behind grillo: bilderberg, aspen institute & amcham

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http://www.presstv.ir/detail/2013/02/21/290090/italy-risks-new-round-of-destabilization/

Berlusconi targeted, overthrown by CIA?

Webster G. Tarpley
Feb 21, 2013

This coming Sunday and Monday, Italians will go to the polls to choose a new parliament and thus a new prime minister, while setting the stage for the election of a new president of the republic shortly thereafter.

Most indications are that the most numerous faction in the coming parliament, with just over one third of the votes, will be the Common Good coalition, composed of the Democratic Party (the remains of the old Italian Communist Party), the Left Ecology Freedom movement of Nichi Vendola, which includes various paleocommunists, and some smaller forces. This coalition is led by Pier Luigi Bersani, a colorless bureaucrat. Ironically, despite its leftist rhetoric, the Common Good is the formation most likely to continue the austerity policies which are currently tearing Italy apart.

Coming in second with almost 30% should be the center-right coalition around the People of Freedom, the party of the irrepressible former prime minister, Silvio Berlusconi, joined by the Northern League of Umberto Bossi, a xenophobic group which also articulates the resentments of northern Italy against the south, the Mezzogiorno.

Another important leader is Giulio Tremonti, the former Minister of Economics and Finance. Berlusconi, a wealthy businessman and three-time prime minister, was most recently in power from 2008 to November 2011. Berlusconi’s fall had been prepared through a series of lurid revelations about his personal life, including an attack by the CIA document dump known as Wikileaks. Berlusconi’s second-place status represents a remarkable comeback, and the last polls show him closing on Bersani.

Third place with almost 20% is likely to belong to a new and unorthodox political formation, the Five Star Movement (5SM), where the dominant personality is the former Genoese comedian Beppe Grillo, a colorful and talented demagogue. The 5SM is anti-politician, anti-euro, anti-infrastructure, anti-tax, and anti-mainstream media. Like the GOP, they want to reduce the public debt, meaning they want deflation. Grillo proposes a guaranteed annual income for all Italians, a 30-hour work week, and a drastic reduction of energy consumption and of production. He demands free Wi-Fi for all. Without modern production, how can these benefits be provided?

Grillo wants to abort the infrastructure projects - like the new high-speed train tunnel between Turin and France and the bridge between Calabria and Sicily - upon which Italy’s economic future depends. He is long on petty bourgeois process reforms like term limits, media reform, corporate governance, and banning convicted felons from parliament, but short on defending the standard of living for working people. On a bizarre note, he has praised the British response to the 2008 banking crisis. As many as 100 members of the 5SM, many of them total political novices, and more than a few adventurers who have jumped on board Grillo’s bandwagon, may now enter parliament, with predictably destabilizing consequences. Grillo could be the vehicle for an Italian color revolution along the lines of Ukraine or Georgia.

In fourth place, with less than 10%, is expected to be the current prime minister of Italy, Mario Monti, a former eurocrat of the Brussels Commission who has led a brutal technocratic austerity regime since coming to power in November 2011 through a coup d’état sponsored by the International Monetary Fund and European Central Bank, and executed by Italian President Giorgio Napolitano with help from Mario Draghi at the European Central Bank.

Both Monti and Draghi are former employees of Goldman Sachs, the widely hated zombie bank. When Monti seized power, he was widely acclaimed as a savior and enjoyed an approval rating of 70%; his approval has now fallen to about 30%. Like Gorbachev, he is unpopular at home but remains the darling of foreign leaders. Even the London Financial Times is bearish on Monti, accusing him of starting his austerity regime when Italy was already in recession.

Among the also-rans are Civic Revolution of Antonio Ingroia, a merger of the Greens with Antonio Di Pietro’s anti-corruption forces left over from the “Clean Hands” movement of the early 1990s, which targeted politicians but did very little to attack the larger corruption of the Bank of Italy and the big banks.

Another smaller list is Stop the Decline, led by the strange Oscar Giannino, backed up by a clique of US-educated professors of neo-liberal austerity economics. This list was paid to poach votes from Berlusconi. But now Giannino has been hit with a scandal based on his false claim of holding a master’s degree from a Chicago university.

The Italian political landscape is extremely fragmented, so public opinion polls - which cannot by law be published after February 8 - are more than usually unreliable. Under the Italian system, the political force which comes in first gets 54% of the seats in the lower house. Multi-party coalitions must get 10% to enter parliament. If the 10% is not achieved, the individual parties fall back under the rule which prescribes that parties not in a coalition must get 4% to win seats.

Italian politics, which for many decades after World War II had eight parties, has undergone massive Weimarization, especially since Monti’s coup. There are now no fewer than 25 political parties or organizations. This time around, there are four new parties, including those of Monti and Grillo. Two parties, including one led by Gianfranco Fini, the president of the Chamber of Deputies, and another by former Defense Minister Ignazio LaRussa, have split from Berlusconi. Two parties have also split from the Democratic Party, including the libertarian Radicals of Marco Pannella and Emma Bonino.

Banks hope for Bersani-Monti regime to continue austerity

The banking community, as represented by Mediobanca and others, is hoping for a Bersani-Monti coalition government to continue the savage austerity policies that Monti’s technocratic ministers have been imposing over the last 15 months. Bersani’s party and its predecessors have always seen their business model as begging the big banks to let them join the government, in exchange for which they will break the labor movement, suppress strikes, and impose budget austerity across the board. Incredibly, Bersani has been one of Monti’s warmest admirers. Bersani has not learned the lesson of Weimar Germany, when the Social Democrats (SPD) supported Hunger Chancellor Heinrich Brüning’s austerity program, wrecking the economy and the political system, and opening the door to National Socialism.

Mediobanca concedes that a Bersani-Monti tandem will be weak, and might need more support from smaller parties, leading to instability with early elections likely in the short term. Although the Common Good will have a majority in the Chamber of Deputies due to the majority bonus, there is no bonus in the Senate, where most members are directly elected by winning their districts. This is where the Common Good plus Monti may fall short.

Some might say that Italians can choose among a genocidal professor, a party hack, a genial satyr, and a scurrilous clown. How did the current situation arise?

During the Obama years, the first goal of the US intelligence community has been to destroy the Berlusconi government, for geopolitical reasons. Based on Berlusconi’s close personal relationship with Putin, he had secured for Italy an important role in the construction of the Nordstream pipeline, and an even more important participation in the Southstream pipeline -- both projects which Washington wanted to sabotage.

Berlusconi also made overtures to President Lukashenko of Belarus, much demonized in Foggy Bottom. The State Department wants to turn the European Union against Putin’s Russia, but the pro-US eurocrats and eurogarchs complained that Italy was becoming an advocate for Moscow within the Brussels bureaucracy. Lucia Annunziata wrote in La Stampa of May 25, 2009 under the title “The Shadow of a Plot” that center-right circles believed US-Italian relations were being hurt by “the excessive closeness of premier Silvio Berlusconi to the Russian Prime Minister Putin.”

The London Economist commented: Italy is one of the countries which have gotten much closer to Moscow than Washington desires, starting from the [August 2008] crisis in Georgia. By 2010 at the latest, US agencies were fully mobilized to overthrow Berlusconi.

State Department campaign to topple Berlusconi, 2008-2011

One part of this effort involved Gianfranco Fini, the former neofascist whom Berlusconi had made President of the Chamber of Deputies in 2008. Fini had been a member of the official neofascist party. In July 2010, after a faction fight, Fini was expelled from Berlusconi’s party, managing to take with him 34 deputies and 10 senators in a move which weakened, but did not destroy, Berlusconi’s governing majority. It was later revealed that Fini’s actions had been closely coordinated with the US embassy in Rome.

During 2009, David Thorne took over as US ambassador to Italy. Thorne was a Yale roommate of John Kerry, who has just become US Secretary of State. Thorne, like Kerry and the Bushes, is a member of the infamous Skull and Bones secret society, and is the twin brother of Kerry’s ex-wife. Thorne’s first meeting on becoming ambassador was with Fini, and not with Berlusconi. Fini is also reported to be a close personal friend of Nancy Pelosi, when Speaker of the House had the same job as Fini. (Il Fatto Quotidiano, September 15, 2010)

Fini, true to form, is now a part of the pro-austerity With Monti For Italy coalition. Bur despite his US backing, Fini may be close to the last hurrah. He had rented a theater in Agrigento, Sicily for a major appearance, but found the premises empty except for a few dozen supporters.

When the Fini operation failed, the CIA turned to exposés of the wild parties at Berlusconi’s mansion in Arcore, near Milan, feeding an immense international propaganda campaign. In December 2009, Berlusconi was struck on the face and seriously injured by an alabaster model of the Milan Cathedral. Italian judges, some of them politically motivated, pursued scores of legal actions against Berlusconi. One of these judges, Ilda Boccassini, was a sympathizer of the left countergang Lotta Continua well into the 1980s. Wikileaks documents made public in December 2010 confirmed the deep hostility of the State Department to Berlusconi.

Giorgio Napolitano, Henry Kissinger’s favorite communist

The coup that finally ousted Berlusconi in November 2011 was managed by Giorgio Napolitano, the president of the Italian Republic and thus the head of state. The Italian presidency has often been almost a ceremonial office, but it acquires significant powers when governments fall, which is frequently. Napolitano has vastly expanded these powers.

For most of his life, Napolitano has been an active member of the Italian Communist Party. He belonged to the right-wing faction around Giorgio Amendola - Napolitano was known as Skinny Giorgio, and Amendola as Fat Giorgio. It has recently been revealed that between 1977 and 1981, Napolitano conducted secret meetings with the Carter administration’s ambassador to Rome, Richard Gardner of the Trilateral Commission. These meetings only became public knowledge in 2005, with the publication of Gardner’s memoirs, Mission Italy. This puts Napolitano in contact with the US embassy during the kidnapping and murder of former Italian Prime Minister Aldo Moro, in whose death US intelligence agencies played an important role.

Henry Kissinger once called Napolitano “my favorite communist.” Business Week referred to him as the point man in Italy for the New York Council on Foreign Relations. The Italian press has dubbed him King George. But thanks in large part to Putin’s support for the Italian prime minister, it took the CIA two years to overthrow Berlusconi. In the end, only economic and financial warfare, plus Napolitano’s treachery, would prove decisive. 
 

Mario Monti: Bilderberg, trilateral, Goldman Sachs

In October 2011, the Yale-educated economist Mario Monti, a eurogarch of the Brussels Commission from 1994 to 1999, was president of the Bocconi University of Milan, a business school. He had worked on the Santer, Prodi, and Barroso commissions in Brussels. He was and remains the European Chairman of the Trilateral Commission, founded by David Rockefeller, as well as a member of the secretive Bilderberg group. He was also a consultant for Goldman Sachs and Coca-Cola.

While Berlusconi was under siege by the Anglo-Americans, Napolitano plotted for months to make Monti the kingpin of a regime of technocrats - supposedly nonpartisan experts who did not represent any political party and could therefore more readily impose pitiless austerity. This was a formula the International Monetary Fund had been trying to force on Italy for 30 years and more.

A modern coup d’état using spreads, not tanks

The indispensable ingredient in the Napolitano-Monti coup was a broad-based and coordinated attack on Italian government bonds by Wall Street, the City of London, and their European satellites. This attack involved threats by ratings agencies to downgrade Italian debt, backed up by massive derivatives speculation against the bonds using credit default swaps (CDS) to increase the interest-rate premium - or spread - paid by Italy compared to Germany in borrowing. (The agencies were later investigated for fraud by Judge Michele Ruggiero of Trani.) Of course, the European Central Bank could at any time have wiped out the speculators by purchasing large quantities of Italian bonds in the open market and driving up the price.

But Napolitano and Monti knew that they could count on the new boss of the European Central Bank Mario Draghi to sabotage the Italian bonds. Draghi took over from the Frenchman Trichet in the night of Halloween 2011, and the attack on Italy began immediately on November 1.

During the summer of 2011, Berlusconi had resisted demands for draconian austerity, perhaps because he knew that Italy was too big to fail and that sooner or later Wall Street and London would have to back off. He was vilified for a lack of civic virtue. During the final attack on Berlusconi, Italian bond yields reached 7%, and the famous spread peaked at 575 basis points over the rate on German bonds. The New York Times cited reports that Draghi “had restricted… purchases of Italian bonds to put more pressure on Mr. Berlusconi to quit” and to extort more austerity from Italy. “If so, the pressure worked.” (NYT, November 9, 2011) The parliament was in panic.

On November 8, 2011 Napolitano appointed Monti, who had never been elected to any public office, as senator for life. This also meant immunity from prosecution for life, unless and until the Italian Senate voted to take this parliamentary immunity away. Also on November 8, Berlusconi concluded that he had lost his parliamentary majority. On November 10, 2011, the new senator for life Monti met with Napolitano at the Quirinal Palace for a two-hour discussion of economic “growth” by means of “structural reforms.” Napolitano still ridiculed rumors that he would make Monti the next prime minister. On the same day, Obama called Napolitano to assure him of US support in his management of the post-Berlusconi crisis. Just this month, Napolitano visited Obama with the obvious goal of getting more US support for Monti.

Berlusconi and other politicians like the anti-corruption activist Di Pietro were pressing for early elections to let the Italian people show what they wanted. But Napolitano was intent on carrying out his cold coup: “markets trumped traditional democratic processes,” wrote the New York Times on December 2, 2011. On November 13, Napolitano officially charged Monti with forming a government of non-party austerity technocrats, and Monti won a vote of confidence in the Chamber of Deputies by 556 to 61. Only the Northern League opposed Monti. This lopsided vote recalled a similar one carried out in the resort town of Vichy, France on July 10,1940 in which the National Assembly voted dictatorial powers for Marshal Pétain, effectively replacing the Third French Republic with a fascist regime. On that day, the vote -- managed by the infamous Pierre Laval -- had been 569 in favor, 80 against, and 18 abstentions.

Monti’s cabinet was composed of little-known figures, mainly from northern Italy, with Catholic, academic, or military backgrounds. One who has become infamous is Labor Minister Elsa Fornero, a professor who cried in public over her own cruelty when she presented her anti-retiree measures. There was the impression that the Monti cabinet were bit players reading lines that had been written by the IMF and the ECB.

Presidential powers from von Hindenburg to Napolitano

Napolitano was following in the footsteps of German Reich President Field Marshal von Hindenburg, who pushed aside the Reichstag (parliament) as the maker of governments when he named the austerity enforcer Heinrich Brüning as chancellor in March, 1930. After this point, no German government could obtain a governing majority, and all relied on Hindenburg’s emergency powers to stay in office -- including von Papen, von Schleicher, and finally Hitler in the first weeks of 1933. These were all called presidential governments, as Monti’s has been. By relegating the parliament to irrelevance, von Hindenburg contributed mightily to the atrophy and death of German democracy.

At the time, I called attention to the obvious coup d’état by Goldman Sachs and its allies, with a similar operation in Greece around the same time. Paolo Becchi, Professor of the Philosophy of Jurisprudence at the University of Genoa, noted that Napolitano “telling a technocrat from Brussels to form a government is nothing but a coup d’état ordered by powerful forces, partly from outside Italy, and managed by the President of the Republic.” Up until now, the bankers had been willing to govern indirectly, masking their power with the faces of politicians.

Now, the bankers wanted to seize power directly: “But it was necessary at least to keep up appearances. With an attitude which is typical of all the followers of Cataline [who attempted a coup against the Roman Republic in the time of Cicero], Monti’s main concern was to seize power with legal means.” Becchi added: “In the moment when political power is brought down to the level of financial power, a coup d’état is always possible, and so easy to carry out that almost nobody realizes it.” (Libero, December 1, 2011)

Monti’s economic measures aimed at shifting an initial €24 billion over three years of the cost of the economic depression away from bankers and speculators and onto the shoulders of working people. The minimum of years on the job to obtain a pension was raised from 40 years to 42 years and one month for men. The minimum age for old-age pensions was raised from 60 years to 62 and then to 66 in 2018. Increases in pension payments would generally be frozen. The property tax (IMU) was increased by 30% and extended to resident homeowners, who had previously been exempt. The value added tax (IVA) was raised from 21% to 23%. As camouflage, a luxury tax on yachts, private planes, and Ferraris was introduced. Only the Northern League and Di Pietro voted against these measures.

Then came a push to make Italy a hire and fire society on the American model, striking down protections that had been in place for decades. Taxi drivers, pharmacists, doctors, lawyers, and notaries were deprived of minimum fees for their services, and their professions were deregulated.

Thanks to Monti’s measures, the Italian unemployment rate has risen from 8.5% in November 2011 to 11.2% in February 2013, the worst in 13 years. Almost 3 million Italians are out of work, with 644,000 or 29% of them laid off on Monti’s watch. Youth unemployment is now at an all-time record of 37%. By December of 2012, industrial production, after falling every months since Monti took power, was down by 7% compared to December 2011.

Grillo: Endless referendums, endless instability

The early Northern League told Italians and foreigners and southerners were responsible for their problems. Grillo blames politicians and political parties. Bersani’s support for Monti’s austerity, combined with Berlusconi’s personal excesses, has focused new attention on the comedian Beppe Grillo and his 5SM. Grillo may well emerge as the big winner of these elections. Grillo has a recent precedent: the comedian Guglielmo Giannini, who in 1944 founded the Man In the Street (uomo qualunque) movement, an Italian precursor of French poujadisme.

Giannini appealed to the angry postwar petty bourgeoisie with populist themes of anti-politics, anti-politicians, anti-corruption, anti-government, deregulation, and anti-taxes. Grillo uses many of the techniques of Giannini, such as obscene and abusive slogans, or mocking the names of his opponents: for Grillo, Monti becomes Rigor Montis.

Grillo, ignoring the lessons of the Weimar Republic, recommends hyper-democracy as a method of governing. The basic approach to all controversies is to organize a referendum. This can work at the level of local government, where some of Grillo’s supporters started, but might lead to chaos if applied nationwide. Grillo wants a referendum on whether Italy should stay in the euro, an idea which appeals in Italy to a few ultra-lefts, but mainly to reactionaries. Grillo (like the framers of Weimar) focuses on the need of government to make sure that all voices receive representation, but neglects the equally imperative need on to promote majorities capable of deciding issues and exercising power.

Grillo mayor fails to solve pre-school issue in Parma

The first big success for Grillo came in Parma, traditionally the turf of the PCI/Democratic Party. Here Grillo’s candidate took over as mayor early in 2012. Within less than a year, Grillo was greeted by protests over the rising cost of living, especially for the mayor’s raising of the price of pre-school for working families, while eliminating multi-child discounts. Up to this point, Grillo had enjoyed all the advantages of the Muslim Brotherhood under Mubarak, or of Jesse Ventura running for governor of Minnesota, meaning the ability to criticize without any responsibility.

When confronted with an attack on his own record, Grillo responded with petulance, suggesting he cannot take criticism. Grillo has been declining television interviews, preferring to give speeches to large crowds in the piazza of many cities. But observers note that this is also a way to avoid probing questions from hostile journalists. In any case, big crowds do not necessarily indicate election majorities. Grillo portrays himself as a victim of the mass media, even though enjoys extensive coverage in the current phase. He is rich, but campaigns in a mini-van to increase his populist appeal.

According to Elisabetta Gualmini and Piergiorgio Corbetta in their survey of the Grillo movement entitled Il Partito del Grillo (Bologna: Il Mulino/Istituto Cattaneo, 2013), about 60% of Grillo’s support comes from angry, male, sometimes unemployed generation X technicians, IT and software personnel, and small businessmen born between 1969 and 1978, and thus aged between 35 and 44. There are few pensioners, few housewives, few women of any background. Over 50% describe themselves as extreme left, left, or center-left, while about 30% self-described as center-right to right. Grillo represents a protest movement that cuts across the other political parties.

An ominous symptom is the dictatorship of Grillo inside the party. In recent weeks, Grillo has ousted a regional councilor from Emilia-Romagna for complaining on television of the lack of democracy inside the 5SM. He also expelled a Bologna city councilwoman for taking part in Ballaró, a widely viewed television talk show, after Grillo banned such appearances, presumably to keep the spotlight on himself. Previously, he had expelled three candidates from Bologna and a member of the Ferrara city council. Grillo considers the 5SM is a trademark which he owns. The dissidents are generally excommunicated by means of a tweet. Does Grillo write the tweets, blog, scripts, and speeches by himself, or is he controlled and supported by a syndicate?

Grillo’s Svengalis: Casaleggio associates

Some say Grillo is a synthetic candidate. According to published accounts, Grillo’s Svengali and teleprompter is political consultant Gianroberto Casaleggio, 58, of Casaleggio Associates, a company specialized in political and media consulting and strategies for Internet marketing - more or less the methods which have put Grillo where he is today.

Casaleggio and Grillo confer by telephone on average three times a day. Casaleggio, like Grillo, sports the hair style of an aging freak, trying to look like John Lennon, but unlike Grillo usually wears a suit. (Tommaso Caldarelli, Giornalettismo, May 25, 2012) Casaleggio’s office is near Piazza Scala in Milan. The dominant partner at Casaleggio Associates is Enrico Sassoon, currently the director of the Italian edition of the Harvard Business Review.

Sassoon has worked for Pirelli, and is currently a leading light of the American Chamber of Commerce in Italy. Sassoon is also on the board of the Italian branch of the Aspen Institute, where his colleagues are mostly members of the Bilderberg group. Giampietro Zanetti, a Berlusconi backer, writes in his blog: “Who is behind Grillo? Bilderberg and the Aspen Institute!”

Casaleggio, who once advised Di Pietro and Olivetti, believes that “by 2018 the world will be divided into: the West with direct democracy and free access to the Internet, and the enemies of freedom like China-Russia-Middle East.” In 2020 there will be a new world war, with the population reduced by a billion, then catharsis, and finally rebirth in the name of Gaia, and world government.” (Marco Alfieri, La Stampa, May 26, 2012) Is this really what Grillo’s voters want?

Grillo and Casaleggio are the authors of a book called We Are At War - meaning that Grillo is the Guy Fawkes or Ludendorff of a war against political parties as such. The need to destroy political parties is one of the favorite themes of various disinformation channels of the US intelligence community, who see this as part of the effort to smash the national states and impose the Empire. A coincidence?

In 2012, the big political news from Europe was the emergence of Alexis Tsipras and Syriza to fight austerity in Greece with program, leadership, organization, and strategy, and not with utopias of participatory democracy. Grillo is the opposite of Syriza on most points, meaning that Italy now risks a new round of destabilization. Which method will prevail? 

biz updates: shut down the fed / world depression...

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http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100007777/shut-down-the-fed-part-ii/

Shut Down the Fed (Part II)

see part I

Ambrose Evans-Pritchard
September 27th, 2010

I apologise to readers around the world for having defended the emergency stimulus policies of the US Federal Reserve, and for arguing like an imbecile naif that the Fed would not succumb to drug addiction, political abuse, and mad intoxicated debauchery, once it began taking its first shots of quantitative easing.

My pathetic assumption was that Ben Bernanke would deploy further QE only to stave off DEFLATION, not to create INFLATION. If the Federal Open Market Committee cannot see the difference, God help America.

We now learn from last week’s minutes that the Fed is willing “to provide additional accommodation if needed to … return inflation, over time, to levels consistent with its mandate.”

NO, NO, NO, this cannot possibly be true.

Ben Bernanke has not only refused to abandon his idee fixe of an “inflation target”, a key cause of the global central banking catastrophe of the last twenty years (because it can and did allow asset booms to run amok, and let credit levels reach dangerous extremes).

Worse still, he seems determined to print trillions of emergency stimulus without commensurate emergency justification to test his Princeton theories, which by the way are as old as the hills. Keynes ridiculed the “tyranny of the general price level” in the early 1930s, and quite rightly so. Bernanke is reviving a doctrine that was already shown to be bunk eighty years ago.

Inflation targeting: is Bernanke the new Von Havenstein, head of the Weimar Reichsbank?

So all those hillsmen in Idaho, with their Colt 45s and boxes of krugerrands, who sent furious emails to the Telegraph accusing me of defending a hyperinflating establishment cabal were right all along. The Fed is indeed out of control.

The sophisticates at banking conferences in London, Frankfurt, and New York who aplogized for this primitive monetary creationsim – as I did – are the ones who lost the plot.

My apologies. Mercy, for I have sinned against sound money, and therefore against sound politics.

I stick to my view that Friedmanite QE ‘a l’outrance‘ is legitimate to prevent a collapse of the M3 broad money supply, and to prevent outright deflation in economies with total debt levels near or above 300pc of GDP. Not in any circumstances, but where necessary, and where conducted properly by purchasing bonds outside the banking system (not the same as Bernanke “creditism”).

The dangers of tipping into a debt compound trap – as described by Irving Fisher in Debt-Deflation Theory of Great Depresssions in 1933 – outweigh the risk of an expanded money stock catching fire and setting off an inflation surge later. Debt deflation is a toxic process that can and does destroy societies as well as economies. You do not trifle with it.

But deliberately creating inflation “consistent” with the Fed’s mandate – implicitly to erode debt – is another matter. Nor can this be justified at this particular juncture. M3 has been leveling out. M2 has begun to rise briskly. The velocity of money has picked up. The M1 monetary mulitplier has jumped.

We have a very odd world. The IMF has doubled its global growth forecast to 4.5pc this year, and authorities everywhere have ruled out a serious risk of a double dip recession.

Yet at the same time the Bank of Japan has embarked on unsterilised currency intervention, which amounts to stimulus, and both the Fed and the Bank of England are signalling fresh QE.

You can’t have it both ways. If the US is not in deep trouble, the Fed should not be thinking of extra QE. It should step back and let the economy heal itself, if necessary enduring several years of poor growth to purge excess leverage.

Yes, U6 unemployment is 16.7pc. But as dissenters at the Minneapolis Fed remind us, you cannot solve a structural unemployment crisis with loose money.

Fed is trying to conjure away the hangover from the last binge (which Greenspan/Bernanke caused, let us not forget), as if to vindicate its prior claim that you can always clean up painlessly after asset bubbles.

Are the Chinese right? Are the Americans and the British now so decadent that they will refuse to take their punishment, opting to default on their debts by stealth?

Sooner or later we may learn what the Fed’s hawkish bloc of Fisher, Lacker, Plosser, Hoenig, Warsh, and Kocherlakota really think about this latest lurch into monetary la la land, with all that it implies for moral hazard and debt contracts.

If I have written harsh words about these heroic resisters, I apologise for that too.

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http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8026324/Gold-is-the-final-refuge-against-universal-currency-debasement.html

Gold is the final refuge against universal currency debasement

States accounting for two-thirds of the global economy are either holding down their exchange rates by direct intervention or steering currencies lower in an attempt to shift problems on to somebody else, each with their own plausible justification. Nothing like this has been seen since the 1930s.

Ambrose Evans-Pritchard
26 Sep 2010

“We live in an amazing world. Everybody has big budget deficits and big easy money but somehow the world as a whole cannot fully employ itself,” said former Fed chair Paul Volcker in Chris Whalen’s new book Inflated: How Money and Debt Built the American Dream.

“It is a serious question. We are no longer talking about a single country having a big depression but the entire world.”

The US and Britain are debasing coinage to alleviate the pain of debt-busts, and to revive their export industries: China is debasing to off-load its manufacturing overcapacity on to the rest of the world, though it has a trade surplus with the US of $20bn (£12.6bn) a month.

Premier Wen Jiabao confesses that China’s ability to maintain social order depends on a suppressed currency. A 20pc revaluation would be unbearable. “I can’t imagine how many Chinese factories will go bankrupt, how many Chinese workers will lose their jobs,” he said.

Plead he might, but tempers in Washington are rising. Congress will vote next week on the Currency Reform for Fair Trade Act, intended to make it much harder for the Commerce Department to avoid imposing “remedial tariffs” on Chinese goods deemed to be receiving “benefit” from an unduly weak currency.

Japan has intervened to stop the strong yen tipping the country into a deflation death spiral, though it too has a trade surplus. There is suspicion in Tokyo that Beijing’s record purchase of Japanese debt in June, July, and August was not entirely friendly, intended to secure yuan-yen advantage and perhaps to damage Japan’s industry at a time of escalating strategic tensions in the Pacific region.

Brazil dived into the markets on Friday to weaken the real. The Swiss have been doing it for months, accumulating reserves equal to 40pc of GDP in a forlorn attempt to stem capital flight from Euroland. Like the Chinese and Japanese, they too are battling to stop the rest of the world taking away their structural surplus.

The exception is Germany, which protects its surplus ($179bn, or 5.2pc of GDP) by means of an undervalued exchange rate within EMU. The global game of pass the unemployment parcel has to end somewhere. It ends in Greece, Portugal, Spain, Ireland, parts of Eastern Europe, and will end in France and Italy too, at least until their democracies object.

It is no mystery why so many states around the world are trying to steal a march on others by debasement, or to stop debasers stealing a march on them. The three pillars of global demand at the height of the credit bubble in 2007 were – by deficits – the US ($793bn), Spain ($126bn), UK ($87bn). These have shrunk to $431bn, $75bn, and $33bn respectively as we sinners tighten our belts in the aftermath of debt bubbles.. The Brazils and Indias of the world are replacing some of this half trillion lost juice, but not all.

East Asia’s surplus states seem structurally incapable of compensating for austerity in the West, whether because of the Confucian saving ethic, or the habits of mercantilist practice, or in China’s case by the lack of a welfare net. Their export models rely on the willingness of Anglo-PIGS to bankrupt themselves.

So we have an early 1930s world where surplus states are hoarding money, instead of recycling it. A solution of sorts in the Great Depression was for each deficit country to devalue, breaking out of the trap (then enforced by the Gold Standard). This turned the deflation tables on the surplus powers – France and the US from 1929-1931 – forcing them to reflate as well (the US in 1933) or collapse (France in 1936). Contrary to myth, beggar-thy-neighbour policy was the global cure.

A variant of this may now occur. If China continues to hold down its currency, the country will import excess US liquidity, overheat, and lose wage competitiveness. This is the default cure if all else fails, and I believe it is well under way.

The latest Fed minutes are remarkable. They add a new doctrine, that a fresh monetary blitz – or QE2 – will be used to stop inflation falling much below 1.5pc. Surely the Fed has not become so reckless that it really aims to use emergency measures to create inflation, rather preventing deflation? This must be a cover-story. Ben Bernanke’s real purpose – as he aired in his November 2002 speech on deflation – is to weaken the dollar.

If so, he has succeeded. The Swiss franc smashed through parity last week as investors digested the message. But the swissie is an over-rated refuge. The franc cannot go much further without destabilizing Switzerland itself.

Gold has no such limits. It hit $1300 an ounce last week, still well shy of the $2,200-2,400 range reached in the late Medieval era of the 14th and 15th Centuries.

This is not to say that gold has any particular "intrinsic value"’. It is subject to supply and demand like everything else. It crashed after the gold discoveries of Spain’s Conquistadores in the New World, and slid further after finds in Australia and South Africa. It ultimately lost 90pc of its value – hitting rock-bottom a decade ago when central banks succumbed to fiat hubris and began to sell their bullion. Gold hit a millennium-low on the day that Gordon Brown auctioned the first tranche of Britain’s gold. It has risen five-fold since then.

We have a new world order where China and India are buying gold on every dip, where the West faces an ageing crisis, and where the sovereign states of the US, Japan, and most of Western Europe have public debt trajectories near or beyond the point of no return.

The managers of all four reserve currencies are playing fast and loose: the Fed is clipping the dollar; the Bank of England is clipping sterling; the European Central Bank is buying the bonds of EMU debtors to stave off insolvency, something it vowed never to do just months ago; and the Bank of Japan has just carried out two trillion yen of “unsterilized” intervention.

Of course, gold can go higher.

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http://www.telegraph.co.uk/finance/economics/7980291/EU-austerity-policies-risk-civil-war-in-Greece-warns-top-German-economist-Dr-Sinn.html

EU austerity policies risk civil war in Greece, warns top German economist Dr Sinn

Greece’s austerity measures cannot prevent default and will lead to a breakdown of the political order if continued for long, a leading German economist has warned.

Ambrose Evans-Pritchard in Cernobbio, Italy
03 Sep 2010

“This tragedy does not have a solution,” said Hans-Werner Sinn, head of the prestigious IFO Institute in Munich.

“The policy of forced 'internal devaluation', deflation, and depression could risk driving Greece to the edge of a civil war. It is impossible to cut wages and prices by 30pc without major riots,” he said, speaking at the elite European House Ambrosetti forum at Lake Como.

“Greece would have been bankrupt without the rescue measures. All the alternatives are terrible but the least terrible is for the country to get out of the eurozone, even if this kills the Greek banks,” he said.

Dr Sinn said Greece is an entirely different case from Spain and Portugal, which still have manageable public debts and can bring their public finances back into line with higher taxes.

“Greece would have defaulted in the period between April 28 and May 7, had the money not been promised by the European Union,” he said, describing the failure of the EU’s bail-out strategy to include a haircut for the banks as an invitation to moral hazard.

“There should be a quasi-insolvency procedure for countries. Creditors have to accept a haircut before any money flows for rescue plans, otherwise we’ll never have debt discipline in the eurozone,” he said.

Greek society has so far held together well, despite a wave of strikes and street violence in the early months of the crisis. However, unemployment is rising fast and political fatigue with such austerity policies typically sets in the second year.

Under the rescue deal, the eurozone pledged €80bn of new loans at 5pc interest and the International Monetary Fund offered a further €30bn.

The joint bail-out was hoped to safeguard Greece against the pressure from global capital markets for two and half years, but the relief rally proved short. Spreads on longer-term Greek government debt have surged back to crisis levels of about 800 basis points, implying a high risk of default.

“We are in the second Greek crisis right now, today,” said Dr Sinn.

Greece is undergoing what amounts to an IMF austerity package but without the IMF cure of debt restructuring or devaluation that usual for a country with a spiralling public debt and a chronic loss of competitiveness.

The IMF says Greece’s debt will rise to 150pc by 2013-2014 even if Athens complies fully, a strategy viewed as self-defeating by several ex-IMF officials. There is a strong suspicion that the real objective is to bail-out North European banks with heavy exposure to Southern Europe, rather help Greece.

Dr Sinn said the Germany is now was super-competitive after clawing back 18pc in competitiveness during its long slump. “We’re in a new phase of history. The toggle switch has turned and we are going to see a mirror image of the last 15 years. This time it is Germany that will have an internal boom,” he said.

Germans will not recyle their savings in the Club Med region. They will invest at home.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7909432/The-Death-of-Paper-Money.html

The Death of Paper Money

As they prepare for holiday reading in Tuscany, City bankers are buying up rare copies of an obscure book on the mechanics of Weimar inflation published in 1974.

Ambrose Evans-Pritchard Published
25 Jul 2010

Ebay is offering a well-thumbed volume of "Dying of Money: Lessons of the Great German and American Inflations" at a starting bid of $699 (shipping free.. thanks a lot).

The crucial passage comes in Chapter 17 entitled "Velocity". Each big inflation -- whether the early 1920s in Germany, or the Korean and Vietnam wars in the US -- starts with a passive expansion of the quantity money. This sits inert for a surprisingly long time. Asset prices may go up, but latent price inflation is disguised. The effect is much like lighter fuel on a camp fire before the match is struck.

People’s willingness to hold money can change suddenly for a "psychological and spontaneous reason" , causing a spike in the velocity of money. It can occur at lightning speed, over a few weeks. The shift invariably catches economists by surprise. They wait too long to drain the excess money.

"Velocity took an almost right-angle turn upward in the summer of 1922," said Mr O Parsson. Reichsbank officials were baffled. They could not fathom why the German people had started to behave differently almost two years after the bank had already boosted the money supply. He contends that public patience snapped abruptly once people lost trust and began to "smell a government rat".

Some might smile at the Bank of England "surprise" at the recent the jump in Brtiish inflation. Across the Atlantic, Fed critics say the rise in the US monetary base from $871bn to $2,024bn in just two years is an incendiary pyre that will ignite as soon as US money velocity returns to normal.

Morgan Stanley expects bond carnage as this catches up with the Fed, predicting that yields on US Treasuries will rocket to 5.5pc. This has not happened so far. 10-year yields have fallen below 3pc, and M2 velocity has remained at historic lows of 1.72.

As a signed-up member of the deflation camp, I think the Bank and the Fed are right to keep their nerve and delay the withdrawal of stimulus -- though that case is easier to make in the US where core inflation has dropped to the lowest since the mid 1960s. But fact that O Parsson’s book is suddenly in demand in elite banking circles is itself a sign of the sort of behavioral change that can become self-fulfilling.

As it happens, another book from the 1970s entitled "When Money Dies: the Nightmare of The Weimar Hyper-Inflation" has just been reprinted. Written by former Tory MEP Adam Fergusson -- endorsed by Warren Buffett as a must-read -- it is a vivid account drawn from the diaries of those who lived through the turmoil in Germany, Austria, and Hungary as the empires were broken up.

Near civil war between town and country was a pervasive feature of this break-down in social order. Large mobs of half-starved and vindictive townsmen descended on villages to seize food from farmers accused of hoarding. The diary of one young woman described the scene at her cousin’s farm.

"In the cart I saw three slaughtered pigs. The cowshed was drenched in blood. One cow had been slaughtered where it stood and the meat torn from its bones. The monsters had slit the udder of the finest milch cow, so that she had to be put out of her misery immediately. In the granary, a rag soaked with petrol was still smouldering to show what these beasts had intended," she wrote.

Grand pianos became a currency or sorts as pauperized members of the civil service elites traded the symbols of their old status for a sack of potatoes and a side of bacon. There is a harrowing moment when each middle-class families first starts to undertand that its gilt-edged securities and War Loan will never recover. Irreversible ruin lies ahead. Elderly couples gassed themselves in their apartments.

Foreigners with dollars, pounds, Swiss francs, or Czech crowns lived in opulence. They were hated. "Times made us cynical. Everybody saw an enemy in everybody else," said Erna von Pustau, daughter of a Hamburg fish merchant.

Great numbers of people failed to see it coming. "My relations and friends were stupid. They didn’t understand what inflation meant. Our solicitors were no better. My mother’s bank manager gave her appalling advice," said one well-connected woman.

"You used to see the appearance of their flats gradually changing. One remembered where there used to be a picture or a carpet, or a secretaire. Eventually their rooms would be almost empty. Some of them begged -- not in the streets -- but by making casual visits. One knew too well what they had come for."

Corruption became rampant. People were stripped of their coat and shoes at knife-point on the street. The winners were those who -- by luck or design -- had borrowed heavily from banks to buy hard assets, or industrial conglomerates that had issued debentures. There was a great transfer of wealth from saver to debtor, though the Reichstag later passed a law linking old contracts to the gold price. Creditors clawed back something.

A conspiracy theory took root that the inflation was a Jewish plot to ruin Germany. The currency became known as "Judefetzen" (Jew- confetti), hinting at the chain of events that would lead to Kristallnacht a decade later.

While the Weimar tale is a timeless study of social disintegration, it cannot shed much light on events today. The final trigger for the 1923 collapse was the French occupation of the Ruhr, which ripped a great chunk out of German industry and set off mass resistance.

Lloyd George suspected that the French were trying to precipitate the disintegration of Germany by sponsoring a break-away Rhineland state (as indeed they were). For a brief moment rebels set up a separatist government in Dusseldorf. With poetic justice, the crisis recoiled against Paris and destroyed the franc.

The Carthaginian peace of Versailles had by then poisoned everything. It was a patriotic duty not to pay taxes that would be sequestered for reparation payments to the enemy. Influenced by the Bolsheviks, Germany had become a Communist cauldron. Spartakists tried to take Berlin. Worker `soviets' proliferated. Dockers and shipworkers occupied police stations and set up barricades in Hamburg. Communist Red Centuries fought deadly street battles with right-wing militia.

Nostalgics plotted the restoration of Bavaria’s Wittelsbach monarchy and the old currency, the gold-backed thaler. The Bremen Senate issued its own notes tied to gold. Others issued currencies linked to the price of rye.

This is not a picture of America, or Britain, or Europe in 2010. But we should be careful of embracing the opposite and overly-reassuring assumption that this is a mild replay of Japan’s Lost Decade, that is to say a slow and largely benign slide into deflation as debt deleveraging exerts its discipline.

Japan was the world’s biggest external creditor when the Nikkei bubble burst twenty years ago. It had a private savings rate of 15pc of GDP. The Japanese people have gradually cut this rate to 2pc, cushioning the effects of the long slump. The Anglo-Saxons have no such cushion.

There is a clear temptation for the West to extricate itself from the errors of the Greenspan asset bubble, the Brown credit bubble, and the EMU sovereign bubble by stealth default through inflation. But that is a danger for later years. First we have the deflation shock of lives. Then -- and only then -- will central banks go to far and risk losing control over their printing experiment as velocity takes off. One problem at a time please.

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100007444/it-pays-to-riot-in-europe/

It pays to riot in Europe

Ambrose Evans-Pritchard
August 25th, 2010

Ireland must now pay more than Greece to borrow.

Dublin has played by the book. It has taken pre-emptive steps to please the markets and the EU. It has done an IMF job without the IMF. Indeed, is has gone further than the IMF would have dared to go.

It has imposed draconian austerity measures. The solidarity of the country has been remarkable. There have no riots, and no terrorist threats.

Protesters attack riot police in Athens over harsh austerity measures

Yet as of today it is paying 5.48pc to borrow for ten years, or near 8pc in real terms once deflation is factored in. This is crippling and puts the country on an unsustainable debt trajectory if it lasts for long.

Yet Greece is able to borrow from the EU at 5pc and from the IMF at a staggered rate far below that (still too high for the policy to work, but that is another matter). These were the terms of the €110bn joint bail-out.

To add insult to injury Ireland is having SUBSIDIZE Greece to meet its share of the rescue fund.

I am sure you can all see the absurdity of this. It has moral hazard written all over it, and shows what happens once a dysfunctional system twists itself into ever greater knots rather confronting the core issue.

Yes, I know that the Irish and Greek maturities are different but the fact is that Greece has extracted better terms by letting matters get further out of hand.

George Papandreou’s PASOK has benefitted from dilly-dallying on the first set of austerity measures, and – not to be too diplomatic about it – by insulting the Germans with demands for war reparations. Hotheads also set fire to downtown Athens and Thessaloniki, improving the effect.

If I were Irish – (and I suppose in a sense I am: Sir John Parnell was my great, great, great grandfather) – I would be a little annoyed.

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http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100007519/china%E2%80%99s-young-officers-and-the-1930s-syndrome/

China’s young officers and the 1930s syndrome

Ambrose Evans-Pritchard
September 7th, 2010

I try to remain optimistic that the US and China will work out a more or less amicable way to run the world for the next half century, a “Chimerica” of interwoven superpowers.

But it was slightly disturbing to hear the warnings of a distinguished China-watcher at a closed-door session of the annual Ambrosetti conference on Lake Como.

(This gathering of the global policy elites at Villa D’Este is a hardship assignment for Telegraph hacks. It fell to me again this year, but somebody has to do it.)

“China’s military spending is growing so fast that it has overtaken strategy,” said Professor Huang Jing from the Lee Kwan Yew School of Public Policy in Singapore. (He kindly let me quote his remarks.)

“The young officers are taking control of strategy and it is like young officers in Japan in the 1930s. They are thinking what they can do, not what they should do. This is very dangerous.

“They are on a collision course with a US-dominated system”.

Harvard Professor Niall Ferguson rattled me even further with a talk warning that the Chimerica marriage of the last generation is “on the rocks”.

“China gets 10pc growth: the US gets 10pc unemployment. That doesn’t seem the basis for a happy marriage,” said Prof Fergusson, – who used to sit next to me at the Telegraph as a young leader writer almost 20 years ago, before he went on to become one of the 100 most influential people on the planet (Time magazine).

China’s trade surplus is surging back to near record levels, yet the yuan has barely moved against the dollar since the fixed peg ended in June. It has actually fallen against a trade-weighted basket of currencies.

This is not an accident. The exchange rate is controlled. The yuan must rise – ceteribus paribus – unless the central bank prevents it doing so by purchasing foreign assets.

Prof Ferguson said naval rivalry is passé – cyberwarfare is the issue of the future, and he advises the West to be a little more careful about its reliance on Chinese-manufactured microchips.

Be that as it may, the current flash-point is a very old fashioned showdown between gunboats in the Yellow Sea and the South China Sea (the latter now a “core interest” of China along with Tibet and Taiwan), also claimed in part by a ring of other nations who are not pleased.

related post: china: territorial waters / leading energy demand

In late July, the chairman of US chiefs of staff, Admiral Mike Mullen, said he had moved from being “curious” about what the Chinese were doing, “to being concerned about what they’re doing. They seem to be taking a much more aggressive approach.”

“I see a fairly significant investment in high-end equipment – satellites, ships … anti-ship missiles, obviously high-end aircraft and all those kinds of things. They are shifting from a focus on their ground forces to focus on their navy, and their air force.”

Last week this little spat escalated to the point where a Chinese submarine erected a Chinese flag on the seabed of the South China Sea, 4,000 meters below the surface.

China has a perfect right to develop a blue-water navy and to make its presence felt in the region. The question in such matters is judging the purpose and precise circumstances, and I must confess that Prof Huang’s comments were slightly disturbing, always bearing in mind that he has a Singapore (Chinese diaspora) perspective.

Let it be said in China’s defence that it occupies no overseas military bases, and has no modern history of projecting imperial power.

On balance, I remain hopeful that country with a one-child policy, an aging crunch from Hell, and a chronic dearth of young people, will show an enormous reluctance to support military adventurism. Losing an only child is especially cruel.

Let us hope that the Communist hierachy in Beijing can rein in those young officers. But as Dr Huang said, they can no longer control much of anything, least of all the 17m-strong base of the Communist Party.

“The empire has lost control of its officials, which is how Chinese empires have always fallen in history.”

This needs watching, I fear.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7442926/Is-Chinas-Politburo-spoiling-for-a-showdown-with-America.html

Is China's Politburo spoiling for a showdown with America?

The long-simmering clash between the world's two great powers is coming to a head, with dangerous implications for the international system.

Ambrose Evans-Pritchard
14 Mar 2010

US President Barack Obama shakes hands with Chinese ambassador to America Zhou Wenzhong on the Great Wall of China Photo: Reuters

China has succumbed to hubris. It has mistaken the soft diplomacy of Barack Obama for weakness, mistaken the US credit crisis for decline, and mistaken its own mercantilist bubble for ascendancy. There are echoes of Anglo-German spats before the First World War, when Wilhelmine Berlin so badly misjudged the strategic balance of power and over-played its hand.

Within a month the US Treasury must rule whether China is a "currency manipulator", triggering sanctions under US law. This has been finessed before, but we are in a new world now with America's U6 unemployment at 16.8pc.

"It's going to be really hard for them yet again to fudge on the obvious fact that China is manipulating. Without a credible threat, we're not going to get anywhere," said Paul Krugman, this year's Nobel economist.

China's premier Wen Jiabao is defiant.

"I don’t think the yuan is undervalued. We oppose countries pointing fingers at each other and even forcing a country to appreciate its currency," he said yesterday. Once again he demanded that the US takes "concrete steps to reassure investors" over the safety of US assets.

"Some say China has got more arrogant and tough. Some put forward the theory of China's so-called 'triumphalism'. My conscience is untainted despite slanders from outside," he said

Days earlier the State Council accused America of serial villainy. "In the US, civil and political rights of citizens are severely restricted and violated by the government. Workers' rights are seriously violated," it said.

"The US, with its strong military power, has pursued hegemony in the world, trampling upon the sovereignty of other countries and trespassing their human rights," it said.

"At a time when the world is suffering a serious human rights disaster caused by the US subprime crisis-induced global financial crisis, the US government revels in accusing other countries." And so forth.

Is the Politiburo smoking weed?

I let others discuss the rights and wrongs of this, itself a response to the US report card on China. Clearly, Beijing is in denial about is own part in the global imbalances behind the credit crisis, specifically by running structural trade surpluses, and driving down long rates through dollar and euro bond purchases. No doubt the West has made a hash of things, but the Chinese view of events is twisted to the point of delusional.

What interests me is Beijing's willingness to up the ante. It has vowed sanctions against any US firm that takes part in a $6.4bn weapons contract for Taiwan, a threat to ban Boeing from China and a new level of escalation in the Taiwan dispute.

In Copenhagen, Wen Jiabao sent an underling to negotiate with Mr Obama in what was intended to be - and taken to be - a humiliation. The US President put his foot down, saying: "I don't want to mess around with this anymore." That sums up White House feelings towards China today.

We have talked ourselves into believing that China is already a hyper-power. It may become one: it is not one yet. China is ringed by states - Japan, Korea, Vietnam, India - that are American allies when push comes to shove. It faces a prickly Russia on its 4,000km border, where Chinese migrants are itching for Lebensraum across the Amur. Emerging Asia, Brazil, Egypt and Europe are all irked by China's yuan-rigged export dumping.

Michael Pettis from Beijing University argues that China's reserves of $2.4 trillion - arguably $3 trillion - are a sign of weakness, not strength. Only twice before in modern history has a country amassed such a stash equal to 5pc-6pc of global GDP: the US in the 1920s, and Japan in the 1980s. Each time preceeded depression.

The reserves cannot be used internally to support China's economy. They are dead weight, beyond any level needed for macro-credibility. Indeed, they are the ultimate indictment of China's dysfunctional strategy, which is to buy $30bn to $40bn of foreign bonds every month to hold down the yuan, refusing to let the economy adjust to trade realities. The result is over-investment in plant, flooding the world with goods at wafer-thin export margins. China's over-capacity in steel is now greater than Europe's output.

This is catching up with China, in any case. Professor Victor Shuh from Northerwestern University warns that the 8,000 financing vehicles used by China's local governments to stretch credit limits have built up debts and commitments of $3.5 trillion, mostly linked to infrastructure. He says the banks may require a bail-out nearing half a trillion dollars.

As America's creditor - owner of some $1.4 trillion of US Treasuries, agency bonds, and US instruments - China can exert leverage. But this is not what it seems. If the Politburo deploys its illusiory power, Washington can pull the plug on China's export economy instantly by shutting markets. Who holds whom to ransom?

Any attempt to retaliate by triggering a US bond crisis would rebound against China, and could be stopped - in extremis - by capital controls. Roosevelt changed the rules in 1933. Such things happen. The China-US relationship is no doubt symbiotic, but a clash would not be "mutual assured destruction", as often claimed. Washington would win.

Contrary to myth, the slide to protectionism after the 1930 Smoot-Hawley Tariff Act did not cause the Depression. Trade contracted more slowly in the 1930s than this time. The Smoot-Hawley lesson is that tariffs have asymmetrical effects. They devastate surplus countries: then America. Deficit Britain did well by retreating into Imperial Preference.

Barack Obama has never exalted free trade. This orthodoxy is, in any case, under threat in the West. His top economic adviser Larry Summers let drop in Davos that free-trade arguments no longer hold when dealing with "mercantilist" powers. Adam Smith recognized this too, despite efforts by free-trade ultras to appropriate him for their cause.

China's trasformation has been remarkable since Deng Xiaoping unleashed capitalism, but as ex-diplomat George Walden writes in China: a Wolf in the World? you cannot feel at ease with a regime that still covers up Mao's murderous nihilism. He reminds us too that China has never forgiven the humilations inflicted by the West when the two civilizations collided in the 19th Century, and intends to exact revenge. Handle with care.

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http://blogs.wsj.com/deals/2010/08/20/wall-street-drug-use-employees-giving-up-cocaine-for-pot-and-pills/

August 20, 2010
Kyle Stock

Wall Street Drug Use: Employees Giving Up Cocaine for Pot and Pills

The credit crisis appears to have sobered up Wall Street in more ways than one.

A review of drug-test data compiled by drug testing firm Sterling Infosystems Inc., shows that cocaine is losing its favor among investment professionals. What drug is their choice? Marijuana.

Last year, cocaine showed up in 7% of the positive tests at Wall Street firms, down from 16% in 2007, according to Sterling, a New York-based firm that screens about 5,900 employees a year for some 270 finance shops.

Meanwhile, the prevalence of marijuana in failed tests jumped from 64% to 80% between 2007 and 2009.

“I think the incidence of hard drug use is lower today than it was 10 or 15 years ago,” says Adam Zoia, CEO of executive recruiting firm Glocap Search LLC. “The banks, in particular, are pretty persnickity on background checks.”

In all, finance seems to be a relatively clean profession. Only 2% of the industry failed drug tests last year, compared with 3.6% of the working world at-large, according to Sterling. Retail workers, in comparison, were red-flagged 4.1% of the time.

The highest levels of abuse seem to be at real estate investment trust companies, a sector that, incidentally, does more random testing than others.

But the test results generally capture drug use among new hires, candidates who knew that they would likely be tested. Random drug testing is rare, according to a spokesman for a bulge-bracket bank who asked to remain unnamed.

Among existing employees, psychologists and counselors said that drug abuse has not slackened. Some even said it is peaking, exacerbated by the credit crisis and the volatile and tenuous recovery that has ensued.

Seabrook House, a 24-bed luxury rehab facility in Pennsylvania, has been crammed with Wall Street refugees in recent months, according to Clinical Director William Heran. They are paying $24,000 for a three-month program to get clean.

Mr. Heran has been around long enough to discern a forex trader from an M&A banker. He says the rage these days is a Pez dispenser with the head of a red devil. Inside? Pills of Oxycodone or Percocet.

“We’re in crisis mode,” he says. “Many of these drugs are so accessible to the average person, let alone the person who is well-spoken and professional.”

Indeed, amphetamines seem to be gaining cache, showing up in 10% of Sterling’s positive tests this year, compared with 3% in 2007.

Across the U.S., cocaine and marijuana use has been static since 2002 at least, according to federal Health Department data. But New York is a hot-bed for illicit drugs and Manhattanites are particularly heavy users.

In a 2001 survey, 9.6% of Manhattan residents said they had used marijuana in the previous year, compared with 6% of people across the country; 5% of the island’s residents had done cocaine in the previous month, compared with 2.3% U.S.-wide.

Turning Point For Leaders, a Connecticut-based intervention and rehab company, is also seeing a steady stream of clients from Wall Street. Robert Curry, who founded the business, says that the industry is still a hot bed of abuse.

“Investment bankers — gunslingers, as we call them — are highly prone to addiction,” he explained. “And there’s a lot of denial among employers. The attitude is: ‘If they can’t fix themselves, then they’re going to have to live with it. We’re not going to put any time and effort into it.’”

Many counselors says that finance workers feel entitled to illicit drugs, given their paychecks and stress of their jobs. They are also allegedly very good at masking their addictions, the counselors say.

Heavy users, however, are seldom fooling their employers, says Brad Lamm, president of New York-based Intervention Specialists. Lamm has also seen a surge in substance abuse on Wall Street – in his words “a lot of crack and coke.”

“The titans of Wall Street normalize crazy behavior all the time,” he says. “If somebody’s delivering and showing up and doing the work, they almost have to catch on fire for someone to sound the alarm.”

The upside is that none of Mr. Lamm’s clients has been fired for abuse. In fact, he typically contacts the employer before an intervention with a sort of mantra that he uses to get through to both the user and the boss: “Dead guys don’t bonus.”

Kyle Stock writes for FINS, Dow Jones’ finance career site.