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.

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.

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 entertaining...in 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 on...is 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!

Nope.

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.

Regards,

Bill Bonner,
for The Daily Reckoning

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." http://www.usatoday.com/money/industries/food/2008-02-11-food-prices_N.htm

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." http://hsgac.senate.gov/public/index.cfm?FuseAction=Hearings.Hearing&Hearing_ID=3fe95f08-0b7d-45d0-94ea-4c4346c353de

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.

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 good...like 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

Fault Lines: Ride of the Valkyries

The following was written by Jawad Mian, Portfolio Manager based in Doha, Qatar

The script hasn’t changed. It always begins with an economic crisis that weakens social and political orders. People erupt into violent protests as problems surface to an extent that can no longer be ignored. The demonstrators direct their ire against unemployment, tyranny, and the general lack of dignity and justice in their own society. Meanwhile, the government operates in denial and tries to control the situation by establishing curfews, enforcing military rule, and cutting local access to news media. The public doesn’t seem to care: demonstrators grow in numbers, vehicles are burnt, lives are lost, and international coverage of the situation explodes. The President decides to reform his government and address the public. It makes no difference. The situation on the ground gets worse. In the meantime, a new leader is “imported” and the public rallies behind the opposition. It is only a matter of days now. The President wakes up one morning to this palpable fact and negotiates his survival with political actors on the world stage. The “key players” have lost interest and are busy carving out plans for the country’s future. They offer him a safe exit: a parting gift for being a loyal servant during his tenure. Democracy wins again – and history records it to be a momentous time.

It’s over. In little time, the Mubarak era will come to a decisive end. The advocates for a Western-style liberal democracy will claim victory and Mohamed ElBaradei will emerge as the new Egyptian leader. One need only look at the international news coverage of the Egypt unrest over the past week (and the attention specifically drawn to ElBaradei) to draw that conclusion. No crystal ball needed. I have no doubt the former UN nuclear inspector will bring ‘democratic reform’ to the country – whatever that means anymore. It is a widely known fact that the economic and security interests of Egypt are tied to the United States and the broader global economy. The country cannot afford to sink into political chaos. Nor will it. There can be many potential outcomes but only one stark reality: Americans will remain part of the region’s security architecture for the foreseeable future and Egypt is of strategic importance to their Middle East strategy. The more things change the more they stay the same. So, while the people of Egypt are ready for “change”, the geopolitical arrangements (US strategy since the end of the 1973 Arab-Israeli war) will remain unchanged. Egypt is one of those countries whose internal politics matter to more than its own citizens. The other is Iran.

In a 2009 paper titled The Revenge of Geography, Robert Kaplan wrote: “The instability Iran will cause will not come from its implosion but from a strong, internally coherent Iranian nation that explodes outward from a natural geographic platform to shatter the region around it. The security provided to Iran by its own natural boundaries has historically been a potent force for power projection. The present is no different. Through its uncompromising ideology and nimble intelligence services, Iran runs an unconventional, postmodern empire of sub-state entities in the greater Middle East: Hamas in Palestine, Hezbollah in Lebanon, and the Sadrist movement in southern Iraq. As with Russia, the goal of containing Iran must be to impose pressure on the contradictions of the unpopular, theocratic regime in Tehran, such that it eventually changes from within. The battle for Eurasia has many, increasingly interlocking fronts. But, the primary one is for Iranian hearts and minds, just as it was for those of Eastern Europeans during the Cold War. Iran is home to one of the Muslim world’s most sophisticated populations, and traveling there, one encounters less anti-Americanism and anti-Semitism than in Egypt.”

Viewed in this light, the rise of The Green Revolution during the 2009 Iranian Presidential election and its emphatic failure is better understood. People need to wake up to the fact that Iran is the only natural geopolitical power in the Middle East. This is something that the West is unwilling to accept for obvious reasons. The Persian Gulf possesses 55 percent of the world’s crude-oil reserves, and Iran dominates the whole gulf, from the Shatt al-Arab on the Iraqi border to the Strait of Hormuz in the southeast – a coastline of 1,317 nautical miles, thanks to its many bays, inlets, coves, and islands that offer plenty of excellent places for hiding tanker-ramming speedboats. No doubt, this is of utmost strategic importance to world powers. It is no surprise then that Iran is being wooed by both India and China, whose navies will come to dominate the Eurasian sea lanes in the 21st century, according to Kaplan. Rest assured, the Americans are not twiddling their thumbs. They aren’t happy bystanders. American ’diplomacy’ (read: arm-twisting) in the Arab world is about to become even more intricate. The regime change in Egypt is just the first step.

Alfred Thayer Mahan, a US naval captain and author of The Influence of Sea Power Upon History: 1660-1783, coined the term “Middle East” in 1890 to denote the area between Arabia and India that held particular importance for geopolitical strategy. The area falls within the inner core of Eurasia which is inherently unstable and registers all the primary shifts in global power politics. The rising tensions in the Middle East and proxy wars between Israel and Iran, Saudi Arabia and Iran, the United States and Iran, and the slow-motion civil war in Iraq are taking place in a very different milieu than is generally assumed. These events are not happening in isolation. Rather, these incipient fractures are part of a vast network of unstable fault lines at the interface of colliding geopolitical interests. They threaten to interact in a very destructive way as rising economic stress accelerates the radicalization of politics. The most important political fault line in the Middle East currently lies between Iran and the rest of the Arab world – oil producing and oil importing regimes supported by US weight. That is to say, between Iran and America. Who can coerce whom?

The final score will be orchestrated by Wagner’s classic tune – Ride of the Valkyries.

Normal Recovery? No Way

By Comstock Partners, Inc.

The majority of economists and strategists are now telling anyone who will listen that the economic recovery is now normal and are trumpeting this view to jump-start the stock market. They are confidently asserting that "the new normal" concept popularized by Pimco is now a moot issue. In fact, there is nothing in the major economic indicators to indicate that the current recovery is anything other than anemic. We have taken eight major economic indicators and compared them to where they are now versus the economic peak 36 months ago. We did the same for the equivalent time periods for the prior two business cycles, using the official dates designated by the National Bureau of Economic Research. We did not use surveys, opinions or diffusion indexes, but relied instead on the major basic indicators measuring employment, income, consumption, production, housing and capital expenditures.

As was true when we did a similar study about four months ago, the results are very clear that the current recovery is far weaker than the prior two expansionary periods, which themselves were below the average of other post-war expansions. The results are summarized as follows.

1) GDP was up an average of 6.4% from the prior peak at this point in the last two cycles, and only 0.2% now.

2) New home sales were up 23% then; down 47% now.

3) Retail sales were up 14% then, 1% now.

4) Industrial production was up 2.5% then, down 5.6% now.

5) Non-farm payroll employment was down 0.1% then, down 5.2% now

6) Personal income was up 11% then, 4% now.

7) New orders for durable goods were up 6.2% then, down 2.2% now.

8) Initial weekly unemployment claims were down 8% then, up 22% now.

The facts speak for themselves. The current recovery is far weaker than the prior two across a broad array of major economic numbers, and the Fed apparently agrees. That is why they stated in Tuesday's release following the FOMC meeting that the economy has been growing "at a rate insufficient to bring about an improvement in labor market conditions. Growth in household spending....remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit ....investment in non-residential structures is still weak. Employers remain reluctant to add to payrolls. The housing sector continues to remain depressed."

That is why the Fed reiterated its policy of purchasing $600 billion of longer-term Treasury securities and repeated its previous statement that economic conditions "are likely to warrant exceptionally low levels for the federal funds rate for an extended period." The current market action seems based on the same type of delusionary views that prevailed at the tops in early 2000 and late 2007, and therefore rests on a rickety foundation.