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Positive Reality Therapy for Americas Critical "States of Denial"

October 27 - (Econotech FHPN) (The following article draws on an extensive set of news summaries for the past month from the mainstream media that, due to length, was posted separately on my site on Oct 24 link.

"North Korea's declared nuclear bomb test program will increase the incentives for other nations to go nuclear, will endanger security in the region and could ultimately result in nuclear terrorism ... demonstrates the total failure of the Bush administration's policy toward that country. For almost six years this policy has been a strange combination of harsh rhetoric and inaction." (William J. Perry, Secretary of Defense from 1994 to 1997, later Clinton's Special Adviser on North Korea, WP, Oct 11)

"the Bush administration sees diplomacy as something to be engaged in with another country as a reward for that country's good behavior. They seem not to see diplomacy as a tool to be used with antagonistic countries or parties, that might bring about an improvement in the behavior of such entities, and a resolution to the issues that trouble us. Thus we do not talk to Iran, Syria, Hizballah or North Korea. We only talk to our friends -- a huge mistake." ("Bush's Blunder in North Korea," by Donald Gregg,was a CIA official since 1951 and a liaison to President Carter's NSC and, National Security Adviser to VP George Bush and U.S. ambassador to South Korea from 1989 to 1993, now chairman of the board of the Korea Society, WP, Oct 9)

"[North Korea's] test appears to represent a stunning failure for the Bush administration's stated goal of blocking the spread of weapons of mass destruction, the foundation of its security policy. (WSJ, Oct 9)

"the American era in the region has ended ... Much more likely is the emergence of a new Middle East that will cause great harm to itself and the world ... What brought it to an end? Topping the list is the Bush administration's decision to attack Iraq and its conduct of the operation and resulting occupation ... Other factors include the demise of the Middle East peace process, a failure by traditional Arab regimes to counter the appeal of radical Islamism, and globalization." (Richard Haass, Director of Policy Planning in Powell's State Dept, now President of the Council on Foreign Relations, FT, Oct 17)

"With the Middle East immersed in its worst crisis for years, we call for urgent international action towards a comprehensive settlement of the Arab-Israeli conflict. The outlines of what is needed are well known." (Newspaper ad signed by numerous famous former global leaders, FT, Oct 4)

"Israeli officials and politicians across the political spectrum are convinced Iran represents an existential threat ... Saudi Arabia, in what was considered a dramatic move several years ago, offered to get much of the Arab world to recognize Israel in exchange for a withdrawal from all territory Israel occupied during the 1967 war. Israel rejected the idea." (WSJ, Oct 3)

"Senate Majority Leader Frist said Monday that the Afghan war against Taliban guerrillas can never be won militarily and urged support for efforts to bring "people who call themselves Taliban" and their allies into the government. [Frist] said he learned from briefings that Taliban fighters were too numerous and had too much popular support to be defeated on the battlefield. "It sounds to me ... that the Taliban is everywhere." (AP, Oct 2)

A New Global Strategic Bargain of Energy and National Security

The explosion of N. Korea's nuclear device, the ongoing deep morass in Iraq, Afghanistan, very high and very volatile energy prices, among many other things, indicate two critical facts about the state of the world today which should by now be crystal clear to anyone not in a deep "state of denial" (to borrow what I consider to be the inaccurate title of Woodward's new book, explained at the end of this article).

First, the U.S. can, and should, not attempt to police and remake the whole world unilaterally. Second, leading nations need to more rationally, fairly share access to energy, to help create more just, sustainable global economic development.

With a rather belated recognition and acceptance of this glaring reality by the world's leaders, I believe that there would be the possibility of a grand new strategic bargain between, most importantly, the U.S. and China, with the EU, Japan, Russia, India, Saudi Arabia and others also playing critical roles. It would not have to be negotiated nor presented as such, I would prefer gradual but steadfast diplomacy with this bargain in mind.

Bluntly put, the U.S. can not ask, let alone try to pressure or cajole, major powers such as China, the EU and Russia, to act on America's behalf against its own designated enemies, e.g. N. Korea and Iran, which these other powers may not necessarily wish to confront to the same extent as the U.S. does right now, without offering something very significant, beyond its market access and appreciation, to these major powers in return.

"Because of North Korea's track record as an eager exporter of weaponry, some experts are more worried about the government in Pyongyang spreading nuclear technology to other "rogue" nations than about the possibility of it launching a nuclear attack ... most experts said the country would probably refrain from doing so. (LAT, Oct 21)

"Whether the NPT survives this combined assault depends on how the big powers rise to the challenge: by co-operating to press both regimes to abandon their nuclear exploits and uphold the rules, or by competing in the wider struggle for regional influence ... North Korea is dangerous, but isolated. An Iran with nuclear weapons, says one senior Bush administration official, would be a "game-changer"." (Economist, Oct 19)

"Ms. Rice's immediate challenge is to get real cooperation from North Korea's neighbors. Yet she appeared to make little progress on that front during her Asia trip, which ended Saturday." (WSJ, Oct 21)

"As Rice left China today for Russia, her goal of uniting Northeast Asia in a strong, unambiguous punitive stance against North Korea remained elusive ... Rice sought Friday to lower expectations ... Beijing believes that if it is identified too closely with a U.S. hard-line stance, it loses the opportunity to broker a solution in the future, with the international prestige that entails." (LAT, Oct 21)

The essence of a possible grand bargain is that the U.S. will greatly scale back its so far unsuccessful efforts at regime change in the "Axis of Evil," to remake the Middle East, Northeast Asia, etc, and rather share control of critical regions with major powers, including regional ones. In the case of the Middle East, this would modify a sixty-year U.S. policy of hegemonic domination of by far the most important source of oil. In the case of East Asia, it would simply accept the reality of China as a leading power with its own strong interests in influence, and try to make the best of it.

In return for this change in current U.S. policy, the other major powers, especially China, the EU and Russia, will fully, unreservedly commit to do all that they can to help stop nuclear weapons proliferation, starting with N. Korea, while the world transitions over the next decades to more sustainable sources of inexpensive, clean energy.

I have long believed, and my web site's tag line, "finance innovators, not speculators" reflects this, that the most important struggle in the world today is not Bush/Cheney's "war on terror." It is about who will control the "commanding heights" of the global economy in the 21st century, via its monetary/financial and energy systems.

These global production and financial networks need to be closely linked as part of this new grand bargain, in which the U.S. will once again earn its way, rather than relying upon much of the world's development capital. The "war on terror" and nuclear non-proliferation will naturally be part of global economic development and security, there can not be global prosperity without global peace and security.

"Global leaders must find a way to unravel lop-sided trade and investment flows or risk a slump in the U.S. dollar that would create havoc for the world economy, ADB Chief Economist Ali said. An international agreement along the lines of the 1985 Plaza Accord "on a bigger scale" is needed to unwind the imbalances that have resulted in the U.S. current account deficit swelling to a record $805 billion." (Bloomberg, Oct 3)

Whether or not this suggestion is a way to go, I believe that, as I wrote in my Sep 26 article:

"Reforming the monetary/financial system to make the U.S. earn its way once again, as it had proudly done for two centuries, would profoundly change everything, including the low image of the U.S. in the world and the social/political mass culture of this nation. Wouldn't U.S. corporate innovation become focused on what the rest of the world really needs? And wouldn't Americans be proud in doing so? Wouldn't that be a more positive image and vision for the world?"

Frankly, by running such unprecedented current account deficits, which draw upon the world's savings that could otherwise go towards global economic development, and by consuming about 25% of the world's energy, the U.S. has lost much of its moral authority.

The U.S. trying to badger the rest of the world to do its bidding is like a credit card junkie telling his creditors what to do. Likewise with energy, how could the U.S. with a straight face tell China and others which nations are acceptable for it to cut energy deals with?

Reconsider Worldview based on U.S. as Hegemonic Sole Super-Power

Most, perhaps all, in the U.S. foreign policy "establishment" would balk at this bargain, especially when it comes to sharing U.S. power in the Middle East.

One of the biggest "states of denial" that extends clear across the ideological spectrum of the U.S. elite, from Kissingerian "realist" to neocon "idealist" Jacobins, is that the U.S. is the world's unquestioned, unchallenged superpower or hegemon (sometimes called hyper- or uber-power in Europe), its current global dominance greater than even the Roman and other (in)famous empires of the past.

Since the breakup of the Soviet Union, I have never read, heard or seen even a single solitary public dissent (what is said in private I'm obviously not privy too) from a leading economic, foreign policy and national security expert, of any ideological persuasion, on this characterization of U.S. as unprecedented superpower, regardless of how strongly critical various members of the elite may be of important aspects of U.S. foreign/military policy at any given moment.

Yet it is precisely this hubristic delusion of America's unprecedented, unlimited, and unchecked power on the part of Bush, Cheney, Rumsfeld and the neocon's that has now gotten the U.S. into the huge mess described by leading bipartisan former government officials and mainstream "establishment" experts quoted at the very beginning of this article.

The harsh reality is that the U.S. of today has nowhere near the economic, industrial, technological and most especially financial power in the world that it did in 1945, when an ailing FDR met with Saudi Arabia's first monarch, Ibn Saud, on a Navy ship in Egypt to seal the foundation "oil for security" deal of the postwar era between the two nations, nor even in 1980, as U.S. industrial descent was already picking up steam just before the disastrous precipitous decline in Reagan's first term, when the "Carter Doctrine" of unchallenged U.S. control of the Persian Gulf was stated.

The accelerating decline in key economic parameters of U.S. power, military excluded, since that time has become so glaringly obvious by now that it seems to me it takes almost deliberately willful blindness on the part of the U.S. elite to continue not to see the evidence and deny it. How can one read any leading news publication without noticing what is happening to the underpinnings of U.S. power? One could find many quotes any week from the mainstream media like the following recent ones:

"During the past five years America has accounted for only 13% of global real GDP growth, using purchasing-power parity (PPP) weights. Asia has accounted for over half of the world's growth since 2001. Even in current dollar terms, Asia's 21% contribution exceeded America's 19%." (Economist, Oct 19)

"IBM has moved its global procurement headquarters to southern China from New York to "capitalize on emerging market opportunities." IBM spends 30 percent of its $40 billion annual procurement in Asia. This is the first time the company is moving the headquarters of one of its biggest divisions to China ... The move "places us closer to the core of the technology supply chain." (Bloomberg, Oct 12)

"Azim Premji, chairman of Wipro, the Indian outsourcing group, has warned that the US faces a more acute skills shortage in information technology than India, blaming failings in America's education system and restrictive immigration policies. "Math is not considered as important, and students are not getting a premium when they graduate as engineers," he said." (FT, Oct 26)

"the [BIS] said. Global trading in futures and options contracts on lending rates, currencies and stock indexes increased to $484 trillion from $429 trillion in the first quarter, the Basel, Switzerland- based BIS said in a quarterly review." (Bloomberg, Sep 11)

To put the last quote in context, U.S. current dollar annual GDP is $13.3 trillion, $3.3 trillion per quarter, compared with $1.9 quadrillion in annual derivatives trading, 147 times as much.

As best I can tell, it seems that the U.S. elite actually believes that Wall Street, along with its City of London ally, dominating this orgy of global derivatives trading and structured finance is THE viable basis of U.S. economic power.

Attempt to Explain America's Massive Denial of Basic Economic Reality

For years I have found it almost impossible to think that elite policy-makers could truly believe that the U.S. is performing a great service for the rest of the world by being the global "shopper of last resort."

The only explanations for this massive denial of basic economic reality by both elites and the average American that I have been able to come up with over the years are the following, I'm sure I've missed other crucial ones.

First, the CEOs of U.S. global corporations have no national loyalty, so the skill gap, decline of industrial competitiveness, etc. simply doesn't matter too much to them. Even the corporations of those few well-meaning leading CEO's who consistently warn about such dangers to the U.S., such as IBM's Palmisano and Intel's Grove and Barrett, must constantly shift their resources and efforts to outside the U.S.

Fifty years ago CEO's actually believed that "what is good for General Motors is good for America," as GM's CEO and Secretary of Defense "Engine Charlie" Wilson said in 1955, so a perceived lag in science and math education, especially following Sputnik in 1957, was actively addressed.

This is no longer the case today. What is good for any major global corporation is now good for its CEO stock options and hedge funds, which inevitably has meant massive outsourcing offshore, not building up U.S. domestic capabilities.

That is a major change in mindset, and until it changes, there is very little hope that the growing problems of the U.S. can and will be altered, because there is not the power, money and incentive to do so in corporate America.

Second, the U.S. has become a nation of middle-class homeowners who are doubling as inadvertent (mostly) speculators, especially in real estate, whose economic self-interest in their home equity makes it virtually impossible for them to tell, or even beware aware of, the difference between real economic wealth creation and the paper version.

As I've previously mentioned a number of times, the same applies to their political leaders and pundits, especially in the liberal "blue states," where real estate speculation has been most egregious. Their financial self-interest makes it all but impossible for them to see how U.S. economic policies are negatively affecting the rest of the world they usually sincerely would like to help, because it seems almost impossible to honestly understand the huge negative impact of the rest of the world funding the U.S. massive twin deficits, when one is sitting on huge real estate capital gains resulting from those policies.

Again, this is particularly difficult for liberal leaders, pundits, advisors, even economists, to come to grips with (not to single them out, there's plenty of blame to go around), but until they do, the prospects of truly meaningful change is very limited, if not impossible.

Third, somewhat related, the average American doesn't know a great deal about subjects that have rapidly become in just the past few years critical to his future, such as China, derivatives/structured finance, the Middle East, N. Korea, etc., etc., , in part due to the abysmal oligopolistic state of the mainstream mass media and two major political parties.

It's one thing if decades ago voters didn't know the difference between Sunni and Shia, Iraq and Iran, it's quite another when the U.S. now has a declared national security strategy of pre-emptive/preventive undeclared, in the Constitutional sense (which doesn't seem to bother the "strict constructionist" faction on the Supreme Court, war all over the globe.

Fourth, key parts of the technology elite in the U.S., which I've long considered perhaps its "last best hope" as reflected in my site's name, econotech, now actually seems to believe that the 24/7 narcissistic obsessive social networking of MySpace, YouTube, etc., combined with relentless massive media advertising and branding, is the economic and technological equivalent of developing leading edge advanced industrial capital goods and affordable, good quality basic consumer goods and services to help raise desperately low global living standards.

Again, the financial self-interest of massive stock options, usually to unjustified excess, even backdated at times, and IPO's seems to have something to do with this Silicon Valley shift to the fantasy worlds of Hollywood and Madison Ave.

I guess what all four reasons boil down to, in the final analysis, is that if humans can get a "free lunch," which the U.S. has been able to do since 1971 with its paper dollar, then it is simply hard-wired in their nature to take it, and then make up all sorts of plausible-sounding reasons, at least to oneself most importantly, and hopefully to one's close family and friends, for why that's not what they're actually doing.

Modern mainstream psychology has shown the amazing power of humans to delude themselves in this way many times in small lab experiments, so why should it be any different on the scale of the global economy?

Historical Context for a New Grand Strategic Bargain

At the risk of seeming even more hubristic and self-deluded the elite that I've just criticized, such a grand bargain as the one I sketched above would be of the same historic importance for long-lasting peace and prosperity in the 21st century as the creation of the post WW II Bretton Woods institutions and economic reconstruction along with security alliances.

Sixty years ago, the latter without the former could very well have ended up in yet a third round of the 20th century's extended "Thirty Years' War," with even many more tens of millions dead, this time in nuclear holocausts. Everything possible must be done ASAP to avoid going down that path toward international anarchy today.

This grand strategic bargain should have been attempted thirty years ago during the huge energy, monetary, foreign policy and political crises of the 1970s. If it had, perhaps a great deal of unnecessary pain and suffering could have been avoided, and a huge amount of global development achieved.

But global leadership on all sides, trapped in a Cold War mindset, clearly was nowhere close to being up to the task back then. Hopefully this time around they will be, better late than never, although as a result the U.S. has already unnecessarily squandered huge amounts of historically earned goodwill and prestige, "soft power" if you prefer, or "political capital" as Bush might put it.

World More Dangerous With Loss of U.S. Power and Domestic Political Stalemate

And make no mistake about it, this is a huge loss, even if Wall Street currently doesn't seem to care.

E.g., I recently saw a Bloomberg tv interview with Jesper Koll, Merrill Lynch's chief Japan economist who has been there for two decades, in which he quickly brushed aside any concern whatsoever about the recent N. Korean nuclear test.

Not to single out Koll, he seemed a nice enough guy and is a good market economist, but this is extremely short-sighted, to say the least (as if that would be unexpected from Wall Street).

Financial markets globally remain extremely complacent toward the potential dangers ahead, as market players are already spending their huge year-end bonuses, counting on the ongoing global rally to continue (see my Sep 26 article, "Global Markets Hope ..." link). E.g.,

"The Chicago Board Options Exchange volatility index, or VIX, dropped 0.27, or 2.5%, to 10.63 -- its lowest closing level since late 2005." (WSJ, Oct 21)

Barring a major late turnaround and/or last minute surprise, come November, there may be a huge political stalemate in D.C.

"A last-minute "October surprise" -- a dramatic news event that shakes up the U.S. election -- could be a big wild card in the final three weeks of the fight for control of Congress. With Democrats threatening to sweep Republicans out of power in Congress in the November 7 elections, a late-breaking foreign crisis, terrorist attack or a new scandal could change the debate and shape the ultimate outcome." (Reuters, Oct 17)

Wall Street thinks that such a stalemate will be okay:

"Investors are banking that a Democratic victory will mean political stalemate with President George W. Bush rather than passage of an anti-business agenda." (Bloomberg, Oct 24)

But it very well might make the world, already teetering on the brink of war in many volatile areas, an even far more dangerous place.

With the possibility of tremendous political warfare in Washington, the loss of U.S. global power and prestige, right now dangerously palpable, could become even worse, and with it the prospects for global stability,

That doesn't reflect how I feel about the political situation, as you will see in the final section of this article.

But it does mean that the nation's leaders should be very much aware of what happened in the 1970s under wounded Nixon and weak Ford and Carter, and the effects of a relentlessly hounded Clinton in the 1990s.

And also remember what happened with the worldwide collapse of the elite's moral authority associated with the Vietnam War and the year 1968, not only in the U.S. and Europe, but also in the enormously devastating "Cultural Revolution" in China.

No one wants to relive those times of upheaval, and we're far way from that right now, but the negative international surprises keep coming. Very few expected Israel to do what it did to Lebanon this summer. Nor for N. Korea to test a device so soon, even though:

"North Korea's leadership is under severe economic pressure. Financial sanctions imposed by the US in September last year appear to have had a tougher than expected effect. (FT, Oct 5)

What's next? Will Gaza explode, with unforeseen consequences, perhaps for Egypt? More unrest in Eastern Europe, whose current account deficits might make them somewhat vulnerable to another contagion effect in things start to get out of hand, as happend in East Asia in 1997?

"Police in Budapest charged at protesters to end a day of riots on the 50th anniversary of Hungary's anti-communist uprising. The violence extended a month of pressure on Prime Minister Gyurcsany to resign." (Bloomberg, Oct 24)

"The average monthly wage in Hungary was 847 euros ($1,067) at the end of last year, a third of the 2,542-euro average in Germany. The frustrations in Budapest mirror those of people around Eastern Europe as governments from Estonia to Slovakia struggle to fulfill promises that capitalism would bring a better life. Gyurcsany's Socialists were the first Hungarian party to win a second consecutive term since the fall of communism when it won re-election in April. Czechs, Poles and Slovaks have all replaced the parties that led them into the EU two years ago." (Bloomberg, Oct 20)

"Attempts at forming stable governments in some of the 10 nations that joined the EU in 2004 have foundered as voters cast their ballots for a growing number of parties and as politicians struggle to forge coalitions with a common goal. Alliances have shattered as political leaders seek to implement budget cuts demanded by the EU without breaking campaign spending promises." (Bloomberg, Oct 3)

My point is that the loss of U.S. prestige and status globally, combined with the tensions inherent in an inequitable hyper-speculative version of globalization, has created potential tinderboxes all over the world, with not necessarily completely foreseeable but still very serious risks.

Unfortunately, when the structural foundations of stability are steadily weakned, reality has a nasty habit of intervening into situations based upon massive denial and delusion. No one can predict how. But one thing is obvious so far, unanticipated geopolitical surprises have become more frequent, and Wall Street doesn't seem to care in the least, as the good times continue to roll. For now.

What Would Happen Politically If the Housing Bubble Really Collapsed?

"Is this what a housing bust looks like? New home prices fell last month by the largest amount in 35 years and owners are being warned to brace for further declines, especially in formerly hot markets. After years of increases, some buyers say prices are still out of their range. The Commerce Department reported that the median price for a new home sold in September was $217,100, a decline of 9.7 percent from September 2005. That was the lowest median home price in two years and the sharpest year-over-year decline since December 1970, providing dramatic evidence of the slowdown in the once-booming housing market." AP, Oct 27

"The decline in home prices after a five year real-estate boom will cause the economy to slow and force the Fed to lower rates to avoid a recession, McCulley wrote on Pimco's Web site on Oct. 19. "To think otherwise after a bubble is to not understand bubbles." (Bloomberg, Oct 23)

"Moody's Economy.com projects that the median sales price for an existing home will decline in 2007 by 3.6 percent, which would be the first decline for an entire year in home prices since the Great Depression of the 1930s. 133 of the nation's 379 metropolitan areas would suffer price declines. account for nearly one-half of the value of the nation's stock of single-family homes ... the rebound in prices is not expected to occur quickly." (AP, Oct 3)

"The ABX index, which measures the risk of owning bonds backed by home-loans to people with poor credit, rose 30 percent since Aug. 9 to the highest since January. There are more than $500 billion of such notes outstanding. The increase in the index shows traders expect mortgage delinquencies and foreclosures to increase at a time when the number of homes for sale is at a 13-year high. The percentage of home-loan payments more than 60 days delinquent rose to 7.23 percent in July from 5.9 percent a year earlier, the fastest rate of increase since 1998." (Bloomberg, Oct 23)

"Since the start of 2005, the inventory of unsold new homes has climbed 29 percent, while the stock of unsold existing homes is up a staggering 82 percent" ... cancellations are rising, and they aren't being captured in the aggregate statistics because of the way the survey is designed. Hence, sales are being overstated and inventories understated." Caroline Baum, Bloomberg, Sep 29)

"I don't think that the [housing market] boom came from a 1 per cent Fed funds rate or from the Fed's easing. It came from the collapse of the Berlin Wall," Mr Greenspan told a private audience in Canada on Friday ... the collapse of Communism in eastern Europe and the shift towards more market-based economies in China and other parts of the developing world brought "billions of cheap labourers onto the scene". This, he said, "brought disinflation and lowered inflation risk premiums and long-term interest rates, creating a decline in real interest rates and equity-risk premiums." In consequence, "the real market value of assets increased faster than GDP." (FT, Oct 9)

"The rate of [real estate] decline is going to dramatically slow," Greenspan told an audience of insurance-industry executives in White Sulphur Springs, West Virginia. "We are beginning to see some evidence that all the data are not going south," he said, citing statistics on mortgage applications." (Bloomberg, Oct 10)

If Greenspan fully believed his explanation of what he calls the "boom," then why did he lower interest rates to 1% in the first place and keep them there so long?

It wasn't just the "billions of cheap labourers onto the scene" that was key, it was transferring to that labor by stateless multinationals advanced technology and management, developed over decades by innovative individuals standing on the shoulders of their societies' progress, now expropriated for the benefits of the very few at the very top running those multinationals, via their stock options, and the financial hyper-speculators driving them to do so.

But I digress. The key point to be made for the purpose of this discussion is the potential political problem arising from the American middle-class not understanding and accepting what Greenspan said above.

Five or ten years ago, if you had told the American middle-class that their homes would be worth what they are today, you would have been considered insane. Everyone knew such valuations would be completely absurd based on all their prior experience.

Yet today, the American middle-class very strongly believes that these previously insane valuations are normal, and more importantly politically, that they somehow earned their massive increase in home equity.

They have no real idea how it happened, magically perhaps, they don't particularly care. They don't fully understand the role of East Asia that Greenspan mentioned above, because no leader has ever clearly told them, no one has explained to them the so-called "Bretton Woods II" marriage of convenience between the spending Americans and the saving Chinese, implicitly agreed to by "independent" central bankers in the U.S. and CCP leaders in China.

Nor do they fully appreciate how they've benefited from massive government tax breaks on mortgage interest and capital gains, the latter enacted clearly to pump a bubble, huge government mortgage security subsidies, government supply restricting zoning and land use regulations, etc., all of which was not in the news report on Greenspan that I quoted above.

If the middle-class homeowner thought about it at all, they might think their huge home equity gains was the "free market" at work, and since they took the "risk," they deserve they deserve the huge capital gains, even the small number who weren't fully honest.

"the use of liar loans has become epidemic. In 2005, mortgages underwritten with minimal documentation sometimes accounted for as much as 50 percent of subprime mortgages. almost 60 percent of the stated-income amounts are exaggerated by more than 50 percent." (sfgate.com, Oct 6)

Regardless, they know it's their money, period, end of story. They've even spent a good chunk of it, via home equity extraction, which has continued even through rising rates, though at a slower pace. But there's still far more new paper wealth left.

The Fed is doing everything it can to maintain this mass delusion about real estate values, otherwise they would be far lower, while keeping inflationary pressures under control, at least until after the Nov election.

But what if this truly massive social "state of denial" were ever threatened, what would be the consequences? Who would be blamed? Who would the middle class lash out at, as it historically has been prone to do when its living standards are very seriously threatened? Who would pay the price, be the target, for their sublimated anger?

For three decades, as their real incomes stagnated (average real weekly earnings are still -17% below the level of 1972) working and middle class people's lives were spindled, folded and mutilated on the premise and promise, by both political parties and the mass media, that what came to be called "globalization" would somehow ultimately pay off for them.

It did, finally, but in an unanticipated way, not through better new jobs, 1996-2000 was the only period of modestly rising real wages since 1972) but rather through the by far largest speculative bubbles in history, first in the equity markets, then more importantly in real estate in the 2000s.

Social science research gives clues as to who the target would be targeted such the real estate bubble significantly defalte (see the end of the Social - U.S. and Political - U.S. sections of the 10/24 news summaries link).

Historic Political Realignment Needed

For many years now, the current U.S. political party alignment has proven to be incredibly dysfunctional. To head off the possibility of increasing internal and international conflicts based on genuine frustration and anger, a new historical political realignment is needed.

A critically needed political realignment can be done simply by combining the moderate, progressive, centrist majority of the two major parties into whichever party decides to come to its senses first (don't hold your breath), rather than allowing the sensible majority to continue to remain divided, frustrated and trapped in two separate parties, due to the control of both parties by their extreme wings.

Such an obvious realignment would leave the anti-evolution right of the ultra-cynical Rove and the ultra-liberal left of Hollywood to stew in their own self-made minority juices. The vast majority doesn't believe either extreme has a self-proclaimed monopoly on morality and is fed up with the extremes' imposing their personal versions of that in Rove's highly orchestrated "culture wars."

I think it would bea mistake to get down in the mud and fight Rove's "culture wars" on his divide-and-conquer terrain, as some seem to advise doing. Rather, a progressive majority realignment would produce a durable, powerful, ethical coalition of progressive business people and labor force focused on innovation for real, sustainable, fair wealth creation, hopefully relegating Rove's "culture wars" to history's trashbin, and pre-empting any ridiculous charges of "class war" also.

It seems increasingly likely that, barring a huge pre-November election surprise, Rove's pipedream of a durable realignment may go up in smoke, not so much because of Foley or Iraq, but rather because it was based on a very negative, inherently unstable coalition of the anti-evolution right and "conservatives" who didn't want to pay taxes but did want pork-barrel, not "free market," handouts and subsidies, to the point of corruption.

A new progressive realignment would be historically similar to the Republican industrial ascendancy in 1896 and the Democratic social safety net in 1932, less similar to the racial "wedge issue" Republican realignment in 1972, the clear precursor to the even more dismal negative politics of Rove in this era.

These major political realignments seem to occur every 30-40 years, along with significant economic/financial crisis. Perhaps it was no historical accident that the creation of Lincoln's Republican party came with the great crisis of the Civil War; McKinley's Republican consolidation with the major economic/financial crisis in the 1890s; FDR's "New Deal" with the 1930's "Great" Depression; and Nixon's 1972 racial "Southern strategy" with the 1971-73 collapse of the Bretton Woods monetary system and the assertion of Opec's power.

Before continuing with the main themes of this article, the following section gives my patient investment readers a brief update on financial markets, which I will cover in more detail once again in future articles.

Equity Markets Keep Rising, Regardless of Short-term Rate Expectations

The prospects of short-term rates going down was a key rationale often cited for both the stock and bond markets strongly rallying in the third quarter following a sharp May-June correction, even though each market was betting on a diametrically opposite economic forecast, as noted in my Sept 26 article, "Global Markets Hope ... ," link.

Since then, a few key data releases and Fed speeches convinced financial markets that the Fed was not going to cut rates anytime soon.

"Federal Reserve officials may leave interest rates alone until the middle of next year, confident of "moderate" economic growth and abating inflation pressures. Futures traders anticipate the Fed's benchmark lending rate will stay at 5.25 percent through May ' (Bloomberg, Oct 26)

The result? Of course global equity markets continued to go up anyway, while the U.S. bond market has had a small correction of its previous very strong advance.

I.e., in an equity bull market, it doesn't matter what the rationale of the day is, s-t rates expected to go down, s-t rates expected to stay flat, all news is okay, including bad news, especially with decent earnings reports.

"[S&P 500] has risen 4 percent in October, which would be the biggest monthly gain since December 2003. As of yesterday, with about half the companies in the S&P 500 reporting earnings, 73 percent have posted profits that exceeded analyst forecasts, while 12.5 percent reported results that trailed estimates." (Bloomberg, Oct 26)

"The MSCI Asia-Pacific Index set for its highest close since May 18. The measure last rose for six straight days in the period ended Jan. 31. U.S. stocks advanced, sending the Standard & Poor's 500 Index to its longest winning streak since March." (Bloomberg, Oct 26)

"The Shanghai Composite Index, which tracks performances in the bigger of two Chinese stock exchanges, rose 53 percent this year, the sixth-best performer out of 80 global indexes tracked by Bloomberg." (Bloomberg, Oct 13)

"The DJ Stoxx 600 [Europe] Index at the highest since February 2001. Stocks have risen 17 percent from their low on June 13 as takeovers, a three-month retreat in oil prices and better-than- expected earnings bolstered prospects for profit growth and underpinned stock values." (Bloomberg, Oct 21)

"Lead rose 2.7 percent in London, earlier touching the highest ever. Nickel climbed 1.2 percent to the highest since at least 1987." (Bloomberg, Oct 13)

"Shares of Nippon Building Fund Inc., Japan's biggest real estate trust, reached a record last week as land prices and rents soared." (Bloomberg, Oct 12)

Consider what would have been the equity market's reaction had N. Korea detonated a nuclear advice during its sharp decline in May-June. Yet rising global geopolitical risks do not register at the current time, with equity market volatility (VIX) once again extremely low.

The most basic reality of the global financial markets continues to be, as the FT said Sep 26, "Cheap credit is everywhere ... the most avid consumers of leveraged loans have been private equity groups."

"U.S. leveraged-buyout activity is on pace for a record. 371 leveraged buyouts worth about $124.6 billion have closed in the first nine months, a 50% increase from the $83.1 billion in deals for the same time period a year ago ... The total for deals announced but not yet closed this year is a whopping $238.7 billion across 405 deals, up from $111 billion across 317 deals at this time last year."(WSJ, Oct 9)

"Takeovers involving European companies have climbed to $1.26 trillion this year from $819 billion in the same period a year ago ... Finance has been the most active, with $341 billion of deals involving banks and insurance companies ... Private-equity firms record $160 billion they have raised this year." (Bloomberg, Oct 9)

China's ICBC $22 billion IPO received more than $500 billion in orders. "I am staggered by the wall of liquidity that exists in the capital markets right now," says Steven Barg, UBS AG's head of equity capital markets for Asia." (WSJ, Oct 21)

"Asian hedge funds starting operations increased to 215 in 2005 from 95 in 2002." (Bloomberg, Oct 27)

"Assets at commodity hedge funds rose 87 percent to $22.5 billion in the past year and may grow to $30 billion in 2007. The number of funds increased to 95 from 70 a year ago." (Bloomberg, Oct 23)

"Since 1999, the amount of money invested in commodities by pension funds, mutual funds and endowments has soared almost 17- fold, to $100 billion from $6 billion. Hedge funds, commercial banks and Wall Street firms, meantime, have poured about $50 billion into the market." (Bloomberg, Oct 10)

"the sea of cash flooding the Gulf [Arab oil producers] these days has produced an explosion of investment companies. New names spring up almost every week. Arab companies' acquisitions abroad are announced with as much frequency ... Gulf oil producers' current account surplus will increase 37 per cent this year to $227bn. (FT, Oct 19)

Here's a few things to worry about:

"U.S. stocks fell on Friday [Oct 27] as a report showing third-quarter U.S. economic growth was the weakest in more than three years raised concerns about the outlook for corporate profits. The market pulled back after two weeks of gains. The government said GDP expanded at a 1.6 percent annual rate -- much slower than the 2.2 percent rate economists had expected and down from a 2.6 percent rate in the second quarter. Stocks showed little reaction to a report from the University of Michigan that its consumer sentiment index rose to a stronger-than-expected reading of 93.6 in October, up from 85.4 in the previous month." (AP, Oct 27)

"The Fed's [staff] number-crunchers threw out previous conclusions about how fast the economy can grow without fueling inflation. They concluded that the speed limit is lower than previously thought. The implication: Unless the economy slows more than the Fed now expects, the central bank may have to resume raising interest rates sooner rather than later to control inflation. In effect, policy makers were told last month that time is running out for inflation to fall." (Bloomberg, Oct 23)

"The Conference Board index of leading indicators edged up just 0.1% to 137.7 in September, but noted that consumer expectations have improved. The index fell by a revised 0.2% in August. "The economy has slowed but the evidence to date doesn't suggest it will stall or go into a recession." "To the contrary, the economy retains considerable strength," given the rise in stock prices and drop in energy prices. employment remains robust and inflation relatively low." (WSJ, Oct 20)

"The Institute for Supply Management's manufacturing index dropped to 52.9, the lowest since May 2005." (Bloomberg, Oct 2)

"Caterpillar shares had the biggest drop in 19 years. Sales of construction equipment will be less than the company anticipated as a housing slump triggers a period of slack economic growth." (Bloomberg, Oct 20)

"[Investor] Sentiment has reached a level of extreme optimism, according to an indicator compiled by Ned Davis Research." (Bloomberg, Oct 9)

"For the year ending August 31, "86.8 per cent of the $118.56bn in equity flows has headed overseas." (FT, Oct 4)

"Gulf oil producers will continue buying dollar-based assets with their windfall revenues, but not all the money will flow into the US, according to [the IMF]. Gulf oil producers will record current account surpluses of $239bn this year, rising to $259bn in 2007." (FT, Oct 10)

"In 2006, fuel exporters expected to generate a $505 billion surplus, vs. $462 billion from Asian nations ... oil-exporting countries have recently taken the lead in buying U.S. bonds and Treasury bills ... If they tumble to $50 per barrel, the boom in petrodollar purchases of U.S. securities could evaporate." (BW, Oct 9)

"the possibility of a disorderly unwinding of the external deficits ... The rest of the world may no longer need further increases in the US external deficit. But it would not want to see it contract too brutally or too quickly either. If US domestic demand weakened, however, a big correction of the external deficit is exactly what most Americans would want, since that would be preferable for them to a domestic recession. They would wish to export their slowdown." (Martin Wolf, FT, Sep 28)

But until that seemingly inevitable but much-delayed day of reckoning, for now the huge global "wall of liquidity," actually a tsunami, has prevailed. Until I give an updated market/chart review in a future article, I will close this section by just repeating what I wrote Sep 26 link:

"as I have written a number of times since June 2 link when global financial markets were sharply declining, equity markets still remain in their now 4-year bull market, judged on the most simplistic trend criteria (e.g. MSCI World (ex US) and the NYSE are currently well above their rising 200-day moving averages), indicating the equity markets' recent diminution of concern over the prospects of a successful "soft landing"

It's the Hyper-Speculative Global Financial Markets

James Carville said, "It's the economy, stupid," often attributed to Bill Clinton. I've updated that slogan for this era.

Perhaps one of the most fundamental of America's states of denial is the simple failure to admit the obvious, i.e., that the U.S. economy and government is now mainly one of, for and by hyper-speculators, not the people.

A simple way of trying to show this is that Wall Street's estimate before third-quarter results started coming in was that "the financial industry will account for 48 percent of the S&P 500's third-quarter growth, according to Thomson." (Bloomberg, Oct 16)

The other nine sectors add up to the other half. This probably understates the role of finance in the U.S. economy, as many large non-financial corporations make significant profits from their financial activities.

Regardless of the exact percentage after all the results have been reported, finance now occupies the "commanding heights" of the U.S. economy after a thirty-plus year transformation.

The same conclusion is shown looking at tax receipts. Bush closed the budget gap this year because of much greater than expected capital gains taxes. Payroll tax receipts increased far less.

Bottom line, the U.S. is not a service, information or any other fad term economy, but rather a hyper-speculative one.

Return on Leveraged Legal Looting (ROLLL)

Global finance now means what I have labeled ROLLL, return on leveraged legal looting, by hedge and private equity funds and the largest investment and commercial banks, usually at the expense of the public in one way or another, which has long since superceded the emphasis on "shareholder value." E.g.,

"The current situation has created an arbitrage that is being exploited by private equity groups at the expense of public shareholders. Either defaults begin to rise and corporate credit conditions tighten again, limiting the scope for buy-outs, or companies will inevitably conclude that they should be more aggressive in their borrowing." (FT, Sep 26)

Much of modern finance, based on innumerable arbitrage games, doesn't create real economic wealth, as most corporations do through innovation, but rather simply redistributes it to the super-wealthy, via their control of the credit system with which to expropriate real wealth. Calling this looting financial innovation doesn't change its nature.

ROLLL has been based on a few obvious tricks, one being the real estate bubble, some of which are not repeatable. Unfortunately, by the time that becomes obvious, whatever breathing room these tricks have bought the U.S. over the past decades to begin to transition to a much more healthy U.S. economy will have disappeared.

Here's a timely example of hyper-speculators' big gains. I discuss in a section below on China how long it might continue to play along with the Goldman's of the world.

"The first-day stock gains give Goldman Sachs Group Inc., the world's most profitable securities firm, a paper gain of $4.9 billion on its investment. Goldman paid almost $2.58 billion in April for 16.48 billion shares of ICBC for itself and its employee- and client-owned private-equity funds." (Bloomberg, Oct 27)

"[Goldman's] China bonanza is the result of more than 70 visits by former Goldman Chief Executive Officer Paulson, who became U.S. Treasury Secretary last June." (Bloomberg, Oct 23)

"Goldman will announce on Oct. 25 its new class of partners, who will join the 287 who currently hold that title. Last year, that group shared more than $2 billion, or about 20% of the total compensation Goldman paid. That averages out to about $7 million per partner. Goldman's partners also are offered opportunities to invest beside the firm when it buys stakes in other companies, which can be lucrative." (WSJ, Oct 13)

Politically, splitting actually economically innovative corporations, and countries for that matter, those that create real products and services, away from control by global hyper-speculators, in the case of corporations via CEO stock options and buy-outs, will be critical. The purpose of the changes proposed in this article is to encourage everyone to get very wealthy the "old-fashioned way," by actually creating something of economic value, not as the hyper-speculators have done.

"Former NYSE chairman Grasso must return tens of millions of dollars in compensation to the exchange, a New York state judge ruled on Thursday. Mr Spitzer filed a high profile law suit in 2004 arguing that the $139.5m in salary, bonus and benefits paid to Mr Grasso in 2003 for his eight years as NYSE chairman violated New York law requiring that compensation for executives at not-for-profit organisations be "reasonable" and "commensurate with services performed." (FT, Oct 19)

I only mention Grasso's case because, if I recall correctly, in a recent tv interview perhaps the most celebrated, respected CEO of the prior two decades defended him, before the verdict, on the grounds that no executive would turn down huge sums of money if legitimately offered by its board.

But are these offers really legitimate, even when perfectly legal most of the time? Buffett recently said of current corporate morality: "many perpetrators of corporate scandals acted because they felt others were doing it." (FT, Oct 10)

Corporate morality is not going to change by hiring more moral CEO's and MBAs with ethics classes. It is critical to break the systemic link of corporate America, the repository of crucial talent, know-how and technology, that is tethering it in its now more than two-decade alliance with the global hyper-speculators. (See my April 10 article, "SOX counterproductive; Corp America responds to distorted incentives," link.}

Self-Described "Schmucks" of the Financial World

The larger ROLLL becomes, the worse off America's and the global future ultimately will be, as capital/savings is siphoned off in pure hyper-speculative activity solely designed to line the pockets of the super-wealthy, with no useful or redeeming economic value whatsoever, rather than being rationally invested to raise global living standards.

Who are these hyper-speculators, and what drives them? A revealing self-description was in the lead article on page one of the Sept 30 WSJ:

"Mr. Tepper, 49 years old, is head of Appaloosa Management, a $4.5 billion hedge fund that owns 9.3% of Delphi's stock. Mr. Tepper has gotten rich investing in America's broken companies and declining industries ... Mr. Tepper says he is not causing economic pain -- he is just capitalizing on it ... Delphi wants to close many plants and lay off thousands of people. It also intends to cut wages and benefits ... On [Tepper's] desk sit three plastic pigs. He jokes that he rolls them for guidance on difficult trades. If all three snouts point down, in the eating position, it's a signal to buy. "The media says that hedge funds are the new masters of the universe," he chuckles. "We're just a bunch of schmucks." (WSJ, Sep 30)

Tepper's amorality is not an aberration, it is the norm. The world's financial system is being run by people who make the 1987 character played by Michael Douglas, Gordon "Greed is Good" Gekko, seem benign (despite their philanthropic activities).

There is now a whole MBA army of Gekko's on financial steroids and with very little adult supervision whatsoever, a key point as to who might possibly restrain these "masters of the universe," that I will get back to shortly.

Billions of People Without Clean Water, Basic Sanitation, Health, Security, etc.

Two generations with Gekko's amoral attitude are now endemic to global financial markets.The global economy essentially consists of billions of very poor people going nowhere fast, while global stock markets and all other speculative activity make all-time highs.

"more than 1 billion people were without clean water in 2004 ... 2.6 billion people worldwide without access to proper sanitation." (Reuters, Sep 28)

"President-elect Calderón recently admitted that violence has escalated out of the control of the authorities in several states and in Mexico City ... Big investors appear to shrug off the violence, as they have the disputes after Mr Calderón's election. "It's not a concern," said Damian Fraser, chief Latin America strategist of UBS Warburg. As Mr Fraser spoke last week, the IPC index of the Mexico Stock Exchange set fresh records." (FT, Oct 4)

"Maoist guerrillas are active in a quarter of the country's 602 administrative districts. Transport infrastructure is woefully inadequate. Nor is there a coherent energy policy ... average age is 23 and there are 300m children aged between six and 16 poised to enter the workforce - but education is poor and jobs are scarce ... only 35m Indians [out of 1.1 billion] - less than 7 per cent of the workforce - are employed in the formal economy and 21m of those work for the government." (Victor Mallet, FT, Oct 19)

But "India will have at least 50 property- related initial public offerings in the next year as the real- estate industry booms" (Bloomberg, Oct 3)

"The world's ecosystem is being degraded by humans at an unsustainable rate that risks causing "irreversible damage" to the planet, the conservation group WWF said. "by 2050 humanity will demand resources at double the rate at which the Earth can generate them." "At this level of ecological deficit, exhaustion of ecological assets and large-scale ecosystem collapse become increasingly likely." Almost half of the ecological footprint is due to emissions from fossil fuels. "Humanity is no longer living off nature's interest, but drawing down its capital," WWF said." (Bloomberg, Oct 24)

And almost as if to celebrate the stock market bull markets?

"the video of a Merrill Lynch [private] banker having a sexual encounter on a Spanish beach with an ex-girlfriend of Brazilian soccer star Ronaldo ... has crashed computers on trading floors in Sao Paulo and Rio de Janeiro." (Bloomberg, Sep 29)


Continue to Part II


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