Wednesday, 9 June 2010

euro woes up, global economic shift


IMF's unpalatable truth – euro must 'reform or die'

Nils Pratley
7 June 2010

This is the sort of thing markets don't need right now: the International Monetary Fund pointing out the uncomfortable truth that eurozone countries need to harmonise their monetary and fiscal arrangements or else they risk a double-dip recession. The IMF is not offering a revolutionary thought here. Its argument lies within the broad consensus view that the euro must "reform or die."

But meaningful harmonisation would only be possible after the approval of a new European treaty, which is not happening any time soon. In the meantime, how do you persuade reluctant Germans to spend more liberally for the short-term economic good of all?

Welcome to a world where investors are living on their nerves. European politicians reacted to the Greek crisis by cobbling together a €750bn (£618bn) sticking plaster to deal with crises (a large and important element was approved today) but the longer-term issue of reforming the euro is not yet under discussion.

As it happened, stock markets in Europe remained relatively calm despite big overnight falls in Asia. But the fate of the euro remains the number-one worry for investors – it's not going away.

Euro 'will be dead in five years'

The euro will have broken up before the end of this Parliamentary term, according to the bulk of economists taking part in a wide-ranging economic survey for The Sunday Telegraph.

Edmund Conway
05 Jun 2010

The single currency is in its death throes and may not survive in its current membership for a week, let alone the next five years, according to a selection of responses to the survey – the first major wide-ranging litmus test of economic opinion in the City since the election. The findings underline suspicions that the new Chancellor, George Osborne, will have to firefight a full-blown crisis in Britain's biggest trading partner in his first years in office.

Of the 25 leading City economists who took part in the Telegraph survey, 12 predicted that the euro would not survive in its current form this Parliamentary term, compared with eight who suspected it would. Five declared themselves undecided. The finding is only one of a number of remarkable conclusions, including that:

• The Government will borrow almost £10bn less next year than the Treasury previously forecast, despite this weaker growth.

• Just as many economists think the Bank of England will not raise rates until 2012 or later as think it will lift borrowing costs this year.

But the conclusion on the euro is perhaps the most remarkable finding. A year ago or less, few within the City would have confidently predicted the currency's demise. But the travails of Greece, Spain and Portugal in recent weeks, plus German Chancellor Angela Merkel's acknowledgement that the currency is facing an "existential crisis", have radically shifted opinion.

Two of the eight experts who predicted that the currency would survive said it would do so only at the cost of seeing at least one of its members default on its sovereign debt. Andrew Lilico, chief economist at think tank Policy Exchange, said there was "nearly zero chance" of the euro surviving with its current membership, adding: "Greece will certainly default on its debts, and it is an open question whether Greece will experience some form of revolution or coup – I'd put the likelihood of that over the next five years as around one in four."

Douglas McWilliams of the Centre for Economics and Business Research said the single currency "may not even survive the next week", while David Blanchflower, professor at Dartmouth College and former Bank of England policymaker, added: "The political implications [of euro disintegration] are likely to be far-reaching – Germans are opposed to paying for others and may well quit."

Four of the economists said that despite the wider suspicion that Greece or some of the weaker economies may be forced out of the currency, the most likely country to leave would be Germany.

Peter Warburton of consultancy Economic Perspectives said: "Possibly Germany will leave. Possibly other central and eastern European countries – plus Denmark – will have joined. Possibly, there will be a multi-tier membership of the EU and a mechanism for entering and leaving the single currency. I think the project will survive, but not in its current form."

Tim Congdon of International Monetary Research said: "The eurozone will lose three or four members Greece, Portugal, maybe Ireland and could break up altogether because of the growing friction between France and Germany."

The recent worries about the euro's fate followed the creation last month of a $1 trillion (£691bn) bail-out fund to prevent future collapses. Although the fund boosted confidence initially, investors abandoned the euro after politicians showed reluctance to support it wholeheartedly.

JUNE 1, 2010

'The Euro Zone Has Failed'

AFP/Getty Images Czech Republic President Václav Klaus

After the fall of communism in 1989, the Czech Republic wanted to be a normal European country again as soon as possible, after being excluded from participating in the post-World War II European integration process for 41 years. The only way to achieve this was to become a member country of the European Union. We had no other choice, but the communist experience was still too "fresh." We wanted to be free and didn't want to lose our freedom and our finally regained sovereignty. Many of us were therefore in favor of a looser form of European integration, against the so-called deepening of the EU and against the creation of political union in Europe. People like me understood very early that the idea of a European single currency is a dangerous project which will either bring big problems or lead to the undemocratic centralization of Europe. My position was clear: With all my reservations, we had to apply for EU membership, but at the same time we had to fight against projects such as the euro.

As a long-standing critic of the idea of a European single currency, I have not rejoiced at the current problems in the euro zone because their consequences could be serious for all of us in Europe—for members and non-members of the euro zone, for its supporters and opponents. Even the enthusiastic propagandists of the euro suddenly speak about the potential collapse of the whole project now, and it is us critics who say we have to look at it in a more structured way.

The term "collapse" has at least two meanings. The first is that the euro-zone project has not succeeded in delivering the positive effects that had been rightly or wrongly expected from it. It was mistakenly and irresponsibly presented as an indisputable economic benefit to all the countries willing to give up their own long-treasured currencies. Extensive studies published prior to the launch of the European single currency promised that the euro would help to accelerate economic growth and reduce inflation and stressed, in particular, that the member states of the euro zone would be protected against all kinds of external economic disruptions (the so-called exogenous shocks).

This has not happened. After the establishment of the euro zone, the economic growth of its member states has slowed down compared to previous decades, increasing the gap between the rate of growth in the euro-zone countries and that in other major economies—such as the United States and China, smaller economies in Southeast Asia and other parts of the developing world, as well as Central and Eastern European countries that are not members of the euro zone.

Economic growth in Europe has been slowing down since the 1960s, thanks to the increasingly damaging economic and social system which started dominating Europe at that time. The European "soziale Marktwirtschaft" is an unproductive variant of a welfare state, of state paternalism, of "leisure" society, of high taxes and low motivation to work. The existence of the euro has not reversed that trend. According to the European Central Bank, the average annual rate of growth in the euro-zone countries was 3.4% in the 1970s, 2.4% in the 1980s, 2.2% in the 1990s and only 1.1% from 2001 to 2009 (the decade of the euro). A similar slowdown has not occurred anywhere else in the world (speaking about "normal" countries, e.g. countries without wars or revolutions).

Not even the expected convergence of inflation rates has taken place. Two distinct groups have formed within the euro zone—one (including most of the countries of western and northern Europe) with a low inflation rate and one (including Greece, Spain, Portugal and Ireland) with a higher inflation rate. We have also seen an increase in long-term trade imbalances. There are countries where exports exceed imports and countries that lastingly import more than they export. It is no coincidence that the latter countries also have higher inflation. It has no connection with the world-wide crisis. This crisis "only" escalated and exposed longtime hidden economic problems; it did not cause them.

During its first 10 years, the euro zone has not led to any measurable homogenization of its member states' economies. The euro zone, which comprises 16 European countries, is not an "optimum currency area" as defined by the economic theory. Even Otmar Issing, the former member of the Executive Board and chief economist of the European Central Bank, has repeatedly pointed out (most recently in a speech in Prague in December 2009) that the establishment of the euro zone was primarily a political, not an economic, decision. In such a situation, it is inevitable that the costs of establishing and maintaining it exceed its benefits.

My choice of the words "establishing" and "maintaining" is not accidental. Most economic commentators were satisfied by the ease and apparent inexpensiveness of the first step (the establishment of the common monetary area). This helped to form the impression that everything was fine with this project.

The exchange rates of the countries joining the euro zone probably more or less reflected the economic reality at the time when the euro was born. However, over the last decade, the economic performance of euro-zone countries diverged and the negative effects of the "straight-jacket" of a single currency have become more and more visible. When "good weather" (in the economic sense of the word) prevailed, no visible problems arose. Once the crisis (or "bad weather") arrived, the lack of homogeneity manifested itself very clearly. In that sense, I dare say that—as a project that promised to be of considerable economic benefit to its members—the euro zone has failed.

The second meaning of the term collapse is the possible collapse of the euro zone as an institution, the demise of the euro. To that question, my answer is no, it will not collapse. So much political capital had been invested in its existence and in its role as a "cement" that binds the EU on its way to supra-nationality that in the foreseeable future the euro will surely not be abandoned.

It will continue, but at a very high price—low economic growth. It will bring economic losses even to non-members of the euro zone, like the Czech Republic.

The huge amount of money that Greece will receive can be divided by the number of the euro-zone inhabitants, and each person can calculate his or her own "contribution." However, the "opportunity" costs arising from the loss of a potentially higher growth rate, which is much more difficult for a non-economist to imagine, will be far more painful. I do not doubt that for political reasons this price will be paid and that the euro-zone inhabitants will never find out just how much the euro truly cost them.

The mechanism that will save the European monetary union is the increasing volume of financial transfers that will have to be sent to euro-zone countries suffering from the biggest economic and financial problems. Yet everyone knows that sending massive financial transfers is possible only in a state, and the EU, or the euro zone, is not a state. Only in a state there is a sufficient feeling of solidarity among its citizens. Only in a state—and unified Germany in the 1990s is an excellent example—can massive financial transfers be justified and made politically viable. (By the way, the inter-German financial transfers in that era annually equaled the whole sum potentially needed for Greece to survive). Twenty years ago, I happened to be the minister of finance in a dissolving political—and monetary—union called Czechoslovakia. I have to confess that the country broke up because of the lack of mutual solidarity.

That is why Europe will have to decide whether to centralize itself politically as well. Europeans don't want that because they know (or at least feel) that it would be to the detriment of liberty and prosperity. There is, however, a real danger that the politicians will do it anyway—behind the backs of those who elected them. And this is what bothers me most. The recent dealings in EU headquarters in Brussels—literally behind closed doors—about the aid package for Greece demonstrated that there is no democracy there. The German-French tandem made the decision on behalf of the rest of the euro-zone countries, and I am afraid this will continue.

It is evident that the euro—the European single currency—and the currently proposed measures to save the euro do not represent any "salvation" for the European economy. In the long run, it can be saved only by a radical restructuring of the European economic and social system. My country had a velvet revolution and made a radical transformation of its political, economic and social structures. Fifteen years ago, I sometimes joked that after entering the EU we should start a velvet revolution there as well. Unfortunately, this ceases to be a joke now.

The Czech Republic has not made a mistake by avoiding the membership in the euro zone. I am glad we are not the only country taking that view. In April, the Financial Times published an article by the late governor of the Polish central bank, Slawomir Skrzypek. He wrote it shortly before his tragic death in an airplane crash near Smolensk, Russia. In that article, Mr. Skrzypek wrote, "As a non-member of the euro, Poland has been able to profit from flexibility of the zloty exchange rate in a way that has helped growth and lowered the current account deficit without importing inflation." He added that "the decade-long story of peripheral euro members drastically losing competitiveness has been a salutary lesson." There is no need to add anything to that.

Václav Klaus has served as president of the Czech Republic since 2003.

Spain is trapped in a 'perverse spiral' as wage cuts deepen the crisis

The Spanish Inquisition used to burn Englishmen in Sevilla's Plaza de San Francisco when they had the chance. There must have been some nostalgia for this practice when the news hit that Fitch Ratings had stripped the country of its AAA status.

Ambrose Evans-Pritchard
30 May 2010

The downgrade could not have come at a more dreadful moment. The EU's €750bn "shield" for eurozone debtors has halted an incipient run on Club Med banks, but it has failed to restore full confidence for the obvious reason that such a guarantee cannot plausibly be extended from Greece to Portugal and then to Spain. The sums are too large, the number of solvent creditors too reduced, the intra-EMU politics too poisonous.

Pierre Lellouche, France's Europe minister, compares the shield to Nato's Article 4, the mutual defence clause that deems an attack on any one state to be an attack on all. Leaving aside the question of whether Nato's Article 4 was ever credible – I doubt it was – this use of Nato language illustrates the confusion in EU circles over the causes of the Club Med bond crisis. This is not a war. It is a beauty contest. Eurozone states must attract capital from pension funds and Asian central banks to finance their deficits or default.

Whether intended or not, Mr Lellouche may have pulled the detonation plug on EMU by boasting that Europe's politicians had created an EU debt union on the sly. "It is expressly forbidden in the treaties. De facto, we have changed the treaty," he told the Financial Times. How will that go down at Germany's constitutional court, already facing a growing in-tray of claims that these bail-outs breach the Maastricht treaty?

For Spain it has been a horrible week. The central bank seized CajaSur and imposed draconian write-down rules on banks to restore confidence. The Spanish Socialist and Workers Party (PSOE) of Jose Luis Zapatero then rammed a 5pc cut in public wages through the Cortes by a single vote, shattering consensus. The government cannot hope to pass a budget. Its own trade union base is planning a general strike.

The subtext of Fitch's 32-page report shows Mr Zapatero's self-immolation to be futile in any case. The agency has not downgraded Spain for lack of austerity. Its implicit conclusion is that the policy of 1930s wage cuts – or "internal devaluations" – being imposed on southern Europe's humiliated states as a quid pro quo for the EU shield is itself part of the problem. Ultra-austerity will bleed the economy, shrivel tax revenues and fail to close deficit anyway. "Fitch believes the risk that economic growth will fall short of the government's projections," it said.

El Pais spoke of a "perverse spiral" in its editorial. "The Fitch note drives home the apparently unsolvable contradiction in which the Spanish economy finds itself. To maintain debt solvency Spain must squeeze public spending: yet this policy undermines the chances of recovery which itself causes further loss of confidence."

Spain's unemployment was already 20.5pc even before this latest dose of shock therapy. There are 4.6m people without work. Dole payments alone account for half the budget deficit. By comparison, the Anuario Estadístico shows that Spain's unemployment never rose above 9.5pc during the Great Depression. The economy shrank by 3pc from peak to trough. The Zapatero slump is worse than anything inflicted by Gil Robles during the Bienio Negro.

It is no mystery why Spain is trapped in depression. The country joined the euro without grasping its Faustian implications, as did others. Germany was equally naive in thinking it could have a currency union entirely on its own terms.

EMU caused Spanish interest rates to halve overnight, with dire results as the Bank of Spain's governor confessed in April 2007. "The single monetary policy has meant that excessively loose conditions for our economy have been almost continuous," he said.

Real rates were -2pc as the bubble reached its crescendo. Nearly 800,000 homes were built in 2007, more than in Britain, Germany, and Italy combined. There is now an overhang of 1.6m unsold properties, six times the level per capita in the US. Total public/private debt has reached 270pc of GDP.

The boom was a debt illusion, just as it was in Britain but with the added twists of lower wealth to offset household debt and a global investment position that is underwater by 70pc of GDP. Britain still has the instruments to extricate itself. The Bank of England has engineered a devaluation of 20pc, restoring competitiveness at a stroke. Spain can try to claw back an even greater loss by cutting wages, but that risks a slow death by debt-deflation as compound interest tightens its vice.

This can end only in two ways. Either Germany tolerates massive monetary reflation by the ECB or Spain will be forced out of EMU, setting off a catastrophic chain-reaction through north Europe's banking system.

Your choice, Berlin.

May 30, 2010

Greece urged to give up euro

Robert Watts

The Greek government has been advised by British economists to leave the euro and default on its €300 billion (£255 billion) debt to save its economy.

The Centre for Economics and Business Research (CEBR), a London-based consultancy, has warned Greek ministers they will be unable to escape their debt trap without devaluing their own currency to boost exports. The only way this can happen is if Greece returns to its own currency.

Greek politicians have played down the prospect of abandoning the euro, which could lead to the break-up of the single currency.

Speaking from Athens yesterday, Doug McWilliams, chief executive of the CEBR, said: “Leaving the euro would mean the new currency will fall by a minimum of 15%. But as the national debt is valued in euros, this would raise the debt from its current level of 120% of GDP to 140% overnight.

“So part of the package of leaving the euro must be to convert the debt into the new domestic currency unilaterally.”

Greece’s departure from the euro would prove disastrous for German and French banks, to which it owes billions of euros.

McWilliams called the move “virtually inevitable” and said other members may follow.

“The only question is the timing,” he said. “The other issue is the extent of contagion. Spain would probably be forced to follow suit, and probably Portugal and Italy, though the Italian debt position is less serious.

“Could this be the last weekend of the single currency? Quite possibly, yes.”

Crise grecque: la Bundesbank évoque un «complot français»

Guillaume Errard

La Banque centrale allemande reproche à la Banque centrale européenne, sous influence française, d'avoir racheté un trop grand nombre de dettes grecques.

Les relations entre la France et l'Allemagne n'ont pas fini d'être tendues. Et ce en dépit des déclarations de Nicolas Sarkozy, qui avaient martelé il y a une semaine qu'il n'y avait pas de désaccord avec l'Allemagne sur la réforme de l'euro. Il y a deux semaines, la Banque centrale européenne annonçait le rachat d'obligations souveraines et privées, et notamment des dettes grecques, et ce, pour accompagner le plan d'aide de 750 milliards d'euros, crée par les Etats membres de la zone euro. Une mesure que n'a pas du tout apprécié la Bundesbank, la banque centrale allemande d'émission qui n'hésite pas à parler de «complot français» qui porte atteinte aux intérêts de l'Allemagne.

Les banques françaises les plus exposées à la crise grecque

Le journal allemand Der Spiegel rapporte dans son édition de lundi que la BCE a déjà racheté 40.000 millions d'obligations dont 25.000 millions de dettes grecques, causant «une irritation importante» de la Bundesbank. L'Allemagne, par la voix de sa chancelière Angela Merkel ou du patron de la Deutsche Bank, n'a jamais caché ses doutes quant à la capacité de la Grèce de rembourser ses dettes. En février dernier, plusieurs grandes banques allemandes avaient décidé de ne plus souscrire de nouvelles obligations de l'Etat grec, inquiètes de la situation financière du pays.

Les banques françaises ont pour 51 milliards d'obligations grecques et les banques allemandes en ont pour 31 milliards d'euros. La France va payer 5,5 milliards et l'Allemagne va payer 8,4 milliards d'euros de prêts garantis par l'Etat. On se souvient qu'après cette mesure l'indépendance de la BCE avait sérieusement été remise en cause... par l'Allemagne, puisqu'elle avait toujours clamé qu'en dépit de la situation financière plus que compliquée de la Grèce, elle ne rachèterait pas d'obligations grecques. Autrement dit, des produits qu'aucun investisseur ne voulait. La BCE avait martelé son indépendance.

Rencontre Sarkozy-Merkel le 7 juin

Nul doute que les marchés financiers ne tarderont pas à spéculer sur cette nouvelle tension franco-allemande, dont Nicolas Sarkozy et Angela Merkel pourront discuter le 7 juin à l'occasion d'une rencontre pour discuter d'une coordination des positions de la France et de l'Allemagne, en vue du prochain Conseil européen et des sommets du G8 et du G20 prévus fin juin au Canada. Pour l'heure, on est encore loin de la mise en place d'une gouvernance économique au sein de l'Union européenne.

related texts:

germans doubt eurocurrency

euro at risk

explosion euro

euro: systemic chaos after german legal challenge

eu: clashes between pro and anti derivatives


June 7, 2010

Analyst: Buy Barbed Wire and Guns

Anthony Fry, senior managing director at Evercore Partners, said on CNBC this morning, “The current problems will be with us for 5 years or more and uncertainty is very high."

“Look at the current situation. You have Greece, now you have Hungary and huge issues surrounding Spain and Portugal,” he said.

“You can have lower rates and deflation, higher rates and higher inflation or the nightmare scenario of higher rates and deflating asset prices,” he said.

“If the nightmare scenario plays out as I suspect it may then the debt situation gets worse. There is currently no exit strategy and the reaction to the crisis of policy makers remains a big worry.”

“I don’t want to scare anyone but I am considering investing in barbed wire and guns, things are not looking good and rates are heading higher,” he said.

Higher rates and deflating assets prices come about because of stagflation, a problem faced in the U.S, during the late 1970's. Any replay of such a scenario would likely be more extreme, given the current sovereign debt problems.

Evercore has handled over $1 trillion of merger, acquisition, recapitalization and restructuring transactions and is headed by Roger Altman, a former Deputy Secretary of the Treasury.


Goldman Sachs accused of disrupting FCIC's probe into financial crisis

Goldman Sachs has been accused of “deliberately and disruptively” refusing to work with the Financial Crisis Inquiry Commission (FCIC) after employing delaying tactics and attempting to inundate the panel with millions of pages of documents.

James Quinn
07 Jun 2010

The investment bank, which has now been subpoenaed to appear before the FCIC as a result of its alleged actions, has also been accused of “mischief-making” with regards to its conduct towards the commission after sending it 20m separate documents. The FCIC has a staff of 50.

The accusations came from Phil Angelides, chairman of the FCIC, which is charged by the US Congress with finding the root causes of the crisis and outlining steps to ensure it does not happen again.

It is the latest black mark against the bank, which is accused by the US Securities and Exchange Commission of securities fraud in relation to the alleged mis-selling of derivatives, a charge the bank denies.

Mr Angelides appears infuriated with Goldman’s tactics, suggesting that the bank is involved in “a very deliberate effort to run out the clock”. The FCIC must close its investigation and deliver its report to Congress by the end of this year.

“We did not ask them to pull up a dump truck to our offices to dump a bunch of rubbish,” Mr Angelides continued during a conference call following the issue of the subpoena. “We should not be forced to play 'Where’s Waldo?’ on behalf of the American people.”

It is understood that Goldman delayed responding to the FCIC’s very specific requests for certain documents relating to the use of derivatives and other matters for months, and then changed tactic and delivered some five terabytes of information in the past three weeks.

When asked why the bank might delay its involvement, the FCIC’s vice-chairman Bill Thomas said: “They may have more to cover up than maybe we thought or they told us they did.”

Lloyd Blankfein, Goldman’s chairman, appeared before the FCIC alongside other senior bankers at the start of this year, and is likely to do so again as a result of the subpoena.

A Goldman spokesman said the bank has been “committed” to providing the information the FCIC requested.


Leader Capital Markets CEO commits suicide

Danny Barak, 48, chief executive of one of Israel's top investment banks, jumps from his office on 17th floor of Tel Aviv office towers without leaving note explaining move


The chief executive of Leader Capital Markets, one of Israel's top investment banks, has committed suicide, a company spokeswoman said on Sunday. Danny Barak, 48, jumped from his office on the 17th floor of one of Tel Aviv's most prominent office towers on Friday, the spokeswoman said. Barak, who is survived by his wife and four children, did not leave a note explaining his suicide. "It is a mystery," the spokeswoman said.

Barak, who founded Leader Capital Markets, was CEO since 2001. He held 15.5% of the company, which is a subsidiary of Leader Holdings & Investments.

'Heavy loss'

"Danny's professional abilities contributed to the establishment of Leader Capital Markets as a leading entity in Israel's capital market," Leader Capital Markets Chairman Yair Fudim said in a statement. "Danny Barak's death is a heavy loss not just to our group but to the entire Israeli capital market." Following the recent sale of Leader Holdings to businessman Dan David, Barak was due to step down as CEO in 2011 though he had been offered to stay on as chairman of Leader Capital Markets, the spokeswoman said.

The investment bank is engaged in underwriting, corporate research, securities trading for institutional investors and asset management. Shares in Leader Capital Markets opened down 5.8% in Tel Aviv on Sunday morning.



Le témoignage accablant de trois anciens de Moody's

Interrogés par la commission d'enquête américaine sur la crise financière, trois anciens salariés de l'agence de notation sont passés aux aveux sur les dérives de Moody's, accusée d'être devenue une usine à "triple A", la note suprême. De quoi relancer la polémique sur les agences de notation.

Financial Terrorists

"Quand j'ai rejoint Moody's fin 1997, la pire crainte d'un analyste était de contribuer à l'attribution d'une note qui serait fausse, de causer des dégâts à la réputation d'exactitude de Moody's, et de perdre son travail en conséquence. Quand j'ai quitté Moody's (voici deux ans, ndr) la pire crainte d'un analyste était qu'il fasse quelque chose qui le verrait désigné comme responsable d'avoir mis en danger la part de marché de Moody's, de causer du tort à son chiffre d'affaires ou de dégrader les relations de Moody's avec ses clients et de perdre son travail en conséquence." Cet aveu sans appel est signé Mark Froeba, ex-cadre dirigeant de la branche produits dérivés de Moody's. Il figure tel quel dans le compte-rendu du témoignage qu'il a accordé à la commission d'enquête fédérale sur la crise financière (FCIC) à New York.

Mark Foeba y assure également que l'agence de notation recourait à l'intimidation afin que les analystes "soient effrayés à l'idée de contrarier les banques d'investissement". Cet ancien cadre dirigeant n'est pas le seul à témoigner contre les pratiques de Moody's. Deux ex-salariés ont également éclairé les enquêteurs sur les dérives qu'ils ont pu observer.

"Même s'il n'y a jamais eu d'instruction explicite pour abaisser les critères de notation, il fallait s'expliquer et se défendre sur chaque contrat raté", leur a ainsi raconté Eric Kolchinsky qui fut un temps chargé de la notation des CDO (collateralized debt obligations) liés aux crédits "subprime". A ses yeux, les dérives ont débuté quand, en 2007, une part importante de la rémunération des cadres a commencé à être payée en actions et en options.

Créée il y a un an, la FCIC, qui travaille en toute indépendance, doit conclure ses travaux en décembre. Son président, Phil Angelides, accuse Moody's, au même titre que les autres agences de notation, d'avoir facilité la vente de titres adossés à des prêts immobiliers en leur attribuant des notes n'invitant pas les investisseurs à se montrer prudents. Selon lui, Moody's est devenue "une usine de triple A", en référence à la note la plus élevée de l'échelle des grandes agences de notation.

Le patron de Moodys, Raymond McDaniel a rétorqué que les agences de notation n'étaient pas des "sentinelles" et qu'elles ne pouvaient pas empêcher l'émission ou l'achat de certains produits. Pour lui, "les marchés peuvent croître sans les notes, et ils le font". Il a reçu le soutien de Brian Clarkson, un ancien président de Moody' s à l'origine du développement rapide de l'agence dans la finance structurée, qui a quitté le groupe en 2008.

Jugeant "incontestable" l'intégrité des analystes de Moody' s, Brian Clarkson a laissé entendre que la commission devrait enquêter sur le fonctionnement de Wall Street dans son ensemble, et non sur les seules agences de notation.

Warren Buffett se désolidarise de la direction de Moody's

Interrogé par la chaîne de télévision CNBC, l'influent investisseur Warren Buffett a pris ses distances avec la direction de l'agence de notation, dont il détient 13% du capital par le biais de sa holding financière, Berkshire Hathaway. "Je pense qu'ils ont eu tort comme tout le monde", a-t-il déclaré avant d'être entendu par la commission d'enquête. Il appelle ainsi les investisseurs à ne pas dépendre seulement des notes délivrées par les agences de notation.


Why Rothschild is piling into gold

Danielle Levy
Jun 02, 2010

Rothschild's Private Banking & Trust's head of investments Dirk Wiedmann has increased the firm's overweight positions in gold and hedge funds in preparation for further volatility and modest economic growth.

Wiedmann highlights short-term fixes for long term problems as a key headwind facing the global economy.

'The cracks in the financial system have been papered over and may not become critical for some time. Crucially, central banks will do all they can to prevent another recession. Policymakers will focus on short-term fixes and try to muddle through,' Wiedmann said.

€750bn will not fix the Europe problem

Most notably Wiedmann argues the recent €750 billion stabilisation fund agreed by the EU, IMF and ECB will not solve the long-term structural problems in the eurozone or the unsustainable debt burdens of the 'PIGS' - Portugal, Italy, Spain and Greece.

He said this put a big question mark over the future of the euro. 'The lack of unity among politicians and central bankers suggests a durable solution to deal with large structural deficits in many countries is still a long way off. Against that backdrop, and in a climate of risk aversion, we maintain our preference for the US dollar over the euro.'

As a result, the investment strategist said that high public debt levels coupled with currency volatility, tax rises, spending cuts in the developed world and monetary tightening in the emerging markets mean that the negatives outweigh the positives in terms of the investment case for equities.

Expect a gold surge in the second half

Wiedmann expects gold prices to surge during the second half the year in an uncertain environment, comfortably breaking the $1,300 per ounce level - particularly if sovereign debt problems in Europe continue to escalate to a point where a break-up of the euro seems likely, he said.

For other commodities the firm has a neutral to negative outlook, arguing that buying opportunities may be emerging if financial markets stabilise.

'Following a sharp correction, prices of industrial metals such as copper, aluminium, nickel and zinc now much more reasonable. Much of the speculative excess has left this market and industrial metals are trading much more closely to their fundamentals,' Wiedmann said.

Backing defensive equities

In addition, growing risk aversion amongst investors could mean that equities struggle going forward, representing another reason to go slightly underweight equities, Wiedmann argues.

Within the firm's equity allocation, Wiedmann is currently backing high quality defensive companies with good earnings visibility and solid cash generation.

'At a company level, many large, blue chip firms have debt-free balance sheets, attractive free cash flows and stable business models and are trading at reasonable valuation with dividend yields that are comparable to the yields on government bonds,' he said.

'At the same time, we believe it is essential to be selective and focus on quality stocks: we do not currently recommend investing only for broad market exposure.'

Emerging markets are overheating

Wiedmann believes China, India and Brazil have all show signs of overheating. Although emerging market equities have underperformed for around seven months, he said it is too early to start adding to positions in emerging market equities.

'Given their stronger fundamentals, emerging markets should become the focus for new investments once the dust has settled, although rising interest may act as a headwind,' Wiedmann said. 'Looking at valuations the case, the case for direct investment is not yet compelling as emerging markets are still trading at only a slight discount to developed markets, providing little margin for safety.'

The scene is set for hedge funds

Alongside gold, Rothschild expects hedge funds to profit from shifts in risk appetite as well as currency and interest rate moves and is particularly bullish on global macro managers, having adjusted its hedge fund allocation to make it more 'market neutral'.

With the European parliament set to crack down on hedge funds through the Directive on Alternative Investment Fund Managers (AIFM), which will come into force in 2012, Wiedmann expects uncertainty about the outcome of the legislative process to make Ucits III funds more attractive.

Government bonds are not a safe haven

Although government bonds have proved popular recently on the back of growing risk aversion among investors, Wiedmann expects growing competition between government borrowers to drive yields up and therefore sees the asset class as 'unappealing'.

Although the strategist sees the fundamentals of corporate bonds as stronger with buying opportunities starting to emerge, he believes the area should be approached with caution as prices become more volatile.

'Low interest rates and rising corporate profits should be supportive, but bank bonds may struggle in the face of tighter regulation and weak growth,' Wiedmann added.


source: reseau Voltaire

Rising and Declining Economic Powers: The Sino-US Conflict Deepens

James Petras, New York

4 May 2010

Will the intensified conflicts between the US and China inevitably lead to a global conflagration? If recent past history is any indication the answer is a resounding yes. The most destructive wars of the 20th century were the result of confrontations between established (EIP) and rising (RIP) imperial powers. The practices and policies of the former serve as guides to the latter.


England’s colonial exploitation of India, its markets, treasury, raw materials and labor served as a model for Germany’s war and attempted conquest of Russia. [1] The enmity between Churchill and Hitler had as much to do with their common imperial visions, as it did their conflicting views of politics. Likewise, European and US colonial plunder of Southeast Asia and China’s coastal cities served as a model for Japan’s drive to colonize and exploit Manchuria, Korea and mainland China.

In each instant the conflict between early established, but stagnant, imperial powers and late developing dynamic empires led to world wars in which only the intervention of another rising imperial power, the United States (as well as the unanticipated military prowess of the Soviet Union), secured the defeat of the RIP. The US emerged from the war as the dominant imperial power, displacing the established European imperial powers, subordinating the RIP of Germany and Japan and confronting the Sino-Soviet bloc. [2] With the demise of the USSR and the conversion of China into a dynamic capitalist country, the stage was set for a new confrontation between an established imperial power (EIP) the US and its European allies and China, the newly emerging world power.

The US empire covers the world with nearly 800 military bases, [3] multi-lateral (NATO) and bi-lateral military alliances, a dominant position in the self-styled international financial institutions (World Bank, International Monetary Fund) and with multi-national banks, investment houses and industries in Asia, Latin America, Europe and elsewhere.

China did not challenge or borrow the US model of military driven empire building. Even less does it look at the previous Japanese or German approach to challenging established empires. Its dynamic growth is driven by economic competitiveness, market relations guided by a developmental state and a willingness to borrow, learn, innovate and expand internally and overseas displacing US market supremacy in regions and countries in Latin America, the Middle East and Asia, as well as inside the US and the European Union. [4]

Established Imperial States

World and regional wars, insofar as they involved EIP (and most wars directly and via proxies engaged the imperial states) resulted from efforts to retain privileged positions in established markets, accessing raw materials, exploiting labor via mercantile, colonial, bilateral and multilateral agreements. Frequently trading zones linked the imperial and dependent country and region and excluded potential competitors. Military bases were “super-imposed’ over imperial controlled economic zones. Networks of political clients favored imperial countries.

Given the privileged and early establishment of their imperial domains, EIP portrayed later emerging imperial powers as “aggressors” who threatened “peace”, namely, their hegemonic position. Like the EIP the later states followed a pattern of military conquests of colonial and non-colonial client states of the established imperial states followed by plunder. [5] Lacking the networks, satraps and clients of the EIS, they relied on military power, separatist movements and “fifth columnists” (local movements whose primary loyalty was to the rising imperial power). The RIP claimed that its “legitimate” quest for a share of world power was blocked by illegal economic boycotts of access to raw materials and colonial style mercantile systems which closed potential markets. [6]

The EIP defeat of the RIP (Germany and Japan) with the essential backing of the USSR and the USA established the bases for a new set of empires which competed and conflicted on a new bases. The USSR established a military-ideological group of satellite states confined to Eastern Europe in which the imperial center economically subsidized its clients in exchange for political control. The US replaced the European colonial powers via a worldwide network of military treaties and the forceful penetration of former colonial states with a system of neo-colonial dependencies. [7]

The collapse of the Soviet empire and the implosion of the USSR briefly opened new vistas in Washington, for a unipolar empire without competitors or challengers, a ‘pax Americana’. [8] This ‘vision’ based on a superficial one dimensional analysis of US imperial military supremacy ignored several crucial weaknesses.

1) The relative decline of US economic power faced with stiff competition from the EU, Japan, the newly industrializing countries and beginning in the early nineties from China.

2) The fragile foundations of US imperial power in the Third World based on highly vulnerable client collaborators whose economies, subject to pillage, were not sustainable.

3) The de-industrialization and financialization of the US economy leading to a decline of merchandise trade and an increasing dependence on income from financial services. The almost complete specularization of the financial sector led to great volatility and the pillage of productive assets as collateral for the mounting debt overhang.

In other words, the ‘external edifice’ of a unipolar empire obfuscated the deepening internal rot and deep contradiction between greater external expansion and domestic deterioration. The rapid military expansion of the US, replacing the USSR’s Warsaw pact with the incorporation of the Eastern European countries into NATO created the image of an irrepressible dynamic empire. The pillage and transfer of wealth from Russia, Eastern Europe and the former Soviet Republic gave the appearance of a dynamic economic empire.

There were several problems with this viewpoint insofar as the pillage was a one-shot windfall; the plunder, mostly enriched Russian gangster oligarchs; and the privatized public firms passed mostly into the hands of Germany and the countries of the European Union. The US Empire which bore the cost of promoting the downfall of the USSR was not the prime economic beneficiary – its gains were mostly military, ideological and symbolic.

The fateful long term consequences of the post Soviet, US military victories occurred during the Bush senior and Clinton regimes of the early and mid 1990’s. The US invasion of Iraq and rapid fire smash-up of Yugoslavia gave an enormous impetus to US military driven empire building. The rapid military victories, the subsequent de facto colonization of Northern Iraq and control over its trade and budget revived the idea that imperial rule via colonization was a viable historical project.

Likewise, the establishment of the Kosova entity (subsequent to the bombing of Belgrade) and its conversion into a massive NATO military base reinforced the idea that military driven global expansion was the ‘wave of the future’. [9] Even more disastrous, the military primacy over economic directed empire building, led to the ascendancy of hard line militarist ideologues deeply embedded in the Israeli-Zionist military metaphysic of unending colonial wars. [10] As a result by the beginning of the new millennium all the political, military and ideological pieces were in place for the launching of a series of imperial-zionist driven wars, which would further sap the US economy, profoundly deepen its budget and trade deficits and open the way for the rise of new dynamic economic-market driven empires. [11]

Unlike earlier RIP, China has relied from the beginning on developing the domestic productive forces, building on the fundamental achievements of the Chinese social revolution. The social revolution created a unified country, ousted colonial enclaves, created a healthy educated labor force, basic infrastructure and industry. The new capitalist leaderships turned the economy outward and invited foreign capital to provide technology, open overseas markets and capitalist managerial skills, while retaining control over the financial system and strategic industries. Most important its semi-privatized agriculture, created a multi-million surplus work force of low paid wage workers for intense exploitation in labor intensive coastal assembly plants.

The new capitalist rulers eliminated the social safety net of free health and basic education forcing high rates of savings to cover medical bills and tuition and increasing the rates of investments to astronomical levels. Initially at least , China, in contrast to earlier RIP, intensified the exploitation of domestic labor and resources, instead of engaging in overseas military conquests and the pillage of resources and exploitation of “forced labor’.

China’s overseas expansion was market driven based on a triple alliance of state, foreign and national capital, in which over time, the role of each actor varied according to political and economic circumstances and the realignment of internal capitalist forces.

From the beginning the internal market was sacrificed in the pursuit of external markets. Mass consumption was postponed in favor of state and private elite investment, profits and wealth. Rapid and massive accumulation widened inequalities and concentrated power at the top of the new state-capitalist hybrid class system. [12]

In contrast to the EIP of the past and the US today, China as a RIP, subordinated banks to financing industry-manufacturing especially the export sectors. Unlike EIP like the US, China abjured big military spending on overseas bases, colonial wars and costly military occupations. Instead its goods penetrated markets, including that of the EIP. In a sui generis situation of borrowing technology and marketing expertise from imperial based multi nationals and then turning around and using the acquired skills to rise up the production cycle from assembly plant to manufacture, to design and innovative high value products. [13]

The RIP increased its merchandise exports while sharply limiting the penetration of financial services, the new driving force of the EIP. The result overt ime was a ballooning of a merchandise trade deficit not only with China but with nearly 100 other countries around the world. The pre-eminence of the financial military driven imperial elite inhibited the development of higher tech merchandise development capable of penetrating the market of the RIP and reducing the trade deficit. Instead the backward under developed and uncompetitive manufacturing sector were not able to compete with lower wage Chinese products and together with a backward looking overpaid bureaucratic trade union elite complained of unfair competition and “undervalued Chinese currency”.

They overlooked the fact that the US deficit was a product of domestic economic configurations and gross imbalances between finance and manufacturers and producers. An army of financial writers, economists, pundits, experts and other ideological experts linked to dominant financial capital provided the ideological gloss to the confrontational campaign against China’s economic driven rising imperial power. [14]

In the past EIP powers organized a “division of labor”. In the colonial model the dependencies of colonial produced raw materials and imported finished manufactured goods from the EIP. In the early post-colonial period the division of labor was the production of labor intensive goods in the newly independent countries in exchange for more technologically advanced goods from the EIP. A “third stage” division of labor was propagated by the ideologies of finance capital in which the EIP would export services (financial, technological, entertainment, etc.) for both labor intensive and more advanced manufactured goods.

The ideologies of the third phase division of labor assumed that the invisible earning resulting from repatriated earnings of finance capital would “balance” the external accounts of the deficits in merchandise trade. The financial monopoly of Wall Street and the City in London would ensure returns to retain a balance of payments surplus. This mistaken assumption was based on the earlier colonial and post-colonial model in which the agro-mineral and manufacturing countries did not control their own financing, insuring and transportation of international and domestic commodities. Today that is not the case.

Unable to dominate financial markets in merchandise trading countries like China, finance capital intensified its internal and intra-imperial speculative activity. This led to a spiraling of the fictitious economy, its inevitable collapse and the accumulation of external debt and trade deficits.

In contrast China expands its industrial sector balancing imports of semi-finished commodities for assembly, technology to set-up its own manufacturing production and capital linked to majority nationally owned plants with sales of finished goods to the US, EU and the rest of the world. Through state banks it retains control over the financial sector hence it lowers the outflow of ‘invisible earnings’ paid out to the EIP.

EIP engages in vast non-productive and inefficient (with billion dollar cost overruns) military expenditures and high cost colonial wars without ‘imperial returns’. [15] In contrast a RIP like China pours hundreds of billions, building up its domestic economy as a springboard for conquering external markets. The brutal imperial-colonial wars of the EIP savage millions of conquered peoples but at the cost of the disaccumulation of capital. In contrast the RIP, like China, harshly exploits hundreds of millions of migrant workers, in the process of accumulating capital for extended reproduction in the home and overseas markets. Unlike the past, it is the EIP which resort to military aggression to retain markets while the RIP expands overseas via market competitiveness.

The ‘economic disease’ of the EIP is their tendency to overextend their financial sector and shift their policies from promoting industry and trade to speculative and other malignant activity that feeds on itself and self-destructs. In contrast the RIP shift bank capital from financing domestic manufacturing to securing overseas raw materials for industry.

Differences Between Imperial Centers and “Diasporas”

There are important differences between past and present Imperial countries and various overseas Diasporas. In the past the imperial centers generally dictated policy to their overseas dependencies, securing mercenaries, conscripts and volunteers for their imperial wars, as well as profitable returns on investments and favorable trade relations. In some cases, settler colonies via their representatives in parliaments did influence imperial policy, in some cases up to and including devolution of power. Moreover, in some cases repatriated colonists did receive political support from the imperial center in securing financial compensation for expropriated properties. However, the imperial center always overrode the resistance of overseas settlers when it came to fashioning a pact with the ex-colonies which preserved larger economic and political interests. [16]

In contrast the US imperial state pays a multi billion dollar tribute and submits to war policies dictated by its apparent “dependency” Israel as a result of the Zionist power configurations pervasive penetration of strategic policy making. We have the extra-ordinary circumstances of the “Diaspora” (ZPC) of a foreign state (Israel) trumping the interests of strategic economic interests (oil industry) and top imperial field commanders and intelligence agencies of the imperial center in setting Middle Eastern policy. [17]

Unlike any previous EIP, in the US the entire mass media propaganda apparatus, most academic centers, the majority of heavily funded think tanks churn out thousands of programs, publications and policy papers annually reflecting an Israeli-Zionist centric view of the Middle East, censoring black-listing and purging any dissidents or forcing them into a groveling recantation.

The new rising imperial powers like China have no such “hegemonic” dependency. In contrast to the disloyal role of ZPC which serves as a political-military instrument of Israel, the Chinese Diaspora serves as an economic ally of he Chinese state. Overseas Chinese facilitate market opportunities for mainland business groups, engage in joint ventures inside and outside of China, but do not shape the foreign policy of the state in which they reside. The Chinese Diaspora do not act as a “fifth column” against the national interest of their countries of residence, unlike American Zionists whose mass organization put all of their efforts into the singular goal of subordinating US policy to maximize Israel’s colonial policies.

The differences in the relations between past and present imperial centers and their external and internal diasporas’ have enormous, multifaceted consequences in the competitive context for global power. Let us enumerate them ‘telegraphically’.

The European EIP, by sacrificing colonial diaspora demands for the continuance of racial-colonial forms of imperialism in favor of a negotiated transition to independence, retained and then expanded long term, large scale lucrative investment, trade and financial links and in some cases even military bases. The settlers were sacrificed to promote a new type of imperialism.

The RIP today, China, is not shackled by overseas racist colonial settlers.They are free to advance their economic interests anywhere in the world, particularly in regions and countries and among peoples targeted by the fifth column, ZPC, embedded in its rival EIP (USA). [18]

China has over $24 billion in lucrative investments in Iran and is its principle oil importer. The US has zero investments and trade. China has displaced the US as the principle importer of Saudi oil, as well as a major trading partner in Syria, Sudan and other Muslim countries where the Zionist promoted sanctions policy minimize or eliminate US economic activity. [19] While China’s nationally and market determined policies have been the motor force for enhancing Chinese global economic position, the US harnessed to the needs of a tributary colonial power is a huge economic loser.

Equally significant, while China’s diaspora is strictly interested in expanding economic ties, the Israeli diaspora – the ZPC – is strictly tied to militarizing US policy, engaging in extraordinarily costly prolonged wars and antagonizing almost every major Islamic population with blatant Islamophobic rhetoric and hate propaganda.

The turn to a totally “unbalanced” militarized foreign policy, promoted on behalf of Israel, has completely unhinged the link between US military policy from its overseas economic interests. Paradoxically Israel’s fifth column has been an important factor facilitating China’s displacement of the US in major world markets. What had been historically a “stateless” people (citizens of secular non-Jewish states) primarily defined by their entrepreneurial capacities, has in present day America, been redefined by its mainstream leaders as the principle upholders of a doctrine of offensive wars (“preventive wars”) linked to Israel, the most militarized country in the world. [20] As a result of their influence and in alliance with rightwing extremists, Washington has forsaken important economic opportunities in favor of projections of military power.

How Empires React to Decline: Past and Present

Like the US today, declining empires in the past have adopted various strategies to minimize losses, some more successful than others. In general the least successful and costliest policy was the attempt to roll back mass anti-imperialist movements to restore colonial domination. In a period of declining global economic power, colonial restorationist polices have always failed. The non-military strategy was the least costly and most successful, in at least securing some semblance of imperial presence. Success was based on negotiated transitions to independence in which market supremacy ensured continued imperial hegemony in partnership with an emerging colonial bourgeoisie.

Historically, declining imperial powers resorted to five strategies or a combination of them.

1) Attempting to recover colonies or neo-colonies by renewed military offensives. After World War II, France in Indo-China and Algeria, England in Kenya paid a severe economic and political price in trying to restore colonial rule and ultimately they failed.

2) Negotiating a neo-colonial settlement. England severely weakened by its losses during World War II and facing a multi-million independence movement, thought it the better part of wisdom to negotiate and grant independence to India in order to retain a semblance of imperial trade and investment ties as well as indirect political influence via British trained (Anglicized) military and civil service officials.

3) Cede the leading position to a superior rising imperial power. By becoming a junior partner, this approach seeks to at least secure a reduced share of economic benefits and political influence. England faced with the massive anti-fascist communist led resistance movement in Greece slipped back and played second fiddle as the US assumed the role of political gendarme and took control of the emerging client state. Britain retained a reduced sphere of influence in the Balkans and Mediterranean. Likewise, Belgium attempted to subvert the new nationalist government in the Congo, led by President Patrice Lumumba only to give pride of place to the US backed puppet regime of Mobutu.

4) Ceding political rule to indigenous rulers amenable to protecting the colonial era economic and financial levers. The retirement of the British colonial regime from the Caribbean actually lessened the administrative and police costs of protecting and promoting ‘sterlings’ privileged trading position and investments in the early post colonial period. Imperial ‘preference’ was promoted via the “old boy” networks of Anglicized – British educated and indoctrinated officials, who were duly impressed by the pomp and ceremony of an elite dominated society. However, over time market dominance via ‘free trade doctrines’ replaced the old boy networks of the post colonial past and opened the door to US hegemony.

The rapid collapse of a competing empire can give new life to an empire experiencing a slower more prolonged decline. The sudden and total collapse of the Communist satellite system and the break-up of the USSR provided an exceptional opportunity for the US to extend its empire of military bases and to recruit mercenaries to fight its imperial wars. The major European powers experienced a revival of imperial fortunes by seizing the strategic industrial, service, transport media, real estate and financial sectors, in Eastern Europe, the Baltic states and the Balkans, replacing ‘direct’ Russian rule with market and ideological dominance. Recent experiences of how imperial ruling classes handled their decline have direct relevance to the responses of US imperial rulers.

US Responses to Imperial Decline: Saving the Empire Sacrificing the Nation

Washington has pursued at least six responses to its decline.

- The long term, large scale response of Washington to its declining position in the world economy and its declining political influence in several regions is to extend and reinforce its global military base networks. [21] Beginning in the 1990’s it converted the former Warsaw pact countries – Poland, Hungary, Czech Republic, etc. – into NATO members under US military leadership. It then extended its military reach by incorporating the Ukraine and George as “associate” members of NATO. This was followed by establishing bases in Kyrgystan, Kosova and other statelets of the ex- Yugoslavian republic.

The new millennium witnessed a series of prolonged wars and military invasions in Iraq and Afghanistan culminating in massive base building and recruitment of local mercenary armies and police: Further abroad the White House secured seven military bases in Colombia, expanded its military presence in Paraguay, Honduras and signed bilateral military treaties with Peru, Chile and Brazil, even as the US was expelled from its military base in Manta, Ecuador. [22] While the US was expanding its global military presence in Asia and Latin America, China replaced the US as Brazil, Argentina, Peru and Chile’s major trading partner. [23] While the US financed a vast mercenary army in Iraq, China became Saudi’s main petroleum export market. The US global military expansion did not lead to a parallel or commensurate increase or recovery of global economic power. On the contrary as the military expanded, its economic reach further declined.

- The White House’s second response to its global economic decline has been a very active, well funded campaign to create client regimes. Most of this effort involves financing local elites, NGO’s, malleable opposition politicians and ex-patriots residing in the US with ties to Washington and its intelligence agencies. The so-called “color revolutions” in the Ukraine and George, the tulip rebellion in Kyrgystan, the ethnic breakup of Yugoslavia, the de facto partition of Iraq and the establishment of a Kurdish “republic”, the promotion of Tibetan and Uighur separatists in China oligarchs in eastern Bolivia and the military build up of Taiwan can been as part of this effort to extend political domination in the face of global economic decline.

Yet global client building has been a failure on two counts. The clients have pillaged the economy, running down the public treasury, and immiserating the population, leading in some cases to their overthrow by force or ballots. [24] Secondly, the clients are more of a cost drawing on loans and handouts from the US Treasury rather than contributing to US global economic aspirations. Costly client building, supporting local satraps, undermines economic empire building. Meanwhile, Chinese investments in manufacturers and its concomitant demand for new materials and foodstuffs has led to a larger and more profitable presence even in the US client-states. While US backed client states rise and fall in quick succession, China’s market based presence experiences steady growth.

- Under the direction of a highly militarized elite, including influential Zionist policymakers, Washington has moved inextricably into multi—trillion dollar wars of colonial occupation in the Middle East and South Asia, under the mistaken assumption that “shows of strength” will intimidate nationalist and independent states and buttress the US economic presence. On the contrary, the wars have decreased US influence, increased local nationalist and pan-Moslem rejection especially in light of Zionized Washington’s unconditional backing of Israeli colonialism. More than any other move to bolster the empire, the prolonged colonial wars have massively mis-directed economic resources which, theoretically, could have revitalized the US global economic presence and increased its competitive position via China, into non-productive military expenditures.

- Colonial wars to restore imperial power, we have noted, were tried and failed by the European powers shortly after World War II. The US, likewise, internally weakened by Wall Streets pillage of the productive economy and by its multinational corporations large scale transfer of capital overseas and outsourcing of work – mainly to China and India - is least able to restore and profit from overseas colonial empire building. The irony is that half a century ago the US opted for market dominance against the European colonial model of empire building. Now it is the other way around. Europeans and China pursue hegemony via the market, while the US adopts the failed military based colonial model of empire building.

- Clandestine operations, namely “coup mongering”, has become a method of choice for reverting nationalist populist regimes in Latin America, Iran, Lebanon and elsewhere. In each case, Washington failed to restore a client regime causing a boomerang effect: the targeted governments radicalized their politics, gained support and became further entrenched. For example, a US backed coup in Venezuela was reversed, President Chavez was restored and proceeded to nationalize major multinationals, and spur Latin American opposition to free trade agreements and military bases. [25] Likewise, US backing for the Israeli invasion of Lebanon and the subsequent successful defense by Hezbollah strengthened its presence in the pro-US Harriri regime.

- The US unconditional embrace of the racist colonial militarist state of Israel as its principal ally in buttering colonial wars in the Middle East, has in fact had the opposite effect: alienating 1.5 billion Islamic peoples, eroding support among former allies (Turkey and Lebanon) and strengthening Zionists policy influentials advocating a ‘third military front’ – a war with Iran, with its two million person armed forces.

US Strategies to Undermine, Weaken and Outcompete China as an Emerging Imperial Power

At the first signs of China’s potential as a global competitor, Washington promoted a liberal economic strategy hoping to create a ‘dependency’ relationship. Subsequently, when liberalization failed to induce dependency, but rather accelerated China’s growth, Washington resorted to more punitive policies.

During the eighties and nineties, Washington encouraged China to pursue an “open door” policy toward US multi-national corporations (MNC) and provided tax incentives to encourage MNC to ‘colonize’ strategic growth sectors of China. Washington successfully promoted China’s entry into the World Trade Organization, with the idea that “free trade” would favor US MNC in capturing Chinese markets. The strategy failed: China harnessed the MNC to its own export strategy, capturing US markets; it forced the MNC into joint ventures which accelerated the transfer of technology and advanced China’s industrial learning curve in the course of increasing its own productive capacity. The WTO agreement undermined barriers to US trade and facilitated the flow of US capital into Chinese productive sectors, while eroding the US productive base and undermining its competitiveness. Over time, Chinese enterprises, state and private, grew out from and overcame, in part, its “dependence” and assumed greater control over joint-ventures and developed their own centers of innovation, marketing and finance. [26]

The liberal strategy of creating a dependency failed; it was China which accumulated trade surpluses and subsequently assumed the role of creditor while the US turned “debtor” state. Liberalization may have worked for the US in Latin America and Africa. There weak states run by corrupt rulers oversaw the pillage of their countries raw materials, the ruinous privatization and denationalization of strategic firms and the massive outflow of earnings. But in China, their rulers harnessed the MNC to their own national projects, ensuring control over the dynamic process of capital accumulation. They sacrificed short term excess profits to the MNC for the long term goal of gaining markets, know-how and the spread and deepening of new productive lines via ‘content rules’ and technology transfers. Liberalization favored Chinese merchandise export boom, while the economy gained autonomy, upgrading the product cycle. ¨

China retained the reins of the financial sector, blocking a takeover by the US “leading sectors” in finance, media, real estate and insurance. [27] By limiting penetration, speculation and volatility, China avoided the periodic crises which affected the US in 1990 – 01, 2000 – 02, 2008 – 2010. China’s version of the “open door” was not a repeat of the earlier version which led to the foreign dominance of coastal enclaves. Rather the foreign own MNC’s became ‘islands of growth’ harnessed to furthering Chinese state controlled and directed overseas expansion.

By the early years of the new millennium, Washington realized that the liberal strategy had failed to block China’s ascent to global power and increasingly turned toward a punitive strategy.

Strategies to Undermine and Weaken China as an Emerging Global Power

The US developed a detailed, complex and multi-prong strategy to undermine China’s rise to global pre-eminence. The strategy involves economic, political and military moves designed to weaken China’s dynamic growth and contain its outward expansion.

Economic Strategies

Washington, backed by the major financial press as well as most economists and ‘experts’, advocates intervening into China’s domestic economic policy in pursuit of measures designed to disarticulate its dynamic growth model. The most widespread demand is that China overvalue its currency to erode its competitive edge and weaken its dynamic export industries. [28]

In the past, between 2000 – 2008 Chinese revalued its exchange rate by 20% and still doubled its export surplus with the US. [29] They did this by increasing productivity, lowering rates of profit and improving quality control. Moreover, the problem of US negative trade balances is chronic and global – it has negative balances with over 90 countries, including Japan and the EU. [30]

The anti-China coalition, led by the Washington-Wall Street complex, has been pressing Beijing hard to deregulate its financial sector to facilitate the takeover of China’s financial markets, claiming ‘trade and investment’ violations. The White House sees the powerful financial sector as the only real lever to capture the commanding heights of China’s economy, through mergers and acquisition. This campaign lost steam, in the face of the financial crises of 2008 -2010 induced by Wall Street’s speculative activity. China’s financial system was barely affected thanks to its public regulatory structure and constraints on the entry of US banks.

Washington has imposed protectionist measures, contrary to WTO rulers, in the form of tariffs on Chinese exports of steel and tires and Congress has threatened an across the board 40% tariff on all Chinese exports to the US – a call for a ‘trade war’.

The US has blocked several large scale Chinese investments and buyouts of oil companies, technology firms and other enterprises. In contrast, China has allowed US MNC to invest tens of billions and to subcontract in the most diverse sectors of the Chinese economy. China as a rising world power is confident that its dynamic economy can harness US MNC to its continued growth while the US in the face of its deteriorating position is fearful of any acceleration of “Chinese takeovers”, a fear borne of economic weakness, couched and disguised in the rhetoric of a “security threat”.

Washington encouraged China’s sovereign investment fund and overseas investors to link-up with US financial houses engaged in speculative activity, hoping to strengthen outflows to the US and creating a ‘speculator culture’ in China, to weaken the power of productive capital in the state planning apparatus.

Washington has escalated its threats of economic retaliation in order to undermine and exclude China’s dynamic export sector and to secure concessions which will compromise the domestic political standing of its rulers, if and when they adopt Washington’s dictates. Chinese political leaders who allow Washington to determine its domestic economic policies will provoke internal opposition from business and workers prejudiced by those policies. Once compromised and weakened and facing inflamed national opinion, China’s leaders will face pressure from within and without –threatening China’s stability.

Washington has mounted a concerted international media campaign, mobilizing the IMF and the EU to weaken China’s national industrial model, blaming the rising world power for its decline. From the leading columnist in the ‘serious’ financial press to the sensational mass circulation ‘yellow press’, from political leaders in Congress to senior executive officials, to leaders of uncompetitive manufacturers and trade union bureaucrats of a moribund labor movement, a campaign is orchestrated to ‘confront’ China over a host of crimes and sins, ranging from unfair competition, low wages, state subsidies, to shoddy quality and unsafe products.

US and English academics, economists, investment consultant experts and pundits embedded in the empire have encouraged their Chinese counterparts as well as overseas investors and policymakers to propagate policies in line with Washington’s demands for policy changes. The goal is to facilitate greater US penetration and to limit China’s dynamic overseas expansion.

From day to day US “experts” and economists discover reasons to preach an “imminent crises” in China: the economy is slowing down or growing too fast; a “bubble” in real estate is ready to burst; [31] the banks are overloaded with bad debts, putting the financial system in danger of collapse; inflation is growing out of control; overseas investments are following colonial patterns; the economy is unbalanced, too dependent on exports rather than domestic consumption; its export competitiveness is a prime factor in unbalancing world trade; its growing economic ties in Asia threatens their ‘national security’ etc. These and numerous other propaganda pieces packaged as serious economic analysis in the Financial Times, Wall Street Journal and The New York Times are designed to blame China for the weaknesses and decline of US economic competitiveness in the world.

The purpose is to influence and pressure ‘malleable’ or ‘accommodating’ neoliberal Chinese officials to change policies. Equally important these ‘critiques’ are designed to unify the business, banking, political and military elite and justify aggressive moves against China. The basic problem with these expert diagnoses is that they have repeatedly been refuted by the reality of China’s continuous dynamic growth; its ability to manage and regulate financial lending to avoid bubble busts; the growing positive reception by its African hosts to new investment deals due to their relatively generous loans and infrastructure projects which accompany investments in extractive sectors. [32] More recently Washington has influenced India and Brazil to join the chorus blaming China for trade imbalances, a most dangerous alliance in the making.

Political Offensive

Established empires in decline, like the US today, have a repertoire of levers designed to discredit, seduce, isolate and contain rising world powers like China and put it on the defensive.

One of the longest standing political ploys is Washington’s human rights propaganda campaign, highlighting China’s human rights violations, while ignoring its own massive offenses and downplaying those of its allies like the Jewish state of Israel. By discrediting China internal politics, the State Department hopes to inflate US moral authority, deflect attention from its worldwide long term and large scale violation of human rights accompanying its global empire building and build an anti-China coalition.

While human rights propaganda serves as the stick to beat back China’s economic advance, Washington also attempts to induce China’s cooperation in slowing down its decline. US diplomats frame this approach by emphasizing “treating China as an equal”, recognizing it as a “world power” which has to “share responsibilities”. [33] Behind this diplomatic rhetoric is an effort to harness China to a policy of collaborating and following US empire building strategies as a junior partner, at the expense of China’s economic interests. For example, while China has invested billions in joint ventures with Iran and has developed a growing lucrative trading relation, Washington demands China support sanctions to weaken and degrade Iran to enhance US military power in the Gulf. [34] In other words, China should give up its market driven economic expansion to share “responsibility” in policing the world in which the US is supreme. Likewise, if we translate the meaning of the White House’s demand for China to “assume responsibility” for “rebalancing the world economy” it boils down to telling Beijing to reduce its dynamic growth, to allow the US to gain trade advantages to reduce (“rebalance”) its trade deficit.

Alternating between positive symbolic gestures, such as references to the US and China as the (G-2), the two determining powers in the world, the White House has promoted a “united front” with the EU against China’s supposedly “protectionism”, “currency manipulation” and other “unfair” economic practices. [35]

At international gatherings like the recent Copenhagen Conference on climate warming, the GATT meeting on trade liberalization and the UN meeting on Iran, Washington attempts to satanize China as the main obstacle in reaching global accords, deflecting attention from the facts of Chinese compliance in setting standards superior to the US, [36] on climate, opposing protectionism and seeking a negotiated settlement with Iran.

Over time this imperial offensive to slow its decline has provoked an increasingly aggressive response as China gains confidence in its capacity to project power.

Strategies to Counter Established Imperial Powers

A rising economic powers’ most formidable and effective response to the established imperial powers’ efforts to block its advance is … to keep on growing at double or triple the rate of growth of its declining adversary. Nothing challenges the “crises” propaganda emitted by US embedded experts as the reports that, for example, in the first quarter of 2010 China grew at 12%, six times the projected growth of the US. [37] China’s policy toward US attacks and threats was reactive and defensive, rather than pro-active and offensive especially during the first decade of its advance toward global power status.

China affirmed that is exchange rate was an “internal matter” and even acceded to US demands and revalued its currency (2006 – 2008) by 20%. Later China responded by pointing out that the currency brouha had little to do with the US trade deficit, pointing to the structural weaknesses in the US economy, namely to its low level of savings, capital formation and loss of competitiveness.

Initially, China merely protested at US human rights attacks, either denying the charges or claiming they were internal affairs. By 2010, however, China went on the offensive, publishing its own documented inventory of US domestic human rights violations. [38] When Washington protested at China’s violation of the human rights of Tibetan and Uigher separatists, China rebuked Washington’s interference in China’s internal affairs and threatened to take reprisals which led Washington to drop its crusade.

Beijing has encouraged the US MNC to invest in China and export back to the US. Given the overall growth of China, the corporate penetration does not enhance US power rather it provides China with a lobby in Washington opposing protectionist measures.

China does little to directly constrain US overseas expansion, (since Washington does a good job at self-destruction) rather it focuses on enhancing its own economic based strategy of increasing overseas investments, borrowing technology and upgrading its high tech industries. China, despite pressure from Washington, refuses to join its sanctions campaign against Iran and develops investment ties in Afghanistan while the US military occupation costs billions and alienates most Afghans including its client regime. [39] China refuses to lend support to Obama’s military centered strategy to buttress the empire. While attending “summits” and bilateral conferences it refuses to make concessions which prejudice its overseas markets, without directly confronting the military mission promoted by Obama.

Most strikingly in Asia, the most dynamic countries, have ignored Washington’s warnings of China as a “security threat” and expanded their trade and economic ties with their neighbor. Over time Asia is replacing the US as the fastest growing trading partner of Beijing. More recently in April 2010, India have voiced concern over its trade imbalances with China and entered in negotiations to increase its exports.

Overall the US imperial strategy to stem its decline and block China’s growth as a world power has failed. White House policymakers and financial detractors of Beijing have ignored the formidable foundations of Chinese empire building and its capacity to rectify internal imbalances to sustain dynamic expansion.

Pillars of Global Power

China as most previous newly emerging global powers has sought – in this case successfully and without resorting to force and conquest – to lay the foundations for a sustainable economic empire. The strategy includes a complex mix of domestic and overseas measures.

1. Overseas investments to secure strategic resources, especially energy, metals and food. [40]

2. High levels of domestic investments to build up manufacturing capacity, introducing advanced technology to upgrade value added and lessen its dependence on imports of manufactured parts. Sustained high levels of investment are perceived as necessary to sustain export competitiveness.

3. Big push to upgrade the education of the labor force to achieve industrial supremacy – with the emphasis on engineers, scientists and industrial managers over and against stock speculators, investment bankers and lawyers. However, China’s efforts to upgrade its labor force will not succeed unless it recognizes and integrates its 200 – 300 million migrant workers whose children are currently excluded from advanced public education in the major metropolies. [41]

4. Multi-billion dollar investments in infrastructure, including dozens of new airports, high speed railroads and improved waterways linking the coastal regions to the interior, enhancing the dynamic growth of industry As a result, there is less migration to the established coastal manufacturing centers resulting in some cases in labor scarcity, which in turn has led to a significant rise in wage levels and less geographic imbalances between old and new poles of development.

5. As skilled labor begins to replace unskilled labor and as dynamic growth proceeds up the ladder to higher value added production, so do wage levels and social consciousness, leading to pressure to diminish the gaping class inequalities.

6. As a result of class pressures from below evidenced in over 100,000 annual locally based protests, strikes and demonstrations, the government has slowly moved to lessen class tensions in part with investments in social welfare and greater social spending. China is shifting from buying US Treasury notes to investing in subsidizing public health and education in rural areas. By bringing the state back into social development instead of relying on the market which has proved highly inefficient, it is upgrading rural labor for modern production processes.

In summary the pillars of China’s dynamic push for global power rest on the rebalancing the economy, upgrading its productive base, expanding its domestic market, pursuing growth and social stability while maximizing access to strategic materials essential for production.

China’s Version of “Rebalancing” its Economy: The New Contradictions

China’s rebalancing of its internal economy is accompanied by a relative shift in its economic relations with the US. Given the openly hostile posture adopted by Congressional leaders and the stagnant market in the US, China has increased its trade and investments with high growth Asia, to lessen its dependence on the US market and lower the risk of facing a protectionist squeeze. US-China trade now represents only 12% of total Chinese trade. [42] China while still a “creditor” for the US is shifting toward using its trade surpluses in more productive (and lucrative) investments. Not all of China’s new overseas ventures have been successful as some of its ‘western educated’ investment managers have lost several billion dollars investing in Blackstone and other investment houses. China’s dynamic ‘rebalancing of growth’ by strengthening the foundations for further external expansion faces greater dangers internally than from the outside. Within China, several changes in the internal class structure can endanger the stability of the system, as has been the case in other established empires. The big push for overseas expansion has created a powerful segment of the new public-private ruling class, which ignores the need for developing the internal market, especially investments in social development. Secondly, the entire ruling class and governing elite while paying lip service to the need for upgrading labor, building a social safety net in rural areas and extending social rights to health and education to migrant labor, refuse to increase their taxes to pay for it, resist any redistributive policies and defend their family privileges, creating conditions for heightened class tensions and conflict.

Equally deleterious to the future foundations of China’s external expansion is the emergence of a powerful speculator class, especially in the real estate, banking and local regional political elite which creates tendencies to bubble economics, which threaten the financial system. [43] While the regime though its ultimate control over monetary policy and the financial system adopts policies to ‘deflate’ the bubble, it does nothing structurally which could undermine this sector of the ruling class. Moreover, speculation in real estate raises the cost of housing beyond the reach of most workers, while the inflated price of land leads to arbitrary dispossession of homeowners by local and regional officials linked to real estate speculators, fueling mass unrest and in some cases violent protests.

The growth in power of importers, financial speculators and real estate billionaires could provide an opening for the leading sector of the US Empire – the financial, real estate and insurance ruling class. Up to now the repeated instability and crises induced by these sectors in 1990 – 01, 2000 – 2002, 2007 – 2010, has undermined their ability to penetrate the Chinese economy.

Given China’s continued growth, especially evident in the present, where it grew 9% in 2009 and 12% in 2010, while the US wallowed in and around zero growth, who has the most to lose if and when Washington decides to escalate into a trade war?

External Confrontation or Domestic Restructuring: Within the USA?

The US has a trade deficit with at least 91 other countries besides China, demonstrating that the problem is embedded in the structure of the US economy. Any punitive measure to restrict China’s exports to the US will only increase Washington’s deficit with other competitive exporters. A decline of US imports from China will not result in an increase for US manufacturers because of the under-capitalized nature of the latter, directly related to the pre-eminent position of finance capital in capturing and allocating savings. Moreover, “third countries” can re-export Chinese made products, putting the US in the unenviable position of starting trade wars across the board or accepting the fact that a finance –commercial led economy is not competitive in today’s world economy.

China’s decision to incrementally divert its trade surplus from the purchase of US Treasury notes to more productive investments in developing its “hinterland” and to strategic overseas ventures in raw materials and energy sectors will eventually force the US Treasury to raise interest rates to avoid large scale flight from the dollar. Rising interest rates may benefit currency traders, but could weaken any US recovery or plunge the country back into a depression. Nothing weakens a global empire more than having to repatriate overseas investments and constrain foreign lending to bolster a sliding domestic economy.

The pursuit of protectionist policies will have a major negative impact on US MNC in China since the bulk of their products are exported to the US market: Washington will cut its nose to spite its face. Moreover, a trade war could spill over and adversely affect US auto corporations producing for the Chinese market. GM and Ford are far more profitable in China than the US where they are running in the red. [44] A US trade war will have an initial negative impact on China until it adjusts and takes advantage of the potential 400 million consumers in the vast interior of the country. Moreover, Chinese economic policymakers are rapidly diversifying their trade toward Asia, Latin America, Africa, the Middle East, Russia and even in the EU. Trade protectionism may create a few jobs in some uncompetitive manufacturing sectors in the US but it may cost more jobs in the commercial sector (Wal-Mart) which depends on low priced items to low income consumers.

The bellicose trade rhetoric on Capitol Hill and confrontational policies adopted by the White House are dangerous posturing, designed to deflect attention from the profound structural weaknesses of the domestic foundations of the empire. The deeply entrenched financial sector and the equally dominant military metaphysic which directs foreign policy have led the US down the steep slope of chronic economic crises, endless costly wars, deepening class and ethno-racial inequalities as well as declining living standards.

In the new competitive multi-polar world order, the US cannot successfully follow the earlier path of blocking a rising imperial power’s access to strategic resources via colonial dictated boycotts. Not even in countries under US occupation, such as Iraq and Afghanistan, can the White House block China from signing lucrative investment and trade deals. With countries in the US sphere of influence, like Taiwan, South Korea and Japan, the rate of growth of trade and investment with China far exceeds that of the US. Short of a full scale unilateral military blockade, the US cannot contain China’s rise as a world economic actor, a newly emerging imperial power.

The major weakness in China is internal, rooted in class divisions and class exploitation, which the currently entrenched political elite profoundly linked through family and economic ties, might ameliorate but cannot eliminate. [45] Up to now China has been able to expand globally through a form of “social imperialism”, distributing a portion of the wealth generated overseas to a growing urban middle class and to upwardly mobile managers, professionals, real estate speculators and regional party cadre.

In contrast the US, military directed overseas conquests have been costly with no economic returns and with long term damage to the civilian economy both in its internal and external manifestations. Iraq and Afghanistan do not reward the imperial treasury in anyway comparable to what England plundered from India, South Africa and Rhodesia (Zimbabwe). In a world increasingly based in market relations, colonial style wars have no economic future. Huge military budgets and hundreds of military bases and military based alliances with neo-colonial states are the least efficient means to compete successfully in a globalized market place. That is the reason why the US is a declining empire and China, with its market driven approach is a newly emerging empire of a ‘new sort’ (sui generis).

Transition from Empire to Republic?

In the face of the US’s demonstrable economic decline, can the ruling elite recognize that its empire is not sustainable (let alone desirable)? The US can increase its exports to China and its share of world trade to balance its accounts, only if it carries out deep political and economic changes.

Nothing short of a political and economic revolution can reverse the decline of the US. The key is to rebalance the US economy from finance driven to industrial centered: but any such shift requires class warfare against entrenched power on Wall Street and in Washington. [46] What passes for the current US private manufacturing sector shows no appetite for such a historic change. Up to now manufacturers have bought into or been bought out by financial institutions: they have lost their distinct character as a productive sector.

Even assuming that there is a political shift toward re-industrializing the US, industry would have to lower its profits, increase its investments in applied research and development and vastly improve the quality of its products, to become competitive in domestic and overseas markets. Vast sums need to be re-allocated from wars, ‘marketing’ and speculation into social services like comprehensive national health plans high skill engineering and advanced industrial training to increase efficiency and competitiveness in the domestic market.

The transfer of a trillion dollars in military spending from colonial wars could easily finance the reconversion to a civilian economy producing quality goods for local and overseas consumption, including merchandise and commodities reducing toxic chemical and environmentally damaging sources of energy.

Substituting trade missions for military bases, could increase inflows to the US and reduce outflows abroad. Ending political links and billion dollar subsidies to militarized states like Israel and lifting sanctions on major economic markets like Iran will decrease outflows from the US treasury and enhance economic inflows and opportunities for productive sectors throughout the 1.5 billion muslim world.

Focusing investment on the growing market for clean energy and technology for domestic and overseas economies, will create new jobs and lower the cost of living while enhancing living standards. Confiscatory taxes on the millionaire/billionaires especially the entire ‘Wall Street” ruling elite, and a cap on all income over one million dollars can finance social security and comprehensive public national health system, which would reduce charges to industry and state. The transition from empire to republic requires a profound rebalancing of social power and a deep restructuring of the US economy. Only then will the US be able to compete economically with China in the world economy.

The transition from a militarist imperialist power, corroded by a corrupt political elite beholden to a parasitic speculator economic elite, to a productive republic with a balanced economy and competitive sector requires fundamental political changes and a profound ideological revolution. To bring about this political and economic revolution requires a new configuration of the state which pursues public investments creating competitive industries, deepens the domestic market and expands social services.

To expand overseas markets, Washington must end boycotts and military subservience to Israel, pushed by the pro-Israel fifth column embedded in top financial and political institutions and in control of the legislature. [47]

Ending military directed empire building will open the flow of public financing toward civilian technological innovations; ending restrictions on overseas technology sales can further reduce trade deficits, while upgrading local production to competitive levels.

To more forward requires a head-on confrontation with the ideologues of finance capital and a rejection of their efforts to deflect attention from their role in destroying America. The “blame” China campaign for what are in reality internally caused US structural imbalances must be confronted before it leads us into new, costly and self-destructive trade wars or worse. China’s internal “imbalances” are profound and pervasive and over time can weaken the pillars of external expansion. China’s class, inequalities, uneven regional development, private wealth and public corruption and discriminatory treatment of migrants as second grade citizens (a dual citizenship system) will be resolved internally as the socio-economic divisions translate into class struggle. Fundamental changes in the privatized health system toward a comprehensive national public health system are essential, but these changes require a revival of the class struggle against state and private vested interests. [48]


As in the past, a declining imperial power faced with profound internal imbalances, a loss of competitiveness in merchandise trade and an overdependence on financial activities looks to political retribution, military alliances and trade restrictions to slow its demise. [49] Propaganda, whipping up chauvinist emotions by scapegoating the rising new imperial state and forging military alliances to “encircle” China have absolutely no impact. They have not stopped all of China’s neighbors from expanding economic ties with it. There are no prospects that this will change in the near future.

China will push ahead with double digit growth. The US Empire will continue to wallow in chronic stagnation, unending wars and increased reliance on the tools of political subversion, promoting separatist regimes which predictably collapse or are overthrown. The US unlike the established colonial powers of an earlier period cannot deny China access to strategic raw materials as was the case with Japan. We live in a post-colonial world where the vast majority of regimes will trade and invest with whoever pays the market price. China, unlike Japan, depends on securing markets via economic competitiveness – market power – not military conquest. Unlike Japan it has a vast multitude of workers; it need not conquer and exploit foreign colonized labor.

China’s market driven empire building is attuned to modern times, driven by an elite free to engage the world on its own terms, unlike the US plagued by financial speculators who eat away and erode the economy, ravaging industrial centers and turning abandoned houses into parking lots.

If the US imperial elite at present is at a loss as to how it can contain China’s rise to world power, the mass of the US working class is at a loss as to how it can move from a military driven empire toward a productive republic. The economic decay and the entrenched political and social elites have effectively depoliticized discontent; systemic economic crises have been converted into private individual maladies. Over the long run, something will have to break; militarism and Zionist power will so bleed and isolate the United States that necessity will induce a forceful response … The longer it takes the more violent the rebirth of the republic. Empires do not die peacefully; nor do financial elites embedded in extraordinary wealth and power surrender their privileged positions peacefully.

Only time will tell how long the American people will endure the dispossession of homes, employer servitude, fifth column colonization and military driven empire building based on domestic decay.

James Petras is a Bartle Professor (Emeritus) of Sociology at Binghamton University, New York. He is the author of 64 books translated in 29 languages and has published over 2000 articles. His most recent book: Global Depression and Regional Wars, Clarity Press (2009).

[1] Ian Kershaw, Hitler: 1936-1945, Vol. 2 (London: 2008). According to the eminent scholar Frederick Clairmont “For Hitler, India was a model of a predatory colonial empire, ‘The Soviet Union will be our India’ he jubilantly declaimed”. “Operation Sea Lion: Looking Back” letter to colleague at the Sorbonne, April 2010.

[2] Gabriel Kolko, The Politics of War (New York: Pantheon 1990).

[3] Chalmers Johnson, Nemesis: The Last Days of the American Republic (New York: Metropolitan Books 2007).

[4] The US and China: One Side is Losing, the Other is Winning, by James Petras, Voltaire Network, 3 January 2010 and US and China: Provoking the Creditor, Hugging the Holyman, by James Petras, Voltaire Network, 9 March 2010.

[5] Herbert Bix, Hirohito and the Making of Modern Japan (New York: Harper Collins 2000).

[6] Edward Miller, Bankrupting the Enemy: The US Financial Siege of Japan before Pearl Harbor (Annapolis MD: United States Naval Institute Press 2007) esp. Ch. 6 “Birth of the Embargo Strategy”, Ch. 7 “Export Controls”, Ch. 10 “Japan’s Vulnerabilities: Strategic Resources”.

[7] James Petras and Morris Morley, "The Imperial State” in James Petras et al: Class, State and Power in the Third World (Montclair: Allenheld and Osmun 1981).

[8] Defense Strategy for the 1990’s published later as Defense Planning Guidance (draft 1992).

[9] Diana Johnstone, Fools Crusade: Yugoslavia, NATO and Western Delusions (Monthly Review: NY 2002).

[10] The neo-conservative manifests is emblematic of this rising power elite; see The Project for the New American Century (Information Clearance House) September 2000.

[11] On Israeli aligned US officials promoting the Iraq war see James Petras, The Power of Israel in the United States (Atlanta: Clarity Press 2006).

[12] China’s kin-class ruling class has produced several hundred billionaires and probably the worst inequalities in Asia. See the Financial Times (FT), March 30, 2010, p. 9.

[13] China’s promotion and the growth of new high tech industries has led to tighter controls on foreign tech multi-nationals, FT February 22, 2010, p. 2. China has replaced the US as the biggest manufacturer of wind turbines and producer of “clean coal”, FT Special Report on Energy March 29, 2010. On China’s increasing control of its economy see FT April 8, 2010, p. 9.

[14] Almost in every issue of the Financial Times there is at least one article blaming China for “global imbalances”. See FT March 31, 2010, p. 3, FT April 6, 2010, p. 3 and p. 8.

[15] The US military budget has more than doubled over the past ten years, reaching one trillion dollars of which 70% is current expenditures in ongoing wars and preparation for new wars, the rest for pensions and other payments for past wars.

[16] Both in the case of Kenya and what was previously called Rhodesia (Zimbabwe), British imperial officials facing prolonged resistance agreed to an independence which included generous compensation for property losses to settlers.

[17] See Petras: Power of Israel in the United States, op cit; Zionism, Militarism and the Decline of the US Power (Atlanta: Clarity Press 2008.)

[18] This is especially the case where the Zionist power configuration in the government has promoted sanctions against Iran, Syria and earlier against Iraq. China has moved in with a 5 billion dollar investment in Iranian gas fields, one among many new investments, Global Research, March 8, 2010.

[19] By 2010 China, as well as India to a growing extent, was replacing the US as the main importer of Saudi oil. FT February 22, 2010, p. 4.

[20] Per capita Israel has the biggest armed forces, the most fighter planes and nuclear bombs in the world. Next to the US it has invaded more countries than all the rest of the Middle East countries combined.

[21] Chalmers Johnson, The Sorrows of Empire (Owl Books, New York 2005).

[22] Beginning with President Clinton (2000) and continuing through to Obama, the US has poured over 6 billion dollars into Colombia, backing the military, secret police and death squads. The US has over a thousand military advisers and contract mercenaries operating in Colombia. The military agreements with Brazil and the rest of Latin America are on a vastly lesser scale of intrusion.

[23] China’s displacement of the US as the dominant trading partner in major Latin American markets received only a tiny fraction of the attention that any visit by a prominent Israeli official.

[24] US clients were overthrown in Kyrgystan (2010), defeated electorally in the Ukraine (2009) and confronted by mass opposition after a disastrous military adventure in Georgia.

[25] US – Venezuela Relations: Imperialism and Revolution, by James Petras, Reseau Voltaire, 5 January 2010.

[26] See “China Mobile Group axes Google”, FT, March 25, 2010, p. 1; FT February 22, 2010, p. 2.

[27] Congressional Research Services, “China’s Holdings of US Securities: Implications for the US Economy” July 30, 2009.

[28] FT April 6, 2010, p. 8., provides an account of the US Senate’s blame China with charges of “currency manipulation”.

[29] Yang Yao “Renmibi Adjusted will not cure trade imbalances”, FT, April 12, 2010.

[30] Stephan Roach, “Blaming China will not solve America’s Problems”, FT, March 30, 2010, p. 11.

[31] A typical report on “bubble fears” is in the FT February 22, 2010. Two months later China had “cooled off” the bubble by forcing bank lending down by 43% in the first quarter. Al Jazeera, April 15, 2010.

[32] Contrary to the charges of neglecting its domestic market, it is growing 15% over the past year. China’s imports are growing faster than their exports. See Jim O’Neill “Tough Talk on China ignore Economic Reality”, FT April 1, 2010, p. 9.

[33] FT April 12, 2010, p. 3.

[34] “Obama to press Hu on Teheran Sanctions”, FT, April 13, 2010, p. 3.

[35] At a G20 meeting the US circulated a letter condemning China but only five countries signed it. (The FT headline was deceptive). “G20 attack China on exchange rate”, FT March 31, 2010, p. 3.

[36] China is steaming ahead on clean energy, overtaking the US during 2009 to become the leading investor in renewable energy technologies, a 79% rise in installed capacity in 5 years. BBC News, March 26, 2010.

[37] FT April 12, 2010, p. 22. Growth projections based on first quarter of 2010.

[38] Al Jazeera, March 12, 2010.

[39] China Daily, March 24, 2010 for differences between US and Chinese approach to Afghanistan.

[40] The dynamic push to secure raw materials is illustrated by massive investments in iron mines in Russia and Africa, FT, April 13, 2010, p. 17.

[41] Al Jazeera, March 5, 2010.

[42] FT March 30, 2010, p. 11.

[43] FT, April 24/25 2010, p. 1. “Shanghai plans to equal New York as a global financial centre by 2020”.

[44] FT, April 13, 2010, p. 19.

[45] “China vows to tackle the social divide”, Al Jazeera, March 5, 2010.

[46] For a similar call to “rebalance” the British economy from finance to manufacturing see Ken Coults and Robert Rowthorne U.K.: "Either a Large Trade Surplus or Grim Prospects for Profits and the Fiscal Deficit", cited in the FT, April 14, 2010, p. 11.

[47] By a margin of over 300 to 10 US Congress people signed a letter scripted by the pro Israel AIPAC backing Israel and demanding Obama retracts his “pressure” on Israel to desist from seizing Palestinian property. See FT April 24/25 2010, p. 3.

[48] Waikeung Tam, “Privatizing Health Care in China: Problems and Reforms.” Journal of Contemporary Asia, Vol 40(1), Feb. 2010, p. 63-81.

[49] “US tightens missile-shield encirclement of China and Russia.” Global Research, March 4, 2010.


The US Finds its Superpower Structure and Capital are Insufficient to Cope with a Transformed World

Editorial Dept
12 January 2010

The United States of America, in global strategic terms, is tumbling down a series of misadventures, declining in a “step of sighs” through frustrating economic and military endeavours as it discovers that its superpower structures and massive capital wealth are insufficient to cope with a transformed world.

This transformed world was created by the very superpower capabilities and massive wealth of the West. Even the People’s Republic of China (PRC) is beginning to recognize that massive financial holdings are inadequate to address all challenges to national survival and wellbeing.

The question is whether this current process through which the US is going must inevitably be played to a conclusion which sees the US itself — as the Roman and Hellenic and Mongol and British and Netherlands and Soviet empires once were — broken apart or reduced to modesty among the ruins of grandeur? It is not. Nothing is written which cannot be re-written.

The Russian Federation’s grand strategic growth began only with its recognition that it was forced, with the death of the Union of Soviet Socialist Republics (USSR) in 1990-91, to put aside the pretensions that it had been a superpower. The defeat of the USSR-led bloc by the US-led bloc which determined the end of the Cold War engendered in Moscow the deep reflections and reorganizations which only defeat can bring. Russia, with this realization, was able to revive the strategic momentum which had been thwarted by the 1917 Revolution.

The West, and particularly the United States after the end of the Cold War, wallowed in a condition even worse than defeat. It wallowed in victory.

With defeat comes the ability — indeed, the license, mandate, and demand — to sweep out failed or obsolete institutions; to scour out the sclerotic accumulation of laws and bureaucratic procedures; and to purge the perpetuation of the kind of strategic insensitivities which had led to defeat. With victory, no such license is granted, and the presumption of superiority reinforces and compounds ancient structures. It does, however, reinforce the thinking and architecture which had led to victory. Further, victory it leads to the excesses of those who ride to power on the exhausted backs of those who, in fact, had created the victory.

Those who conceive, manoeuvre, and shed blood or risk careers for success are never those best suited to the shallow machinery of managing success when it has reached a plateau of self-satisfaction. But success is never able to be sustained if it is only “managed”. This is one of the lessons of The Art of Victory. Thus, the desire by the US to see itself not merely as the “sole surviving superpower” in the post-Cold War period, but to also see itself as the superior of its one-time allies, merely compounded the widespread Western view after 1991 that effort, creativity, alliance teamwork, and the humility of the threatened were unnecessary. It led to the belief that “the peace dividend” of victory could be spent recklessly, and forever, without heed.

Thus, in relative terms, post-Cold War, Russia and — in a different fashion — the People’s Republic of China (PRC) learned, re-organized, and began the process of rebuilding their societies, less hampered by the earlier constraints of state structures. They prepared for a new world, and acted accordingly. They learned from history, ancient and recent. The West — but again, particularly the US — engaged in no such introspection; did not bow to the humbling workload of reconstruction; and was left hidebound by institutions which had acquired the towering and massive strength of fortifications built for a war long past.

The West — including the US — is now in the hands of managers who know nothing of what it took to built Western values, institutions, methodologies, and wealth. They preside over populations increasingly ignorant of those values, and this suits the managers. The education systems created by the managers, displacing the pride and identity of the earlier warriors, reinforce ignorance of the real underpinnings of success, and, in fact, success itself is despised because there is no comprehension of what failure can bring. They cannot even observe the lessons which the Russians post-Cold War, or the Egyptians post the 1967 Six Day War, were forced to learn.

Wealth and identity, while being built, demand absolute self-awareness, discipline, and a constant understanding of context. Wealth, when it is being spent, is blind to everything but self-gratification. I once called this “the Saudi disease”: I am wealthy, therefore I am smart. It is now the Western disease. And the West will continue its decline until it has sunk so low, spent so much, that it is forced and humiliated into self-review. Even alcoholics — those who admit their condition — are aware of this phenomenon.

So what, then, are the options for the West, but particularly the US which was, until recently and briefly (for less than a century), primus inter pares among Western nations?

Any fundamental assessment of US goals, capabilities, and options must be conditioned on external realities which provide the context for any US aspirations. The nature of global rivalry has changed dramatically in the two decades which followed the end of the Cold War. This is not surprising. The entire global framework transformed in just two decades following World War I, and again in the few decades following World War II. Given the compounding pace of scientific and technological growth which began following World War II, what is, in fact, surprising is that the new global framework took so long to emerge, haltingly, from the mists of the swamp in which it has incubated.

It was postulated that the clearing of the post-Cold War mists would reveal a Pacific Century, an age dominated by China. Indeed, China may well continue its rise in strategic terms, but, equally, it is plagued by a legacy of challenges, particularly if it is to meet the growing expectations of its population. In any event, the Pacific Century was, arguably, the 20th Century, which gradually emerged as the Atlantic Century played out. But the rise in one region does not necessarily mean that others fail to rise. Just as the Atlantic era blended with the Pacific era, so the Pacific age blends with the emerging Indian Ocean age, and all — Atlantic , Pacific, and Indian oceanic regions — are inseparably bound, along with the fortunes of the heartlands.

If anything, the revival of the Great Silk Route binding together — finally — Europe. Asia, and the Middle East and Africa, spells the vital importance of all the oceanic aspects. In this regard, the Indian Ocean region, which enabled US projection into Arabia, Iraq, Afghanistan, and Central Asia, has long been ignored, and seen only as a transit zone for extra-regional powers. That is now ending.

The Indian Ocean is a complex strategic theatre in its own right, and, with the Pacific and Atlantic in many ways already strategically “defined”, it is the one dynamic zone which can affect the global place of the great powers. It is one of the few fields of manoeuvre left open.

What it means to the regional inhabitants is one thing: the Indian Ocean is home to 48 littoral and dependent states, reaching up into its subsidiary seas and gulfs, and to a third of the world’s population. Indian Ocean states had, in 2007, a combined gross domestic product (GDP) in excess of $4-trillion.

What the Indian Ocean means to out-of-region powers, such as the US, is something else: it is a zone of transit; it is a zone which enables access to markets and resources. It is also one of the few dynamic zones through which alliance-building, or strategic spoiling, can have global ramifications.

The US has in Cold War and post-Cold War years viewed the region through different prisms, and never as a strategic whole. Moreover, it has in post-Cold War years viewed it mainly through the priority of land power projection. Its principal military thrusts into the region have been via the ground-force-dominated Central Command (CENTCOM), or the new, “soft” prism of African Command (AFRICOM), which has yet to find a means of actually functioning meaningfully in Africa. The US Navy, through what is now Pacific Command, has made side adventures into the Indian Ocean.

Now, however, the Indian Ocean demands greater attention because of its inherent resource wealth, growing markets, and the reality that it is integral to both the revived Great Silk Route, and the evolution of “the Great Silk Sea Route”, as this writer has termed the Indian Ocean’s increasingly complex transit trade.

Moreover, with the decline in on-the-ground influence in the Northern Tier coming to a head with the US retirement from Iraq and Afghanistan, the US has little option but to rebuild its regional authority and power not on CENTCOM, but on the US Navy’s capabilities and historical legacy — minor though it is — in the Indian Ocean. The only presence which the US can maintain with any degree of authority and independence is its sea power.

The process, however, is complex, and the frameworks of alliances and competitors are no longer clear and simple. The Indian Ocean exemplifies the emerging nature of the global strategic pattern, in which friends and competitors are often the same nation-states; in which alliances may of necessity be restricted to shorter timeframes than in the past, or may be restricted to certain key issues. Friends will, more than ever, need to understand that they can disagree on some issues and yet remain allies.

Within this, the Indian Ocean is a major key to accessing and influencing Russia’s dominance of Central Asia, the Middle East, and parts of Africa. The Indian Ocean is, perhaps, the principal dynamic key to China’s strength, because competition in the Pacific is less critical — or perhaps less likely — to influence or concern Beijing. For India itself, the biggest single littoral economy and military power in the Indian Ocean, the choices are emerging more starkly.

India is, unless it radically alters its policies, faced with being marginalized to being a strictly Indian Ocean power; literally one in the Alfred Thayer Mahan model of a sea power state. While this would be significant, it would waste India’s potential role as a Eurasian land power state — a “heartland” state, as Sir Halford Mackinder’s strategic philosophies would have it — and make it vulnerable to the growing heartland power of the Shanghai Cooperation Organization (SCO) states, dominated by the Russia Federation (RF) and the PRC. Thus, to be successful, India needs to ensure that it becomes a combination sea power and heartland power, with the ability to both dominate the Indian Ocean from a maritime sense, and access and influence the wealth and trade of the heartland Central Asia.

To achieve this combination, India needs to gradually expand its relations with the great sea power capabilities in the Indian Ocean of the other major Indian Ocean powers (Australia, and, ultimately, Iran), and the United States of America. This would enable India to preclude dominance by the PRC’s People’s Liberation Army Navy (PLAAN) and any — as yet minimal — RF Navy resurgence in the region. Thus, the Indo-US strategic link must be expanded if New Delhi is to retain any global leverage.

However, and in superficial contradiction, New Delhi cannot become a player in the SCO’s heartland unless it allies itself, yet again, but with greater depth, with Russia to find a way into Central Asia. This would give it a measure of security against the PRC’s growing dominance of regional trade and pipelines across southern Central Asia and into the Northern Tier states of Iran and Afghanistan. Indeed, it needs Russia to help provide the geopolitical linkages into Central Asia, but at the same time must find a way to enjoy direct access to this region.

At present, the great impasse is the geographic and strategic linkage enjoyed between the PRC and Pakistan, and this is absolutely vital to Beijing. In Gwadar (linked via the PRC-funded Karakoram Highway across the mountains), the PRC sees the ability to use the Pakistani Baluchistan port as a terminus and hub into the East-West maritime trade, feeding raw materials into China from ships which have traversed the Indian Ocean from the Middle East and Africa. It will also become a means of exporting some Chinese product to Europe (potentially) through Gwadar to ships which would then transit the Indian Ocean and its subsidiary sea, the Red Sea, and through Suez to Europe.

This would give the PRC the ability to avoid the chokepoints of South-East Asia, particularly the Malacca Strait, which could be used to hold China to ransom. Even the Western Australian mineral and gas exports to the PRC could, conceivably, be partially re-oriented in their shipping routes to feed into pipelines and road transport from Pakistan’s Gwadar port up to the Western regions of the PRC as the logistic chain develops.

The PRC’s nurturing of stability and investments in Afghanistan, seen in the longer term and post the US/Coalition withdrawal from that country within the coming year or two, not only fits with Beijing’s expansion of commercial and supply interests deep into Central and South Asia, but also gives strategic depth to Pakistan in a way not seen since the Iran-Afghanistan-Pakistan linkages during the era of the Shah of Iran in the 1970s.

In addition to this, of course, the extensive and accelerating development of rail and other links from the PRC border down through Myanmar has been achieved by Beijing while the West has, in its moral piety, “sanctioned” Myanmar. The PRC, in fact, has moved to eliminate its dependence on the South-East Asian straits as its means of securing its trade with the Middle East, Africa, and Europe. It has begun developing a framework of linkages via (i) the overland northern Silk Route via Russia; (ii) the lower Silk Route via the Caspian; (iii) the overland linkages through Myanmar; (iv) the links through Pakistan, to subsequently embrace Afghanistan; and (v) through gradually growing links through Iran, to both the Indian Ocean and through Iran to Armenia, Turkey, and the Black Sea Basin into Europe.

Within all this, the US is losing its once-tight grip on the northern Indian Ocean states, including those in the Persian Gulf annex of the Indian Ocean, simply because it cannot sustain its land and air power presence in a meaningful way there. The future US maritime projection into the Ocean must be substantial, in order to show presence and therefore invoke influence, and yet it cannot rely on the same static array of bases which it once enjoyed as a legacy of assuming control of the former British sphere of influence.

The US, then, must view the Indian Ocean in its entirety, something which it has not yet done, having preferred to view the Middle East, South Asia, South-East Asia, and the Horn of Africa as somehow separate and unrelated areas, and areas totally removed from any relationship with South Africa and the Cape of Good Hope sea route (on the one hand), and Australia, in the South-East Quadrant — the Empty Quarter — of the Indian Ocean (on the other). Even the modest shift in mainstream US strategic thinking toward the Indian Ocean, exemplified by US author Robert Kaplan’s report in Foreign Affairs journal of March/April 2009, sees “the Indian Ocean” as the northern portions and in fairly traditional “arc of Islam” terms, for example.

To achieve its Indian Ocean goals, and to be a player in the “New Great Game” for Central Asia — having decisively lost the old “Great Game” to Russia by 2009 — the US will need to rely far more heavily on Australia as a maritime partner in the Indian Ocean. However, Washington will need to recognize that Australia, as the second most wealthy Indian Ocean state (and by far the wealthiest of the big states on a per capita basis), has its own delicate web of balanced interests with the PRC, India, Pakistan, South Africa, and the Middle East over a variety of trade, sea route, and other issues. Australia, both psychologically and strategically, cannot be “deputy” to the US’ “sheriff” in the region; its partnership with the US on Indian Ocean maritime issues must be delicate and balanced.

Australia, with its potential to offer home porting and fleet support to a US Navy presence in the Indian Ocean, is the key to US reinvigoration of its global role and re-entry into the Eurasian Great Game. On the other hand, if Australia must go it alone in the region, then it must. Its 2009 Defence White Paper highlighted the ongoing importance of the US-Australian alliance, but also the criticality of the need for Australia to develop totally independent security arrangements within the Indo-Pacific realm.

Indeed, the sophistry and legacy paternalism of Washington’s view of the Indian Ocean will need to give way to a more realistic and partnering approach to the region, particularly with Australia, quite rapidly if the US is to retain any momentum at all in the Indian Ocean, rather than suffering — as Britain did in 1964 — a downward spiralling erosion of influence and capabilities. The regional dynamic is such that Australia is reaching a point where, if the US does not partner with it on more or less equal terms in the Indian Ocean, then Australia will build other arrangements.

Australia is already at a point where it has recognized the need for independent intelligence capabilities and assessments on the Arabian Peninsula, the Northern Tier, and the Horn of Africa, as well as, of course, South and South-East Asia. There has been a growing realization that US assessments on, for example, Iran and Pakistan, or even on the Arabian Peninsula, have been undertaken through a prism of Islamist terrorism and oil, and this is too transitory and too narrow a focus for a country such as Australia, which is embedded into the region.

The US faces a situation, in the immediate term, in which its leadership wishes to disentangle as much as possible from all foreign engagements (certainly from Afghanistan and Iraq, seemingly regardless of the consequences for the region), and the necessity to divert funding away from defense and military operations to meet debt service and domestic social expenditures. It will, in other words, need to do more with less, if it is to sustain any sphere of influence. CENTCOM and AFRICOM can, and probably will, go some way into hibernation; PACCOM (Pacific Command) will become, even more than before, the major US force structure. There will probably be no stomach, or budget, in Washington to create a new Indian Ocean Command, and it would not, in any event, be ideal: the Indian Ocean has for too long been treated as “separate” by US planners.

The necessity will be for PACCOM to engage more strenuously in Indian Ocean deployment, both as a means of “showing the flag” and retaining influence through semi-soft projection; and also as a means to counter or balance or partner with the growing regional military capabilities of Indian Ocean states and other out-of-region states, such as the PRC.

Iran , largely because of a series of missteps by the US beginning with the removal of the Shah by US Pres. Jimmy Carter in 1978-79, will be a formidable and dominating power over Persian Gulf/Arabian Peninsula energy exports within a short period, unless the clerics’ rule collapses (which now seems unlikely in the short term). The US can only hope to rebuild a measure of credibility as an ally to its regional allies, such as Saudi Arabia, Qatar, Kuwait, the UAE, and Oman, and it can now only do this delicately, given the vulnerability of US military assets in the region (including naval). But absent that effort by the US, it will eventually lose its great access to Middle Eastern energy and markets, because others are already on the ascendancy in the region.


A variety of outcomes are likely in the Indian Ocean region, insofar as they affect the United States. They include (but are by no means limited to) the following:

1. The United States will, by virtue of its economic condition, be forced to reduce its global military presence, and find new means of exerting its influence. This will inevitably place new demands on its diplomatic and intelligence capabilities, which will need to be attuned to the need for creativity as a replacement for sheer strength of national military capabilities;
2. There will be a significant growth by the US, because of the decline in ground and air military assets, in the use of maritime projection as the most economic form of military diplomacy. This will place new burdens on the US Navy at a time when it’s comparative technological advantage over major (and some minor) foreign navies will decline. In an age when the carrier battle group retains some utility, but increasing vulnerability, there will be much more manoeuvre and diplomacy required from US naval projection, and no zone will be more challenging than the Indian Ocean region. At the same time, the US Navy has no ideal Indian Ocean basing arrangements which can fulfil the needs: Diego Garcia is sound for refuelling and rearming, but not for major fleet repairs or crew leave; Singapore has proven to be of limited viability, and Singapore itself has been reluctant to go too far in allowing USN basing; Vietnam, in the Pacific, may be supportive, but this does not help in the Indian Ocean. What this all gets down to is that the Royal Australian Navy (RAN) facility at Garden Island, south of Fremantle, may be the best support base for the USN in the Indian Ocean;
3. The US reach into the Middle East and Indian Ocean will be limited (because of budgetary constraints) by reductions in the real elements of power projection: aerial refuelling tankers, and heavy troop and armour transport aircraft. This will shape the kind of engagements which the US can consider going forward, even post-Obama;
4. The US will be a vital ally to India, but must recognize that India cannot afford the need to return to a solid strategic alliance with Russia, simply to re-engage into the Eurasian heartland;
5. The US, through recent discreet diplomacy, has ensured the longer-term survival of the Iranian clerics, and must now contend with the reality that Iran will project more deeply into the Indian Ocean region, but particularly (in the short-term) into the Arabian Peninsula through an expansion of the proxy challenges which Tehran is now raising there: the “Islamic Republic of Eastern Arabia”, the Yemeni-Saudi conflicts now underway, and so on. As well, Iran’s hand in the Horn of Africa is being extended, and pro-US states in the region (such as Ethiopia and the Republic of Somaliland), are justifiably fearful of the reality that the US and NATO will fail to support them. The December 2009-January 2010 moves by the US Obama Administration and UK Brown Government to provide funds to Yemen to combat the insurgencies there only reinforce regional beliefs that the US and UK are in no position to actually provide military and political strength to challenge Iran in the Peninsula;
6. The US can benefit from enhanced relations with the Indian Ocean littoral states. It has hardly considered, for example, planning a cooperative Indian Ocean maritime complex of actions which engage Egypt, Israel, a revived Ethiopian Red Sea presence, the use of the Republic of Somaliland, and so on, in the North-West Quadrant of the region; or of South Africa-Australia maritime linkages. The options are many. Even the US-India military relationship, which has expanded, has not included a significant maritime element. The US-Pakistan maritime relationship has itself not been really studied in light of the broader framework which must include the Pakistan-PRC relationship.

These are basic thoughts. But a variety of creative options begin to open up if the US, faced with economic and political constraints, addresses the new era in which creativity will be needed to replace budgets.

Analysis. By Gregory R. Copley, Editor, GIS.
Extract from Defense & Foreign Affairs Special Analysis
© 2009 Global Information System, ISSA


Arms spending unaffected by financial crisis, says thinktank

Worldwide annual military budget rose 5.9% in real terms according to Stockholm International Peace Research Institute

Richard Norton-Taylor
2 June 2010

F35 Joint Strike Fighters

The US's decision to increase its F35 Joint Strike Fighters programme is in keeping with a wider global pattern that bucks the trend towards austerity. Photograph: LM Otero/AP

Governments around the world might be heralding an age of austerity, and warning citizens that they will need to cut public services, but the aftershocks of the global financial crisis have had little impact on military budgets, a leading thinktank says .

Last year, $1.5 trillion (£1tn)was spent on weapons, an annual increase in real terms of 5.9%, according to the latest report by Sipri, the Stockholm International Peace Research Institute.

The US accounted for more than half of the total increase, though arms spending increased fastest in Asian countries, with China raising its military expenditure most, followed by India. Global spending has risen by nearly 50% over the past decade, said Sipri.

The US headed the list of the world's top 10 arms buyers last year, spending $661bn on military equipment. It was followed by China (spending an estimated $100bn), France ($63.9bn), Britain ($58.3bn), Russia (an estimated $53.3bn) and Japan ($51.8bn), according to the report.

Though some large-scale weapons programmes were cancelled in the latest US budget plans, notably the F22 stealth fighter, more money was earmarked for other projects, including unmanned aerial vehicles (UAVs) and cyberwarfare, said Sipri.

The British government is likely to follow suit in the forthcoming strategic defence review, though it is expected to make significant cuts in the number of F35 Joint Strike Fighters proposed for the Royal Navy's two planned large aircraft carriers. Sipri notes that the US has actually increased its JSF programme.

Of European countries, Britain accounted for the biggest absolute increase (of $3.7bn) followed by Turkey and Russia. Cyprus increased military spending most in real terms, taking inflation into account.

Given its financial woes, Greece, which has traditionally devoted a higher percentage of its wealth to defence than most Nato countries, has already decided to cut military spending this year, the report says.

Natural resources, notably oil, can be a source of international or national conflict, inevitably leading to higher military spending. Sipri points to Nigeria where, it says, "the massive environmental damage caused by oil extraction and the lack of benefit to oil-producing regions has generated grievances", and to Brazil, which has justified planned purchases of submarines "in terms of the need to protect newly discovered underwater oil fields".

It adds that in Afghanistan, where the conflict has fuelled global arms production, insurgent groups and warlords have been collecting up to $400m a year from the opium poppy harvest.

Only six of the biggest armed conflicts last year concerned territority, with 11 fought over the nature and makeup of a national government, according to Sipri's report. It said that only three of the 30 big conflicts over the past decade were between states.

Sipri's 2010 Yearbook also says that eight states - the US, Russia, the UK, France, China, India, Pakistan, and Israel - possess between them nearly 8,000 operational nuclear weapons. Britain deploys 144 nuclear warheads, it says.

William Hague, the foreign secretary, told the Commons last week that Britain's total number of nuclear warheads would not exceed 225, including the maximum 160 already declared as operationally available.

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