U.S.?

Oil producing countries, while significant, do not have the swing in global markets to decide who becomes the world's reserve currency. The dollar will still hold sway in that arena for years to come. But let no one doubt that being the world's reserve currency holds significant benefits --- we've been living on them (some would say abusing the hell out of them) for the past 10 years.

11-20-2007, 12:23 PM

"Simple minded" is harsh. But you write off the role of oil speculators in setting the price and assign the role to producer nation's. Oil producing nations ability to influence price is derived from their ability to control production (supply). OPEC is a cartel of producers who seek to pool their influence. As a result of embargoes in '70's, petroleum exchanges were established to undercut OPEC power by abandoning fixed long-term bilateral trades for more fluid "spot" trades. In the Foreign Policy interview with Gheit, he is saying that the supply (where the producer nations price influence lay), and the demand does not explain the high prices. Rather, it is the result of speculators.

Re my earlier post on currency exchange rates driving the price up, I did not forget the speculators. In fact I think that the speculators are seizing an opportunity to push the price up even more. Because of the "need" to raise the price of oil that I suggested in my earlier post, the speculators are able to jack up the prices even more without too much pushback from the market. That is, they are "nudging" prices that would be rising anyway (due to currency exchange issues, not due to traditional commodity supply and demand) even higher than might otherwise have been allowed by the marketplace. FWIW, this reminds me of the Hunt Brothers and the silver bubble. Back in '73 they started buying silver @ about $2/oz. As others tried to jump on the bandwagon in the late '70's, the price got pushed up to over $50/oz IIRC.

Ski

11-20-2007, 12:27 PM

The weak dollar also plays a role in oil prices - probably about a 25% flux factor from what I can see. If the dollar was at its traditional levels, we'd be looking at 75$ a barrel oil, not 95.

bourbon

01-19-2008, 07:29 PM

Two differing perspectives:

The invasion of the sovereign-wealth funds (http://www.economist.com/opinion/displayStory.cfm?Story_ID=10533866). The Economist, Jan 17th 2008.

In politics, appeals to fear usually sell better than those to reason. But the hypocrisy of erecting barriers to foreign investment while demanding open access to developing markets is self-evident. Host countries should not set up special regimes for sovereign wealth. Although every country has concerns about national security and financial stability, most already have safeguards for bank ownership and defence.

Until East and West even out the surpluses and deficits in their economies, sovereign-wealth funds will not go away. Ideally, the high-savings countries of the Middle East and Asia would liberalise their economies, allowing their own citizens to invest for themselves, rather than paying bureaucrats to do it for them. But do not expect miracles. In the meantime, what should be done to keep the rod of protectionism off their—and the world's—backs?

Subprime Nation (http://www.realclearpolitics.com/articles/2008/01/subprime_nation.html), By Patrick Buchanan. RealClearPolitics, January 15, 2008

To stave off recession, the Fed appears anxious to slash interest rates another half-point, if not more. That will further weaken the dollar and raise the costs of the imports to which we have become addicted. While all this is bad news for the Republicans, it is worse news for the republic. As we save nothing, we must borrow both to pay for the imported oil and foreign manufactures upon which we have become dependent.

We are thus in the position of having to borrow from Europe to defend Europe, of having to borrow from China and Japan to defend Chinese and Japanese access to Gulf oil, and of having to borrow from Arab emirs, sultans and monarchs to make Iraq safe for democracy.

We borrow from the nations we defend so that we may continue to defend them. To question this is an unpardonable heresy called "isolationism."

And the chickens of globalism are coming home to roost.

bourbon

05-27-2008, 06:45 PM

They Rule the World (http://www.washingtonpost.com/wp-dyn/content/article/2008/05/22/AR2008052203380.html): A shadowy organization is in power, and it's made up of the very, very rich. By Reviewed by Anne-Marie Slaughter. The Washington Post, May 25, 2008.
SUPERCLASS: The Global Power Elite and the World They Are Making, By David Rothkopf. Farrar Straus and Giroux. 376 pp. $26

In Superclass, Rothkopf, a former managing director of Kissinger Associates and an international trade official in the Clinton Administration, has identified roughly 6,000 individuals who have "the ability to regularly influence the lives of millions of people in multiple countries worldwide." They are the "superclass" of the 21st century, spreading across borders in an ever thickening web, with a growing allegiance, Rothkopf argues, to each other rather than to any particular nation.

.....Rothkopf harps on the Pareto principle of distribution, or the "80/20 rule," whereby 20 percent of the causes of anything are responsible for 80 percent of the consequences. That means 20 percent of the money-makers make 80 percent of the money and 20 percent of the politicians make 80 percent of the important decisions. That 20 percent belongs to the superclass.

The Madness of Ben Bernanke (http://www.spiegel.de/international/business/a-547317.html), By Gabor Steingart. Spiegel Online, April 14, 2008.

The credit-financed consumer boom of recent years is coming to a painful end. Today's American Way of Life has no chance of surviving the coming years undamaged. The virus will continue to ravage its way through the financial system.
The property crisis is likely to spread to credit card providers soon and will then probably infect car manufacturers, furniture makers and all the other firms that owe their sales increases to the growth in credit finance. "The virus will keep on infecting the system," one management board member from a large bank said, requesting anonymity in return for the candour of his analysis.
His argument is that banks that grant mortgages to home buyers virtually unable to pay their bills are unlikely to be especially scrutinizing when it comes to lending cash to the buyers of fridges, cars and furniture. Indeed, a furniture store in Miami recently tried to lure consumers with the following offer: buy now, pay your first credit installment in three years, and no need for a down-payment.
The credit-financed way of life is typical of the US these days. Many people resort to credit to plug the gap between the lifestyle they have become accustomed to and their declining wages.

Wake Up, America. We're Driving Toward Disaster (http://www.washingtonpost.com/wp-dyn/content/article/2008/05/23/AR2008052302456_pf.html), By James Howard Kunstler.
The Washington Post, May 25, 2008.

As the world passes the all-time oil production high and watches as the price of a barrel of oil busts another record, as it did last week, these systems will run into trouble. Instability in one sector will bleed into another. Shocks to the oil markets will hurt trucking, which will slow commerce and food distribution, manufacturing and the tourist industry in a chain of cascading effects. Problems in finance will squeeze any enterprise that requires capital, including oil exploration and production, as well as government spending. These systems are all interrelated. They all face a crisis. What's more, the stress induced by the failure of these systems will only increase the wishful thinking across our nation.

World Oil: World oil demand is surging as supplies approach their limits (http://ngm.nationalgeographic.com/print/2008/06/world-oil/roberts-text), By Paul Roberts. National Geographic, June 2008.

Many industry experts continue to argue that today's high prices are temporary, the result of technical bottlenecks, sharply rising demand from Asia, and a plummeting dollar. "People will run out of demand before they run out of oil," BP's chief economist declared at a meeting early this year. Other optimists, however, are wavering. Not only have oil prices soared to historic levels, but unlike past spikes, those prices haven't generated a surge in new output. Ordinarily, higher prices encourage oil companies to invest more in new exploration technologies and go after difficult-to-reach oil fields. The price surge that followed the Iran-Iraq war in the 1980s, for example, eventually unleashed so much new oil that markets were glutted. But for the past few years, despite a sustained rise in price, global conventional oil output has hovered around 85 million barrels a day, which happens to be just where Husseini's calculations suggested output would begin to level off.

The change is so stark that the oil industry itself has lost some of its cockiness. Last fall, after the International Energy Agency released a forecast showing global oil demand rising more than a third by 2030, to 116 million barrels a day, several oil-company executives voiced doubts that production could ever keep pace. Speaking to an industry conference in London, Christophe de Margerie, head of the French oil giant Total, flatly declared that the "optimistic case" for maximum daily output was 100 million barrels—meaning global demand could outstrip supply before 2020. And in January, Royal Dutch Shell's CEO, Jeroen van der Veer, estimated that "after 2015 supplies of easy-to-access oil and gas will no longer keep up with demand."

Ken White

05-27-2008, 10:07 PM

................:wry:

selil

05-27-2008, 10:50 PM

................:wry:

Heck even I looked at what $5 dollar or more gas will do to society. The times they be a changing. I started collecting stories for my BLOG on what the price of fuel was doing to shipping and schools and commuters. No end of the stories resulting in behavior change. Not a lot of people tying it all together either. It isn't my area of expertise but I am really surprised how few stories linking the perfect storm of events together.

Jedburgh

05-27-2008, 11:40 PM

Heck even I looked at what $5 dollar or more gas will do to society. The times they be a changing. I started collecting stories for my BLOG on what the price of fuel was doing to shipping and schools and commuters. No end of the stories resulting in behavior change. Not a lot of people tying it all together either. It isn't my area of expertise but I am really surprised how few stories linking the perfect storm of events together.
Although the increasing costs of fuel and food are real, and are definitely having an affect upon us here at home, we also really need to look at the situation from a global perspective, and see how it the effects within the unique contexts of areas that are important to our interests.

Take Turkey as an example, and look at the significant difference in comparative average salaries and use that understanding to put into context the hard fact of fuel costs triple what it costs here in the US, throw in rising food costs and unemployment at roughly 20% - this all feeds the various social ills in what was already a developing world pressure cooker (dense concentrations of urban poor in the major cities, significant secular-religious political tension, virulent ethno-nationalism, organized crime, urban gangs and drug/human trafficking), not to mention that the radical Islamists and other assorted bad guys are recruiting. That's just one country, one context, of many.

Surferbeetle

05-28-2008, 02:36 AM

From today's BBC (http://news.bbc.co.uk/2/hi/business/7421778.stm)

The soaring cost of oil is causing growing strain to economies around the world, rich and poor.

With prices more than doubling in the past year to $135 a barrel, the impact is being felt acutely by consumers and businesses alike.

The risk of strikes and social unrest has become a reality in many countries as fuel becomes unaffordable for more people.

BBC reporters around the world examine the effects of the oil prices on their regions.

Surferbeetle

05-28-2008, 02:42 AM

Again from today's BBC (http://news.bbc.co.uk/2/hi/europe/7412852.stm)

The fishermen's blockade began more than a week ago, and was originally confined to a few ports like La Rochelle on the west coast. But it spread until, on Wednesday, Calais, Boulogne and Dunkirk on the north coast, all serving cross-Channel ferry services to Britain, were isolated by a ring of fishing boats.

The stoppage forced UK authorities to shut the port of Dover, causing such a long build-up of lorry traffic that the M20 motorway had to be closed.

The fishermen say rapidly rising prices for diesel threaten them with bankruptcy. They are demanding a greater subsidy from the French government, in effect putting a cap on prices. But fishermen say that agreement is redundant, since fuel has become 30% more expensive since the start of the year.

selil

05-28-2008, 02:46 AM

I found several stories about French fisherman, European farmers, and others that won't be able to afford to harvest. Here in Indiana and the corn belt they are late to plant (wet spring) which will impact the volume produced radically. Fuel is a lynch pin in the economic circle.

selil

05-28-2008, 02:59 AM

Here is an interesting piece about local politics and energy costs.

LINK (http://local.theoildrum.com/node/4057)

Robert Rapier posed an interesting hypothetical yesterday as to how individuals would respond to gasoline at $100/gallon.

However, from my position for the last three years, the question has been “how will local government respond to large increases in energy bills?”

I am the Mayor of Huntington Beach, California, a full service city of 200,000 residents, 27 square miles, 1200 employees and 8.5 miles of beach. We have nearly 200 police vehicles, 3 helicopters, 15 fire engines/trucks, 7 ambulances, 1 HazMat vehicle, and 1 medical decontamination unit. In addition there are hundreds of miscellaneous vehicles and trucks for public works, marine safety, building department, water department, and administration. All said, we consume 495,000 gallons of gasoline/diesel/jet fuel per year. For every $1 fuel goes up, it is a half million dollars out of our general fund budget.

Perhaps more shocking than the amount of fuel our city vehicles use is how much fuel is used to pick up our residents’ trash, sort it at the transfer station, and then haul it 46 miles round trip to a dump that is running out of capacity. Prior to a recent conversion to natural gas vehicles, our contractor reported to me that they were using 525,000 gallons per year of diesel.

120mm

05-28-2008, 11:21 AM

I wonder what impact government worker unions have on the cost of operating his fair city? The artificial inflation of government workers' wages combined with some truly unbelieveable retirement benefits HAS to make the cost of fuel into a very tiny drop in a huge bucket.

Maybe they all need to subscribe to this:

www.daveramsey.com

bourbon

05-28-2008, 03:21 PM

Vic Bout

05-28-2008, 03:34 PM

when the cost of a gallon of gas exceeds the hourly minimum wage?

05-29-2008, 03:35 PM

when the cost of a gallon of gas exceeds the hourly minimum wage?

Will it matter? Who's going to be able to afford to go through the drive through windows?

Steve Blair

05-29-2008, 03:58 PM

when the cost of a gallon of gas exceeds the hourly minimum wage?

Considering that the starting wage at the local fast food joints here is higher than the starting pay for many non-faculty university staff members (and no...I'm not kidding), we'll be walking before the Taco Bell crew does....:eek:

bourbon

06-16-2008, 01:21 AM

Seven Questions: The New World Energy Order (http://www.foreignpolicy.com/story/cms.php?story_id=4326), Foreign Policy Online, June 2008

Why are oil prices soaring so high, and will they ever return to Earth? Fatih Birol, chief economist at the International Energy Agency in Paris, explains why peak oil is real, why biofuels are indispensable, and how China determines what you pay at the pump.

How Iran Has Bush Over a Barrel (http://www.time.com/time/world/article/0,8599,1813706,00.html), By Robert Baer. Time Online, Jun. 11, 2008.

In the worst case scenario, seventeen million barrels of oil would come off world markets.

Plan Would Lift Saudi Oil Output (http://biz.yahoo.com/nytimes/080614/1194784977541.html?.v=3), By JAD MOUAWAD. The New York Times, June 14, 2008.

The increase could bring Saudi output to a production level of 10 million barrels a day, which, if sustained, would be the kingdom’s highest ever. The move was seen as a sign that the Saudis are becoming increasingly nervous about both the political and economic effect of high oil prices.....

Saudi Arabia is currently pumping 9.45 million barrels a day, which is an increase of about 300,000 barrels from last month.
The Mouawad article is very interesting news. See also Peter Maass' famous NYT magazine article The Breaking Point: Saudi Arabia, soaring demand and the theory of peak oil (http://www.petermaass.com/core.cfm?p=1&mag=124&magtype=1).

bourbon

06-18-2008, 06:31 PM

Another possible scenario is that the incredibly high prices in commodities are being driven by speculators, and we are witnessing a bubble that is pending to pop. Col. Lang has recently posted about this (http://turcopolier.typepad.com/sic_semper_tyrannis/2008/06/king-abdullah-a.html), and it is a notion that is increasingly gaining traction, Der Spiegel recently had a good story about this:

How Speculators Are Causing the Cost of Living to Skyrocket (http://www.spiegel.de/international/world/0,1518,559550,00.html), Spiegel Online, 06/13/2008.
What's Really Driving the Price of Oil? (http://www.spiegel.de/international/business/0,1518,538412,00.html), By Beat Balzli and Frank Hornig. Spiegel Online, February 28, 2008.

Note possible effects this will have on Iran: See Watcher in the Middle's post here (http://council.smallwarsjournal.com/showpost.php?p=48936&postcount=192)

slapout9

06-21-2008, 02:45 PM

Found this on John Robb's weblog. Fantastic piece IMO about what our military comes home to while they are fighting to protect us.

http://www.nakedcapitalism.com/2008/06/uwe-reinhardt-bankers-and-patriots.html

Cluster

06-21-2008, 04:11 PM

Another possible scenario is that the incredibly high prices in commodities are being driven by speculators

Speculation is just the froth. Oil prices have risen from $12 a barrel in 1999 to $139 currently. Oil production has been flat since 2005. (http://europe.theoildrum.com/node/4152#more)This is due to fundamentals - supply and demand. To make matters worse this is just production. When you look at oil exports then the problem gets much worse. As the prices rise, producer countries consumers are getting more wealthy, which means driving more and consequently and using more oil domestically. This coupled with oil field depletion rates means that it is only a matter of time before exports begin to contract dramatically. See here (http://www.theoildrum.com/node/4092#more) of an outline of the Export Land Model. The middle case has the top five—Saudi Arabia, Russia, Norway, Iran and the UAE—collectively approaching zero net oil exports around 2031. If that is even close to being true then we are in serious trouble.

bourbon

06-26-2008, 12:57 AM

MEND recently attacked Shell's Bonga oil facility that is 120km offshore, taking 200,000+ b/d offline. Probably a 7 hour infiltration by small craft. Jeff Vail has an excellent post on it: Nigeria - Significance of the Bonga Attack (http://www.jeffvail.net/2008/06/nigeria-significance-of-bonga-attack.html)

bourbon

07-24-2008, 05:58 PM

Bringing Down Bear Stearns (http://www.vanityfair.com/politics/features/2008/08/bear_stearns200808), by Bryan Burrough. Vanity Fair, August 2008.

On Monday, March 10, the rumor started: Bear Stearns was having liquidity problems. In fact, the maverick investment bank had around $18 billion in cash reserves. But soon the speculation created its own reality, and the race was on to keep Bear’s crisis from ravaging Wall Street. With the blow-by-blow from insiders, Bryan Burrough follows the players—Bear’s stunned executives, trigger-happy reporters at CNBC, a nervous Fed, a shadowy group of short-sellers—in what some believe was the greatest financial scandal in history.
by Bryan Burrough August 2008

The Story of Deep Capture (http://www.deepcapture.com/the-story-of-deep-capture-by-mark-mitchell/), By Mark Mitchell, with reporting by the Deep Capture Team (In PDF here (http://www.deepcapture.com/wp-content/uploads/2008/06/deepcapture-the-story-v1.pdf))

This is very long, around 70 pages, but it is enthralling. At root is "naked short selling", something currently being debated in Washington. And at issue is a small number of law-breaking hedge funds who have seemingly co-opted or gamed the financial media.

bourbon

08-26-2008, 05:05 PM

A Few Speculators Dominate Vast Market for Oil Trading (http://www.washingtonpost.com/wp-dyn/content/article/2008/08/20/AR2008082003898_pf.html), By David Cho. The Washington Post, August 21, 2008.

The CFTC, which learned about the nature of Vitol's activities only after making an unusual request for data from the firm, now reports that financial firms speculating for their clients or for themselves account for about 81 percent of the oil contracts on NYMEX, a far bigger share than had previously been stated by the agency. That figure may rise in coming weeks as the CFTC checks the status of other big traders.

Are Oil Prices Rigged? (http://www.time.com/time/business/article/0,8599,1834888,00.html), By ARI J. OFFICER AND GARRETT J. HAYES. Time, Aug. 22, 2008.

Just how would you raise prices if you were an oil supplier? Controlling the supply — as in the 1973 OPEC embargo — has become less effective with more sources of oil worldwide. And oil suppliers clearly cannot raise prices by controlling demand in the physical oil market; ultimately, they need to sell their oil, not buy it. However, with the market inefficiencies that we expose here, oil suppliers can regain the upper hand by artificially inflating demand using a different market. To understand this mechanism, we must take a glimpse into the future — the futures market, that is.

On the offensive: How Gunvor rose to the top of Russian oil trading (http://www.ft.com/cms/s/0/c3c5c012-21e9-11dd-a50a-000077b07658.html), By Catherine Belton and Neil Buckley. Financial Times, May 14 2008.

But many wonder whether Gunvor’s rapid expansion over the past five years – just as the Kremlin has moved in on private oil production – is due to more than just vision. The company has “one very good friend,” a former partner says. “He is at the very top level,” says another.

Some have speculated whether there are ties that bind Gunvor’s other co-founder, Gennady Timchenko, and Vladimir Putin, Russia’s president from 2000 until last week. As the company emerges from obscurity, some details of the connections between the two are finally becoming clear. The company claims that it has not benefited from any political favours.

09-11-2008, 06:14 PM

Interesting news from the Saudi's as reported in the NYT article here (http://www.nytimes.com/2008/09/11/business/worldbusiness/11oil.html?_r=2&adxnnl=1&oref=slogin&ref=business&adxnnlx=1221131040-KOS/e6DE0gSZ3H0lkcDcLw&oref=slogin)

Hours after suffering a rare setback in a negotiating session at OPEC’s headquarters, Saudi Arabian officials assured world markets on Wednesday that they would ignore the wishes of other cartel members and continue to pump plenty of oil.

The late-night bargaining session ended early Wednesday morning with a surprise declaration that OPEC would cut production to shore up sagging prices. Saudi negotiators publicly endorsed that position, but then spent much of Wednesday privately spreading the word that they did not feel bound by it.

bourbon

09-18-2008, 01:46 PM

New SEC Rules Target 'Naked' Short-Selling (http://www.washingtonpost.com/wp-dyn/content/article/2008/09/17/AR2008091703631.html), By Marcy Gordon. The Washington Post, September 18, 2008.

Banking crisis: Regulators look to curb naked ambition of the short sellers, by Simon Bowers (http://www.guardian.co.uk/business/2008/sep/17/stockmarkets.marketturmoil). guardian.co.uk, September 17 2008.

I linked to it a few posts down, but here it is again-- the story of 'naked' short-selling: The Story of Deep Capture (http://www.deepcapture.com/the-story-of-deep-capture-by-mark-mitchell/), By Mark Mitchell, with reporting by the Deep Capture Team (In PDF here (http://www.deepcapture.com/wp-content/uploads/2008/06/deepcapture-the-story-v1.pdf))
www.deepcapture.com

Schmedlap

09-19-2008, 01:28 AM

Interesting news from the Saudi's as reported in the NYT article here (http://www.nytimes.com/2008/09/11/business/worldbusiness/11oil.html?_r=2&adxnnl=1&oref=slogin&ref=business&adxnnlx=1221131040-KOS/e6DE0gSZ3H0lkcDcLw&oref=slogin)

The Saudis have a long history as price makers. In 1981 and 2001 - maybe also in the 1990s, they ramped up production to flood the market and drive prices down in order to punish cheating cartel members. They may also be motivated to make Iran and Russia feel the pain of low prices (since Russia helps out Iran).

slapout9

10-09-2008, 12:45 PM

Stay tuned the time is just about right for some SBE (Slapout Base Ecocnomics).

slapout9

10-09-2008, 11:34 PM

The Center of Gravity of the current Financial Crisis was activated in 1999 with the repeal of the Glass-Steagall act. Glass-Steagall was enacted in 1933 after the 1929 crash in order to prevent exactly what is happening now. The law separated Commercial Banking from Stock Brokerage firms because if you mix the two sooner or later you will create a crisis because the two do not go together.
In order to begin to fix the problem Glass-Stefall needs to be reimplemented and then put a real banker in charge, not a stock broker. Just look at Paulson"s latest recommendation. He doesn't want to be the lender of last resort which is what the Federal Reserve was designed to be on purpose...no he wants give the banks money in exchange for Stocks:eek: Do you think Goldman Sachs will get a piece of that action. That is a clear conflict of interest. More later.
Link to MP3 of Glass-Stegall act and comparison of today's crisis.
http://www.altruists.org/f178

Ken White

10-10-2008, 02:07 AM

The Center of Gravity of the current Financial Crisis was activated in 1999 with the repeal of the Glass-Steagall act...While it certainly had an effect, here are the main culprits, in sequence; The Community Reinvestment Act, 1977(LINK) (http://en.wikipedia.org/wiki/Community_Reinvestment_Act); the Depository Institutions Deregulation and Monetary Control Act, 1980; the Garn-St. Germain Depository Institutions Act, 1982 (The S&L debacle...) and of course, the Gramm-Leach-Bliley Act in 1999 which eliminated Glass-Stegall and which had been pushed by Robert Rubin and Larry Summers and was signed by Clinton.

I agree on your fix but the elimination of Glass-Stegall was just the latest in over 30 years of gross stupidity by Congress.

jmm99

10-10-2008, 03:03 AM

I should mouth off; but I won't because the two of you are exactly on the right track - and I'm enjoying the discussion without having to think - or to defend my positions.

Only one disagreement (non-legal) with Ken:

... over 30 years of gross stupidity by Congress ...

I would modify that to "over 30 years of gross venality by Congress." This mess has everything to do with $$ and "gratuities" to Congresspeople (ain't PC wonderful).

selil

10-10-2008, 03:20 AM

I think I would follow it back to the late 1940s like Fabius Maximus did and what he has been calling the debt super cycle followed by a boomer wave.

Ken White

10-10-2008, 03:53 AM

Congress has been venal AND stupid for longer than 30 years... :mad:

davidbfpo

10-10-2008, 08:11 AM

I have deliberately avoided reading much on the financial crisis, but a couple of points here give cause to comment.

I fully accept that various US legislation and the alleged venality / corruption of the body politic has had an impact.

From observing other spheres of human activity is the financial crisis yet another example of ingenuity outpacing understanding?

We have seen this in the development of military technology, often called an arms race and is not a modern phenomenon - which I see when visiting centuries old fortifications. The snag is that too often there is a significant time lag between the technical, military, government, social and other sectors understanding the new.

Clearly clever or venal financiers have pursued sub-prime mortgages and securitisation without many fully understanding what was happening, let alone the potential impact if something went wrong.

davidbfpo:)

selil

10-10-2008, 01:31 PM

UC31Oudc5Bg

Hacksaw

10-10-2008, 01:47 PM

That conversation would be a heck of a lot funnier if it didn't ring so farging true... Ugh

Ken White

10-10-2008, 03:14 PM

all true. The terribly sad thing is that there's been enough greed and stupidity exhibited by all involved -- including some, not all, of the borrowers -- and laziness by many of us who didn't participate but saw it coming and did little but rail about it from the sidelines that we have truly put ourselves in this position...

slapout9

10-10-2008, 04:47 PM

Interview of James K. Galbraith son of Economist John Kennth Galbraith about the Predator state:eek:

http://tpmcafe.talkingpointsmemo.com/2008/08/11/what_is_the_predator_state/

and this one on how to fix things.

http://www.washingtonpost.com/wp-dyn/content/article/2008/09/24/AR2008092403033.html

:D So as not to disappoint anyone.....for your listening pleasure and cultural enhancement. Financial crisis set to music.

http://www.youtube.com/watch?v=NiacSBvWPYI

PS jm99 this is from some type of legal organization ever heard of it??

October 8,08 interview of James Galbraith and his latest recommendations. Put money directly in to the hands of the American people so they can pay their bills until a long term solution is found in the next administration.

http://www.youtube.com/watch?v=GG0MlQRf-Pg&feature=user

jmm99

10-11-2008, 10:10 PM

YouTube - which is what I got on this box (cheap) - and too lazy to run down to the office for broadband. So.

PS jm99 this is from some type of legal organization ever heard of it??

can't help you right now. What's the name ? Lots of legal orgs out there (in the sense of dealing with laws). Some are illegal (in the sense that you and I would use it) - especially on the political fringes.

Galbraith presents some interesting points. They are an interesting family.

... they had four sons: J. Alan Galbraith is a partner in the prominent Washington D.C. law firm Williams & Connolly; Douglas Galbraith died in childhood of leukemia; Peter W. Galbraith has been a US diplomat who served as Ambassador to Croatia and is a widely published commentator on American foreign policy - particularly in the Balkans and the Middle East; James K. Galbraith is a prominent progressive economist at the University of Texas Lyndon B. Johnson School of Public Affairs. ...

http://en.wikipedia.org/wiki/John_Kenneth_Galbraith#Family

Went to law school at the same time as the eldest brother Alan (I confess my only recollection is him walking down the steps with Sally Katzen - a dinner date or some such); and have read a number of articles by brother Peter. James seems not to have fallen far from the tree.

PS: If we are going to have socialism here, we might as well involve everyone in the process. So, "from each according to his ability; to each according to his need". As lawyers go, I am not in the upper classes - so, that Marxist result to me would probably be relatively "revenue-neutral".

Thanos

10-11-2008, 11:11 PM

... in light of China holding a lot of our paper?

Bill Moore

10-12-2008, 03:58 AM

Thanks for the links to the videos, they were entertaining. Unfortuantely, I far from smart enough to know if the criticisms directed against our financial system is accurate or conspiracy theory (which you Southern boys are well known for). :D

slapout9

10-12-2008, 02:46 PM

Watch this one and then check the facts yourself!!! then read the daily newspapers.:eek:

http://www.youtube.com/watch?v=OnwLgrSJZKs&feature=related

Early Christmas message from President Kennedy to President Bush. "Mankind Is Your Business"

http://www.youtube.com/watch?v=hr5ydIa_yyY

Thanks for the links to the videos, they were entertaining. Unfortuantely, I far from smart enough to know if the criticisms directed against our financial system is accurate or conspiracy theory (which you Southern boys are well known for). :D
Hi Bill, actually I got from here(see link) and I think he was a Yankee but he thought like a true Southern Democrat:wry: Also Bill doing the job that you do makes you more than qulified to figure out the accuracy of the statements in the video and interviews...just basic slapout economics/police work.:)

http://www.youtube.com/watch?v=xhZk8ronces

For your Sunday night Listening pleasure from the Soul of the South.
http://www.youtube.com/watch?v=07evJobAelE

Bill Moore

10-13-2008, 03:20 AM

Shek

10-13-2008, 11:16 AM

http://www.lib.umich.edu/govdocs/jfkeo/eo/11110.htm

It wasn't the military industrial complex that plotted JFK's assassination, it was the Federal Reserve. :confused:

I don't understand our ability to print dollars endlessly without a basis for its worth, which may be why it worth less day by day. I thought it was Nixon who separated the value of the dollar from our nation's stores of gold? I need to brush up on my economic history.

Slapout, who was that Taliban looking guy singing and clapping his hands in that Utube video you posted?

Bill,

Here's an article that will provide some insight into your question - "The Economic Organization of a POW Camp (http://facstaff.uww.edu/kashianr/POWCampRadford.pdf)." An updated occurance of this can be found at this link (http://www.marginalrevolution.com/marginalrevolution/2008/10/the-economic-or.html) (notice that they can't use any form of paper currency).

Here's a short case study (http://ajnelson.us/wp-content/uploads/2008/10/wizard-of-oz.doc) based on Hugh Rockoff's "The Wizard of Oz as a Monetary Allegory" - the paper itself is gated by JSTOR. While many economists now doubt that the Wizard of Oz was written specifically as a monetary allegory, the economic interpretation is still sound.

Both of these should provide the insights you're looking for - i.e., the instability that can follow a strict backing of paper currency by a metal.

slapout9

10-13-2008, 11:54 AM

http://www.lib.umich.edu/govdocs/jfkeo/eo/11110.htm

It wasn't the military industrial complex that plotted JFK's assassination, it was the Federal Reserve. :confused:

I don't understand our ability to print dollars endlessly without a basis for its worth, which may be why it worth less day by day. I thought it was Nixon who separated the value of the dollar from our nation's stores of gold? I need to brush up on my economic history.

Slapout, who was that Taliban looking guy singing and clapping his hands in that Utube video you posted?

Hi Bill, Stone is usually wrong on everything, Lee Harvey did it and nobody else.

The memo you posted was sent to the Treasury a legal Government agency. The Federal reserve is not and that is the whole problem. If you dig a round you will find FDR did something similar to this during the War when pennies were made from steel to save copper for bullets.

In the videos I posted you will find a return to the gold stanard would be a disaster, we had depressions with gold just like paper money. The problem is interest!! and how it is handled.

I will explain further tonight busy now.

The bearded guy is Randy Owen lead singer of Alabama. The Taliban???are they like the Beatles or something?!&*

jmm99

10-13-2008, 03:55 PM

Here's the story in the guy's own words:

http://thelawparty.org/

and

http://thelawparty.org/WhoAreWe.htm

I could not even begin to comment.

I have two questions:

1. When will we see "theslapparty.org" with a neat webpage; and

2. Will we meet in the phone booth across from my office or the one across from yours near the new Piggly-Wiggly ?

slapout9

10-13-2008, 05:25 PM

Hi jm99, yeah I found his web page last night, he is a flake, but the video series he posted was done by another guy and it is generally correct in what he states. I do believe that sound Law is the basis of a sound currency, hence my interest in the lawparty.

I actually have started a blog, but nothing on it yet...all those darn buttons.

Oh, Piggly-Wiggly is best in case we get hungry or thirsty. gotta go more details later.

slapout9

10-14-2008, 12:57 AM

Here it is folks (SBE) in about 8 and a half minutes. Pay special attention between a federal reserve note a debt!!!!insturment vs. a United States Note which is a currency insturment. This is what President Kennedy wanted to do along with some other past Presidents. The quality of the video is not that great but the information is correct.

http://www.youtube.com/watch?v=7tr5BbH6X8s&feature=related

The quality of this video is a lot better. Has a solution to our problem to.
http://www.youtube.com/watch?v=nNumEm2NzQA

Watcher In The Middle

10-17-2008, 03:58 AM

Oil's Drop Squeezes Producers - Economies of Iran, Venezuela Vulnerable as Crude Price Falls but Demand Stays Low
By NEIL KING JR. and SPENCER SWARTZ
Dated: 10.09.2008

Big oil-producing countries are showing signs of distress as the global credit crunch and falling crude prices begin to squeeze government budgets and delay projects.

Fears that the boom days are fading appear strongest in Iran and Venezuela, whose governments have come to rely on oil prices to prop up otherwise shaky economies. Both countries this week led a chorus within the Organization of Petroleum Exporting Countries calling for an emergency meeting of the cartel, now set for Nov. 18, to weigh a production cut.

The global economic crisis is eating into oil demand, particularly in the U.S. and Europe, and helping drive down crude prices. Some forecasters said that despite a strong thirst for oil in Asia and the Middle East, global oil consumption could flatten out next year, potentially ending nearly a decade of steady demand growth.

In early afternoon trading, benchmark crude for November delivery fell $1.59, or 1.8%, to $87.36, on the New York Mercantile Exchange. Crude has plunged around $60 a barrel from its July high, and analysts said signs of a deep recession among industrialized countries could move prices down further.

Oil exporters have racked up cash surpluses as prices soared to historic highs. Saudi Arabia, the world's largest exporter, is expected to record $138 billion this year, up from $95 billion last year.

But government spending also has soared within OPEC and among other big producers such as Russia, based in part on the expectation that oil prices would remain high.

Standard & Poor's said last week that Venezuela's budget balance "could deteriorate quickly" if crude prices fall sharply. The nationalization of a number of industrial companies is expected to cost the government around $6 billion, or about 2% of gross domestic product, in 2008, according to Standard & Poor's.

PFC Energy, a Washington consultancy, estimates that Venezuela needs an oil price of nearly $95 a barrel to assure macroeconomic stability, three times what they needed in 2000. By contrast, Saudi Arabia requires an oil price of $55 a barrel, more than double from eight years ago, according to PFC estimates.

Link to Article
(http://online.wsj.com/article/SB122357560511419739.html?mod=googlenews_wsj)

That was one week ago. Here's today's [10.16.2008] news on oil prices:

Opec brings forward crunch meeting
By Javier Blas and Carola Hoyos in London
Published: October 16 2008

Opec on Thursday brought forward to next week an emergency meeting to consider a cut in production after oil prices dropped to less than $70 a barrel for the first time in more than a year on worries about a global recession.

The move coincided with fresh calls from those countries within the oil producing cartel that are heavily dependent on oil revenues for their budgets – most notably Iran, the organisation’s perennial hawk – to cut output. Ecuador and Qatar also supported slashing production.

Even Saudi Arabia, the cartel’s most powerful member, which initially opposed the 500,000 barrel a day cut announced last month and is close to the US, appears to be in agreement that the group needs to reduce its production.
Link to Article (http://www.ft.com/cms/s/0/9bfdbe08-9b8e-11dd-ae76-000077b07658.html)

The question really is if Opec can cut production fast and deep enough to take into account dropping demand. Everything I'm seeing is projecting China to experience a large continuing increase in oil demand (on the order of 500k+ Bbl. per day), but if US demand for imported Chinese goods keeps dropping, the much anticipated increased oil demand from China just isn't going to materialize.

An interesting concept being talked about currently is that now would be the perfect point for the US to really impact both the oil markets and Opec (and Russia) by announcing a major expansion in favor of increased offshore drilling as part of an overall energy increase plan here in the US. Even though such a plan would take 4 to 5 years to even start to have an actual effect, now's the time to hit Opec in the marketplace.

bourbon

10-17-2008, 05:45 PM

Toxic Information: U.S. intelligence officials are worried that financial institutions are vulnerable to hackers (http://www.shaneharris.net/2008/10/toxic-information.html), by Shane Harris. National Journal, Oct. 18, 2008.

Not that we need it, but here's yet another reason to worry about havoc in financial markets: U.S. intelligence officials increasingly fear that computer hackers could wreck banks and large financial institutions, or send stock markets into one more panicked frenzy, by covertly manipulating data and spreading false information.

In interviews and speeches over the past few months, senior counterintelligence and security officials laid out some dire scenarios. They're all predicated on a determined individual or small group fabricating information in such a way that the public sees a different picture of financial health than exists, either at a particular company or in broad markets.

An interesting concept being talked about currently is that now would be the perfect point for the US to really impact both the oil markets and Opec (and Russia) by announcing a major expansion in favor of increased offshore drilling as part of an overall energy increase plan here in the US. Even though such a plan would take 4 to 5 years to even start to have an actual effect, now's the time to hit Opec in the marketplace.
I doubt increased U.S. production will be able to rival OPEC market share. What a favorable congressional posture to on and offshore drilling would do is scare futures traders and drive the short term speculators out of the market. That's what was driving this these huge prices.

bourbon

01-12-2009, 04:11 PM

60 Minutes had an excellent piece on oil prices last night, crediting excessive financial speculation for last years surge in prices. Nothing new if you have been following this thread, they should have made this six months ago.

The Price Of Oil (http://www.cbsnews.com/video/watch/?id=4713382n): The historic swings in oil prices last year were the result of financial speculation from Wall Street and not supply and demand. Steve Kroft investigates. CBS News: 60 Minutes, January 11, 2009.

Bullmoose Bailey

01-21-2009, 07:30 AM

Bill,

Here's an article that will provide some insight into your question - "The Economic Organization of a POW Camp (http://facstaff.uww.edu/kashianr/POWCampRadford.pdf)." An updated occurance of this can be found at this link (http://www.marginalrevolution.com/marginalrevolution/2008/10/the-economic-or.html) (notice that they can't use any form of paper currency).

Here's a short case study (http://ajnelson.us/wp-content/uploads/2008/10/wizard-of-oz.doc) based on Hugh Rockoff's "The Wizard of Oz as a Monetary Allegory" - the paper itself is gated by JSTOR. While many economists now doubt that the Wizard of Oz was written specifically as a monetary allegory, the economic interpretation is still sound.

Both of these should provide the insights you're looking for - i.e., the instability that can follow a strict backing of paper currency by a metal.

:) Thanks for the Oz Metaphor portion. Have heard a lot about that but found your link enlightening as to what it's really about.

If the US Dollar is entirely independent of Gold then I guess we wouldn't be in danger from Opn Grandslam any longer:D

Perhaps UK still having troublous monetarism proves your point; " i.e., the instability that can follow a strict backing of paper currency by a metal."

Ski

01-21-2009, 11:48 AM

How can any of this be considered economic warfare in retrospect?

Seems like economic suicide.

bourbon

03-24-2009, 02:39 PM

China calls for new reserve currency (http://www.ft.com/cms/s/0/7851925a-17a2-11de-8c9d-0000779fd2ac.html?nclick_check=1), by Jamil Anderlini. Financial Times, March 23 2009.

China’s central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund.

In an essay posted on the People’s Bank of China’s website, Zhou Xiaochuan, the central bank’s governor, said the goal would be to create a reserve currency “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies”.

slapout9

03-25-2009, 03:18 AM

I think this is twice in the past week China has warned us that they will soon find other options to the US Dollar.

Surferbeetle

03-25-2009, 04:05 AM

Poor taste, not for everybody, but funny: leveraged sellout...living the dream (http://www.leveragedsellout.com/2007/09/thank-you-for-quitting/)

Several times a year, I receive a forward in which some young analyst at an Investment Bank has flipped out, decided to quit, and written an embittered email manifesto to his group detailing his thought process. These emails ring of both anger and haste, and, without fail, they carry the tone of “I’m meant to be doing something better than this.”

Anyway, don’t get me wrong. I appreciate hubris; I applaud it. But when someone is so deluded to think that he is better than Banking, he is advertising his stupidity. These kinds of people don’t understand the solid fundamentals that come with getting one’s hands dirty, and it’s obvious that these quitters are just scared of a little hard work and the occasional all-nighter.

Surferbeetle

03-26-2009, 03:05 AM

From BBC: AIG employee quits at 'betrayal' (http://news.bbc.co.uk/2/hi/business/7964250.stm)

A top executive at troubled insurer AIG has resigned, citing "betrayal" by AIG and "unfair persecution" by elected US officials.

slapout9

03-30-2009, 06:28 PM

My main Man James K. Galbraith :) wants us to adopt a Bob's World Population Centric Economic Strategy. Link to article in UK Guardian below.

http://www.guardian.co.uk/commentisfree/2009/mar/27/g20-globalrecession

bourbon

05-19-2009, 12:20 AM

Econo-Jihad (http://nationalinterest.org/Article.aspx?id=21464), by Bruce Hoffman and Gabriel Weimann. The National Interest Online, May 13, 2009.

In sum, repeated jihadi websites postings now reflect growing interest in health of both the American and global economies. The struggle is also increasingly seen as an economic war. And many jihadis have come to the conclusion that financial, rather than military, losses will defeat America. The websites, accordingly, emphasize the importance of targeting U.S. economic interests and directing their military jihad at targets which affect the U.S. economy. The concept of jihad, dating back to the earliest stages of Islam, has always been open to various interpretations: military, spiritual, political, religious and more. As such, “Econo -Jihad” aims to undermine the Western, and especially America’s, economy with the goal of engineering total economic collapse.

Brian Hanley

05-19-2009, 05:27 PM

Napoleon said it, "Corruption has limits. Stupidity has none."

We are doing the best job we can to overreach and destroy our nation in the process. Because we have this idea in our heads that we are the richest and most powerful nation on earth we cannot allow ourselves to think in terms of limits. Bluntly put, we have acted (and continue to act) like a spoiled, rich, pouting child spending ourselves into the poorhouse to avenge an act (9-11) that killed 1/10th the number of people killed by influenza each year. (More able bodied adults in their prime are killed by the flu each year by a factor of a bout 2-3.)

Hubris now defines us, on the right and the left, republican and democrat. Hubris has become the core of our national soul and we cannot allow ourselves to realize the obvious.

The wake up call is just beginning. My honest opinion is that by the end of 20 years, the world will have a new order and the USA is going to be second tier at best. We could change that, but neither party has a single politician with the balls and vision to do it.

Consequently, Al Qaeda doesn't need to do a darn thing. All they need to do is sit and wait while we exhaust ourselves over virtually nothing, and we protect them by making sure that the local parties with interests don't take care of the problem. Then Al Qaeda can declare their "victory".

Unfortunately, the "victory" of Al Qaeda will include getting control of Pakistan's nuclear arsenal. That arsenal is what they were after from the beginning when they pulled the 9-11 stunt. They wanted us to react so that the presence of infidel boots on the ground would recruit for them. They miscalculated, yes, but we miscalculated even more by ignoring the cost.

When (not if) Al Qaeda gets their nukes, that may mean an American city going up although not necessarily. (I would expect that the Baghdad area round the green zone will go up in a mushroom cloud though.)

The smart thing for us to do, right now, and going forward, is to tell India "Go ahead. Knock yourself out." and let them take care of Pakistan and Al Qaeda. They have the local knowledge, and they have the motive, interest and wealth to do it.

But, quite simply put, we are stupid. And stupidity has no limits. I think our grandchildren will curse our names.

Steve the Planner

05-19-2009, 08:07 PM

It was strange to review this link and notice the focus on Oil Prices as an economic weapon.

Years ago, Thomas Malthus explained that the food production capacity of the world's would soon be exceeded, so population clashes were inevitable. Now, due to changes in technology, we have plenty of food and plenty of people, but, as in Malthus' time, a rocky reliance on market systems for distribution. This often produces imbalances, cyclical booms and busts, and, indirectly, large scale population resettlements (voting by feet).

Of course, Malthus, like a proper Victorian, was overly-focused on England's Great Empire, and the teaming masses of places like India.

What we learned about oil allocations is not that what goes up must come down, or that the much-dreaded peak was exceeded, but that markets, people and technologies adjust (sometimes imperfectly).

Now, we face a possible threat of Pakistan's fall (with consequent risks to the control of nuclear resources). But we have to remember the Malthusian outcomes. India's large population generally feeds itself, has a huge Army, and deep understanding of nuclear weapons and threats (including disproportionate attention to the Paki threat).

I understand why an American might see Pakistan solely through their own eyes, but, as with food, oil and other crises, we need to remember that "we are not alone."

If I was Indian, I don't think I would be waiting for Dick Cheney to return to power before I took steps to secure the threats on my own doorstep.

It is a big, and growing, world---for what it is worth.

Steve

bourbon

06-15-2009, 06:11 PM

WINDFALL FOR ITALY?: Customs Finds $134 Billion in a Suitcase (http://www.spiegel.de/international/zeitgeist/0,1518,630158,00.html). Spiegal Online, June 12, 2009.

It is either the biggest smuggling operation in history -- or a fraud of equally impressive proportions. Italian customs officials stopped two men at the Swiss border carrying bonds worth $134 billion (95.8 billion euros).

Italian customs officers on the Swiss border often stop smugglers -- but not of this scale. Two Japanese citizens have been detained by Italian police in Chiasso on the Swiss-Italian border after being found with $134 billion of US bonds hidden in the base of their suitcase, according to a press statement by the Italian Guardia di Finanza.

The two men, reported to be more than 50 years old, were traveling by train from Italy to Switzerland on June 3. Financial police at a control on the border found the documents tucked inside a closed section at the bottom of their suitcase, separate from their personal items. According to their statement, the men's luggage included 249 government bonds worth $500 million and 10 so-called Kennedy bonds, each worth a billion dollars.

Italian Police Ask SEC to Authenticate Seized U.S. Treasuries (http://www.bloomberg.com/apps/news?pid=20601101&sid=afJXAA1ahZyo), by Sonia Sirletti and John Glover. Bloomberg, June 12, 2009.

It is nice to see that traditional artisans are back creating counterfeit securities the old fashioned way; I had thought they were driven out of the counterfeit business (http://www.euromoney.com/Article/2054070/The-US-treasury-market-reaches-breaking-point.html) by the hedge fund boys (http://www.bloomberg.com/apps/news?pid=20601109&sid=aB1jlqmFOTCA).

Ski

06-16-2009, 05:59 PM

The bonds are almost certainly - like 99.99% - fake. There are a number of these schemes out there, it's the financial industry's equiviliant to the Nigerian e-mail scam.

slapout9

07-06-2009, 01:16 PM

F. William Engdahl discusses the world future, some scary stuff here:eek:

http://www.youtube.com/watch?v=frw87_Fbc8g

slapout9

07-20-2009, 12:18 AM

If you think war is only concerned with armed conflict watch this video. This guy is right Goldman Sachs is far worse then UBL.

http://www.youtube.com/watch?v=VSwWy4E6I04&feature=player_embedded

crisselvin

08-30-2009, 07:41 AM

Karan Bilimoria is the founder of Cobra Beer. Bilimoria’s success story is truly inspiring and motivating. All those dejected with failed businesses and entrepreneurship should look to Bilimoria for his astounding success. As a qualified chartered accountant, he had a long stint with Ernst and Young, which he describes as life-learning and invaluable. He also possesses a law degree from the University of Cambridge. http://www.londonspeakerbureau.co.uk/Karan_bilimoria.aspx

bourbon

10-08-2009, 09:20 PM

The demise of the dollar (http://www.independent.co.uk/news/business/news/the-demise-of-the-dollar-1798175.html), by Robert Fisk. The Independent, 6 October 2009.

In a graphic illustration of the new world order, Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.

tequila

10-09-2009, 02:53 AM

Debunking the Dumping-the-Dollar Conspiracy (http://www.foreignpolicy.com/articles/2009/10/07/debunking_the_dumping_the_dollar_conspiracy?page=f ull)

For at least the last decade, a persistent, recurring conspiracy theory has held that major oil exporters will stop pricing oil in dollars, which will then lead to a collapse in the U.S. economy as the dollar becomes worthless. According to some accounts, Iraq's decision to price its oil in euros rather than dollars precipitated the U.S. overthrow of Saddam Hussein, and Iran's threats to move away from the dollar is the real reason the U.S. government is raising the alarm over the country's nuclear program.

The latest item in this tradition was an article by Robert Fisk, a longtime Middle East correspondent, in the London-based Independent. The article warns of a grand conspiracy between the Arab oil states, China, Japan, Russia, and France to stop pricing oil in dollars by 2018. When this happens, Fisk says, the dollar will suffer a severe blow to its international standing and the United States might struggle to pay for its oil. The article apparently caused a shudder in the currency markets yesterday, as panicked investors unloaded dollars in reaction to the terrifying prospect of this alleged international oil conspiracy.

But they really shouldn't be concerned. Fisk's theory would make a good plot for a Hollywood movie, but it doesn't make much sense as economics. It is true that oil is priced in dollars and that most oil is traded in dollars, but these facts make relatively little difference for the status of the dollar as an international currency or the economic well-being of the United States ...

M-A Lagrange

10-09-2009, 06:02 AM

But they really shouldn't be concerned. Fisk's theory would make a good plot for a Hollywood movie, but it doesn't make much sense as economics. It is true that oil is priced in dollars and that most oil is traded in dollars, but these facts make relatively little difference for the status of the dollar as an international currency or the economic well-being of the United States ...
I do not want to be the devil advocate but basically US is paying oil in paper as the US print dollars. Changing the currency on oil market from $ to euro will allow Europe to pay oil in paper, just as the US.
Then the US will have to:
1) pay in foreign currency that they will have to purchase on international market. So the price variations of oil will impact directly the economy of US as even oil produced domestically will be subject to a world price in foreign currency.
2) China is one of the biggest owner of US debt. Actually it does not worst even 1$/$. As curious it can be the bonds have a lower value than the one printed on it. A change in international currency for oil would impact the value of the $ on the market exchange. Then China (for example) will ask to be payed back for all the debt they own. What is actually quoted 0.9$/1$ may in deed be quoted 1.2$/1$.
Just take the time to make the calculation of what represent 50% of US debt but with a 1,2$ value of each $ of debt. :D

tequila

10-09-2009, 11:23 AM

... Even if all oil were sold for dollars, it would be a very small factor in the international demand for dollars, as can be seen with a bit of simple arithmetic. World oil production is a bit under 90 million barrels a day. If two-thirds of this oil is sold across national borders, then it implies a daily oil trade of 60 million barrels. If all of this oil is sold in dollars, then it means that oil consumers would have to collectively hold $4.2 billion to cover their daily oil tab.

By comparison, China alone holds more than $1 trillion in currency reserves, more than 200 times the transaction demand for oil. In other words, if China reduced its holdings of dollars by just 0.5 percent, it would have more impact on the demand for dollars than if all oil exporters suddenly stopped accepting dollars for their oil ...

China does not buy USD or U.S. Gov debt because it is a spectacularly good investment. It has not been a good investment for the past decade, if you haven't noticed.

China buys U.S. Gov debt because it would like to maintain a good exchange rate for its goods in the most important (both politically and economically) market in the world, and secondly because the U.S. remains the haven of last resort even in the face of a U.S.-generated global near-depression.

Given that the U.S. provides the ultimate guarantee of security for the Gulf countries, I doubt highly that they would give up one of their few leverages in such a relationship for euros or a basket of world currencies.

Brian Hanley

10-09-2009, 03:49 PM

Backtracking to the Engdahl piece, I agree in substance with some of his economic material, however, his take on the "color revolutions" is false. Even more than military campaigns, intelligence efforts take place in a fog; and in modern America, they suffer from a long history of administrations saying "Go ahead, yes we want that." until the plug is pulled at 1 minute to midnight and a bunch of people die or have to run for their lives.
The color revolutions only look like they could be "directed efforts" in retrospect, and Engdahl's ideas are simply hubris. In Engdahl's mind, the idea that the people of those nations could have been smart enough and motivated enough to make those work isn't even a question. But, I was there, right in the middle of Saakishvili's transition to power, and those people are so capable. Never, ever underestimate them. Stalin was a Georgian, so is Primakov, and other members of the FSB and Kremlin. They didn't magically become cunning because of some "vibrations" in the Kremlin. Yes, the USA does influence from time to time, and Saakishvili has stayed in power by throwing around the idea that he is America's chosen. But it was all very messy, and mostly Georgians. Flatly, those people are so much better at this stuff (intrigue, black ops) than we are that we aren't in the same solar system as they are. Never, ever, ever underestimate them.

Regarding this pricing model, the above arithmetic done on a daily basis adds up to 1.5 trillion on a yearly basis and has cascading effects. Yes, that makes a difference. Basic theory of markets - the marginal buyers set the price. Even during the height of the Enron created power blackouts in California, most of the power was sold at ordinary rates. But if only a few buyers must buy at a higher price, that becomes the new price.

Regarding the other nations of the world creating a new currency instrument - they have no real choice. They have to move to a new instrument because the USA has become a nation run by pirate capitalists. We are the source of the disease, and the Europeans, Russians, Chinese and Indians all know it. Those pirates have our elected officials so well in hand that they can't be stopped or regulated.
What happened with the meltdown is that AIG essentially insured loans made by the major banks. Based on those AIG issued derivatives, the banks moved loans they had made from the suspense account (which is where outstanding loans are carried) into their capital account. When the loans turned out to be bad, it became apparent that the lack of an open market for those AIG issued derivatives had radically underpriced them, because AIG could not actually cover them. What that means is that when the fraud was removed Citibank, Bank of America, et al had real reserves worse than 1:1000 when they are supposed to have 1:20 or at worst 1:40. That is why the international financial system broke. These banks no longer had the cash to carry out simple day to day operations for customers. The executives of those banks knew precisely what they were doing, and they did it to get around banking regulation of cash reserves. Their "record profits" were all lies.
This type of instrument is still not traded openly, nor is it regulated in any way. That is extremely dangerous because now, for the first time in history, capitalism has been decoupled from productivity. To make money (on paper) it is no longer necessary or important to produce value in the economy. In fact, quite the reverse is true. Productivity, the creation of value, is the real stuff that money is a symbol for. We have allowed a financial system to come to life that makes money with no relationship to value at all. This new system will destroy value while enriching (on paper) those who game the system. They are still gaming it. The longer they are allowed to continue to do it, the more industries will shut down, the more jobs will be lost, and the greater share of the total economy will be owned by those gaming it in a vicious cycle.
Given that, the rest of the world has no choice but to figure out a way to wall itself from uncle sam.

I put the majority of my money in accounts in other countries/currencies a while ago.

slapout9

11-14-2009, 09:40 PM

US Stages a Fake Coup in order to get rid of National Debt. Best Economic recovery plan I have seen in a while:wry:

http://www.theonion.com/content/video/u_s_government_stages_fake_coup

H/T to Fabius Maximis website.

bourbon

02-06-2010, 05:48 PM

Paulson Says Russia Urged China to Dump Fannie, Freddie Bonds (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=afbSjYv3v814), by Michael McKee and Alex Nicholson. Bloomberg, January 29, 2009.

The Russians made a “top-level approach” to the Chinese “that together they might sell big chunks of their GSE holdings to force the U.S. to use its emergency authorities to prop up these companies,” Paulson said, referring to the acronym for government sponsored entities. The Chinese declined, he said.
Short but interesting article. August 2008, same time period as Russia's 5 day war with Georgia.

Brian Hanley

02-07-2010, 07:41 AM

Interesting. Nice try Vladimir. :-)

I think I've posted here about that little Georgia war. I ran an office in Tbilisi for 5 years up until 2005. Saw the transition to Saakishvili. I'll quickly recap my thoughts on that and segue into what I think this attempt probably means.

I think the Kremlin decided that McCain was going to pull an October surprise in Georgia, pull the US into kicking some Russian ass to drive their troops back from Tskhinvali in order to throw the presidency to the republicans. Their reasons are: A. Saakishvili needed it to prop himself up. B. Saakishvili had been paying the guy McCain chose for SecDef as Georgia's lobbyist. C. McCain chose Saakisvili to succeed "Heavy Schevy." D. The republicans were clearly on the ropes. (E. It's what they would do in a heartbeat to keep power.)

So, Putin and the boys decided to pop it off early when it they would be in control, and could kick some Georgian ass instead. Saakishvili's government is crawling with FSB agents. And frankly, I have to say, Saakishvili is a good sycophant, but he's just - well - the guy ain't very bright. Since lobbyists always over-indulge their clients, it was no big deal to get Saakishvili to think he should attack during the Olympics. (Schevardnadze never would have.)

Putin knew that he would be in the stands with George Bush, able to watch him at the Olympics. When the balloon went up in Georgia, there he was. I watched him on TV during the opening preamble looking at Bush as Bush was told about it, and then Putin was conferring with his guys. Check the archives if you doubt me. I said right then what was going on - that Putin was using this as his final way to convince Kremlin doubters of the wisdom of his plan. The Kremlin boys have learned about us that our politicians are led around by the nose by our news media. And they knew the Olympics would be just too big a distraction for the Georgia war to get press. And that is why the war started at the Olympic opening, and wound up the day before the end. Nice, neat, tidy, and our politicians didn't have to give a damn.

Consequently, it does not surprise me at all that Putin and company would attempt to try to get the Chinese to whack us with a big stick at the same time. Thinking this through, I would bet good money that there was a contingency plan to extend the Georgia war and push all the way through Georgia, taking control of the capital and annexing the nation back into the Russian Federation. (Georgia was a province of Russia for longer than the USA has been a nation.) I'd bet that the idea was, that if the Chinese could be talked into doing that, it would slam the USA economy so as to make a US military response a non-starter inside the beltway. A quick little blitz, then lock down Georgia until the house-to-house fighting is over. In America, if a War falls in the forest and nobody reports it, it didn't happen.

But, the Chinese are no dummies. I am certain they saw right through it and knew darn well it wouldn't be in their interest. It would have critically weakened China too, because we are in a bit of a deadly embrace these days.

I have said for many years now that the long term Russian Federation plan is to wait until the USA tires, try to provoke nations like Iran and whomever else into provoking a US military response. The long term plan is to be able to waltz in when the USA tires out and runs out of money - then take control of the Middle East. After all, it is as much their backyard as Mexico is ours. In the interim, the Russians learned all about what happens when a nation overspends on military and gets bogged down - we pushed them into that to end the cold war. As Russia sees it, since we have no significant trade relations with them, our loss is their gain.

bourbon

04-03-2010, 09:17 PM

Manipulating Gold and Silver: A Criminal Naked Short Position that Could Wreck the Economy (http://www.deepcapture.com/manipulating-gold-and-silver-a-criminal-naked-short-position-that-could-wreck-the-economy/), by Mark Mitchell. Deep Capture, 02 April 2010.

Maguire says that the naked short selling scam is in the trillions of dollars, making it by far the biggest financial fraud in history. He calls it “financial terrorism” and accuses the naked short sellers of “treason” for putting national security at risk. It might be hard to believe that foreign entities are plotting to crush the U.S. economy, and perhaps they are not, but there is no doubt that loopholes in the clearing and settlement system – not just for metals, but also stocks, bonds, Treasuries, and derivatives – could quite easily be exploited by any foreign entity desiring to do harm to the U.S. economy. The only dispute is whether such a desire exists.

Dayuhan

04-04-2010, 03:37 AM

could quite easily be exploited by any foreign entity desiring to do harm to the U.S. economy. The only dispute is whether such a desire exists.

The beauty of economic interdependence is that at least on the level of national actors, nobody has much incentive to target the US economy... they'd do themselves far more harm than good.

I've said this before, but it bears repeating: short sellers are jackals, not lions. They prey on the weak, the bloated, and the dying. If the underlying equity or commodity is fairly valued and supported by reasonably strong fundamentals, short sellers can't cause anything more serious than a transient downward blip. Anything brought down by short sellers was dead on its feet to start with, and you could argue that short sellers do the markets a favor by perforating bloat before it gets any bigger.

It doesn't take an abacus to figure that gold and silver are way out on a limb at today's prices. It doesn't take an abacus to figure that any positive economic news is likely to pull money out of precious metals and into equities and real estate, reducing support levels and depressing prices. Obviously short sellers are going to exploit this... but really, who cares? If the price of gold knocks back to $500/oz, how does that hurt the US economy? Sure, it sucks if you're carrying a long position in gold, but anyone carrying a long position in gold in what could turn out to be the opening stages of a recovery cycle is cruisin' for a bruisin' anyway. If you're betting on a double dip recession holding gold might make sense, but if the dip don't dip you're likely to take it where it hurts... this is the nature of the game.

Short sellers make admirable scapegoats, and people who buy late into a bubble and watch their money take a dive are often inclined to look for scapegoats. Good to remember, though, that even if you see a dead elephant on the savannah with a bunch of jackals chowing down, that doesn't mean it was the jackals that killed the elephant.

Yes, some short selling crosses the line into fraud, and it needs to be controlled more effectively... but I don't see it as the existential crisis that some make it out to be.

Schmedlap

04-04-2010, 03:41 AM

It doesn't take an abacus to figure that gold and silver are way out on a limb at today's prices. It doesn't take an abacus to figure that any positive economic news is likely to pull money out of precious metals and into equities and real estate, reducing support levels and depressing prices. Obviously short sellers are going to exploit this... but really, who cares? If the price of gold knocks back to $500/oz, how does that hurt the US economy? Sure, it sucks if you're carrying a long position in gold, but anyone carrying a long position in gold in what could turn out to be the opening stages of a recovery cycle is cruisin' for a bruisin' anyway. If you're betting on a double dip recession holding gold might make sense, but if the dip don't dip you're likely to take it where it hurts... this is the nature of the game.

As someone who is betting against gold, I heartily endorse your post and hope that you repeat it on as many credible message boards as possible, so as to help speed any coming decline in gold.:D

Brian Hanley

04-04-2010, 05:49 AM

The total size of the precious metals market is just not that big and the same goes for the supply. That is one basic reason we went off the gold standard - our money supply needs were just too big. Precious metals today are fundamentally industrial commodities. Otherwise, it's a psychological hedge against devaluing currency. Shorts do the world a service. They are the carrion eaters of capitalism. They can't eat carrion until it's already dead.

A better way to look at the whole situation is this:

Value is created by productive work in the context of reasonable demand, thus the economy is well modeled by a leaky balloon. The rate of work going drives a rate of value creation. That is countered by the rate of decay of the value created, which can be thought of as entropy.

In the current economy we have some serious basic issues aside from structural finance problems. The most basic is that the baby boomers have been driving a high rate of value creation, but the leading edge of the boomers are reaching retirement age. Unfortunately for us, retirement is a non-value creation activity. It consumes value, but creates nothing. As the number of non-productive value consumers swell, the rate of value creation going into the economy drops. That slows growth and can reverse it.

Since, in a capitalist society, we depend on the valuation of the work engine (corporations) by the marginal dollar buys, as soon as the money going into our financial markets needs to go out more than it needs to go in - big problems.

Fundamentally, there are only three ways to solve this problem.

A. Non-boomers can become 3 times as productive. But in a system dominated by tight energy supplies that is impossible. It won't happen.

B. Boomers can be gotten rid of. This requires ending their lives in something like Kurt Vonnegut's "Suicide Parlors", making it very attractive and fun. This also isn't going to happen.

C. Boomers can stay in the workforce and forget about retiring. For most, this is possible, if unpleasant. The tough part is going to be keeping boomers motivated to be productive in their peak value occupations, or to retool for other high value occupations.

Aside from that? We are in for a long, tough sled.

Dayuhan

04-04-2010, 11:07 AM

The eventual and inevitable retirement of the boomers will certainly have an economic impact, but there are some positives to the equation as well. Retirees consume, but do not produce. By consuming they create demand for goods and services, which in turn creates employment. As boomers age they will create jobs in health care and services that have to be locally delivered, and as they retire they will cease to compete in the employment market, which adds up to more available jobs locally. As boomers retire they will create vacant positions that have to be filled; if you're young and unemployed, as so many are these days, that's not a bad thing.

Changing demographics have an impact on patterns of supply and demand. That impact has positives and negatives; it's not a blessing or a curse, just a change that we have to adapt to. This is not exactly unusual, it's happening all the time.

PS: Re precious metals, one of the odd quirks in gold markets in the last decade has been the emerging impact of demand for physical possession of gold coming from India. Seems to be a cultural thing; a tradition that when Indians get wealthy they are supposed to own and hold gold. I don't suppose that this will last forever, as it's a fundamentally irrational drive: gold in a vault doesn't earn interest and doesn't do a great deal for the owner. In the short run, though, prosperity on the subcontinent will mean greater demand for gold, even during the kind of expansion cycle that you'd expect to drive gold prices down. How much price support this will provide is anyone's guess at this point, but it is a part of the equation that isn't always considered.

PPS: The PS above is based on conversations in the Dubai gold souk; I'm not a precious metals expert by any means and I wouldn't consider that to be an authoritative comment!

Fuchs

04-04-2010, 11:41 AM

That's a good example of the mad U.S.American "our demand drives the economy" thinking.

Economy is about supply and demand. You need more than mere demand to increase it. An increasing share of non-productive citizens requires a changed distribution of income. The U.S. isn't exactly renowned for its readiness and competence in distributing income socially.

I wrote this in Feb 2009. Maybe it helps.

Sometimes it feels like (military-interested) U.S.Americans don't understand the (inter)national scope of the economic problems.
Old recipes (more consumption, cheap money) are still getting promoted, and the economic illness is often considered to be merely a problem of incompetent management or companies.

Bad news: The whole U.S.American economy was crap for many years - not just Wall Street.

Let's take the 2008 figures:

CIA World Factbook:

GDP:
$14.58 trillion (2008 est.)

GDP - composition by sector:
agriculture: 1.2%
industry: 19.6%
services: 79.2% (2008 est.)

$14.58 trillion times (19.6%+1.2%) means an
industrial & agricultural production of $3.03264 trillion

U.S.Bureau of Economic Analysis
(= U.S. Department of Commerce):

U.S. trade balance 2008 = $ -0.677099 trillion
(goods about -0.821, services about +0.144)

Total services export in 2008 was $ 0.551 trillion - you cannot double that quickly. There's no demand for such an expansion in the world. It's obvious that the U.S. can't balance this trade deficit with an expansion of services exports.

Exchange rate changes won't help at the necessary scale as well - one becomes always more expensive when exchange rates change; either export or imports. The crisis is global anyway - the countries can't simply pull each other out of the mess.

It's about goods; industrial products mostly (the U.S. won't be able to export an additional several hundred billion $ worth of raw materials or agricultural goods).

The industrial output is the key here.

Now let's look at the figures again; the deficit of 2008 was about 22.33 % as large as the U.S. industrial & agricultural production of 2008.

Well, it doesn't look like the U.S. industry will soon begin to expand much (albeit it will recover from the ongoing crash somehow, sometime).

Now let's look at the dimension of the problem:

The population of the USA PRODUCED ABOUT 18.25 % LESS GOODS THAN IT CONSUMED AND INVESTED in 2008.
(consumption + investment = production of 3.3264 trillion plus net import of 0.677099 trillion (and I used trade balance instead of goods trade balance - minimally less accurate, but more meaningful). 0.677099 trillion / 3.709739 trillion = .182519. I also kept the marginal carry over effects out; this is no dissertation.)

I didn't cherry-pick the sources; both are official U.S. sources (selected for convenient access for the readers). Go and check the links if you don't believe me.
It's not anti-American spin - it's official U.S. statistics (and pre-2008 statistics didn't look much different).

There's simply not enough national income to afford private consumption, public consumption and investment at the old (or even desired) levels. A compromise is necessary.

You cannot reduce the consumption of raw materials and half-finished products much without a further reduction of industrial output.
You cannot easily reduce public consumption of industrial goods for infrastructure purposes (most of them weren't imported anyway).
You cannot reduce recapitalization in the economy (that would strangle the industrial output in the medium and long term).
You CAN reduce private consumption and some public consumption, though.

In the end, we're likely talking about a reduction of about ONE FIFTH in consumption - unless an industrial miracle happens (massive expansion of U.S. industrial output) and/or a world trade miracle happens (which would be necessary to sustain the trade deficit for more than at most a few more years).

"Stimulus packages" won't help much (if at all). They can AT BEST reduce the loss of industrial output. There's not even talk about raising it beyond 2007 levels with stimulus policy.

***U.S.American readers only***
Imagine this: You can expect to buy one seventh to a quarter less in stores in 2015 than in 2007.
Something feels wrong? You're right, the U.S. economy of the past was wrong, very wrong. To borrow isn't the same as to earn - it never was.
***done***

Meanwhile, I still see discussions about how many expensive warships to buy, how many expensive fighters to buy and similar military expenses.

I have bad news for the U.S.Americans: You cannot afford it. You weren't able to afford your military/lifestyle for many, many years.

Do you want to reduce private consumption by even more than a fifth in favor of stable or rising government consumption (military spending is consumption in macro-economical terms, no matter what right-wing nuts might tell you about its economical effects)?
No? Then don't spend insanely on the military!

The Afghan cavemen and North Korean starving children won't invade you, I guarantee for that! You're allied with many of the major military spenders and military powers of the world - seriously, there's no need for going broke (even more) by spending more on the military than all other countries together!

The "can do" attitude won't help much, at least not until the problem is understood and the worthlessness of many old recipes recognized.

Maybe I should rather cry about this than to be fascinated and amused by pointless discussions - my country is in huge troubles as well due to stupid economic policies (the other extreme; too much export, not enough domestic consumption) and our public didn't get it yet, too.
Well, at least we're creditors, not debtors. That feels a bit better. For now.

The last bold emphasis was to avoid the impression that this was an anti-U.S. diatribe. It was a combination of facts and ranting against illusions and ignorance.

The trade data has slightly changed since I wrote the text.

The services balance had a stable surplus of $ 10.3 bn to $ 13.2 bn for years.
(Goods and services balance combined yield the trade balance.)

The deficit went down from $ 64.9 bn in July 08 to $ 25.8 bn in May 09 and is again on the rise; $ 40.2 bn in Dec 09.

$ 40 bn per month - that's almost $ 500 bn trade deficit per year if it became the new average (despite the trend upwards). The world trade system is not going to sustain this for more than a couple years. The next crisis is around the corner.

A full scientific study would be much larger, more accurate and have much more detail. Nevertheless, I hope the point is visible even with this rudimentary coverage: The West is in trouble because of unsustainable imbalances. It's less wealthy than it believes to be. It's at a slightly similar point as the Soviet Union was in the 80's (and we're in AFG, oh irony).

The U.S. problems are mirrored by UK Southern European problems (the latter problems are in part caused by the Euro monetary union).

The Western World still thinks that this economic crisis was about Wall Street and the "city" (London financial district). It isn't. It's the noise of the first failures of a system based on unsustainable levels of illusion, imbalance and waste.

About the thread topic: The U.S. is waging economic warfare against itself with illusion-driven economic and foreign policies in my opinion.

Dayuhan

04-04-2010, 01:52 PM

Economy is about supply and demand. You need more than mere demand to increase it.

Of course, but without demand (both domestic and foreign) you can't increase or sustain an economy, and when demand shrinks the economy shrinks with it, as we've all seen recently. Production and employment cannot be sustained if there's no demand for the goods and services being produced. Demand for goods and services is only one part of the economic picture, but it's a very critical part.

An increasing share of non-productive citizens requires a changed distribution of income. The U.S. isn't exactly renowned for its readiness and competence in distributing income socially.

I'm not quite sure what that's supposed to mean... who is supposed to "distribute income socially"?

I'm not going to try to go into the overall spectrum of strength, weakness, threat, and opportunity for the US economy, because I haven't the time or patience to write a book. It's neither as weak as some fear and some hope nor as strong as some fear and some hope, if that makes any sense at all.

Fuchs

04-04-2010, 02:16 PM

The problem is that too many people equate rising demand with an improving economy.
That's simply not true as long as it's sustained by a trade balance deficit.

We should look at goods output (+ goods trade balance). The goods output is really the basis of the economy, not how much you go shopping with a credit card.

Dayuhan

04-05-2010, 03:04 AM

Can't have a whole lot of goods output unless somebody somewhere is doing some shopping. Somebody needs to buy the goods that are being put out.

For the last 2 decades Americans have done the goods producers of the world a massive favor by serving as the profligate consumers of last resort. It's a difficult and thankless job, but somebody had to do it. Have to wonder who will pick up the torch when Americans finally wear out... the youth of emerging Asia have potential, they know how to spend!

Not saying that production of goods is insignificant, but services work too, as long as somebody's willing to pay for 'em (that is to say, as long as there's demand). There's a place for both in any economy. Of course that's coming from an American who's living in Asia and selling services mainly to the Middle East... the beauty of a globalized globe!

For me the single greatest economic problem the US faces in the long term is a perverse education system that insists on churning out people - including many university graduates, some with advanced degrees - with no employable skills. Then we wonder why we have college graduates driving taxis, and college graduates who can't get middle class jobs. We have more graduates in sociology and political science, literature and philosophy, than any economy can possibly use, but even with unemployment at 10% you can't find machinists or precision welders. The average age of an American heavy equipment operator is 53... for years it's been almost impossible to get young people to train for these jobs, even though they pay well. We'd rather send them to a mediocre college to get a degree in the history of labor that qualifies them for nothing but professional discontent. Technical training is one area where the Germans are way ahead of the US, from what I hear at least... but I rant. To make a long story short, any economy with more astrologers than astronomers has a real problem, and the US is definitely in that class.

Possibly I've been around this stuff for too many years, but I've rather lost the ability to panic, or at least the tendency to panic. Yes, there are crises looming; there always are. Yes, there have been stupid policy decisions all over the world and all kinds of economies all over the place face major issues... I've never seen it any other way, anywhere. Always there is someone in the corner shaking a large rattle and howling of imminent doom... usually a lot of people, all prophesying doom from different directions. I have a feeling we'll get by, though not without the usual mess.

Entropy

04-05-2010, 04:08 AM

The eventual and inevitable retirement of the boomers will certainly have an economic impact, but there are some positives to the equation as well. Retirees consume, but do not produce. By consuming they create demand for goods and services, which in turn creates employment. As boomers age they will create jobs in health care and services that have to be locally delivered, and as they retire they will cease to compete in the employment market, which adds up to more available jobs locally. As boomers retire they will create vacant positions that have to be filled; if you're young and unemployed, as so many are these days, that's not a bad thing.

The problem with your analysis is that much of what retirees consume will be government entitlements for which there soon won't be any money. That will probably create additional public sector employment but at the cost of private sector employment. Not to mention the unholy trinity we'll see in the next two decades - namely, the end of the social security surpluses, a huge retirement bubble and an expensive and unsustainable Medicare program (~$40-70 Trillion in unfunded liabilities depending on who you believe.) While there certainly will be some positive impacts of the boomer retiree bubble, those impacts are dwarfed by the costs of promises made to those retirees.

Dayuhan

04-05-2010, 04:42 AM

If you assume that retirees will be depending primarily on government entitlements, yes, that looks a huge problem. It's not necessarily so. Even with recent setbacks the US Boomers are the most affluent generation in the history of the planet, and while many will delay retirement until they can get a better price for asset holdings, many of us do have very substantial assets and will be quite able to take care of ourselves.

Age no longer equals poverty, or dependency. Americans over age 50 have a median net worth more than double the American national average, and a per capita income roughly 25% above the national average. They own something like 3/4 of the country's investment instruments and control a very large percentage of the national wealth. Some may end up depending on the taxpayers, far more will not.

Entropy

04-05-2010, 01:21 PM

I have not seen any evidence that a substantial portion of the boomer generation is planning for, much less willing or able to forgoe social security and medicare in retirement. If you've got something that provides some evidence and arguments for your position I'd be very interested in seeing it. I've seen nothing which would indicate the boomer generation, as a political entity, has any intention of not receiving the government benefits they believe they bought and paid for.

It's also not just entitlements. The regular budget's been operating for a couple of decades now with bonus income from social security surpluses. The "balanced" budgets under President Clinton, for example, were made possible by that social security money. The future there doesn't look good as those surpluses will soon become deficits.

And it's the future I'm really worried about. A recent CBO report highlights the solvency problem quite clearly and the CBO director, on his blog (http://cboblog.cbo.gov/?p=467), summarizes the issue in typically understated language:

A large and persistent imbalance between federal spending and revenues is apparent in CBO’s projections for the next 10 years and will be exacerbated in coming decades by the aging of the population and the rising costs of health care. That imbalance stems from policy choices made over many years. As a result of those choices, U.S. fiscal policy is on an unsustainable path to an extent that cannot be solved by minor tinkering. The country faces a fundamental disconnect between the services that people expect the government to provide, particularly in the form of benefits for older Americans, and the tax revenues that people are willing to send to the government to finance those services. That fundamental disconnect will have to be addressed in some way if the nation is to avoid serious long-term damage to the economy and to the well-being of the population.

That is polite bureaucratic language to say Uncle Sam is heading toward national insolvency. Avoiding a solvency crisis will be exceedingly difficult, not least due to political concerns.

Indeed, the momentum pushing us toward insolvency is powerful, the product of 40 years of policy decisions. The miracle of compound interest makes the problem worse each year. CBO estimates indicate that in 2020 the interest alone on the debt will be somewhere between $700 billion and a trillion dollars annually which will make it the largest federal government "program" after Medicare and Social Security. And that number will continue to grow over the decade after since we'll still be running deficits of $600-700 billion (estimated) annually in 2020.

It's not clear exactly how or when this unsustainable fiscal situation will end. What is clear is that even under rosy scenarios very difficult choices will soon be unavoidable.

One of my "hobbies" lately is examining the effects of fiscal unsustainability on national security and I've come to the conclusion that big changes are inevitable. The debates we have today about force structure and policy assume we will be able to maintain our current level of resources into the future. In my judgment, that is not a safe assumption.

slapout9

04-06-2010, 12:27 AM

Latest from W.F.Engdahl and some Economic Warfare in the Ukraine.

http://www.engdahl.oilgeopolitics.net/print/Ukraine%20and%20a%20Tectonic%20Shift%20in%20Heartl and%20Power.pdf

Dayuhan

04-06-2010, 01:15 AM

I have not seen any evidence that a substantial portion of the boomer generation is planning for, much less willing or able to forgoe social security and medicare in retirement.

I didn't say they'd be forgoing the entitlements, I said they wouldn't be depending on them. There's a difference.

We're looking at two different questions: I'm trying to assess the impact of retirement on the private sector economy, you're looking at government finances.

The Government's financial status stands or falls on the health (or lack thereof) of the private sector economy. Given the current fiscal realities, ultimately government will have to spend less, tax more, print more money, or some combination of the above. Government's ability to do these things depends on the private sector economy, which is what we need to be primarily concerned with.

It is true that the US will probably have to spend less on defense, and I do not see that as a bad thing, or as a trend that must necessarily compromise national security.

Fuchs

04-06-2010, 08:29 AM

Can't have a whole lot of goods output unless somebody somewhere is doing some shopping. Somebody needs to buy the goods that are being put out.

For the last 2 decades Americans have done the goods producers of the world a massive favor by serving as the profligate consumers of last resort. It's a difficult and thankless job, but somebody had to do it. Have to wonder who will pick up the torch when Americans finally wear out... the youth of emerging Asia have potential, they know how to spend!

See; first line was OK, though trivial.

The rest sounds badly like the usual "consumption drives the economy" myth.
This is a chicken-egg problem (at best), except for the fact that we know that the egg (production) came first.

Consumption drives an economy much less than investment - something that the U.S. has neglected badly. Investment is the counterpart of savings, after all - and the U.S. savings rate was close to or below zero for years (there are small statistical problems, though).

It's no service to others to accept a part their production output for the promise of paying back without the ability to pay back and then invest much of the foreign wealth into inefficient projects that yield a high percentage of loss.

There's no such thing as a "consumer of last resort" in economics.

The right thing to do is to go for sustainability. This means either reduced goods consumption or increased goods production. The current model of an inflated service sector, a huge fiscal deficit and a huge trade balance deficit doesn't work. It's the path downhill to the next crash in much less than the usual 8-11 years.

The U.S. needs to get away from the "consumption dives the economy" myth and pay more attention to savings (and thus investment) instead to increase the industrial capital stock (high-tech industry workplaces cost up to a million/job) in order to reach the level of industrial production to sustain its goods consumption trade-wise. Roughly 20% more industry without much additional service jobs would help greatly to correct many other problems as well, such as unemployment, insufficient tax income, pensions troubles, health care GDP percentage and more.

Dayuhan

04-06-2010, 09:55 AM

The comment about the "massive favor" was meant to be tongue-in-cheek, possible that was insufficiently clear. Still there is an element of truth in it: a lot of countries have driven their growth on exports and trade surpluses in the last 2 decades, and everybody can't run a surplus: if one country is going to drive their growth on a trade surplus, somebody somewhere has gotta have a deficit.

Investment, production, and demand move together, hard to say one leads the others. Nobody will invest unless they see a clear demand for the goods or services the investment is intended to produce. The perception of demand generates investment, which enables production; the realization of demand makes production profitable and sustainable, which drives more demand, etc. Can't move any of them without the others.

While I'd agree that the US economy is too heavily weighted toward services, I think it's fairly arbitrary to base economic assessments purely on goods production. Excessive dependence on the manufacture of goods can be a problem too, especially in high-wage economies that can only produce highly priced goods, for which global demand is limited. Services are a valid component of any economic picture, but like any other component they aren't going to hold up the whole edifice.

It's hard to generate viable and competitive manufacturing jobs in the US today, largely because the skill sets needed in sophisticated, modern manufacturing are largely lacking in the US workforce. There's no way the US is going to compete in low-skill assembly line manufacturing, our costs are just too high, and we're not going to run high-tech manufacturing with a bunch of liberal arts graduates who clutch the pearls and come over all faint at the idea of working in a factory. So we need to retool education to generate the needed skills, and move on from there... long process.

US investment markets are if anything overcapitalized and overvalued, but very little of that capital goes into domestic manufacturing, because investors generally don't see it as viable: they don't think there would be sufficient demand for the products, given the production cost, to justify the investment.

It's easy to say "the US needs to..." but these decisions are not made by fiat; the US is composed of a whole bunch of ornery folks who make their own decisions. Neither you nor I, still less the government, will make much impact by telling them what they need to do.

Fuchs

04-06-2010, 11:07 AM

...and that's part of the reason why the perception needs to change.- No more excusing of deficits with the ideas that a demand larger than one's income drives growth. No more cheering of the services sector. No more cheering of corporate interests that lead to less domestic industry jobs.
A greater prestige of manufacturing jobs, less prestige for services jobs would eventually lead to different demand for education & training opportunities.

The attitude needs to change - that change can lead to a new course of a huge self-organizing crowd.

slapout9

04-06-2010, 04:40 PM

I have not seen any evidence that a substantial portion of the boomer generation is planning for, much less willing or able to forgoe social security and medicare in retirement. If you've got something that provides some evidence and arguments for your position I'd be very interested in seeing it. I've seen nothing which would indicate the boomer generation, as a political entity, has any intention of not receiving the government benefits they believe they bought and paid for.

It's also not just entitlements. The regular budget's been operating for a couple of decades now with bonus income from social security surpluses. The "balanced" budgets under President Clinton, for example, were made possible by that social security money. The future there doesn't look good as those surpluses will soon become deficits.

And it's the future I'm really worried about. A recent CBO report highlights the solvency problem quite clearly and the CBO director, on his blog (http://cboblog.cbo.gov/?p=467), summarizes the issue in typically understated language:

That is polite bureaucratic language to say Uncle Sam is heading toward national insolvency. Avoiding a solvency crisis will be exceedingly difficult, not least due to political concerns.

Indeed, the momentum pushing us toward insolvency is powerful, the product of 40 years of policy decisions. The miracle of compound interest makes the problem worse each year. CBO estimates indicate that in 2020 the interest alone on the debt will be somewhere between $700 billion and a trillion dollars annually which will make it the largest federal government "program" after Medicare and Social Security. And that number will continue to grow over the decade after since we'll still be running deficits of $600-700 billion (estimated) annually in 2020.

It's not clear exactly how or when this unsustainable fiscal situation will end. What is clear is that even under rosy scenarios very difficult choices will soon be unavoidable.

One of my "hobbies" lately is examining the effects of fiscal unsustainability on national security and I've come to the conclusion that big changes are inevitable. The debates we have today about force structure and policy assume we will be able to maintain our current level of resources into the future. In my judgment, that is not a safe assumption.

Galbraith on deficits. A Government is not a business.....it doesn't need to make a profit because they have the sovereign power to create money.

http://www.thenation.com/doc/20100322/galbraith

Brian Hanley

04-06-2010, 04:40 PM

I was in that region (in Tbilisi) from 2000 to 2005. He weaves a conspiracy originating at RAND with factlets that support his radical-left conspiracy views. There are a lot of declarations in that Engdahl article but not a lot of evidence if you look at it carefully. It just didn't happen the way he says it did.

Bluntly put, Engdahl is a nut - a crackpot. He writes all kinds of stuff and the theme is always the same. Some puppetmasters (who happen to be precognitive geniuses) know things we don't and he enlightens us about their plans to take over the world. For instance, because Mr. Engdahl has told us so, we now know that Bill Gates has pulled the sheets off a program of eugenics that uses vaccines to lower population. http://www.financialsense.com/editorials/engdahl/2010/0304.html

From the article:
In a recent conference in California, Gates reveals a less public agenda of his philanthropy—population reduction, otherwise known as eugenics. He supports this with a quote from a speech by Gates:
The world today has 6.8 billion people. That's headed up to about 9 billion. Now if we do a really great job on new vaccines, health care, reproductive health services, we lower that by perhaps 10 or 15 percent.[/I]

In the world according to Engdahl this means: [quote]In plain English, one of the most powerful men in the world states clearly that he expects vaccines to be used to reduce population growth.

Uh, no. Not by a long shot. The theory of this is well established. Improve living standards and population growth slows down - way down. Hans Rosling has made educating the world about this his life's work. You can see the graphs here: http://www.gapminder.org/

Simply put, Engdahl is a paranoid wack-job who happens to be good enough at writing that most of the time people who read him, who don't know much about the area can believe it.

slapout9

04-06-2010, 04:46 PM

Simply put, Engdahl is a paranoid wack-job who happens to be good enough at writing that most of the time people who read him, who don't know much about the area can believe it.

As one who knows nothing about the area(or natural gas) that is why I post his writings sometimes to get different opinions.

Brian Hanley

04-07-2010, 04:44 PM

How the nation's biggest banks are ripping off American cities with the same predatory deals that brought down Greece

MATT TAIBBI
http://www.rollingstone.com/politics/story/32906678/looting_main_street/print

...

What happened here in Jefferson County would turn out to be the perfect metaphor for the peculiar alchemy of modern oligarchical capitalism: A mob of corrupt local officials and morally absent financiers got together to build a giant device that converted human #### into billions of dollars of profit for Wall Street — and misery for people like Lisa Pack.

There was so much money to be made ... that banks like JP Morgan spent millions paying middlemen who bribed — yes, that's right, bribed, criminally bribed — the county commissioners and their buddies just to keep their business.

Birmingham became the poster child for a new kind of giant-scale financial fraud, one that would threaten the financial stability not only of cities and counties all across America, but even those of entire countries like Greece.
...

Once you follow that trail and understand what took place in Jefferson County, there's really no room left for illusions. We live in a gangster state, and our days of laughing at other countries are over.
...

The original cost estimates for the new [municipal] sewer system were as low as $250 million. But in a wondrous demonstration of the possibilities of small-town graft and contract-padding, the price tag quickly swelled to more than $3 billion. County commissioners were literally pocketing wads of cash from builders and engineers and other contractors eager to get in on the project, while the county was forced to borrow obscene sums to pay for the rapidly spiraling costs.
...

Wall Street was happy to help. First, it employed the same trick it used to fuel the housing crisis: It switched the county from a fixed rate on the bonds it had issued to finance the sewer deal to an adjustable rate. The refinancing meant lower interest payments for a couple of years — followed by the risk of even larger payments down the road. ...

...For an extra fee, the banks said, we'll allow you to keep paying a fixed rate on your debt to us. In return, we'll give you a variable amount each month that you can use to pay off all that variable-rate interest you owe to bondholders.

In financial terms, this is known as a synthetic rate swap — the spidery creature you might have read about playing a role in bringing down places like Greece and Milan. On paper, it made sense: The county got the stability of a fixed rate, while paying Wall Street to assume the risk of the variable rates on its bonds. That's the synthetic part. The trouble lies in the rate swap. The deal only works if the two variable rates — the one you get from the bank, and the one you owe to bondholders — actually match.
...

"It was right around the corner here, at the hotel," Martin says. "That's where they met — that's where this all started."

They means Charles LeCroy and Bill Blount, the two principals in what would become the most important of all the corruption cases in Jefferson County. LeCroy was a banker for JP Morgan, serving as managing director of the bank's southeast regional office. Blount was an Alabama wheeler-dealer with close friends on the county commission. For years, when Wall Street banks wanted to do business with municipalities, whether for bond issues or rate swaps, it was standard practice to reach out to a local sleazeball like Blount and pay him a ####load of money to help seal the deal. "Banks would pay some local consultant, and the consultant would then funnel money to the politician making the decision," says Christopher Taylor, the former head of the board that regulates municipal borrowing.
...

The scheme they operated went something like this: LeCroy paid Blount millions of dollars, and Blount turned around and used the money to buy lavish gifts for his close friend Larry Langford, the now-convicted Birmingham mayor who at the time had just been elected president of the county commission. ... Langford then signed off on one after another of the deadly swap deals being pushed by LeCroy. ... "The transactions were complex, but the scheme was simple," said Robert Khuzami, director of enforcement for the SEC. "Senior JP Morgan bankers made unlawful payments to win business and earn fees."

...

Just tell us how much. That sums up the approach that JP Morgan took a few months later, when Langford announced that his good buddy Bill Blount would henceforth be involved with every financing transaction for Jefferson County. ... But the bank had one small problem: Goldman Sachs had already crawled up Blount's trouser leg, and the broker was advising Langford to pick them as Jefferson County's investment bank.

The solution they came up with was an extraordinary one: JP Morgan cut a separate deal with Goldman, paying the bank $3 million to back off, with Blount taking a $300,000 cut of the side deal. ...

That such a blatant violation of anti-trust laws took place and neither JP Morgan nor Goldman have been prosecuted for it is yet another mystery of the current financial crisis. "This is an open-and-shut case of anti-competitive behavior," says Taylor, the former regulator.

...

All told, JP Morgan ended up paying Blount nearly $3 million for "performing no known services," in the words of the SEC. ...

The deals wound up being the largest swap agreements in JP Morgan's history. Making matters worse, the payoffs didn't even wind up costing the bank a dime. As the SEC explained in a statement on the scam, JP Morgan "passed on the cost of the unlawful payments by charging the county higher interest rates on the swap transactions." In other words, not only did the bank bribe local politicians to take the sucky deal, they got local taxpayers to pay for the bribes. ... According to an analysis of the swap deals commissioned by the county in 2007, taxpayers had been overcharged at least $93 million on the transactions.

...

The crazy thing is that such arrangements — where some local scoundrel gets a massive fee for doing nothing but greasing the wheels with elected officials — have been taking place all over the country. In Illinois, during the Upper Volta-esque era of Rod Blagojevich, a Republican political consultant named Robert Kjellander got 10 percent of the entire fee Bear Stearns earned doing a bond sale for the state pension fund. At the start of Obama's term, Bill Richardson's Cabinet appointment was derailed for a similar scheme when he was governor of New Mexico. ...

... Imagine a mortgage that you have to keep on paying even after you sell your house. That's basically how a swap deal works. And Jefferson County had done 23 of them. At one point, they had more outstanding swaps than New York City.

Judgment Day was coming — just like it was for the Delaware River Port Authority, the Pennsylvania school system, the cities of Detroit, Chicago, Oakland and Los Angeles, the states of Connecticut and Mississippi, the city of Milan and nearly 500 other municipalities in Italy, the country of Greece, and God knows who else. All of these places are now reeling under the weight of similarly elaborate and ill-advised swaps — and if what happened in Jefferson County is any guide, hoo boy. Because when the #### hit the fan in Birmingham, it really hit the fan.

For Jefferson County, the deal blew up in early 2008, when a dizzying array of penalties and other fine-print poison worked into the swap contracts started to kick in. ...

It gets worse. Remember the swap deal that Jefferson County did with JP Morgan, how the variable rates it got from the bank were supposed to match those it owed its bondholders? Well, they didn't. Most of the payments the county was receiving from JP Morgan were based on one set of interest rates (the London Interbank Exchange Rate), while the payments it owed to its bondholders followed a different set of rates (a municipal-bond index). Jefferson County was suddenly getting far less from JP Morgan, and owing tons more to bondholders. ...

... Last year, when Jefferson County, staggered by the weight of its penalties, was unable to make its swap payments to JP Morgan, the bank canceled the deal. That triggered one-time "termination fees" of — ... $647 million. That was money the county would owe no matter what happened with the rest of its debt, even if bondholders decided to forgive and forget every dime the county had borrowed. It was ... debt that does not go away, ever, for as long as you live. On a sewer project that was originally supposed to cost $250 million, the county now owed a total of $1.28 billion just in interest and fees on the debt. Imagine paying $250,000 a year on a car you purchased for $50,000, and that's roughly where Jefferson County stood at the end of last year.

... The destruction of Jefferson County reveals the basic battle plan of ... banks like JP Morgan and Goldman Sachs have systematically set out to pillage towns and cities from Pittsburgh to Athens. These guys aren't number-crunching whizzes making smart investments; what they do is find suckers in some municipal-finance department, corner them in complex lose-lose deals and flay them alive. In a complete subversion of free-market principles, they take no risk, score deals based on political influence rather than competition, keep consumers in the dark — and walk away with big money. "It's not high finance," says Taylor, the former bond regulator. "It's low finance." And even if the regulators manage to catch up with them billions of dollars later, the banks just pay a small fine and move on to the next scam. This isn't capitalism. It's nomadic thievery.

davidbfpo

04-08-2010, 07:28 AM

Brian Hanley,

Thanks for that insight posted above.

A sort of book review in a UK newspaper for a book published in the USA, 'The Big Short: Inside the Doomsday Machine', by Michael Lewis:
only in America could you imagine the story of a one-eyed neurology intern with undiagnosed Asperger's Syndrome (no not Gordon Brown) who ended up making a fortune by applying the principles of "value investing" to subprime mortgage lending. Greenspan says no one saw it coming. Well, this man did....

But not many will know of Dr Mike Burry, a one time neurologist who according to a new book* by the former bond salesman Michael Lewis, predicted the crisis almost exactly and persuaded Wall Street to create the instruments that would allow him to capitalise on it.

Something to pick up when waiting to see your bank manager!

tequila

04-08-2010, 12:14 PM

I'd recommend Lewis' work because he writes so well and so clearly about the products at the heart of the crisis. He is pretty illustrative because the book that made his name, Liars' Poker, was about the origins of the trader culture and the beginnings of the mortgage derivatives business on the Street in the 1980s. Read that, and his accounts of traders "ripping the faces off" of their banks' clients, and you will understand why Ayn Rand is so popular on Wall Street.

His handicap is that he is, by and large, a narrative writer with a story, and villains/ignoramuses and lonely heroes (in this case, the "shorts", or the guys who bet against the mortgage market, not all of whom were small potatos --- absent from his book, for instance, is John Paulson, the protagonist of The Greatest Trade Ever, or Magnetar Capital, the hedge fund that drove much of the subprime mortgage bond demand in 2006-2007. This makes his stories very interesting and readable, but somewhat slanted and a bit skewed from a journalistic aspect. What he doesn't get is that the "shorts" like his heroes, like Paulson and Magnetar, were absolutely critical to the formation of the synthetic CDOs and the CDS markets that made the real estate bubble into a systemic crisis. It would not have happened without them.

For a good basis of what the book is about, check out this Portfolio article by Lewis: The End of Wall Street's Boom (http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom/).

Ski

04-08-2010, 12:50 PM

Adding on to what Tequila wrote above, Lewis' latest isn't bad, but it's a narrative designed to sell books and tell a part of the story, not the entire drama.

I would have liked for him to get into the aspects of governmental deregulation from the 1980's to the present, and how that allowed Wall St. firms to grossly manipulate every financial market, not just the derivative markets.

slapout9

04-09-2010, 05:19 AM

slapout9

04-09-2010, 05:25 AM

Link below.

http://www.engdahl.oilgeopolitics.net/index.html

tequila

04-14-2010, 02:15 PM

An outstanding report on how Magnetar (http://www.propublica.org/feature/all-the-magnetar-trade-how-one-hedge-fund-helped-keep-the-housing-bubble), a hedge fund based out of Chicago, was key to keeping the bubble growing in 2006-2007. If you want to understand how a real estate bubble came close to destroying the entire global financial system, this is something you have to read.

On a personal note, I had something of a ringside seat for several Magnetar-related issues.

For a more user-friendly but still very thorough explanation of this, you can check out the This American Life podcast (http://www.thisamericanlife.org/radio-archives/episode/405/inside-job)of the same report.

flagg

04-14-2010, 08:12 PM

After spending countless hours on this topic in the past 5 years I've found Eric Janszen at the iTulip.com forum to possess one of the best track records in decrypting the current state of economic affairs and accurately predicting the economic path we are on.

The short-term stuff is not his strength....but on the medium to long term stuff he's been batting a thousand for the better part of a decade since circa 99.

Eric coined the term Economic MAD...which touches on(too lightly in my opinion) the greater geopolitical consequences of our global predicament.

Some of the key issues on the iTulip.com forum moving forward include:

How and when will China see its first crash? At what stage will the benefit of instantaneous stimulus allowed by China's form of government and the massive capital reserves in it's armory be overwhelmed by massive excess capacity in industrial production and commercial real estate?

How and when to make the energy investment of a lifetime? The iTulip position is that energy price lows made in early 2009 could be the lowest we see in our lifetime and are gearing up for significant energy price increases and volatility moving forward.

Developing a successful energy investment thesis is the Itulip.com main effort right now as it's deemed to be a current and future key form of currency, and while the forum has some paid subscriber only content, much of it is freely available to all forum visitors.

Eric has a book that just went to the publisher:

http://www.amazon.com/Postcatastrophe-Economy-Rebuilding-America-Avoiding/dp/1591842638/ref=sr_1_2?ie=UTF8&s=books&qid=1271274520&sr=1-2

Not due out until September...while I plan on buying it....I think that the speed of events at times leapfrogs a lot of book publishing content.

A couple other websites I recommend also include:

www.shadowstats.com

www.nowandfutures.com

The extremely frustrating part for me as a former undergrad political science student, amateur economist, and part-time soldier is the complete failure, in my opinion, of the internet to yet offer a single location/source to effectively merge the political/economic/military facets of geopolitical analysis.

While I think iTulip's position and consensus among members regarding the likelihood of a global trend towards energy nationalization as Peak Cheap Oil takes hold and China's government becoming increasing challenged to keep it's job creation perpetual motion machine moving to prevent internal dissent are likely to be accurate.......what's lacking is the complementary analysis to determine the direct and indirect consequences if one or both occur.

In a nutshell, If I had a magic wand I'd put a community of folks like Itulip.com together with a community of folks like smallwarsjournal.com in a pub for a day....add some beer, and shake, to see what comes out.

Just my 0.02c

bourbon

08-23-2010, 07:06 PM

Stock Swing Still Baffles, With an Ominous Tone (http://www.nytimes.com/2010/08/23/business/23flash.html), by Graham Bowley. The New York Times, 22 August 2010.

The stock market mysteriously plunges 600 points — and then, more mysteriously, recovers within minutes. Over the next few weeks, analysts at Nanex, an obscure data company in the suburbs of Chicago, examine trading charts from the day and are stunned to find some oddly compelling shapes and patterns in the data.

To the Nanex analysts, these are crop circles of the financial kind, containing clues to the mystery of what happened in the markets on May 6 and what might have caused the still-unexplained flash crash.

The charts — which are visual representations of bid prices, ask prices, order sizes and other trading activity — are inspiring many theories on Wall Street, some of them based on hard-nosed financial analysis and others of the black-helicopter variety.

To some people, like Eric Scott Hunsader, the founder of Nanex, they suggest that the specialized computers responsible for so much of today’s stock trading simply overloaded the exchanges.

Could a foreign power or non-state actor “weaponize” High-Frequency Trading? Have they already?

Brian Hanley

08-24-2010, 04:50 PM

Quite a long time ago now, I worked at Bank of America when the ATM system crashed. I was one of those assigned to analyze why. In any system that services orders, there are queues. In the physical world the lines at supermarket checkouts are queues, at an oil change place the line of cars is the queue. Queue depth is economically beneficial for the serving agent, it's sometimes called "backlog". Queue depth has a negative economic impact for the requesting agent, it's sometimes called "backorder."

Orders are never processed instantly. If the system is mostly idle, the average queue depth will be less than 1. If the system is busy, the average queue depth will rise. The queuing time is often a major, if not the major time period delaying the request for service.

Analyzing the logs of traffic in the ATM system that day, we saw that it all started with one ATM having a customer call in complaining. Someone sent a shutdown-reset out, then turn on. For some reason it didn't happen quickly, and so they did it again. Each ATM was on a shared leased line with 5 or 6 others. All of them started slowing down because there were many messages sent back and forth when an ATM shutsdown and restarts. So they did the same thing with all of them on that line. That generated enough traffic to slow down the controller. Each controller had up to 8 leased lines worth of ATMs, and all the ATMS on the impacted controller got slow. So they did the shutdown restart on all the ATMs on that controller.

You see where this is going. The mainframe computers had never been tested with that much traffic. The people in operations had gone from 1 ATM down to almost 50 in about 10 minutes. And since the shutdown restarts all got slow, it flooded the mainframes with messages. Then things really got out of hand as the ops guys started getting calls from all over the state. They ended up doing a shutdown-restart on every ATM. But that brought everything to a crawl. And ATMs would come online then go offline. Customers called to complain about that because the ops guys had just been hitting the keys again and again to restart. Each time, that meant a whole cycle had to be re-initiated and that request went into the queue. The end result was that after the software guys were brought in and told ops to stop touching the keyboards, it took around 8 hours for all those restarts to go through the system.

So yes. I am sure that a savvy player or set of players would be capable of overwhelming the system, at least for a short period of time. It could also easily be the case that this was one of those random "Storms" that chaos theory predicts. That the orders are instantly canceled is a little suspicious.

bourbon

09-03-2010, 03:03 PM

SEC Probes Canceled Trades: Regulators Looking Into Role 'Quote Stuffing' May Have Played in Flash Crash (http://online.wsj.com/article/SB10001424052748703882304575465990082237642.html). The Wall Street Journal, 1 September 2010.

Regulators are scrutinizing what some in the stock market are calling "quote stuffing," trading in which unusually large numbers of orders to buy or sell stocks are placed in a fraction of a second, only to be canceled almost immediately.

The Securities and Exchange Commission has begun looking into whether the practice is putting some investors at a disadvantage by distorting stock prices, according to people familiar with the matter. The SEC is looking at what role, if any, quote stuffing played in the May 6 "flash crash," when the Dow Jones Industrial Average collapsed 700 points in minutes, the people say.

The SEC is looking at what role, if any, 'quote stuffing' played during the May 6 flash crash. Above, traders at the New York Stock Exchange that day, when the Dow Jones Industrial Average fell 700 points in minutes.

Traders say the phenomenon of huge bursts of orders flooding stocks and then getting canceled has risen with the growth of high-speed computerized trading in recent years.

In addition, the SEC is looking into another practice in which large numbers of orders are placed. In these cases, what's unusual is that the orders are priced in increments as small as one-tenth of a cent and far away from the actual price at which a stock is trading, says a person familiar with the line of inquiry.

slapout9

10-21-2010, 04:33 PM

Link from sic semper tyrannis to nice article on how we engaged in Economic Warfare against the Soviet Union.

http://turcopolier.typepad.com/sic_semper_tyrannis/2010/10/a-note-on-economic-warfare-richard-sale.html#more

Brian Hanley

10-22-2010, 05:45 PM

The oil of Central Asia, and control over it, is the key to Russian survival. The situation has not changed today from Soviet times in terms of revenue for the Kremlin. Chechnya itself is a worthless piece of mountainous guerrilla favorable territory filled with hillbillies with guns. Some of them make the boys in "Deliverance" seem like cultured gentlemen. (I've met them out there. A village headman wanted to breed me to the village's women - all of them. Another story...)

Russia's incursions in Georgia, first taking Abkhazia, and solidifying their presence in South Ossetia during the last summer Olympic games in Beijing, are all about that unpleasant pipeline from Baku that pays no tolls to Moscow. Since Armenia is in bed with the Kremlin, there is literally about 30 miles of land now that the pipeline runs through which is not under Kremlin control. Sooner or later the pincers will strike. I've been surprised it hasn't happened already, but my best guess is that Putin doesn't have enough support in the Kremlin to test the American Tiger. And I suspect that BP is aware of the problem and some deals have been cut.

I am sure the Kremlin would like to rerun the huge runup and overshoot in the oil market of a few years ago. They could do it if Osama bin Laden gets hold of nukes. My guess is that they don't want him and/or the Muslim Brotherhood controlling Pakistan and its nukes because he's crazy enough to use them on Russia.

And that brings us to Iran and its nuclear program which has about as much chance of being peaceful as a shark does of being vegetarian. As a nation-state that has depended in part on Russian help and has more than its quota of Russian agents, Iran is more controllable. Just pointing out here that it is in Russia's interests for Iran to nuke Israel and if possible the oil fields of the Gulf. That would provoke a counterstrike that would wreck oil production in Iran and put the Kremlin in the driver's seat. Probably end with Moscow owning Iran. The price of oil would spike if only Iran's production was clobbered, and the West would fall to its knees if the gulf went with it.

slapout9

11-10-2010, 03:37 PM

Interview with Dr. Michael Hudson on currency wars.

http://www.youtube.com/watch?v=8P1fihT5B7o&feature=player_embedded

Dayuhan

11-10-2010, 09:45 PM

Fuchs

11-10-2010, 10:57 PM

Just pointing out here that it is in Russia's interests for Iran to nuke Israel and if possible the oil fields of the Gulf. That would provoke a counterstrike that would wreck oil production in Iran and put the Kremlin in the driver's seat. Probably end with Moscow owning Iran.

It's way too risky and very, very unlikey.

Moscow has had it with Muslims in the South - they're not interested in getting more involved with them on another than the diplomatic level.

They would furthermore consider the possibility of a Western take-over of Iran - but Iran is one of the few non-Western-controlled routes to the Indian Ocean for Moscow.

It makes most sense for Moscow to foster friendship with Iran as a nation, sit out the current Iranian government, keep the West out of Iran and to work towards a close relationship (possibly a loose alliance; arms exports, naval and air base, military training, railway traffic to Indian Ocean) in the future.

slapout9

01-21-2011, 02:48 PM

Link to the educational bears.
http://www.youtube.com/watch?v=XnAT7FZpmg0

Backwards Observer

01-21-2011, 04:08 PM

Always a pleasure.

"He was speaking and they weren't translating. They normally translate every couple of words, but Hu Jintao was just going, 'ching chong, ching chong, chong,'" Limbaugh said, continuing his imitation at length.

US radio host criticized for mocking China president - AFP (http://www.google.com/hostednews/afp/article/ALeqM5jxkhnEM8wDhShy4yCe-zqoFxky1g?docId=CNG.fa7db8f3462efc0aa7b25879a26f4c 9b.c1)

$$$

In early October, China's Premier Wen Jiabao addressed European leaders in Brussels. Ominous talk of currency wars dominated the proceedings. And why not? After all, America — and a growing coalition of forces — has mounted a massive attack on China. And the American led coalition's weapon of choice is the renminbi- U.S. dollar exchange rate. According to America's war "plan," a maxi appreciation of the RMB against the greenback will generate economic instability in China. This will rein in the hegemon.

Premier Wen had good reasons to be worried and to warn the assembled in Brussels that a maxi renminbi appreciation would destabilize China and be "a disaster for the world."

America's 'Plan' to Destabilize China - Cato Institute (http://www.cato.org/pub_display.php?pub_id=12492)

Steve Hanke - Wikipedia (http://en.wikipedia.org/wiki/Steve_Hanke)

Backwards Observer

01-21-2011, 04:29 PM

"Ching chong ching chong chong."

That means, "Smell ya later."

slapout9

01-21-2011, 08:46 PM

"Ching chong ching chong chong."

That means, "Smell ya later."

I didn't know you spoke Panda-nese.:D

Backwards Observer

01-22-2011, 04:11 AM

I didn't know you spoke Panda-nese.:D

Actually, I don't; but I learned some Douchebag-ese while in the States.

Sergeant T

03-01-2011, 06:31 PM

Have not dug into this one in depth yet. (http://www.scribd.com/doc/49755779/Economic-Warfare-Risks-and-Responses-by-Kevin-D-Freeman) Thus far it has the odor of someone with a hypothesis that went in search of facts to shore it up. Anyone that uses that double word score term financial terrorism repeatedly makes me a bit suspicious.

bourbon

03-02-2011, 01:00 AM

Dayuhan

03-03-2011, 10:15 AM

Interesting stuff, there is an accompanying article (http://www.washingtontimes.com/news/2011/feb/28/financial-terrorism-suspected-in-08-economic-crash/) by Bill Gertz in the Washington Times.

Being familiar with some of the threads in this, I believe this report will be deflected, ignored, or downplayed. I also believe that by publicly tugging on some of these threads, the author has just exposed himself to personal and professional danger.

Could just as well have started with some of the answers, and then went looking for the OSINT to match.

From the cited article:

Paul Bracken, a Yale University professor who has studied economic warfare, said he saw “no convincing evidence that ‘outside forces’ colluded to bring about the 2008 crisis.”

“There were outside players in the market” for unregulated credit default swaps, Mr. Bracken said in an e-mail. “Foreign banks and hedge funds play the shorts all the time too. But suggestions of an organized targeted attack for strategic reasons don’t seem to me to be plausible.”

I agree with Mr. Bracken. I also doubt very much that anyone is going into "personal and professional danger" over this. I look at things like this:

explaining that those domestic economic factors would have caused a “normal downturn” but not the “near collapse” of the global economic system that took place.

I mostly just want to click somewhere else.

Plenty of causes out there without going into the conspiracy market.

Never attribute to malice that which is adequately explained by stupidity, greed, ineptness, short-term thinking or any combination of the above..

bourbon

05-02-2011, 01:24 AM

The Miscreants’ Global Bust-Out: Preface (http://www.deepcapture.com/the-miscreants-global-bust-out-preface/), by Patrick Byrne. Deep Capture, 28 April 2011.

The Miscreants’ Global Bust-Out (Chapter One): Was the United States Attacked By Financial Terrorists? (http://www.deepcapture.com/the-miscreants-global-bust-out-chapter-one-was-the-united-states-attacked-by-financial-terrorists/), by Mark Mitchell. Deep Capture, 29 April 2011.

I did not know if Zuhair Karam was violent, but I telephoned him because I thought his biography was interesting. For example, it was interesting that soon after making a home in Illinois, Zuhair Karam obtained finance to publish a semi-famous work of jihadi propaganda, and soon thereafter, became (without any relevant experience) a proprietary day trader of equities and derivatives at a small, unregistered brokerage in Chicago called Tuco Trading.

Most of the other people who operated through Tuco Trading also had interesting biographies. Among them (just to name a few) were a Russian Mafia figure who is knowledgeable about a brutal gangland-style murder in New Jersey; the top lieutenants of a Russian Mafia kingpin and oligarch who have been accused by U.S. officials of having ties to the Russian government’s intelligence apparatus; and an Iranian fellow whose family has high-level ties to Palestinian Islamic Jihad, and the terrorist-sponsoring Revolutionary Guard in Tehran.

Meanwhile, Zuhair’s little brokerage, Tuco Trading, maintained partnerships with several other brokerages, all of which had close business relationships with people of similarly colorful backgrounds. Among them were multiple associates of La Cosa Nostra; numerous traders with ties to the Russian Mafia; and a jihadi who not only was Al Qaeda’s most important financier, but also operated a secret bomb factory in a Chicago warehouse district before the U.S. government named him a “Specially Designated Global Terrorist”.

Aside from the amazing backgrounds of this cast of characters, it was also interesting that Tuco Trading was closed by an “Emergency Order” of the SEC on March 9, 2008 — just a few days before the March 13 collapse of Bear Stearns. Not that the SEC had any idea what was happening at Tuco; the Commission seemed primarily concerned that the brokerage was massively exceeding margin limits.

What the SEC seems to have missed (though a report by Tuco’s bankruptcy receiver made it clear) was that in the month before it was shut down, this tiny, unregistered brokerage transacted trading equal to more than 20 percent of the volume of the largest brokerage on the planet. Moreover, data and other evidence obtained by Deep Capture suggests that most of this massive deluge was aimed at manipulating the stock prices of America’s largest financial institutions, including Bear Stearns.

In other words, there is good reason to believe that Zuhair’s strange, little brokerage with all of its odd connections, contributed to the 2008 financial cataclysm that nearly brought the United States to its knees.

davidbfpo

05-02-2011, 08:29 AM

Bourbon,

Yet again evidence that the current complex structure for regulation, reporting and enforcement we have in the West and elsewhere failed to cope with what was really happening.

Dayuhan

05-05-2011, 09:51 PM

What the SEC seems to have missed (though a report by Tuco’s bankruptcy receiver made it clear) was that in the month before it was shut down, this tiny, unregistered brokerage transacted trading equal to more than 20 percent of the volume of the largest brokerage on the planet. Moreover, data and other evidence obtained by Deep Capture suggests that most of this massive deluge was aimed at manipulating the stock prices of America’s largest financial institutions, including Bear Stearns.

In other words, there is good reason to believe that Zuhair’s strange, little brokerage with all of its odd connections, contributed to the 2008 financial cataclysm that nearly brought the United States to its knees.

This is hyperventilated melodrama. You can't drive a company out of business by manipulating its share price. If the company is healthy, all you can do is produce a transient blip in its market cap. If a company is a hollow shell that's ready to die anyway (as Bear Stearns was) you can kill it off, but the cause of that is the underlying condition of the company, not the share price manipulation.

Short sellers are the vultures and jackals of the financial world. They kill off the sick and dying, they don't bring down the healthy. It's entirely possible - indeed likely - that people with inside knowledge of how badly Bear Stearns and others were overextended decided to make some money by pushing them over the edge. That's illegal, but it happens. These companies didn't fall because of short sellers, though, they fell because they were badly managed.

It all has a strong whiff of the standard conspiracy-theory tactic: start with a theory, find a bunch of factoids that ae consistent with the theory, ignore all facts that aren't consistent with the theory. You convince those predisposed to believe, but not many others.

bourbon

05-06-2011, 01:25 AM

You can't drive a company out of business by manipulating its share price. If the company is healthy, all you can do is produce a transient blip in its market cap.
You mean according to efficient market hypothesis; which, if you are one of the people who still subscribe to this theory – I couldn’t convince you otherwise with a car battery and a strobe light. Needless to say, EHM completely ignores the reality of market panics.

You are also presupposing a classical bear raid, and ignore the use of ETFs, phantom shares, and option strategies. Not to mention credit default swaps, that can be easily manipulated.

Short sellers are the vultures and jackals of the financial world.
That’s great, but again (and you have done this before) we are not talking about regular short selling, which is legal and generally good for markets.

We are talking about market manipulation and naked short selling, which is an abuse of the clearing and settlement system. It creates phantom shares which massively dilute supply, thereby driving down price.

It is apples and oranges, as has been explained before. Yet you continue to fail to understand the distinction.

It all has a strong whiff of the standard conspiracy-theory tactic: start with a theory, find a bunch of factoids that ae consistent with the theory, ignore all facts that aren't consistent with the theory. You convince those predisposed to believe, but not many others.
Except the difference between conspiracy theory and scientific theory is the ability to make predictions; and the things DeepCapture and its principles were saying about the slop in clearing & settlement mechanisms has borne out over the past two years in scandals involving stocks, CDS, MBS, ETFs, and commodities. That intellectual debate has been settled; they were right.

The rest that is reported is actions – many of which can be easily confirmed; and actors – who would be suing the hell out of these guys if any of this wasn't true (they haven’t).

bourbon

05-06-2011, 01:38 AM

The Miscreants’ Global Bust Out (Chapter Two): The “Money Weapon” and a Jihad Bigger than Bin Laden (http://www.deepcapture.com/the-miscreants-global-bust-out-chapter-two-the-money-weapon-and-a-jihad-bigger-than-bin-laden/), by Mark Mitchell. Deep Capture, 03 May 2011.

Three years later, a lot of people still thought it was “remarkable” that Sheikh DeLorenzo and an Al Qaeda operative had managed to insert spies into the U.S. military. But that didn’t stop Sheikh DeLorenzo (a sophisticated financier who looks the part in his pin-striped suits) from seeking permission from the Securities and Exchange Commission to set up a trading platform called Al Safi Trust, the ostensible purpose of which was to enable Muslim traders to engage in short selling without violating shariah law.

In 2007, the SEC granted permission, which is pretty “remarkable” because Al Safi Trust creates precisely the sort of crack in the financial system that would likely be exploited by people looking to crash the markets. Traders who engage in legal short selling (as opposed to illegal naked short selling) first borrow stock, then sell it, hoping the price will fall. This is a perfectly legitimate practice because it does not manipulate the markets. The stock that is borrowed and then sold is real stock; it is not phantom stock that artificially increases supply and drives down prices.

The Miscreants’ Global Bust Out (Chapter 3): Michael Milken and the BCCI Criminal Enterprise (http://www.deepcapture.com/the-miscreants-global-bust-out-chapter-3-michael-milken-and-the-bcci-criminal-enterprise/), by Mark Mitchell. Deep Capture, 05 May 2011.

But, of course, this scheme eventually collapsed – and it must be stressed, the vast majority of the companies that Milken financed ultimately disappeared.

In later years, the “bust out” concept was refined into such schemes as the “death spiral” PIPEs finance that was pioneered with help from Al Qaeda Golden Chain member Shiekh Yamani’s Investcorp and other outfits. Always, the basic idea is to finance a company, load it with debt, and then take it down.

In the 1980s, Milken and his cronies orchestrated a number of bust outs in league with BCCI and its proprietors, including future Al Qaeda Golden Chain member Shiekh Mahfouz, who remained one of Milken’s closest associates until Sheikh Mahfouz’s death in 2009.

Dayuhan

05-06-2011, 11:09 PM

That’s great, but again (and you have done this before) we are not talking about regular short selling, which is legal and generally good for markets.

We are talking about market manipulation and naked short selling, which is an abuse of the clearing and settlement system. It creates phantom shares which massively dilute supply, thereby driving down price.

It is apples and oranges, as has been explained before. Yet you continue to fail to understand the distinction.

I am aware of the distinction. I'm also aware that it doesn't matter. Either way, all you're doing is driving down the share price, which has no impact at all on the fundamental viability or core strength of the company. If the company is strong, all you do by depressing the share price is open a buying opportunity for somebody else. You might as well try to dig a hole in the ocean. If the company is already on the edge, or is too small or too far out on the fringe for investors to notice the price dropping below what fundamentals can support, that's a different story. That's why short sellers seek out the weak and the isolated.

Naked or otherwise, short sellers don't bring down healthy companies and they don't bring down economies. Naked shorting is abusive and can do damage, but it's not a cause of major economic dislocation. If you see a long line of dominos falling and want to know why, don't ask what knocked down the first domino: dominos fall all the time. Ask why so many others were stacked in a neat vulnerable line.

Except the difference between conspiracy theory and scientific theory is the ability to make predictions; and the things DeepCapture and its principles were saying about the slop in clearing & settlement mechanisms has borne out over the past two years in scandals involving stocks, CDS, MBS, ETFs, and commodities. That intellectual debate has been settled; they were right.

The rest that is reported is actions – many of which can be easily confirmed; and actors – who would be suing the hell out of these guys if any of this wasn't true (they haven’t).

Of course they were right. They were predicting things that were already going on, and have been for ages in various forms. There re always scandals in financial markets; predicting that is like predicting sunrise in the east. When the economy is strong, nobody notices outside the community. When the economy is weak, people come to the conclusion that the scandals caused the weakness. They're wrong. The scandals are always there and always will be. They are actually a good sign. Given the amount of money to be made, somebody will always break the rules. If there are scandals it means people are being caught, which provides at least some control. If there are no scandals it means nobody's getting caught, which means everybody is breaking the rules. Never invest in a market where there are no scandals.

I see no evidence that "economic warfare" or sinister malign influences were the cause of the recent crash. I see a long chain of mutually reinforcing bad decisions, from Wall Street, Main Street, and most of all Government, reaching back to the mid 90s... arguably before, but that's when it started going out of control. That chain could have been broken at several points, but it wasn't. Lots of lessons to be learned, but they really don't involve the Dark Arts, though people who really want to see it that way will always find reasons to do so, and will always suppose that the majority who don't see it that way are naive or deluded.

We too easily miss the forest for the trees. Any of us can point to a hundred abuses of the derivatives markets since 2002, and propose regulations, describe effects, etc. Or we could just note that if the derivatives markets had been allowed to fully crash in 2001/2002 when they needed to, instead of having the risk sucked out of them by an inappropriate countercyclic intervention, all that discussion would be unnecessary. Macro incentive management often achieves more than attempts at specific regulation.

bourbon

05-11-2011, 05:08 PM

I am aware of the distinction. I'm also aware that it doesn't matter. Either way, all you're doing is driving down the share price, which has no impact at all on the fundamental viability or core strength of the company. If the company is strong, all you do by depressing the share price is open a buying opportunity for somebody else. You might as well try to dig a hole in the ocean. If the company is already on the edge, or is too small or too far out on the fringe for investors to notice the price dropping below what fundamentals can support, that's a different story. That's why short sellers seek out the weak and the isolated.

Again, you mean according to efficient market hypothesis.

There are at least three flaws with this argument:

- As mentioned before, it ignores the reality of market panics;
- It violates the principle of one vs. many;
- And it ignores the factors time and speed.

Taken in isolation, a naked short sale of a single or small number of shares will function like a traditional short. But in the case of many shares sold short there is a critical difference:

- A traditional short is constrained by the number of shares available to borrow, which is limited by the number of shares in the public float – which is based on the on number of shares issued. This is a finite number.

- In a naked short the limit has nothing to do with the ability to barrow. The only limit becomes the amount of capital put up against the position, and that capital requirement diminishes as the price of the stock falls. It can create an unlimited amount of shares short to drive the price down through the basic supply/demand equation.

When you consider that Lehman fell in one week of market panic, your point about depressing the price to point of opening buying opportunities is moot. Speed kills. Nobody had time to think, much less the ability think or act rationally.

Naked or otherwise, short sellers don't bring down healthy companies and they don't bring down economies.
Once again, this is according to efficient market hypothesis.

You have also not bothered to address the use of CDS, leveraged ETFs, and rumor/media which is likely to be used in conjunction with NSS in a bear raid. And which the evidence suggests is the case with Bear and Lehman.

Naked shorting is abusive and can do damage, but it's not a cause of major economic dislocation.
The collapse of Lehman caused a stock market collapse and the immediate freezing of credit markets; it is also universally accepted as a key trigger of this current economic catastrophe. So in this case, it looks like it may have.

If you see a long line of dominos falling and want to know why, don't ask what knocked down the first domino: dominos fall all the time. Ask why so many others were stacked in a neat vulnerable line.
No, I’m going to want to beat the hell out of the person who intentionally pushed the first domino. Then beat the hell out of his friends.

Yes, dominos fall all of the time. Newborn babies also die all of the time, but that doesn’t mean you can go into a nursery and snuff-out infants.

Dayuhan

05-11-2011, 11:45 PM

Again, you completely miss the point. Short selling, naked or clothed, no matter who is involved, only manipulates share price. It has no influence on the fundamental viability of the company, which is determined not by share price, but by revenues and earnings, debt, returns on equity and investment, and a whole bunch of other boring stuff.

All of what you say about naked shorting is true. It's also irrelevant, because you can't drive a healthy company out of business by manipulating the share price.

An example: suppose you, AQ, the Russian Mafia and the Saudi Royal Family decided to drive Google out of business by short selling. You could certainly depress the share price for a short while, but that would have no impact at all on Google's health or business. Google doesn't live on selling stock, it lives on selling services, and short selling will not do anything to the core revenue stream that Google thrives on. You wouldn't even be able to depress the share price for very long, because once you depress it you'll trigger a whole bunch of buying action. It's like digging a hole in water: if the shares are worth money and you force the price down, others will buy in and force the price back up. A naked short position will protect you from losing money, but it won't drive Google out of business no matter how large it is.

On the other hand, if a company is in a huge amount of debt, has made all kinds of unprofitable hugely leveraged acquisitions, if it earns less than it spends, if it's balance sheets and profit/loss statements are pig-ugly... if you short that company down, you won't bring in buying action because people will look at the numbers and run away. The share price tumbles, and instead of a green light flashing a red flag goes up, the bond ratings dive, the creditors stop lending and call in their notes, and pretty soon you don't make payroll, among many other awful things. When that happens the Company is gone, but it wasn't the short sellers that killed it. The ex-CEO may stagger down the Bowery mumbling into his bottle that if the short sellers hadn't jumped he could have squeezed through. The shareholders who were holding your stock without looking at the numbers will blame the short sellers to avoid taking responsibility for their own bad decision. At the end of the day, though, a company in this position isn't brought down by short sellers, it's brought down by the bad decisions that left it vulnerable to short sellers. All the short sellers did was run up the red flag.

Short selling manipulates share price. It has no impact on the actual business.

As long as the actual business is strong and the company is well managed, you cannot drive the company out of business by manipulating the share price.

Even if you shorted Exxon Mobil's share price to zero, they'd still sell oil and they'd still stay in business... and with $6 billion or so a year in earnings, long before you got the share price to zero there would be more buyers than you could short against. You wouldn't keep the Russian Mafia or the Saudis on board either, because they'd see more to earn on the buy side.

When you consider that Lehman fell in one week of market panic, your point about depressing the price to point of opening buying opportunities is moot. Speed kills. Nobody had time to think, much less the ability think or act rationally.

What fell? The share price? The share price isn't what keeps a company alive, if that company has a strong underlying business. And a week is a long time in the market world. If you dropped XOM below $50 you'd see buyers in a whole lot less than 7 days. Probably less than 7 minutes.

The collapse of Lehman caused a stock market collapse and the immediate freezing of credit markets; it is also universally accepted as a key trigger of this current economic catastrophe. So in this case, it looks like it may have.

The collapse of Lehman didn't cause the stock market collapse. The stock market collapsed because its valuations were riding on thin air and it deserved to collapse. Lehman was just the first to drop. If Lehman had gone down in a healthy economy they'd have been bought out by a healthier competitor and buried in peace, and nobody would have noticed. Lehman was not the cause or the trigger, it was just the first of the walking dead to keel over. The cause was the long chain of events that drove the bubble in the first place.

No, I’m going to want to beat the hell out of the person who intentionally pushed the first domino. Then beat the hell out of his friends.

Yes, dominos fall all of the time. Newborn babies also die all of the time, but that doesn’t mean you can go into a nursery and snuff-out infants.

That would be a silly response. An economy is by nature Darwinian: the weak must die, or they drag down the whole. Neither is it much of a big deal when the weak die, if the whole is healthy.

If there's a herd of sick, weak, dying buffalo staggering down the Serengeti, the jackals will come round. The sickest weakest buffalo will get pulled down first, and the jackals will play as dirty as they can.

Instead of blaming the jackals, ask why that herd was so damned sick in the first place.

slapout9

05-13-2011, 02:55 PM

Watch this video to truly understand how Banking works and how Money really works. As John Kenneth Galbraith said it truly boggles most peoples minds at the simplicity of it.

http://www.youtube.com/watch?v=wDHSUgA29Ls&feature=feedlik

tequila

05-13-2011, 03:29 PM

Even if you shorted Exxon Mobil's share price to zero, they'd still sell oil and they'd still stay in business... and with $6 billion or so a year in earnings, long before you got the share price to zero there would be more buyers than you could short against. You wouldn't keep the Russian Mafia or the Saudis on board either, because they'd see more to earn on the buy side.

I think you're conflating industrial firms with financial firms a bit too much here. Lehman didn't have oil stocks or refineries to liquidate or fall back on. It churned digital paper and depended on short term financing to survive because it was leveraged, like all the major investment banks including Goldman Sachs, up to its eyeballs.

Once investor confidence in Lehman, as evidenced by share price, evaporated, Lehman could not find anyone willing to lend to it or counterparties to do deals with to generate revenue.

I'm not a big believer in the stuff that Deep Capture is selling, but all financial firms depend on confidence, more than anything else, to generate profits and to survive.

slapout9

05-13-2011, 03:56 PM

HBO releases the movie version of the best seller "To Big To Fail"

A lot of Lehman Brothers stuff will be in the movie. Link to some nice clips especially the guy they picked to play Ben Berneke.....almost pass for a double.

http://www.hbo.com/movies/too-big-to-fail/index.html

Dayuhan

05-13-2011, 11:06 PM

I think you're conflating industrial firms with financial firms a bit too much here. Lehman didn't have oil stocks or refineries to liquidate or fall back on. It churned digital paper and depended on short term financing to survive because it was leveraged, like all the major investment banks including Goldman Sachs, up to its eyeballs.

A financial firm's assets are in its investment portfolio. If the financial firm is stupid and has a portfolio full of hot air, it will deflate at the slightest puncture. The cause of the deflation is not the puncture, it's the gaseous nature of the portfolio. If the portfolio is solid, a puncture won't matter.

It is true that most US financial firms had pumped up their books with volumes of hot air, which left them insanely vulnerable. The eventual explosion has to be blamed on the decision chain that produced that vulnerability, not on the specific events that caused the deflation. Anyone running a financial firm should know there's a $#!tload of nails and needles out there and you will sooner or later brush up against them. If they pop your balloon, it's not the fault of the nails and needles, it's your fault for overinflating your company into a hot air balloon just to make it bigger.

Why do you figure short sellers targeted Lehman and Bear Stearns, and not, say, Wells Fargo?

Jackals prey on the weak. They aren't the cause of the weakness.

motorfirebox

05-14-2011, 12:03 AM

A financial firm's assets are in its investment portfolio. If the financial firm is stupid and has a portfolio full of hot air, it will deflate at the slightest puncture. The cause of the deflation is not the puncture, it's the gaseous nature of the portfolio. If the portfolio is solid, a puncture won't matter.

It is true that most US financial firms had pumped up their books with volumes of hot air, which left them insanely vulnerable. The eventual explosion has to be blamed on the decision chain that produced that vulnerability, not on the specific events that caused the deflation. Anyone running a financial firm should know there's a $#!tload of nails and needles out there and you will sooner or later brush up against them. If they pop your balloon, it's not the fault of the nails and needles, it's your fault for overinflating your company into a hot air balloon just to make it bigger.

Why do you figure short sellers targeted Lehman and Bear Stearns, and not, say, Wells Fargo?

Jackals prey on the weak. They aren't the cause of the weakness.
While that's accurate in one sense, I think reality is that any serious portfolio--any Goldman Sachs, any Lehman Bros, any amount of real investment--is, nowadays, largely 'gaseous'. It's leveraged on leverages which are leveraged on leveraged leverages, just as a matter of course. It stops being a minor point of failure when it becomes the systemic basis. And even businesses rooted in goods and services are vulnerable because they've all got gigantic financial wings. A famous instance is GE's financial wing being significantly larger--and significantly riskier--than its manufacturing business.

Dayuhan

05-14-2011, 03:38 AM

While that's accurate in one sense, I think reality is that any serious portfolio--any Goldman Sachs, any Lehman Bros, any amount of real investment--is, nowadays, largely 'gaseous'. It's leveraged on leverages which are leveraged on leveraged leverages, just as a matter of course. It stops being a minor point of failure when it becomes the systemic basis. And even businesses rooted in goods and services are vulnerable because they've all got gigantic financial wings. A famous instance is GE's financial wing being significantly larger--and significantly riskier--than its manufacturing business.

It's certainly true that all of the financial industry carries some amount of risk - it pretty much has to - and that by 2007-2008 that amount had, across the board, become largely unsustainable. It wasn't evenly distributed by any means, though. Companies like Barclay's Wells Fargo, JP Morgan Chase, came out of it rather well, and were able to acquire productive assets from other companies at minimal prices. Others, especially those who had overindulged in mortgage-backed Kool-Aid, didn't do as well.

My point in the above was simply that a company in any industry that has managed its risks effectively and, effectively, paid as much attention to defense as offense, is not going to be driven out of business by short selling, even in a recession. It may see its share value reduced, but that won't force it to close up shop.

Lehman and Bear Stearns werre attractive to short sellers and vulnerable to short sellers because they grotesquely mismanaged risk. They didn't fall because of short sellers, they fell because they had taken on an unmanageable amount of risk. Short sellers saw that - possibly due to inside information (illegal but common), possibly just from watching carefully (legal and common) and moved in to pick off the low hanging fruit. Ugly, yes, but the crisis would have happened anyway. Too many companies were way too far out on way too skinny limbs, somebody was gonna tumble and set the dominos going. It was just a question of when and how. A situation like that is made to order for short selling, and somebody will take advantage. If you leave food scraps on your kitchen floor the rats and roaches will come around. Don't blame the rats and roaches, blame whoever's been leaving the food scraps on the kitchen floor.

I personally think that the recent crisis was inextricably rooted in the late 90's equity bubble and what I consider to be a highly inappropriate response to that bubble, before and after it burst, Analysis that focuses excessively on the events of 2005-2008 is going to miss a lot of essential points.

motorfirebox

05-14-2011, 02:31 PM

It's certainly true that all of the financial industry carries some amount of risk - it pretty much has to - and that by 2007-2008 that amount had, across the board, become largely unsustainable. It wasn't evenly distributed by any means, though. Companies like Barclay's Wells Fargo, JP Morgan Chase, came out of it rather well, and were able to acquire productive assets from other companies at minimal prices. Others, especially those who had overindulged in mortgage-backed Kool-Aid, didn't do as well.

My point in the above was simply that a company in any industry that has managed its risks effectively and, effectively, paid as much attention to defense as offense, is not going to be driven out of business by short selling, even in a recession. It may see its share value reduced, but that won't force it to close up shop.

Lehman and Bear Stearns werre attractive to short sellers and vulnerable to short sellers because they grotesquely mismanaged risk. They didn't fall because of short sellers, they fell because they had taken on an unmanageable amount of risk. Short sellers saw that - possibly due to inside information (illegal but common), possibly just from watching carefully (legal and common) and moved in to pick off the low hanging fruit. Ugly, yes, but the crisis would have happened anyway. Too many companies were way too far out on way too skinny limbs, somebody was gonna tumble and set the dominos going. It was just a question of when and how. A situation like that is made to order for short selling, and somebody will take advantage. If you leave food scraps on your kitchen floor the rats and roaches will come around. Don't blame the rats and roaches, blame whoever's been leaving the food scraps on the kitchen floor.

I personally think that the recent crisis was inextricably rooted in the late 90's equity bubble and what I consider to be a highly inappropriate response to that bubble, before and after it burst, Analysis that focuses excessively on the events of 2005-2008 is going to miss a lot of essential points.
If there's a hundred dollar bill stuck to the end of a tree branch, and a bunch of guys die falling off the branch trying to get it, yeah, they were stupid--but the fact remains that there was an arguably good reason to go crawling out on that branch.

Yes, if a company leaves itself so exposed that it can be severely damaged or taken down completely with a campaign of short sales, CDSs, and the like, that company was stupid. But they're only stupid if it doesn't work--if their vulnerability is never exploited, they can make a buttload of money. It's not like Lehman Bros went out and exposed itself to massive risk on a dare; they had strong financial motive to do so, and they were hardly the only firm doing it. Our financial regulation allows and encourages risky behavior by financial giants who can crush us if they trip and fall. I don't completely buy the idea that the crash was a deliberate act by teh terrars, but I don't see it as out of the realm of possibility.

Dayuhan

05-14-2011, 11:04 PM

If there's a hundred dollar bill stuck to the end of a tree branch, and a bunch of guys die falling off the branch trying to get it, yeah, they were stupid--but the fact remains that there was an arguably good reason to go crawling out on that branch.

There's arguably a much better reason to stay underneath, wait for the whole lot to fall, pick up the bill and walk away... which is, effectively, what the short sellers did.

Yes, if a company leaves itself so exposed that it can be severely damaged or taken down completely with a campaign of short sales, CDSs, and the like, that company was stupid. But they're only stupid if it doesn't work--if their vulnerability is never exploited, they can make a buttload of money. It's not like Lehman Bros went out and exposed itself to massive risk on a dare; they had strong financial motive to do so, and they were hardly the only firm doing it.

Gain is always an incentive to take risks. That incentive is counterbalanced by fear the disincentive to risk is fear of the consequence of getting caught out. That's why it's called risk. The question in this case is why so many people simultaneously focused on the incentive and disregarded the balancing disincentive. i would argue that government's response to the late 90s equity bubble created a general perception that risk had been largely taken off the table, thus removing the controlling counterincentive. The traders were no longer afraid... and ultimately it's fear, not regulation, that controls how much risk a trader is willing to take.

If the derivatives market had been allowed to crash and burn in 2001/2002, which it should have done and undoubtedly would have done without intervention, I doubt very much whether derivative traders would have pursued risk as aggressively as they did from 2005-2008. Look at the whole world of penny tech stocks. They still trade, but very few people take interest. That's not because of regulation, it's because traders had an object lesson in how easy it is to get burned.

Look up the total amount of derivatives exposure in 2001 and 2008, and you'll see what I mean.

Our financial regulation allows and encourages risky behavior by financial giants who can crush us if they trip and fall. I don't completely buy the idea that the crash was a deliberate act by teh terrars, but I don't see it as out of the realm of possibility.

I personally think regulation is very much overrated. It's easy to look back and say regulation could have prevented this, this, or that, but in fact the speculators are always one and a half steps ahead of the regulators. Intelligent management of macro incentives achieves much more. Unfortunately, intelligent management of macro incentives is often politically inexpedient.

Every politician loves a bubble, and wants to ride it as far as possible before it pops. Bill Clinton got away with that quite triumphantly, leaving poor dumb George to reap his whirlwind. Every politician hates a recession, and tries to end it as soon as possible. Sometimes, though, a bubble needs to be deliberately popped before it goes critical, and sometimes a recession needs to be able to do its job and run its course.

motorfirebox

05-15-2011, 05:26 AM

Dayuhan

05-17-2011, 10:14 PM

I largely agree, though I think there's some value in regulation--certainly some value in tighter regulation than we currently enjoy. Deregulation can't fully be blamed for, say, the housing crisis, but it seems to me that it facilitates rapid wealth extraction in the form of foreclosures on homes to which proper standing cannot be reliably produced.

I wouldn't suggest that regulation has no value, just that's it's overrated as both a cause of and a solution to problems. It has a place, but it needs to be used intelligently, and it rarely is. There is a very real regulatory burden on business. It's not because regulation is too tight, though, it's just too chaotic: there's a huge, overlapping, and often contradictory web of federal, state, and local regulation, and the confusion makes compliance a real burden. If you ask people in the business world, many would gladly accept tighter regulation if it was simpler and more coherent.

Above all, especially where financial regulation is concerned, it has to be recognized that creating an incentive and then trying to regulate against it is like trying to carry water in a strainer. We can and do prohibit certain types of high-risk behaviour, but ultimately the primary factor regulating risk-taking is fear of adverse consequence. Take away that fear and risk-taking will get out of hand no matter how you regulate. Regulation supports, but cannot replace, effective management of incentives.

To get back to the topic of economic warfare, the existence of that bubble presents a vulnerability that seems exploitable to the right group under the right conditions. That, for instance, short selling only affects share price doesn't strike me as a reason it can't be used as a weapon. People and companies make money off of share prices. If the right share price or set of prices changes dramatically at the right time, traders end up with losses they may or may not be able to cover; enough uncovered debt will trigger a downturn.

If it can occur via pursuit of money, why can't it occur via pursuit of ideology?

It could, but I'm not convinced that it did, and it would only be an effective weapon in very limited and unusual circumstances. Short selling is primarily a way of making money. It's a rather shady way of making money, but that's not unusual. Sometimes it can have second-order effects, but to be useful as a weapon those effects would have to be predictable and to some extent reliable to make it worth the effort. I doubt very much whether the people who shorted Lehman or Bear Stearns had any idea what the subsequent chain of events would be: a coherent plot aimed at achieving the results that occurred would require far more prescience than I'm prepared to assign to any of those involved.

The most likely scenario to me is that some shady actors (likely acting on inside information) spotted some low hanging fruit, in the form of companies with market valuations grossly out of proportion to the actual state of their business, and decided to pluck it. I suspect that they were as surprised as everyone else when the whole tree came down.

Never attribute to malice, conspiracy, etc that which can be adequately explained by stupidity, clumsiness, greed, casual venality, etc, etc, ad infinitum, ad nauseam.

tequila

05-18-2011, 03:07 AM

A financial firm's assets are in its investment portfolio. If the financial firm is stupid and has a portfolio full of hot air, it will deflate at the slightest puncture. The cause of the deflation is not the puncture, it's the gaseous nature of the portfolio. If the portfolio is solid, a puncture won't matter.

It is true that most US financial firms had pumped up their books with volumes of hot air, which left them insanely vulnerable. The eventual explosion has to be blamed on the decision chain that produced that vulnerability, not on the specific events that caused the deflation. Anyone running a financial firm should know there's a $#!tload of nails and needles out there and you will sooner or later brush up against them. If they pop your balloon, it's not the fault of the nails and needles, it's your fault for overinflating your company into a hot air balloon just to make it bigger.

Why do you figure short sellers targeted Lehman and Bear Stearns, and not, say, Wells Fargo?

Jackals prey on the weak. They aren't the cause of the weakness.

I think you are underestimating the fragility of any financial firm's portfolio. Firms that depend on trading for the majority of their profits are more vulnerable since they have fewer and riskier funding sources, but all financial firms hold assets which depend on counterparties. During a market panic, counterparty risk froze credit markets which the entire financial system depended on - it was a systemwide bank run, except that the run was on the shadow financial system which most firms depended on for financing. As you know, bank runs can destroy even relatively healthy institutions.

bourbon

05-23-2011, 04:15 PM

The latest DC:

The Miscreants’ Global Bust-Out (Chapter 7): The Bernie Madoff Cover-Up, the Blind Sheikh, and the RLevi2 Algorithmic Market Manipulation Machine (http://www.deepcapture.com/the-miscreants-global-bust-out-chapter-7-the-bernie-madoff-cover-up-the-blind-sheikh-and-the-rlevi2-algorithmic-market-crash/), by Mark Mitchell. Deep Capture, 20 May 2011.

I do not mean to suggest that Omar and Irfan Amanat are terrorists. But they definitely know terrorists, and are on exceedingly good terms with some of them.

It is therefore of possible concern that aside from founding Datek and Lightspeed, Omar and Irfan Amanat founded Island, the largest Electronic Communications Network (ECN) in America. In fact, they founded or served as key consultants to nearly every other major ECN in the nation.

Since ECNs act like their own private stock exchanges and enable stock manipulators to operate in anonymity, they are cited by U.S. government agencies as among the bigger loopholes that could be exploited by financial terrorists.

As it were, Irfan Amanat used one of his Electronic Communications Networks to engage in a massive market manipulation scheme. And it was precisely the sort of scheme that worries experts in threat finance.

This scheme was carried out in September 2001, in the days before and after the Al Qaeda attacks on the World Trade Center. While the timing may have been a coincidence, there is no question that Mr. Amanat’s attacks damaged the markets.

The Miscreants’ Global Bust-Out (Chapter 6): Man Financial and Al Qaeda’s Wash Trades (http://www.deepcapture.com/the-miscreants-global-bust-out-chapter-6-al-qaedas-wash-trades-the-blind-sheikh-and-the-rlevi2-algorithmic-market-manipulation-program/), by Mark Mitchell. Deep Capture, 17 May 2011.

In 2008, one of Dawood Ibrahim’s top henchmen was Naresh Patel. Mr. Patel presided over an underground Al Qaeda and Mafia banking network with tentacles in the United Arab Emirates, India, Pakistan, China, Nigeria, Italy, Afghanistan, South Africa, the Congo, Nepal, the Cook Islands, Great Britain, and the United States.

The principal function of this network was to manage Al Qaeda drug profits — hundreds of millions of dollars that both Al Qaeda and its subsidiary, the Albanian Mafia, had earned from selling not just heroin, but also cocaine.
According to the U.S. Department of Justice, much of that money was transferred through banks in Dubai, and onwards to at least fifteen accounts that Patel held at Man Financial, the outfit that was (as we have seen) tied to Michael Milken, Bernie Madoff, Tuco Trading, and BKS in Moscow.

Patel traded huge volumes through these Man Financial accounts in 2008, but the DOJ didn’t catch him until 2009, at which point he was charged with transacting, through Man Financial, massive volumes of “wash trades” –simultaneously selling and buying commodities. He was doing the same thing with securities.

The DOJ described this activity as “money laundering” because money laundering was part of it, and money laundering is a concept that is fairly well understood by counterterrorism officials. Market manipulation, by contrast, is less well understood, judging from the fact that few people are ever prosecuted for it, though it happens constantly and, sometimes, on massive scales.

There is no sign that the DOJ understands that people (like Naresh Patel) who# deploy “wash trades” are not just laundering money – they are manipulating markets.# They use “wash trades” (simultaneously buying and selling the same securities) to create a tremendous amount of trading noise as cover under which they can manipulate prices down.

The Miscreants’ Global Bust-Out (Chapter 5): The Russians, their Friends, and Bernie Madoff’s Bear Markets (http://www.deepcapture.com/the-miscreants-global-bust-out-chapter-5-the-russians-their-friends-and-bernie-madoffs-bear-markets/), by Mark Mitchell. Deep Capture, 13 May 2011.

The Miscreants’ Global Bust-Out (Chapter 4): Michael Milken, the Mafia, and Some Powerful Hedge Funds (http://www.deepcapture.com/the-miscreants-global-bust-out-chapter-4-michael-milken-the-mafia-and-some-powerful-hedge-funds/), by Mark Mitchell. Deep Capture, 09 May 2011.

Dayuhan

05-23-2011, 11:05 PM

Since when exactly was the Albanian Mafia an "Al Qaeda Subsidiary"?

Despite all the talk about "Al Qaeda's wash trades" etc, there is no specific reference here that credibly links AQ to any of this. Lots of peripheral reference to Justice Dept reports, but do you see any specific quotes or citations? Are there any credible, recognized experts on AQ that corroborate the allegations?

Why would an effort to "manipulate prices down" necessarily constitute an attack, let alone "economic warfare"?

bourbon

05-24-2011, 04:11 PM

Why would an effort to "manipulate prices down" necessarily constitute an attack, let alone "economic warfare"?
Please read the report (http://av.r.ftdata.co.uk/files/2011/03/49755779-Economic-Warfare-Risks-and-Responses-by-Kevin-D-Freeman.pdf) commissioned by the Irregular Warfare Support Group. It is evident that you have not, since your previous arguments, and now this question, are covered in the report.

bourbon

05-24-2011, 04:14 PM

The Miscreants’ Global Bust-Out (Chapter 8): Al Qaeda, Iran, and Some Mafia-tied Agents of Economic Sabotage (http://www.deepcapture.com/the-miscreants-global-bust-out-chapter-8-al-qaeda-iran-and-some-mafia-tied-agents-of-economic-sabotage/), by Mark Mitchell. Deep Capture, 23 May 2011.

Ingram knew quite a bit about collateralized debt obligations because he had previously worked as the head of the mortgage-backed securities desks at Goldman Sachs and Deutsche Bank. After leaving the big banks, Ingram ran his own high-flying company that specialized in trading mortgage bonds and mortgage derivatives, such as CDOs.

In addition, according to the DOJ, Ingram had gone into multiple lines of business with an Egyptian named Diaa Badr Mohsen, who had warehouses full of weapons – including Cobra helicopters, and Stinger missiles – in Miami and New Jersey. (http://www.observer.com/node/45026)

Acting on a tip from a diamond trader named Randy Glass, the FBI began investigating the Egyptian as part of a larger sting operation focused on a mysterious Pakistani who was trying to buy components for nuclear weapons.

The court documents in the Ingram case do not name the Pakistani, but they make it clear that the Egyptian, Diaa Badr Mohsen, had expressed interest in supplying weapons to him. They also make it clear that the Egyptian had previously sold a lot of weapons to people in Pakistan and that he laundered the money from these weapons sales through Kevin Ingram.

In June 2001, the FBI arrested Ingram as he was about to board his private airplane and fly to Europe with more than $2 million in cash that he had obtained from undercover FBI agents posing as arms dealers.

The FBI also arrested the Egyptian Diaa Badr Mohsen, along with a Pakistani liquor store owner in New Jersey named Mohammed Raja Malik, who also dealt in sophisticated weaponry.

A few months later, the September 11 attacks occurred, and the FBI questioned the Egyptian Diaa Badr Mohsen extensively. This was because the FBI determined that it was likely that the Egyptian Diaa Badr Mohsen was tied to Al Qaeda. Indeed, the bureau suspected that the Egyptian might have direct ties to the 9-11 hijackers.

Dayuhan

05-25-2011, 03:12 AM

In addition, according to the DOJ, Ingram had gone into multiple lines of business with an Egyptian named Diaa Badr Mohsen, who had warehouses full of weapons – including Cobra helicopters, and Stinger missiles – in Miami and New Jersey.

What a crock. That isn't what the link says. The link says that an FBI undercover agent offered Stinger missiles and Cobra helicopter parts as bait in a sting operation. There is nothing at all in the link that says the guys arrested actually had this stuff in their possession.

If you actually read the link, it looks like a couple of rather inept small time wannabes had illusions about making a score and ended up in jail. The only AQ connection is that Government agents once questioned one of the suspects about AQ connections, which is inevitable when an Egyptian or Pakistani is arrested for attempting an arms deal. None of the charges filed suggest an AQ connection and there's nothing to suggest that the questioning revealed anything.

The article says that after 2 1/2 years of investigation...

the government failed to identify a Pakistani connection or any other foreign would-be arms customers with possible terrorist links, and instead arrested two small-time Jersey City dealmakers-an Egyptian and a Pakistani

Not exactly something to get all breathlessly hyped up over. The article cited suggests no connection at all to AQ, any Mafia, or any "agent of economic sabotage".

Hard to imagine why someone would link to an article and so completely and deliberately misstate the contents. I guess they figure nobody will bother to click and check. Why anyone would bother to read material from people who play that sort of game, let alone take it seriously, is beyond me.

Dayuhan

05-25-2011, 05:46 AM

Please read the report (http://av.r.ftdata.co.uk/files/2011/03/49755779-Economic-Warfare-Risks-and-Responses-by-Kevin-D-Freeman.pdf) commissioned by the Irregular Warfare Support Group. It is evident that you have not, since your previous arguments, and now this question, are covered in the report.

How does that support the allegation that the Albanian Mafia is a subsidiary of AQ? The words "Albania" and "Albanian" don't even appear in the document.

Have you done much inquiring into this report... what the authors credentials are, what the track record and credentials of his "consulting firm" are, what other clients they've worked for, how often their work is referenced by recognized analysts, etc? The only thing I can see really demonstrated by that collection of pixels is that DOD spends its money in some very strange ways. Gotta wonder how much they paid for that little collection of speculative hypotheses.

I should start a one-man consulting firm of my own, and start trolling for contracts.

Unconvincing, to say the least.

bourbon

06-09-2011, 05:04 PM

Unconvincing, to say the least.
But yet you offer no valid arguments against the points the author of the Irregular Warfare Support Group report has made. Rather, you have chosen to selectively engage singular points while at the expense of others.

Surely, if it is so unconvincing as you say, you then could easily refute the arguments the author puts forward.

motorfirebox

06-10-2011, 04:43 PM

I've been thinking about the "it's just stock price" argument, and I'm not sure it holds water for several reasons. The simplest consideration is that falling stock prices make it harder to raise capital by selling stock. More broadly, a drop in stock prices can mean a drop in debt to equity ratio for companies--like investment banks--whose debts are publicly traded. This can, again, make it more difficult to raise capital, since the debt/equity ratio is often used to assess investment risk. A specific issue with the debt/equity ratio is that a high ratio can violate one or more debt covenants, forcing a company into unprofitable actions in order to get out of default.

Another facet is the effect falling share price can have on the board of directors. The directors' positions rely on shareholder confidence, which drops when share prices fall. So for that and other reasons, a company might very well choose to reduce their profit margin in order to maintain a higher share price (for instance, buying back shares if the price drops too low (http://articles.economictimes.indiatimes.com/2011-02-02/news/28430008_1_fall-in-share-prices-tender-offer-route-promoter)).

bourbon

06-11-2011, 08:29 PM

America's dodgy financial plumbing - Too big a fail count: The sheer number of unsettled trades is rattling regulators (http://www.economist.com/node/18774844). The Economist, 2 June 2011.

CLEARING and settlement are supposed to ensure that share, bond and derivative deals are completed safely and on time. These back-office processes are arcane, unglamorous and too often taken for granted—until things go wrong, when their importance becomes painfully apparent. The financial crisis of 2007-09 and the “flash crash” of American stockmarkets in May 2010 revealed numerous faults in the plumbing. Efforts are under way to mend these, but regulators have been slow to attend to some worrying new blockages arising from today’s high-frequency and tightly coupled markets.

The cracks in our clearing and settlement systems are the central issue detailed in both the Irregular Warfare Support Group report and Deep Capture. This article in The Economist scratches the surface of the issue, and provides a spiffy graph to visualize the massive spike in average daily settlement fails in US capital markets during second half of 2008.
http://media.economist.com/images/images-magazine/2011/06/04/fn/20110604_fnc847.gif

Dayuhan

06-15-2011, 08:05 AM

But yet you offer no valid arguments against the points the author of the Irregular Warfare Support Group report has made. Rather, you have chosen to selectively engage singular points while at the expense of others.

Surely, if it is so unconvincing as you say, you then could easily refute the arguments the author puts forward.

The obstacle is not the difficulty of refutation - it is very easy - but the volume of refutable material. It would just take too much time, and since nobody's takimng it seriously anyway, why bother? If someone would pay me as much to refute it as the poor oblivious American taxpayer paid to have it written, I'll gladly take the job.

I've been thinking about the "it's just stock price" argument, and I'm not sure it holds water for several reasons. The simplest consideration is that falling stock prices make it harder to raise capital by selling stock. More broadly, a drop in stock prices can mean a drop in debt to equity ratio for companies--like investment banks--whose debts are publicly traded. This can, again, make it more difficult to raise capital, since the debt/equity ratio is often used to assess investment risk. A specific issue with the debt/equity ratio is that a high ratio can violate one or more debt covenants, forcing a company into unprofitable actions in order to get out of default.

Another facet is the effect falling share price can have on the board of directors. The directors' positions rely on shareholder confidence, which drops when share prices fall. So for that and other reasons, a company might very well choose to reduce their profit margin in order to maintain a higher share price (for instance, buying back shares if the price drops too low (http://articles.economictimes.indiatimes.com/2011-02-02/news/28430008_1_fall-in-share-prices-tender-offer-route-promoter)).

That would be a valid point if stock manipulation had the ability to significantly depress the stock price of an otherwise healthy company for an extended period of time. I see no reason to believe that they can, or that it's been tried. A brief dip in the stock price will not significantly impair fundraising or disrupt management.

Short selling doesn't drive healthy companies out of business... the art of short selling is to identify and target the walking dead. Of course if there's a lot of walking dead out there that can cause problems, but the source of the problems isn't the short selling, it's the prevalence of walking deadness. If short selling seems to be causing major disruption the chances are the short selling itself is just a symptom of a much deeper systemic problem. The answer isn't t try and ban short selling, it's to try and prevent companies from getting into the kind of condition that will allow them to be damaged by short selling.

motorfirebox

06-15-2011, 10:03 AM

Short selling doesn't drive healthy companies out of business... the art of short selling is to identify and target the walking dead. Of course if there's a lot of walking dead out there that can cause problems, but the source of the problems isn't the short selling, it's the prevalence of walking deadness. If short selling seems to be causing major disruption the chances are the short selling itself is just a symptom of a much deeper systemic problem. The answer isn't t try and ban short selling, it's to try and prevent companies from getting into the kind of condition that will allow them to be damaged by short selling.
You're putting short selling and other potential financial weapons in a box that is completely removed from the state of the markets and the prevailing market culture. Yes, such tactics won't work against otherwise healthy companies. The problem is that there are fewer and fewer otherwise healthy companies, and naked short selling and other forms of uncovered risk are a big part of the reason why. Your position is akin to saying guns wouldn't be a problem if everyone would just stop shooting each other.

Dayuhan

06-15-2011, 12:42 PM

You're putting short selling and other potential financial weapons in a box that is completely removed from the state of the markets and the prevailing market culture. Yes, such tactics won't work against otherwise healthy companies. The problem is that there are fewer and fewer otherwise healthy companies, and naked short selling and other forms of uncovered risk are a big part of the reason why. Your position is akin to saying guns wouldn't be a problem if everyone would just stop shooting each other.

Not saying that at all, I'm saying that short selling is NOT a reason why companies are unhealthy, it's a phenomenon that emerges when there are many fundamentally unsound and overvalued companies around, and people start taking advantage of that. The short sellers are a symptom of the unhealthiness, not a cause. When a herd of buffalo is sick and hungry the vultures and jackals will gather, but the vultures and jackals aren't the reason why the herd is dying off.

I wouldn't agree that there are fewer and fewer healthy companies around. A lot of the unhealthy ones are gone; whatever they had going that was productive has been absorbed by better-run competitors. That's what recessions are supposed to do, and one of the reasons the recent recession was so bad was that the 2001-2002 recession was countered too effectively, before it could do what needed to be done after the absurdly inflated bubble years of the late 90s. The herd needs to be culled now and then, lest the sick multiply and infect the healthy.

motorfirebox

06-15-2011, 05:14 PM

Dayuhan

06-15-2011, 10:57 PM

I'm not sure that's true this time around. We've allowed a lot of otherwise unhealthy companies to thrive, and have even allowed them to continue, in general, the unhealthy practices which got us all into this spot in the first place. We're getting rid of liar loans in the housing market (largely through the wholesome and healthy method of drying up credit almost completely), but we still have a derivatives bubble of between $500 trillion and $1.5 quadrillion.

Largely true, but those are consequences of bad policy, not of short selling or of some shadowy conspiracy driven by AQ, the Albanian Mafia, Dr. Evil, or any similar entity. Economic policy that is shortsighted, driven by immediate political expedience, and/or just plain dumb has been a consistent theme since the mid/late 90s... and before, but that makes a reasonable start point, as it's where the current crisis really began to build.

What "got us all into this mess in the first place" is debatable and deserves more debate. Politicians of both parties have made a consistent and largely successful effort to lay all the blame on Wall Street, thus conveniently absolving themselves, but in truth Wall Street, main Street, and Washington DC all carry a lot of responsibility, with the latter probably carrying the most.

Regarding stock price, "prolonged" is pretty relative, considering that we're trading over tens of milliseconds nowadays.

Trading is very fast, yes, but the impact of stock price on a company's ability to raise funds or on boardroom stability plays out over a much longer period of time. A company has to be in pretty precarious shape to collapse because the stock price dropped for a few weeks.

motorfirebox

06-16-2011, 01:15 AM

flagg

06-16-2011, 01:32 PM

I've just posted over on the Energy Security thread as well.....

Has anyone familiar with or looked over Eric Janszen's iTulip.com forum?

Not trying to piss in his pocket or spam on his behalf, but I'm a believer.....the guy's analysis and calls since circa 1998 have been scary accurate.

He's also getting noticeably darker very recently in regards to our ability to avoid a major conflict in Asia over debt/energy sometime over the current decade.

Basically, he thinks that unless there is a massive write-down of credit bubble debt and laser focus on energy efficiency...then the alternative for the US is a major war NOT on US soil.

But in having said that while his economic/finance/energy analysis(from him and the alpha's in the community) is an order of magnitude better than most I've followed the weakness I perceive is the geopolitical/security side of the house.

It's not my intend to derail the topics/conversations....but I really rate his stuff..enough so to chuck it out there for consideration.

Dayuhan

06-16-2011, 10:49 PM

Heh, if there's any conspiracy, it's more than likely among the potential 'victims' themselves. Investment banks profit unimaginably from the current circumstances, for all that those circumstances could potentially wreck them and everyone else on the planet who doesn't live in a mud hut. But that isn't to say that a conspiracy to purposefully cause massive financial damage couldn't exist.

Certainly investment banks can make profits during downturns, but I doubt they'd conspire to produce one, and I haven't seen any credible evidence to suggest that they have. Never attribute to malice (or conspiracy) what can adequately be explained by stupidity, short-sightedness, pursuit of immediate expedience, etc, ad nauseam.

Certainly a conspiracy to cause massive financial damage could exist, but it would need the motivation and the capacity, and it would need to have a refuge when discovered, which it would be. Most who have the capacity are in the boat already and haven't the motivation. Neither do we need a conspiracy to produce a mess; messes come up easily and often enough with no conspiracy. Again, never attribute...

Effects on the boardroom was only one consequence of stock price that I mentioned. Besides the others I brought up, there's another facet--the companies who trade on those stock prices. A bear raid intended to cause financial damage does not necessarily have to damage the company being raided in order to be successful.

Very few financial institutions would be so exposed to one company, especially a company in bad enough condition to be sunk by a bear raid, to really hurt them. If they were, they'd deserve to go down.

The conspiracy talk is to me a distraction from the real problems. of which there are many. One of the knottiest, which nobody has ever really solved, is this: given that good long-term economic policy is often unpopular in the short term, how does a democratic government pursue good policy without getting thrown out of office?

Has anyone familiar with or looked over Eric Janszen's iTulip.com forum?

He's also getting noticeably darker very recently in regards to our ability to avoid a major conflict in Asia over debt/energy sometime over the current decade.

Basically, he thinks that unless there is a massive write-down of credit bubble debt and laser focus on energy efficiency...then the alternative for the US is a major war NOT on US soil.

Any links to specific material on this energy/debt war prospect? All I get is requests for a paid subscription, which I've no immediate inclination to buy.

"Within this decade" seems too soon on the energy front, and I see no reason to fight over debt. I also can't see why a war over energy would be fought in Asia.

It will be quite a while before China has the capacity to fight a major war in the Middle East or Africa, and I doubt they'd be inclined to in any but the most extreme conditions. They might be tempted to make a grab for the Caspian, but that would more likely produce war with Russia than with the US. The Chinese are likely to want to fight energy wars with dollars, rather than bombs, as they've a surplus of dollars to fight with. Cheaper to outbid the rival than to fight far away from home, which poses many risks.

Seems superficially far-fetched, but hard to say without seeing the specific arguments, not that I'm about to pay for that privilege!

The front page of the site is a bit self-promotional for my taste, but I guess that goes with the niche he's trying to carve out.

flagg

06-17-2011, 12:46 AM

Any links to specific material on this energy/debt war prospect? All I get is requests for a paid subscription, which I've no immediate inclination to buy.

"Within this decade" seems too soon on the energy front, and I see no reason to fight over debt. I also can't see why a war over energy would be fought in Asia.

It will be quite a while before China has the capacity to fight a major war in the Middle East or Africa, and I doubt they'd be inclined to in any but the most extreme conditions. They might be tempted to make a grab for the Caspian, but that would more likely produce war with Russia than with the US. The Chinese are likely to want to fight energy wars with dollars, rather than bombs, as they've a surplus of dollars to fight with. Cheaper to outbid the rival than to fight far away from home, which poses many risks.

Seems superficially far-fetched, but hard to say without seeing the specific arguments, not that I'm about to pay for that privilege!

The front page of the site is a bit self-promotional for my taste, but I guess that goes with the niche he's trying to carve out.

Some of his best content lives behind a paywall......again, I'm not trying to spam/spruke on his behalf.

I follow a good bit of financial/economics/energy commentary and the only one I actually pay for is THIS one...the important nuggets of info behind the paywall tend to make their way into the open forums and public domain pretty quickly.

My personal understanding and belief is that while Eric Janszen is running iTulip as a profitable business.....he clearly doesn't NEED to as he has had considerable verified entrepreneurial/investment success.

I find his analysis and commentary differs substantially from the analyst/commentary herd because EJ doesn't need the money, doesn't need to talk his book, and doesn't suffer from the effects and consequences of herd mentality.

Here's a rare appearance on CNBC(theyusually don't invite back folks who don't talk their book):

http://www.youtube.com/user/itulipdotcom#p/a/u/2/kqOOnbMMemE

I'd suggest starting here( Eric Janszen, user EJ):

http://www.itulip.com/forums/forumdisplay.php/8-Janszen-s-Quick-Comment

http://www.itulip.com/forums/forumdisplay.php/25-iTulip-News-with-AntiSpin

as well as with user Bart here(he's provided some great indicators and has his own website at www.nowandfutures.com ):

http://www.itulip.com/forums/forumdisplay.php/43-Bart-s-Comments

and finally user GRG55:

http://www.itulip.com/forums/member.php/2424-GRG55

EJ has a book here that I would recommend:

http://www.amazon.com/Postcatastrophe-Economy-Rebuilding-America-Avoiding/dp/1591842638

------

As stated, I think EJ/iTulip.com's biggest weakness is a lack of SME on geopolitical/security side of the coin.

But it's worth noting what I forgot to mention on my last post is his strong ability to read "kremlinology".

For example, he dumped silver(documented) recently just before the price crash in what is a very rare portfolio trade for him.....lots of reasons for him doing it...but a critical one was the lack of "political relevancy".

Silver isn't politically relevant......but gold and energy are.

So while I question his understanding of the security side of the house....his ability to decipher political decision making when it comes to finance/economics is very strong.

I'm speculating that what he refers to is a coming war in Asia over Energy(IF credit bubble debt is NOT written down and energy efficiency does NOT become a massive focal point) , I believe he is referring to a conflict between the US and China directly or via proxy thru Pakistan/India/Kablamistans with Russia playing a significant role as well.

But again....just speculation on my part....as I think his understanding(my opinion) of things like Saudi security and mass security investment is a bit superficial and hollow...say much like basing opinion and analysis on the SU solely on open source Reagan admin PR on Soviet buildup and capabilities in the 80's.

And EJ is not a "dark" guy...in fact he's quite the optimist(long-term)...but it's hard to miss his change to a darker tone recently...which is cause for concern.

I would also agree that China would try to play to it's strengths....dollars...but wouldn't the US also be tempted to leverage it's own strength via it's incredible conventional/unconventional force projection overmatch?

Temptation to use(literally and/or figuratively) it before you lose it due to increasing difficulty in sustaining the capability long-term?

Couldn't an argument me made that we are looking at some rough 21st century analogies to some of the events of the 1930's?

But I'm just a reserve infantry section commander and small business owner with an OK education and a strong interest in finance/economic/military history....I'm not professionally trained in analysis for either major discipline.

My personal feeling is that there seems to be a disconnect between strong conflict & security analysis and strong finance/economic/energy analysis...I guess that's why I'm an open advocate for trying to cross pollinate the two wherever possible to see what comes out of it, if anything, and try to better understand where we are likely headed.

motorfirebox

06-17-2011, 01:08 AM

I feel like this discussion is being limited to a few points, mainly revolving around short selling. Short selling is, as has been pointed out, not a great weapon for long-term manipulation of the stock market--it's great for getting some quick profits out in the short term, but not much beyond that (in and of itself).

But short selling is not the only financial practice or instrument available. If I were going to construct a strategy of financial attack, my main weapon would probably be the CDS. Used correctly (or badly), a set of credit default swaps can act as a land mine, draining liquidity from a company very quickly.

Another point of limitation in this discussion is that only badly-run companies will put themselves into a position to be badly damaged by such tactics. I can only reiterate that we live under a badly-run economy in which individual risk is artificially lowered by raising collective risk. The housing market crash is an example of this--it bubbled because a combination of active policy and lack of oversight reduced the likelihood of any one company taking major losses on the toxic assets being produced. This continued until the bottom fell out under everyone all at once. So the idea that it's not a problem because only badly-run companies are vulnerable simply does not fly. It's not the only problem, certainly, but when you're dealing with a gasoline spill it's at least as important to not light matches as it is to clean up the spill itself.

The final point of limitation is the idea that a financial attack must be responsible for all of the current state of the economy or none of it--that because the potential for massive damage was created by accident, any triggering of that potential must also be accidental. I don't think the house of cards which comprises our current markets was--or could have been--set up the way it is on purpose; it's too big. But I think it's possible that someone could deliberately try to knock it down, and I think it's possible that they could succeed to a greater or lesser degree. I think it's somewhat less likely that such a deliberate act has already occurred on any significant scale, but I'm not entirely closed to the possibility.

Dayuhan

06-17-2011, 02:19 AM

But short selling is not the only financial practice or instrument available. If I were going to construct a strategy of financial attack, my main weapon would probably be the CDS. Used correctly (or badly), a set of credit default swaps can act as a land mine, draining liquidity from a company very quickly.

Possible, but again, targeting one company is unlikely to do damage much beyond that except in very precarious circumstance. If you're dancing on the edge of a cliff any number of things can push you over the edge... but your problem in that case is not all those things that could push you over the edge, but your position on the edge of the cliff.

Certainly it's possible that if the US backed itself into a position where it could be so easily disrupted, and if that were sufficiently clear to outside parties, someone might come along and exploit that for political advantage. I don't think that's what happened, but it's possible. I also don't see any realistic way of protecting ourselves from that, other than not getting into that position in the first place. Again, the conspiracy talk seems to me a distraction from the real systemic problems that need to be addressed... and all too often a way to blame some nefarious external party for problems that with political will could be brought under control.

I'm speculating that what he refers to is a coming war in Asia over Energy(IF credit bubble debt is NOT written down and energy efficiency does NOT become a massive focal point) , I believe he is referring to a conflict between the US and China directly or via proxy thru Pakistan/India/Kablamistans with Russia playing a significant role as well.

I'm not seeing how addressing debt is going to produce a war in Central Asia. I also don't think energy will: Central Asian oil is not important enough to the US to justify war, by proxy or otherwise. China could absorb the entire output of Kazakhstan, Turkmenistan, and Azerbaijan without any significant adverse consequence for the US. It would be an issue for Russia, not because Russia needs the energy but because Russia's dominance of the export conduits for these countries gives Moscow huge influence at both ends of the pipe. I can see Central Asia as a Russia/China flashpoint more than as a China/US flashpoint.

I would also agree that China would try to play to it's strengths....dollars...but wouldn't the US also be tempted to leverage it's own strength via it's incredible conventional/unconventional force projection overmatch?

Temptation to use(literally and/or figuratively) it before you lose it due to increasing difficulty in sustaining the capability long-term?

Use it how? Where, and to what end? Is there any specific scenario in play here?

My personal feeling is that there seems to be a disconnect between strong conflict & security analysis and strong finance/economic/energy analysis...I guess that's why I'm an open advocate for trying to cross pollinate the two wherever possible to see what comes out of it, if anything, and try to better understand where we are likely headed.

Since that's my line of work, I'll agree, vigorously :D

flagg

06-17-2011, 04:20 AM

Possible, but again, targeting one company is unlikely to do damage much beyond that except in very precarious circumstance. If you're dancing on the edge of a cliff any number of things can push you over the edge... but your problem in that case is not all those things that could push you over the edge, but your position on the edge of the cliff.

Certainly it's possible that if the US backed itself into a position where it could be so easily disrupted, and if that were sufficiently clear to outside parties, someone might come along and exploit that for political advantage. I don't think that's what happened, but it's possible. I also don't see any realistic way of protecting ourselves from that, other than not getting into that position in the first place. Again, the conspiracy talk seems to me a distraction from the real systemic problems that need to be addressed... and all too often a way to blame some nefarious external party for problems that with political will could be brought under control.

I'm not seeing how addressing debt is going to produce a war in Central Asia. I also don't think energy will: Central Asian oil is not important enough to the US to justify war, by proxy or otherwise. China could absorb the entire output of Kazakhstan, Turkmenistan, and Azerbaijan without any significant adverse consequence for the US. It would be an issue for Russia, not because Russia needs the energy but because Russia's dominance of the export conduits for these countries gives Moscow huge influence at both ends of the pipe. I can see Central Asia as a Russia/China flashpoint more than as a China/US flashpoint.

I have asked for clarification behind the paywall...will have to wait and see.

I also see possible friction between Russia and China in the region......and I'm wondering if it would result in aligned interests between the US and Russia to check China.....to me it seems quite complex.....given the following:

The Reagan Administration effectively kaboshed Soviet/Russian efforts pipe gas into Western Europe at the time.....stunting critically needed Soviet cashflow and stunting geopolitical leverage over Western Europe if it went forward at the time.

What role would Soviet leadership THEN and Russian leadership NOW give to US involvement in the oil glut that further choked Soviet cashflow...was it a happy coincidence or planned undermining of a nation?

Fast forward to now...and the next generation of Russian leadership seem to have won the long-game in Western Europe energy politics.

How well could US/Russian leadership work together to stunt China if their interests are only roughly aligned?

Use it how? Where, and to what end? Is there any specific scenario in play here?

Call me a crackpot...but from a Machiavellian perspective....could a FAILURE TO ACT or failure to act fast enough...in a crisis environment where the US would be expected to break up a fight before it spirals out of control, but fails to do so result in an opportunity for the US to capitalize?

Example:

Pakistani based and backed terrorists/insurgents attack India(yet again) compelling India to respond with force against Pakistan.

While the crisis escalates, the US, through an act of omission rather than commission, is intentionally too slow/weak/ineffective to de-escalate the crisis in a distinct change of behavior from previous historical diplomatic efforts to de-escalate the two nuclear armed rivals.

Crisis escalates into conflict that threatens to suck China and the US into the vortex.

But with the US possessing vastly superior strategic conventional and nuclear force projection overmatch against all combined combatants and physical distance, the US decides to sit on the sidelines and quarantines the conflict area of Pakistan/India/China to let the conflict burn itself out, to potentially take a considerable amount of excess production capacity off of the table, to provide the US an opportunity/excuse to default on it's debt to China, to reduce fast growing energy demand from about a 1/3 of the planet's population and force down energy prices via a forced increase in surplus/swing energy production capacity and another generation to sort out Cheap Peak Oil, to ensure the US is sitting at the head of the table for Bretton Woods 3.0, and to provide a sufficiently large crisis to more easily push fundamental/structural reforms in the US like re-industrialization further kicking Chindia in the teeth.

Cr@ppy and dark techno-thriller pulp fiction....but I would agree with Eric Janszen that without significant and fundamental reform in the US the remaining options are quite possibly darker gambles.

If it's a choice(although I know it's not) between an easy gamble and a hard uphill climb....what would most folks choose?

Since that's my line of work, I'll agree, vigorously :D

If you're aware of any sources that effectively mesh the finance/economics analysis with the defense/security analysis I'm all ears.....and would be most appreciative.......seems kinda hard to find in open source.

Same goes for widely distributed research on finance/economic/energy root causes of WWII....it's out there....but largely ignored, understated, or overlooked.

For the record, I don't think we are destined for a major conflict.....but I do think that the longer it takes for the US to make the necessary fundamental and structural changes it demands to regain it's overall health...the dangerously easy gambles will become more attractive if an opportunity presents for their consideration.

One thing EJ has called is a pending economic crash in China within less than 24 months....likely within 12...I would agree based on my amateur understanding of the situation.

EJ's "kremlinology" seems to work pretty well in the west, particularly on the US with his quite accurate calls on the US....but the translation to a command driven economy able to instantly respond with mass liquidity to put out the fires probably makes for a less accurate prediction due to that fact and less transparency in the Chinese banking system.

Eric Janszen refers to China's future crisis as "The Greenspan Credit Bubble with Chinese characteristics."

Maybe we could add "A return to the 1930's with 21st Century characteristics."

Certainly going to be interesting times ahead.

motorfirebox

06-17-2011, 04:35 AM

flagg

06-17-2011, 04:38 AM

I'm not seeing how addressing debt is going to produce a war in Central Asia.

I think I forgot to effectively address your question:

If I understand it correctly, iTulip/EJ posits the FAILURE to address the massive credit bubble debt effectively combined with a failure to achieve considerable improvement in average energy efficiency will lead to a far higher risk of broad conflict outside the US as a solution to the problem from a US perspective.

If the US continues down the track of foreign creditor insolvency to the point of a complete collapse in new credit....what's going to happen with that multi-trillion dollar military capability? Will it just sit there to slowly attrit..or will it be leveraged?

Dayuhan

06-17-2011, 07:48 AM

Why in the world would someone only target one company? As for cliff edges, I'll point out again that dancing on them is not some rare act. If it were, the recent crash wouldn't have been possible.

It happens at regular intervals, and has for a long time. In any event, I think we have more to fear from our own blunders than from "economic warfare"

Trying to bring down the US economy by trying to drive a company or a group of companies out of business, or to depress their stock prices, seems to me too indirect to be worth trying, and I remain convinced that these "attacks" are conducted in pursuit of immediate profit, not political goals. I very much doubt that the people who short-sold Bear Stearns or Lehman had any clue what the consequences would be. They wanted the money.

I agree that not dancing on cliff edges is the only realistic cure. I think that if cliff edges continue to be danced upon, someone's going to try to shove us off. I view that possibility as an addition to the threat presented by wholly accidental disaster. Given the way that it seems a lot of leading economists think, especially on the right (that is, that there's nothing wrong with the system that can't be fixed by even more relaxed oversight), I'm not sure the threat of accidental disaster carries enough weight.

The only people with the capacity to shove us off a cliff are likely to go over it with us, given the interconnectedness of global economies. We're more likely to fumble over edges ourselves than to be pushed off.

As always, we pay too much attention to "oversight" and too little to effective management of incentives and good long-term policy.

Dayuhan

06-17-2011, 07:56 AM

I think I forgot to effectively address your question:

If I understand it correctly, iTulip/EJ posits the FAILURE to address the massive credit bubble debt effectively combined with a failure to achieve considerable improvement in average energy efficiency will lead to a far higher risk of broad conflict outside the US as a solution to the problem from a US perspective.

If the US continues down the track of foreign creditor insolvency to the point of a complete collapse in new credit....what's going to happen with that multi-trillion dollar military capability? Will it just sit there to slowly attrit..or will it be leveraged?

Still not seeing a credible causative chain here. Of course one can always speculate, but that's rarely a sound basis for decisions. How are these factors supposed to drive war?

How well could US/Russian leadership work together to stunt China if their interests are only roughly aligned?

Why would the US want to "stunt China", especially in concert with the Russians?

One thing EJ has called is a pending economic crash in China within less than 24 months....likely within 12...I would agree based on my amateur understanding of the situation.

Hardly rocket science, lots of people are saying similar things. I would not personally want to call it a "crash", or to put a time bracket on it, or to predict how it will play out or what the consequences will be. Too many unknowns in the picture to call any of that accurately.

Certainly going to be interesting times ahead.

There always are... and dramatizing and sensationalizing them will always draw in readers.

slapout9

06-17-2011, 05:56 PM

Interview of Max Keiser who is actually in Greece.:eek: Listen close to understand how debt is used as weapon of mass financial destruction and listen to who benefits.

http://www.youtube.com/watch?v=kssMNSZ7_ZI&feature=player_embedded#at=572

Fuchs

06-17-2011, 07:21 PM

The word "debt" is conspicuously in fashion since it's the Republican strategy to defund the democratic government's policies.

For comparison, "Schulden" ("debt") appears in German media almost only in the context of Greece, followed by the "PIGS" context as a distant second.

Being a fashionable topic, it's a common mechanism to overspread its use. Such as Newtonian physics were applied to the military when they were in fashion, or evolution theory was applied to way too many topics.

slapout9

06-19-2011, 04:10 PM

Fuchs

06-19-2011, 05:12 PM

The comments and reporting weren't exactly excited, it was mostly presented as politicians simply at work.

slapout9

06-22-2011, 06:13 PM

Iceland and maybe Ireland stand up to the Tali-Banksters:)

http://www.youtube.com/watch?v=SixS1JMDgUk&feature=feedu

Go Ireland!

bourbon

12-30-2011, 07:14 AM

The war on terabytes - Policymakers worry about attacks on America’s financial system (http://www.economist.com/node/21542186). The Economist, Dec 31st 2011.

Sponsored access is not the only way that a determined assailant could create havoc. The “flash crash” of May 6th 2010, in which American equities spectacularly nosedived, showed the damage that can be done by high-speed algorithmic trading. It is much easier to drag markets down when they are already reeling, by the use of such things as short-selling, options and swaps, points out James Rickards of Tangent Capital, an expert on financial threats. This is what the military would call a “force multiplier”.

Evidence of market manipulation in the financial crisis (http://necsi.edu/research/economics/bearraid.pdf), by Vedant Misra, Marco Lagi, and Yaneer Bar-Yam. New England Complex Systems Institute, December 13, 2011. (PDF)

We provide direct evidence of market manipulation at the beginning of the financial crisis in November 2007. The type of market manipulation, a “bear raid,” would have been prevented by a regulation that was repealed by the Securities and Exchange Commission in July 2007. The regulation, the uptick rule, was designed to prevent market manipulation and promote stability and was in force from 1938 as a key part of the government response to the 1928 market crash and its aftermath. On November 1, 2007, Citigroup experienced an unusual increase in trading volume and decrease in price. Our analysis of financial industry data shows that this decline coincided with an anomalous increase in borrowed shares, the selling of which would be a large fraction of the total trading volume. The selling of borrowed shares cannot be explained by news events as there is no corresponding increase in selling by share owners. A similar number of shares were returned on a single day six days later. The magnitude and coincidence of borrowing and returning of shares is evidence of a concerted effort to drive down Citigroup’s stock price and achieve a profit, i.e., a bear raid. Interpretations and analyses of financial markets should consider the possibility that the intentional actions of individual actors or coordinated groups can impact market behavior. Markets are not sufficiently transparent to reveal or prevent even major market manipulation events.

Our results point to the need for regulations that prevent intentional actions that cause markets to deviate from equilibrium value and contribute to market crashes. Enforcement actions, even if they take place, cannot reverse severe damage to the economic system. The current “alternative” uptick rule which is only in effect for stocks dropping by over 10% in a single day is insufficient. Prevention may be achieved through a combination of improved transparency through availability of market data and the original uptick rule or other transaction process limitations.

Dayuhan

12-30-2011, 09:17 AM

Interpretations and analyses of financial markets should consider the possibility that the intentional actions of individual actors or coordinated groups can impact market behavior.

Of course "intentional actions of individual actors or coordinated groups can impact market behavior". This is not exactly news. Nor is a bear raid exactly news; and it's not like they started in 2007.

Bear raids and the like are symptoms, not causes; they don't sink healthy companies or crash healthy markets. If a company is sick enough for a bear raid to be anything more than a passing inconvenience, questions need to be asked... not about why a bear raid was allowed, but about why the company was in that condition to begin with.

bourbon

01-02-2012, 01:50 AM

Bear raids and the like are symptoms, not causes; they don't sink healthy companies or crash healthy markets. If a company is sick enough for a bear raid to be anything more than a passing inconvenience, questions need to be asked... not about why a bear raid was allowed, but about why the company was in that condition to begin with.
By that logic I could shoot you in the head the next time you kayak into a rip current; and questions would be need to be asked... not about why you were shot in the head, but about why you were in rip current to begin with.

Of course "intentional actions of individual actors or coordinated groups can impact market behavior". This is not exactly news. Nor is a bear raid exactly news; and it's not like they started in 2007.
Your behavior in this thread is peculiar. All you have done in this thread is selectively taken quotes and arguments out of context, comment on articles you clearly haven’t even read, and regurgitate efficient market hypothesis dogma like a zealot; it is in stark contrast to your otherwise thoughtful posts in other threads.

Dayuhan

01-03-2012, 03:20 AM

By that logic I could shoot you in the head the next time you kayak into a rip current; and questions would be need to be asked... not about why you were shot in the head, but about why you were in rip current to begin with.

Not the best analogy, as a bear raid is not at all like a shot in the head. Might be closer to compare to somebody giving me a hard slap in the side and capsizing my boat. If I have my $#!t together I'll just roll my boat back up again, no harm done. If I can't do that, you might well wonder why I was out there to begin with.

One of the great flaws of this contention is that it consistently and drastically overstates the damage that short selling or a bear raid can actually do to a healthy company. These things can only depress share price, they have no impact at all on the fundamentals of the company. If those fundamentals are solid the depression of the share price will be transient and will have little or no impact beyond the short term.

Your behavior in this thread is peculiar. All you have done in this thread is selectively taken quotes and arguments out of context, comment on articles you clearly haven’t even read, and regurgitate efficient market hypothesis dogma like a zealot; it is in stark contrast to your otherwise thoughtful posts in other threads.

I think my behavior is consistent. I've little patience for conspiracy theories in any field. In this particular area the theories seem both inaccurate and dangerous: pretending that the financial crisis is something that "they" did to "us" only distracts us from serious systemic issues that badly need to be addressed. Even the constant stress on regulation as "the answer" seems to me inappropriate and inutile. Government already has all the tools it needs to manage these situations, it just doesn't want to use them. More regulations aren't going to solve that problem. It's easy to look back and claim that regulation X would have prevented action Y, but the chances are hat all you would have done was to roll over into action Z, with the same outcome. Speculators are always more nimble than regulators, and trying to regulate against incentives is futile. Much better to manage the incentives.

Much of the talk we see about the financial crisis seems to echo what we heard after the stock crash in 2001, only back then it was all the fault of the market makers and the nekkid shorts. We don't seem much for learning from experience...