By Ben Funnell,  June 30 2009 19:14

Just why is there so much debt in the Anglo-Saxon world? Bankers and regulators know well that it is in nobody’s long-term interests to have allowed borrowing to escalate to a position where the US now owes far more, as a multiple of the economy, than at the start of the Great Depression.

The answer is capitalism’s dirty little secret: excessive lending was the only way to maintain the living standards of the vast bulk of the population at a time when wealth was being concentrated in the hands of an elite.

The amount by which the elite has benefited is startling, and illustrates the problem with lightly regulated free markets: the rich get much richer while the rest do not get richer at all. According to Société Générale economists, the inflation-adjusted income of the highest-paid fifth of US earners has risen by 60 per cent since 1970, while it has fallen by more than 10 per cent for the rest. As was recently pointed out in the New York Review of Books, the Walton family, of Wal-Mart fame, is wealthier than the bottom third of the US population put together – about 100m people. These are staggering statistics, confirmed by measures such as the US and UK’s ever-rising Gini coefficients, which estimate income disparity. Another way of putting this is that the share of profits in gross domestic product is at a 100-year high, or was until very recently.

Put simply, the benefits of economic growth have gone into the pockets of plutocrats rather than the bulk of the population. So why has there been no revolution? Because there was a solution: debt. If you couldn’t earn it, you could borrow it. Cheap financing was made widely available. Financial innovations such as the asset-backed securities market aided this process, as did government-sponsored agencies such as Fannie Mae and Freddie Mac. Regulators welcomed it all while perhaps taking insufficient account of the moral hazard problem it posed: that ever-increasing leverage meant the authorities had to keep interest rates low, otherwise the debt burden would cripple consumption. This prompted more leverage, which exacerbated the problem.

A walk in any low-income area in the UK confirms this. There are BMWs in the driveways, satellite dishes on the roofs and furniture delivery vans on the streets. In both Britain and America the jobless were encouraged to buy their own homes. No one begrudges anyone else the right to own a home or buy luxury goods. The problem is that the luxuries need to be paid for out of earnings and the houses out of equity topped up with an affordable amount of debt.

The question is whether the debt load – total US credit market debt outstanding was $53,000bn (€38,000bn, £32,000bn) at the end of March, or 3.7 times GDP – is at all sustainable and, if not, how it can be lowered without sinking the economy. Those pushing extra debt in an effort to boost the economy via increased consumption point to the scale of assets backing the debt. The net worth of US households, including their houses and after counting debt, was $50,000bn in March, according to the Fed. Not a bad tally for 306m people: $165,000 each. However, the cost of servicing this debt as a proportion of income, even with record low rates, is at a 30-year high, above 15 per cent, as incomes have stagnated and the total level of debt has risen.

The debt burden has to come down, which means more saving and lower economic growth for many years to come. Along the way inflation is likely to return, probably sooner and more violently than most expect, which will prompt investors to demand a higher return and make it even harder for governments to tackle the debt. At best the debt will fall slowly over many cycles and simply trim otherwise resilient growth. At worst it could cause growth to lurch upwards before tumbling again, with all the attendant uncertainty that entails. At this point, no one can know which is more likely. I incline to the more benign view because of the size of household assets but, if the dollar’s reserve currency status should come under serious attack, rates would have to rise to defend it and that could itself cause a consumption crisis.

What can be done? First, although it is not ideal, we should not be too hasty about abandoning the capitalist model. It is less bad than any other system yet invented. But we should redouble our efforts to increase productivity through innovation and creating new markets; simply squeezing lower-income workers is a bad option, which helped get us into this mess in the first place. This requires investment in education and research. Second, we have to learn to live within our means. This means spending less than we earn, perhaps doing without the BMWs, flat-screen television sets and leather sofas. Third, we should be careful in distributing the higher tax burden that we will inevitably have to bear over the coming decade. Very high marginal tax rates did not work in the 1970s and will not work now. That said, income disparity at current levels is a political time-bomb that needs to be dealt with. Finally, we should all come to terms with the fact that these are structural issues needing structural solutions; they need to be enforced over a longer time period than any one government’s term. So we need a new political consensus, one aimed at reducing overall debt levels while reducing inequality by encouraging education, entrepreneurship and investment in innovation.

The writer is asset manager at GLG Partners

Today we look at U.S. and global efforts to reduce carbon emissions and slow global warming. Last Friday, June 26 2009, The U.S. House of Representatives approved the landmark America Clean Energy and Security Act by a narrow seven vote margin, including 44 no votes from Democrats. The legislation, also known as Waxman-Markey after its sponsors, or the climate bill, will face an even tougher audience in the Senate, where it must meet a 60-vote threshold. The Minnesota Supreme Court’s decision to seat Al Franken in the Senate may add to the Democrats’ leverage. The bill aims to cut 2005 emissions levels by 17% by 2020 and has at its core a Cap-and-Trade system which calls for mandatory caps on greenhouse gas emissions. Any companies wishing to emit above a certain level will need to purchase permits to do so. Additionally the bill requires large utilities to increase their use of renewable energies such as hydro, wind, solar and geothermal power generation.

The bill’s passage by the House is historic and will likely increase President Obama’s leverage in global climate negotiations as global leaders try to replace the soon-to-expire Kyoto Protocol. Detractors though point to its economic costs and the limited nature of the final legislation

How the Bill Works

At the heart of the bill is a Cap-and-Trade system, a market-based system which caps emissions at a certain level and allows large emitters to buy permits for additional emissions from other companies that emit less than the upper limit. The legislation calls for the number of permits to be reduced over time to encourage lower emissions. In practice, establishing a market for these permits will increase the cost of using carbon-based energy (especially electricity from coal), which will in turn reduce demand.

The revenue earned through auctioning would be distributed among households to offset the negative effect on their purchasing power from the higher cost of energy. Initial plans called for all or at least a majority of the permits to be auctioned but the vote-getting process increased the number allocated. The bill passed by the House calls for 85% to be allocated and 15% to be auctioned. Some of the allocated permits will go to utility companies, the idea being that they will either invest the proceeds in renewable fuels or temper price increases for consumers. This change reduces the potential revenue generation of the policy and runs the risk that low electricity costs could actually encourage greater usage.

Cost Estimates

Estimates of the total economic costs of the U.S. Cap-and-Trade program have varied widely. According to the Congressional Budget Office (CBO), the net annual economic cost of the Cap-and-Trade program in 2020 would be $22 billion—or about $175 per household. Analysis of the CBO results suggests that the implicit tax is relatively progressive. While this estimate has been accused of being understated (and it is worth noting that the Environmental Protection Agency came to an even lower estimate) it presented a baseline for analysis. Other estimates put the ultimate cost much higher. An analysis from the Heritage Foundation concludes that the Cap-and-Trade system described in the bill would cost the economy $161 billion by 2020–or about $1,870 per household. Such estimates do not necessarily account for changes in the price of energy that would occur naturally as a lack of investment limits production of fossil fuel based energy. Furthermore, they may not fully include the technological and efficiency gains that the current legislation hopes to encourage. For example, some of the allocations to utilities are granted with the expectation that they will be auctioned off and the proceeds will be used to fund renewable energy development. It’s worth noting, however, that there’s no guarantee the utilities will do this in practice.

Sector-By -Sector

Where the United States is concerned, the likely impact of the new price for carbon varies by sector. Utilities are likely to the most affected, especially in those regions that derive much of their power from coal-fired plants. The Midwest, the country’s already-shrinking industrial and manufacturing base and the home of many of its coal-fired plants, seems particularly vulnerable. (The distribution of allowances in the legislation is intended to find the funds to improve competitiveness of coal plants.)

The effects on agriculture are also varied. Recent Deutsche Bank research suggests that no-till agriculture, which limits disturbance of the soil, as well as reforestation and planting of vegetative buffers could derive significant carbon credits annually under a Cap-and-Trade regime. By some counts up to 20% of U.S. carbon emissions come from the release of carbon dioxide from farmland. However, the bill puts off to the future one contentious issue–the promotion of agricultural land to grow corn for ethanol, which critics suggest is very inefficient and contributed to global food shortages in 2008. The legislators also chose the Department of Agriculture, more likely to be sympathetic to farmers concerns, rather than the EPA, to be the regulator for approving carbon offsets.

The oil and metals sectors may also face vulnerabilities. Some analysts worry that emissions standards would encourage companies to keep inventories low and to import more refined fuels, contributing to idle capacity in U.S. refineries. However, it may also encourage the creation of cleaner processes or the development of carbon capture technologies, which are as yet far from being commercial. Overall, businesses have supported establishing a climate regime, given that clarity over regulatory responses is key to planning. However, there are still many uncertainties about how such a regime will be implemented.

Trade Concerns

There is also a growing fear that climate change policies could prompt trade protectionist policies. The risk that higher costs might accelerate a decline in the U.S. manufacturing base as more production is moved offshore has contributed to the suggestion that compensatory import taxes might be placed on carbon-intensive imported goods. President Obama, in saluting the bill’s passage, did insist that the U.S. not discriminate against imports. Doing so might lead to retaliatory protectionism and a further hit to trade. In a report released last week, the World Trade Organization (WTO) suggested that import taxes might be WTO-compliant if they limit distortions. Paul Krugman suggests that the WTO’s view is analogous to that for value added taxes. However, Martin Feldstein notes that the system could be very complex. With different countries each having country-specific caps and different tariffs, it could be very difficult to assess how comparable the measures are and what remedies might be needed. Thus the implications for international trade and trade law could be quite significant. Moreover, developing countries are petitioning for trade restrictions on carbon-reducing technologies to be lifted or for technology transfer of such goods. The mostly advanced economy companies who developed such expertise have been reluctant to cut prices.

Other Efficiency Steps

The administration’s energy policy more broadly tries to offset potential costs with new opportunities and technological advances to boost productivity growth. It aims to generate 25% of U.S. energy from renewable sources by 2025, create “green jobs” and reduce dependence on imported oil. Projects to develop renewable fuels and improve the efficiency of the power grid received funding in the stimulus bill, in part to offset the impact of the triple shock of lower energy demand, lower credit and lower hydrocarbon prices on renewable producers. President Obama’s team plans to spend $150 billion over the next decade to promote energy from solar, wind and other renewable sources, as well as energy conservation.

Other key steps include the May 2009 auto efficiency program, which requires the American fleet to increase to an average mileage standard of 39 miles per gallon (mpg) for cars and 30 mpg for trucks by 2016 – a jump from the current average for all vehicles of 25 miles per gallon. Doing so would create a new national standard, after many states have unilaterally taken more aggressive steps. A national standard could make it easier for car companies to supply different jurisdictions. Government estimates that oil consumption may fall 1.8 billion barrels from 2012 to 2016 and greenhouse gas emissions may fall by 900 million metric tons could be overoptimistic. They may, however, be more effective than the recently announced “cash for clunkers” program in which consumers receive a rebate for a new more fuel efficient vehicle if they turn in a gas guzzler. Yet the required fuel efficiency increase is rather low (only 4mpg) and the threshold is lower than the current national average. As such, the latter policy, which has been effective in stocking auto demand in countries like China, Germany and South Korea, might have limited effect in the United States. However the effects of such incentives may be temporary. If they elapse without a sustained increase in consumption, demand for autos could fall quickly especially in developed economies which already have a high number of cars per household.

These initiatives together hope to reduce the amount of oil the United States imports. The bulk of energy imports (oil, gas, electricity) come not from the Middle East but from Canada. An increasing amount of the oil supplied is bitumen from the oil sands, which continues to bear an expensive environmental and economic cost per barrel under current technology. Bitumen’s carbon footprint is improving though through technological innovation – and the fuel expended in transport is clearly lower than the amount needed to ship oil from Saudi Arabia. Yet there is still a long way to go. Given the shift towards energy efficiency and lower emissions fuel supply, Canadian authorities and producers are struggling to improve production so that their largest consumer will keep buying. On President Obama’s visit to Ottawa, his first foreign trip as president, he and Prime Minister Harper announced joint investment in carbon capture technology, adding to funds already pledged by the province of Alberta. Such measures hope to help the U.S. meet energy security needs without adding to environmental insecurity. However, carbon capture technology is still far from being commercial.

Assessing Alternatives

One of the biggest benefits of this legislation is that it provides a mechanism to set a price for carbon over the mid-term. Doing so will help households and businesses make investment and savings decisions. However, economists have long argued that a carbon tax would be more efficient than a Cap-and-Trade system, as it would be less complex and vulnerable to distortions. A carbon tax would set a specific cost per unit of carbon dioxide, thus establishing a clear cost for carbon. A Cap-and-Trade system, on the other hand, would set an upper limit for emissions, but the prices it established for carbon might be variable. Of course, introducing new taxes is rarely popular, particularly not during a recession, even if the tax option would be more efficient and have lower compliance costs.

The European Union’s experience with Cap-and-Trade over the past several years provides reason for caution. The first iteration of the policy, issued too many permits, undermining demand. With prices for carbon low, so was the incentive to reduce emissions. A reformulation improved this balance and emissions have been reduced, though European countries still have a significant space to reach their targets. The EU system allows companies to bank or store their allocations for the future or to borrow them from the future. The EU system also illustrates an effect of the global recession. The drastic reduction in industrial output has meant that many companies are producing well lower than their quotas and are seeking to sell their excess allocation. Several companies sought to raise cash by selling their carbon certificates, causing the price of carbon to plummet. A market-derived carbon price might actually be very volatile.

The Road to Copenhagen

World leaders will meet this December in Copenhagen to negotiate a replacement to the Kyoto Protocol, which expires in 2012. The Kyoto Protocol aimed at reducing emissions of 1990 greenhouse gases levels by 5.2% by 2012. The range that is now being discussed is around 25% to 40% of 1990 levels by 2020. The previous U.S. administration withdrew from ratifying the Kyoto protocol, saying it deemed it unfair for allocating reductions targets between developed and developing countries. The reluctance of emerging market economies to make emissions cuts that might stunt their growth could again be an obstacle to a deal later this year.

The United States and China are the world’s top two greenhouse gas emitters, together accounting for more than 40% of annual emissions. If the United States and China can become catalysts in bringing about a strategic transformation to a low-carbon, sustainable global economy, the world will take a giant step forward in combating climate change. Given the complexities of global discussions, analysts like Kenneth Lieberthal suggest that climate change is yet another policy arena that could be best tackled by a G-2, that is bilateral talks by the two countries. Despite its reluctance to take any steps that might reduce economic growth, China, has been taking some steps to curb emissions growth. China rivals the United States as a carbon emitter, despite having low levels per capita, but now has domestic interests to slowly make changes. In particular, the increase in pollution-related illness is taxing the Chinese health care system. Yet many of these measures, such as China’s own cash for clunkers program, may be of limited effect given the potential demand for primary energy. Coal remains the primary feedstock for Chinese electrical plants, although the country is planning to build several nuclear power plants and is sourcing more of its electricity from wind. China is now the world’s largest assembler of solar technology, but little is applied domestically. Should China choose to allocate a greater share of infrastructure spending towards power generation from renewable fuel sources, it could have a significant effect on global use of such technologies.

Chinese heavy industry has been particularly hard hit by slumping global demand, leading to emissions reductions. Electricity demand continues to fall, year-on-year (as of May at least), despite the aggressive government stimulus which has including new metals processing. In fact, the persistent weakness in industrial electrical demand suggests that overall growth could be weaker than some officials suggest. Electricity demand has tended to be a proxy for economic growth. A more domestically driven growth pattern might reduce the pace of Chinese new energy demand growth over time, however, suggesting that this correlation could change if more output is shifted to the services sector.

Coming to a global consensus might therefore be difficult. Already many European countries, including Sweden, which takes up the EU presidency today, may have hoped for a more aggressive commitment from Washington. Emerging and frontier market economies like South Africa, Mexico and the UAE are now taking measures to reduce their carbon footprint. Brazil has moved to reduce the destruction of its rain forests. However these countries continue to be wary of restrictions on emissions, arguing that advanced economies should bear the bulk of the costs. They are also pushing for more technology transfer from the companies and countries that developed some of these techniques.

Higher Carbon Costs and the Global Economy

A higher price for carbon-based energy could be one of several increased taxes and costs which weigh on U.S. consumption in the near future. Should the recovery in U.S. consumption be as sluggish as feared, such higher costs could be a limitation in the absence of real investment which might prompt productivity gains. Despite the risks of a new carbon price, this cost, plus the allocation of government and private sector funds, could spur innovation and energy savings technology that could lead to productivity growth.

Moreover, the cost of energy could increase quite substantially even in the absence of a carbon price. Even in 2009, there is a risk that higher oil prices might dampen any economic recovery. Further increases, perhaps to the $80-90 a barrel range, could keep the economy well in recessionary territory this year. Given current and past short-falls in oil investment, production growth might be quite sluggish going forward. If petroleum demand returns to trend, this could contribute to higher prices in 2010. Higher oil and coal prices could encourage a change in behavior that could boost the position of alternatives in the energy mix, even though carbon-based fuels – albeit higher cost ones – are likely to fuel the economy for years to come.

According to an ancient source, the Emperor of Persia gave orders that sea waves be punished with beatings, for a storm had hindered him from transporting his troops by ship. That was quite stupid of him. Today, maybe he would have tried the same logic with a Stockholm district court, or asked for a consultation with its judge?

It is odd, how strongly the civil rights situation in the spring of 2009 reminds me the struggles over freedom of press in France in the decades preceding the French revolution.  A new world of ideas is emerging and would not have been able to, were it not for an accelerating technology.  Raids against secret printing houses, confiscation of pamphlets and, even more, confiscation of printing equipment were the norm. Orders were give to stop the adventurous nightly transports between the Prussian enclave Neuchatel — where not only large parts of the Encyclopedia was produced, but also lots of daring pornography and atheist pamphlets — and Paris.

Between the 173os and 1780s, the number of state censors in France was quadrupled. The raids against illegal printing houses rose at about the same pace. In retrospect, we know it did not help. Rather, the increase of censorship and raids on printing houses had a stimulating effect on the new ideas and made them spread even faster.

Now the conflict is raging over the Net’s continued existence as a forum of ideas and as an institution for civil rights, protected from
privacy-threatening interventions and against powerful corporate interests.  That a mad French-German proposal was voted down in the European parliament does not certainly mean that the freedom of the Net and individual privacy are now safeguarded.

How real are then these threats? Let us think about the Dallven river during spring floods. In a really critical year, the water level may rise by 100 meters, maybe 200 meters, flooding housing lots and tree meadows. Does it help to call the local police?

So far, and this is shown by historical experience, legislation has not been able to stop technological development.  Walter Benjamin wrote an influential essay, whose title usually is translated as The Work of Art in the Age of Mechanical Reproduction, where he draws a series of interesting conclusions about what radical changes had spring from his times’ relatively modest degree of reproducibility. The digital revolution has brought about a reproducibility which Walter Benjamin could have hardly dreamt about. One could talk about maximum reproducibility. Google is about to build a library that, if is is allowed to go ahead, will make most material libraries look obsolete or at least outmoded.

Cinema and paper newspapers have been drawn into this new immateriality already for a while. Films, novels, magazines let themselves be reproduced. Further on, also three-dimensional objects, like products of programmable lathes are going to be reproduced. Wirelessly and rapidly.  This immaterialization naturally threatens copyright. And we are not only talking about run-of-the-mill writers like Mr Jan Guillou, whose social problems of acquiring new country estates I am honestly ignoring.  Material copyright has much more serious aspects: What has the big pharma patents on AIDS medicines meant for the Third World? Or what about Monsanto’s claims of holding rights on crops and pigs?   Every society must strike its balance between competing interests and every hypocritical attempt to ignore that is nonsense. A functioning military defence is more important than ice hockey rinks and bicycle lanes. The Net is likely to pose a threat against copyright. And so what?

Intellectual and personal integrity for all citizens, in short being able to access an Internet that has not been transformed into a government channel by lobby-marinated courts and EU politicians in leashes, is arguably more important than the needs of a primarily industrial scene for literature and music, which is rapidly crumbling already within the lifetime of  authors. The need of being read, of formulating and influencing one’s times, may, but does not need to,  get in conflict with the desire to sell many copies. When the two needs are conflicting, the industrial interest must be put aside and the great intellectual sphere of the arts must be defended at all costs against c0rporate and government threats.

The essential interest of artists and authors, if they are intellectually and morally serious about what they are doing, must certainly be to get read, to let their voice become heard in their generation. How that goal is attained, that is, how readers get reached, is in this perspective of secondary importance.

The growing defense of the Internet’s expanded freedom of speech, of immaterial civil rights, that we are now witnessing in country after country, is the start — just as it was in 18th century — of a liberalism that is carried forward by technology and is therefore emancipatory.

Therefore, my vote goes to the Pirate Party.

At least 19 police officers were injured in clashes with anti-globalization protesters in Turin. Thousands of students protested against the economic crisis on the sidelines of a G8 meeting of international university rectors.

Demonstrators hurled rocks and fire extinguishers at police in Turin while over 40 university deans from G8  industrialized countries and 19 developing nations were holding a summit at the Castle of Valentino.

Police in anti-riot gear responded with baton charges and volleys of tear gas. Clashes were violent but lasted only a half hour. Thousands of demonstrators, mainly students, took to the streets of Turin to protest the summit.

Foreign students joined Italians and came in from Greece, The Netherlands and Britain. Some tried to attack a number of banks. At least 19 police officers were injured and some demonstrators when the clashes broke out. A couple of Italian demonstrators were taken into custody.

It was the second day of protests in central Turin. More than 1,000 police officers were deployed. This Italian student explained why the protests were taking place.

He said, we are denouncing the illegitimacy of this summit and also the decisions that are being taken by those participating. We think that training over the years has increasingly become a market and global decision-making has been exploiting the world of knowledge.

Another student said she had come to Turin because she is unhappy with the way the universities are being run.

She said: “This is a demonstration to call for a different type of university, to call on those who are responsible for the economic crisis to take on their responsibilities and not unload them on the weaker subjects of society, like students, those without full-time employment and families.”

The Turin clashes have raised concerns about security in view of the G8 summit of world leaders to be hosted July 8-10 by Italy. Initially the chosen summit venue was an island off Sardinia but since the earthquake struck in central Italy on April 6, the venue has been changed to l’Aquila with the aim of attracting funds to the area.

This year, France experienced 283 protest rallies on Labour Day in cities from Marseilles to Bordeaux, Grenoble and Paris. Although not as dramatic as 1968, the estimate by one of France’s largest trades unions of 1.2 million protesters was five times higher than the protests in May 2008.

In addition, compared to 1968, the 2009 Labour Day protests were more widespread throughout Europe. On 1 May in Germany, union leaders estimated 484,000 people demonstrated in 400 rallies across the country. In Berlin, 237 police were injured after running battles with stone-throwing activists, leading to 289 demonstrators being arrested and five cars torched. In Istanbul, more than 100 protesters were arrested and dozens of people injured as supermarkets and banks were deliberately targeted. In Athens, rioting was dispersed by tear gas, and in Linz in Austria, 20 people were injured and five arrested.

This violence was unrepresentative of the majority of peaceful demonstrations that occurred on 1 May, which is a traditional day of socialist, worker and union-led protests. Nonetheless, the geographic spread of the violence and diversity of motivations behind it reflected an underlying trend: revolutionary and protest movements have become more active across Europe amid the global economic downturn.

By Alexander Cockburn, Counterpunch

On any rational assessment the popular new president is skating on thin ice. Pollyanna bulletins about the economy puff up from the White House and Federal Reserve, like auguries of a new Pope through the  Vatican chimney. “Habemus spem.” We have hope. We’ve just heard it from President Obama: “We are starting to see glimmers of hope across the economy.” From Fed Chairman Ben Bernanke, who’s so far unleashed $12 trillion in booster money, we get the always sinister reassurance, like Death giving the Appointee in Samarra a friendly tap on the shoulder, “the foundations of our economy are strong”.

The economic news in the near and medium term is ghastly, as Mike Whitney outlined on this site last Thursday. Retail sales crashed again in March, nowhere worse than in the car market, though electronics and building materials were way off too. They now reckon there’ll be just over two million housing foreclosures in 2009, up 400,000 from 2008. Industrial output is going through the floor at an annual rate of 20 per cent, the biggest quarterly drop since the end of the Second World War. US industry is now running at only 70 per cent of capacity, the worst number since they started tracking this stat in 1967. Job losses are currently running at 650,000 a month.

Round the next corner is credit card delinquency and  the long-heralded slump in commercial real estate, where vacancy rates are already running at 15 per cent,. Capital One, a huge issuer of Visa and Mastercard, just  said the annualized net charge-off rate for U.S. credit cards — debts the company reckons will never be paid — rose to 9.33 percent in March from 8.06 percent in February. In other words, Capital One – whose credit card promotions take up  hefty space in the mailbag of every US postman – is in big trouble, and  under one in ten of these credit card holders will have a messed up credit rating for several years to come.

Wall Street and its boosters are trying to pretend that indeed the worst is over. The Dow and S&P Index have been rallying for five weeks. Wells Fargo, the huge San Francisco-based bank, second biggest home lender, announced that first quarter net income rose 50 per cent to $3 billion.  No one seriously believes the bank is in anything other than continuing huge trouble, and will soon need – so Blomberg News surmises – $50 billion to settle near-term commitments. The profit figure stems from newly relaxed rules about the valuation of Wells Fargo’s assets.

In other words it’s thin economic ice from here to the horizon. Robert Reich, now teaching economics at Berkeley and formerly labor secretary in the Clinton administration, wrote a piece recently, titled “Why We’re Not at the Beginning of the End, and Probably Not Even At the End of the Beginning”. There are huge problems with the whole orientation of the US economy. The “free market” outsourcing model has failed. Even at the best of times the US consumers who account for over 70 per cent of all economic activity in the country, don’t have purchasing power to keep the whole show on the road, unless they put it on the credit cards which are now maxed out and going into default, or borrow on houses they can’t afford.

Amid a hail of well founded criticism from liberal and conservative economists alike, Obama, with Geithner, Summers and Bernanke at his elbow, remains absolutely committed to giving the bankers everything they ask for, trillion upon trillion.  As William Black, deputy director at the former Federal Savings and Loan Insurance Corp. during the thrift crisis of the 1980s, recently remarked in an acrid interview in Barron’s, (reprinted here last week) “ Unless the current administration changes course pretty drastically, the scandal will destroy Obama’s administration, both economically and in terms of integrity. We have failed bankers giving advice to failed regulators on how to deal with failed assets. How can it result in anything but failure?”

In foreign policy the ice is just as treacherous. As the nation emerges from its disastrous adventure in Iraq, Obama redeploys to the Afghan-Pakistan theater. The administration delightedly touts claims that its remote-controlled missiles are decimating al-Q’aida. The Washington-based journalist Gareth Porter last Thursday cited here data leaked by the Pakistani government showing that only ten out of 60 drone attack in February and March hit al Qaida leaders and the rest did what bombs and missiles usually do, namely kill civilians, 537 of them – thus immeasurably strengthening the hand of the Taliban  in the battle for hearts and minds.

Obama is no doubt unworried by this since the hearts and minds he’s mostly interested in belong to the American people and especially opinion-forming elites, who remain unflustered when high explosive falls on a wedding party in Waziristan. Failure in Iraq was re-labeled “victory” and in terms of domestic politics the chickens only come home to roost when there’s film of people climbing off the roof of the US embassy into a helicopter, or when the casualty rates among US soldiers start soaring. Soaring Pentagon budgets are popular with Congress, whose members nix any effort to cut back.

Where the ice is giving way for Obama is among those who thought he might strike out in a new direction in foreign policy. There’s not much sign of that. Whether it’s a sell-out of Haiti’s poor or acquiescence in Israel’s grim plans for the Palestinians, Obama’s game is strictly business as usual, up to and including the Cuban blockade whose damage, as Fidel Castro said here last week, “cannot be calculated only on the basis of its economic effects, for it constantly takes human lives and brings painful suffering to our people. Numerous diagnostic equipment and crucial medicines –made in  Europe, Japan or any other country– are not available to our patients  if they carry U.S. components or software.”

Obama has welshed on promises that America will stop kidnapping its enemies and “rendering” them to secret prisons overseas. As under Bush, enemy combatants languish without rights or recourse in prisons like Bagram. The torturers who flourished in the Bush years will not be prosecuted. Electronic eavesdropping continues unabated. It seems, so CounterPunch’s Fred Gardner is reporting in exclusives on this site, he and his attorney general are welshing on commitments not to harass medical marijuana operations in states where local laws sanction such activity.

Will the liberal-left mutiny? Never. Remember, Bill Clinton bombed Yugoslavia and kicked away life supports of America’s poorest and most of the liberal-left stayed loyal to the end and cherish his memory. The labor movement has already seen defeat for its cherished “card check” bill, designed to win a level playing field for union organizers, thus presumptively boosting effective purchasing power among working people, vital to the nation’s economic well-being.  They’re not really blaming this on Obama, even though it is his chief aide, Rahm Emmanuel who, in his years on the Hill, picked Democratic candidates who feel no loyalty to labor and refused to push for the card check bill, and though Obama recently stressed he is a “new” Democrat – transparent code for someone distancing himself from the labor movement.

Obama’s polling numbers remain good. He has only to say there are “glimmers of hope” and the pollsters duly find increasing sentiment among Americans that they feel the economy is moving in a “positive” direction. He gets good assessments from Democrats and Independents. Many  Republicans don’t like him but here again Obama is lucky, just as he was lucky – at least in the near term -  to have three Navy SEALS off the horn of Africa who were good shots. The Republican opposition is in appalling shape, lumbering from one ill-conceived stunt to the next.

Obama’s lucky to have succeeded a terrible president. He gets out a lot and talks a great game. His problem is the same as the country’s. The economic ice is cracking under his feet, and the “stimulus” is going to be about as efficacious as those cushions under the seats the flight attendants assure us are going to come in handy when the plane goes down in the North Atlantic.

The Curse of Rockefeller

He died in action thirty years ago, in intimate activity in a subterranean sanctuary at the end of a secret tunnel under a street in the West 50s in New York.  Nelson Rockefeller was one of the richest men in the world, but he never found a way to buy his way into the Oval Office. As Bruce Jackson writes in our April 16-30  newsletter, just published:

– he was the individual more responsible than any other for the rise to power of Henry Kissinger. Kissinger was on Rockefeller’s personal payroll for a decade; it was because of Rockefeller that Kissinger was brought into the Nixon administration;

– he was responsible for the September 13, 1971 bloodbath at Attica prison;

– in 1973 he created the most repressive drug laws in the nation. In 1973, he got the New York legislature to pass what immediately became known as “the Rockefeller Drug Laws,” These laws imposed very long sentences, many with mandatory minimums, for what were often minor offenses everywhere else. Sale of two ounces of heroin, morphine, opium, cocaine or cannabis in any form, or possession of four ounces of those same drugs brought the same sentence as second-degree murder: 15 or 25 to life, with no parole before the minimum was served and no judicial discretion.

Thousands of drug dealers, drug users and “mules” went to prison for decades under the Rockefeller laws, but few big time dealers did any more time under them than they would have under the laws that had been in place before 1973, primarily because many of them – like Nicky Barnes and Frank Lucas – were not only willing to turn informer, but had enough people to snitch on to make massive sentence reductions worthwhile to the prosecutors.

Now by agreement between Gov. Paterson and the New York state assembly, these laws are about to be repealed. Read Bruce Jackson in CounterPunch newsletter on the true reasons for repeal and the awful legacy of a truly appalling human.

Also in this terrific new issue: As the economy implodes, the social fabric frays and nutball groups organize for Armageddon. Pam Martens sets forth the national game-plan of the “Free State Project”. Is it coming to a town near you?

Half a million new jobless every month and the salesmen of “free trade” still hawk their credo. Paul Craig Roberts describes what offshoring has done to America.

Alexander Cockburn can be reached at alexandercockburn@asis.com

By Barry Eichengreen and Kevin O’Rourke.

The parallels between the Great Depression of the 1930s and our current Great Recession have been widely remarked upon. Paul Krugman has compared the fall in US industrial production from its mid-1929 and late-2007 peaks, showing that it has been milder this time. On this basis he refers to the current situation, with characteristic black humour, as only “half a Great Depression.” The “Four Bad Bears” graph comparing the Dow in 1929-30 and S&P 500 in 2008-9 has similarly had wide circulation (Short 2009). It shows the US stock market since late 2007 falling just about as fast as in 1929-30.

Comparing the Great Depression to now for the world, not just the US

This and most other commentary contrasting the two episodes compares America then and now. This, however, is a misleading picture. The Great Depression was a global phenomenon. Even if it originated, in some sense, in the US, it was transmitted internationally by trade flows, capital flows and commodity prices. That said, different countries were affected differently. The US is not representative of their experiences.

Our Great Recession is every bit as global, earlier hopes for decoupling in Asia and Europe notwithstanding. Increasingly there is awareness that events have taken an even uglier turn outside the US, with even larger falls in manufacturing production, exports and equity prices.

In fact, when we look globally, as in Figure 1, the decline in industrial production in the last nine months has been at least as severe as in the nine months following the 1929 peak. (All graphs in this column track behaviour after the peaks in world industrial production, which occurred in June 1929 and April 2008.) Here, then, is a first illustration of how the global picture provides a very different and, indeed, more disturbing perspective than the US case considered by Krugman, which as noted earlier shows a smaller decline in manufacturing production now than then.

Figure 1. World Industrial Output, Now vs Then

Source: Eichengreen and O’Rourke (2009).

Similarly, while the fall in US stock market has tracked 1929, global stock markets are falling even faster now than in the Great Depression (Figure 2). Again this is contrary to the impression left by those who, basing their comparison on the US market alone, suggest that the current crash is no more serious than that of 1929-30.

Figure 2. World Stock Markets, Now vs Then

Source: Global Financial Database.

Another area where we are “surpassing” our forbearers is in destroying trade. World trade is falling much faster now than in 1929-30 (Figure 3). This is highly alarming given the prominence attached in the historical literature to trade destruction as a factor compounding the Great Depression.

Figure 3. The Volume of World Trade, Now vs Then

Sources: League of Nations Monthly Bulletin of Statistics, http://www.cpb.nl/eng/research/sector2/data/trademonitor.html

It’s a Depression alright

To sum up, globally we are tracking or doing even worse than the Great Depression, whether the metric is industrial production, exports or equity valuations. Focusing on the US causes one to minimize this alarming fact. The “Great Recession” label may turn out to be too optimistic. This is a Depression-sized event.

That said, we are only one year into the current crisis, whereas after 1929 the world economy continued to shrink for three successive years. What matters now is that policy makers arrest the decline. We therefore turn to the policy response.

Policy responses: Then and now

Figure 4 shows a GDP-weighted average of central bank discount rates for 7 countries. As can be seen, in both crises there was a lag of five or six months before discount rates responded to the passing of the peak, although in the present crisis rates have been cut more rapidly and from a lower level. There is more at work here than simply the difference between George Harrison and Ben Bernanke. The central bank response has differed globally.

Figure 4. Central Bank Discount Rates, Now vs Then (7 country average)

Source: Bernanke and Mihov (2000); Bank of England, ECB, Bank of Japan, St. Louis Fed, National Bank of Poland, Sveriges Riksbank.

Figure 5 shows money supply for a GDP-weighted average of 19 countries accounting for more than half of world GDP in 2004. Clearly, monetary expansion was more rapid in the run-up to the 2008 crisis than during 1925-29, which is a reminder that the stage-setting events were not the same in the two cases. Moreover, the global money supply continued to grow rapidly in 2008, unlike in 1929 when it levelled off and then underwent a catastrophic decline.

Figure 5. Money Supplies, 19 Countries, Now vs Then

Source: Bordo et al. (2001), IMF International Financial Statistics, OECD Monthly Economic Indicators.

Figure 6 is the analogous picture for fiscal policy, in this case for 24 countries. The interwar measure is the fiscal surplus as a percentage of GDP. The current data include the IMF’s World Economic Outlook Update forecasts for 2009 and 2010. As can be seen, fiscal deficits expanded after 1929 but only modestly. Clearly, willingness to run deficits today is considerably greater.

Figure 6. Government Budget Surpluses, Now vs Then

Source: Bordo et al. (2001), IMF World Economic Outlook, January 2009.

Conclusion
To summarize: the world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the US leads one to overlook how alarming the current situation is even in comparison with 1929-30.

(This article first appeared on http://www.VoxEU.org.)

By Seumas Milne
When mass protests exploded on the streets of Seattle in 1999 against the kind of globalisation embodied in the World Trade Organisation, their anti-capitalist message was widely portrayed as utopian. A decade on, as anti-capitalist demonstrators vented their fury yesterday on the social and ecological vandals of the City and prepared to do battle today outside the G20 meeting in the heart of what was once London’s docks, it looks more like common sense.

The wreckage of the neoliberal order – which reached its zenith in the wake of Seattle and has generated the greatest global economic crisis since the 1930s – is now all around us. World trade is in free fall and, by some measures, collapsing faster than at the time of the Great Depression. While G20 leaders talk of saving or creating 20 million jobs, 25 million are expected to be lost in the wealthy OECD states alone, whose main area of competition now seems to be their relative rates of economic decline. And what in the richest economies means mass unemployment and rising poverty translates into destitution and rising death rates in the developing world.

So it can hardly be a surprise that some people end up trashing the homes or offices of bailed-out bankers – or that French workers have taken to “bossnapping” executives handing out mass redundancies, as has been the experience of astonished Caterpillar and Sony executives in recent weeks. As unrest over the impact of the crisis has grown across Europe, workers are increasingly resorting to direct action against closures and following the example of the successful occupation of the Republic Windows and Doors factory in Chicago, backed by Barack Obama last December.

The night before last, workers occupied Belfast’s Visteon car components plant after 565 out of its 610-strong UK workforce were sacked on Tuesday, and by yesterday morning the action had spread to its factories in Enfield and Basildon. There is likely to be plenty more of this kind of thing to come, as conflict over who carries the costs of the crisis becomes more overt – and so there will have to be if we are to avoid the return to business as usual that politicians and corporate powerbrokers evidently still envisage across the western world.

Of course, all the talk at the ExCel centre is of regulation, a green New Deal and “partnerships of purpose”. Champions of the failed free market are thin on the ground anywhere these days – even Nigel Lawson and Cecil Parkinson, the Thatcherite architects of the 1980s Big Bang City deregulation, this week turned their backs on the financial mayhem they unleashed. But the fact that many of those presiding at the G20 are the same people who brought us to the present catastrophic pass scarcely inspires confidence in their ability to overcome the crisis.

No doubt some modest progress will be made on bringing hedge funds and tax havens under control, though the US and Britain are holding out against tougher regulation. The transatlantic battle over regulation versus co-ordinated expansion is in any case largely a phoney one. Obama is right that the US can’t be the sole engine of global recovery, but then Germany’s own fiscal stimulus is a good deal larger than its politically hybrid government likes to let on. And if demand is boosted simply to refloat the existing failed economic model – which in the US and Britain includes a crippled, corrupted financial system – it won’t work anyway.

The same goes for G20 plans to inject extra cash into the International Monetary Fund, which claims to have changed the nefarious neoliberal ways that made it a target for the protesters of the 1990s, but is in fact still imposing the kind of structural adjustment conditions which are the opposite of what is needed to pull countries out of the slump. As for today’s expected declarations on action against global warming, they barely count as political window-dressing.

All the signs are that most of the politicians playing to the gallery in London today have yet to face up to the full scale of the crisis, or what will need to be done to overcome it. Angela Merkel, Nicolas Sarkozy and President Lula are right to single out the Anglo-Saxon model and “white men with blue eyes” for the meltdown – even if that underplays its systemic nature. But this isn’t only a crisis of capitalism or of a particular form of capitalism after all, it’s one of US economic and global power as well.

That’s because it’s the product not just of financialisation and deregulated markets, but also of chronically low American savings and unsustainable levels of consumption – including the massive military expenditure that has underpinned US wars and global overstretch in the years since the end of the cold war. The deficits they’ve generated have increasingly been financed by China and the fact that today’s meeting is of the G20 rather than the G7 – and that its most important meetings are between Obama and President Hu Jintao – is a symbol of the decline of American economic power exposed by the crisis.

The rebalancing of the US relationship with China, which is so far riding the economic storm somewhat more successfully than its western counterparts, can play a part in overcoming the crisis. But right now recovery is being held back by the failure of the US, and even more precariously Britain, to intervene decisively in the financial sector to drive up lending – rather than pour cash into the black hole of bankers’ gambling debts. In both countries, the combination of halfhearted quantitative easing and a refusal to take control of the banks is stifling the impact of tax cuts and extra public spending. In Britain in particular, the limits of crude Keynesianism – rather than direct intervention and nationalisation – are clearly being reached.

Meanwhile, market enthusiasts have once again been complaining, as they did at the time of Seattle, that the G20 protesters have no alternative. It was never true in the 1990s, but now such claims are simply ridiculous. The policies and programmes now pouring out of the international trade union movement, NGOs, political parties and thinktanks – on climate change, jobs, green investment, public services, trade, finance, international institutions and global justice – are voluminous and serious. The problem is not a shortage of alternatives, but a lack of political muscle so far to make them stick.

By Terence Hoffman in Westminster

The United Nations of Westminster, Whitehall and Washington have signed an accord stating Anglo-Saxon democracy is “not necessarily capitalist in nature.” The communiqué, released to mark Equal Rights Day, signifies the final deconstruction of neopostmodernist economics. It also declares the rule of law’s victory over corporate interests.

“Capitalism doesn’t work in a free market,” the document says, quoting the Seventh Circular of the Post-American Church’s Infernal Screed. “To function, it needs regulating, and to thrive it requires manipulation.” Britain’s break with dominator culture started at the 2009 climate talks, though the Copenhagen Consensus deleted all reference to it. Instead, that deal was framed as “sustaining ethical business, going forward.”

Today’s propaganda release is more forthright, describing postideology as “a framework-based market, not the market-based framework” of times past. “If you gave more than you got you were always a loser,” the statement concludes. “But we were only winning by claiming our economies were ‘growing’, and to do that we had to take
much more than we gave.” Measured in debt and destruction, the costs were clear, and the planet’s resources were obviously finite. Yet it was only when rich countries agreed to steep emissions cuts that these sorts of imbalances could be discussed. The result was the world’s first “planned retrenchment”, reducing annual energy use by 10 per cent across the member states of the Organisation for Ecological Cooperation and Deescalation.

“Exceptional times call for exceptional clichés,” the Prime Minister told a newscast from his potato plot. “A decade of reverse ‘growth’ has been a nurturing experience for all of us. We’re giving more than we get, we’re restoring
nature and we’re helping those less fortunate than ourselves.” The shift to localisation has revived democracy, he stressed, from the smallest chain of Rhizomatic Councils to the Globalised Umbrellas protecting everyone.

“If there’s one thing no one can dispute,” the Prime Minister said, “it’s that no matter how weak we made it, there is such a thing as society.” All we have to do now is make it work again.

Katharine Ainger, Thursday 26 March 2009

Ten years ago, the anticapitalist movement predicted this recession. Now it must envisage an alternative global future

It was 1999 and the summer of corporate love. Many pundits – now talking of “bad apples” and applauding bailouts – were predicting the stockmarket would go up forever. Not coincidentally, it was also a decade ago that the anticapitalist movement emerged with a rambunctious “carnival against capital” in London’s Square Mile; the contagion spread to the streets of Seattle where the World Trade Organisation meeting was shut down by protesters later that year.

The movement, which was essentially demanding democratic control over the global economy, wreathed summit after summit of the G8, the WTO and the World Bank with protest and teargas. It was wild, infuriating, diverse and sometimes incoherent, as only a network that encompasses indigenous peoples, radical environmentalists, workers and kids in hoodies could be. The movement was like the child in the crowd as the emperor of global neoliberalism wheeled by, pointing out that his cloaks were woven from financial fictions and economic voodoo.

They must now be credited for their prescience. Today, everybody can see the emperor has no clothes; but as the G20 meets in London next week to ensure financial “stability” for a return to business as usual, it appears rather as though the emperor has rushed back to the very same discredited tailors to bail them out and commission several new outfits.

And what of the movement that predicted the crash? Post 9/11 it lost momentum as it was forced to rechannel energy into fighting rearguard actions against state repression and the war on terror. Yet the less visible but vital processes of developing workable alternatives, building grassroots movements, and popular education continued. The movement also effected a palpable cultural shift of alternative economic ideas and environmental concerns towards the mainstream; in Latin America social movements helped elect governments that were prepared to challenge neoliberal doctrine. Movement demands also foreshadowed a rebalancing of power towards the global south, and helped to delegitimise the institutions of the global economy.

These ideas have never been more relevant or necessary. Clearly we need a vision, and it doesn’t look as if the G20, still so in thrall to financial capital, will deliver one. So could this be the hour for a movement that was beaten, teargassed and imprisoned for pointing out the now blindingly obvious?

NGOs, churches and trade unions are mobilising thousands to turn out on 28 March with the demand to “Put people first”; 1 April is “Financial Fools Day”, when direct action activists and environmentalists will be setting up a climate camp outside the European Climate Exchange in London – because the same financial system now in crisis is being entrusted to cut emissions through the artificial creation of a market in carbon credits. Meanwhile another group called G20 Meltdown is promising a carnival at the Bank of England. The climate camp has an open process and has worked hard to establish its social base of legitimacy; the carnival is more of a hotchpotch, and it’s unclear who will turn up. Perhaps some windows will be broken – and frankly, it would be astonishing if no one was angry enough to do so.

Whatever they decide, the G20 and other leaders are going to be faced with increasing unrest from those paying with their jobs, their social security and their taxes for a crisis not of their making and a bailout not of their choosing. From Haiti to India, people are rioting over food. We are entering a singular moment of climate chaos and food shortages, a social and energy crisis as well as financial meltdown. The solutions the “alter-global” networks have developed offer a way out that is based on whole systems thinking. Fundamental to this vision is an economy that meets the needs of everyone on a planet of finite resources.

Which is why the climate camp in the city, with its slogan “Because nature doesn’t do bailouts”, is one of the most interesting of all the movements coalescing in London next week. It’s a potent mix of seasoned anti-globalisation activists who are skilled in creative direct action and a new generation that is energised and refreshingly undogmatic. The camp has taken a key component of the globalisation movement – the temporary autonomous zones of street parties and convergence centres liberated in cities during summit protests – to a new level, creating a transformational space which prefigures the world they want, featuring everything from wind turbines and composted waste to decentralised decision-making and creative play.

At the end of this year, almost exactly 10 years to the day since Seattle, this new incarnation of the movement will be on the streets during the Copenhagen climate summit demanding real climate justice that does not rely on the current “business as usual” proposals. Perhaps anticapitalism had the right idea at the wrong moment in history. Perhaps its moment has come.

• Katharine Ainger is co-author of We Are Everywhere, a book documenting global social movements.