THE NEGATIVE WAY TO GROWTH ? / PROJECT SYNDICATE
The Negative Way to Growth?
NEW YORK – Monetary policy has become increasingly unconventional in the last six years, with central banks implementing zero-interest-rate policies, quantitative easing, credit easing, forward guidance, and unlimited exchange-rate intervention. But now we have come to the most unconventional policy tool of them all: negative nominal interest rates.
Such rates currently prevail in the eurozone, Switzerland, Denmark, and Sweden. And it is not just short-term policy rates that are now negative in nominal terms: about $3 trillion of assets in Europe and Japan, at maturities as long as ten years (in the case of Swiss government bonds), now have negative interest rates.
At first blush, this seems absurd: Why would anyone want to lend money for a negative nominal return when they could simply hold on to the cash and at least not lose in nominal terms?
In fact, investors have long accepted real (inflation-adjusted) negative returns. When you hold a checking or current account in your bank at a zero interest rate – as most people do in advanced economies – the real return is negative (the nominal zero return minus inflation): a year from now, your cash balances buy you less goods than they do today. And if you consider the fees that many banks impose on these accounts, the effective nominal return was already negative even before central banks went for negative nominal rates.
In other words, negative nominal rates merely make your return more negative than it already was. Investors accept negative returns for the convenience of holding cash balances, so, in a sense, there is nothing new about negative nominal interest rates.
Moreover, if deflation were to become entrenched in the eurozone and other parts of the world, a negative nominal return could be associated with a positive real return. That has been the story for the last 20 years in Japan, owing to persistent deflation and near-zero interest rates on many assets.
One still might think that it makes sense to hold cash directly, rather than holding an asset with a negative return. But holding cash can be risky, as Greek savers, worried about the safety of their bank deposits, learned after stuffing it into their mattresses and walls: the number of armed home robberies rose sharply, and some cash was devoured by rodents. So, if you include the costs of holding cash safely – and include the benefits of check writing – it makes sense to accept a negative return.
Beyond retail savers, banks that are holding cash in excess of required reserves have no choice but to accept the negative interest rates that central banks impose; indeed, they could not hold, manage, and transfer those excess reserves if they were held as cash, rather than in a negative-yielding account with the central bank. Of course, this is true only so long as the nominal interest rate is not too negative; otherwise, switching to cash – despite the storage and safety costs – starts to make more sense.
But why would investors accept a negative nominal return for three, five, or even ten years? In Switzerland and Denmark, investors want exposure to a currency that is expected to appreciate in nominal terms. If you were holding Swiss franc assets at a negative nominal return right before its central bank abandoned its euro peg in mid-January, you could have made a 20% return overnight; a negative nominal return is a small price to pay for a large capital gain.
And yet negative bonds yields are also occurring in countries and regions where the currency is depreciating and likely to depreciate further, including Germany, other parts of the eurozone core, and Japan. So, why are investors holding such assets?
Many long-term investors, like insurance companies and pension funds, have no alternative, as they are required to hold safer bonds. Of course, negative returns make their balance sheets shakier: a defined-benefit pension plan needs positive returns to break even, and when most of its assets yield a negative nominal return, such results become increasingly difficult to achieve. But, given such investors' long-term liabilities (claims and benefits), their mandate is to invest mostly in bonds, which are less risky than stocks or other volatile assets. Even if their nominal returns are negative, they must defer to safety.
Moreover, in a “risk-off" environment, when investors are risk-averse or when equities and other risky assets are subject to market and/or credit uncertainty, it may be better to hold negative-yielding bonds than riskier and more volatile assets.
Over time, of course, negative nominal and real returns may lead savers to save less and spend more.
And that is precisely the goal of negative interest rates: In a world where supply outstrips demand and too much saving chases too few productive investments, the equilibrium interest rate is low, if not negative. Indeed, if the advanced economies were to suffer from secular stagnation, a world with negative interest rates on both short- and long-term bonds could become the new normal.
To avoid that, central banks and fiscal authorities need to pursue policies to jump-start growth and induce positive inflation. Paradoxically, that implies a period of negative interest rates to induce savers to save less and spend more. But it also requires fiscal stimulus, especially public investment in productive infrastructure projects, which yield higher returns than the bonds used to finance them.
The longer such policies are postponed, the longer we may inhabit the inverted world of negative nominal interest rates.
EUROZONE FACES FIRST REGIONAL BANKRUPCY AS DEBACLE STALKS AUSTRIA´S CARINTHIA / THE TELEGRAPH
Eurozone faces first regional bankruptcy as debt debacle stalks Austria's Carinthia
Fitch has stripped Austria of its AAA rating, adding that 'within a short space of time the debt dynamics of Austria have deteriorated significantly'
By Ambrose Evans-Pritchard
6:37PM GMT 03 Mar 2015
The 550,000-strong province on the Slovene border must fend for itself as losses spin out of control Photo: Alamy
The Alpine region of Carinthia faces probable bankruptcy after Austria’s central government refused to vouch for debts left by a disastrous banking expansion in eastern Europe and the Balkans.
It would be the first sub-sovereign default in Europe since the Lehman Brothers crisis, comparable in some respects to the bankruptcy of California's Orange County in 1994 or the city of Detroit in 2013.
Austria’s finance minister, Jörg Schelling, said Vienna would not cover €10.2bn (£7.4bn) in bond guarantees issued by the Carinthian authorities for the failed lender Hypo Alpe Adria, or for the "Heta" resolution fund that succeeded it. This leaves the 550,000-strong province on the Slovene border to fend for itself as losses spin out of control.
“The government won’t waste another euro of taxpayer money on Heta,” he said, insisting that there must be an end to moral hazard. The Hypo affair has alredy cost taxpayers €5.5bn. The Austrian state has said it will cover €1bn of its own guarantees “on the nail” but nothing more.
Sources in Vienna suggested that even senior bondholders are likely to face a 50pc writedown, becoming the first victims of the eurozone’s tough new “bail-in” rules for creditors. These rules are already in force in Germany and Austria, and will be mandatory everywhere next year.
“We are at a very delicate phase when Europe’s banking system switches from a bail-out regime into a much tougher bail-in regime, and Austria has just thrown this into sharp relief,” said sovereign bond strategist Nicholas Spiro. The biggest bondholders are Deutsche Bank’s DWS Investment, Pimco, Kepler-Fonds and BlackRock. The World Bank also owns €150bn of Hypo debt.
Austria’s banking regulators surprised markets by intervening over the weekend to wind down Heta and suspend debt payments until 2016 after discovering a further shortfall in capital of €7.6bn. The surge in the Swiss franc in January after the collapse of Switzerland’s currency floor against the euro appears to have been the last straw, setting off another wave of likely losses from eastern European mortgages denominated in francs.
“This is getting bigger and bigger,” said Marc Ostwald from Monument. “They kept kicking the can down the road but it is finally catching up with them, and Heta won’t be the last. There is a whiff of the Irish situation in this story. Carinthia stood as guarantor for debts that it could not possibly cover,” he said. There are many regions that could slide into difficulties, including Belgium's Wallonia, or the Italian region of Sicily.
The Hypo bonds were underwritten in the boom years before the Lehman crisis by Austria’s populist leader Jorg Haider, then governor of Carinthia, leaving it to a subsequent social democrat team in Klagenfurt to sort out the mess.
Carinthia’s governor, Peter Kaiser, said his government is not liable for the debts unless Heta is definitively declared bankrupt – as opposed to just a moratorium - and vowed to defend his region in the courts. He warned that Carinthia would face a “dramatic situation” if bankruptcy does in fact go ahead, as widely expected.
Austria has not suffered any immediate fallout from Heta’s latest woes. It was able to sell five-year bonds on Tuesday at yields below zero for the first time ever as investors scramble to amass EMU sovereign debt before the European Central Bank launches quantitative easing next week. The ECB aims to buy €60bn of bonds each month, but there is already a chronic shortage of assets available on the market.
William Jackson, from Capital Economics, said Austrian banks face a double squeeze as borrowers in Hungary and the Balkans struggle with both deep property slumps and a slide in their local currencies. “These foreign currency debts are a slow-burn issue. The non-performing loans emerge over time,” he said.
The International Monetary Fund said in its latest healthcheck on Austria that three large banks – Raiffeisen, Erste and Volksbanken – are vulnerable to any shocks. “Risks remain elevated. Bank profitability suffers from rising non-performing loans, risk costs and write-offs,” it said.
The IMF said Austria’s reforms have largely stalled. The country has one of the highest barriers to services in Europe, the worst subsidies at 3.75pc of GDP, the highest tax share on labour at 58pc, a high rate of early retirement, and high state spending at 52pc of GDP, compared with 45pc in Germany.
While Austria remains a rich and successful country, it is slithering towards the bottom of the reform league. France looks less sluggish by comparison, and Greece looks almost Thatcherite.
| Etiquetas: Economics, U.S. Economic And Political
The economic recovery
Not quite what it seems
Talk of a renaissance in American manufacturing is overblown
CHICAGO AND INDIANAPOLIS
AT A gleaming Rolls-Royce factory in Indianapolis (pictured), a team of workers produces “LiftFans”, gadgets that help fighter planes take off and land without needing much of a runway. This plant is a far cry from the hot, smelly, noisy places that people normally associate with manufacturing. Workers in goggles hand-build the LiftFans, which sell for millions of dollars, with the help of state-of-the-art machinery. Computers quietly hum. The atmosphere is disarmingly serene.
America has some of the world’s most impressive manufacturing facilities. But talk of a “renaissance” is certainly overblown. Growth is being driven by a small number of industries, which are hiring few new workers. And even high-tech operations, at which America should excel, are struggling.
Manufacturing’s golden years were the late 1970s, when employment in the sector hit nearly 20m (see chart 1). That was a fifth of the labour force at the time. From then until the millennium, though, the number of jobs dropped by around 2m. Foreign competition, from Japan and especially China, took its toll. One paper found that a quarter of the employment decline in American manufacturing from 1990 to 2007 was caused by Chinese import competition. Then the recession came, which for many firms proved a killer blow. At its nadir in 2010, manufacturing employed 9% of the labour force.
When the recession ended in mid-2009, the stage seemed set for a turnaround. From 2009 to 2013 manufacturing workers became cheaper relative to the private-sector workforce as a whole; after taking inflation into account, average hourly earnings in manufacturing were flat.
The boom in cheap shale gas has boosted investment in new factories. Meanwhile, Chinese wages have been rising fast. And until recently the dollar was weak, which made American exports more competitive. No wonder, then, that stories abound of big companies bringing factories back to America. According to a paper from the International Monetary Fund (IMF), America’s manufacturing output bounced back from the recession of 2008-09 faster than after other recent ones (see chart 2). There have been 18 straight months of job growth in manufacturing.
Those who long for a new wave of industrialisation in America will cheer. What they have in mind is better pay. Since wages tend to track productivity, many of those working in factories earn more than their peers in shops and restaurants. Economists at the Brookings Institution, a think-tank, analysed wages in manufacturing and non-manufacturing jobs between 2008 and 2010, controlling for factors that influence earnings, such as sex and education. After doing so, they found that manufacturing workers earned a weekly average of $605, 8% higher than those in other industries. Others reckon that a thriving manufacturing sector would boost America’s exports. MIT’s Task-Force on Production and Innovation suggests that if America is ever to reduce its gaping trade deficit, manufacturing needs to do well.
Certainly, bits of America are great at making things. Indiana is bursting with high-tech factories like the Rolls-Royce plant. But dig a little deeper, and the figures are not so good.
During the recession, as usual, durable and non-durable goods behaved in different ways. Production of durable goods—cars, furniture, appliances and so on—plunged (see chart 3).
That was unsurprising, since it is fairly easy to put off buying such things. After the recession, people made up for lost time. By mid-2013 output of durables had passed its 2007 peak.
Meanwhile, non-durable goods—groceries, clothes, chemicals and textiles, purchases of which are harder to postpone—were less volatile.
However, the past few years have seen exaggerated performances from both sectors. According to an IMF paper, the recovery of the non-durables sector was weaker than after the recessions of the early 1990s or early 2000s. Durable goods did better: the recovery in output beat those seen after the previous two recessions.
The boom in the durables sector, though, is largely owing to a few industries. Cheap credit, for instance, spurred demand for new motors and rapid growth in carmaking. That sector accounted for over a third of durables growth from 2009 to 2013. (Others, like furniture and computer-manufacturing, barely grew.) This reliance on the American consumer’s appetite for new stuff is worrying, says a report from the Information Technology and Innovation Foundation, a think-tank. It suggests that when pent-up demand is satisfied, a few big industries will suffer. At that point, overall output is likely to stall.
Data on jobs also suggest that manufacturing is not entering another golden age. That is less surprising, since with better technology manufacturing is becoming ever less labour-intensive.
Nonetheless, the post-recession rise in manufacturing employment is one of the weakest in memory. According to the Economic Policy Institute, a think-tank, if employment had followed the trend of the average recovery in the years since 1945, then an extra 1.2m manufacturing jobs would have been created by the third quarter of 2014. In fact, 800,000 or so appeared. Manufacturing-job growth, though it has seen a few brisk years, has barely kept up with that of the workforce as a whole.
Trade optimists will hope American industry shifts towards its relative strengths. As leaner and meaner firms emerge from the ashes of the recession, the argument goes, America will shed low-tech industries and excel at the fancier stuff. It already relies heavily on “advanced manufacturing”—activities that involve lots of science and maths. That sector’s output in 2013 was well over $1 trillion. Exports of this sort reached $900 billion each year, accounting for nearly half of America’s total.
But even here, all is not well. In a few advanced industries, notably aerospace and industrial-machine production, America exports more than it imports. But many industries that have been strong historically are now running big trade deficits: America imports about $40 billion more in pharmaceuticals than it exports, and a similar gap appears in semiconductors. Other areas of supposed expertise, like communications equipment and computers, run even bigger deficits. If America cedes leadership in advanced industries, says Mark Muro of Brookings, it will struggle as the best innovation, labour and investment go elsewhere. That may be happening now: since 2000, advanced-manufacturing jobs have dwindled as a share of America’s total employment.
A few things must happen for manufacturing to flourish. The 2015 Economic Report of the President, released on February 19th, suggests reforming the tax system, which hits manufacturing firms hard. Mr Muro hopes the federal government will double its investment in basic research and development, as Barack Obama has promised. And schools and colleges need to improve. America ranks a miserable 13th in the OECD, a club of mostly rich countries, in the proportion of the population graduating in science, maths and engineering. Without big improvements, manufacturing will soon flounder again.
Colleagues,
What I propose to you is that the current difficulties in the international order are unrelated to Yalta and its consequences, but have their origin in the rise of the neoconservative ideology in the post-Soviet era and its influence on Washington’s foreign policy.
The collapse of the Soviet Union removed the only constraint on Washington’s power to act unilaterally abroad. At that time China’s rise was estimated to require a half century. Suddenly the United States found itself to be the Uni-power, the “world’s only superpower.” Neoconservatives proclaimed “the end of history.”
By the “end of history” neoconservatives mean that the competition between socio-economic-political systems is at an end. History has chosen “American Democratic-Capitalism.” It is Washington’s responsibility to exercise the hegemony over the world given to Washington by History and to bring the world in line with History’s choice of American democratic-capitalism.
In other words, Marx has been proven wrong. The future does not belong to the proletariat but to Washington.
The neoconservative ideology raises the United States to the unique status of being “the exceptional country,” and the American people acquire exalted status as “the indispensable people.”
If a country is “the exceptional country,” it means that all other countries are unexceptional. If a people are “indispensable,” it means other peoples are dispensable. We have seen this attitude at work in Washington’s 14 years of wars of aggression in the Middle East. These wars have left countries destroyed and millions of people dead, maimed, and displaced. Yet Washington continues to speak of its commitment to protect smaller countries from the aggression of larger countries. The explanation for this hypocrisy is that Washington does not regard Washington’s aggression as aggression, but as History’s purpose.
We have also seen this attitude at work in Washington’s disdain for Russia’s national interests and in Washington’s propagandistic response to Russian diplomacy.
The neoconservative ideology requires that Washington maintain its Uni-power status, because this status is necessary for Washington’s hegemony and History’s purpose.
The neoconservative doctrine of US world supremacy is most clearly and concisely stated by Paul Wolfowitz, a leading neoconservative who has held many high positions: Deputy Assistant Secretary of Defense, Director of Policy Planning US Department of State, Assistant Secretary of State, Ambassador to Indonesia, Undersecretary of Defense for Policy, Deputy Secretary of Defense, President of the World Bank.
In 1992 Paul Wolfowitz stated the neoconservative doctrine of American world supremacy:
“Our first objective is to prevent the re-emergence of a new rival, either on the territory of the former Soviet Union or elsewhere, that poses a threat on the order of that posed formerly by the Soviet Union. This is a dominant consideration underlying the new regional defense strategy and requires that we endeavor to prevent any hostile power from dominating a region whose resources would, under consolidated control, be sufficient to generate global power.”
For clarification, a “hostile power” is a country with an independent policy (Russia, China, Iran, and formerly Saddam Hussein, Gaddafi, Assad).
This bold statement struck the traditional American foreign policy establishment as a declaration of American Imperialism. The document was rewritten in order to soften and disguise the blatant assertion of supremacy without changing the intent. These documents are available online, and you can examine them at your convenience.
Softening the language allowed the neoconservatives to rise to foreign policy dominance. The neoconservatives are responsible for the Clinton regime’s attacks on Yugoslavia and Serbia.
Neoconservatives, especially Paul Wolfowitz, are responsible for the George W. Bush regime’s invasion of Iraq. The neoconservatives are responsible for the overthrow and murder of Gaddafi in Libya, the assault on Syria, the propaganda against Iran, the drone attacks on Pakistan and Yemen, the color revolutions in former Soviet Republics, the attempted “Green Revolution” in Iran, the coup in Ukraine, and the demonization of Vladimir Putin.
A number of thoughtful Americans suspect that the neoconservatives are responsible for 9/11, as that event gave the neoconservatives the “New Pearl Harbor” that their position papers said was necessary in order to launch their wars for hegemony in the Middle East. 9/11 led directly and instantly to the invasion of Afghanistan, where Washington has been fighting since 2001.
Neoconservatives controlled all the important government positions necessary for a “false flag” attack.
Neoconservative Assistant Secretary of State Victoria Nuland, who is married to another neoconservative, Robert Kagan, implemented and oversaw Washington’s coup in Ukraine and chose the new government.
The neoconservatives are highly organized and networked, well-financed, supported by the print and TV media, and backed by the US military/security complex and the Israel Lobby.
There is no countervailing power to their influence on US foreign power.
While the neoconservatives were preoccupied for a decade with their wars in the Middle East, creating a US Africa Command, organizing color revolutions, exiting disarmament treaties, surrounding Russia with military bases, and “pivoting to Asia” to surround China with new air and naval bases, Vladimir Putin led Russia back to economic and military competence and successfully asserted an independent Russian foreign policy.
When Russian diplomacy blocked Washington’s planned invasion of Syria and Washington’s planned bombing of Iran, the neoconservatives realized that they had failed the “first objective” of the Wolfowitz Doctrine and had allowed “the re-emergence of a new rival . . . on the territory of the former Soviet Union” with the power to block unilateral action by Washington.
The attack on Russia began. Washington had spent $5 billion over a decade creating non-governmental organizations (NGOs) in Ukraine and cultivating Ukrainian politicians. The NGOs were called into the streets. The extreme nationalists or nazi elements were used to introduce violence, and the elected democratic government was overthrown. The intercepted conversation between Victoria Nuland and the US ambassador in Kiev, in which the two Washington operatives choose the members of the new Ukrainian government, is well known.
If the information that has recently come to me from Armenia and Kyrgyzstan is correct, Washington has financed NGOs and is cultivating politicians in Armenia and the former Soviet Central Asian Republics. If the information is correct, Russia can expect more “color revolutions” or coups in other former territories of the Soviet Union. Perhaps China faces a similar threat in Uyghurstan.
The conflict in Ukraine is often called a “civil war.” This is incorrect. A civil war is when two sides fight for the control of the government. The break-away republics in eastern and southern Ukraine are fighting a war of secession.
Washington would have been happy to use its coup in Ukraine to evict Russia from its Black Sea naval base as this would have been a strategic military achievement. However, Washington is pleased that the “Ukraine crisis” that Washington orchestrated has resulted in the demonization of Vladimir Putin, thus permitting economic sanctions that have disrupted Russia’s economic and political relations with Europe. The sanctions have kept Europe in Washington’s orbit.
Washington has no interest in resolving the Ukrainian situation. The situation can be resolved diplomatically only if Europe can achieve sufficient sovereignty over its foreign policy to act in Europe’s interest instead of Washington’s interest.
The neoconservative doctrine of US world hegemony is a threat to the sovereignty of every country. The doctrine requires subservience to Washington’s leadership and to Washington’s purposes. Independent governments are targeted for destabilization. The Obama regime overthrew the reformist government in Honduras and currently is at work destabilizing Venezuela, Bolivia, Ecuador, and Argentina, and most likely also Armenia and the former Central Asian Soviet Republics.
Yalta and its consequences have to do with Great Power rivalries. But in the neoconservative doctrine, there is only one Great Power–the Uni-power. There are no others, and no others are to be permitted
Therefore, unless a modern foreign policy arises in Washington and displaces the neoconservatives, the future is one of conflict.
It would be a strategic error to dismiss the neoconservative ideology as unrealistic. The doctrine is unrealistic, but it is also the guiding force of US foreign policy and is capable of producing a world war.
In their conflict with Washington’s hegemony, Russia and China are disadvantaged. The success of American propaganda during the Cold War, the large differences between living standards in the US and those in communist lands, overt communist political oppression, at times brutal, and the Soviet collapse created in the minds of many people nonexistent virtues for the United States. As English is the world language and the Western media is cooperative, Washington is able to control explanations regardless of the facts. The ability of Washington to be the aggressor and to blame the victim encourages Washington’s march to more aggression.
This concludes my remarks. Tomorrow I will address whether there are domestic political restraints or economic restraints on the neoconservative ideology.
It was not long before the director of Homeland Security declared that the department’s focus has shifted from Muslim terrorists to “domestic extremists,” an undefined category. Anyone can be swept into this category. Homes of war protesters were raided and grand juries were convened to investigate the protesters. Americans of Arab descent who donated to charities–even charities on the State Department’s approved list–that aided Palestinian children were arrested and sentenced to prison for “providing material support to terrorism.”
All of this and more, including police brutality, has had a chilling effect on protests against the wars and the loss of civil liberty. The rising protests from the American population and from soldiers themselves that eventually forced Washington to end the Vietnam War have been prevented in the 21st century by the erosion of rights, intimidation, loss of mobility (no-fly list), job dismissal, and other heavy-handed actions inconsistent with a government accountable to law and to the people.
In an important sense, the US has emerged from the “war on terror” as an executive branch dictatorship unconstrained by the media and barely, if at all, constrained by Congress and the federal courts. The lawlessness of the executive branch has spread into governments of Washington’s vassal states and into the Federal Reserve, the International Monetary Fund, and the European Central Bank, all of which violate their charters and operate outside their legal powers.
Jobs offshoring destroyed the American industrial and manufacturing unions. Their demise and the current attack on the public employee unions has left the Democratic Party financially dependent on the same organized private interest groups as the Republicans. Both parties now report to the same interest groups. Wall Street, the military/security complex, the Israel Lobby, agribusiness, and the extractive industries (oil, mining, timber) control the government regardless of the party in power. These powerful interests all have a stake in American hegemony.
The message is that the constellation of forces preclude internal political change.
Hegemony’s Archilles heel is the US economy. The fairy tale of American economic recovery supports America’s image as the safe haven, an image that keeps the dollar’s value up, the stock market up, and interest rates down. However, there is no economic information that supports this fairy tale.
Real median household income has not grown for years and is below the levels of the early 1970s. There has been no growth in real retail sales for six years. The labor force is shrinking.
The labor force participation rate has declined since 2007 as has the civilian employment to population ratio. The 5.7 percent reported unemployment rate is achieved by not counting discouraged workers as part of the work force. (A discouraged worker is a person who is unable to find a job and has given up looking.)
A second official unemployment rate, which counts short-term (less than one year) discouraged workers and is seldom reported, stands at 11.2 percent. The US government stopped including long-term discouraged workers (discouraged for more than one year) in 1994. If the long-term discouraged are counted, the current unemployment rate in the US stands at 23.2 percent.
The offshoring of American manufacturing and professional service jobs such as software engineering and Information Technology has decimated the middle class. The middle class has not found jobs with incomes comparable to those moved abroad. The labor cost savings from offshoring the jobs to Asia has boosted corporate profits, the performance bonuses of executives and capital gains of shareholders. Thus all income and wealth gains are concentrated in a few hands at the top of the income distribution. The number of billionaires grows as destitution reaches from the lower economic class into the middle class. American university graduates unable to find jobs return to their childhood rooms in their parents’ homes and work as waitresses and bartenders in part-time jobs that will not support an independent existence.
With a large percentage of the young economically unable to form households, residential construction, home furnishings, and home appliances suffer economic weakness. Cars can still be sold only because the purchaser can obtain 100 percent financing in a six-year loan. The lenders sell the loans, which are securitized and sold to gullible investors, just as were the mortgage-backed financial instruments that precipitated the 2007 US financial crash.
None of the problems that created the 2008 recession, and that were created by the 2008 recession, have been addressed. Instead, policymakers have used an expansion of debt and money to paper over the problems. Money and debt have grown much more than US GDP, which raises questions about the value of the US dollar and the credit worthiness of the US government. On July 8, 2014, my colleagues and I pointed out that when correctly measured, US national debt stands at 185 percent of GDP.
The problem with neoliberal economics, which pervades all countries, even Russia and China, is that neoliberal economics is a tool of American economic imperialism, as is Globalism. As long as countries targeted by Washington for destabilization support and cling to the American doctrines that enable the destabilization, the targets are defenseless.
If Russia, China, and the BRICS Bank were willing to finance Greece, Italy, and Spain, perhaps those countries could be separated from the EU and NATO. The unraveling of Washington’s empire would begin.
The Islamic State’s Most Recent Victims
By THE EDITORIAL BOARD
Raqqa, Syria, in June. Credit Reuters
Reports of atrocities by the Islamic State never cease. Entire villages in northeastern Syria are being emptied of Assyrian Christians, with hundreds taken hostage and others made to pay a religion tax; priceless antiquities are destroyed in Mosul, Iraq, in a symbolic fight against pagan gods; Egyptian Christians are beheaded in Libya.
It seems sometimes as if a band of fanatics has emerged from the dark ages to wage war on the present, starting at the cradle of civilization and deploying civilization’s own technologies against it.
The Islamic State, also known as ISIS or ISIL, has nurtured this narrative with its claim to be the vanguard of a new caliphate. How much its terrible actions — the beheadings, the threats, the destruction — are rooted in religious zealotry, raw psychopathy or political ideology is hard to determine. In the past, ISIS has been as ready to swap hostages or antiquities for cash as to destroy them.
Still, and perversely, the narrative of evil is the Islamic State’s greatest recruitment tool. The ghoulish videos spread around the world, the ritualized murders, the smashed statues, the British cadences of the spokesman “Jihadi John,” now identified as a Kuwaiti immigrant to England named Mohammed Emwazi — all of this acts as a strong lure for potential fighters and as a challenge to the security and values of the civilized world.
Any response to this threat cannot be to accept the Islamic State’s narrative, to view its actions as a sectarian struggle of Islam versus the West — or, for that matter, as a holy war against the ancient Christians of the Middle East or against small religious sects like the Yazidis.
ISIS is an extremist band of murderers parading as Islamic purists, and does not discriminate in its choice of enemies. It has killed countless Muslims, including Sunnis who purportedly share its faith but refuse to accept its authority. Its ideology is simple: Anyone who does not accept its commands can be tortured, raped or killed.
The United States and other Western governments are right to insist repeatedly that their fight against ISIS is not a war against Islam. At the same time they must make every effort to expose the false claims of the terrorists for what they are: a cover for a sadistic battle for power and plunder.
YEAR END GOLD RESERVES PLUMMET IN 2014 CONFIRMING A DROP IN FUTURE PRODUCTION / SEEKING ALPHA
| Etiquetas: Gold
Year End Gold Reserves Plummet In 2014 Confirming A Drop In Future Production: Is There A Better Slam-Dunk Investment Than Gold?
Mar. 1, 2015 12:29 AM ET
According to industry analysts, gold production will peak in 2015 and then drop drastically.
Year end gold reserve reports confirm that miners are not replacing currently mined gold.
Slashed exploration budgets signal that without a miraculous set of discoveries, there is no reason to believe that current reserves will be replaced in 2015.
Without a higher gold price, future production will continue to fall as money-supply and the global population increase which makes gold very attractive even without a financial crisis.
It is the beginning of 2015 and now is the time when gold mining companies issue their year-end gold reserve calculations, which give investors a glimpse into future production as these are the in-ground ounces that gold companies consider economic. Since we believe that gold production will fall drastically over the next decade, this is very important to keep track of as it can validate or invalidate our thesis.
So far we have not see significantly lower production from the majors, but we wanted to remind investors that mines don't close overnight; it takes some time as evidenced by an excellent chart by Goldcorp (NYSE:GG), which shows the drop clearly:
Source: Goldcorp Corporate Presentation
As investors can see, companies that analyze the industry (CPM Group, GFMS, Metals Focus, etc) are predicting a huge drop-off starting in 2016. This drop almost exactly mirrors the fall in discoveries over a 20 year lag period (the time to develop and permit mining) - all very logical.
If this plays out then we can expect a much higher gold price as production drops while the world's money supply increases (and this is ignoring any increase in demand from developing nations as their populations get more affluent). But how do we verify that this is what we are seeing?
This is where the mineral reserves statements come in, as they reflect how much gold that mining companies confidently expect to be left in the ground. Growing reserves mean that companies are replacing the gold that they are mining, while falling reserves mean that current production is not being replaced. Thus if reserves are rising we can expect future production to increase and vice versa.
So what we did is compile some of the reserve reports of some of the top gold producers: Newmont (NYSE:NEM), Barrick (NYSE:ABX), Goldcorp, Kinross (NYSE:KGC), and Agnico Eagle(NYSE:AEM).
We only used proven and probable reserves as these are the only economically viable reserves, and as is very obvious, in 2014 reserves dropped dramatically by more than 27 million ounces.
In fact, the only miner that increased reserves was Agnico Eagle, and that was due to its acquisition of Osisko which added 4.3 million reserve ounces - without that acquisition it too would have seen a decline in gold reserves.
Additionally, this all happened despite miners using exactly the same reserve calculation price as 2013 - it was not due to using a lower gold price calculation. We want to stress that this is not healthy and normal as the mining industry needs to replace gold reserves every year to stay viable and continue to produce. Without growing reserves (or at least flat reserves), future production will almost certainly drop - which plays very well with our thesis on future gold production.
The only way we can expect reserves to increase is if we start to see a technological revolution like we have seen in the shale oil industry or if explorers are finding a lot of new discoveries. As for the technological revolution, we have seen nothing in the mining industry that seems new or innovative enough to drastically change the industry - no surprise as mining metals is much more difficult and complicated than drilling for oil.
Finally, as evidenced by the chart from Goldcorp, major discoveries have dropped decade lows as we are simply not discovering any new large deposits that are viable at $1200 or $1300 gold.
Additionally, miners have been slashing exploration expenses over the last few years and less money will most likely not help speed discoveries. The industry is between a rock and a hard place (pun intended).
The Opportunity for Investors
Any investor taking even a cursory look at the industry will realize that the future is not very bright for gold production, and the recently issued reserve reports by the major gold producers are validating this view. Rising costs, falling exploration budgets, stressed financials, and a lack of economic discoveries are what we are seeing in the industry - but with that comes opportunity.
The way we see it is that investors can play this in three ways:
Invest in gold directly
Invest in producers with clean balance sheets and good future production
Invest in high-quality explorers
Investing in gold by buying and holding gold (and their paper equivalent the gold ETFs (GLD, CEF, PHYS)), is the most conservative approach as we will probably see a much higher gold price or much less gold production - both positives for an investment in gold. This is not a complicated trade and everything which we've said so far has nothing to do with the many other catalysts that we write about on a regular basis (such as the US fiscal position, the battle between bondholders and the Fed, increase in central bank purchases of gold, or the deteriorating world order). In fact, even the supposed improvement in the US economic picture (the main reason investment banks forecast a falling gold price) would still have no effect on this much more important fundamental issue.
As for the producers, the implications are a bit different because some miners will suffer as reserves drop without being replaced and thus future cash flows also fall. The major miners with the cleanest balance sheets are the safest, but all miners need to be scrutinized carefully as none of them are "invest and forget" type investments. But of course, investors able to select the best companies that are able to grow reserves through exploration or acquisition despite the environment (we have covered a few previously), should do quite well as peers suffer. Quality miners should provide good leverage over any increases in the gold price as their profit margins can double with only moderate moves in the gold price.
Finally we come to the developers and explorers, where we think the real opportunity for massive gains is to be realized. Investors have to be careful here too because many of them have projects that may never be economic, but those companies that do have quality deposits will make excellent takeover targets for the majors as production and reserves fall. In previous pieces, we have covered some of our favorite acquisition targets (one in Chile and one in Peru) and we plan to cover more so if you are interested consider following us (clicking the "Follow" button next to my name).
In conclusion, despite all the negativity over the last few years, gold star is set to burn very bright regardless of what happens in the global economy as reserves are simply not being replaced at the current gold price. Investors do not need to see any financial chaos to have a higher gold price - all investors need is to have the same lack of discoveries trend that we've seen over the last 15 years continue into the future. Thus investors should buy gold, ignore the noise, and wait until economic fundamentals take gold to much higher prices.
Of course, if somehow the stunning growth in worldwide debt catches up with the global economy - all bets are off and we could see a gold price many multiples of what we have today.
There are very few no-brainer investments out there, but gold seems to be one of them and for patient investors this is a great time to buy.
As Brazil Tightens Belt, Other Woes Follow
President Dilma Rousseff’s austerity measures are angering supporters and exacerbating an economic slowdown
By Paulo Trevisani And Rogerio Jelmayer
Brazilian Finance Minister Joaquim Levy, left, consults with President Dilma Rousseff this past week in Brasília, the country’s capital.
BRASÍLIA—President Dilma Rousseff ’s administration, fearful of a potential loss of Brazil’s investment-grade debt rating, is stepping up austerity measures, angering supporters and exacerbating an already painful economic slowdown.
The government on Thursday announced a cap on government spending and investment, as well as additional tax increases for businesses, moves aimed at shoring up Brasília’s deteriorating finances.
The new measures will limit federal spending to 75 billion Brazilian reais ($26.3 billion) from Jan. 1 to April 30, compared with 85 billion reais spent in the period last year. Those reductions follow a number of program cuts and tax increases to hit consumers and businesses since the beginning of the year.
The levies have raised prices for basics like electricity, bus fares and gasoline, and helped pushed annualized inflation to 7.1%, well above official target of 4.5%.
This past week’s measures come just days after Moody’s Investors Service downgraded to junk status the debt of state-controlled Petróleo Brasileiro SA, which is reeling from a massive corruption scandal. The company’s financial woes are stoking fears that Brasília might have to prop up the troubled oil giant, further straining the nation’s public accounts and increasing the risk that Brazil could lose the investment-grade rating on its sovereign debt.
After decades of hyperinflation and economic turmoil, Brazil in the last decade rode a commodities boom to win investment-grade status in 2008.
But massive public spending to help Brazil’s poor and to bolster the economy following the global meltdown has sent debt levels skyward. Brazil’s gross debt is around 64.4% of GDP, a level considered too high by many economists.
With Brazil’s economy now flirting with recession, credit-ratings firms are sounding the alarm. A return to junk status wouldn’t be a blow just to the nation’s psyche, but it would also raise Brazil’s borrowing costs and spook foreign investors, says Pablo Spyer, an analyst at São Paulo-based Mirae Asset Securities.
“American investors are reading the news every day. They are worried. They’ve lost money. Many individual investors bought into Petrobras,” Mr. Spyer said. “If Brazil loses investment grade, money will fly out of the window.”
On Friday, the government announced a high-than-expected primary surplus for January at 21.1 billion reais, or 0.61% of GDP. Those savings are largely the handiwork of new Finance Minister Joaquim Levy, who has spearheaded the austerity efforts. But it is still well off the 1.2% mark he has set as this year’s target, suggesting more belt tightening ahead.
“Economic policy is being adjusted so the economy can grow again, but not a growth dependent on government support,” Mr. Levy told reporters.
Many analysts have praised Brazil’s newfound fiscal discipline as essential to its long-term prosperity. Still, higher taxes and less government spending mean less money in the economy to spur growth and job creation in the short run. Brazil’s official jobless rate climbed to 5.3% in January from 4.3% in December. Official data due late in March are likely to show the country GDP contracted in 2014.
And economists surveyed this week by the central bank predict 0.5% negative growth in 2015.
If those forecasts come to pass, they would mark Brazil’s first back-to-back annual GDP contraction since the Great Depression.
Austerity is also taking a toll on Ms. Rousseff, who narrowly won re-election last fall, in part by demonizing her conservative opponent as a heartless, free-market cost cutter. Now that she’s embraced some of very orthodox policies she eschewed on the campaign trail, her popularity has plummeted. Just 23% of Brazilians in an early February poll rated her performance as “excellent or good,” compared with 42% in December, according to the Datafolha polling firm. T
hose who rated her “bad or terrible” jumped to 44% from 24% over the period.
Labor strikes are rippling across the country. Truckers have blocked busy highways to protest higher fuel prices. Public-sector workers in Brasília have walked off the job because of delayed paychecks caused by tight government budgets. And higher taxes on automobiles have added to a sales slump that sent auto workers to the picket line to protest layoffs.
Union leaders, normally allies of Ms. Rousseff’s ruling Workers’ Party, vow there is more unrest ahead. “The measures are being announced without any debate with workers,” said Miguel Torres, president of Força Sindical, one of Brazil’s most powerful unions. “The government is like the doctor who cuts your head off to treat a headache.”
Business leaders, too, are complaining that an already onerous tax burden just keeps getting heavier.
“It is absurd that the government again uses tax increases to help its finances at a time when production is down and so is employment,” said Paulo Skaf, president of the Federation of Industries in São Paulo, a major industry trade group.
All this bitter medicine is being applied, the government says, to improve the fundamentals of the economy, so Brazil can restore growth with low inflation in the near future.
“Fiscal adjustments are always hard to do,” said Carlos Kawall, former treasury secretary and chief economist at Banco Safra, based in Sao Paulo. But the adjustment “needs to be done,” he said.
| Etiquetas: Human Rights, U.S. Economic And Political
Alfred W. McCoy, The Unwritten American Rules of the Road
by Alfred McCoy
8:00am, February 24, 2015.
My drone is yours, compadre! Or so Washington has now decided. The latest promise of good times in the arms trade comes from an administration that has pioneered a robotic assassination regime organized out of the White House (though credit for groundbreaking drone assassination work should go to Israel as well). Run largely by the CIA, the U.S. drone campaigns across the Greater Middle East and parts of Africa have weekly taken out suspected enemies or even “targets” that exhibit (in the judgment of people thousands of miles away and from another culture) enemy-like behavior. In the process, the Bush and Obama administrations also pioneered the crossing of sovereign borders without permission for an ongoing killing process not defined as war and which, despite much bragging about “precision,” has regularly taken out ordinary civilians, including significant numbers of children. In the process, it has brought a sense of daily terror to peasant populations in the backlands of the planet. Now, Washington is ready to spread the wealth. The State Department has just announced that armed Predator and Reaper drones will be available for sale to carefully vetted and selected allies around the world.
This is, of course, splendid news for U.S. arms makers in a market that, over the next decade, is expected to more than double in size from $5.2 billion to $11.6 billion. However, as the Washington Post reports, this new program will build “on the Obama administration’s update last year to rules on conventional weapons transfers, which emphasize human rights protections in decisions about arms sales.”
For such sales, Washington, as the planetary “human rights” leader, is planning to set up “proper use” or “end use” rules when it comes to assassination by drone. Here’s a typical Washington rule of the road: if you buy an armed drone from the U.S., you must agree not to use “unlawful force against... domestic populations” -- that is, you must not kill your own citizens in your own country.
(Translation: Turkey could theoretically not use such drones against its Kurdish population.) Implied exception: You can target and assassinate your own citizens by drone as long as they are not within your own boundaries. This is a rule of the road that Washington has already definitively pioneered, so far killing four of its own citizens by drone in Yemen and Pakistan, which means assumedly that Turkey could indeed kill a Turkish Kurd as soon as he or she stepped across any border.
Among the things Washington has established with its presidential drone assassination forces is that you can indeed kill both the leaders and the followers of terror outfits, or simply of any organization you consider to be your enemy (while causing considerable “collateral damage”). In the process, Washington has proved one thing: that drones will drive large groups of terrorized and vengeful peasants into the arms of those same terror outfits, increasing their strength and fragmenting societies.
Now, the U.S. is preparing to “export” the drone paradigm it has spent so much time building in this young century. China and Israel have already entered the armed drone market as well. Other countries will follow. Drones will be bought in quantity. Borders will be crossed, according to the latest Washington-pioneered rules, by ever more dronified states organizing their own assassination campaigns. If the Washington model proves true, this will further fragment whole societies, create yet more religiously based extremism, and make our world an even less appetizing place. Think of this as the twenty-first-century version (now forming) of the Washington Consensus and keep it in mind as you read the latest piece from TomDispatch regular Alfred McCoy, author of Torture & Impunity: The U.S. Doctrine of Coercive Interrogation, on all the rules of the road Washington has so enthusiastically been writing in these years and just where they are likely to take us. Tom
From Torture to Drone Assassination, How Washington Gave Itself a Global Get-Out-of-Jail-Free Card
By Alfred W. McCoy
"The sovereign is he who decides on the exception,” said conservative thinker Carl Schmitt in 1922, meaning that a nation’s leader can defy the law to serve the greater good. Though Schmitt’s service as Nazi Germany’s chief jurist and his unwavering support for Hitler from the night of the long knives to Kristallnacht and beyond damaged his reputation for decades, today his ideas have achieved unimagined influence. They have, in fact, shaped the neo-conservative view of presidential power that has become broadly bipartisan since 9/11. Indeed, Schmitt has influenced American politics directly through his intellectual protégé Leo Strauss who, as an émigré professor at the University of Chicago, trained Bush administration architects of the Iraq war Paul Wolfowitz and Abram Shulsky.
All that should be impressive enough for a discredited, long dead authoritarian thinker. But Schmitt’s dictum also became a philosophical foundation for the exercise of American global power in the quarter century that followed the end of the Cold War. Washington, more than any other power, created the modern international community of laws and treaties, yet it now reserves the right to defy those same laws with impunity. A sovereign ruler should, said Schmitt, discard laws in times of national emergency. So the United States, as the planet’s last superpower or, in Schmitt’s terms, its global sovereign, has in these years repeatedly ignored international law, following instead its own unwritten rules of the road for the exercise of world power.
Just as Schmitt’s sovereign preferred to rule in a state of endless exception without a constitution for his Reich, so Washington is now well into the second decade of an endless War on Terror that seems the sum of its exceptions to international law: endless incarceration, extrajudicial killing, pervasive surveillance, drone strikes in defiance of national boundaries, torture on demand, and immunity for all of the above on the grounds of state secrecy. Yet these many American exceptions are just surface manifestations of the ever-expanding clandestine dimension of the American state. Created at the cost of more than a trillion dollars since 9/11, the purpose of this vast apparatus is to control a covert domain that is fast becoming the main arena for geopolitical contestation in the twenty-first century.
This should be (but seldom is considered) a jarring, disconcerting path for a country that, more than any other, nurtured the idea of, and wrote the rules for, an international community of nations governed by the rule of law. At the First Hague Peace Conference in 1899, the U.S. delegate, Andrew Dickson White, the founder of Cornell University, pushed for the creation of a Permanent Court of Arbitration and persuaded Andrew Carnegie to build the monumental Peace Palace at The Hague as its home. At the Second Hague Conference in 1907, Secretary of State Elihu Root urged that future international conflicts be resolved by a court of professional jurists, an idea realized when the Permanent Court of International Justice was established in 1920.
After World War II, the U.S. used its triumph to help create the United Nations, push for the adoption of its Universal Declaration of Human Rights, and ratify the Geneva Conventions for humanitarian treatment in war. If you throw in other American-backed initiatives like the World Health Organization, the World Trade Organization, and the World Bank, you pretty much have the entire infrastructure of what we now casually call “the international community.”
Not only did the U.S. play a crucial role in writing the new rules for that community, but it almost immediately began breaking them. After all, despite the rise of the other superpower, the Soviet Union, Washington was by then the world sovereign and so could decide which should be the exceptions to its own rules, particularly to the foundational principle for all this global governance: sovereignty. As it struggled to dominate the hundred new nations that started appearing right after the war, each one invested with an inviolable sovereignty, Washington needed a new means of projecting power beyond conventional diplomacy or military force. As a result, CIA covert operations became its way of intervening within a new world order where you couldn’t or at least shouldn’t intervene openly.
All of the exceptions that really matter spring from America’s decision to join what former spy John Le Carré called that “squalid procession of vain fools, traitors... sadists, and drunkards,” and embrace espionage in a big way after World War II. Until the creation of the CIA in 1947, the United States had been an innocent abroad in the world of intelligence. When General John J. Pershing led two million American troops to Europe during World War I, the U.S. had the only army on either side of the battle lines without an intelligence service. Even though Washington built a substantial security apparatus during that war, it was quickly scaled back by Republican conservatives during the 1920s. For decades, the impulse to cut or constrain such secret agencies remained robustly bipartisan, as when President Harry Truman abolished the CIA’s predecessor, the Office of Strategic Services (OSS), right after World War II or when President Jimmy Carter fired 800 CIA covert operatives after the Vietnam War.
Yet by fits and starts, the covert domain inside the U.S. government has grown stealthily from the early twentieth century to this moment. It began with the formation of the FBI in 1908 and Military Intelligence in 1917. The Central Intelligence Agency followed after World War II along with most of the alphabet agencies that make up the present U.S. Intelligence Community, including the National Security Agency (NSA), the Defense Intelligence Agency (DIA), and last but hardly least, in 2004, the Office of the Director of National Intelligence. Make no mistake: there is a clear correlation between state secrecy and the rule of law -- as one grows, the other surely shrinks.
World Sovereign
America’s irrevocable entry into this covert netherworld came when President Truman deployed his new CIA to contain Soviet subversion in Europe. This was a continent then thick with spies of every stripe: failed fascists, aspirant communists, and everything in between. Introduced to spycraft by its British “cousins,” the CIA soon mastered it in part by establishing sub rosa ties to networks of ex-Nazi spies, Italian fascist operatives, and dozens of continental secret services.
As the world’s new sovereign, Washington used the CIA to enforce its chosen exceptions to the international rule of law, particularly to the core principle of sovereignty. During his two terms, President Dwight Eisenhower authorized 104 covert operations on four continents, focused largely on controlling the many new nations then emerging from centuries of colonialism. Eisenhower’s exceptions included blatant transgressions of national sovereignty such as turning northern Burma into an unwilling springboard for abortive invasions of China, arming regional revolts to partition Indonesia, and overthrowing elected governments in Guatemala and Iran. By the time Eisenhower left office in 1961, covert ops had acquired such a powerful mystique in Washington that President John F. Kennedy would authorize 163 of them in the three years that preceded his assassination.
As a senior CIA official posted to the Near East in the early 1950s put it, the Agency then saw every Muslim leader who was not pro-American as “a target legally authorized by statute for CIA political action.” Applied on a global scale and not just to Muslims, this policy helped produce a distinct “reverse wave” in the global trend towards democracy from 1958 to 1975, as coups -- most of them U.S.-sanctioned -- allowed military men to seize power in more than three-dozen nations, representing a quarter of the world’s sovereign states.
The White House’s “exceptions” also produced a deeply contradictory U.S. attitude toward torture from the early years of the Cold War onward. Publicly, Washington’s opposition to torture was manifest in its advocacy of the U.N. Universal Declaration of Human Rights in 1948 and the Geneva Conventions in 1949. Simultaneously and secretly, however, the CIA began developing ingenious new torture techniques in contravention of those same international conventions. After a decade of mind-control research, the CIA actually codified its new method of psychological torture in a secret instructional handbook, the "KUBARK Counterintelligence Interrogation" manual, which it then disseminated within the U.S. Intelligence Community and to allied security services worldwide.
Much of the torture that became synonymous with the era of authoritarian rule in Asia and Latin America during the 1960s and 1970s seems to have originated in U.S. training programs that provided sophisticated techniques, up-to-date equipment, and moral legitimacy for the practice. From 1962 to 1974, the CIA worked through the Office of Public Safety (OPS), a division of the U.S. Agency for International Development that sent American police advisers to developing nations. Established by President Kennedy in 1962, in just six years OPS grew into a global anti-communist operation with over 400 U.S. police advisers. By 1971, it had trained more than a million policemen in 47 nations, including 85,000 in South Vietnam and 100,000 in Brazil.
Concealed within this larger OPS effort, CIA interrogation training became synonymous with serious human rights abuses, particularly in Iran, the Philippines, South Vietnam, Brazil, and Uruguay. Amnesty International documented widespread torture, usually by local police, in 24 of the 49 nations that had hosted OPS police-training teams. In tracking torturers across the globe, Amnesty seemed to be following the trail of CIA training programs. Significantly, torture began to recede when America again turned resolutely against the practice at the end of the Cold War.
Although the CIA’s authority for assassination, covert intervention, surveillance, and torture was curtailed at the close of the Cold War, the terror attacks of September 2001 sparked an unprecedented expansion in the scale of the intelligence community and a corresponding resurgence in executive exceptions. The War on Terror’s voracious appetite for information produced, in its first decade, what the Washington Post branded a veritable "fourth branch" of the U.S. federal government with 854,000 vetted security officials, 263 security organizations, over 3,000 private and public intelligence agencies, and 33 new security complexes -- all pumping out a total of 50,000 classified intelligence reports annually by 2010.
By that time, one of the newest members of the Intelligence Community, the National Geospatial-Intelligence Agency, already had 16,000 employees, a $5 billion budget, and a massive nearly $2 billion headquarters at Fort Belvoir, Virginia -- all aimed at coordinating the flood of surveillance data pouring in from drones, U-2 spy planes, Google Earth, and orbiting satellites.
According to documents whistleblower Edward Snowden leaked to the Washington Post, the U.S. spent $500 billion on its intelligence agencies in the dozen years after the 9/11 attacks, including annual appropriations in 2012 of $11 billion for the National Security Agency (NSA) and $15 billion for the CIA. If we add the $790 billion expended on the Department of Homeland Security to that $500 billion for overseas intelligence, then Washington had spent nearly $1.3 trillion to build a secret state-within-the-state of absolutely unprecedented size and power.
As this secret state swelled, the world’s sovereign decided that some extraordinary exceptions to civil liberties at home and sovereignty abroad were in order. The most glaring came with the CIA’s now-notorious renewed use of torture on suspected terrorists and its setting up of its own global network of private prisons, or “black sites,” beyond the reach of any court or legal authority. Along with piracy and slavery, the abolition of torture had long been a signature issue when it came to the international rule of law. So strong was this principle that the U.N. General Assembly voted unanimously in 1984 to adopt the Convention Against Torture. When it came to ratifying it, however, Washington dithered on the subject until the end of the Cold War when it finally resumed its advocacy of international justice, participating in the World Conference on Human Rights at Vienna in 1993 and, a year later, ratifying the U.N. Convention Against Torture.
Even then, the sovereign decided to reserve some exceptions for his country alone. Only a year after President Bill Clinton signed the U.N. Convention, CIA agents started snatching terror suspects in the Balkans, some of them Egyptian nationals, and sending them to Cairo, where a torture-friendly autocracy could do whatever it wanted to them in its prisons. Former CIA director George Tenet later testified that, in the years before 9/11, the CIA shipped some 70 individuals to foreign countries without formal extradition -- a process dubbed “extraordinary rendition” that had been explicitly banned under Article 3 of the U.N. Convention.
Right after his public address to a shaken nation on September 11, 2001, President George W. Bush gave his staff wide-ranging secret orders to use torture, adding (in a vernacular version of Schmitt’s dictum),“I don’t care what the international lawyers say, we are going to kick some ass.” In this spirit, the White House authorized the CIA to develop that global matrix of secret prisons, as well as an armada of planes for spiriting kidnapped terror suspects to them, and a network of allies who could help seize those suspects from sovereign states and levitate them into a supranational gulag of eight agency black sites from Thailand to Poland or into the crown jewel of the system, Guantánamo, thus eluding laws and treaties that remained grounded in territorially based concepts of sovereignty.
Once the CIA closed the black sites in 2008-2009, its collaborators in this global gulag began to feel the force of law for their crimes against humanity. Under pressure from the Council of Europe, Poland started an ongoing criminal investigation in 2008 into its security officers who had facilitated the CIA’s secret prison in the country’s northeast. In September 2012, Italy’s supreme court confirmed the convictions of 22 CIA agents for the illegal rendition of Egyptian exile Abu Omar from Milan to Cairo, and ordered a trial for Italy’s military intelligence chief on charges that sentenced him to 10 years in prison.
In 2012, Scotland Yard opened a criminal investigation into MI6 agents who rendered Libyan dissidents to Colonel Gaddafi’s prisons for torture, and two years later the Court of Appeal allowed some of those Libyans to file a civil suit against MI6 for kidnapping and torture.
But not the CIA. Even after the Senate’s 2014 Torture Report documented the Agency’s abusive tortures in painstaking detail, there was no move for either criminal or civil sanctions against those who had ordered torture or those who had carried it out. In a strong editorial on December 21, 2014, the New York Times asked “whether the nation will stand by and allow the perpetrators of torture to have perpetual immunity.” The answer, of course, was yes. Immunity for hirelings is one of the sovereign’s most important exceptions.
As President Bush finished his second term in 2008, an inquiry by the International Commission of Jurists found that the CIA’s mobilization of allied security agencies worldwide had done serious damage to the international rule of law. “The executive… should under no circumstance invoke a situation of crisis to deprive victims of human rights violations… of their… access to justice,” the Commission recommended after documenting the degradation of civil liberties in some 40 countries. “State secrecy and similar restrictions must not impede the right to an effective remedy for human rights violations.”
The Bush years also brought Washington’s most blatant repudiation of the rule of law. Once the newly established International Criminal Court (ICC) convened at The Hague in 2002, the Bush White House “un-signed” or “de-signed” the U.N. agreement creating the court and then mounted a sustained diplomatic effort to immunize U.S. military operations from its writ. This was an extraordinary abdication for the nation that had breathed the concept of an international tribunal into being.
The Sovereign’s Unbounded Domains
While Presidents Eisenhower and Bush decided on exceptions that violated national boundaries and international treaties, President Obama is exercising his exceptional prerogatives in the unbounded domains of aerospace and cyberspace.
Both are new, unregulated realms of military conflict beyond the rubric of international law and Washington believes it can use them as Archimedean levers for global dominion. Just as Britain once ruled from the seas and postwar America exercised its global reach via airpower, so Washington now sees aerospace and cyberspace as special realms for domination in the twenty-first century.
Under Obama, drones have grown from a tactical Band-Aid in Afghanistan into a strategic weapon for the exercise of global power. From 2009 to 2015, the CIA and the U.S. Air Force deployed a drone armada of over 200 Predators and Reapers, launching 413 strikes in Pakistan alone, killing as many as 3,800 people. Every Tuesday inside the White House Situation Room, as the New York Times reported in 2012, President Obama reviews a CIA drone “kill list” and stares at the faces of those who are targeted for possible assassination from the air. He then decides, without any legal procedure, who will live and who will die, even in the case of American citizens. Unlike other world leaders, this sovereign applies the ultimate exception across the Greater Middle East, parts of Africa, and elsewhere if he chooses.
This lethal success is the cutting edge of a top-secret Pentagon project that will, by 2020, deploy a triple-canopy space “shield” from stratosphere to exosphere, patrolled by Global Hawk and X-37B drones armed with agile missiles.
As Washington seeks to police a restless globe from sky and space, the world might well ask: How high is any nation’s sovereignty? After the successive failures of the Paris flight conference of 1910, the Hague Rules of Aerial Warfare of 1923, and Geneva’s Protocol I of 1977 to establish the extent of sovereign airspace or restrain aerial warfare, some puckish Pentagon lawyer might reply: only as high as you can enforce it.
President Obama has also adopted the NSA’s vast surveillance system as a permanent weapon for the exercise of global power. At the broadest level, such surveillance complements Obama’s overall defense strategy, announced in 2012, of cutting conventional forces while preserving U.S. global power through a capacity for “a combined arms campaign across all domains: land, air, maritime, space, and cyberspace.” In addition, it should be no surprise that, having pioneered the war-making possibilities of cyberspace, the president did not hesitate to launch the first cyberwar in history against Iran.
By the end of Obama’s first term, the NSA could sweep up billions of messages worldwide through its agile surveillance architecture. This included hundreds of access points for penetration of the Worldwide Web’s fiber optic cables; ancillary intercepts through special protocols and “backdoor” software flaws; supercomputers to crack the encryption of this digital torrent; and a massive data farm in Bluffdale, Utah, built at a cost of $2 billion to store yottabytes of purloined data.
Even after angry Silicon Valley executives protested that the NSA’s “backdoor” software surveillance threatened their multi-trillion-dollar industry, Obama called the combination of Internet information and supercomputers “a powerful tool.” He insisted that, as “the world’s only superpower,” the United States “cannot unilaterally disarm our intelligence agencies.” In other words, the sovereign cannot sanction any exceptions to his panoply of exceptions.
Revelations from Edward Snowden’s cache of leaked documents in late 2013 indicate that the NSA has conducted surveillance of leaders in some 122 nations worldwide, 35 of them closely, including Brazil’s president Dilma Rousseff, former Mexican president Felipe Calderón, and German Chancellor Angela Merkel. After her forceful protest, Obama agreed to exempt Merkel’s phone from future NSA surveillance, but reserved the right, as he put it, to continue to “gather information about the intentions of governments… around the world.” The sovereign declined to say which world leaders might be exempted from his omniscient gaze.
Can there be any question that, in the decades to come, Washington will continue to violate national sovereignty through old-style covert as well as open interventions, even as it insists on rejecting any international conventions that restrain its use of aerospace or cyberspace for unchecked force projection, anywhere, anytime? Extant laws or conventions that in any way check this power will be violated when the sovereign so decides. These are now the unwritten rules of the road for our planet. They represent the real American exceptionalism.