Transfer of Wealth: US Government Debt and the Decline of the Middle Class

Paul Craig Roberts served as an Assistant Secretary of the Treasury in the Reagan Administration earning fame as a co-founder of Reaganomics.[1] He is a former editor and columnist for the Wall Street Journal, Business Week, and Scripps Howard News Service who has testified before congressional committees on 30 occasions on issues of economic policy. 

Paul Craig Roberts reviewed The Rule of Empires (2010) by Timothy H. Parsons:

Great empires, such as the Roman and British, were extractive. The empires succeeded, because the value of the resources and wealth extracted from conquered lands exceeded the value of conquest and governance. The reason Rome did not extend its empire east into Germany was not the military prowess of Germanic tribes but Rome’s calculation that the cost of conquest exceeded the value of extractable resources.

The Roman empire failed, because Romans exhausted manpower and resources in civil wars fighting amongst themselves for power. The British empire failed, because the British exhausted themselves fighting Germany in two world wars.

In his book, The Rule of Empires (2010), Timothy H. Parsons replaces the myth of the civilizing empire with the truth of the extractive empire. 

Parsons does not examine the American empire, but in his introduction to the book he wonders whether America’s empire is really an empire as the Americans don’t seem to get any extractive benefits from it. After eight years of war and attempted occupation of Iraq, all Washington has for its efforts is several trillion dollars of additional debt and no Iraqi oil. After ten years of trillion dollar struggle against the Taliban in Afghanistan, Washington has nothing to show for it except possibly some part of the drug trade that can be used to fund covert CIA operations.

America’s wars are very expensive. Bush and Obama have doubled the national debt, and the American people have no benefits from it. No riches, no bread and circuses flow to Americans from Washington’s wars. So what is it all about?

The answer is that Washington’s empire extracts resources from the American people for the benefit of the few powerful interest groups that rule America. The military-security complex, Wall Street, agri-business and the Israel Lobby use the government to extract resources from Americans to serve their profits and power. The US Constitution has been extracted in the interests of the Security State, and Americans’ incomes have been redirected to the pockets of the 1 percent. That is how the American Empire functions.

The New Empire is different. It happens without achieving conquest. The American military did not conquer Iraq and has been forced out politically by the puppet government that Washington established. There is no victory in Afghanistan, and after a decade the American military does not control the country.

In the New Empire success at war no longer matters. The extraction takes place by being at war. Huge sums of American taxpayers’ money have flowed into the American armaments industries and huge amounts of power into Homeland Security. The American empire works by stripping Americans of wealth and liberty.

This is why the wars cannot end, or if one does end another starts. Remember when Obama came into office and was asked what the US mission was in Afghanistan? He replied that he did not know what the mission was and that the mission needed to be defined.

Obama never defined the mission. He renewed the Afghan war without telling us its purpose. Obama cannot tell Americans that the purpose of the war is to build the power and profit of the military/security complex at the expense of American citizens.

The bottom line: In this corrupt empire, wealth is transferred from the US Treasury to the powerful companies that benefit from war. When the unsustainable debt from multiple wars and generous social programs forces a solvency crisis, what will happen? Perhaps Italy and Spain will provide a preview.

The American way of life that we see in TV commercials will soon cost too much for most middle class incomes. Unless the political process reforms itself and energy costs decline in hard-to-fathom ways, America will be humbled — from within. The parasites will kill the host.

US Government Spending and Budget Cuts: We Are Getting Fooled Again

Here is why S&P downgraded the US credit rating.

• U.S. Tax revenue: $2,170,000,000,000 
• Fed budget: $3,820,000,000,000 
• New debt: $ 1,650,000,000,000 
• National debt: $14,271,000,000,000 
• Recent budget cut: $ 38,500,000,000

Now let’s remove 8 zeros and pretend it’s a household budget.

• Annual family income: $21,700 
• Money the family spent: $38,200 
• New debt on the credit card: $16,500 
• Outstanding balance on the credit card: $142,710 
• Total budget cuts: $385

Source: http://www.jsmineset.com/2011/09/04/jims-mailbox-770/

via Jeff Taylor

Greed Personified

We buy our electricity from a electricity cooperative, Cobb EMC. Its mission is to buy and deliver electricity for its members at the lowest price. 

Several years ago we noticed that our power costs were rising painfully. Cobb EMC had apparently delegated most of its services to Cobb Energy, a private corporation that was run by the CEO and directors of Cobb EMC — except they didn't have to follow the governing bylaws of Cobb EMC. The salaries and benefits of the top executives and board of directors had increased greatly. Cobb Energy was making so much money that it built a huge entertainment complex "for the community."

Dwight Brown, indicted CEO of Cobb EMC

About two years ago some concerned Cobb EMC members brought charges against the Cobb Energy management for fraud. On July 8, 2011, I read the following in the Cherokee Tribune, a local newspaper "Former Cobb EMC head indicted again".

A unanimous Cobb County grand jury indicted retired Cobb EMC head Dwight T. Brown on 35 felony criminal counts Thursday. Ironically, the indictments were read in open court before Superior Court Judge Robert Flournoy III, who in March threw out a previous criminal indictment against Brown. 

The 89-page indictment accuses Brown of a pattern of racketeering activity dating to 1997, when he, "together with directors of Cobb EMC … devised and intended to devise a scheme to acquire and maintain interests in Cobb Energy, consisting of preferred and common stock, control of Cobb EMC and Cobb Energy, and personal property, including United States currency."

But Brown is also now facing charges he threatened and intimidated witnesses by participating in filing a civil suit in February, following his Jan. 6 indictment, against people "who allegedly cooperated with the prosecution with regard to the prosecution of Dwight T. Brown and the investigation of Cobb EMC directors." Brown and the other plaintiffs quickly dropped that lawsuit.

The indictment also lays out multiple charges of theft involving SCANA Energy fees, and making false statements and writings for each year between 1998 and 2007; conspiracy to defraud Cobb County government and the Cobb County School District; theft involving meter-reading fees; theft involving $3 million in loans Brown and his wife used to buy stock in Cobb Energy; and theft of dividends paid on that Cobb Energy stock. 

As much as I find Dwight Brown and his cronies despicable, I feel some satisfaction that the legal system has charged him for his behavior. Now, if we just see some convictions with appropriate penalties and jail sentences, I will have regained some confidence in our system of justice that promises "fairness for all." 

Note: Dwight Brown's attorney is Roy Barnes, a former governor of Georgia.

Are Big Banks Above the Law?

  Why do we find out about this from a foreign news source?

On 10 April 2006, a DC-9 jet landed in the port city of Ciudad del Carmen, on the Gulf of Mexico, as the sun was setting. Mexican soldiers, waiting to intercept it, found 128 cases packed with 5.7 tons of cocaine, valued at $100m. But something else – more important and far-reaching – was discovered in the paper trail behind the purchase of the plane by the Sinaloa narco-trafficking cartel.

During a 22-month investigation by agents from the US Drug Enforcement Administration, the Internal Revenue Service and others, it emerged that the cocaine smugglers had bought the plane with money they had laundered through one of the biggest banks in the United States: Wachovia, now part of the giant Wells Fargo.

The authorities uncovered billions of dollars in wire transfers, traveller's cheques and cash shipments through Mexican exchanges into Wachovia accounts. Wachovia was put under immediate investigation for failing to maintain an effective anti-money laundering programme. Of special significance was that the period concerned began in 2004, which coincided with the first escalation of violence along the US-Mexico border that ignited the current drugs war.

Criminal proceedings were brought against Wachovia, though not against any individual, but the case never came to court. In March 2010, Wachovia settled the biggest action brought under the US bank secrecy act, through the US district court in Miami. Now that the year's "deferred prosecution" has expired, the bank is in effect in the clear. It paid federal authorities $110m in forfeiture, for allowing transactions later proved to be connected to drug smuggling, and incurred a $50m fine for failing to monitor cash used to ship 22 tons of cocaine.

More shocking, and more important, the bank was sanctioned for failing to apply the proper anti-laundering strictures to the transfer of $378.4bn – a sum equivalent to one-third of Mexico's gross national product – into dollar accounts from so-called casas de cambio (CDCs) in Mexico, currency exchange houses with which the bank did business.

"Wachovia's blatant disregard for our banking laws gave international cocaine cartels a virtual carte blanche to finance their operations," said Jeffrey Sloman, the federal prosecutor. Yet the total fine was less than 2% of the bank's $12.3bn profit for 2009. On 24 March 2010, Wells Fargo stock traded at $30.86 – up 1% on the week of the court settlement.

The conclusion to the case was only the tip of an iceberg, demonstrating the role of the "legal" banking sector in swilling hundreds of billions of dollars – the blood money from the murderous drug trade in Mexico and other places in the world – around their global operations, now bailed out by the taxpayer.

Link: How a big US bank laundered billions from Mexico's murderous drug gangs 

Even in a time when it is easy to be cynical, some revelations still surprise me.

Texas, PIIGS, Debt, and Bailouts

Background

The governments of Portugal, Italy, Ireland, Greece, and Spain (PIIGS) have borrowed and spent far more money than they can ever pay back.

In the United States, Texas is known for its independent attitude. The governments of California, Illinois, and New York  have borrowed and spent more money than they can pay back.

From John Mauldin:

My grandfather was born in West Texas in 1859 (not a typo). His uncle (a Kelly and Irish) was a charter member of the Texas Rangers, which was formed around 1836. When the mayor of Waco telegraphed the Rangers in the 1870s that there was a riot in town and to please send the Rangers, he got a telegram back saying they would be there on the noon train. The mayor met the train and was dismayed to see that only one Ranger got off. When asked why he didn’t have more men with him, the Ranger supposedly replied, “There’s only one riot, isn’t there?” That became the motto of the Rangers: “One riot, one Ranger.” These were the toughest SOBs in a tough state. And the uncle was Irish to boot.

Texas started out as a republic and was independent for nine years. The treaty that made us a state allows us to either split into five states (wouldn’t that change the balance in the Senate?) or to leave the union, at our choice.

I was once in a hotel bar (a shock, I know) somewhere in Africa and was asked where I was from. “Texas,” I replied. “Interesting,” came back the response; “Whenever I meet someone from America they always say they are from the US or America. Except when they are from Texas. Then they are always from Texas.” Yep. Texas is a state of mind, and those who come here eventually adopt the state as their own. Just seems to happen.

Now, a thought game. What would happen if California and Illinois and New York came to Texas and said, “We think your taxes should double so that we can finance our debt, and please buy even more of our debt next year to pay for our unfunded pensions. Oh, and while you are doing that the Fed is going to print massive amounts of dollars (far, far more than they are now) and destroy the value of the dollar, so your Texas pensions will be worthless.

My guess is that my fellow Texans would look around and decide which Ranger to set on these guys, and make it clear that this was not the ride we had signed on for, and dust off that old treaty and work out an exit strategy.

Understand, in the runup to the recent election our sitting governor talked about secession. I was been in meetings with Very Serious Texas Politicians where secession was earnestly discussed 15 years ago – maybe over some whiskey, but with the conclusion that Texas might be better off without the crushing debt that was coming down the pike.

Do I think that could happen? No. The Fed will never choose hyperinflation, and I do not think you can find 60 Senators to decide that bailing out the states that let their own spending and taxes get out of control would be acceptable with their voters. Further, even though I am a very proud Texan, after 9/11 it was not the Texas flag that brought a tear to my eye, it was the Stars and Stripes. It would have to take a series of massively stupid decisions to bring Texas to the place where it would even remotely consider leaving the union.

Now consider, if I have some pride in being Texan, with less than 200 years of history, proud as it is, what is it like to be Greek or Irish or French or German or any of the European mix? What deep cultural roots must they have? Nearly every country at one point was on top of the heap, and all have rich heritages. There is history around every corner in Europe. Except a history of unity.

If you ask a European in that African bar where he is from, does he say Europe? No, he is from a country. (Unless he is Basque. Or Catalonian. Or Welsh.) One is not from Great Britain but from one of the divers components of the UK. And a large number of Scots want out. Could Belgium split apart? Possibly.

But essentially, what the eurozone is asking Germany (and the Dutch and the rest of “core” Europe) to do is bail out Greece and perhaps much of the rest of the periphery, and to assume massive deficits and rising taxes. Because for there to be enough money for the deficit nations to borrow cheaply, there must be an AAA rating and a 30% cash-to-loan deposit, as I understand it. Spain or Ireland may try and borrow their share of the bailout fund (such irony), but they do not get that AAA rating. For all intents and purposes, it is on the back of Germany and, to some extent, France.

Will German taxpayers go along with that? Will France?

Will the Germans still finance the Greeks in 2013 when they have not whittled down their deficit and the Greeks still want to retire at 50 on full pensions? Will the Irish decide that it is in their best interests to take on massive debt so that French and German and UK banks are paid back? Can the solution to a debt problem be more debt?

Will Texas singlehandedly bail out California so their prison guards can continue to make $100,000 a year? Tough questions.

 

The Food Lobby Provides Dietary Advice

BusinessWeek summarizes how food and drink companies responded to a federal advisory panel's recommendations on new dietary guidelines.

Perhaps we don't need to watch our diet with medical insurance for everyone guaranteed by the government. By the way, who pays those premiums?

Link: BusinessWeek Magazine

Salt Institute
A recommendation to limit sodium to 1,500 mg a day would make Americans eat more "to satisfy their sodium appetite and their hunger for taste satisfaction."

American Meat Institute
Advising consumers to eat "moderate" amounts of meat and poultry may result in nutritional deficiencies.

American Beverage Assn.
Telling Americans to avoid sugar-sweetened beverages "overstates the role" of these drinks "in the rising rates of obesity in America."

The Sugar Assn.
Says "no causal link can be established between the intake of sugars and lifestyle diseases, including obesity."

National Confectioners Assn.
Says federal agencies need "to pursue guidelines that are realistic and accommodate all foods, including occasional treats in moderation."

International Dairy Foods Assn.
Agrees low-fat dairy products are healthier but is pushing for "moderate amounts of added sugar" to "help increase the palatability" of dairy foods.

Where Have All the Jobs Gone?

Charles Hugh Smith at OfTwoMinds.com describes why so many jobs have migrated to China and Asia. Sad but true.

Several of my informed friends say that a few corporations are moving jobs back to the US. Let's hope it is a trend.

The key dynamic to understanding trade with China is U.S. corporate profits. In broad brush, what happened was simple: U.S. global corporations had run out of profitable places to invest their capital in their home domestic market of the U.S. The technology boom had been underway since the early 1980s, and much of the low-hanging fruit of improved productivity had already been reaped.

In the big picture, the U.S. market was "mature"–everybody already had everything, and the only gains to be had were marginal, shaved off at the expense of competitors. So the marketers conjured up a new line of toothpaste and various gimmicks were added to vehicles, but growth in the U.S. was modest, as befits a mature consumer economy.

So how could corporations increase profits? By slashing production costs. If you can't sell 30% more every year, then how do you make 30% more profits? By cutting your production costs by 30%.

How do you do that? By moving production overseas, mostly to China. … profits for the companies in China which make the goods for Corporate America are slim–from 1% to 3%. The big profits flow not to China-based companies, but to the foreign firms which own the production facilities and sell the goods in advanced economies.

This is the fundamental dynamic of trade with China–it has enabled an explosion in U.S. corporate profits to unprecedented heights. If you think about it, it is absolutely staggering that 10% of the entire U.S. GDP ($13.5 trillion) is corporate profits.

The full story of the decline of manufacturing and industry in the U.S. is not complete without looking at the dominance of finance.The U.S. economy has been effectivelyfinancialized, meaning that Financial Elites have come to completely overshadow industry and manufacturing.

Financialization of the U.S. economy and the exploitation of trade with China are deeply related. Domestic industrial capitalism ran into the limits of overcapacity and saturated markets; additional capital investments reaped marginal gains in profits.

The "answer" was to financialize the U.S. economy with vast increases in credit, debt and leverage, enabling a hyper-consumerist economy built on a pyramid of debt and leverage. Industrial Capitalism shifted capital and production overseas for a "two-fer"–to skim unprecedented profits from lowering production costs and by expanding into newly opened economies in China, India and elsewhere.

Simply put: Finance took over America, and Industrial Capital moved overseas. Both profited immensely, and China gained an industrial sector paid for by overseas capital and 200 million jobs for its restive, ambitious populace.

Link: Trade and "Trade War" with China: Who Benefits?

Using Energy Policy to Reduce the Deficit and Fix the Infrastructure

John Mauldin at Thoughts from the Frontline describes a plan to reduce oil imports and the budget deficit while repairing our aging infrastructure.

The mood in the country, if not in Washington (at least before the elections last November), is that the deficit needs to be brought down. And consumers are clearly increasing savings and cutting back on debt. But those accounts must balance. If we want to reduce the deficits AND reduce our personal debt, we must then find a way to reduce the trade deficit, which is running about $500 billion a year as we write, or about $1 trillion less than the deficit.

If the US is going to really attempt to balance the budget over time, reduce our personal leverage, and save more, then we have to address the glaring fact that we import $300 billion in oil (give or take, depending on the price of oil).

This can only partially be done by offshore drilling. The real key is to reduce the need for oil. Nuclear power, renewables, and a shift to electric cars will be most helpful. Let us suggest something a little more radical. When the price of oil approached $4 a few years ago, Americans changed their driving and car-buying habits.

Perhaps we need to see the price of oil rise. What if we increased the price of oil with an increase in gas taxes by 2 cents a gallon each and every month until the demand for oil dropped to the point where we did not need foreign oil? If we had European gas-mileage standards, that would be the case now.

And take that 2 cents a month and dedicate it to fixing our infrastructure, which is badly in need of repair. In fact, the US Infrastructure Report Card (www.infrastructurereportcard.org), by the American Society of Civil Engineers, which grades the US on a variety of factors (the link has a very informative short video), gave our infrastructure the following grades in 2009: Aviation (D), Bridges (C), Dams (D), Drinking Water (D-), Energy (D+), Hazardous Waste (D), Inland Waterways (D-), Levees (D-), Public Parks and Recreation (C-), Rail (C-), Roads (D-), Schools (D), Solid Waste (C+), Transit (D), and Wastewater (D-).

Overall, America's Infrastructure GPA was graded a "D." To get to an "A" would requires a 5-year infrastructure investment of 2.2 trillion dollars.

That infrastructure has to be paid for. And we need to buy less oil. And we know price makes a difference. The majority of that 2 cents would need to stay in the states where it was taxed, and forbidden to be used on anything other than infrastructure.

(And while we are at it, why not build 50 thorium nuclear plants now? No fissionable material, no waste-storage problem, and an unlimited supply (at least for the next 1,000 years) of thorium in the US. The reason we chose uranium was to be able to produce nuclear bombs, among other reasons.) We'll get into this and more when we get to the chapter on the way back for the US.

Mauldin likes thorium nuclear plants. In my opinion, traditional nuclear energy has several problems that are often overlooked: expensive technology, radioactive wastes, scarce fuel imported from other countries, massive water requirements, obvious terrorist target, centralized control, etc.

How many of these shortcomings do thorium nuclear plants overcome?

 

Is Our Economic Leadership Lost in History?

The excerpt below is from Frederick Sheehan, the author of Panderer for Power: The True Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession.

Philosopher George Santayana wrote: “It is a marvel that mathematics should apply so well to the material world, [but] to apply it to history or ideas is pure madness.”

Today, the Federal Reserve Board is monopolized by mad professors. This is simple to understand, and impossible to ignore, by any non-economist who reads their ravings. However, it seems that the hypnotic spell under which Americans revere academic credentials blinds the public to the utter incapacity of the Federal Reserve Board of Governors to accomplish any activity beyond finding the men’s room.

Bernanke acquired his degree in post-graduate economic studies by spouting a single idea that mimicked his professors’ obsession: the Great Depression would have evaporated by 1931 if the Fed had printed more money in 1930. Having put this half-baked theory into practice, both Bernanke and his comrades have received an “F.” Despite his failure, Simple Ben has never deviated from the doctoral thesis, and, he never will. The senile professors who rule the academic community see no reason for him to do so.

…by the time Bernanke is through plundering the middle class of its savings and investments – a staple tactic of desiccated ruling classes since the beginning of time – Sherman will be a footnote in history of American destruction.

via Barry Ritholtz at The Big Picture

Parallels Between the Financial Crisis and the Gulf Oil Spill

Charles Hugh Smith describes the similarities between the financial crisis and the gulf oil spill. Hubris, Incompetence, Corruption, and Denial combined to create a disaster.

How many more can we endure?

Link: Of Two Minds

1. The extreme levels of inherent risk in each system were downplayed/misunderstood by those responsible for their management.

2. The unprecedented risk intrinsic to each system was masked by facsimiles of regulation and specialized expertise.

3. The initial warning signs were dismissed, downplayed or ignored.

4. Each system was on the outer edge of human engineering (mechanical and financial) but was treated by regulators and managers as entirely standard.

5. Once the system collapsed, nobody knew how to fix it.

6. As the full extent of the damage became apparent, those responsible sought to mask the true extent of the damage.

7. The mainstream media and elected officials unskeptically accepted prevarications, mis-statements, misinformation and manufactured facades as representations of the truth.

8. As the true extent of the damage, distortion/manipulation and failure of responsible authorities became undeniable, public confidence in government, regulatory agencies and the market irrevocably eroded.