Friday, February 25, 2011

Libya, Kaddafi, and the Marketing of Dictators

By Numerian

Nobody knows, which is precisely why leadership everywhere is addled and uncertain how to respond. What they should most fear, however, is someone who connects together the riots in Greece several years ago, the demonstrations in Iceland, and the events throughout the Middle East, with the protests in Wisconsin, and who then draws a picture which makes sense and which everyone can understand.

Driving in from the airport to the center of Tripoli, as you pass Pepsi-Cola Road and approach the old city, you see one billboard after another featuring Mohammar Qaddafi. He has different guises, depending on whether he wishes to be Col. Qaddafi in military uniform, or tribal Qaddafi in flowing robes, or religious Qaddafi in the turban and cloak of an imam. Overlooking the central square is Qaddafi the modernizer of Libya, sporting brownish-yellow sunglasses that might have been stylish in 1969 when Qaddafi first came to power in a military coup, but today give him the appearance of trying too hard to be young.

I wondered why there were no pictures of Qaddafi in a hard hat standing next to an oil rig. It is, after all, the miles and miles of oil derricks and refineries situated south of Tripoli, and at the edge of the great expanse of Saharan desert comprising most of the country, that give Libya its wealth and Qaddafi his importance on the world stage. Libya is a founding member of OPEC, and it was Qaddafi’s alliance with the Shah of Iran that spurred OPEC in 1979 to increase oil prices four fold. What the Shah wanted out of such an arrangement was wealth; what Qaddafi wanted was the attention of the West to the plight of the great mass of dispossessed Arabs – the Palestinians. How ironic, therefore, that both leaders have met their end by ignoring a whole group of other dispossessed Arabs: the poor, the hungry, the homeless, the unemployed, and the powerless millions who toiled daily under the billboard visages of their “leader”.

Qaddafi Meets the People

I think we can pretty much speak of Qaddafi in the past tense. He squandered whatever shred of respect he still had from the people he ruled by mowing them down with machine guns this past week. His only hope for survival rests on some faction of the military willing to support him and suppress public demonstrations with whatever brutality is necessary. Even so, there is no guarantee that faction can stay in power, and certainly not without offering up Qaddafi himself as proof of their willingness to bring a new leader to Libya, flying a flag of “reform”

How odd that it should be Col. Qaddafi who has fallen victim to a true revolution, not the phony revolution he talked about endlessly when he extolled the coup d’etat he and some other junior officers staged to oust old King Idris over forty years ago. Qaddafi did everything possible to be the perfect Arab ruler. He spoke up for the Palestinians and against the Israelis, he supported terrorist groups engaged in attacks against Israel and the West, and he behaved himself in public as a pious Muslim. There are rumors that alcohol can be had at some embassy private parties, but it is otherwise impossible to buy in Libya (until recently you could not buy a Coca-Cola, since Pepsi has had the soft drink franchise for years). There is not one pig in the entire country; it is an unclean animal. Qaddafi did his best to ward off a Muslim Brotherhood uprising by being more Muslim and more revolutionary than any who might challenge him on religious grounds.

What more, then, could the people want from him? Why have they been amassing this past week in public squares, taking bullets to the chest from snipers, allowing themselves to be run down by tanks, or strafed by fighter jets? Libyans have lived under this man for forty years. What is it now that provides them the courage to risk death in order to get rid of Mohammar Qaddafi?

The Longer They Rule, the Quicker They Fall?

People certainly can be shocked into action. It had to be a shock to the people of Libya to see within the space of a month the lifetime rulers of their neighbors to the west and the east of them both deposed because of civic demonstrations. Who would have thought you could get rid of someone like Hosni Mubarak merely by taking control of public spaces? Part of the shock must have been the realization that these dictators for life, holding in their hands all important social and political controls, and unafraid to use the most pernicious tools of persuasion, could so suddenly be prompted to give it all up and flee the country. Of course, to be accurate, everyone recognizes that the demonstrators didn’t really depose these dictators; they forced the military to withdraw support and deliver not so much a coup d’etat, as the coup de grace.

In Tunisia, the well-spring of these upheavals, the spark of revolution came from the self-immolation of a young man unable to find any job. This is a reality that resonates deeply with young men and women throughout the Arab world, and a common language allows them to shares their experiences from Morocco to Syria. A restaurant I like to frequent in Damascus is rather like a sports bar, with good pizza and several televisions available showing different football matches. Viewers are encouraged to text in their opinions of the match, and a scroll on the bottom of each screen shows who has just sent a message. It is an unending parade of Middle East countries: Syria, Jordan, Iraq, Egypt, Libya, Algeria, Bahrain, Egypt, Morocco, Qatar, Sudan, Egypt, etc. It is a reminder of how many Arabs are Egyptian, but also how connected the Arab world now is through Al Jazeera, Al Arabiya, texting, social networks, cell phones, and so on.

This sense of being part of a larger Arab world is relatively new and clearly reflects the importance of technological advances in communications. It overcomes something that has always kept Arabs apart: the fact, for example, that Arabs in Syria cannot understand Arabs in Morocco or elsewhere in the Maghreb. The dialects are way too different. In fact, Syrians and Jordanians not only have trouble understanding their neighbors next door in Iraq, they can barely understand the Bedouins who live in the desert herding goats and sheep. Hardly anyone can understand the Egyptians because they speak too fast, and religious leaders can be incomprehensible when reading from the Holy Quran because it is spoken in the Arabic equivalent of Old English.

Written Arabic, the type used in emails, is what has bound young Arabs together in recent years, as has shorthand Arabic used in texting. What about the mothers, the taxi drivers, the professors, the small businessmen, the clergy, and the elderly who came out in the thousands to these demonstrations in support of their children? What was their motivation? It no doubt was sympathy if not empathy for those desperate for employment, but it also has to be frustration and perhaps desperation at the increasing difficulty people have in supporting a family in these countries. The most important components of family budgets in Tunisia, Libya, and Egypt are food and energy, both of which have increased dramatically in the past year, just at the time Ben Bernanke of the Federal Reserve announced he wanted “a little bit of inflation” to combat the global economic crisis.

The Rich Want Inflation, While the Poor Need Deflation

There are lots of other causes for rising commodity prices, such as material shortages, droughts, and growing demand in markets like India and China. But no other cause has one man’s name on it, and no other person has let loose a ravenous pack of hedge fund speculators, provided them trillions of dollars of “liquidity” with which to speculate, and protected them from losses. Bernanke has much to answer for, because it is very unlikely we would have seen these uprisings if he had allowed deflation to take its course. Deflation is the friend of the poor. The average Egyptian or Libyan has no concept of a bank account, because they don’t exist for the retail market in those countries. Poor people would not be hurt by a banking crisis, or a stock market crash, or a derivatives calamity, or a housing bubble, because none of these things directly affect their lives. On the other hand, basic necessities would go down in value under deflation.

The West is fearful of deflation because it undermines the whole concept of a fiat currency, which has brought growth through inflation year after year to the industrialized economies, even though the currency gets progressively debased as a result. Central banks always think they can keep the inflation growing at a modest rate, but along came Alan Greenspan and his protégé Ben Bernanke, who threw away any caution on the amount of currency in circulation, and who refused to acknowledge assets bubbles in the making. Maybe this is because the two of them looked about and saw the specter of deflation undermining all their work – deflation brought about principally by China as manufacturing locus of the world, but any third world country with a work force willing to earn $2 a day could challenge Western supremacy at manufacturing.

At first it wasn’t clear whether Egypt, Libya, Tunisia, Iran or any of these countries facing challenges to the political status quo were part of the dynamic that was undermining living standards in the West. Now it appears that they were, just as it appears the West was horribly wrong on what “Arabs on the street” really want. They do not see everything in the eyes of the Palestinian-Israeli conflict. They aren’t obsessed over radical Islam and don’t want to be ruled by some imam or ayatollah living in the 15th century. No wonder Thomas Friedman is back in the Middle East trying to get his bearings again; if only he spoke Arabic he could, depending on the dialect he knew, talk to the people in the public squares and ask them what they wanted, rather than spend his time talking to people who graduated from Harvard and Oxford and travel to Davos every year in their private jet.

Is Anybody Really Listening?

Talking and listening to the real dispossessed Arabs would be at least a start for the West, even though the demonstrators and their millions of supporters can’t tell us yet if they want a parliamentary democracy, or a bicameral Republican government, or a constitutional monarchy, or even capitalism (don’t underestimate the appeal of Chinese mercantilism to countries new to the global market). The real question for the West, though, is whether the people running things want to talk to any of the dispossessed millions, even those in their own country. In the US, the Republican party leadership is doing as much as possible to ignore and marginalize the Tea Party voices newly-elected to Congress, just as Democratic politicians are trying to appear supportive of the Wisconsin demonstrators without appearing to offend corporate donors who don’t like unions.

This must be a time of great confusion for leaders everywhere. In Egypt Hosni Mubarak had taken to erecting billboards featuring his son Gamal as heir-apparent. In Jordan King Abdullah II replaced his billboard photo with one showing him side by side with his teenage son, the Crown Prince. It is an obvious attempt to familiarize the Jordanian public with their ruler-to-be, but is it having the opposite effect? Are people tiring of monarchies and dynastic rulers? If so, the Chinese seem to be a step ahead of the game, assuring that a new head of the Communist Party appears on the scene every few years. But if it is true, then Saudi Arabia’s monarchy is in trouble, and demonstrations should be occurring in Cuba and North Korea.

It is one thing for the West to see the backside of Mohammar Qaddafi, but quite another to have the Saudi monarchy overthrown. By what, and by whom? Would their oil reserves be secure and would Saudi Arabia remain a stanch friend of the West? In the Middle East, power in these situations is devolving so far to the military, but is installing another military dictator, however benign, going to satisfy the demands of the people? Can anyone satisfy these demands if people want to see the price of wheat, rice, chicken, cotton, sugar, petrol, and other essentials back down to where they were in 2009?

Nobody knows, which is precisely why leadership everywhere is addled and uncertain how to respond. What they should most fear, however, is someone who connects together the riots in Greece several years ago, the demonstrations in Iceland, and the events throughout the Middle East, with the protests in Wisconsin, and who then draws a picture which makes sense and which everyone can understand.

As People Come to Think They Are an Afterthought

The picture is not in focus yet, but the outlines are beginning to appear. They show a collapse of the world economic order because free trade was never free except for the wealthy at the top of the system, and because billions of people are discovering they have been enslaved in sweat shops, or enslaved to the banks through debt which can never be legally discharged. The picture is emerging of crony capitalism run rampant, of fraud perpetrated out in the open because it is never punished, of the sons of rich men like Rupert Murdoch anointed to run his business empire (even though it is a public company), just as the sons of dictators are given the divine right to rule and plunder a country. It is a picture in country after country of wealth, power, and privilege being concentrated in the hands of the few, while poverty spreads to millions.

As these depredations become clearer to the public, the powerful mumble bromides about the necessity for order and security, because they have no other answer. All they have left are the tools of control – the curfews, the police surveillance, the arrests, the fear-mongering designed to convince the public their own safety should be the foremost thing on their mind. It has worked in the past, but maybe now the public is realizing the greatest risk to their safety is the government itself. Maybe this is what they wonder when they see the face of their government everyday on a billboard in a public square, or on the internet, or on the television news programs.

Government which works only for the interest of those who do the governing ultimately loses the consent of the governed. That is the point we now seem to have reached, whether in Tripoli or Dublin or Madison, Wisconsin. It is a truth being comprehended almost simultaneously by billions of people, and this is something that has never happened on a global scale before. We know it is a truth by seeing the bodies of Libyans on the streets of Tripoli and Benghazi, murdered by a government that clearly does not have the consent of the governed.

We would also like to believe that a government cannot last long if it does not have the consent of the governed, but the Middle East has proven this to be untrue. It does seem to be the case that the longer repression and tyranny goes on, the more sudden and unexpected is the collapse of such regimes. This has been so with the USSR and all such closed, one-party systems, and the Middle East is now experiencing its moment of revelation.

The ultimate question for democracies is whether they are immune from such upheavals, by virtue of merely being a democracy with supposed safety valves, or whether democracy has been so degraded by corporatism, oligarchy, and plutocracy that a sudden, wrenching change of the existing order is possible here too. At least for a democracy like the United States, where the two parties seem indistinguishable in their eagerness to provide corporations and the wealthy with whatever they demand, no one should be surprised if there is a wrenching change of the existing order. Let us hope it is a change within the existing structures of democracy, or perhaps better said, as a restoration of those atrophied structures of democracy long in disuse because the wealthy have found ways to achieve their objectives without bothering with the consent of the governed.

Thursday, February 24, 2011

Nowhere Near Over

By David R. Kotok

By “This”, we mean the regional contagion, spreading violence and rising geopolitical risk in the Middle East and North Africa. Reports say that Libya has stopped producing oil and that pipeline delivery to Europe (Italy) is interrupted. Libya seems headed for complete dismemberment and full-blown civil war.

Note that China is evacuating 15,000 workers. China! Imagine that we learn there are as many workers from China in Libya as there are workers from Egypt. Anyone still think this is a local idiosyncratic event.

We are watching a “sea change” occur among one tenth of the world’s population and among the world’s low cost marginal producers of the world’s energy. Scenarios with benign outcomes and peaceful transitions appear remote.

Note how the region’s worst of the bad actors seize their opportunities where they find them. Every success emboldens them. A case study is Iran’s two ships transiting the Suez. Also, note how the most suppressive regimes like Syria, Iran, Saudi Arabia, Libya have learned how to suppress social networks, cut off cell phones, block internet traffic and reverse or alter the information flows.

Consider that suppressive regimes are not an encouraging environment for business risk taking and capital investment. This true around the world. Despots maintain their power with only harsh methods whether in the Middle East or North Korea or Venezuela. Simply put: a thug is a thug. Their actions eventually stymie and persecute thoughtful and creative internal forces. Despots raise costs and lower production. In addition, the energy dependent western democracies are now learning that despots are also not reliable longer-term partners.

Also, consider that success by demonstrators and protesters leads to additional demonstrations and increasing demands for reforms. We believe that the turmoil and regime change in the region has a long way to go. We also believe that forecasting the outcomes is a highly problematic exercise. Do we end up with open democracy or Islamized fundamentalist states or something else? This is going to be determined on a case-by-case basis. We do not know the outcomes. History says that emerging democracies are rare in the Middle East.

A sea change can bring on a protracted period of higher oil and energy pricing. The US economy is ill prepared for it. Our policies border on madness. We do not drill for oil off our coast. In the Gulf, deep water drilling is encouraged in Cuban national waters but not in American waters. On American land, we spend billions subsidizing an uneconomic program called ethanol. We raid the federal treasury to put money in the pockets of the politically connected few. In addition, we raise the price of corn and farmland and global Ag output to increase the starvation of millions of people. Thank you Washington and specifically a few members of America’s congress.

Back to the Middle East. Consider that a 1-penny increase in the price of a gallon of gasoline acts as a sales tax on consumers at the rate of 1.2 billion dollars a year (Naroff Economics estimate). A one-dollar rise in the price of oil eventually leads to a 2.5-cent increase in gasoline on average (Moody’s estimate). It is easy to get to a $4-$5 range for gasoline in the US.

Add that to the food price surge and we have a shock. We have already consumed about half of the 2% payroll tax cut. It appears higher gas prices will use up the other half and more by Memorial Day. Gasoline at 4 to 5 dollars a gallon will be enough to turn the improving consumer sentiment numbers into deteriorating ones and will hurt the fragile economic recovery. It will also set back any hope for stability in the housing sector.

If we flirt with a double dip recession, the Fed may be debating QE3 by late summer. So far, QE2 seems to have little impact. It may turn out to have been too small to do very much. A few hundred billion in a mass of many trillions is not very much.

Consider that there has been no significant increase in the amount of federal debt reaching the markets. To get to that conclusion, add up all the new treasury issuance, subtract the shrinkage of Fannie and Freddie debt and subtract the Fed’s purchases. The net result is that most of the federal deficit is being financed without increasing the publicly traded portion.

So why have treasury bond interest rates risen since QE2, if they are not driven by the deficit. They may be driven by inflation expectations or flight from the dollar or re-allocation of portfolios. However, they do not seem to be higher due to direct federal borrowing from the markets.

So where is this going?

Any slowing of the US economy from this energy shock may act to lower interest rates and dampen inflation expectations. Higher energy prices can mean that something else does not get purchased. We may see substitution and not inflation.

At Cumberland, our US ETF accounts are in the highest cash position they have seen in over two years. We think being full invested when there is a shooting war in a major oil producing country is folly. There is one position that must be maintained. We are high in energy overweight. We are underweighted in consumer discretionary exposure.

This is nowhere near over.

Tuesday, February 22, 2011

When Money Dies

Five Billion German Mark Bill, circa 1923

By Chris Mayer

I didn't come up with the phrase, "when money dies," though I like it a lot. The phrase captures an important idea. It is that money – I refer to that paper kind issued by governments – has a finite life. At some point, it becomes worthless, or dies.

The death of a currency is often a protracted affair. It often takes decades. And as it unfolds, the people who experience it hardly believe it. That is the tale told by Adam Fergusson in his book When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany.

First published in 1975, it had been out-of-print for years and much sought after. A used copy on Amazon cost $300 recently.

The book is a history of the death of the German mark in the 1920s. It is also a scary reminder of the devastating effects of inflation and, therefore, a cautionary tale for US central bankers and politicians who play so fast and loose with US Dollar.

If you don't know what happened to the German mark, here's what you need to know from When Money Dies: "In 1913, the German mark, the British shilling, the French franc and the Italian lira were all worth about the same. Four or five of any of these would buy you a US Dollar."

By 1923, you could exchange one shilling, franc or lira for up to 1 billion marks. "Although," Fergusson writes, "in practice, by then, no one was willing to take marks in return for anything. The mark was dead, one million-millionth of its former self. It had taken 10 years to die."

How did that happen?

The short answer is that post-Imperial Germany found itself with a crushing load of debt. Raising taxes or cutting spending is politically difficult in any age. And so it was in Germany. To deal with these debts, Germany chose the path of least resistance. It printed lots and lots of money.

Sounds like the fiscal position the US government finds itself in today. Bleeding deficits with no end in sight. Piling on debt and entitlements with no end in sight. The solution so far? Why, "quantitative easing." In a new introduction, Fergusson writes:

"Money may no longer be physically printed and distributed in the voluminous quantities of 1923. However, 'quantitative easing,' that modern euphemism for surreptitious deficit financing in an electronic era, can no less become an assault on monetary discipline."

But back to Germany...

Eventually, prices started to rise as the mark lost purchasing power. One of the great strengths of the book is the on-the-ground view you get from the people who lived through it. It gives you an unsettling look at German society as it starts to dissolve and as inflation starts to wreak havoc.

It started slowly, with commodity prices starting to rise everywhere. But as the years wore on, prices kept going up in big steps. Soon the damage was remarkable.

In just eight years since 1913, the price of rye bread rose 13-fold. Beef rose 17-fold. Sugar, milk, pork and potatoes went up 23-28-fold. Butter went up 33-fold! And these were official prices. As a practical matter, real prices were often a third higher. It's hard to fathom.

All this brought out the worst in people. Germany became an ugly society, looking for blame. As Fergusson writes: "They picked upon other classes, other races, other political parties, other nations." There was a long list of villains: "the greed of tourists, or the peasants, or the wage demands of labor, or the selfishness of industrialists and profiteers, or the sharpness of Jews or the speculators making fortunes in the money markets."

Erna von Pustau, who lived through it, described what it was like:

"My allowance and all the money I earned were not worth one cup of coffee. You could go to the baker in the morning and buy two rolls for 20 marks; but go there in the afternoon and the same two rolls were 25 marks. The baker didn't know how it happened... His customers didn't know... It had somehow to do with the dollar, somehow to do with the stock exchange – and somehow, maybe, to do with the Jews."

As we know what would happen later in Germany, her comments are particularly chilling.

Each year, people thought it couldn't get worse. "And yet things always did, from bad to worse, to worse, to worse," Fergusson writes. "It was unimaginable in 1921 that 1922 could hold any more terrors. They came, sure enough, and were in due course more than eclipsed, with the turn of the following year."

Germany plunged into hyperinflation. The price changes get ridiculous to talk about – the numbers so large that they are practically meaningless. Who can imagine paying 500 billion marks for a dozen eggs? It's also interesting to see how society dealt with this breakdown in the currency. The idea of real wealth became very important. Not the kind of wealth denominated in abstract printed marks, but real wealth that one could use.

People bought things. Hugo Stinnes, an industrialist, bought factories, mines, newspapers. The man on the street bought what he could trade. Fergusson ends with a powerful observation:

"In war, boots; in flight, a place in a boat or a seat on a lorry may be the most vital thing in the world, more desirable than untold millions. In hyperinflation, a kilo of potatoes was worth, to some, more than the family silver; a side of pork more than the grand piano."

Despite the awful experience of the 1920s, Germany would repeat its errors again and again. In the 1930s, Hitler would crank up the money presses. By 1948, the reichsmark (which replaced the old mark) died. So Germany created the deutsche mark. Yet it wasn't much better. It lost two-thirds of its purchasing power by 1975.

Such is the fate of all paper money.

I will leave it to you to decide how much relevance Germany's experience has to the US today. I find many alarming parallels.

I would point out, too, that the US dollar has lost 95% of its purchasing power since 1913. And the US dollar is among the best currencies of the last hundred years. That says something about paper currencies, doesn't it?

It's also why staying ahead of inflation is one of the chief tasks of investing.

The monetary puppet-masters at the Fed will have you believe inflationary pressures are inconsequential or a far off mirage.

Don't believe it for a second...

QE2 is humming along with the prospects of a QE3 right around the corner ready to pump untold billions into an already cash-flush banking system.

Now is the time for investors to take action and protect capital from the inflationary pressures building up in our economy.


Chris Mayer,
for The Daily Reckoning

Thursday, February 17, 2011

Why Rise Up Now?

The Turmoil Continues

By Joel Bowman
Reporting from Buenos Aires, Argentina

Bernanke Distances Himself from Rising Food Prices

Is the world finally cracking up? It certainly seems least in that fiery patch of land claimed by the world's three major monotheistic religions. This is serious stuff. Are you paying attention, Fellow Reckoner? Are you looking at the situation closely? In any case, here's a freebie:

"Warning: Riots may be closer than they appear."

Every day we sit down at the computer to read stories of chaos, government overthrow and "anarchy" (as incorrectly defined by the news media) breaking out across the Middle East and North Africa (MENA) region. Here are a few headlines the Associated Press led with this morning:

"Egypt: Death toll put at 365 as strikes continue..."

"Anti-government protests spread to Libya..."

"Thousands of police confront protesters in Yemen..."

"Bahrain protesters urge more pressure..."

What are these people so angry about? So they're oppressed, under the thumb of the state and barely able to earn enough to feed themselves. But so what? Tunisia's ousted thug, Ben Ali, held sway over his countrymen for some twenty-three years before finally being given the proverbial boot. In Egypt, the poor, unwashed masses endured three decades of Hosni Mubarak's disastrous policies. In fact - and perhaps not coincidentally - Egypt was the birthplace of the state. A dubious accolade, indeed. For 6,000 years they've suffered the experiment of state-sponsored aggression. So why rise up now? What makes 2011 so special?

Well, for one thing, it's getting more and more expensive to live from hand to mouth, as the overwhelming majorities in these countries do. More than 40% of the Egyptian people live on $2 per day or less. A whopping 70% rely on food subsidies and handouts. A few percent increase in the price of milk and honey may not break the bank for the average American or European (at least, not yet)...but for those living in Egypt and her surrounding states, it's the difference between eating and going hungry. These people, it may fairly be said, are quite literally starving for change.

"Global food prices are rising to dangerous levels and threaten tens of millions of poor people," World Bank chief Robert Zoellick announced yesterday. "It's poor people who are now facing incredible pressure to feed themselves and their families."

Chimes Addison in today's edition of The 5-Minute Forecast, "The World Bank's latest data on food prices reveals an overall 15% increase from October through January. Its index now sits just 3% below the 2008 record, although a separate index maintained by the UN's Food and Agriculture Organization has already surpassed 2008 levels."

According to the World Bank's own data, global wheat prices have doubled between June and January. The price of corn - which is used to feed the cattle, hogs and chickens that populate the meat shelves at your local grocery store - has surged 73% in the same period. Prices for sugar and edible oils have also risen "sharply," the bank said.

"Zoellick acknowledges rising food prices were 'an aggravating factor' behind the downfall of dictators in Egypt and Tunisia," writes Addison.

But the story doesn't stop there. Not even close. And here comes our second free tip of the day:

"Warning: Inflation may be closer than it appears."

In fact, according to some measures, it may be so close it's already here.

Back in the good ol' US of A, continues Addison, "Wholesale prices jumped 0.8% in January, according to the Bureau of Labor Statistics. The producer price index has now jumped 3% over the last four months. And no, that's not an annualized figure.

"Note that the PPI headline number is for 'finished goods' - stuff that's ready to be sold direct to consumers. In the category of 'crude goods,' the figures are far worse - up 3.3% in January, and up a staggering 15.8% over the last four months."

For his part, the man printing all the money chasing these commodities, Fed Chairman Ben Bernanke, flatly denies any wrongdoing. The trillions of dollars he has injected into the world's economy have nothing to do with the escalating price of commodities, he contends; commodities coincidentally priced in those very same dollars. Instead, Bernanke blames the "two-speed recovery" - where emerging markets are, shall we say, "out-recovering" developed economies - and a failure of these emerging markets to tackle their own inflation.

To blame the increase in dollar supply for the soaring prices of items measured in dollars is "entirely unfair," complained Bernanke. Again, are you listening to all this, Fellow Reckoner? Are you paying attention?

We wonder how long it will be before we wake to read news of uprisings and riots at the source of the world's central fiat currency supply. Can't be long now...

In today's essay, guest columnist and eloquent critic of the Federal Reserve, Fred Sheehan, lends us his thoughts on the real price we pay for our central banks. Please enjoy...

The Daily Reckoning Presents

"We do not now have a problem.... Inflation made here in the US is very, very low"
- Federal Reserve Chairman Ben S. Bernanke, February 10, 2011

When inflation is rising, it is necessary to take matters into ones' own hands, or, get crushed. Those who remain whole during inflationary periods act early.

What follows are summaries of recent quarterly earnings reports. Most of these companies have headquarters in the United States, although they buy and sell worldwide. The key take-away is that inflation is a major burden.

As such, the key question investors must ask themselves is, "How imminent and pervasive is the threat of resurgent inflation." Bernanke says inflation is "very, very low." Corporate America begs to differ.

Numerous quarterly reports from large multi-national companies indicate very clearly that inflationary pressures are building. Here's a representative sample:

DuPont & Co. - Fourth quarter sales rose 15%; net profits fell 15%. "DuPont forecast raw-material and freight costs to be some 4% to 5% higher this year than last, moderating from the 6% rise seen in 2010. [Executives] were confident they would be able to pass these on to end users. Ethane, chlorine, solvents, and pigments were seen as the key areas of cost pressure."

Procter & Gamble - Sales rose 2%; net profits fell 25.5%. "P&G, which sells everything from Tide detergent to Olay skin-care products, said its commodities bill will cost $1 billion for the fiscal year that ends in June, more than double what it had expected."

Colgate-Palmolive - "Colgate's profit fell [in the fourth quarter] 1%...squeezed by higher commodity costs and money paid to promote its products."

3M Company - Fourth quarter sales rose 10%; net profit fell 0.7%. "Margins declined under rising material costs and weakening sales in the company's health care and graphics businesses... 3M said it intends to recover higher material expenses through price increases, which include Scotch tape, Post-It notes, furnace filters, sand paper, automotive components, and thousands of other household and industrial items."

Pepsico - [Pepsi-Cola, Frito-Lay, Quaker, Tropicana, Gatorade] - Full- year reported earnings per share increased 4%; fourth quarter earnings per share declined 6%. CEO Nooyi was pleased with the results, but acknowledged she is "mindful of three realities: (1) A weak consumer landscape given the poor macroeconomic picture, especially the high level of unemployment in key developed markets; (2) High levels of cost inflation for the coming year, driven by broad and pronounced commodity inflation; and, (3) A potentially difficult competitive pricing environment, particularly in beverages." Hugh Johnson, Pepsi's CFO, talked about cost inflation of 8% to 9.5%: "That type of inflation has a pretty strong impact."

Goodyear - [tires, blimps] Net fourth quarter sales rose 14%; with a $177 million fourth quarter loss. "Raw material prices costs are likely to rise 25% to 30% in the first quarter of 2011 and rubber prices have risen 40% since October [2010]."

Whirlpool - [Maytag, Kitchen Aid] Fourth quarter sales fell 1%; profits fell 61%. It is "seeking to offset cost increases for such items as steel, copper and plastics..."

Electrolux - [refrigerators, washers] "Operating income in North America and Europe declined as the company was hit by higher costs for raw materials and lower sales prices." "The costs for our most important raw materials continue to increase," Electrolux CEO Mr. McLoughlin, said in a statement. "In addition to increased costs for steel, we also see considerable increases in resins (used in plastics) and base metals."

In light of these firsthand accounts from the business world, Bernanke's QE2 campaign is succeeding all too well. Inflation is on the upswing, just as he planned. But once this genie emerges from the bottle, there's no telling what will happen next. Before long, the genie makes the rules; not the Federal Reserve Chairman. And often, the rules the genie makes are ones that punish the prudent and reward the reckless.

"Inflation is a means by which the strong can more effectively exploit the weak," Federal Reserve Governor Henry C. Wallich, declared in a 1978 commencement address at Fordham University. "[Inflation] introduces an element of deceit into our economic dealings... [T]he increasing uncertainty in providing privately for the future pushes people who are seeking security toward the government."

Wallich went on to tell the Fordham graduating class of 1978 that, during inflationary periods, contracts are no longer made to "be kept in terms of constant values." By definition, one party to the contract understands this reality better than the other. The one who understands that tomorrow's values will be much lower than today's values is the one who benefits.

In other words, as inflationary pressures build, the forward-looking individual will want to prepare in advance. But that means the forward- looking individual will also want to ignore all the assurances from Washington and Wall Street that "everything is under control." The latest testimony from the titans of global commerce demonstrates very clearly that Bernanke's "very, very low" inflation has already become uncomfortably high.

Prepare accordingly...or you might get crushed.


Frederick J. Sheehan,
for The Daily Reckoning

Ben Bernanke is a Dangerous Fool

Bernanke will be jailed before this is over.

When self-proclaimed experts on the Great Depression, like Ben Bernanke, say that the Federal Reserve contributed to the Depression by not expanding the monetary supply fast enough, they are completely wrong.
The Great Depression was mainly caused by the expansion of the money supply by the Federal Reserve in the 1920s that led to an unsustainable credit-driven boom. Both Friedrich Hayek and Ludwig von Mises predicted an economic collapse in early 1929. In the Austrian view it was this inflation of the money supply that led to an unsustainable boom in both asset prices (stocks and bonds) and capital goods. Ben Strong, the head of the Federal Reserve, attempted to help Britain by keeping interest rates low and the USD weak versus the pound. The artificially low interest rates led to over investment in textiles, farming and autos. In 1927 he lowered rates yet again leading to a speculative frenzy leading up to the Great Crash. The ruling elite of society were the Wall Street speculators. Only 1.5 million people out of an entire population of 127 million invested in the stock market. Margin loans increased from $3.5 billion in 1927 to $8.5 billion in 1929. Stock prices rose 40% between May 1928 and September 1929, while daily trading rose from 2 million shares to 5 million shares per day. By the time the Federal Reserve belatedly tightened in 1928, it was far too late to avoid a stock market crash and depression.

The Federal Reserve was created by bankers to benefit bankers. The Federal Reserve purchased $1.1 billion of government securities from February to July 1932, which raised its total holding to $1.8 billion. Total bank reserves only rose by $212 million, but this was because the American populace lost faith in the banking system and began hoarding more cash, a factor very much beyond the control of the central bank. The potential for a run on the banks caused local bankers to be more conservative in lending out their reserves, and was the cause of the Federal Reserve's inability to inflate. From its backroom, middle-of-the-night creation in 1913, the bank-owned Federal Reserve has sought to benefit its owners, the large Wall Street banking interests and its politician protectors in Congress. The working class has always been nothing more than people to tax and peddle debt to.

Income and wealth inequality reached a new peak in 2007, the highest level of inequality since 1929. William Domhoff details this inequality in the following terms:

In the United States, wealth is highly concentrated in a relatively few hands. As of 2007, the top 1% of households (the upper class) owned 34.6% of all privately held wealth, and the next 19% (the managerial, professional, and small business stratum) had 50.5%, which means that just 20% of the people owned a remarkable 85%, leaving only 15% of the wealth for the bottom 80% (wage and salary workers). In terms of financial wealth (total net worth minus the value of one's home), the top 1% of households had an even greater share: 42.7%.

Real median household income in the US is $49,777 today. It was $52,388 in 1999 before George Bush took office. This is a 5% decline over 10 years. Even more disturbing is the fact that the top 20% of households showed real increases in income. The bottom 50% lost income during the last 10 years, with the bottom 20% losing 8% of income over this time frame. No wonder there is so much anger among the working middle class in the country regarding the bailout for the top 1%. Sixty million households make less today than they made 10 years ago. The policies of the Federal Reserve over the last 10 years have benefited speculators and punished seniors, savers and the working middle class. Every policy, program and regulation rolled out by the Federal Reserve in the last three years has been to prop up, enrich and support their too-big-to-fail Wall Street owners. The middle class American working family is too small to matter.

Tuesday, February 15, 2011

Money as Debt is insane

A society based on the core principle of money as debt; the act of creating debt creates money, and usury; interest on that debt, is doomed for failure.

If you have any debt, don't pay it back as an act of revolution. If you are debt free, stay that way. And spend as little as you can, the less you buy the sooner this insane system will end.

Monday, February 14, 2011

The Faulty Economic Model Behind America’s Support for Dictators

Instead of Democracies.

It is obvious that America has long supported dictators, instead of democracies, in developing countries.


Is it simply – as Noam Chomsky asserts – that America supports strong men who will ensure that their country acts as a “client state” to the U.S., and moves to crush countries which refuse to act as satellites to the U.S.?


But – as usual – faulty economic models are part of the problem.

Specifically, Morton Halperin, Joe Siegel and Michael Weinstein co-wrote a book called The Democracy Advantage: How Democracies Promote Prosperity and Peace, published by the Council on Foreign Relations in 2005, which provides insight into the economic model used to justify America’s historic support for dictators.

Halperin is no outsider, being a high-level adviser in the Clinton, Nixon and Johnson administrations and to the Council on Foreign Relations. In the Johnson Administration, he worked in the Department of Defense where he served as Deputy Assistant Secretary of Defense (International Security Affairs), responsible for political-military planning and arms control. During the first nine months of the Nixon administration, Halperin was a Senior Staff member of the National Security Council staff with responsibility for National Security Planning. In the Clinton administration, he served Director of the Policy Planning Staff at the Department of State, the Special Assistant to the President and Senior Director for Democracy at the National Security Council, and consultant to the Secretary of Defense and the Under Secretary of Defense for Policy. He was nominated by the President for the position of Assistant Secretary of Defense for Democracy and Peacekeeping.

Halperin, Siegel and Weinstein gave a speech at the Carnegie Foundation in 2005 explaining their research findings.

Halperin noted:

Successive American presidents have said, particularly since the end of the Cold War, that a major goal of American foreign policy was to spread or enlarge or enhance democracy, and that our foreign policy was geared to supporting those who were struggling to establish and maintain democratic regimes.

Yet if you look at development assistance from the United States, from the international financial institutions, and even from the Europeans and the European Community, you find that there is no democracy advantage. That is, democratic countries, in fact, receive less development assistance than do non-democratic countries. You also find in the rhetoric, and even the charters, of development agencies a belief that democracy is not their business. They increasingly talk about good governance as one aspect of development, but not about democracy. The people who run USAID believe that their job is to promote development, and not democracy. That permits them to consider good-governance issues, but not to ask the fundamental question: Is this a democratic society that we want to support?

Indeed, the international financial institutions have, with one exception, charters which require them not to take account of whether a country is a democracy, or as it is referred to in the charters, its political criteria.

Underlying this policy of governments and international financial institutions is a belief about how democracy relates to development. There is a widely held view that poor countries need to delay democracy until they develop. Back when I was in college, this was the Scandinavian view of democracy, that only Scandinavian countries were capable of being democratic, and that you needed to have a solid middle class before you could contemplate democracy. The argument went—as presented in the writings of Samuel Huntington and Seymour Martin Lipset —that if a poor country became democratic, because of the pressures in a democracy to respond to the interests of the people, they would borrow too much, they would spend the money in ways that did not advance development—arguments that the current president of Mexico is making about his possible successor. These poor decisions would mean that development would not occur; and because people would then be disappointed, they would return to a dictatorship.

Therefore, the prescription was, get yourself a benign dictator—it was never quite explained how you would make sure you had a dictator that spent the money to develop the country rather than ship it off to a Swiss bank account—wait until that produces development, which produces a middle class, and then, inevitably, the middle class will demand freedom, and you will have a democratic government.

That proposition was wrong.

Siegel picked up from there. Siegel is a Senior Research Scholar at the University of Maryland’s School of Public Policy, and an expert on the political economy of democratic transitions , who has contributed articles to leading policy journals and newspapers including Foreign Affairs , Harvard International Review , Georgetown Journal for International Affairs, Los Angeles Times, Financial Times, Newsweek International, Wall Street Journal, and The International Herald Tribune. Siegel was also a high-level researcher for the CFR.

Siegel told the Carnegie Foundation:

In the last forty-five years of actual performance, there is no evidence that poor authoritarian countries have grown any more rapidly than poor democracies. If you leave out East Asia, you see that poor democracies have grown 50 percent more rapidly, on average, during this period. The Baltic countries, Botswana, Costa Rica, Ghana, and Senegal have grown more rapidly than the Angolas, the Syrias, the Uzbekistans, and the Zimbabwes of the world.

Social dimensions of development … are even more starkly divergent. For example, in terms of life expectancy, poor democracies typically enjoy life expectancies that are nine years longer than poor autocracies. Opportunities of finishing secondary school are 40 percent higher. Infant mortality rates are 25 percent lower. Agricultural yields are about 25 percent higher, on average, in poor democracies than in poor autocracies—an important fact, given that 70 percent of the population in poor countries is often rural-based.

There are many reasons for this …. One characteristic that seems particularly prominent is that democracies do a far better job at avoiding catastrophes of all types. If we look at financial catastrophes for each of the last four decades and look at the twenty worst performers over each of those decades, we find that of eighty cases, only five are democracies. Similarly, if you look at a 10 percent contraction in GDP per capita on an annual basis, you find that poor democracies are half as likely to experience this sort of acute recession as are autocracies.

We see similar patterns with regard to humanitarian issues. Refugee crises are almost invariably a result of the politics in authoritarian systems.

Amartya Sen, the Nobel laureate economist, famously noted that no democracy with a free press has experienced a major famine.

One of the immediate assumptions made is that this is because of the populist pressures that democracies face; therefore, they are investing much more in their health and education sectors, leading to other macroeconomic problems. In fact, that is not true. To our surprise, poor democracies don’t spend any more on their health and education sectors as a percentage of GDP than do poor autocracies, nor do they get higher levels of foreign assistance. They don’t run up higher levels of budget deficits. They simply manage the resources that they have more effectively.

Let me move on to the second assumption, the notion that once autocratic countries reach a middle-income range, they will make the transition to democracy. Given the limited growth that we have seen under authoritarian systems, relatively few authoritarian countries actually reach this middle-income range. In fact, since 1960, only sixteen autocratic countries have reached a per capita base above $2,000 a year.

Fareed Zakaria’s book argues, in a repostulation of the Lipset and Huntington theses, that we shouldn’t be pushing democracy until these countries reach per capita incomes of $6,000 a year. If we were to do that, of today’s eighty-seven democratizers, only four would qualify as being ready. That would exclude the Baltics, Costa Rica, Poland, South Africa, and many others.

However, even among those poor autocracies that have grown, they are no more likely to make the transition to democracy once they have grown or once they have reached a middle-income status than they were when they were poorer.

The third and final assumption is the notion that premature democratization is a recipe for instability. We find empirically no strong basis for this reasonable hypothesis. What we do see, borne out in much of the conflict literature of the last fifteen years, is that the prevailing factor that influences conflict—and today most conflict is civil conflict—is poverty….

When you control for that and you look at countries that are going through political transition, you find that democratizers are no more likely to be vulnerable to conflict than are other poor countries.

In sum, the three core assumptions that have underpinned the authoritarian advantage thesis over the years aren’t borne out through our empirical analysis. What we find is that the form of government that is in place in the developing world has a huge difference on the development performance realized, and that by holding onto these notions that we should defer democracy until some later point, we are, in effect, perpetuating underdevelopment and higher levels of political and sectarian conflict, as well as deferring the point at which people can govern themselves.

Michael Weinstein – former chairman of the Department of Economics at Haverford College and a former economist columnist and editorial board member for The New York Times – then provided some recommendations:

Whether aid is bilateral, multilateral, quadrilateral, let’s give it to the democracies and democratizers, and not to poor autocracies.

Development policies have been anti-democratic. They have trampled on the incipient groups, such as civil groups inside poor countries, anmd run roughshod over them to force countries to follow policies drawn up by Washington D.C., and not by the countries involved. Democracy can be a victim in lots of silent ways.

Democracy … is so clearly connected to growth and prosperity that we say, highlight it, so that whenever a government like the United States, an agency like USAID, a bilateral or multilateral organization begins to contemplate aid policy, it would issue a democracy impact statement. Give us a good prediction of how the policy as proposed and implemented will trample on democratic forces within the poor countries to receive the aid.

In a question and answer following their speech, Halperin, Siegel and Weinstein gave some additional insights.

Halperin noted that the foregoing discussion applies to Muslim as well as Western countries:

I see nothing to suggest that Muslim culture or religion stands in the way of democracy.

The current debate is over whether the people in the streets of Lebanon are the same as those in the streets of Ukraine. We know, from many anecdotes, that the people in Lebanon watched the people in Ukraine on their television. Free Arab television was much more important in exposing them to Ukraine than it was to events in the Middle East. The Lebanese believe that they are doing what the people of Ukraine did, and out of the same passions and convictions

Siegel pointed out several reasons why democratic countries are more prosperous than autocratic regimes:

When there is more symmetry on all sides of a market, buyers and sellers, you usually get more efficiency, more willingness for people to participate. That doesn’t happen if people are unsure if they have all of the facts on the table.

Openness also contributes to higher levels of transparency and lower levels of corruption. Data show that corruption cuts heavily into GDP growth on an annual basis.

The third point is adaptability. Democracies not only have a self-correcting mechanism, but also mechanisms for a systematic means of changing ineffective leadership. This allows for a stable transition to a new policy framework that might allow for a more effective process of addressing the problems that a country is facing, one that is appropriate for its particular circumstances. Because of this process of succession, you don’t have the same instability in democracies that heavily cuts into growth in other systems, either because of the political uncertainty or the civil conflict that results.

One of the problems and barriers to growth is when you have both the political and economic monopolization of power in a single set of hands. This is often one of the characteristic traits of authoritarian systems. To the extent that you can separate economic opportunity from political authority, you will be in a better position to develop. By channeling all of our assistance through central governments, we tend to perpetuate the consolidation. That undercuts the opportunities for development.

And Weinstein gave another reason:

Democracies don’t fall off the edge of the cliff and hit bottom in the way autocracies do.

Afterword: It’s not just America. As Chapter 1 of The Democracy Advantage: How Democracies Promote Prosperity and Peace notes:

Today, it is politically incorrect to extol publicly the virtues of autocracies—
countries where leaders are not popularly elected nor subject to
meaningful checks and balances. Nonetheless, the view that these governments
do a better job of promoting economic growth and stability among
poor countries remains firmly entrenched in the minds of many world leaders, economists, national security advisors, business executives, political scientists, and international civil servants. According to this perspective,
promoting democracy in poor countries is naïve and potentially dangerous.

Sunday, February 13, 2011

Democracy Without Economic Independence is Worthless

By Sarakenos

The Egyptian military, with a US green light, got rid of Mubarak for precisely the same reason they sent the police and thugs that killed over 300 and injured thousands last week — to allow for the economy to run smoothly again. In other words, the disposing of Mubarak is just another solution, as undesirable as it may be, to re-open banks and have business run as usual. Factories, banks, real state, and other businesses are still owned by the same corrupt leaders, with the fate of the Mubarak family stock still unknown.

The High Council of Armed Forces, in all their four communiqués, stressed the “economic interests” of the country, which, in a heavily-privatized economy like Egypt’s, means the interests of the private owners, some of whom are military generals. The forced removal of Mubarak, in the end, served owners’ interests foremost. This economic concern was ranked as the most important objective in the High Council of Armed Forces’ latest communiqué:

•First: The High Council of the Armed Forces is committed to all contents in previous communiqués.
•Second: The High Council of the Armed Forces has great confidence in the ability of Egypt, its institutions, and its people in surpassing the current critical conditions. And based on this, all sectors, public and private, must commit to their glorious and patriotic mission to push the wheel of economy forward, and that the people are held responsible in this matter.
The third point in the communiqué was only natural to forcefully uphold “the glorious and patriotic mission,” which is to keep the current government under Suleiman in power until new elections are held. The Council did not set up a time frame for these elections, but it definitively did so for resuscitating the economy (i.e. retrieve flow of income and profits on their investments) as a priority that cannot wait for democracy; which is now! This communiqué went short of repeating Suleiman’s patronizing words yesterday when he said: “Go back to your homes and your jobs.”

There are a lot of people who simply cannot accept that the economy, at this stage, is of much concern to the Egyptian military regime (which is still in power) and the Obama administration and other US officials, let alone the general public and the revolution. But that is because these people are not trained sufficiently to have an economic eye on world affairs. The focus then shifts to the political aspects of the revolution: democracy, fair elections, and freedom of speech and religion. Make no mistake, these are absolutely important elements of any successful revolution, and achieving them deserves euphoric celebrations. But to ignore the economic demands, the very reason why this revolution even took place, is really an act of infanticide against this new-born Egyptian revolution. Bou Azizi (the true catalyst of the Tunisian and Egyptian revolutions) did not set himself on fire because he couldn’t vote in free elections. He set himself on fire because his only source of income was humiliatingly taken away from him.

All indications seem to favor sustaining the Egyptian economic system and excluding it from the revolution. For example, the Finance minister, Samir Radwan, appointed by Mubarak during the January 25 Revolution, is still running the country’s economic affairs with almost no objection from anyone. He spoke to CNN’s Piers Morgan last night to share his feelings of jubilee, but in fact refrained from using any revolutionary words, and referred to the last eighteen days as “the crisis.” Luckily so far, according to Qatar News Agency (Feb 7, 2011), he refused IMF intervention:

“The minister quoted the CBK chief as stressing that the government’s procedures would be enough to confront the current crisis.”

But then yesterday, he was quoted saying that a stimulus package may be needed, without specifying the source of those funds, to boost up employment. These all sound like innocent events to the economically illiterate. But lessons must be learned from past revolutions, like the Polish Revolution in 1989, when all the fruits of revolution were finally reaped by private owners of the country’s most important resources and industries, after being drowned by IMF loans in return for speeding up the process of privatization and doing away with labor laws and trade barriers.

The January 25 Revolution does not address the private ownership of the country’s telecommunications industry, power grid, water, post, and other major financial infrastructures. Should the country’s resources also belong to the people in the same way that the parliament and presidency ought to? Would democracy be worth anything if the democratically-elected government had no say or authority over the country’s oil, gas, water, energy, agriculture, stock markets and banking regulations, because they are “privately” owned?

Recall that the world stood by watching as the Free Officers Movement, led by Mohammad Najib and Abdul Nasser, took over power in Egypt in 1952. It was only when Abdul Nasser began a campaign of nationalizing the economy (especially the Suez Canal), that the world super powers (Britain, France, and Israel) turned against Egypt and declared war in 1953. This must be a hint to all spectators, that as long as the new freely-elected Egyptian government (to be) secures business contracts and foreign investments, the world shall embrace Egyptian democracy. However, should they choose to nationalize the major sectors of the economy, the free world will turn against Egypt, and we’ll hear western media pundits talking about how Egyptians were never ready for democracy, and how democracy does not fit the Arab mentality or society, and how dictatorships are necessary for the security of the United States of America against possible terrorist cells growing in chaos-hot-bed Egypt.

The Egyptian military, however, being itself invested in the privately owned neo-liberal economy of Egypt, had made assurances in their communiqués to the effect that they are going to protect the economy (read securing investments, foreign and domestic) as a major priority. The Egyptian Revolution of January 25 has put Egypt on the road to democracy, but will it lead to Egyptian economic independence — where economic decisions are made in Egypt, by Egyptians, and serve the interests of Egyptians? Or will they forfeit economic independence and honor free trade agreements that supersede democracy and the people’s will?

One thing is for certain. The Egyptian military rule (and all other dictatorships) can only be forced to make concessions through peaceful and total economic paralysis, as had been witnessed in the past eighteen days of the greatest Arab victory since Saladdin. The lesson to be learned for future Arab revolutions, and all world revolutions, is to keep the economy in the background of all tactics, strategies, and objectives.

Saturday, February 12, 2011

The Environment as our Common Heritage

By James K. Boyce

What does it mean to say that the environment is our “common heritage”? On one level this is a simple statement of fact: when we are born, we come into a world that is not of our own making. The air we breathe, the water we drink, the natural resources on which our livelihoods depend, and the accumulated knowledge and information that underpin our ability to use these resources wisely – all these come to us as gifts of creation passed on to us by preceding generations and enriched by their innovations and creativity.

Yet once we take seriously – as I do – the proposition that this common heritage belongs in common and equal measure to us all, we move beyond a positive statement of facts to a normative declaration of ethics. We move beyond an understanding of what is to an assertion of what ought to be.

To say that the environment belongs in common and equal measure to us all does not mean that we have inherited a free gift with no strings attached. For our common heritage carries with it a common responsibility: the responsibility to share the environment fairly amongst all who are alive today, and the responsibility to care for it wisely to ensure that our children, our grandchildren, and the generations who follow will share fairly in our common heritage, too.

Once we move onto the plane of morality, the proposition that the environment is our common heritage is no longer a simple matter. Indeed, the claim that the environment belongs in common and equal measure to us all may strike some as a utopian ideal – nice-sounding words but devoid of practical content.

Yet I believe that the fair sharing of our common environmental heritage is not only a real possibility, but that it is in the process of becoming a reality here in the United States and across the world.

In making this claim, I do not wish to minimize the great environmental challenges that lie before us. From local landscapes burdened by toxic pollution and reckless resource extraction to the global threat of climate change, we can see the fruits of greed and short-sightedness, the results of the failure of our society and others to live up to the moral imperative summed up in the phrase, “fair sharing of the common heritage.”

But I am also mindful of the words of the late Raymond Williams, who wrote: “To be truly radical is to make hope possible rather than despair convincing.” And I am conscious of the great steps forward that humankind has made, and that through our struggles we continue to make, on the road to establishing that the environment is our common heritage both as a matter of moral principle and as a matter of law.

A clean and safe environment as a human right

Already today, the principle that the environment belongs in equal and common measure to all can be found enshrined in the most fundamental of legal documents: the constitutions of national governments and states.

For example, the constitution of the Commonwealth of Massachusetts – the official name of my home state – says: “The people shall have the right to clean air and water.” That’s a direct quote.

The Constitution of the Republic of South Africa, adopted in 1994 following the demise of the apartheid regime, states: “Every person shall have the right to an environment which is not detrimental to his or her health or well-being.”

These constitutions – and many others at home and abroad – embrace the bedrock principle that access to a clean and safe environment is a human right.

It is not a privilege to be allocated on the basis of political power. It is not a commodity to be allocated on the basis of purchasing power. It is a right held in common and equal measure by all.

Of course, translating this lofty constitutional principle into on-the-ground practice is neither automatic nor simple. But the fact that the right to a clean and safe environment is embedded in constitutions around the world testifies to the great power of the common heritage ideal. And it helps undergird and inspire efforts to translate this right into law and practice.

The environmental justice movement

The environmental justice (or EJ) movement is a prime example of such efforts. In combating disproportionate pollution burdens imposed upon low-income communities and people of color, the EJ movement today is claiming – or reclaiming – the right to a clean and safe environment.

An important tool for EJ activists, indeed for everyone who cares about the quality of the air they breathe and the water they drink, is right-to-know legislation such as the U.S. Emergency Planning and Community Right to Know Act (EPCRA), passed in 1986 in the wake of the chemical disaster in Bhopal, India. EPCRA requires industrial polluters to disclose their releases of hundreds of toxic chemicals, and makes this information available to the public through the annual Toxics Release Inventory. The simple fact that polluters know that the public has access to this information sometimes is enough to change their behavior – particularly when the right to know is coupled with communities actively voicing the demand for a clean and safe environment.

When communities stand up against polluters, they are sometimes accused of “nimby-ism,” the not-in-my-back-yard philosophy that simply deflects pollution burdens onto other communities. The environmental justice movement has a clear and compelling reply to this charge: “Not in anybody’s back yard.”

But it would be utopian to imagine that we will be able prevent all pollution anytime soon. We can and must continue our efforts to reduce pollution, but we cannot expect to eliminate it altogether, at least not in our lifetimes.

What does the common heritage principle have to say, then, about the pollution that will not be prevented in the foreseeable future?

I believe there is a two-part answer to this question. First, pollution burdens should be distributed fairly, as advocated by the EJ movement, rather than concentrated in particular communities.

Second, polluters should pay for their use of the limited waste-absorptive capacities of our air and water. When polluters pay, they have an incentive to cut pollution above and beyond what is required by regulations. In keeping with the principle that the environment belongs in common and equal measure to us all, the money the polluters pay should be distributed fairly to the public, as we are the ultimate owners of the air and water.

A common heritage climate policy

As an example of how this dimension of the common heritage principle could be translated into effective policy, consider the “cap-and-dividend” climate bill that was introduced a year ago in the U.S. Senate by Maria Cantwell (D-Wa) and Susan Collins (R-Me), a bill they plan to reintroduce in the new Congress with additional sponsors.

The Cantwell-Collins bill, officially called the Carbon Limits and Energy for America’s Renewal (CLEAR) Act, would put a ceiling (that is, a cap) on U.S. carbon emissions from burning fossil fuels. To bring fossil fuels into the nation’s economy, the oil and gas and coal companies will need to buy permits at monthly auctions. The total number of permits, fixed by the cap, will decline over time as we transition to a clean-energy economy. As the permits become more scarce, their price will go up.

Most of the money from the permit auctions – 75% – will be returned directly to the American people in the form of equal per person “dividends” paid out monthly via ATM withdrawals, electronic deposits into bank accounts, or checks in the mail. The other 25% will be devoted to clean energy investments.

Unlike the cap-and-trade proposals that have repeatedly failed to pass the United States Senate, the Cantwell-Collins bill has no free permit giveaways to polluters. The polluters pay. And the permits are not tradable – any more than other sorts of permits, like hunting permits or driving permits, are tradable – so that unlike cap-and-trade, the bill does not create a new sandbox for Wall Street to play in.

If enacted into law, this cap-and-dividend policy not only will curb carbon emissions. It also will translate into very concrete practice – and into people’s pocketbooks – the principle that our country’s share of limited capacity of the Earth’s atmosphere to absorb carbon emissions belongs to all Americans in common and equal measure.

Crop genetic diversity as the common heritage of humankind

As a final example of how we can apply the common heritage principle to real-world challenges, I want to talk about seeds – specifically about rice, wheat, maize and the other crops on which we depend for our survival. These crops originated through what Charles Darwin called “artificial selection,” whereby the earliest farmers saved and replanted seeds of those plants over successive generations that did best at providing palatable and nutritious food. In this way, ultimately they bred new species that would never have come into existence without the guiding hand of human intervention.

This is perhaps the greatest example in history of what economists sometimes call “investment in natural capital”: human actions that positively enhance the ability of the environment to sustain our well-being in the long term.

Over the millennia since their ancestors first domesticated plants, generations of farmers have bred hundreds of thousands of diverse crop varieties. This diversity is what enables plant breeders today to respond to outbreaks of new insect pests and crop diseases by finding resistant varieties.

Crop diversity is sustained in the field largely by small farmers, most of them in the global South – maize farmers in southern and central Mexico; rice farmers in India, Bangladesh and southeast Asia; potato farmers in the Andes; and so on. In so doing, these farmers provide an enormously valuable service to humankind, a service for which they currently receive no compensation.

In this case, the fair sharing of our common heritage does not only mean protecting crop diversity from a genetic version of the enclosure movement that privatized common agricultural lands in 18th century Britain. It also means devising ways to reward small farmers, above all in the historic centers of crop genetic diversity in Latin America, Asia and Africa, for their vital contributions to long-term human food security.

There is much in common between small-farmer movements around the world, many of which have banded together under the umbrella of the international alliance known as Via Campesina, and the movement for environmental justice and efforts to forge a fair climate policy here in the United States.

In these and other diverse arenas, these new environmentalists are upholding the moral principle that the environment, as our common heritage, should be shared fairly within the present generation and cared for responsibly on behalf of future generations.

This is why I say that the common heritage principle not a utopian aspiration. It is a powerful, living force in the world today. But we cannot be complacent. Much has been achieved, but much remains to be done. As we join, each in our own way, in the common struggle to make this moral principle a practical reality, we can take heart both from the victories of those who came before us, and from the knowledge that we have allies across the globe.

We can take heart from the words penned by the 19th century anti-slavery minister Theodore Parker, words repeated and made famous in more recent times by Dr. Martin Luther King, Jr.: “The arc of the moral universe is long, but it bends toward justice.”

We can take heart from the evidence all around us that history is on our side.

This post is excerpted from the author’s acceptance speech for the Fair Sharing of the Common Heritage Award, presented by Project Censored and the Media Freedom Foundation in Berkeley, California, February 5, 2011.

Tuesday, February 8, 2011

Growth or Hot Money

What’s Really Affecting Food Prices

By Bill Bonner

The Dow rose another 29 points on Friday. Gold lost $4.

Which is to say, nothing much happened one way or the other. Unemployment data came out, moving the unemployment rate down to 9%. But there were suspicious adjustments in the numbers. From the reports we read, nobody really knew if the numbers were good or bad.

The more interesting news continues to come from America's central planners. At least, they are roughly the same way that TV shows such as 1000 Ways to Die or Jackass are entertaining.

Maybe it's just human nature. But it's fun to watch people do stupid things - sometimes, even when they're fatal.

And now comes Ben Bernanke, chairman of the US Federal Reserve, former chairman of the Princeton Economics Department, with a claim so dumb that we don't what to think. What's the matter with Princeton? What's the matter with economics? What's the matter with the Fed? What's the matter with Ben Bernanke?

The Telegraph has the report:

Ben Bernanke...has dismissed the idea that the central bank's policies are to blame for the rise in global food prices to a record high...
Now, let's see. The Fed adds $2 trillion to the world's supply of "hot money." Maybe that has no effect? What do you think? The Telegraph continues:

Mr. Bernanke said that the rapid growth of developing economies was behind the increase in food prices, rather than the Fed's decision to embark on a second, $600bn (£371bn) round of printing money. "Clearly what's happening is not a dollar effect, it's a growth effect," Mr. Bernanke said in a rare question and answer session with journalists at the National Press Club in Washington on Thursday.

The United Nations Food and Agriculture Organization (UN FAO) has warned that high prices, already above levels in 2008 which sparked riots, were likely to rise further.

The FAO measures food prices from an index made up of a basket of key commodities such as wheat, milk, oil and sugar, and is widely watched by economists and politicians around the world as the first indicator of whether prices will end up higher on shop shelves.

The index hit averaged 230.7 points in January, up from 223.1 points in December and 206 in November. The index highlights how food prices, which throughout most of the last two decades have been stable, have taken off in alarming fashion in the past three years. In 2000, the index stood at 90 and did not break through 100 until 2004.
Well, how do you like that? It's growth that it driving food prices to records. Not money printing.

But wait...hold the emerging world growing faster now than it was two or three years ago? Nope. Hmmm... Is the growth a big surprise? Did something happen to make investors and traders suddenly realize that...well...hey...the world is growing!


Then, how come prices are shooting up now? Why didn't they shoot up 4 years ago? Or 2 years ago? Or last year? What has changed?

Well... How about the $1.5 trillion of brand spanking new money that the Fed put into the world's money supply in 2009-2010? And how about the $600 billion more it's pumping in now?

That's new, isn't it? So, here's a wild and crazy idea. Maybe...just maybe...the fundamentals of supply and demand really do work. Maybe...just maybe...if you increase the world's hot money supply (hot money does not come from an increase in real wealth or consumer demand...but from central banks' low interest rates and money printing)...well, maybe prices on global, auction-priced goods - such as food - go up.

Just look at what is happening to other global, auction-priced goods. Oil, for example, soared above $100 over the weekend. And look at gold. Put oil and food in terms of gold and what do you find? That they haven't gone up at all! What does that tell you? That the "growth" hypothesis is nonsense.

In other words, yes...the developing world is growing. It has been growing at a high rate for the last 20 years. Nothing new there.

What's new is that central banks are printing money at a record pace. They are creating more bubbles.

And more thoughts...

Isn't this going to end badly? Why would governments play such a dangerous game? Aren't they putting their own credibility, currencies and solvency in jeopardy?

Yes, of course they are...

But there is something you have to understand. Governments always look out for the elite groups that control them. They're not necessarily concerned with the betterment of humankind...or even the best interests of their own people.

Here's an example, from The New York Times:

Public deficits and debt relative to gross domestic product have ballooned in the last three years for one simple reason - the big banks at the heart of our financial system blew themselves up. On this point, the conclusions of the Financial Crisis Inquiry Commission, which appeared last week, are very clear and utterly compelling.

No one forced the banks to take on so much risk. Top bankers lobbied long and hard for the rules that allowed them to behave recklessly. And these same people effectively captured the hearts, minds and, some would say, pocketbooks of the regulators - in the sense that a well- regarded regulator can and often does go work for a bank afterward.
Meanwhile, Barry Ritholtz says the feds are using Fannie and Freddie as another way to shovel taxpayer money to Wall Street. As you know, the Fed already plays Sugar Daddy to the bankers. If the bankers have some trash mortgage-backed security that they lost money on, the Fed buys it from them at an inflated price. Of course, just having the Fed in the market buying MBSs inflates the markets.

But it turns out, the Fed isn't the only one. The US Treasury also gave Fannie and Freddie a blank check to save the housing industry. But they let the housing industry go bust. Instead, they took the money and saved the housing industry's creditors. The big banks, in other words. Wall Street. The richest of the rich.

Why should taxpayer money be used to bail out the rich?

Well, they're not just rich. They're powerful. They're the people the government was set up to protect. Give the feds a break; they're just doing their jobs.

The private sector innovates. Government procrastinates...hesitates...and vegetates.

That's just the way it works. That's what government has always been for. The government of ancient Egypt protected the pharaohs. The government of the Ottoman Empire protected the Ottomans. The government of Genghis Khan looked out for Genghis.

And who does the US government look out for? Naturally, it looks out for the elite groups that control it. Who's that? The big banks, of course.

More on that tomorrow, too.


Bill Bonner,
for The Daily Reckoning

Monday, February 7, 2011

Food, Egypt and Wall Street

By Robert Alvarez

The dramatic rise in food prices is fueling a great deal of discontent in Tunisia, Egypt and elsewhere. It is a deep under current propelling many of the poor, facing prospects of starvation to resort to the streets and to violence. According to the United Nation's Food Agency (Food and Agriculture Organization -- FAO) world food prices are up for the 7th month in a row and are likely to remain close to the record high reached in December 2010. There's no end in sight to this destabilizing battle with food price inflation in places like Egypt, where more than half of an average income goes for food. According to the U.S. State Department, more than 60 food riots occurred worldwide over the past two years.

In March 2008, a dramatic spike in food prices led thousands of people on the brink of starvation in Egypt to violently riot -- sending a seismic shock wave through the Mubarak regime. After the Egyptian military was able to distribute enough wheat to dispel the rioting, efforts to stockpile wheat by the Mubarak government have failed, as food prices continue to hover at record highs.

Many reasons are given in the media for this problem ranging from soaring demand, cuts in food subsidies, droughts, and government mandates to use more grain-based bio-fuel. But, another significant factor is at play: unfettered speculation by investment banks. As noted in USA today, in 2008, "the bulls may not be running on Wall Street, but they're charging in the commodities pits."

At issue are the still deregulated commodity markets ushered in by the Clinton Administration and the U.S. Congress with the passage of the Commodity Futures Modernization Act of 2000. Before this law, the Commodity Futures Trading Commission (CFTC) served as a cop on the beat, enforcing rules that prevent distortion of manipulation of prices beyond normal supply and demand. But Wall Street Banks and companies such as ENRON, and British Petroleum were determined to make a lot more money from speculation by exempting energy-derivative contracts and related swaps from government oversight. And so, the 2000 law allows entities that have no stake in whether adequate amounts of food and fuel are available for ordinary people and commodity-dependent businesses, to make huge sums of money by gambling with other people's money.

Soon after passage of the 2000 law "dark" unregulated futures trading markets emerged, most notably the Intercontinental Exchange (ICE) in London -- created by Wall Street and European investment banks and several oil companies. A key practice involves "over the counter index trading" in which hundreds of billions of dollars of pension, sovereign wealth other institutional funds are used to flood "dark" commodity markets to buy and hold futures contracts without an expiration date or oversight. When it's time to make money on a losing bet, these funds are withdrawn causing commodity price crashes and economic instability. These transactions do not involve customary "bona fide" commodity traders, such as an airline company hedging on the price of jet fuel by purchasing futures contracts. As noted by Michael McMasters, a prominent hedge trader before a U.S. Senate panel in 2008, this amounts to "a form of electronic hoarding and greatly increases the inflationary effect of the market. It literally means starvation for millions of the world's poor."

Some world leaders are willing to speak out against the pernicious role of "dark" commodity markets. Recently, French President Sarkozy warned of further unrest and even war at the Davos forum, unless commodity speculation is reined in -- something that is being fought bitterly by Wall Street and Congressional Republicans. The Dodd/Frank Financial Reform Law places some restrictions on this practice by the Commodity Futures Trading Commission (CFTC). In particular, the CFTC is beginning the process of weeding out "non bona fide" investment bank speculators. True to form, House Republicans are demanding that the CFTC slam on the brakes and are planning hearings and legislation to hamstring these efforts.

The spontaneous mass uprising of ordinary people in the Middle East against their authoritarian regimes has many root causes. One that should receive much greater attention is the unfettered speculation over food supplies by powerful private financial institutions that could care less about world-wide starvation and its impacts.

Robert Alvarez is a Senior Scholar at the Institute for Policy Studies and served as a senior policy advisor to the U.S. Secretary of Energy from 1993 to 1999.

Friday, February 4, 2011

Bernanke’s Belief in Money Printing

By Eric Fry

When Stock Market Rallies Validate Effective Monetary Policy

In olden times, Federal Reserve Chairmen would devote themselves to safeguarding the dollar's purchasing power, while giving almost no thought to the plight of the economy or the direction of the stock market. (In very olden times, Federal Reserve Chairmen did not even exist, which meant that America's silver dollars had to safeguard their purchasing power all by themselves...without any help whatsoever from the Fed.)

Now comes Ben Bernanke, an academic with an obsession for the stock market. Bernanke knows he's supposed to pursue a "dual mandate" of "maximum employment" consistent with "stable prices and moderate long- term interest rates." This essentially impossible mandate is akin to pursuing maximum rice production, consistent with low water usage. The objectives clash head-on. But that's a story for another day.

Our story for today is the mandate Ben Bernanke seems to be pursuing: playing the stock market. Based on his recent public remarks, Bernanke seems more obsessed with the stock market than a day trader.

He justifies his obsession by asserting that a rising stock market will produce rising employment. "Higher stocks prices will boost consumer wealth and help increase confidence, which can also spur spending," the Chairman declared last November, the day after the Federal Open Market Committee formally christened QE2 - the second round of quantitative easing.

So far, so good.

"The US stock market's total value has increased by over 25% - some $3.2 trillion - since Aug. 26," Barron's Randall Forsyth observes. "That date was prior to Federal Reserve Chairman Ben Bernanke's speech to the central bank's Jackson Hole, Wyo., policy pow-wow, when he first laid out the justification for the Fed's purchases of Treasuries now known by all as QE2..."

Applauding his handiwork in a recent CNBC interview, Bernanke crowed, "Policies have contributed to a stronger stock market just as they did in March 2009, when we did the last iteration of [quantitative easing]. The S&P 500 is up 20%-plus and the Russell 2000, which is about small cap stocks, is up 30%-plus."

In other words, Bernanke seems to countenance no distinction whatsoever between a rallying stock market and an effective monetary policy. In fact, as he sees it, the former is irrefutable proof of the latter.

One Wall Street analyst recently observed that the stock market is advancing "as if propelled by some mysterious force." But the source is no mystery; it is Bernanke's pedal-to-the-metal money printing that is powering the stock market higher...or at least helping to power it higher.

Bernanke openly admits to goosing the stock market - indirectly - for the purposes of advancing the nation's collective good. Unfortunately, the results-to-date suggest that Bernanke's meddling has merely advanced the nation's selective boosting net income at Goldman Sachs.

But after stripping away all the Bernanke-babble, what you find is a guy running a $1 trillion pump-and-dump scheme. He's pumping up share prices in the hopes that something good - anything good - will result. And he says he will "withdraw liquidity" - i.e. dump Treasury bonds - once economic conditions improve.

Where's all Bernanke's money coming from? He makes it all by himself...sort of. It's called quantitative easing, but it's really just multisyllabic fraud. Quantitative easing creates money out of thin air, thereby undermining the value of the currency already in circulation.

Bernanke uses the money to buy Treasury bonds. The effect of this bizarre transaction is that one branch of the government issues debt securities, while another branch of the government purchases those securities. Seems like a pretty sweet deal. And it is...for as long as the market tolerates overt currency debasement.

Over the short run, Bernanke's quantitative easing can appear to work wonders. Over the longer term, this game is likely to become much less wonderful. High single-digit inflation is a likely result. Low double- digit inflation is possible.

Triple-digit inflation? That couldn't happen in the US could it?

The Daily Reckoning Thursday, February 3, 2011