This is not a liquidity crisis, its an insolvency crisis for the dollar system which has been recklessly driven with only US domestic advantage in mind since 1964. As the right always remind us, welfare without strings is evil. The american empire was an easy street, easy street causes rot, and that kind of rot starts at the top.
The only question is how it will end. My guess is a hyperinflationary blow off when the west turns to other measures to fund its borrowing. There is no savings glut to borrow because all thay ever was the flip side of the US trade deficit.
Depression, war and climate mayhem will make the business of laying blame difficult but it goes like this; its the cycle of history, people build civilisations, the structure of the civilisation seems so strong and eternal that it is taken for granted, once that has happens it gets loaded up until it fails..
Failure has arrived. How it plays out is the only question.
http://www.telegraph.co.uk/finance/comment/liamhalligan/4741093/There-will-be-slim-pickings-if-China-loses-its-appetite-for-Western-debt.html
"But I have to admit that China, with its massive 1,400m population, isn't doing badly. Retail sales remain strong – up 17pc in real terms. Growth has slowed, but GDP still expanded by a pretty spectacular 6.8pc during the fourth quarter of last year.
Japan – that other Asian giant – continues to suffer. Tumbling exports have sparked the worst slump in 35 years. Japanese GDP contracted 3.3pc during the last three months of 2008 – equivalent to a 12.7pc annualized drop. The Nikkei 225 index of leading Japanese shares is down 16pc since the start of 2009. Chinese shares, in contrast, have gained 25pc this year – the best return of any stock market in the world. London's FTSE-100 shed 12pc over the same period, with New York's S&P 500 down 15pc.
Optimism in China has been boosted by the government's Rmb4,000bn (£405bn) support package. Unlike Japan and the cash-strapped Western nations, China is funding its fiscal stimulus using reserves, not extra borrowing.
As the West's predicament has worsened, and China's relative strength has punched through, the political mood music has changed. Just a few weeks ago, in his first speech as US Treasury Secretary, Timothy Geithner accused Beijing of "manipulating" its currency. So what if the renminbi has appreciated more than 20pc against the dollar since 2005, undermining Chinese exports? Wanting to appear tough, "Tiny Tim" attacked China.
Last week's G7 Finance Minister's meeting in Rome produced far more measured tones. "We welcome China's fiscal measures and continued commitment to move to a more flexible exchange rate," purred the post-Summit communiqué.
Hillary Clinton also perfected her "China bashing" rhetoric as she bid for the White House. But now, as US Secretary of State, and on a visit to China, she insists "a positive co-operative relationship" between Beijing and Washington "is vital to peace and prosperity, not only in the Asia-Pacific region, but worldwide".
So, what's different – apart from US politicians no longer being in election mode? Well, behind the scenes, the Chinese government has started demanding guarantees for the $700bn of US Treasury bills on its books.
China has been keeping the States afloat for the best part of a decade, buying up vast quantities of T-bills to fund America's enormous budget and trade deficits. At any point, China could seriously damage the world's largest economy – by refusing to lend more money. So reliant is America on funding from Beijing that, by turning off the cash taps, China could spark an instant run on the dollar.
The Chinese haven't done that as it would harm their dollar-based holdings and they understand we live in an inter-dependent world.
But the ever-greater use of Asian savings to fund the "advanced" economies' deficits is unsustainable. And, as such, we're reaching the point where it will not be sustained. With Western governments intent on printing money and debauching their currencies, the big emerging market creditors – not only China, but Taiwan, Russia, South Korea and others – are now privately raising doubts about their future appetite for Western debt.
This demand drop-off will happen just as the West's dependence on such credit peaks. America and the UK are starting to issue sovereign paper like confetti, to fund highly-irresponsible "recovery programs".
The "rush from risk" that followed the Lehman collapse last September caused the repatriation of billions of dollars invested in emerging markets back to the "safe haven" of the West. That has so far allowed the US and UK authorities to get their larger debt issues away.
But the upcoming volumes are simply enormous. Last year, the US sold bonds to cover its $460bn deficit – around $200bn to foreigners, with China taking the lion's share. But America is on course to issue a staggering $2,000bn of debt in each of the next two years.
Over the same period, the UK will be flogging three times more gilts annually than during 2008. Right across the Western world, crisis-ridden governments will be issuing more and more debt.
Worried about falling currencies and rising inflation, the emerging markets – not least the Chinese – are demanding better returns to buy Western sovereign bonds. This is entirely justified. The debtor governments are weak, confused, and piling loans on top of loans with little sign of future growth. "
But how will the Western world react when the creditor countries finally refuse to buy? How will America respond – with resignation, understanding, or aggression? That's the crucial question the world faces over the next three to five years. Just what happens when China stops buying US government debt?
Showing posts with label civilisation. Show all posts
Showing posts with label civilisation. Show all posts
23 February 2009
3 November 2008
They Made a Killing
People knew about secret, CIA-led coups and used that information to game the stock market. One wonders about the extent to which ECHELON and other electronic interception networks are used to gain commercial advantage and private gain today.
By Ray Fisman
Posted Tuesday, Oct. 28, 2008, at 7:07 AM ET
In 1951, Jacobo rbenz Gzman became Guatemala's second democratically elected president. rbenz's authoritarian predecessors had been very sympathetic to American business interests, particularly those of the United Fruit Co. (now Chiquita), which had bought up land titles on the cheap from Guatemala's corrupt elite for its ever-expanding banana empire. Once in office, Presidente rbenz sought to take it all back, nationalizing UFC's Guatemalan assets and redistributing them to the poor.
But UFC had friends in very high placesthe assistant secretary of state for inter-American affairs, John Moor Cabot, was the brother of UFC President Thomas Cabot. The secretary of state himself, John Foster Dulles, had done legal work for UFC, and his brother Allen Dulles was director of the CIA and also on UFC's board. Thanks to the Freedom of Information Act, we now know that the various Cabots and Dulleses had a series of top-secret meetings in which they decided that rbenz had to go and sponsored a coup that drove rbenz from office in 1954.
With a U.S. puppet back in the president's mansion, UFC's profits were safe. But it appears the company wasn't the only beneficiary of this Cold War cloak-and-dagger diplomacy: A recent study by economists Arindrajit Dube, Ethan Kaplan, and Suresh Naidu argues that those in on the planning process also profited handsomely. By tracking the stock prices of UFC and other politically vulnerable firms in the months leading up to CIA-staged coups in Guatemala, Chile, Cuba, and Iran, the researchers provide evidence that someoneperhaps one of the Dulleses, Cabots, or others in the knowwas trading stocks based on classified information of these coups-in-the-making.
Dube, Kaplan, and Naidu examine how the stock market reacted to events that no Wall Street trader should have known about: top-secret meetings of the coup-plotting cabals at CIA headquarters and presidential approvals of CIA-organized invasions. These events would have increased the expected future profits of companies like UFCif the CIA-led coup in Guatemala were successful, for example, UFC would get its plantations back. If stock traders were privy to the coup-planning process, we would expect them to bid up the prices of affected companies in anticipation of these higher profits. These meetings and authorizations were all highly classified, however, and since you can't trade on information you don't have, UFC's stock price shouldn't have budged until the coup actually took place and the investing world learned of the regime change.
Unless, that is, some of the Cabots, Dulleses, or other insiders were using their privileged information to profit personally from a future coup. To understand why insider trading would boost a company's stock price, suppose that someone in on the planningperhaps at UFC or at the State Department itselfstarted quietly buying up cheap UFC stock in anticipation of the price jump that would come when the coup took place (or tipped off his stock-trading cousins about the future boost to UFC so they could do the same). All of this pre-coup buying would increase demand for UFC stock, bidding up its price even before CIA operatives actually got to work overthrowing the Guatemalan government.
Such trading on inside information is illegal, and when it involves highly classified details about a future CIA coup, it verges on treason. Yet the researchers found that prices of companies affected by the CIA's regime-toppling effortsUFC in Guatemala, Anglo-Iranian (oil) in Iran, Anaconda (mining) in Chile, and American Sugar in Cubawent up in the weeks and months preceding the coups. (The authors restrict their analysis to coups for which they had access to declassified planning documents and for which U.S. companies had had property nationalized by the targeted regimes.)
Furthermore, these gains were concentrated in the days following crucial government authorizations or plans for the coup (suggesting the trades weren't simply the result of good guesswork about a coup in the making). For example, in the week that President Eisenhower gave full approval to Operation PBFortune to overthrow rbenz, UFC's price went up by 3.8 percent; the stock market overall was flat that week.
In all, shares of coup-affected companies went up by a total of 10 percent following top-secret authorizations, swamping the 3.5 percent gain that came immediately in the coups' aftermaths. If information hadn't been leaking into the stock market via insider trading, then the entire impact of the coup should have appeared only when the very public invasions took place and the investing world finally got news of the regime change. Unfortunately, there are limits to what these stock-market forensics can uncover. When the researchers contacted the Securities and Exchange Commission to find out who was trading on these days, they learned that there are limits to what the Freedom of Information Act could provide. So, we can't pin the apparent insider trading on anyone in particular.
There's also some evidence, albeit tentative, that the market was very good at forecasting the coups' success and failurea further indication that the traders driving up the price had detailed knowledge of the covert plans (and their expected outcomes). The CIA-led invasion of Cuba is referred to these days as the Bay of Pigs fiasco for a reason, and whoever was trading on insider knowledge seemed to place his bets accordingly the pre-invasion increase in American Sugar's stock price was much lower than the gains for companies affected by the other, successful coups in the study.
By Ray Fisman
Posted Tuesday, Oct. 28, 2008, at 7:07 AM ET
In 1951, Jacobo rbenz Gzman became Guatemala's second democratically elected president. rbenz's authoritarian predecessors had been very sympathetic to American business interests, particularly those of the United Fruit Co. (now Chiquita), which had bought up land titles on the cheap from Guatemala's corrupt elite for its ever-expanding banana empire. Once in office, Presidente rbenz sought to take it all back, nationalizing UFC's Guatemalan assets and redistributing them to the poor.
But UFC had friends in very high placesthe assistant secretary of state for inter-American affairs, John Moor Cabot, was the brother of UFC President Thomas Cabot. The secretary of state himself, John Foster Dulles, had done legal work for UFC, and his brother Allen Dulles was director of the CIA and also on UFC's board. Thanks to the Freedom of Information Act, we now know that the various Cabots and Dulleses had a series of top-secret meetings in which they decided that rbenz had to go and sponsored a coup that drove rbenz from office in 1954.
With a U.S. puppet back in the president's mansion, UFC's profits were safe. But it appears the company wasn't the only beneficiary of this Cold War cloak-and-dagger diplomacy: A recent study by economists Arindrajit Dube, Ethan Kaplan, and Suresh Naidu argues that those in on the planning process also profited handsomely. By tracking the stock prices of UFC and other politically vulnerable firms in the months leading up to CIA-staged coups in Guatemala, Chile, Cuba, and Iran, the researchers provide evidence that someoneperhaps one of the Dulleses, Cabots, or others in the knowwas trading stocks based on classified information of these coups-in-the-making.
Dube, Kaplan, and Naidu examine how the stock market reacted to events that no Wall Street trader should have known about: top-secret meetings of the coup-plotting cabals at CIA headquarters and presidential approvals of CIA-organized invasions. These events would have increased the expected future profits of companies like UFCif the CIA-led coup in Guatemala were successful, for example, UFC would get its plantations back. If stock traders were privy to the coup-planning process, we would expect them to bid up the prices of affected companies in anticipation of these higher profits. These meetings and authorizations were all highly classified, however, and since you can't trade on information you don't have, UFC's stock price shouldn't have budged until the coup actually took place and the investing world learned of the regime change.
Unless, that is, some of the Cabots, Dulleses, or other insiders were using their privileged information to profit personally from a future coup. To understand why insider trading would boost a company's stock price, suppose that someone in on the planningperhaps at UFC or at the State Department itselfstarted quietly buying up cheap UFC stock in anticipation of the price jump that would come when the coup took place (or tipped off his stock-trading cousins about the future boost to UFC so they could do the same). All of this pre-coup buying would increase demand for UFC stock, bidding up its price even before CIA operatives actually got to work overthrowing the Guatemalan government.
Such trading on inside information is illegal, and when it involves highly classified details about a future CIA coup, it verges on treason. Yet the researchers found that prices of companies affected by the CIA's regime-toppling effortsUFC in Guatemala, Anglo-Iranian (oil) in Iran, Anaconda (mining) in Chile, and American Sugar in Cubawent up in the weeks and months preceding the coups. (The authors restrict their analysis to coups for which they had access to declassified planning documents and for which U.S. companies had had property nationalized by the targeted regimes.)
Furthermore, these gains were concentrated in the days following crucial government authorizations or plans for the coup (suggesting the trades weren't simply the result of good guesswork about a coup in the making). For example, in the week that President Eisenhower gave full approval to Operation PBFortune to overthrow rbenz, UFC's price went up by 3.8 percent; the stock market overall was flat that week.
In all, shares of coup-affected companies went up by a total of 10 percent following top-secret authorizations, swamping the 3.5 percent gain that came immediately in the coups' aftermaths. If information hadn't been leaking into the stock market via insider trading, then the entire impact of the coup should have appeared only when the very public invasions took place and the investing world finally got news of the regime change. Unfortunately, there are limits to what these stock-market forensics can uncover. When the researchers contacted the Securities and Exchange Commission to find out who was trading on these days, they learned that there are limits to what the Freedom of Information Act could provide. So, we can't pin the apparent insider trading on anyone in particular.
There's also some evidence, albeit tentative, that the market was very good at forecasting the coups' success and failurea further indication that the traders driving up the price had detailed knowledge of the covert plans (and their expected outcomes). The CIA-led invasion of Cuba is referred to these days as the Bay of Pigs fiasco for a reason, and whoever was trading on insider knowledge seemed to place his bets accordingly the pre-invasion increase in American Sugar's stock price was much lower than the gains for companies affected by the other, successful coups in the study.
25 October 2008
U.S. has plundered world wealth's -China
Fri Oct 24, 2008 1:59am EDT
BEIJING, Oct 24 (Reuters) - The United States has plundered global wealth by exploiting the dollar's dominance, and the world urgently needs other currencies to take its place, a leading Chinese state newspaper said on Friday.
The front-page commentary in the overseas edition of the People's Daily said that Asian and European countries should banish the U.S. dollar from their direct trade relations for a start, relying only on their own currencies.
A meeting between Asian and European leaders, starting on Friday in Beijing, presented the perfect opportunity to begin building a new international financial order, the newspaper said.
The People's Daily is the official newspaper of China's ruling Communist Party. The Chinese-language overseas edition is a small circulation offshoot of the main paper.
Its pronouncements do not necessarily directly voice leadership views. But the commentary, as well as recent comments, amount to a growing chorus of Chinese disdain for Washington's economic policies and global financial dominance in the wake of the credit crisis.
"The grim reality has led people, amidst the panic, to realise that the United States has used the U.S. dollar's hegemony to plunder the world's wealth," said the commentator, Shi Jianxun, a professor at Shanghai's Tongji University.
Shi, who has before been strident in his criticism of the U.S., said other countries had lost vast amounts of wealth because of the financial crisis, while Washington's sole concern had been protecting its own interests.
"The U.S. dollar is losing people's confidence. The world, acting democratically and lawfully through a global financial organisation, urgently needs to change the international monetary system based on U.S. global economic leadership and U.S. dollar dominance," he wrote.
Shi suggested that all trade between Europe and Asia should be settled in euros, pounds, yen and yuan, though he did not explain how the Chinese currency could play such a role since it is not convertible on the capital account.
A two-day Asia-Europe Meeting (ASEM) of 27 EU member states and 16 Asian countries was set to open on Friday. Though few analysts expect much in the way of concrete agreements, Shi said it could prove momentous.
"How can Europe and Asia grasp each other's hands and together confront the once-in-a-century global financial crisis sparked by the U.S.; how can they construct a new equitable and safe international financial order?" he said.
"The world is waiting for this Asian-European meeting to achieve big results in financial cooperation." (Reporting by Simon Rabinovitch; Editing by Ken Wills)
BEIJING, Oct 24 (Reuters) - The United States has plundered global wealth by exploiting the dollar's dominance, and the world urgently needs other currencies to take its place, a leading Chinese state newspaper said on Friday.
The front-page commentary in the overseas edition of the People's Daily said that Asian and European countries should banish the U.S. dollar from their direct trade relations for a start, relying only on their own currencies.
A meeting between Asian and European leaders, starting on Friday in Beijing, presented the perfect opportunity to begin building a new international financial order, the newspaper said.
The People's Daily is the official newspaper of China's ruling Communist Party. The Chinese-language overseas edition is a small circulation offshoot of the main paper.
Its pronouncements do not necessarily directly voice leadership views. But the commentary, as well as recent comments, amount to a growing chorus of Chinese disdain for Washington's economic policies and global financial dominance in the wake of the credit crisis.
"The grim reality has led people, amidst the panic, to realise that the United States has used the U.S. dollar's hegemony to plunder the world's wealth," said the commentator, Shi Jianxun, a professor at Shanghai's Tongji University.
Shi, who has before been strident in his criticism of the U.S., said other countries had lost vast amounts of wealth because of the financial crisis, while Washington's sole concern had been protecting its own interests.
"The U.S. dollar is losing people's confidence. The world, acting democratically and lawfully through a global financial organisation, urgently needs to change the international monetary system based on U.S. global economic leadership and U.S. dollar dominance," he wrote.
Shi suggested that all trade between Europe and Asia should be settled in euros, pounds, yen and yuan, though he did not explain how the Chinese currency could play such a role since it is not convertible on the capital account.
A two-day Asia-Europe Meeting (ASEM) of 27 EU member states and 16 Asian countries was set to open on Friday. Though few analysts expect much in the way of concrete agreements, Shi said it could prove momentous.
"How can Europe and Asia grasp each other's hands and together confront the once-in-a-century global financial crisis sparked by the U.S.; how can they construct a new equitable and safe international financial order?" he said.
"The world is waiting for this Asian-European meeting to achieve big results in financial cooperation." (Reporting by Simon Rabinovitch; Editing by Ken Wills)
22 October 2008
The ABCs of Paulson's Bailout
Licensed Kleptocracy for Years to Come
By MICHAEL HUDSON
Treasury Secretary Paulson’s bailout speech on Monday, October 13, poses some fundamental economic questions: What is the impact on the economy at large of this autumn’s unprecedented creation and giveaway of financial wealth to the wealthiest layer of the population? How long can the Treasury’s bailout of Wall Street (but not the rest of the economy!) sustain a debt overhead that is growing exponentially? Is there any limit to the amount of U.S. Treasury debt that the government can create and turn over to its major political campaign contributors?
In times past, national debt typically was run up by borrowing money from private lenders and spent on goods and services. The tendency was to absorb loanable funds and bid up interest rates on the one hand, while spending led to inflationary price increases for goods and services. But the present giveaway is different. Instead of money being borrowed or spent, interest-yielding bonds are simply being printed and turned over to the banks and other financial institutions. The hope is that they will lend out more credit (which will become more debt on the part of their customers), lowering interest rates while the money is used to bid up asset prices – real estate, stocks and bonds. Little commodity price inflation is expected from this behavior.
The main impact will be to reinforce the concentration of wealth in the hands of creditors (the wealthiest 10 percent of the population) rather than wiping out financial assets (and debts) through the bankruptcies that were occurring as a result of “market forces.” Is it too much to say that we are seeing the end of economic democracy and the emergence of a financial oligarchy – a self-serving class whose actions threaten to polarize society and, in the process, stifle economic growth and lead to the very bankruptcy that the bailout was supposed to prevent?
Everything that I have read in economic history leads me to believe that we are entering a nightmare transition era. The business cycle is essentially a financial cycle. Upswings tend to become economy-wide Ponzi schemes as banks and other creditors, savers and investors receive interest and plow it back into new loans, accruing yet more interest as debt levels rise. This is the “magic of compound interest” in a nutshell. No “real” economy in history has grown at a rate able to keep up with this financial dynamic. Indeed, payment of this interest by households and businesses leaves less to spend on goods and services, causing markets to shrink and investment and employment to be cut back.
Banks cannot make money ad infinitum by selling more and more credit – that is, indebting the non-financial economy more and more. Government officials such as Treasury Secretary Paulson or Federal Reserve Chairman Bernanke are professionally unable to acknowledge this problem, and it does not appear in most neoclassical or monetarist textbooks. But the underlying mathematics of compound interest are rediscovered in each generation, often prompted by the force majeur of financial crisis.
A generation ago, for instance, Hyman Minsky gained a following by describing what he aptly called the Ponzi stage of the business cycle. It was the phase in which debtors no longer were able to pay off their loans out of current income (as in Stage #1, where they earned enough to cover their interest and amortization charges), and indeed did not even earn enough to pay the interest charges (as in Stage #2), but had to borrow the money to pay the interest owed to their bankers and other creditors. In this Stage #3 the interest was simply added onto the debt, growing at a compound rate. It ends in a crash.
This was the flip side of the magic of compound interest – the belief that people can get rich by “putting money to work.” Money doesn’t really work, of course. When lent out, it extracts interest from the “real” production and consumption economy, that is, from the labor and industry that actually do the work. It is much like a tax, a monopoly rent levied by the financial sector. Yet this quasi-tax, this extractive financial rent (as Alfred Marshall explained over a century ago) is the dynamic that is supposed to enable corporate, state and local pension funds to pay for retirement simply out of stock market gains and bond investments – purely financially and hence at the expense of the economy at large whose employees are supposed to be gainers. This is the essence of “pension-fund capitalism,” a Ponzi-scheme variant of finance capitalism. Unfortunately, it is grounded in purely mathematical relationships that have little grounding in the “real” economy in which families and companies produce and consume.
Paulson’s bailout plan reflects a state of denial with regard to this dynamic. The debt overhead is self-aggravating, becoming less and less “solvable” and hence more of a quandary, that is, a problem with no visible solution. At least, no solution acceptable to Wall Street, and hence to Paulson and the Democratic and Republican congressional leaders. The banks and large swaths of the financial sector are broke from having made bad gambles in the belief that money could be made to “work” under conditions that shrink the underlying industrial economy and stifle wage gains, eroding the market for consumer goods. Debt deflation reduces sales and business activity in general, and hence corporate earnings. This depresses stock market and real estate prices, and hence the value of collateral pledged to back the economy’s debt overhead. Negative equity leads to bankruptcy and foreclosures.
By increasing America’s national debt from $5 trillion earlier this year to $13 trillion in almost a single swoop by taking on junk loans and other bad investments rather than letting them to under as traditionally has occurred in the “cleansing” culmination of business crashes (“cleansing” in the sense of clean slates for debts that cannot reasonably be paid), Paulson’s bailout actions increase the interest payments that the government must pay out of taxes or by borrowing (ore printing) yet more money. Someone must pay for bad debts and junk loans that are not wiped off the books. The government is now to take on the roll of debt collector to “make a profit for taxpayers” by going around and kneecapping the economy – which of course is comprised primarily of the “taxpayers” ostensibly being helped.
It is a con game. Financial gains have soared since 1980, but banks and institutional investors have not used them to finance tangible capital formation. They simply have recycled their receipt of interest (and credit-card fees and penalties that often amount to as much as interest) into yet new loans, extracting yet more interest and so on. This financial extraction leaves less personal and business income to spend on consumer goods, capital goods and services. Sales shrink, causing defaults as the economy is less able to pay its stipulated interest charges.
This phenomenon of debt deflation has occurred throughout history, not only over the modern business cycle but for centuries at a time. The most self-destructive example of financial short-termism is the decline and fall of the Roman Empire into debt bondage and ultimately into a Dark Age. The political turning point was the violent takeover of the Senate by oligarchic creditors who murdered the debtor-oriented reformers led by the Gracchi brothers in 133 BC, picking up benches and using them as rams to push the reformers over the cliff on which the political assembly was located. A similar violent overthrow occurred in Sparta a century earlier when its kings Agis and Cleomenes sought to annul debts so as to reverse the city-state’s economic polarization. The creditor oligarchy exiled and killed the kings, as Plutarch described in his Parallel Lives of the Illustrious Greeks and Romans. This used to be basic reading among educated people, but today these events have all but disappeared from most people’s historical memory. A knowledge of the evolution of economic structures has been replaced by a mere series of political personalities and military conquests.
The moral of ancient and modern history alike is that a critical point inevitably arrives at which economies either adopt hard creditor-oriented laws that impoverish the population and plunge downward socially and militarily, or save themselves by alleviating the debt burden. What is remarkable today is the almost total failure of political leaders to provide an alternative to Paulson’s bailout of Wall Street from the Bear Stearns bankruptcy down through the government takeover of Fannie Mae and Freddie Mac to last week’s giveaway to the banks. Nobody is even warning where this destructive decision is leading. Governments ostensibly representing “free market” philosophy are acting as the lender of last resort – not to households and business non-financial debtors, and not to wipe out the debt overhang in a Clean Slate, but to subsidize the excess of financial claims over and above the economy’s ability to pay and the market value of assets pledged as collateral.
This attempt is necessarily in vain. No amount of money can sustain the exponential growth of debt, not to mention the freely created credit and mutual gambles on derivatives and other financial claims whose volume has exploded in recent years. The government is committed to “bailing out” banks and other creditors whose loans and swaps have gone bad. It remains in denial with regard to the debt deflation that must be imposed on the rest of the economy to “make good” on these financial trends.
Here’s why the plan for the government to recover the money is whistling in the dark: It calls for banks to “earn their way out of debt” by selling more of their product – credit, that is, debt. Homeowners and other consumers, students and car buyers, credit card users and their employers – the “taxpayers” supposed to be helped – are to pay the repayment money to the banks, instead of using it to purchase goods and services. If they charge only 6 per cent per year, they will extract $93 billion in interest charges – $42 billion to pay the Treasury for its $700 billion, and another $51 billion for the Federal Reserve’s $850 billion in “cash for trash” loans.
If you are going to rob the government, I suppose the best strategy is simply to brazen it out. To listen to the mass media, there seemed no alternative but for Congress to ram the plan through just as Wall Street lobbyists had written, to “save the market from imminent meltdown,” refusing to hold hearings or take testimony from critics or listen to the hundreds of economists who have denounced the giveaway.
Hubris has reached a level of deception hardly seen since the 19th century’s giveaways to the railroad barons. “We didn’t want to be punitive,” Paulson explained in a Financial Times interview, as if the only alternative was an enormous gift. Europe did not engage in any such giveaway, yet he claimed that England and other European countries forced his hand by bailing out their banks, and that the Treasury simply wanted to keep U.S. banks competitive. Wringing his hands melodramatically, he assured the public on Monday that “We regret having to take these actions.” Banks went along with the pretense that the bailout was a worrisome socialist intrusion into the “free market,” not a giveaway to Wall Street in the plan drawn up by their own industry lobbyists. “Today’s actions are not what we ever wanted to do,” Paulson went on, “but today’s actions are what we must do to restore confidence to our financial system.” The confidence in question was a classic exercise in disinformation – a well-crafted con game.
Paulson depicted the government’s purchase of special non-voting stock as a European-style nationalization. But government’s appointed public representatives to the boards of European banks being bailed out. This has not happened in America. Bank lobbyists are reported to have approached Treasury to express their worry that their shareholdings might be diluted. But the Treasury-Democratic Party plan invests $250 billion in government credit in non-voting shares. If a recipient of this credit goes broke, the government is left the end of the line behind other creditors. Its “shares” are not real loans, but “preferred stock.” As Paulson explained on Monday: “Government owning a stake in any private U.S. company is objectionable to most Americans – me included.” So the government’s shares are not even real stock, but a special “non-voting” issue. The public stock investment will not even have voting power! So the government gets the worst of both worlds: Its “preferred stock” issue lacks the voting power that common stock has, while also lacking the standing for repayment in case of bankruptcy that bondholders enjoy. Instead of leading to more public oversight and regulation, the crisis thus has the opposite effect here: a capitulation to Wall Street, along lines that pave the ground for a much deeper debt crisis to come as the banks “earn their way out of debt” at the expense of the rest of the economy, which is receiving no debt relief!
Paulson shed the appropriate crocodile tears on behalf of homeowners and the middle class, whose interest he depicted as lying in ever-rising housing and stock market prices. “In recent weeks, the American people have felt the effects of a frozen financial system,” he explained. “They have seen reduced values in their retirement and investment accounts. They have worried about meeting payrolls and they have worried about losing their jobs.” He almost seemed about to use the timeworn widows and orphans cover story and beg Americans please not to unplug Granny from her life support system in the nursing home. We need to preserve the value of her stocks, and help everyone retire happily by restoring normal Wall Street financial engineering to make voters rich again.
European executives who steered their banks into the debt iceberg have been fired. England wiped out shareholders in Northern Rock last summer, and more recently Bradford and Bingley. But in America the culprits get to stay on. No bank stockholders are being wiped out here, despite the negative equity into which the worst risk-taking banks have fallen or the prosecutions brought against them for predatory lending, consumer fraud and related wrongdoing.
Government aid will be used to pay exorbitant salaries to the executives who drove these banks into insolvency. “Institutions that sell shares to the government will accept restrictions on executive compensation, including a clawback provision and a ban on golden parachutes,” Paulson pretended – only to qualify it by saying that the rule would apply only “during the period that Treasury holds equity issued through this program.” The executives can stay on and give themselves the usual retirement gifts after all, prompting Democratic Congressman Barney Frank to complain about how weak the Treasury restrictions are. “Compensation experts say that the provisions, though politically prudent to appease public anger, will probably have little real impact on how financial executives are paid in coming years. They predict banks will simply pay higher taxes and will find other creative ways of paying their executives as they see fit. Some say there could even be a sudden surge in compensation as soon as the government program ends, in a few years, leading to eye-popping numbers down the road. … When Congress limited the tax deductibility of cash salaries to $1 million, for example, it simply led to an explosion in stock options used as compensation and even higher total payouts.”
And speaking of stock options, the government shortchanged itself here too, despite its promises to ensure that it will shares in the gains when banks recover. Senator Schumer went so far as to assure voters that “under any capital injection plan that Treasury pursues, dividends must be eliminated, executive compensation must be constrained, and normal banking activities must be emphasized.” This was mostly hot air. England and other countries have insisted that banks not pay dividends until the government is reimbursed. The idea is to avoid using public money to pay dividends to existing shareholders and continued exorbitant salaries to their mismanagers! But the terms of the U.S. bailout is made simply call for banks not increase their dividend payouts – a policy they most likely would follow in any case in view of their earnings crunch.
Schumer verged on the ridiculous when he proclaimed: “We must operate in the same way any significant investor operates in these situations – when Warren Buffett invested in Goldman Sachs and General Electric in recent weeks, he demanded strict, but not onerous terms. The government must be similarly protective of taxpayer interests.” But Buffett obtained a much better deal for his $5 billion investment in Goldman Sachs, including warrants to buy its stock at a price below the going price when he helped rescue the company. Likewise in England, the government took stock ownership at low prices before the bailout, not at higher prices after it! But instead of exercising its warrants at the depressed prices where bank stocks stood at the time Paulson detailed the bailout terms, the U.S. Treasury would be able to exercise its warrants (equal to 15 percent of its investment) only at prices that were to be set after the banks had time to recover with the Treasury’s aid. Existing stockholders thus will benefit more than the government – which is why bank stocks soared on news of the bailout’s terms. So the government does not appear to be a good bargainer in the public interest. In fact, Paulson may be guilty of deliberate scuttling of the public interest that, as Treasury Secretary, he is supposed to defend.
Given his financial experience, Paulson had to know how deceptive his promise was in placing such emphasis on the government’s stock options, the sweetener that has made so many executives fabulously wealthy: “taxpayers will not only own shares that should be paid back with a reasonable return, but also will receive warrants for common shares in participating institutions,” he explained. But the “reasonable return” is only 5 per cent annually, just above what the government typically has to pay, not a rate reflecting anything like what the “free market” now charges Wall Street firms with negative equity. The government’s $250 billion in preferred stock will carry a dividend that rises to 9 per cent after five years, with no limit on how long the loan may be outstanding.
All I can say is, Wow! If only homeowners could get a similar break: a reduction in their interest rate to just 5 per cent, rising to a penalty rate of just 9 per cent – without the heavy penalties and late fees that Countrywide/Bank of America charges! By contrast, German banks that receive a public rescue will pay “a fee of at least 2 per cent annually of the amount guaranteed. The U.K. will charge 0.50 per cent plus the cost of default insurance on a bank's debt.”A British banker wrote to me that “the government offers 12 per cent preference shares, and ordinary shares at an absolutely huge discount to asset value to provide the cash.” But the U.S. Government agreed to exercise its stock options at the post-bailout price, not the price prior to rescue. It even gives up most of these options if the banks do repay the Treasury’s loan. On the excuse of encouraging private Wall Street investors to replace government “ownership” and “intrusion” into the marketplace, banks can “cut in half the number of common shares the government will eventually be able to purchase. That can be done if a bank sells stock by the end of 2009, and raises at least as much cash as the government is investing.”
These bailout terms suggest that what Wall Street wants is pretty much what colonialist Britain achieved for so many years in India and Africa: puppet leaders with an imperial political advisor, in America’s case a Secretary of the Treasury and a vice-regent as head of the Federal Reserve System. But what the rest of the economy needs is a genuinely free leader able to impose better and more equitable laws to write down debt, not build it up and bail out more bad loans. Within the present administration itself, Sheila Bair, head of the Federal Deposit Insurance Corporation, complained in a Wall Street Journal interview that she didn’t understand “Why there’s been such a political focus on making sure we’re not unduly helping borrowers but then we’re providing all this massive assistance at the institutional level.” She “described painstaking efforts made by lawmakers in crafting the federal Hope for Homeowners program to make sure it limited resale profits for borrowers who received affordable home loans,” by giving the government a share of the rising sales price.
The imbalance between creditor demands and debtors’ ability to pay is indeed the problem. Paulson claimed in his Monday address that he needed to get to the root of the economic problem. But in his view it is simply that the banks “are not positioned to lend as widely as is necessary to support our economy. Our goal is to see … that they can make more loans to businesses and consumers across the nation.” As he explained in his Financial Times interview, “for the first time you have seen an action that is systematic, that is getting at the root causes” of the financial crisis. But his perspective is remarkably narrow. It denies that the problem is debt above and beyond the ability of the economy at large to pay, and higher than the market price of property and assets pledged as collateral.
Creating a system for the banks to “earn their way out of debt” means creating yet more interest-bearing debt for the economy at large. Mortgage loans are what is supposed to restore high housing prices and office costs – precisely what caused the debt meltdown in the first place. Despite Paulson’s and Ms. Bair’s characterization of the present crisis as merely a liquidity problem, it is really a debt problem. The volume of real estate debt, auto debt, student loans, bank debt, pension debts by municipalities and states as well as private companies exceed their ability to pay.
Shortly after Paulson’s Monday speech a Dutch economics professor, Dirk Bezemer, wrote me that: “In my thinking I liken it to a Ponzi game where in the final stages the only way to keep things going a bit longer is to pump in more liquidity. That is a solution in the sense that it restores calm, but only in the short run. This is what we now see happening and – despite the 10 per cent stock market rally today – I am still bracing myself for the inevitable end of the Ponzi game – suddenly or as a long drawn out debt deflation.” He went on to explain what he and other associates of mine have been saying for many years now: “The actual solution is to separate the Ponzi from the non-Ponzi economy and let the pain be suffered in the first part so as to salvage what we can from the second. This means bailing out homeowners but not investment banks, etc. The qualification to this general approach is that those Ponzi game players whose demise is a real ‘system threat’ need support, but only with punitive conditionalities attached. And just like Third World countries, they won’t have a choice.
The problem of “debt pollution” is being “solved” by creating yet more debt, not by reducing its volume. Neither the Treasury nor Congress is helping to resolve this problem. The working assumption is that giving newly created government debt to the banks and Wall Street will lead to more lending to re-inflate the real estate and stock markets. But who will lend more to the one-sixth of U.S. homes already said to have fallen into negative equity territory? As debt deflation eats into the domestic market for goods and services, corporate sales and earnings will shrink, dragging down stock prices. Wall Street is in control, but its policies are so shortsighted that they are eroding the underlying economy – which is passing from democracy to oligarchy, and indeed it seems to a bipartisan financial kleptocracy.
Michael Hudson is a former Wall Street economist He was Dennis Kucinich’s Chief Economic Advisor in the recent Democratic primary presidential campaign, and has advised the U.S., Canadian, Mexican and Latvian governments, as well as the United Nations Institute for Training and Research (UNITAR). A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website, mh@michael-hudson.com
By MICHAEL HUDSON
Treasury Secretary Paulson’s bailout speech on Monday, October 13, poses some fundamental economic questions: What is the impact on the economy at large of this autumn’s unprecedented creation and giveaway of financial wealth to the wealthiest layer of the population? How long can the Treasury’s bailout of Wall Street (but not the rest of the economy!) sustain a debt overhead that is growing exponentially? Is there any limit to the amount of U.S. Treasury debt that the government can create and turn over to its major political campaign contributors?
In times past, national debt typically was run up by borrowing money from private lenders and spent on goods and services. The tendency was to absorb loanable funds and bid up interest rates on the one hand, while spending led to inflationary price increases for goods and services. But the present giveaway is different. Instead of money being borrowed or spent, interest-yielding bonds are simply being printed and turned over to the banks and other financial institutions. The hope is that they will lend out more credit (which will become more debt on the part of their customers), lowering interest rates while the money is used to bid up asset prices – real estate, stocks and bonds. Little commodity price inflation is expected from this behavior.
The main impact will be to reinforce the concentration of wealth in the hands of creditors (the wealthiest 10 percent of the population) rather than wiping out financial assets (and debts) through the bankruptcies that were occurring as a result of “market forces.” Is it too much to say that we are seeing the end of economic democracy and the emergence of a financial oligarchy – a self-serving class whose actions threaten to polarize society and, in the process, stifle economic growth and lead to the very bankruptcy that the bailout was supposed to prevent?
Everything that I have read in economic history leads me to believe that we are entering a nightmare transition era. The business cycle is essentially a financial cycle. Upswings tend to become economy-wide Ponzi schemes as banks and other creditors, savers and investors receive interest and plow it back into new loans, accruing yet more interest as debt levels rise. This is the “magic of compound interest” in a nutshell. No “real” economy in history has grown at a rate able to keep up with this financial dynamic. Indeed, payment of this interest by households and businesses leaves less to spend on goods and services, causing markets to shrink and investment and employment to be cut back.
Banks cannot make money ad infinitum by selling more and more credit – that is, indebting the non-financial economy more and more. Government officials such as Treasury Secretary Paulson or Federal Reserve Chairman Bernanke are professionally unable to acknowledge this problem, and it does not appear in most neoclassical or monetarist textbooks. But the underlying mathematics of compound interest are rediscovered in each generation, often prompted by the force majeur of financial crisis.
A generation ago, for instance, Hyman Minsky gained a following by describing what he aptly called the Ponzi stage of the business cycle. It was the phase in which debtors no longer were able to pay off their loans out of current income (as in Stage #1, where they earned enough to cover their interest and amortization charges), and indeed did not even earn enough to pay the interest charges (as in Stage #2), but had to borrow the money to pay the interest owed to their bankers and other creditors. In this Stage #3 the interest was simply added onto the debt, growing at a compound rate. It ends in a crash.
This was the flip side of the magic of compound interest – the belief that people can get rich by “putting money to work.” Money doesn’t really work, of course. When lent out, it extracts interest from the “real” production and consumption economy, that is, from the labor and industry that actually do the work. It is much like a tax, a monopoly rent levied by the financial sector. Yet this quasi-tax, this extractive financial rent (as Alfred Marshall explained over a century ago) is the dynamic that is supposed to enable corporate, state and local pension funds to pay for retirement simply out of stock market gains and bond investments – purely financially and hence at the expense of the economy at large whose employees are supposed to be gainers. This is the essence of “pension-fund capitalism,” a Ponzi-scheme variant of finance capitalism. Unfortunately, it is grounded in purely mathematical relationships that have little grounding in the “real” economy in which families and companies produce and consume.
Paulson’s bailout plan reflects a state of denial with regard to this dynamic. The debt overhead is self-aggravating, becoming less and less “solvable” and hence more of a quandary, that is, a problem with no visible solution. At least, no solution acceptable to Wall Street, and hence to Paulson and the Democratic and Republican congressional leaders. The banks and large swaths of the financial sector are broke from having made bad gambles in the belief that money could be made to “work” under conditions that shrink the underlying industrial economy and stifle wage gains, eroding the market for consumer goods. Debt deflation reduces sales and business activity in general, and hence corporate earnings. This depresses stock market and real estate prices, and hence the value of collateral pledged to back the economy’s debt overhead. Negative equity leads to bankruptcy and foreclosures.
By increasing America’s national debt from $5 trillion earlier this year to $13 trillion in almost a single swoop by taking on junk loans and other bad investments rather than letting them to under as traditionally has occurred in the “cleansing” culmination of business crashes (“cleansing” in the sense of clean slates for debts that cannot reasonably be paid), Paulson’s bailout actions increase the interest payments that the government must pay out of taxes or by borrowing (ore printing) yet more money. Someone must pay for bad debts and junk loans that are not wiped off the books. The government is now to take on the roll of debt collector to “make a profit for taxpayers” by going around and kneecapping the economy – which of course is comprised primarily of the “taxpayers” ostensibly being helped.
It is a con game. Financial gains have soared since 1980, but banks and institutional investors have not used them to finance tangible capital formation. They simply have recycled their receipt of interest (and credit-card fees and penalties that often amount to as much as interest) into yet new loans, extracting yet more interest and so on. This financial extraction leaves less personal and business income to spend on consumer goods, capital goods and services. Sales shrink, causing defaults as the economy is less able to pay its stipulated interest charges.
This phenomenon of debt deflation has occurred throughout history, not only over the modern business cycle but for centuries at a time. The most self-destructive example of financial short-termism is the decline and fall of the Roman Empire into debt bondage and ultimately into a Dark Age. The political turning point was the violent takeover of the Senate by oligarchic creditors who murdered the debtor-oriented reformers led by the Gracchi brothers in 133 BC, picking up benches and using them as rams to push the reformers over the cliff on which the political assembly was located. A similar violent overthrow occurred in Sparta a century earlier when its kings Agis and Cleomenes sought to annul debts so as to reverse the city-state’s economic polarization. The creditor oligarchy exiled and killed the kings, as Plutarch described in his Parallel Lives of the Illustrious Greeks and Romans. This used to be basic reading among educated people, but today these events have all but disappeared from most people’s historical memory. A knowledge of the evolution of economic structures has been replaced by a mere series of political personalities and military conquests.
The moral of ancient and modern history alike is that a critical point inevitably arrives at which economies either adopt hard creditor-oriented laws that impoverish the population and plunge downward socially and militarily, or save themselves by alleviating the debt burden. What is remarkable today is the almost total failure of political leaders to provide an alternative to Paulson’s bailout of Wall Street from the Bear Stearns bankruptcy down through the government takeover of Fannie Mae and Freddie Mac to last week’s giveaway to the banks. Nobody is even warning where this destructive decision is leading. Governments ostensibly representing “free market” philosophy are acting as the lender of last resort – not to households and business non-financial debtors, and not to wipe out the debt overhang in a Clean Slate, but to subsidize the excess of financial claims over and above the economy’s ability to pay and the market value of assets pledged as collateral.
This attempt is necessarily in vain. No amount of money can sustain the exponential growth of debt, not to mention the freely created credit and mutual gambles on derivatives and other financial claims whose volume has exploded in recent years. The government is committed to “bailing out” banks and other creditors whose loans and swaps have gone bad. It remains in denial with regard to the debt deflation that must be imposed on the rest of the economy to “make good” on these financial trends.
Here’s why the plan for the government to recover the money is whistling in the dark: It calls for banks to “earn their way out of debt” by selling more of their product – credit, that is, debt. Homeowners and other consumers, students and car buyers, credit card users and their employers – the “taxpayers” supposed to be helped – are to pay the repayment money to the banks, instead of using it to purchase goods and services. If they charge only 6 per cent per year, they will extract $93 billion in interest charges – $42 billion to pay the Treasury for its $700 billion, and another $51 billion for the Federal Reserve’s $850 billion in “cash for trash” loans.
If you are going to rob the government, I suppose the best strategy is simply to brazen it out. To listen to the mass media, there seemed no alternative but for Congress to ram the plan through just as Wall Street lobbyists had written, to “save the market from imminent meltdown,” refusing to hold hearings or take testimony from critics or listen to the hundreds of economists who have denounced the giveaway.
Hubris has reached a level of deception hardly seen since the 19th century’s giveaways to the railroad barons. “We didn’t want to be punitive,” Paulson explained in a Financial Times interview, as if the only alternative was an enormous gift. Europe did not engage in any such giveaway, yet he claimed that England and other European countries forced his hand by bailing out their banks, and that the Treasury simply wanted to keep U.S. banks competitive. Wringing his hands melodramatically, he assured the public on Monday that “We regret having to take these actions.” Banks went along with the pretense that the bailout was a worrisome socialist intrusion into the “free market,” not a giveaway to Wall Street in the plan drawn up by their own industry lobbyists. “Today’s actions are not what we ever wanted to do,” Paulson went on, “but today’s actions are what we must do to restore confidence to our financial system.” The confidence in question was a classic exercise in disinformation – a well-crafted con game.
Paulson depicted the government’s purchase of special non-voting stock as a European-style nationalization. But government’s appointed public representatives to the boards of European banks being bailed out. This has not happened in America. Bank lobbyists are reported to have approached Treasury to express their worry that their shareholdings might be diluted. But the Treasury-Democratic Party plan invests $250 billion in government credit in non-voting shares. If a recipient of this credit goes broke, the government is left the end of the line behind other creditors. Its “shares” are not real loans, but “preferred stock.” As Paulson explained on Monday: “Government owning a stake in any private U.S. company is objectionable to most Americans – me included.” So the government’s shares are not even real stock, but a special “non-voting” issue. The public stock investment will not even have voting power! So the government gets the worst of both worlds: Its “preferred stock” issue lacks the voting power that common stock has, while also lacking the standing for repayment in case of bankruptcy that bondholders enjoy. Instead of leading to more public oversight and regulation, the crisis thus has the opposite effect here: a capitulation to Wall Street, along lines that pave the ground for a much deeper debt crisis to come as the banks “earn their way out of debt” at the expense of the rest of the economy, which is receiving no debt relief!
Paulson shed the appropriate crocodile tears on behalf of homeowners and the middle class, whose interest he depicted as lying in ever-rising housing and stock market prices. “In recent weeks, the American people have felt the effects of a frozen financial system,” he explained. “They have seen reduced values in their retirement and investment accounts. They have worried about meeting payrolls and they have worried about losing their jobs.” He almost seemed about to use the timeworn widows and orphans cover story and beg Americans please not to unplug Granny from her life support system in the nursing home. We need to preserve the value of her stocks, and help everyone retire happily by restoring normal Wall Street financial engineering to make voters rich again.
European executives who steered their banks into the debt iceberg have been fired. England wiped out shareholders in Northern Rock last summer, and more recently Bradford and Bingley. But in America the culprits get to stay on. No bank stockholders are being wiped out here, despite the negative equity into which the worst risk-taking banks have fallen or the prosecutions brought against them for predatory lending, consumer fraud and related wrongdoing.
Government aid will be used to pay exorbitant salaries to the executives who drove these banks into insolvency. “Institutions that sell shares to the government will accept restrictions on executive compensation, including a clawback provision and a ban on golden parachutes,” Paulson pretended – only to qualify it by saying that the rule would apply only “during the period that Treasury holds equity issued through this program.” The executives can stay on and give themselves the usual retirement gifts after all, prompting Democratic Congressman Barney Frank to complain about how weak the Treasury restrictions are. “Compensation experts say that the provisions, though politically prudent to appease public anger, will probably have little real impact on how financial executives are paid in coming years. They predict banks will simply pay higher taxes and will find other creative ways of paying their executives as they see fit. Some say there could even be a sudden surge in compensation as soon as the government program ends, in a few years, leading to eye-popping numbers down the road. … When Congress limited the tax deductibility of cash salaries to $1 million, for example, it simply led to an explosion in stock options used as compensation and even higher total payouts.”
And speaking of stock options, the government shortchanged itself here too, despite its promises to ensure that it will shares in the gains when banks recover. Senator Schumer went so far as to assure voters that “under any capital injection plan that Treasury pursues, dividends must be eliminated, executive compensation must be constrained, and normal banking activities must be emphasized.” This was mostly hot air. England and other countries have insisted that banks not pay dividends until the government is reimbursed. The idea is to avoid using public money to pay dividends to existing shareholders and continued exorbitant salaries to their mismanagers! But the terms of the U.S. bailout is made simply call for banks not increase their dividend payouts – a policy they most likely would follow in any case in view of their earnings crunch.
Schumer verged on the ridiculous when he proclaimed: “We must operate in the same way any significant investor operates in these situations – when Warren Buffett invested in Goldman Sachs and General Electric in recent weeks, he demanded strict, but not onerous terms. The government must be similarly protective of taxpayer interests.” But Buffett obtained a much better deal for his $5 billion investment in Goldman Sachs, including warrants to buy its stock at a price below the going price when he helped rescue the company. Likewise in England, the government took stock ownership at low prices before the bailout, not at higher prices after it! But instead of exercising its warrants at the depressed prices where bank stocks stood at the time Paulson detailed the bailout terms, the U.S. Treasury would be able to exercise its warrants (equal to 15 percent of its investment) only at prices that were to be set after the banks had time to recover with the Treasury’s aid. Existing stockholders thus will benefit more than the government – which is why bank stocks soared on news of the bailout’s terms. So the government does not appear to be a good bargainer in the public interest. In fact, Paulson may be guilty of deliberate scuttling of the public interest that, as Treasury Secretary, he is supposed to defend.
Given his financial experience, Paulson had to know how deceptive his promise was in placing such emphasis on the government’s stock options, the sweetener that has made so many executives fabulously wealthy: “taxpayers will not only own shares that should be paid back with a reasonable return, but also will receive warrants for common shares in participating institutions,” he explained. But the “reasonable return” is only 5 per cent annually, just above what the government typically has to pay, not a rate reflecting anything like what the “free market” now charges Wall Street firms with negative equity. The government’s $250 billion in preferred stock will carry a dividend that rises to 9 per cent after five years, with no limit on how long the loan may be outstanding.
All I can say is, Wow! If only homeowners could get a similar break: a reduction in their interest rate to just 5 per cent, rising to a penalty rate of just 9 per cent – without the heavy penalties and late fees that Countrywide/Bank of America charges! By contrast, German banks that receive a public rescue will pay “a fee of at least 2 per cent annually of the amount guaranteed. The U.K. will charge 0.50 per cent plus the cost of default insurance on a bank's debt.”A British banker wrote to me that “the government offers 12 per cent preference shares, and ordinary shares at an absolutely huge discount to asset value to provide the cash.” But the U.S. Government agreed to exercise its stock options at the post-bailout price, not the price prior to rescue. It even gives up most of these options if the banks do repay the Treasury’s loan. On the excuse of encouraging private Wall Street investors to replace government “ownership” and “intrusion” into the marketplace, banks can “cut in half the number of common shares the government will eventually be able to purchase. That can be done if a bank sells stock by the end of 2009, and raises at least as much cash as the government is investing.”
These bailout terms suggest that what Wall Street wants is pretty much what colonialist Britain achieved for so many years in India and Africa: puppet leaders with an imperial political advisor, in America’s case a Secretary of the Treasury and a vice-regent as head of the Federal Reserve System. But what the rest of the economy needs is a genuinely free leader able to impose better and more equitable laws to write down debt, not build it up and bail out more bad loans. Within the present administration itself, Sheila Bair, head of the Federal Deposit Insurance Corporation, complained in a Wall Street Journal interview that she didn’t understand “Why there’s been such a political focus on making sure we’re not unduly helping borrowers but then we’re providing all this massive assistance at the institutional level.” She “described painstaking efforts made by lawmakers in crafting the federal Hope for Homeowners program to make sure it limited resale profits for borrowers who received affordable home loans,” by giving the government a share of the rising sales price.
The imbalance between creditor demands and debtors’ ability to pay is indeed the problem. Paulson claimed in his Monday address that he needed to get to the root of the economic problem. But in his view it is simply that the banks “are not positioned to lend as widely as is necessary to support our economy. Our goal is to see … that they can make more loans to businesses and consumers across the nation.” As he explained in his Financial Times interview, “for the first time you have seen an action that is systematic, that is getting at the root causes” of the financial crisis. But his perspective is remarkably narrow. It denies that the problem is debt above and beyond the ability of the economy at large to pay, and higher than the market price of property and assets pledged as collateral.
Creating a system for the banks to “earn their way out of debt” means creating yet more interest-bearing debt for the economy at large. Mortgage loans are what is supposed to restore high housing prices and office costs – precisely what caused the debt meltdown in the first place. Despite Paulson’s and Ms. Bair’s characterization of the present crisis as merely a liquidity problem, it is really a debt problem. The volume of real estate debt, auto debt, student loans, bank debt, pension debts by municipalities and states as well as private companies exceed their ability to pay.
Shortly after Paulson’s Monday speech a Dutch economics professor, Dirk Bezemer, wrote me that: “In my thinking I liken it to a Ponzi game where in the final stages the only way to keep things going a bit longer is to pump in more liquidity. That is a solution in the sense that it restores calm, but only in the short run. This is what we now see happening and – despite the 10 per cent stock market rally today – I am still bracing myself for the inevitable end of the Ponzi game – suddenly or as a long drawn out debt deflation.” He went on to explain what he and other associates of mine have been saying for many years now: “The actual solution is to separate the Ponzi from the non-Ponzi economy and let the pain be suffered in the first part so as to salvage what we can from the second. This means bailing out homeowners but not investment banks, etc. The qualification to this general approach is that those Ponzi game players whose demise is a real ‘system threat’ need support, but only with punitive conditionalities attached. And just like Third World countries, they won’t have a choice.
The problem of “debt pollution” is being “solved” by creating yet more debt, not by reducing its volume. Neither the Treasury nor Congress is helping to resolve this problem. The working assumption is that giving newly created government debt to the banks and Wall Street will lead to more lending to re-inflate the real estate and stock markets. But who will lend more to the one-sixth of U.S. homes already said to have fallen into negative equity territory? As debt deflation eats into the domestic market for goods and services, corporate sales and earnings will shrink, dragging down stock prices. Wall Street is in control, but its policies are so shortsighted that they are eroding the underlying economy – which is passing from democracy to oligarchy, and indeed it seems to a bipartisan financial kleptocracy.
Michael Hudson is a former Wall Street economist He was Dennis Kucinich’s Chief Economic Advisor in the recent Democratic primary presidential campaign, and has advised the U.S., Canadian, Mexican and Latvian governments, as well as the United Nations Institute for Training and Research (UNITAR). A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website, mh@michael-hudson.com
19 October 2008
How to become an epicurian hacker philosopher zen master.
Hat tip to Divided By Zer0. thx ace.
1. The world is full of fascinating problems waiting to be solved.
Being a hacker is lots of fun, but it's a kind of fun that takes lots of effort. The effort takes motivation. Successful athletes get their motivation from a kind of physical delight in making their bodies perform, in pushing themselves past their own physical limits. Similarly, to be a hacker you have to get a basic thrill from solving problems, sharpening your skills, and exercising your intelligence.
If you aren't the kind of person that feels this way naturally, you'll need to become one in order to make it as a hacker. Otherwise you'll find your hacking energy is sapped by distractions like sex, money, and social approval.
(You also have to develop a kind of faith in your own learning capacity — a belief that even though you may not know all of what you need to solve a problem, if you tackle just a piece of it and learn from that, you'll learn enough to solve the next piece — and so on, until you're done.)
2. No problem should ever have to be solved twice.
Creative brains are a valuable, limited resource. They shouldn't be wasted on re-inventing the wheel when there are so many fascinating new problems waiting out there.
To behave like a hacker, you have to believe that the thinking time of other hackers is precious — so much so that it's almost a moral duty for you to share information, solve problems and then give the solutions away just so other hackers can solve new problems instead of having to perpetually re-address old ones.
Note, however, that "No problem should ever have to be solved twice." does not imply that you have to consider all existing solutions sacred, or that there is only one right solution to any given problem. Often, we learn a lot about the problem that we didn't know before by studying the first cut at a solution. It's OK, and often necessary, to decide that we can do better. What's not OK is artificial technical, legal, or institutional barriers (like closed-source code) that prevent a good solution from being re-used and force people to re-invent wheels.
(You don't have to believe that you're obligated to give all your creative product away, though the hackers that do are the ones that get most respect from other hackers. It's consistent with hacker values to sell enough of it to keep you in food and rent and computers. It's fine to use your hacking skills to support a family or even get rich, as long as you don't forget your loyalty to your art and your fellow hackers while doing it.)
3. Boredom and drudgery are evil.
Hackers (and creative people in general) should never be bored or have to drudge at stupid repetitive work, because when this happens it means they aren't doing what only they can do — solve new problems. This wastefulness hurts everybody. Therefore boredom and drudgery are not just unpleasant but actually evil.
To behave like a hacker, you have to believe this enough to want to automate away the boring bits as much as possible, not just for yourself but for everybody else (especially other hackers).
(There is one apparent exception to this. Hackers will sometimes do things that may seem repetitive or boring to an observer as a mind-clearing exercise, or in order to acquire a skill or have some particular kind of experience you can't have otherwise. But this is by choice — nobody who can think should ever be forced into a situation that bores them.)
4. Freedom is good.
Hackers are naturally anti-authoritarian. Anyone who can give you orders can stop you from solving whatever problem you're being fascinated by — and, given the way authoritarian minds work, will generally find some appallingly stupid reason to do so. So the authoritarian attitude has to be fought wherever you find it, lest it smother you and other hackers.
(This isn't the same as fighting all authority. Children need to be guided and criminals restrained. A hacker may agree to accept some kinds of authority in order to get something he wants more than the time he spends following orders. But that's a limited, conscious bargain; the kind of personal surrender authoritarians want is not on offer.)
Authoritarians thrive on censorship and secrecy. And they distrust voluntary cooperation and information-sharing — they only like ‘cooperation’ that they control. So to behave like a hacker, you have to develop an instinctive hostility to censorship, secrecy, and the use of force or deception to compel responsible adults. And you have to be willing to act on that belief.
5. Attitude is no substitute for competence.
To be a hacker, you have to develop some of these attitudes. But copping an attitude alone won't make you a hacker, any more than it will make you a champion athlete or a rock star. Becoming a hacker will take intelligence, practice, dedication, and hard work.
Therefore, you have to learn to distrust attitude and respect competence of every kind. Hackers won't let posers waste their time, but they worship competence — especially competence at hacking, but competence at anything is valued. Competence at demanding skills that few can master is especially good, and competence at demanding skills that involve mental acuteness, craft, and concentration is best.
If you revere competence, you'll enjoy developing it in yourself — the hard work and dedication will become a kind of intense play rather than drudgery. That attitude is vital to becoming a hacker.
more
1. The world is full of fascinating problems waiting to be solved.
Being a hacker is lots of fun, but it's a kind of fun that takes lots of effort. The effort takes motivation. Successful athletes get their motivation from a kind of physical delight in making their bodies perform, in pushing themselves past their own physical limits. Similarly, to be a hacker you have to get a basic thrill from solving problems, sharpening your skills, and exercising your intelligence.
If you aren't the kind of person that feels this way naturally, you'll need to become one in order to make it as a hacker. Otherwise you'll find your hacking energy is sapped by distractions like sex, money, and social approval.
(You also have to develop a kind of faith in your own learning capacity — a belief that even though you may not know all of what you need to solve a problem, if you tackle just a piece of it and learn from that, you'll learn enough to solve the next piece — and so on, until you're done.)
2. No problem should ever have to be solved twice.
Creative brains are a valuable, limited resource. They shouldn't be wasted on re-inventing the wheel when there are so many fascinating new problems waiting out there.
To behave like a hacker, you have to believe that the thinking time of other hackers is precious — so much so that it's almost a moral duty for you to share information, solve problems and then give the solutions away just so other hackers can solve new problems instead of having to perpetually re-address old ones.
Note, however, that "No problem should ever have to be solved twice." does not imply that you have to consider all existing solutions sacred, or that there is only one right solution to any given problem. Often, we learn a lot about the problem that we didn't know before by studying the first cut at a solution. It's OK, and often necessary, to decide that we can do better. What's not OK is artificial technical, legal, or institutional barriers (like closed-source code) that prevent a good solution from being re-used and force people to re-invent wheels.
(You don't have to believe that you're obligated to give all your creative product away, though the hackers that do are the ones that get most respect from other hackers. It's consistent with hacker values to sell enough of it to keep you in food and rent and computers. It's fine to use your hacking skills to support a family or even get rich, as long as you don't forget your loyalty to your art and your fellow hackers while doing it.)
3. Boredom and drudgery are evil.
Hackers (and creative people in general) should never be bored or have to drudge at stupid repetitive work, because when this happens it means they aren't doing what only they can do — solve new problems. This wastefulness hurts everybody. Therefore boredom and drudgery are not just unpleasant but actually evil.
To behave like a hacker, you have to believe this enough to want to automate away the boring bits as much as possible, not just for yourself but for everybody else (especially other hackers).
(There is one apparent exception to this. Hackers will sometimes do things that may seem repetitive or boring to an observer as a mind-clearing exercise, or in order to acquire a skill or have some particular kind of experience you can't have otherwise. But this is by choice — nobody who can think should ever be forced into a situation that bores them.)
4. Freedom is good.
Hackers are naturally anti-authoritarian. Anyone who can give you orders can stop you from solving whatever problem you're being fascinated by — and, given the way authoritarian minds work, will generally find some appallingly stupid reason to do so. So the authoritarian attitude has to be fought wherever you find it, lest it smother you and other hackers.
(This isn't the same as fighting all authority. Children need to be guided and criminals restrained. A hacker may agree to accept some kinds of authority in order to get something he wants more than the time he spends following orders. But that's a limited, conscious bargain; the kind of personal surrender authoritarians want is not on offer.)
Authoritarians thrive on censorship and secrecy. And they distrust voluntary cooperation and information-sharing — they only like ‘cooperation’ that they control. So to behave like a hacker, you have to develop an instinctive hostility to censorship, secrecy, and the use of force or deception to compel responsible adults. And you have to be willing to act on that belief.
5. Attitude is no substitute for competence.
To be a hacker, you have to develop some of these attitudes. But copping an attitude alone won't make you a hacker, any more than it will make you a champion athlete or a rock star. Becoming a hacker will take intelligence, practice, dedication, and hard work.
Therefore, you have to learn to distrust attitude and respect competence of every kind. Hackers won't let posers waste their time, but they worship competence — especially competence at hacking, but competence at anything is valued. Competence at demanding skills that few can master is especially good, and competence at demanding skills that involve mental acuteness, craft, and concentration is best.
If you revere competence, you'll enjoy developing it in yourself — the hard work and dedication will become a kind of intense play rather than drudgery. That attitude is vital to becoming a hacker.
more
14 October 2008
The golden age lies ahead
I have to agree with London Banker, a more community minded soceity focused on effiency and local production lies ahead...
I was reminded yesterday that the vast bulk of “wealth” created during the Greenspan/Bernanke bubble years accrued to the very top percentiles of population – with many in the OECD middle class and lower class either stagnating or getting poorer as they mired themselves in unsustainable debt. While opportunity and employment grew strongly in emerging countries, there too the elites gained disproportionately as income inequalities surged. The crash of global financial markets therefore will have disproportionate effect on the elites, impoverishing them to a far greater extent, although it will be felt throughout society as employment, pensions, investments and public services contract.
Once we hit bottom of this downturn, some years hence in all probability, we may experience a democratisation of wealth and opportunity like none seen since the end of World War II when education reforms and unionisation laid the groundwork for the rise of the American and OECD middle classes. Those who have lost economic and political power during the boom years, are likely to organise and retake authority within economic and political systems during the bust years. The collapse of concentrated wealth in Wall Street will spur more collaborative capital formation and investment throughout the economy. This could provide reorientation of economic progress toward more equitable, sustainable and democratic outcomes in coming generations. I hope so, it’s the only bright spot of the week.
London banker
I was reminded yesterday that the vast bulk of “wealth” created during the Greenspan/Bernanke bubble years accrued to the very top percentiles of population – with many in the OECD middle class and lower class either stagnating or getting poorer as they mired themselves in unsustainable debt. While opportunity and employment grew strongly in emerging countries, there too the elites gained disproportionately as income inequalities surged. The crash of global financial markets therefore will have disproportionate effect on the elites, impoverishing them to a far greater extent, although it will be felt throughout society as employment, pensions, investments and public services contract.
Once we hit bottom of this downturn, some years hence in all probability, we may experience a democratisation of wealth and opportunity like none seen since the end of World War II when education reforms and unionisation laid the groundwork for the rise of the American and OECD middle classes. Those who have lost economic and political power during the boom years, are likely to organise and retake authority within economic and political systems during the bust years. The collapse of concentrated wealth in Wall Street will spur more collaborative capital formation and investment throughout the economy. This could provide reorientation of economic progress toward more equitable, sustainable and democratic outcomes in coming generations. I hope so, it’s the only bright spot of the week.
London banker
5 October 2008
Envious eyes watch China's rise
"CAN you save us? We're here to be rescued." That, in a nutshell, was the collective cry of a swarm of US and European bankers, auditors, consultants and industrialists thronging the cavernous halls of the colossal convention centre in Tianjin last weekend.
While the western delegates at the World Economic Forum's summer conference in the coastal port city that serves as the maritime entry to Beijing were confused, bemused and hyper-anxious about the financial crisis and its impact on the global economy, the Chinese were magisterially assured. Certain that they are the new masters of the universe - now or very soon.
The Chinese Premier, Wen Jiabao, made plain that his country's economy is not immune from the crisis. But, unlike the US and Europe, which are heading for recession or in it, China had put in place the monetary and regulatory measures to ensure continued growth.
China's growth in gross domestic product will not be the 11.9 per cent of last year but still, at 8 or 9 per cent in 2008 and the same in 2009, is still a boost to global trade. Inflation, which peaked at more than 8 per cent in February, has been brought down to 4.9 per cent. And if Chinese exports - enjoying a 170 billion ($300 billion) surplus with the EU alone last year - are experiencing slower growth and even heading for a decline, Mr Wen promised to continue the shift towards domestic consumption and to open the economy further.
But will this happen? Will Mr Wen deliver on his oft-repeated promise to reform China's capital markets? As Stephen Roach, the Asia chairman of Morgan Stanley, told delegates, Chinese consumer spending is, at about 35 per cent of GDP, less than half that of the US where the "binge" of the past 14 years has come to an end, leaving the US consumer "toast, done, finished". The US, he said gloomily, "will have its version of Japan's lost decade".
There were two striking aspects to the Tianjin discussions among policymakers. First, the Chinese authorities were blunt that it was up to the US to sort out the mess it had created, putting at risk, as Mr Wen told CNN, "the safety and security of Chinese capital". Chinese investments in US and European financial assets have gone sour in the toxic meltdown, so the country's leaders are demanding global co-operation to fix the regulatory framework, with Liu Mingkang, the top banking supervisor, exclaiming with unusual ferocity that US lending practices had been ridiculous and demanding a large say in any reforms.
Second, the Europeans were vastly outnumbered by the Americans. David Hale, a Chicago-based consultant and economist, told a group of us: "The Chinese and Americans are drawn to each other; they have a lot in common - entrepreneurial, can-do."
One of the most prominent European delegates there was Tom Enders, the chief executive of Airbus. Over the weekend he and Mr Wen opened the plane-maker's first non-European final assembly line - in a $US600 million ($770 million) plant on a cabbage field that took less than 15 months to build and is now the most modern in the world.
Mr Enders denies that Airbus is putting all its eggs in the Chinese basket but he and his executive team are investing heavily in the prospect of sustained growth - not just in the economy but in air traffic as consumers grow richer. They expect Chinese airlines to order more than 3000 new aircraft in the next 20 years and Airbus to capture more than half of those. Although the new plant involves little technology transfer, Airbus executives do not rule out co-operating more fully with the Chinese in years to come.
One senior European diplomat gave a gloomy forecast of how China's pace of development would affect the European market. "The Chinese are investing heavily in R&D and moving rapidly up the technological value-chain, but we Europeans are in danger of falling behind and failing to invest in research. We could swiftly drop out of the premier league as far as they are concerned."
It was a shuddering thought at the start of a week in which the US financial crisis swept the globe engulfing several European banks. If the diplomat's fears are proven right, there could be worse to come in other sectors, too.
Guardian News & Media
While the western delegates at the World Economic Forum's summer conference in the coastal port city that serves as the maritime entry to Beijing were confused, bemused and hyper-anxious about the financial crisis and its impact on the global economy, the Chinese were magisterially assured. Certain that they are the new masters of the universe - now or very soon.
The Chinese Premier, Wen Jiabao, made plain that his country's economy is not immune from the crisis. But, unlike the US and Europe, which are heading for recession or in it, China had put in place the monetary and regulatory measures to ensure continued growth.
China's growth in gross domestic product will not be the 11.9 per cent of last year but still, at 8 or 9 per cent in 2008 and the same in 2009, is still a boost to global trade. Inflation, which peaked at more than 8 per cent in February, has been brought down to 4.9 per cent. And if Chinese exports - enjoying a 170 billion ($300 billion) surplus with the EU alone last year - are experiencing slower growth and even heading for a decline, Mr Wen promised to continue the shift towards domestic consumption and to open the economy further.
But will this happen? Will Mr Wen deliver on his oft-repeated promise to reform China's capital markets? As Stephen Roach, the Asia chairman of Morgan Stanley, told delegates, Chinese consumer spending is, at about 35 per cent of GDP, less than half that of the US where the "binge" of the past 14 years has come to an end, leaving the US consumer "toast, done, finished". The US, he said gloomily, "will have its version of Japan's lost decade".
There were two striking aspects to the Tianjin discussions among policymakers. First, the Chinese authorities were blunt that it was up to the US to sort out the mess it had created, putting at risk, as Mr Wen told CNN, "the safety and security of Chinese capital". Chinese investments in US and European financial assets have gone sour in the toxic meltdown, so the country's leaders are demanding global co-operation to fix the regulatory framework, with Liu Mingkang, the top banking supervisor, exclaiming with unusual ferocity that US lending practices had been ridiculous and demanding a large say in any reforms.
Second, the Europeans were vastly outnumbered by the Americans. David Hale, a Chicago-based consultant and economist, told a group of us: "The Chinese and Americans are drawn to each other; they have a lot in common - entrepreneurial, can-do."
One of the most prominent European delegates there was Tom Enders, the chief executive of Airbus. Over the weekend he and Mr Wen opened the plane-maker's first non-European final assembly line - in a $US600 million ($770 million) plant on a cabbage field that took less than 15 months to build and is now the most modern in the world.
Mr Enders denies that Airbus is putting all its eggs in the Chinese basket but he and his executive team are investing heavily in the prospect of sustained growth - not just in the economy but in air traffic as consumers grow richer. They expect Chinese airlines to order more than 3000 new aircraft in the next 20 years and Airbus to capture more than half of those. Although the new plant involves little technology transfer, Airbus executives do not rule out co-operating more fully with the Chinese in years to come.
One senior European diplomat gave a gloomy forecast of how China's pace of development would affect the European market. "The Chinese are investing heavily in R&D and moving rapidly up the technological value-chain, but we Europeans are in danger of falling behind and failing to invest in research. We could swiftly drop out of the premier league as far as they are concerned."
It was a shuddering thought at the start of a week in which the US financial crisis swept the globe engulfing several European banks. If the diplomat's fears are proven right, there could be worse to come in other sectors, too.
Guardian News & Media
7 September 2008
China: Beyond the Bird's Nest
by Jennifer Barry, September 5, 2008
Print
I don’t usually follow the Olympics closely, but these Games were different. The 2008 Beijing Olympics were an event of great and unusual cultural, political, and economic significance to the world. Most commentary has naturally focused on the athletics, and I have not seen much serious analysis on these other topics. I decided to highlight the economic issues behind the Olympics.
In the press, the Beijing Games were repeatedly termed China’s “coming out party,” but I think that phrase trivializes what the nation has accomplished. China is no mere debutante dressed up for a ball, she is a powerful woman seeking global respect. She wants to regain the pride that was lost during the humiliation of the Opium War, when Britain not only forced China to pay for the illegal drugs she had destroyed, but also coerced her to give major territorial, legal and trade concessions.
The status of China is radically changed today. The nation has enormous stockpiles of money from its manufacturing might, and the larger-than-life spectacles in the opening ceremony give a small demonstration on the power of 1.3 billion people when they work toward a common goal. China does not merely have a dominant Olympic team, but it is the third country to have a successful manned spaceflight.
As Bob Costas pointed out in his interview of President Bush, America no longer has much leverage when it comes to pressuring the Chinese government. Much of the U.S. manufacturing base was outsourced to China years ago. America’s trade deficit so far in 2008 is approximately US $481 billion. Even the 35% drop in the U.S. Dollar Index since 2002, and the controlled increase in the yuan has not been enough to make most American exports competitive with Chinese products.
The U.S. economy is particularly vulnerable to a politically motivated sell-off of assets by a sovereign wealth fund, like the one run by China. According to a Congressional report released in January, “foreign investors now hold slightly less than 50% of the publicly held and publicly traded U.S. Treasury securities, 25% of corporate bonds, and about 12% of U.S. corporate stocks.” Overseas investors control over 44% of the U.S. national debt.
These dangers to the financial system are not just theoretical. Since China has approximately $1 trillion in dollar denominated assets, last year two officials threatened the “nuclear option” of dollar sales if the Bush Administration did not reduce the level of political pressure.
Then in August, Yu Yongding, the former advisor to the Chinese central bank, warned the Treasury Department not to let Freddie and Fannie fail. He stated that if “international investors are not compensated adequately, the consequences will be catastrophic,” implying retribution by China. The nation has been selling GSE bonds this summer, not trusting the implied backing of the U.S. government.
I believe the economic actions of the Chinese government demonstrate its attempt to be mindful of the past, both its pitfalls and its glories. While it won’t be bullied by other nations, the policy of economic decentralization shows it is trying to avoid the catastrophe of one misguided ruler sending the nation down the wrong path. Unbridled capitalism is bursting out all over the country under the slogan of Deng Xiaoping, “Poverty is not socialism. To be rich is glorious.” The ruling Communist Party could therefore justify liberalization of the economy without the political reform that one would expect to accompany it, as the Communists were not about to loosen their grip on power.
While China has incredible potential in its huge population and manufacturing base, it also faces huge challenges. In order to feed and provide jobs for over a billion people, China now suffers from air pollution, deforestation, lack of clean water and other signs of environmental damage. China is now a net importer of food and energy. Most of the rural residents are poor and uneducated, and unrest over ethnic and economic issues simmers in the background. All these issues could seriously derail the spread of prosperity.
However, one of China’s traditional strong suits is planning. If they make intelligent decisions on handling growth similar to their policy of economic liberalization, the country will have become the dominant power of the 21st century. On the other hand, another Cultural Revolution would be disastrous.
One of the reasons that commodities have declined so sharply is the mistaken belief that China must fall into a recession when the developed countries do. This is unlikely for several reasons. China's GDP grew 11.4% in 2007, so in order for a recession to occur (which requires negative growth), their economy would have to suffer a massive crash.
In addition, China restricted industrial activity this summer to lower pollution levels and save energy for the Beijing Olympics. These constraints contributed to the seasonal weakness in commodities, but the resumption of factories will lead to a jump in demand. The nation is still urbanizing and industrializing, so it has a backlog of infrastructure projects to complete which will require tons of base metals and energy.
Even if the West were to suffer a depression as bad as the Great Depression, 75% of the workforce would still be employed. If a sharp drop in demand occurred, China could still keep its population working by spending its current account surplus on developing the countryside, like FDR did with the Works Progress Administration in the 1930s. China is no longer dependent on income and goodwill from Western nations to keep its economy afloat.
The Chinese saw the 2008 Beijing Olympics as their opportunity to send a message to the world about their reemergence. They set the tone for their global interaction with themes of diversity, harmony, and openness. Chinese society is rapidly evolving and while it is not without flaws, their success at reinventing themselves has been breathtaking. Although nominally Communist, investment great Jim Rogers calls the Chinese the “best capitalists in the world.” China is becoming a new superpower, and must be taken seriously. Nations must decide if they will struggle against China's rising strength, or work in harmony with the Chinese.
Copyright © 2008 Jennifer Barry
I don’t usually follow the Olympics closely, but these Games were different. The 2008 Beijing Olympics were an event of great and unusual cultural, political, and economic significance to the world. Most commentary has naturally focused on the athletics, and I have not seen much serious analysis on these other topics. I decided to highlight the economic issues behind the Olympics.
In the press, the Beijing Games were repeatedly termed China’s “coming out party,” but I think that phrase trivializes what the nation has accomplished. China is no mere debutante dressed up for a ball, she is a powerful woman seeking global respect. She wants to regain the pride that was lost during the humiliation of the Opium War, when Britain not only forced China to pay for the illegal drugs she had destroyed, but also coerced her to give major territorial, legal and trade concessions.
The status of China is radically changed today. The nation has enormous stockpiles of money from its manufacturing might, and the larger-than-life spectacles in the opening ceremony give a small demonstration on the power of 1.3 billion people when they work toward a common goal. China does not merely have a dominant Olympic team, but it is the third country to have a successful manned spaceflight.
As Bob Costas pointed out in his interview of President Bush, America no longer has much leverage when it comes to pressuring the Chinese government. Much of the U.S. manufacturing base was outsourced to China years ago. America’s trade deficit so far in 2008 is approximately US $481 billion. Even the 35% drop in the U.S. Dollar Index since 2002, and the controlled increase in the yuan has not been enough to make most American exports competitive with Chinese products.
The U.S. economy is particularly vulnerable to a politically motivated sell-off of assets by a sovereign wealth fund, like the one run by China. According to a Congressional report released in January, “foreign investors now hold slightly less than 50% of the publicly held and publicly traded U.S. Treasury securities, 25% of corporate bonds, and about 12% of U.S. corporate stocks.” Overseas investors control over 44% of the U.S. national debt.
These dangers to the financial system are not just theoretical. Since China has approximately $1 trillion in dollar denominated assets, last year two officials threatened the “nuclear option” of dollar sales if the Bush Administration did not reduce the level of political pressure.
Then in August, Yu Yongding, the former advisor to the Chinese central bank, warned the Treasury Department not to let Freddie and Fannie fail. He stated that if “international investors are not compensated adequately, the consequences will be catastrophic,” implying retribution by China. The nation has been selling GSE bonds this summer, not trusting the implied backing of the U.S. government.
I believe the economic actions of the Chinese government demonstrate its attempt to be mindful of the past, both its pitfalls and its glories. While it won’t be bullied by other nations, the policy of economic decentralization shows it is trying to avoid the catastrophe of one misguided ruler sending the nation down the wrong path. Unbridled capitalism is bursting out all over the country under the slogan of Deng Xiaoping, “Poverty is not socialism. To be rich is glorious.” The ruling Communist Party could therefore justify liberalization of the economy without the political reform that one would expect to accompany it, as the Communists were not about to loosen their grip on power.
While China has incredible potential in its huge population and manufacturing base, it also faces huge challenges. In order to feed and provide jobs for over a billion people, China now suffers from air pollution, deforestation, lack of clean water and other signs of environmental damage. China is now a net importer of food and energy. Most of the rural residents are poor and uneducated, and unrest over ethnic and economic issues simmers in the background. All these issues could seriously derail the spread of prosperity.
However, one of China’s traditional strong suits is planning. If they make intelligent decisions on handling growth similar to their policy of economic liberalization, the country will have become the dominant power of the 21st century. On the other hand, another Cultural Revolution would be disastrous.
One of the reasons that commodities have declined so sharply is the mistaken belief that China must fall into a recession when the developed countries do. This is unlikely for several reasons. China's GDP grew 11.4% in 2007, so in order for a recession to occur (which requires negative growth), their economy would have to suffer a massive crash.
In addition, China restricted industrial activity this summer to lower pollution levels and save energy for the Beijing Olympics. These constraints contributed to the seasonal weakness in commodities, but the resumption of factories will lead to a jump in demand. The nation is still urbanizing and industrializing, so it has a backlog of infrastructure projects to complete which will require tons of base metals and energy.
Even if the West were to suffer a depression as bad as the Great Depression, 75% of the workforce would still be employed. If a sharp drop in demand occurred, China could still keep its population working by spending its current account surplus on developing the countryside, like FDR did with the Works Progress Administration in the 1930s. China is no longer dependent on income and goodwill from Western nations to keep its economy afloat.
The Chinese saw the 2008 Beijing Olympics as their opportunity to send a message to the world about their reemergence. They set the tone for their global interaction with themes of diversity, harmony, and openness. Chinese society is rapidly evolving and while it is not without flaws, their success at reinventing themselves has been breathtaking. Although nominally Communist, investment great Jim Rogers calls the Chinese the “best capitalists in the world.” China is becoming a new superpower, and must be taken seriously. Nations must decide if they will struggle against China's rising strength, or work in harmony with the Chinese.
Copyright © 2008 Jennifer Barry
31 July 2008
Starved and Stuffed -- Eaten Up
Eaten Up
Raj Patel’s book Stuffed and Starved predicted the current global food crisis - spiralling food prices, starvation and obesity. Ed Pilkington meets the soothsayer of agro-economics and talks about what will happen when all the food finally runs out
By Ed Pilkington
29/07/08 "The Guardian" -- - -There is a passage towards the end of Raj Patel’s book, Stuffed and Starved, which elevates its author to the rank of soothsayer. He wrote it at the beginning of 2007, well before the roar of anger about rising food prices that resounded across the planet and that he so uncannily and accurately predicted.
The passage begins with Patel’s summary of earlier sections of the book in which he depicts the wasteland, as he calls it, of the modern food system. It is a system that destroys rural communities, poisons poor city dwellers, is inhumane to animals, demands unsustainable levels of use of fossil fuels and water, contributes to global warming, spreads disease and limits our sensuousness and compassion. As if that litany wasn’t enough, he then adds this: “Perhaps most ironic, although it is controlled by some of the most powerful people on the planet, the food system is inherently weak. It has systemic and structural vulnerabilities that lie close to the surface of our daily lives. All it takes to expose them is a gentle jolt.”
When he wrote that passage, Patel had in mind his native Britain and its occasional history of food crises. There was the oil crisis of 1973 that prompted panic-buying in the shops. Or 2000, when protesting truckers blockaded the oil refineries and the shelves again came close to emptying. Those events inspired Patel to contemplate a startling question: “What would have happened,” he wrote, “had all the food on the shelves run out?”
He left that question dangling in the book. But he got thinking about it again as he was on a tour of Australia last August promoting the book. As he travelled from Perth to Melbourne and then Sydney he kept being asked the same question: how did the drought that by then was already biting hard on Australian farmers as well as on consumers who were suffering rising prices, fit into his critique of modern food production? As he faced his audiences, it began to look to Patel, in a tentative, creeping way, that the gentle jolt he had written about was really happening.
“What was weird was that the stories I was hearing about drought and farmers in desperation were very similar to the stories that had been told to me in India a couple of years before. They were all about small independent farmers up to their eyeballs in debt. They had borrowed hugely to make a go of it, and then there’d been a shock - in Australia it was drought, in India it might be harvest failure, in Britain foot-and-mouth. It only takes one small shock.”
And then the agricultural slurry really hit the fan. The first intimations of something truly out of the ordinary came in Mexico in early 2007, before he had finished writing Stuffed and Starved. There were reports of unrest in some of the larger cities about rising food prices, partly related to the decision of the US government to divert huge quantities of corn to ethanol production, in an attempt to reduce dependence on foreign oil. Then early this year some eight months after Patel had finished writing about the risk of gentle jolts - the so-called “silent tsunami” began. Food prices appeared to be out of control, spiralling up by 68% in the case of rice in the first four months of this year alone. Wheat and corn almost doubled in a year.
Such hikes on the costs of the basics of life hit the urban poor in the cities of the developing world hardest, and the misery was soon made manifest in the form of unrest. Impromptu protests grew into angry marches and then erupted into food riots. In Haiti six people died and the prime minister was ousted from power. Two days of rioting ensued in Egypt and 24 people died in Cameroon. The pattern repeated itself right across the developing world, from Guyana and Bolivia to Ivory Coast, Surinam and Senegal, Yemen, Uzbekistan, Bangladesh and South Korea. Wild events in turn prompted wild official responses. Vietnam introduced a night curfew on harvesting machines to stop illegal raiding of the fields; any Filipino caught hoarding rice was threatened with life in jail, Malaysia cancelled all public building works and switched instead to stockpiling food. Even the rich western world was hit. Food prices in the UK have risen almost 7% year on year, shaking the government’s economic confidence. And if any doubts remained about the severity of this crisis, Wal-Mart, the supermarket goliath that stands at the pinnacle of the modern food system, announced it was imposing a four-bag limit for rice on its cash-and-carry customers to stop a run on supplies.
For millions of people around the world the soaring prices have spelt disaster - the World Bank has put the number of people who have been pushed into hunger at 100 million. But for one person, the impact has been strangely and paradoxically counter-factual. When Stuffed and Starved - Patel’s first book - came out last August, he and his publishers imagined it would at best enjoy a specialist readership among globalisation activists attuned to issues of corporate greed and exploitation. But the food crisis has turned it from being a niche read into the literary equivalent of a crystal ball. As a result, the demand has in Patel’s words “gone bonkers”. Reprints have been ordered in Britain, the US and Spain, deals done for editions in Italy, China and South Korea and half a dozen translations are under discussion. “If I had been this popular at school I’d be a different man today,” he quips. His analysis of the crisis, as the author of the book that predicted it all, is now hotly sought after. Or as Patel, who has the savvy Londoner’s gift for self-deprecation, puts it: “Spank me, and call me Cassandra!”
We meet for lunch in a restaurant within a Big Mac’s throw from Capitol Hill in Washington. It’s trivial I know, but it’s impossible not to be curious - a little intimidated even - about what Patel will order from the menu. He points out in his book that the livestock industry is responsible for 18% of greenhouse gas emissions, more than cars. So will he go for the hanger steak?
He asks for a pizza with goat’s cheese and mushrooms, but when I ask whether his choice was politically or ethically motivated, he laughs. “I haven’t had a steak in my life. Growing up in a Hindu household, I clamoured for hamburgers like any other kid and my parents said: ‘Oh, if you must.’ But they drew the line at steak.”
Patel sees in himself, and his eating habits, a tale in microcosm of the globalisation he writes about. His family on his mother’s side were civil servants in Kenya, and tin miners in Fiji on his father’s side. They both were drawn to the mother country, arriving in London in the 60s, where they met. It later became a cliche, but they were among the first to open up “Mr Patel’s corner shop”, working 18-hour days in an era before 24-hour supermarkets. The earliest memories of their son, who was born in 1972, are of playing among the fags, mags and sweets in the shop in Golders Green. It would be too neat, I hazard, to suggest that his parents were forced to close down the shop because of competition with the supermarkets? “My dad did very well for himself,” he replies, speaking with a high-velocity stammer. “But they were certainly driven out. You can’t compete any more, the corner shop is a dying industry.”
Despite those difficulties, the Patels did proud by their son, sending him to a north London grammar school, then to Oxford where he studied PPE, and finally to Berkeley in California. Along the way, he became interested in, and engaged with, the anti-globalisation movement. He was among the thousands who protested in Seattle against the World Trade Organisation (WTO) in 1999, and it was there that he came face to face with what he calls the “march of the farmers’ movement” in the form of arguably the world’s largest network of independent organisations, La Via Campesina, which represents around 150 million farm workers and smallholders across the globe. “I was struck by their sophisticated and detailed critique of the WTO. Seven years before Seattle they had already translated the draft text of the Dunkel report [on trade] into Kannada and were distributing it in the fields.”
He began delving more deeply into the subject of trade, food policy and agricultural resistance as an analyst at Food First, a radical thinktank in Oakland, where an idea for a book emerged. It began life as a meditation on choice, or the lack of it - Coke v Pepsi, McDonald’s v Wendy’s. Its working title was Choice Cuts. Over the next three years he travelled to research the book from South Africa, Europe and South Korea to Brazil, Mexico and the US. In the process the thesis grew bigger in scope and more refined. Its focus was no longer just a lack of consumer choice, it embraced an entire world food system that can consign 800 million - more than one in 10 people on earth - to hunger while simultaneously inflicting obesity on an even greater number, 1 billion people. Hence the book’s new, and in his opinion better, title.
His analysis shows how communities around the planet have been disempowered by a system that appears to offer an abundance of cheap food, but in reality dictates unhealthy and limited choices to an overworked and underpaid workforce that cannot afford any better. “The figure that often stuns people outside the US when I tour with the book is that 20% of American fast-food meals are eaten in cars. People are incredulous and ask: is that because Americans so love their cars? But living here you see how hard people work, for a pittance, with no healthcare, no decent education, not even a hint of a pension - so it’s not surprising that the one hot meal you eat a day you eat off your lap. That’s where the food system becomes a lifestyle.”
Much of the broad argument in Stuffed and Starved will be familiar to those who have followed the debate on globalisation - how the liberalisation of trade has created a vast global market for heavily subsidised American and European agricultural products at the expense of local growers in the developing world; how relentless pressure to drive down food prices over 30 years has seen rich ecosystems replaced by monocultures that rely on oil-powered machines, chemical fertilisers and pesticides to drive up yields; and how international corporations and supermarkets that control the flow of technologies and of food itself have been the beneficiaries. It is a portrait of the agro-economics of the madhouse. “While we think our food is made for us, we are in fact being made for our food,” he says.
Take India, which he describes as a storm of contradictions. “India has the most people in the Forbes top 10 billionaires list, but in the past decade the average calorie intake of the poorest has fallen. There are levels of hunger we haven’t seen since the British left, combined with the world’s highest levels of type 2 diabetes from the pressure of eating too much of the wrong kinds of food.”
Or take the UK, where food producers are now less than one per cent of the workforce. The government may be committed to reducing global warming emissions, but meanwhile a quarter of all trucks on UK roads are carrying food and the average British family is driving 136 miles a year to buy it.
Or America. This is the country whose farmers, food giants and supermarkets benefit most from the global system. Such is the might of US food corporations that the double arches of McDonald’s are more widely recognised as a symbol than the cross. Wal-Mart is the largest private employer not only in the US, but also in Mexico where Walmex takes in three out of every 10 pesos Mexicans spend on food. Yet amid such largesse 35 million Americans don’t know where their next meal is coming from. “You are hearing these amazing stories of working American families adopting coping strategies that I learned about in development sociology - skipping meals, growing their own fruit and vegetables, giving up on meat. That’s happening right here right now.”
Which brings us back to the current food crisis. What surprised him, he says, is not that the food system felt a gentle jolt - after all, he predicted it - but that it has been pummelled all at once by a perfect storm of troubles. “We could have seen it coming because of the biofuels policy, which has always struck me as absurd, or the rising price of oil, or increased consumption of meat, or weird things happening with climate. But all these things happened at once, and that sent food prices through the roof.”
And this time, there were none of the safeguards of grain stores, strategic food reserves, or import barriers that used to protect vulnerable economies from the vagaries of world markets. They had all been removed in the liberalisation craze of the past few decades.
His prognosis is that in the short term at least the crisis will carry on biting. Major institutions such as the World Bank persist, he says, in responding to events with the same failed policies of liberalisation of markets. “There’s no reason why food prices should come down significantly. And if they don’t, and there’s no real impetus for governments to redistribute spending power, people will continue to take to the streets.”
In the medium term, he’s confident that change is in the air. He detects a growing seriousness and willingness to embrace new ideas in some unexpected quarters. The reason we are chatting in a DC restaurant is that Patel has just that morning been giving testimony before a Congressional committee investigating the World Bank’s approach to food and development. With representatives from the World Bank, UN, Monsanto and other monoliths listening in, he told the committee that industrial agriculture could no longer be relied upon to feed the world and that we need a shift towards less fossil-fuel dependent farming and a return to rich ecosystems based on natural crop rotations and organic fertilisers. “Those are the kinds of things that are anathema to the World Bank and development analysts at the moment, and Congress normally doesn’t want to hear them. That they called on someone like me is very weird, but very heartening.”
In the longer term, though, even the current food crisis may seem mild. The world population is set to rise from about six billion today to nine billion by 2050. Global warming is likely to disrupt growing patterns and extend drought across Africa and the American south-west. Water resources for irrigation will be depleted. If we are already in a perfect storm, then we lack the terminology to describe what lies ahead.
I put it to him that any attempt to change world food production is like a game of poker with extraordinarily high stakes: it not only has to meet the massive yield of industrial farming - and say what you like about the modern food system, the one thing it has done is churn out mountains of the stuff relatively cheaply - it also has to raise it to support three billion extra hungry mouths. Can his alternative model achieve that?
“We’ve got an energy problem, a fuel problem, a water problem and global warming all coming at us,” he replies. “Monoculture is heavily C02-emitting, water and fossil-fuel dependent. Clearly we can’t carry on as we are. We can and we must meet this challenge with something new. So the question is what?”
That’s not entirely an answer to my question. There is a slightly starry-eyed quality to Stuffed and Starved that is also striking about its author in the flesh. When he talks of alternative farming techniques that offer a way forward, the examples he chooses come from Cuba, Venezuela and a project in Oakland that follows in the footsteps of the Black Panthers. That’s hardly going to play well with sceptical American policy-makers.
The other element that is lacking from his prognosis is any role for science and technological innovation in the search for solutions. Where technology does appear it is in the role of villain - GM crops are a ruse by Monsanto and others to secure corporate profits at the expense of the rural poor.
But isn’t there a place for responsibly directed science in steering us through the coming maelstrom? Couldn’t GM, for instance, prove to be crucial in developing drought-resistant crops as global warming tightens its grip?
“I’m big on science, married to a neuroscientist, I love it,” he insists, protesting perhaps a little too much. “I like the way Cuban science approaches the problem. They say you can have GM crops if you can prove there’s no better way of doing things. So they don’t have GM crops, because there always is a better way.”
Not exactly a ringing endorsement for the value of science. But then that is not where Patel’s heart lies. For that you have to look to politics, and political resistance. The soothsayer’s next book, he says, will be a look at the individuals and communities who are refusing to bow down to the current global system. He will soon be starting another journey to meet them. On his list: the slum-dwellers of Durban and the homeless Americans who run the University of the Poor. He sees in them a lesson for us all. “We are victims,” he says as he polishes off his pizza and prepares to fly back to San Francisco where he now lives. “If we are choosing between Coke or Pepsi, Burger King or McDonald’s, that’s not choice. We should stop feeling guilty about that. We should start feeling angry”.
Ed Pilkington is the Guardian’s New York correspondent. He is a former national and foreign editor of the paper, and author of Beyond the Mother Country.
Raj Patel’s book Stuffed and Starved predicted the current global food crisis - spiralling food prices, starvation and obesity. Ed Pilkington meets the soothsayer of agro-economics and talks about what will happen when all the food finally runs out
By Ed Pilkington
29/07/08 "The Guardian" -- - -There is a passage towards the end of Raj Patel’s book, Stuffed and Starved, which elevates its author to the rank of soothsayer. He wrote it at the beginning of 2007, well before the roar of anger about rising food prices that resounded across the planet and that he so uncannily and accurately predicted.
The passage begins with Patel’s summary of earlier sections of the book in which he depicts the wasteland, as he calls it, of the modern food system. It is a system that destroys rural communities, poisons poor city dwellers, is inhumane to animals, demands unsustainable levels of use of fossil fuels and water, contributes to global warming, spreads disease and limits our sensuousness and compassion. As if that litany wasn’t enough, he then adds this: “Perhaps most ironic, although it is controlled by some of the most powerful people on the planet, the food system is inherently weak. It has systemic and structural vulnerabilities that lie close to the surface of our daily lives. All it takes to expose them is a gentle jolt.”
When he wrote that passage, Patel had in mind his native Britain and its occasional history of food crises. There was the oil crisis of 1973 that prompted panic-buying in the shops. Or 2000, when protesting truckers blockaded the oil refineries and the shelves again came close to emptying. Those events inspired Patel to contemplate a startling question: “What would have happened,” he wrote, “had all the food on the shelves run out?”
He left that question dangling in the book. But he got thinking about it again as he was on a tour of Australia last August promoting the book. As he travelled from Perth to Melbourne and then Sydney he kept being asked the same question: how did the drought that by then was already biting hard on Australian farmers as well as on consumers who were suffering rising prices, fit into his critique of modern food production? As he faced his audiences, it began to look to Patel, in a tentative, creeping way, that the gentle jolt he had written about was really happening.
“What was weird was that the stories I was hearing about drought and farmers in desperation were very similar to the stories that had been told to me in India a couple of years before. They were all about small independent farmers up to their eyeballs in debt. They had borrowed hugely to make a go of it, and then there’d been a shock - in Australia it was drought, in India it might be harvest failure, in Britain foot-and-mouth. It only takes one small shock.”
And then the agricultural slurry really hit the fan. The first intimations of something truly out of the ordinary came in Mexico in early 2007, before he had finished writing Stuffed and Starved. There were reports of unrest in some of the larger cities about rising food prices, partly related to the decision of the US government to divert huge quantities of corn to ethanol production, in an attempt to reduce dependence on foreign oil. Then early this year some eight months after Patel had finished writing about the risk of gentle jolts - the so-called “silent tsunami” began. Food prices appeared to be out of control, spiralling up by 68% in the case of rice in the first four months of this year alone. Wheat and corn almost doubled in a year.
Such hikes on the costs of the basics of life hit the urban poor in the cities of the developing world hardest, and the misery was soon made manifest in the form of unrest. Impromptu protests grew into angry marches and then erupted into food riots. In Haiti six people died and the prime minister was ousted from power. Two days of rioting ensued in Egypt and 24 people died in Cameroon. The pattern repeated itself right across the developing world, from Guyana and Bolivia to Ivory Coast, Surinam and Senegal, Yemen, Uzbekistan, Bangladesh and South Korea. Wild events in turn prompted wild official responses. Vietnam introduced a night curfew on harvesting machines to stop illegal raiding of the fields; any Filipino caught hoarding rice was threatened with life in jail, Malaysia cancelled all public building works and switched instead to stockpiling food. Even the rich western world was hit. Food prices in the UK have risen almost 7% year on year, shaking the government’s economic confidence. And if any doubts remained about the severity of this crisis, Wal-Mart, the supermarket goliath that stands at the pinnacle of the modern food system, announced it was imposing a four-bag limit for rice on its cash-and-carry customers to stop a run on supplies.
For millions of people around the world the soaring prices have spelt disaster - the World Bank has put the number of people who have been pushed into hunger at 100 million. But for one person, the impact has been strangely and paradoxically counter-factual. When Stuffed and Starved - Patel’s first book - came out last August, he and his publishers imagined it would at best enjoy a specialist readership among globalisation activists attuned to issues of corporate greed and exploitation. But the food crisis has turned it from being a niche read into the literary equivalent of a crystal ball. As a result, the demand has in Patel’s words “gone bonkers”. Reprints have been ordered in Britain, the US and Spain, deals done for editions in Italy, China and South Korea and half a dozen translations are under discussion. “If I had been this popular at school I’d be a different man today,” he quips. His analysis of the crisis, as the author of the book that predicted it all, is now hotly sought after. Or as Patel, who has the savvy Londoner’s gift for self-deprecation, puts it: “Spank me, and call me Cassandra!”
We meet for lunch in a restaurant within a Big Mac’s throw from Capitol Hill in Washington. It’s trivial I know, but it’s impossible not to be curious - a little intimidated even - about what Patel will order from the menu. He points out in his book that the livestock industry is responsible for 18% of greenhouse gas emissions, more than cars. So will he go for the hanger steak?
He asks for a pizza with goat’s cheese and mushrooms, but when I ask whether his choice was politically or ethically motivated, he laughs. “I haven’t had a steak in my life. Growing up in a Hindu household, I clamoured for hamburgers like any other kid and my parents said: ‘Oh, if you must.’ But they drew the line at steak.”
Patel sees in himself, and his eating habits, a tale in microcosm of the globalisation he writes about. His family on his mother’s side were civil servants in Kenya, and tin miners in Fiji on his father’s side. They both were drawn to the mother country, arriving in London in the 60s, where they met. It later became a cliche, but they were among the first to open up “Mr Patel’s corner shop”, working 18-hour days in an era before 24-hour supermarkets. The earliest memories of their son, who was born in 1972, are of playing among the fags, mags and sweets in the shop in Golders Green. It would be too neat, I hazard, to suggest that his parents were forced to close down the shop because of competition with the supermarkets? “My dad did very well for himself,” he replies, speaking with a high-velocity stammer. “But they were certainly driven out. You can’t compete any more, the corner shop is a dying industry.”
Despite those difficulties, the Patels did proud by their son, sending him to a north London grammar school, then to Oxford where he studied PPE, and finally to Berkeley in California. Along the way, he became interested in, and engaged with, the anti-globalisation movement. He was among the thousands who protested in Seattle against the World Trade Organisation (WTO) in 1999, and it was there that he came face to face with what he calls the “march of the farmers’ movement” in the form of arguably the world’s largest network of independent organisations, La Via Campesina, which represents around 150 million farm workers and smallholders across the globe. “I was struck by their sophisticated and detailed critique of the WTO. Seven years before Seattle they had already translated the draft text of the Dunkel report [on trade] into Kannada and were distributing it in the fields.”
He began delving more deeply into the subject of trade, food policy and agricultural resistance as an analyst at Food First, a radical thinktank in Oakland, where an idea for a book emerged. It began life as a meditation on choice, or the lack of it - Coke v Pepsi, McDonald’s v Wendy’s. Its working title was Choice Cuts. Over the next three years he travelled to research the book from South Africa, Europe and South Korea to Brazil, Mexico and the US. In the process the thesis grew bigger in scope and more refined. Its focus was no longer just a lack of consumer choice, it embraced an entire world food system that can consign 800 million - more than one in 10 people on earth - to hunger while simultaneously inflicting obesity on an even greater number, 1 billion people. Hence the book’s new, and in his opinion better, title.
His analysis shows how communities around the planet have been disempowered by a system that appears to offer an abundance of cheap food, but in reality dictates unhealthy and limited choices to an overworked and underpaid workforce that cannot afford any better. “The figure that often stuns people outside the US when I tour with the book is that 20% of American fast-food meals are eaten in cars. People are incredulous and ask: is that because Americans so love their cars? But living here you see how hard people work, for a pittance, with no healthcare, no decent education, not even a hint of a pension - so it’s not surprising that the one hot meal you eat a day you eat off your lap. That’s where the food system becomes a lifestyle.”
Much of the broad argument in Stuffed and Starved will be familiar to those who have followed the debate on globalisation - how the liberalisation of trade has created a vast global market for heavily subsidised American and European agricultural products at the expense of local growers in the developing world; how relentless pressure to drive down food prices over 30 years has seen rich ecosystems replaced by monocultures that rely on oil-powered machines, chemical fertilisers and pesticides to drive up yields; and how international corporations and supermarkets that control the flow of technologies and of food itself have been the beneficiaries. It is a portrait of the agro-economics of the madhouse. “While we think our food is made for us, we are in fact being made for our food,” he says.
Take India, which he describes as a storm of contradictions. “India has the most people in the Forbes top 10 billionaires list, but in the past decade the average calorie intake of the poorest has fallen. There are levels of hunger we haven’t seen since the British left, combined with the world’s highest levels of type 2 diabetes from the pressure of eating too much of the wrong kinds of food.”
Or take the UK, where food producers are now less than one per cent of the workforce. The government may be committed to reducing global warming emissions, but meanwhile a quarter of all trucks on UK roads are carrying food and the average British family is driving 136 miles a year to buy it.
Or America. This is the country whose farmers, food giants and supermarkets benefit most from the global system. Such is the might of US food corporations that the double arches of McDonald’s are more widely recognised as a symbol than the cross. Wal-Mart is the largest private employer not only in the US, but also in Mexico where Walmex takes in three out of every 10 pesos Mexicans spend on food. Yet amid such largesse 35 million Americans don’t know where their next meal is coming from. “You are hearing these amazing stories of working American families adopting coping strategies that I learned about in development sociology - skipping meals, growing their own fruit and vegetables, giving up on meat. That’s happening right here right now.”
Which brings us back to the current food crisis. What surprised him, he says, is not that the food system felt a gentle jolt - after all, he predicted it - but that it has been pummelled all at once by a perfect storm of troubles. “We could have seen it coming because of the biofuels policy, which has always struck me as absurd, or the rising price of oil, or increased consumption of meat, or weird things happening with climate. But all these things happened at once, and that sent food prices through the roof.”
And this time, there were none of the safeguards of grain stores, strategic food reserves, or import barriers that used to protect vulnerable economies from the vagaries of world markets. They had all been removed in the liberalisation craze of the past few decades.
His prognosis is that in the short term at least the crisis will carry on biting. Major institutions such as the World Bank persist, he says, in responding to events with the same failed policies of liberalisation of markets. “There’s no reason why food prices should come down significantly. And if they don’t, and there’s no real impetus for governments to redistribute spending power, people will continue to take to the streets.”
In the medium term, he’s confident that change is in the air. He detects a growing seriousness and willingness to embrace new ideas in some unexpected quarters. The reason we are chatting in a DC restaurant is that Patel has just that morning been giving testimony before a Congressional committee investigating the World Bank’s approach to food and development. With representatives from the World Bank, UN, Monsanto and other monoliths listening in, he told the committee that industrial agriculture could no longer be relied upon to feed the world and that we need a shift towards less fossil-fuel dependent farming and a return to rich ecosystems based on natural crop rotations and organic fertilisers. “Those are the kinds of things that are anathema to the World Bank and development analysts at the moment, and Congress normally doesn’t want to hear them. That they called on someone like me is very weird, but very heartening.”
In the longer term, though, even the current food crisis may seem mild. The world population is set to rise from about six billion today to nine billion by 2050. Global warming is likely to disrupt growing patterns and extend drought across Africa and the American south-west. Water resources for irrigation will be depleted. If we are already in a perfect storm, then we lack the terminology to describe what lies ahead.
I put it to him that any attempt to change world food production is like a game of poker with extraordinarily high stakes: it not only has to meet the massive yield of industrial farming - and say what you like about the modern food system, the one thing it has done is churn out mountains of the stuff relatively cheaply - it also has to raise it to support three billion extra hungry mouths. Can his alternative model achieve that?
“We’ve got an energy problem, a fuel problem, a water problem and global warming all coming at us,” he replies. “Monoculture is heavily C02-emitting, water and fossil-fuel dependent. Clearly we can’t carry on as we are. We can and we must meet this challenge with something new. So the question is what?”
That’s not entirely an answer to my question. There is a slightly starry-eyed quality to Stuffed and Starved that is also striking about its author in the flesh. When he talks of alternative farming techniques that offer a way forward, the examples he chooses come from Cuba, Venezuela and a project in Oakland that follows in the footsteps of the Black Panthers. That’s hardly going to play well with sceptical American policy-makers.
The other element that is lacking from his prognosis is any role for science and technological innovation in the search for solutions. Where technology does appear it is in the role of villain - GM crops are a ruse by Monsanto and others to secure corporate profits at the expense of the rural poor.
But isn’t there a place for responsibly directed science in steering us through the coming maelstrom? Couldn’t GM, for instance, prove to be crucial in developing drought-resistant crops as global warming tightens its grip?
“I’m big on science, married to a neuroscientist, I love it,” he insists, protesting perhaps a little too much. “I like the way Cuban science approaches the problem. They say you can have GM crops if you can prove there’s no better way of doing things. So they don’t have GM crops, because there always is a better way.”
Not exactly a ringing endorsement for the value of science. But then that is not where Patel’s heart lies. For that you have to look to politics, and political resistance. The soothsayer’s next book, he says, will be a look at the individuals and communities who are refusing to bow down to the current global system. He will soon be starting another journey to meet them. On his list: the slum-dwellers of Durban and the homeless Americans who run the University of the Poor. He sees in them a lesson for us all. “We are victims,” he says as he polishes off his pizza and prepares to fly back to San Francisco where he now lives. “If we are choosing between Coke or Pepsi, Burger King or McDonald’s, that’s not choice. We should stop feeling guilty about that. We should start feeling angry”.
Ed Pilkington is the Guardian’s New York correspondent. He is a former national and foreign editor of the paper, and author of Beyond the Mother Country.
Toward a Type 1 civilization
Along with energy policy, political and economic systems must also evolve.
By Michael Shermer
July 22, 2008
Our civilization is fast approaching a tipping point. Humans will need to make the transition from nonrenewable fossil fuels as the primary source of our energy to renewable energy sources that will allow us to flourish into the future. Failure to make that transformation will doom us to the endless political machinations and economic conflicts that have plagued civilization for the last half-millennium.
We need new technologies to be sure, but without evolved political and economic systems, we cannot become what we must. And what is that? A Type 1 civilization. Let me explain.
In a 1964 article on searching for extraterrestrial civilizations, the Soviet astronomer Nikolai Kardashev suggested using radio telescopes to detect energy signals from other solar systems in which there might be civilizations of three levels of advancement: Type 1 can harness all of the energy of its home planet; Type 2 can harvest all of the power of its sun; and Type 3 can master the energy from its entire galaxy.
Based on our energy efficiency at the time, in 1973 the astronomer Carl Sagan estimated that Earth represented a Type 0.7 civilization on a Type 0 to Type 1 scale. (More current assessments put us at 0.72.) As the Kardashevian scale is logarithmic -- where any increase in power consumption requires a huge leap in power production -- we have a ways before 1.0.
Fossil fuels won't get us there. Renewable sources such as solar, wind and geothermal are a good start, and coupled to nuclear power could eventually get us to Type 1.
Yet the hurdles are not solely -- or even primarily -- technological ones. We have a proven track record of achieving remarkable scientific solutions to survival problems -- as long as there is the political will and economic opportunities that allow the solutions to flourish. In other words, we need a Type 1 polity and economy, along with the technology, in order to become a Type 1 civilization.
We are close. If we use the Kardashevian scale to plot humankind's progress, it shows how far we've come in the long history of our species from Type 0, and it leads us to see what a Type 1 civilization might be like:
Type 0.1: Fluid groups of hominids living in Africa. Technology consists of primitive stone tools. Intra-group conflicts are resolved through dominance hierarchy, and between-group violence is common.
Type 0.2: Bands of roaming hunter-gatherers that form kinship groups, with a mostly horizontal political system and egalitarian economy.
Type 0.3: Tribes of individuals linked through kinship but with a more settled and agrarian lifestyle. The beginnings of a political hierarchy and a primitive economic division of labor.
Type 0.4: Chiefdoms consisting of a coalition of tribes into a single hierarchical political unit with a dominant leader at the top, and with the beginnings of significant economic inequalities and a division of labor in which lower-class members produce food and other products consumed by non-producing upper-class members.
Type 0.5: The state as a political coalition with jurisdiction over a well-defined geographical territory and its corresponding inhabitants, with a mercantile economy that seeks a favorable balance of trade in a win-lose game against other states.
Type 0.6: Empires extend their control over peoples who are not culturally, ethnically or geographically within their normal jurisdiction, with a goal of economic dominance over rival empires.
Type 0.7: Democracies that divide power over several institutions, which are run by elected officials voted for by some citizens. The beginnings of a market economy.
Type 0.8: Liberal democracies that give the vote to all citizens. Markets that begin to embrace a nonzero, win-win economic game through free trade with other states.
Type 0.9: Democratic capitalism, the blending of liberal democracy and free markets, now spreading across the globe through democratic movements in developing nations and broad trading blocs such as the European Union.
Type 1.0: Globalism that includes worldwide wireless Internet access, with all knowledge digitized and available to everyone. A completely global economy with free markets in which anyone can trade with anyone else without interference from states or governments. A planet where all states are democracies in which everyone has the franchise.
The forces at work that could prevent us from making the great leap forward to a Type 1 civilization are primarily political and economic. The resistance by nondemocratic states to turning power over to the people is considerable, especially in theocracies whose leaders would prefer we all revert to Type 0.4 chiefdoms. The opposition toward a global economy is substantial, even in the industrialized West, where economic tribalism still dominates the thinking of most politicians, intellectuals and citizens.
For thousands of years, we have existed in a zero-sum tribal world in which a gain for one tribe, state or nation meant a loss for another tribe, state or nation -- and our political and economic systems have been designed for use in that win-lose world. But we have the opportunity to live in a win-win world and become a Type 1 civilization by spreading liberal democracy and free trade, in which the scientific and technological benefits will flourish. I am optimistic because in the evolutionist's deep time and the historian's long view, the trend lines toward achieving Type 1 status tick inexorably upward.
That is change we can believe in.
Michael Shermer is an adjunct professor in the School of Politics and Economics at Claremont Graduate University, the publisher of Skeptic magazine and a monthly columnist for Scientific American. His latest book is "The Mind of the Market."
By Michael Shermer
July 22, 2008
Our civilization is fast approaching a tipping point. Humans will need to make the transition from nonrenewable fossil fuels as the primary source of our energy to renewable energy sources that will allow us to flourish into the future. Failure to make that transformation will doom us to the endless political machinations and economic conflicts that have plagued civilization for the last half-millennium.
We need new technologies to be sure, but without evolved political and economic systems, we cannot become what we must. And what is that? A Type 1 civilization. Let me explain.
In a 1964 article on searching for extraterrestrial civilizations, the Soviet astronomer Nikolai Kardashev suggested using radio telescopes to detect energy signals from other solar systems in which there might be civilizations of three levels of advancement: Type 1 can harness all of the energy of its home planet; Type 2 can harvest all of the power of its sun; and Type 3 can master the energy from its entire galaxy.
Based on our energy efficiency at the time, in 1973 the astronomer Carl Sagan estimated that Earth represented a Type 0.7 civilization on a Type 0 to Type 1 scale. (More current assessments put us at 0.72.) As the Kardashevian scale is logarithmic -- where any increase in power consumption requires a huge leap in power production -- we have a ways before 1.0.
Fossil fuels won't get us there. Renewable sources such as solar, wind and geothermal are a good start, and coupled to nuclear power could eventually get us to Type 1.
Yet the hurdles are not solely -- or even primarily -- technological ones. We have a proven track record of achieving remarkable scientific solutions to survival problems -- as long as there is the political will and economic opportunities that allow the solutions to flourish. In other words, we need a Type 1 polity and economy, along with the technology, in order to become a Type 1 civilization.
We are close. If we use the Kardashevian scale to plot humankind's progress, it shows how far we've come in the long history of our species from Type 0, and it leads us to see what a Type 1 civilization might be like:
Type 0.1: Fluid groups of hominids living in Africa. Technology consists of primitive stone tools. Intra-group conflicts are resolved through dominance hierarchy, and between-group violence is common.
Type 0.2: Bands of roaming hunter-gatherers that form kinship groups, with a mostly horizontal political system and egalitarian economy.
Type 0.3: Tribes of individuals linked through kinship but with a more settled and agrarian lifestyle. The beginnings of a political hierarchy and a primitive economic division of labor.
Type 0.4: Chiefdoms consisting of a coalition of tribes into a single hierarchical political unit with a dominant leader at the top, and with the beginnings of significant economic inequalities and a division of labor in which lower-class members produce food and other products consumed by non-producing upper-class members.
Type 0.5: The state as a political coalition with jurisdiction over a well-defined geographical territory and its corresponding inhabitants, with a mercantile economy that seeks a favorable balance of trade in a win-lose game against other states.
Type 0.6: Empires extend their control over peoples who are not culturally, ethnically or geographically within their normal jurisdiction, with a goal of economic dominance over rival empires.
Type 0.7: Democracies that divide power over several institutions, which are run by elected officials voted for by some citizens. The beginnings of a market economy.
Type 0.8: Liberal democracies that give the vote to all citizens. Markets that begin to embrace a nonzero, win-win economic game through free trade with other states.
Type 0.9: Democratic capitalism, the blending of liberal democracy and free markets, now spreading across the globe through democratic movements in developing nations and broad trading blocs such as the European Union.
Type 1.0: Globalism that includes worldwide wireless Internet access, with all knowledge digitized and available to everyone. A completely global economy with free markets in which anyone can trade with anyone else without interference from states or governments. A planet where all states are democracies in which everyone has the franchise.
The forces at work that could prevent us from making the great leap forward to a Type 1 civilization are primarily political and economic. The resistance by nondemocratic states to turning power over to the people is considerable, especially in theocracies whose leaders would prefer we all revert to Type 0.4 chiefdoms. The opposition toward a global economy is substantial, even in the industrialized West, where economic tribalism still dominates the thinking of most politicians, intellectuals and citizens.
For thousands of years, we have existed in a zero-sum tribal world in which a gain for one tribe, state or nation meant a loss for another tribe, state or nation -- and our political and economic systems have been designed for use in that win-lose world. But we have the opportunity to live in a win-win world and become a Type 1 civilization by spreading liberal democracy and free trade, in which the scientific and technological benefits will flourish. I am optimistic because in the evolutionist's deep time and the historian's long view, the trend lines toward achieving Type 1 status tick inexorably upward.
That is change we can believe in.
Michael Shermer is an adjunct professor in the School of Politics and Economics at Claremont Graduate University, the publisher of Skeptic magazine and a monthly columnist for Scientific American. His latest book is "The Mind of the Market."
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