Italian pensioners protest in Rome
Press TV – October 28, 2011
Italian pensioners have taken to the streets of Rome to protest against their government’s harsh austerity measures, Press TV reports.
Thousands of pensioners gathered in a central square in Rome to voice their opposition to the government’s recent changes to the country’s pension plan.
The protests are a response to the recent decision by Prime Minister Silvio Berlusconi and his coalition partners, the Northern League, to increase Italy’s retirement age to 67 by 2025.
Italian workers are accusing the government of implementing reform measures too late and following instructions dictated by other European nations.
Italian opposition parties believe Rome should tax properties and residents with assets, rather than increasing the country’s retirement age and cutting public expenditure.
Rome has been pressured to implement economic reforms and budget cuts to reassure investors worried about the country’s huge debt ratio that is second only to Greece.
There is growing fear among EU leaders that Italy could be sucked into a crisis that has already claimed Greece, Ireland and Portugal.
Rome is facing a nearly two-trillion-euro debt that is 120 percent of its Gross Domestic Product.
Mahmoud Jibril and Qaddafi’s Wealth Redistribution Project
By Mahdi Darius Nazemroaya | The Passionate Attachment | October 25, 2011
Colonel Muammar Qaddafi symbolizes many things to many different people around the world. Love or hate the Libyan leader, under his rule Libya transformed from one of the poorest countries on the face of the planet into the country with the highest living standards in Africa. In the words of Professor Henri Habibi:
When Libya was granted its independence by the United Nations on December 24, 1951, it was described as one of the poorest and most backward nations of the world. The population at the time was not more than 1.5 million, was over 90% illiterate, and had no political experience or know how. There were no universities, and only a limited number of high schools which had been established seven years before independence. [1]
Qaddafi had many grand plans. Many of them were of a pan-African nature. This included the formation of a United States of Africa.
Qaddafi’s Pan-African Projects
Colonel Qaddafi started the Great Man-Made River. The Great Man-Made River is a massive project to transform the Sahara Desert and reverse the desertification of Africa. The Great Man-Made River with its irrigation plans was also intended to help the agricultural sector in other parts of Africa. This project was one of the victims of NATO’s attacks on Libya.
Qaddafi also envisioned independent pan-African financial institutions. The Libyan Investment Authority and the Libyan Foreign Bank were important players in setting up these institutions. Qaddafi, through the Libyan Foreign Bank and the Libyan Investment Authority, was instrumental in setting up Africa’s first satellite network, the Regional African Satellite Communication Organization (RASCOM), to reduce African dependence on external powers. [2]
It is believed that his crowning achievement would have been the creation of the United States of Africa. The supranational entity would have been created through the African Investment Bank, the African Monetary Fund, and finally the African Central Bank. These institutions were all viewed with animosity by the European Union, United States, International Monetary Fund (IMF), and World Bank.
Qaddafi’s Wealth Redistribution Project
Qaddafi had a wealth redistribution project inside Libya. U.S. Congressional sources in a report to the U.S. Congress even acknowledge this. On February 18, 2011 the report stated:
In March 2008, [Colonel Qaddafi] announced his intention to dissolve most government administrative bodies and institute a Wealth Distribution Program whereby state oil revenues would be distributed to citizens on a monthly basis for them to administer personally, in cooperation, and via local committees. Citing popular criticism of government performance in a long, wide ranging speech, [he] repeatedly stated that the traditional state would soon be “dead” in Libya and that direct rule by citizens would be accomplished through the distribution of oil revenues. [The military], foreign affairs, security, and oil production arrangements reportedly would remain national government responsibilities, while other bodies would be phased out. In early 2009, Libya’s Basic People’s Congresses considered variations of the proposals, and the General People’s Congress voted to delay implementation. [3]
The Wealth Redistribution Project, along with the establishment of an anarchist political system, was viewed as a very serious threat by the U.S., the E.U., and a group of corrupt Libyan officials. If successful it could have created political unrest amongst many domestic populations around the world. Internally, many Libyan officials were working to delay the project.
Why Mahmoud Jibril Joined the Transitional Council
Amongst the Libyan officials who was opposed to this project and viewed it with horror was Mahmoud Jibril. Jibril was put into place by Saif Al-Islam Qaddafi. Because of strong influence and advice from the U.S. and the E.U., Saif Al-Islam selected Jibril to transform the Libyan economy and impose neo-liberal economic reforms.
Jibril would become the head of two bodies in the Libyan Arab Jamahiriya, the National Planning Council of Libya and National Economic Development Board of Libya. While the National Economic Development Board was a regular ministry, the National Planning Council would actually put Jibril in a government position above that of the equivalent of the prime minister–the Office of the General-Secretary of the People’s Committee of Libya. Jibril actually was one of the forces that opened the doors for privatization and poverty in Libya.
About six months before the conflict erupted in Libya, Mahmoud Jibiril actually met with Bernard-Henri Lévy in Australia to discuss forming the Transitional Council and deposing Qaddafi. [4] He described Qaddafi’s Wealth Redistribution Project as “crazy” in minutes and documents from the National Economic Development Board of the Libyan Arab Jamahiriya. [5] Jibril believed that the masses were not fit to govern themselves and that an elite should control the fate and wealth of any nation. What Jibril wanted to do is downsize the government and layoff a large segment of the public sector, but in exchange increase government regulations in Libya. He would also always cite Singapore as the perfect example of a neo-liberal state. While in Singapore, which he regularly visited, it is likely that he meet with Bernard-Henri Lévy.
When the problems erupted in Benghazi, Mahmoud Jibril immediately went to Cairo, Egypt. He told his colleagues that he would be back in Tripoli soon, but he had no intention of returning. In reality, he went to Cairo to meet the leaders of the Syrian National Council and Lévy. They were all waiting for him to coordinate the events in Libya and Syria. This is one of the reasons that the Transitional Council has recognized the Syrian National Council as the legitimate government of Syria.
Mahmoud Jibril is now the prime minister of the Transitional Council of Libya. The opposition of Jibril to Qaddafi’s Wealth Redistribution Project and his elitist attitude are amongst the reasons he conspired against Qaddafi and helped form the Transitional Council. Is this ex-regime official, who has always been an open supporter of the Arab dictators in the Persian Gulf, really a representative of the people?
NOTES
[1] Henri Pierre Habib, Politics and Government of Revolutionary Libya (Montmagny, Québec: Le Cercle de Livre de France Ltée, 1975), p.1.
[2] Regional African Satellite Communication Organization, “Launch of the Pan African Satellite,” July 26, 2010:
[3] Christopher M. Blanchard and James Zanotti, “Libya Christopher M. Blanchard and James Zanotti, “Libya: Background and U.S. Relations,” Congressional Research Service, February 18, 2011,” Congressional Research Service, February 18, 2011, p.22.
[4] Private discussions with Mahmoud Jiribil’s co-workers inside and outside of Libya.
[5] Internal private documents from the National Economic Development Board.
~
Mahdi Darius Nazemroaya is a Sociologist and Research Associate of the Centre for Research on Globalization (CRG), Montréal. He specializes on the Middle East and Central Asia. He was on the ground in Libya for over two months and was also a Special Correspondent for Flashpoints, which is a program based in Berkeley, California. Nazemroaya has been releasing these articles about Libya in conjunction with aired discussions (now archived) with Cynthia McKinney on Freedom Now, a show aired on Saturdays on KPFK, Los Angeles, California KPFK.org.
What Would Happen if Goldman Sachs Disappeared?
By John Rubino | Safe Haven | October 24, 2011
As Europe grinds out yet another doomed banking system rescue plan, it might be helpful to examine the underlying assumption, which is that we need these big banks.
Do we really? If Goldman Sachs, JP Morgan Chase, Deutsche Bank, Crédit Lyonnais and five or six of their peers ceased to exist tonight, what would happen? Would their absence change the number of factories, hospitals, farms, biotech research labs, oil wells, or gold mines? Would there be fewer houses or cars? Would computers get slower or TVs lower-def? No. The world of tomorrow morning would have exactly the same amount of real wealth and productive capacity as it does today. The main thing it wouldn’t have is a lot of arcane financial instruments that don’t produce anything edible, and a hundred thousand or so bankers making inordinate amounts of money moving this paper around. To the extent that those bankers would have to take jobs making real things, the post-Goldman world would arguably be richer and more productive.
The big banks’ disappearance might, admittedly, leave some ripples in the pond. Interest rates might rise and stock prices fall as countries like the US and Japan have to suddenly live within their means. Military budgets, public services and pensions would shrink dramatically. But there would be compensations. Where today’s low interest rate regime is devastating to retirees living on the proceeds of bank CDs and Treasury bonds, higher interest rates would give them back their personal incomes, probably more than offsetting lower Social Security and Medicare benefits. For young families, falling real estate prices (also due to higher interest rates) would bring starter homes within closer reach. And all those soldiers now occupying foreign countries, or training to, would be freed up to take real jobs alongside the ex-bankers.
People who have leveraged themselves to the hilt to buy various assets would have to sell, of course, but savers — especially those with a lot of precious metals — would snap up those assets and put them to productive use. Apple and Warren Buffett’s Berkshire Hathaway between them have over $100 billion of ready cash, which they’ll use to acquire and deploy cheap assets. Community banks that focus on mortgages, business loans, and customer service(!) will thrive as depositors abandon Bank of America for local institutions. Farmers markets and local farms will grow to replace a disrupted global agribusiness supply chain. Freed from all those financial sector campaign contributions, politics might even get a little cleaner.
Viewed this way, the process looks a lot less threatening, and might even be a path to the kind of world most rational people would prefer. So relax, let the big banks go, and let’s see what happens.
Penny Wise and Euro Foolish
By John P. Hussman, Ph.D., Hussman Funds | October 23, 2011
Among the effects of the recent and now renewed credit strains in the global economy is that investors have lost touch with relative magnitudes. For example, a billion dollars effectively represents about $3.20 for every adult and child in the U.S., while a trillion dollars represents about $3,200 dollars per person. From our standpoint, among the most important research coordination that government provides comes from the National Institutes of Health (NIH), which funds basic medical research in cancer, diabetes, multiple sclerosis, Alzheimer’s, autism, and other conditions, and where the total annual budget is about $31 billion annually (roughly $100 per American). Add in just over $7 billion in research through the National Science Foundation, and about $120 per citizen a year is spent by the government on essential medical and non-military scientific research through these agencies. These figures pale in comparison to the amounts that are increasingly demanded in order to make bondholders whole on their voluntary, bad investments. The Federal Reserve provided an amount equal to the entire NIH budget simply to backstop the rescue of Bear Stearns, which allowed Bear Stearns bondholders to receive 100 cents on the dollar, plus interest. In return, the Fed got questionable assets that it pouched into a shell company called “Maiden Lane,” which were later reported to have “underperformed.”
Incomprehensibly large bailout figures now get tossed around unexamined in the wake of the 2008-2009 crisis (blessed, of course, by Wall Street), while funding toward NIH, NSF and other essential purposes has been increasingly squeezed. At the urging of Treasury Secretary Timothy Geithner, Europe has been encouraged to follow the “big bazooka” approach to the banking system. That global fiscal policy is forced into austere spending cuts for research, education, and social services as a result of financial recklessness, but we’ve become conditioned not to blink, much less wince, at gargantuan bailout figures to defend the bloated financial institutions that made bad investments at 20- 30- and 40-to-1 leverage, is Timothy Geithner’s triumph and humanity’s collective loss.
The most depressing display of math-illiteracy by investors last week was the excitement over a report suggesting that France and Germany had agreed to a 2 trillion euro bailout package for Europe, which triggered a “risk-on” tone for the rest of the week, even after the report was retracted as inaccurate. It was almost beyond belief that investors took that report seriously, but people have become so tolerant of unbelievably large figures that virtually any bailout number can now be tossed out without triggering the least bit of scrutiny. Notably, 2 trillion euros is more than the GDP of France, and is half the GDP of Germany and France combined. Moreover, Europe has just gone through a tooth-pulling process just to approve 440 billion euros for the European Financial Stability Fund (EFSF) from all EU members combined.
So barring new dedicated funds from Germany and France, which had zero chance of being forthcoming, the only way you could morph 440 billion euros into 2 trillion euros was for each of those 2 trillion euros to really be only 22 euro cents of protection. In other words, you could only say that the EFSF would “protect” 2 trillion euros in European debt by limiting the protection to about 20% of face value, without using any of the funds to recapitalize banks or deal with much deeper probable losses on Greek debt (50-60%). Those losses alone will gulp down a large chunk of the EFSF (not to mention post-default needs to stabilize Greece over the longer-term, which the Troika estimates at another 450 billion euros).
Last week, the yield on one-year Greek debt closed at 183%, a new record, and up from 169% the prior week. Yet on Friday, the market rallied on hopes of a comprehensive “solution” to the European debt crisis, and took heart that part of an 8 billion euro hold-over loan to Greece was approved. The 1-year Greek yield pushed 3 percentage points higher. As I’ve noted before, this limited amount of immediate relief is needed to buy time preparatory to a default. A clean solution to the European debt problem does not exist. The road ahead will likely be tortuous.
The way that Europe can be expected to deal with this is as follows. First, European banks will not have their losses limited to the optimistic but unrealistic 21% haircut that they were hoping to sustain. In order to avoid the European Financial Stability Fund from being swallowed whole by a Greek default, leaving next-to-nothing to prevent broader contagion, the probable Greek default will be around 50%-60%. Note that Greek obligations of all maturities, including 1-year notes, are trading at prices about 40 or below, so a 50% haircut would actually be an upgrade. Given the likely time needed to sustainably narrow Greek deficits, a default of that size is also the only way that another later crisis would be prevented (at least for a decade, and hopefully much longer).
Gradually, but eventually, European leaders are beginning to recognize that you can’t solve a sovereign debt crisis by expanding the quantity of sovereign debt, when even the strongest countries are already bloated with it. You can’t get “Out” by walking through yet another door marked “In.” The markets aren’t quite to that realization, hoping for some easy “final” resolution that will simply make the problem go away, but that dawn will come.
The Troika report released over the weekend notes that “the situation in Greece has taken a turn for the worse … Deeper PSI [private sector involvement – i.e. loss-taking], which is now being contemplated, also has a vital role in establishing the sustainability of Greece’s debt*. To assess the potential magnitude of improvements in the debt trajectory, and potential implications for official financing, illustrative scenarios can be considered using discount bonds with an assumed yield of 6 percent and no collateral. The results show that debt can be brought to just above 120 percent of GDP by end-2020 if 50 percent discounts are applied… *Footnote: The ECB does not agree with the inclusion of the illustrative scenarios concerning a deeper PSI in this report.”
That footnote is interesting – it’s not that the ECB disputed the deeper loss-taking scenarios – it just didn’t want to include them in the report.
My guess is that European leaders will force a bank recapitalization within days – probably 100 billion euros, preferably 200 billion, but the larger number is doubtful because at present market values, European banks would have to sell new shares in nearly the same quantity as their current outstanding float in order to acquire the new capital. Yet Stratfor correctly notes that even in the event of a 200 billion recapitalization, a 50% haircut on Greek debt “would absorb more than half of that 200 billion euros. A mere 8 percent haircut on Italian debt would absorb the remainder.” So a good chunk of the present EFSF could end up recapitalizing banks, especially if too little is raised from private investors. This would leave little ammunition against any further strains, should they develop.
Of course, Europe wouldn’t need to blow all of these public resources or impose depression on Greek citizens if bank stockholders and bondholders were required to absorb the losses that result from the mind-boggling leverage taken by European banks. It’s that leverage (born of inadequate capital requirements and regulation), not simply bad investments or even Greek default per se, that is at the core of the crisis.
The bottom line is a) European leaders will likely initiate a forced bank recapitalization within days; b) Greece will default, but the new hold-over funding may give the country a few more months; c) the EFSF will not be “leveraged” by the European Central Bank; d) banks are likely to take haircuts of not 21%, but closer to 50% or more on Greek debt; e) much of the EFSF will go toward covering post-default capital shortfalls in the European banking system following writedowns of Greek debt; f) the rest will most probably be used to provide “first loss” coverage of perhaps 10% on other European debt, which may be sufficient to limit contagion provided that implied default probabilities on Italian and Spanish debt don’t breach that level and the global economy stabilizes; g) uncertainty following a Greek default is likely to create significant financial strains, even in the absence of a recession; h) all bets for stability are off if the global economy deteriorates markedly from here, which is unfortunately what we continue to expect.
Shenanigans
On the subject of bank capital, I can’t stress enough that the proper approach is for government to restrict even temporary, fully-collateralized assistance only to those institutions that are clearly solvent, and to promptly restructure the other institutions. What the global economy needs most is not bank bailouts, but to establish and enforce a legal and regulatory structure that allows the streamlined bankruptcy of insolvent institutions (Title II of Dodd-Frank addresses this with a more comprehensive policy than existed in 2008, but it doesn’t read as a “clean” solution in my view – putting too many cooks in the kitchen – particularly the Fed and the Treasury).
Again, again, again, the “failure” of a financial institution only means that the institution fails to pay off its own bondholders. Depositors typically lose nothing. For example, “saving” Bear Stearns meant primarily that Bear Stearns’ bondholders would be made whole. Saving Dexia a few weeks ago meant the same thing for Dexia’s bondholders. The key is not to prevent “failure,” but to prevent disorderly failure and piecemeal liquidation. Washington Mutual was a seamless, and therefore nearly unmemorable “failure.” Lehman was disorderly and jarring. The difference was that there was a legal and regulatory structure to quickly cut away stockholder and bondholder liabilities in the Washington Mutual instance (which was handled by the FDIC), while there was no similar way to restructure non-bank financials like Lehman in 2008.
From my perspective, weak regulation of bank leverage, inadequate capital requirements, and the need for prompt, streamlined restructuring for insolvent banks are among the most urgent problems that the global economy faces. Consider this. The Financial Times reported on Friday that in 2008, Dexia lent 1.5 billion euros of its capital to two institutional investors, who used the cash to buy newly issued shares in … wait for it … Dexia. Remember that as a bank, Dexia operated at leverage of about 50 times its tangible shareholder equity (see last week’s comment ). So Dexia’s maneuver made it possible to meet regulatory capital standards and take on a huge amount of additional leverage, without actually raising any bona-fide capital. As FT noted, “The unorthodox funding move, which roused Belgian regulators’ concern at the time, amounted to Dexia borrowing money from itself to finance a capital increase. This is illegal in most jurisdictions and is now banned in the European Union, but did not break Belgium’s existing laws.”
On a similarly outrageous note, Bloomberg reported last week that ” Bank of America , hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits… The Federal Reserve and the Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by the counterparties. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC is objecting. The bank doesn’t believe regulatory approval is needed.” Well, other than that it goes against Section 23A of the Federal Reserve Act , but then, the Fed can make an exemption whether the FDIC likes it or not . And that’s what we’ve come to – government of the banks, by the banks, and for the banks (because banks are people too) .
The Bloomberg report continued, “Bank of America’s holding company — the parent of both the retail bank and the Merrill Lynch securities unit — held almost $75 trillion of derivatives at the end of June, according to data compiled by the OCC. About $53 trillion, or 71 percent, were within Bank of America NA [the FDIC insured entity], according to the data, which represent the notional values of the trades. That compares with JPMorgan’s deposit-taking entity, JPMorgan Chase Bank NA, which contained 99 percent of the New York-based firm’s $79 trillion of notional derivatives.”
Note that the figures are in trillions, not billions (U.S. GDP is $15 trillion). That said, the vast majority of the “notional value” of derivatives in the financial system represents multiple fully-hedged links in a long chain between final users who actually take the risk, so Bank of America’s true risk is most probably a tiny fraction of that notional amount. Unless those derivatives include unhedged short positions in credit default swaps on Greek debt (which we can’t really rule out), it’s not clear that the derivatives themselves are underwater. The real problem, in my view, is that the transfer is clearly driven by the intent to get around capital adequacy regulations, and runs precisely opposite to the right way to create a good bank and a bad bank . It saddles the good bank – the taxpayer insured one – with the questionable liabilities, while “giving relief” to the holding company. This is really preposterous. … Full article
450 economists call on G20 finance ministers to stop speculation fueling hunger
World Development Movement | 11 October 2011
More than 450 economists from over 40 countries have called on the G20 finance ministers, who are meeting in Paris this week, to take urgent action to stop financial speculation in commodity markets driving up food prices and fueling hunger.
‘Excessive financial speculation is contributing to increasing volatility and record food prices, exacerbating global hunger and poverty,’ say the economists in a letter to the finance ministers. ‘With around 1 billion people enduring chronic hunger worldwide, action is urgently needed to curb excessive speculation and its effects on global food prices.
Economists from top universities including Cambridge, Oxford, Berkeley, Cornell and the London School of Economics have signed the letter, adding their voices to an escalating international campaign.
The G20 agriculture ministers have also called on their finance counterparts to introduce tighter regulation. Speculation is one of a range of issues to be discussed at the finance ministers’ meeting.
The US has moved to control speculation, and European proposals for similar rules are expected to be announced next week. But the UK government is set to block European legislation.
Neil Kellard, Professor in Finance at the University of Essex, who signed the letter, said today:
Over-speculation can steer commodity prices away from fair levels indicated by the supply and demand for food and push the poorest further into chronic hunger. Conversely, very little evidence exists that the recent high levels of commodity investing are necessary to meet hedging demand or promote pricing efficiency in financial markets. Position limits can be set to dampen commodity price movements whilst maintaining and probably enhancing market function.”
Deborah Doane, director of the World Development Movement, said today:
Excessive lobbying from the finance sector seems to be delaying political action, both here in the UK, and elsewhere. This is despite the obvious suffering caused by speculation on this most basic human need, and despite the growing number of voices calling for action. Instead of propping up cynical financial gambling by speculators, the G20 finance ministers must act to ensure that strict rules are put in place to limit the hold of bankers over the world’s food markets.”
The Myth of Greek Profligacy
By MARSHALL AUERBACK | CounterPunch | October 24, 2011
Historically, Greeks are very good at constructing myths. The rest of the world? Not so much. Reading the press, one gets the impression of a bunch of lazy Mediterranean scroungers, enjoying one of the highest standards of living in Europe while making the frugal Germans pick up the tab. This is nonsensical propaganda, designing to justify the continued collective execution being inflicted on Athens for the sins of its fathers and grandfathers. As if Greece is the only country ever to cook its books in the European Union! The heart of the problem is in the antiquated revenue system that supports that state, which results in a budget shortfall consistently about 10 per cent of GDP. The top 20 per cent of the income distribution in Greece pay virtually no taxes at all, the product of a corrupt bargain reached during the days of the junta between the military and Greece’s wealthiest plutocrats. No wonder there is a fiscal crisis.
So it’s not a problem of Greek profligates, or an overly generous welfare state, both of which suggest that the standard IMF style remedies being proposed here are bound to fail, as they are doing right now. In fact, given the non-stop austerity being imposed on Athens (which simply has the effect of deflating the economy further and thereby exacerbating the very problem the Greeks are trying to eliminate), the Greeks really are getting close to the point where they should just default and shift the problem back to those imposing the austerity. It can’t be worse than the slow execution they are facing today.
In reality, the Greeks have one of the lowest per capita incomes in Europe (€21,100), much lower than the Eurozone 12 (€27,600) or the German level (€29,400). Further, the Greek social safety nets might seem very generous by US standards but are truly modest compared to the rest of the Europe. On average, for 1998-2007 Greece spent only €3530.47 per capita on social protection benefits–slightly less than Spain’s spending and about €700 more than Portugal’s, which has one of the lowest levels in all of the Eurozone. By contrast, Germany and France spent more than double the Greek level, while the original Eurozone 12 level averaged €6251.78. Even Ireland, which has one of the most neoliberal economies in the euro area, spent more on social protection than the supposedly profligate Greeks.
One would think that if the Greek welfare system was as generous and inefficient as it is usually described, then administrative costs would be higher than that of more disciplined governments such as the German and French. But this is obviously not the case, according to Eurostat. Even spending on pensions, which is the main target of the neoliberals, is lower than in other European countries.
Furthermore, if one looks at total social spending of select Eurozone countries as a per cent of GDP through 2005 (based on OECD statistics), Greece’s spending lagged behind that of all euro countries except for Ireland, and was below the OECD average. Note also that in spite of all the commentary on early retirement in Greece, its spending on old age programs was in line with the spending in Germany and France.
In fact, Greece has one of the most unequal distributions of income in Europe, and a very high level of poverty, as the following table shows. Again, the evidence is not consistent with the picture presented in the media of an overly generous welfare state—unless the comparison is made against the situation in the US.
Of course, these facts don’t matter. The prevailing myth is that Greece is in the words of the FT’s John Authers, “a country that was truly profligate”, with little in the way of data to support that assertion. The country, however, is truly stuck: they can’t devalue, they can’t pay their way, at current prices, and nobody will voluntarily finance them. So they must exit and devalue or drop their domestic prices. The massive default, though inevitable, is just a step along the way.
To make the problem worse, export earnings also seem to face their own structural cap that is consistently exceeded by import spending, which means that the debt that finances the government shortfall is increasingly held abroad. The debt is issued under Greek law, but now it is payable in Euros which Greece is powerless to print. In this sense, ironically, the fiscal crisis is a consequence of Greece’s success, after a long preparation, in joining the European Union, and hence giving up its own currency.
The point is that, if this analysis of the source of the problem is correct, then standard IMF austerity policy is unlikely to do much to help. If the problem is not the level of wages, or the size of the welfare state, then pushing wages down and shrinking the welfare state is not going to do much. Greece, after all, is still a democracy and if one is to judge from the intensifying riots in the country, it is far from clear whether Greece (or any other euro zone member for that matter) is really willing to cut spending and raise tax rates enough to make a difference. This much is implicitly being conceded by the “Troika” – European Commission (EC), the International Monetary Fund (IMF), and the European Central Bank (ECB), which was submitted to the EU Summit yesterday, and will no doubt be a part of the deliberations in the Greek debt restructuring proposals to be hammered out by Oct. 26th.
On the first page of the document is not only a pretty open and blatant admission that expansionary fiscal consolidation (EFC) has proven to be a contradiction in terms, at least in Greece, but there is also a serious policy incompatibility problem, at least over the intermediate term horizon, with efforts at internal devaluation (ID) – that is, attempting nominal domestic private income deflation in order to improve trade prospects when one has a fixed exchange rate constraint.
While they stop short of recognizing that their demands and the actions they have imposed on Greek policymakers are setting off a debt deflation implosion of the Greek economy (never mind rupturing any semblance of a social contract, and ripping the social fabric to shreds as well – this is, after all, the jackboot version of neoliberal “reform” designed to stamp out any last vestige of social democracy and organized labor in the eurozone) this is a very large concession for the Troika to have taken.
To admit that EFC is not working, and that pursuing ID will aggravate matters further, including the ability of Greece to hit fiscal targets, is a fairly large step in the recognition of the reality of the situation. This is not something the faith based neoliberal economists in the Troika organizations are often prone to do. It is not what their incentive structures, formal and informal, tend to encourage them to do.
So why pursue it? Well, let’s face it: this has far less at this stage to do with Greece (even as the prevailing mainstream myth continues to perpetuate the picture of a lazy, unproductive country full of profligates and scroungers), than punishing other potential fiscal recalcitrants. They are scapegoating the Greeks – in order to make sure that should Greece take the rumored “hair cut” on its debt and restructure, the other peripheral countries – especially Italy – won’t get any ideas and be tempted down the same path. This is the strategy to prevent what is euphemistically called the “contagion impact”. In reality, it is also called the principle of collective guilt, destroying the livelihoods of thirteen million people for political reasons. Given their own history, the Germans above all other nations, should understand this phenomenon.
If the prevailing mix of fiscal austerity policies continue, there will be spill-over effects to nations that export to Greece. To be sure, Greece is a tiny market in Euroland, but its fiscal problems are by no means unique. As the bigger economies like Spain and Italy also adopt austerity measures, the entire continent can find government revenue collapsing – even Germany, where economic deceleration has become markedly more noticeable in the past few months. Worse, exports to neighbors will be hurt by reduction of demand. Finally, if austerity succeeds in lowering wages and prices in one nation it can lead to competitive deflation, only compounding the problem as each country tries to gain advantage in order to promote growth through exports. What is most remarkable to us is that the largest net exporter, Germany, does not appear to recognize that its insistence on fiscal austerity for all of its neighbors will cook its own golden egg-laying goose.
Angela Merkel likes to say that no real economic union is possible if one party to the union (Greece) works shorter hours and takes longer holidays than another (Germany). What she should say is that no real economic union is possible if the governing plutocrats of ALL nations (not just the billionaire Greek shipowners who probably have already moved their money offshore, but also wealthy bankers who have suffered no consequence of their own fraudulent and willfully destructive lending practices) consistently evade their fair share of the cost of that party’s own state expenditure, expecting the union either to pay the bill itself, or to force the bottom 80 per cent to pay it.
Greece is not a special case, but rather a case in point of what happens when you impose fiscal consolidation on countries with high private debt to GDP ratios, high desired private net saving rates, and large, stubborn current account deficits. What is needed is a way to redistribute demand toward the trade deficit nations—for example, by having the trade surplus nations spending euros on direct investment in the trade deficit nations. Germany did this with East Germany. Such a mechanism could be set up under the aegis of the European Investment Bank very quickly. Effective incentives to “recycle” current account surpluses in this manner via foreign direct investment, equity flows, foreign aid, or purchases of imports could be easily crafted. If it could be accomplished, it will be a way Greece and the others could become competitive enough to secure their future through higher exports.
Failure to embrace this kind of growth option will ultimately give the Greeks little alternative but to default, leaving the euro zone’s policy makers with an even bigger and costlier mess on their hands. Admittedly, this will not fully solve Greece’s problems as they would likely have to leave the euro zone as well and reintroduce the drachma. This would entail capital controls, which will cause people to head for the exits (this is, after all, a country with lots of boats). If they default, it would be more akin to a “Samson moment” for the entire euro zone. Like Samson in his last days, blinded and beaten by the Philistines, Greece is weakened, blind and bound. Default would represent one last defiant burst of strength with which it “pulls down the temple” (in this case the euro zone) via default and takes down everybody. Myth-making at the expense of the Greeks does not serve anybody’s interests, as there will be a cascade of defaults everywhere, and a Soviet style collapse in incomes, hardly an enticing prospect for the global economy. Not an attractive ending, but this is the kind of outcome which the troika’s self-surviving, immoral and cruel policies could lead to. The Greeks, and the vast majority of Europe’s citizens, deserve better.
MARSHALL AUERBACK is a market analyst and commentator. He can be reached at MAuer1959@aol.com
What Quantitative Easing Really Means
By ISMAEL HOSSEIN-ZADEH | CounterPunch | October 21, 2011
Stripped from the fancy (and mystifying) jargon, quantitative easing (QE) simply means increasing the quantity of money supply, or easing credit conditions—in the hope of stimulating the stagnant economy. This is usually done by having central banks inject a pre-determined quantity of money into the coffers of commercial banks in return for the purchase of their financial assets, which consist largely of government bonds. Although it is typically done electronically, or on paper, its practical effect is the same as printing money.
This is supposed to be an expansionary monetary policy designed to promote economic recovery. The rationale behind the policy is that the addition of new funds to the capital base of the commercial banks (at or near zero interest rates) will enable them to, in turn, extend new credit to businesses and/or manufacturers at reasonably low rates so that they would, then, be encouraged to borrow, to expand, to hire and, therefore, create growth and prosperity.
While under certain circumstance (when money supply or capital markets are tight, interest rates are too high and effective demand or purchasing power is strong) this may work, under the current market conditions (where there is no shortage of capital, interest rate or the cost of borrowing is already low, and effective demand is very weak) it is bound to fail—as it has actually failed miserably.
Borrowing and investing in the production of goods and manufactures is weak not because there is a shortage of investible funds (corporations are sitting on more than $2 trillion in cash but not hiring) or because the cost of borrowing is too high, as is implicitly assumed by the QE gurus, but because the macro-level purchasing power is too weak and the uncertain market conditions do not warrant investment and expansion. Furthermore, corporations prefer to produce not at home but where the labor is cheapest globally.
Likewise, the reluctance on the part of banks to extend credit to manufacturers is not because they lack capital, but because they find it more profitable to invest in speculation, that is, in buying and selling of assets and/or securities such as bonds, stocks, commodities, real estate, currencies, and the like—destabilizing activities that tend to create asset price bubbles, inevitably followed by bursts. Parasites discovered a long time ago that it is easier to suck the existing blood out of the body of living organisms than producing it from scratch. Karl Marx used an even better metaphor to characterize parasitic finance capital: “The complete objectification, inversion and derangement of capital as interest-bearing capital. . . . It appears as a Moloch demanding the whole world as a sacrifice belonging to it of right.”
This explains why instead of increasing industrial production and raising employment the 1,200 billion dollars of money that the Federal Reserve Bank has pumped into the coffers of commercial banks through two rounds of QEs has simply resulted in further financialization of the economy; which goes to explain the significant bubbling of some asset prices of the past few years, especially the considerable rise in certain share prices as well as the drastic rise in the price of a number of important commodities such as rice, wheat, and oil.
By the same token, it also explains why the QE policy has further exacerbated income and wealth inequality, both in Europe and the United States, as it has helped only the financial elite without any help to the public. “The evidence suggests that QE cash ends up overwhelmingly in profits, thereby exacerbating already extreme income inequality and the consequent social tensions that arise from it,” reports Dhaval Joshi, of BCA Research. Joshi further points out that real wages – adjusted for inflation – have fallen in both the US and UK, where QE has been used to promote growth. “The shocking thing is, two years into an ostensible recovery, [UK] workers are actually earning less than at the depth of the recession. Real wages and salaries have fallen by £4bn. Profits are up by £11bn. The spoils of the recovery have been shared in the most unequal of ways.” In Germany, meanwhile, where there has been no quantitative easing, real wages have risen.
It is not unreasonable, therefore, to conclude that the financial oligarchy is using QE essentially as a legal, policy tool to further enrich itself at the expense of everybody else. Not only were the Wall Street gamblers able to bail themselves out by means of $16 trillions of taxpayers’ dollars, but now they are also showering themselves with additional trillions of QE dollars to grow even richer and bigger.
Let us assume for a moment that, as the Federal Reserve and the government claim, QE is honestly designed to be an expansionary monetary policy intended to stimulate the economy. If so, why is then the government at the same time pursuing a fiscal policy that is contractionary, that is, moving in the opposite direction of the monetary policy by cutting social spending at all levels of the public sector?
The answer is that while from the viewpoint of national or public interests the two policies contradict each other, they are quite consistent from the viewpoint of Wall Street gamblers; both the supposedly expansionary monetary policy and the brutally austere contractionary fiscal policy serve the nefarious interests of the financial aristocracy. It is hard to believe that economic policy makers do not see the obvious: that their monetary and fiscal policies contradict each other. But, then, it is perhaps not so much a matter of economic knowhow or policy expertise as it is of wicked preferences and warped loyalties to the powerful special interests to be served.
The Real Agenda Behind the Cain Tax Scheme
By MIKE LOFGREN | CounterPunch | October 21, 2011
The tax plan of Republican candidate Herman Cain is the best current example of the real agenda of the GOP. It is a masterpiece of marketing, with its simple “9-9-9” label being reminiscent of a two-for-one pizza special. It would lower all Federal income tax rates to a single 9-percent rate, set the corporate rate at 9 percent, and levy a national sales tax of 9 percent. It has the sort of meretricious simplicity that appeals both to the simple-minded and the mainstream media. True to its “horserace” philosophy of covering politics, early on most of the the press declared Cain’s plan a brilliant campaign move without making any effort to evaluate its substantive merits.
Bruce Bartlett, formerly an economist in the Reagan and George H.W. Bush administrations (and a fellow Republican apostate), analyzed the 9-9-9 tax plan. His conclusion: it decreases revenue as it drastically cuts the taxes of the wealthy and – here’s the kicker – raises taxes on the least well-off. And it does not in fact tax all income at 9 percent (so much for its appealing tripartite simplicity): it lowers the capital gains and dividend rates to zero. Generally, the richer the individual is, the more likely his income is to be derived from capital gains and dividends, which are already taxed at less than half the top marginal income tax rate. This current inequity in the tax code accounts for the fact that the 400 richest Americans have been paying an average effective Federal income tax rate of 17-18 percent since passage of the Bush tax cuts: little more than half the effective rate they had paid since the early 1990s – even as their combined income quadrupled. Cain’s plan would sharply increase this disparity.
The usual rationale for reducing tax rates on capital below the rates on labor – and Cain abolishes them entirely – is that capital gains and dividends are “double taxed,” that is, the corporation that pays them out is taxed, and the recipient is taxed. But this is a smokescreen. The American revenue system is about taxing individual legal entities. Taxes on an individual, be he a wager-earner or sole proprietor of a business, are only levied once; that said, all income from whatever source (unless it is specifically exempt) is taxed in those cases. Corporations, on the other hand, pay rates on profits, a narrower category whose definition is more susceptible to creative bookkeeping. This is how GE can pay zero Federal taxes in a given year; yet that does not preclude its shareholders from realizing capital gains. Those GE shareholders are individual entities who are legally separate from the corporations whose shares they own. They are taxed once on the investment income they receive.
While Bartlett did not do a net estimate of the total revenue change, it appears to me that just executing the tax cuts in only the second phase of Cain’s three-phase plan would result in gross revenue losses of over a trillion dollars per year (so much for the GOP’s abiding concern for the deficit). The plan’s revenue raisers, on the other hand (including its Federal consumption tax with no allowance for deductions, even for food), would fall disproportionately on the non-rich and would in any case be unlikely to make up the revenue loss.
As Bartlett describes it, the Cain plan would eliminate deductions to corporations for the workers they hire. Therefore, Corporate America would have even less incentive to hire workers than now, when they are sitting on close to $2 trillion in cash. They would have all the more incentive to park their loot at a commercial bank (which would in turn park the deposits at a Federal Reserve bank), or arbitrage sweat labor overseas. On the other hand, according to Bartlett’s reading, corporations could borrow money to pay shareholder dividends and deduct the expense!
The Tax Policy Center did a distributional analysis of Cain’s plan. The Center’s conclusion: “A middle income household making between about $64,000 and $110,000 would get hit with an average tax increase of about $4,300, lowering its after-tax income by more than 6 percent and increasing its average federal tax rate (including income, payroll, estate and its share of the corporate income tax) from 18.8 percent to 23.7 percent. By contrast, a taxpayer in the top 0.1% (who makes more than $2.7 million) would enjoy an average tax cut of nearly$1.4 million, increasing his after-tax income by nearly 27 percent . . . a typical household making more than $2.7 million would pay a smaller share of its income in federal taxes than one making less than $18,000.”
So much for the policy; what of the political strategy? At first I wondered: did Herman Cain dream this plan up himself? If not, who whispered it in his ear, and what interests did that person represent? Now we know: Rich Lowrie, a Cain economic advisor who lives in Gates Mills, Ohio, a village of 2400 inhabitants east of Cleveland, and one of the wealthiest suburbs in the country. Lowrie’s day job is as an investment advisor, and he has been involved with such groups as the Koch brothers-funded Club for Growth and Americans for Prosperity. His plan has had substantive input from long-time Republican operatives Arthur Laffer (who, with his Laffer Curve, is one of the fathers of the current generation of crackpot right-wing economists), and Steve Moore, a pioneer in the operation of 501(c)4 organizations that promote the political views of billionaires while remaining tax-exempt.
Still, it is a little surprising that after the greatest financial meltdown in 80 years, widespread unemployment and destitution, and rising public anger over the greatest income disparity in America since the 1920s, a declared presidential candidate would tout a plan that would raise taxes on low and moderate income-earners while drastically reducing them on the wealthy. Potential Republican primary voters are notoriously tolerant of lunatic-fringe nostrums, but one would think even they might blanche at a plan that would raise taxes on the majority of them.
But, at least so far, not a bit of it. Cain surged in the polls after unveiling his tax plan. According to the mainstream media, he surged because of it. The underlying causes of this phenomenon would make a fascinating case study in psychopathology. Nevertheless, one suspects that Cain will begin to sink in the polls now that the big media have finally begun to evaluate 9-9-9 and as his rivals start to chip away at his front-runner status. Still, Cain’s tax plan is a startling illustration of how to use kamikaze tactics to advance a political agenda.
In the case of other policies with substantial fiscal (and social) consequences, for instance the privatization of Social Security, right-wing think tanks fronting for billionaires have worked for decades to mainstream heretofore politically unthinkable policies by endlessly repeating simple, misleading memes and touting faked “analysis.” Eventually they succeed in changing the debate and dragging the Washington Consensus (regardless of what the country at large thinks) in the direction of serving our ever-more-entrenched plutocracy.
Viewed in the light of how he advanced the GOP’s tax agenda, Cain is not a “vanity” candidate or a joke, even if he has no realistic chance of winning. His strategic purpose would appear to be to normalize bad policy and shape the Beltway’s hive mind gradually to accept a tax system with few major precedents – save that in France’s ancien régime, where the aristocracy was exempt from taxes while the poor were squeezed. And we all know how well that historical episode ended.
While Cain’s lowering of taxes on the wealthy is a well-known formula in the GOP’s playbook, the really interesting and heretofore less well-known aspect of his plan was its increase in taxes for the working poor. Republicans have of late become quite uncharacteristically enamored of raising taxes, but not on the rich. They are targeting the less well-off.
The first public laying of the groundwork for the idea of taxing low-income earners came in a November 2002 Wall Street Journal editorial page comment. The working poor, less well-off retirees, and others who do not pay Federal income taxes were “lucky duckies.” The Journal followed up with two additional editorials using that infantile phrase.
Most Republican office holders did not yet come out publicly to make the Journal’s argument. But a few, like Jim DeMint and Orin Hatch, occasionally commandeered the Senate chamber to denounce a tax policy that has allegedly allowed almost half of Americans to avoid paying Federal income taxes.
Since Obama’s election, Republicans have amped up the “soak the poor” theme. They are strangely lukewarm about maintaining a payroll tax cut, despite the fact that it would increase the purchasing power of tens of millions of Americans who would have no choice but to recycle the money into the economy in order to buy necessities. Strange behavior indeed from a party that never met a tax cut it didn’t like.
And now Rick Perry is said to be producing a flat tax, one likely to be similarly regressive in the manner of 9-9-9, even if differing in details. The normalization of bad policy continues.
Cain has never bothered to put together a proper campaign organization. Given that his campaign is spending tens of thousands of dollars of scarce funds to buy copies of his auto-hagiography, it is possible that his whole candidacy, like that of Donald Trump or Sarah Palin, is mainly a bid to boost his personal income: book sales, speaking fees, a gig as a Fox News commentator. As year chased weary year in the pizza pie business, Cain no doubt grew tired of being a huckster for his own brand of ketchup sauce and easer-like mozzarella on a soggy cardboard crust; he wanted to augment his income in the more respectable realm of ideas. The Club for Growth, Americans for Prosperity, Americans for Tax Reform, and all the other front organizations for billionaires would agree: regardless of what happens to his candidacy, Herman Cain has succeeded in the world of ideas.
Mike Lofgren is a former professional staff member of the House and Senate Budget Committees. He retired this year.
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Is America behind the massive surge in Kiev regime’s child trafficking?
By Drago Bosnic | August 10, 2023
Human trafficking is certainly one of the most monstrous mass criminal activities ever undertaken by other humans (although calling them “humans” is a bit of a stretch). And yet, there’s a special kind of this deeply repulsive crime that pushes it to diabolical proportions – child trafficking. Underage kids, particularly those who were abandoned, sold or have very poor/abusive family backgrounds, are by far the most vulnerable group. The depraved criminals who engage in such illicit activities specifically target unfortunate children and given there are millions of them all around the globe, particularly in war-torn areas, the “recruitment pool” is effectively endless. Unfortunately, the demand on the black market also seems to be constant and growing, making it a very lucrative and appealing prospect for criminals. … continue
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