Stasiland – U.S.A.?

Stasiland – U.S.A.?

Freedom is indivisible, and when one man is enslaved, all are not free.  When all are free, then we can look forward to that day when this city will be joined as one and this country and this great continent of Europe in a peaceful and hopeful globe.  When that day finally comes, as it will, the people of West Berlin can take sober satisfaction in the fact that they were in the front lines for almost two decades.

-       President John F. Kennedy, Ich bin ein Berliner Speech, June 26^th 1963

“I think at the end the Stasi had so much information… that they thought everyone was the enemy, because everyone was under observation.  I don’t think they (the Stasi) knew who was for them, or against, or whether everyone was just shutting up.  When I find a file where they’ve been watching a family in their living room for twenty years I ask myself: What sort of people are they who want this knowledge for themselves?”

-       Author, Anna Funder, Stasiland, Stories from Behind the Berlin Wall, Copyright 2003

By J.M. Hamilton 10-16-2015

In February of this year, JMH explored whether or not the U.S. actually runs a command economy, or exhibits the characteristics of a centrally planned economy; today, we visit a not entirely dissimilar issue, often associated with authoritarian or totalitarian regimes, and that is whether or not the U.S. runs a police or surveillance state?  Moreover, if the U.S. is running a surveillance state, who are the beneficiaries and to what end?  And finally, is the U.S. marching down the road toward an authoritarian or totalitarian state model?

Exiting through London’s Imperial War Museums’ gift shop this summer, I ran into the book, Stasiland.  The book was placed just above eye level on the shelf, and being a history freak, I bought it immediately.  Stasiland was researched and written by Anna Funder, an Australian, starting in the mid-nineties and through the very early aughts.  Stasiland addresses topics – taken largely from firsthand accounts and interviews - about German citizens, who suffered under East Germany’s totalitarian regime; the men who made up the German police state, or Stasi; and the Berlin Wall.  Encountering this book was timely and I highly recommend it, as Germany celebrates the 25th anniversary of its reunification this month, and last November was the fall of the Berlin Wall’s 25^th anniversary. 

These are seminal events not only in Germany’s history, but w/in the history of Western democracy as well.  Moreover, there is a great deal the U.S. and our citizens can learn from the German Democratic Republic’s (GDR) police state, as we shall soon see.

First a quick overview and some history.  Ms. Funder’s timing for writing the book was impeccable, as even by the mid-nineties, the Berlin Wall was rapidly disappearing, and for some Germans, perhaps intentionally or unintentionally, memory of the Wall and East Germany were already beginning to fade.  That’s not to say, that there weren’t, or are to this very day, some former East Germans engaged in Ostalgie, or nostalgia for the former GDR. 

For the majority of Western democracies’ citizens, Berlin represented the focal point of the Cold War that dominated international relations and foreign policy, post WWII, all the way through the very early 90s, when the Soviet empire and its satellites (including East Germany) crumbled and collapsed. 

The backstory: During the Cold War (a war waged between Western democracies, and the Eastern Soviet Union and its Communist satellites), Berlin was severed in two by a physical barrier, The Wall.  Berlin, the historic capitol of Germany, was situated in East Germany.  So the world saw this Western enclave of democracy, West Berlin, situated inside the Communist Bloc.  The former German Capitol, along with the German state, were divided up by the Allied Powers, Post- WWII, into zones of influence and control: American, British, French, and Soviet/Russian.  The Berlin Wall ran up against the Reichstag building, or German parliament building, which during the Cold War was no longer operational. 

Fearing that Western Europe - largely in ruins Post WWII -would fall to communism, the Marshall Plan was introduced by America, which provided aid and financing for Western Europe’s rebuilding.  When the Soviets attempted a Berlin power grab in 1948, essentially cutting off/blockading West Berlin from food and medicine by rail and truck, the Berlin Air Lift was authorized by the Truman administration.  The Air Lift transported tons of food, fuel and medicine into Western Berlin by plane on a daily basis for over a year.  As such, West Berlin became a symbol of Western Democracies’ defiance against communism and totalitarian tyranny.  In 1949, the Soviets lifted the blockade, and the supplies to Western Berlin resumed being transported into the city by rail.  (Prior to this crisis, in 1946, Winston Churchill gave his famous Iron Curtain speech, in of all places - Fulton, MO, warning of these events and the Cold War to come.)

Throughout the Cold War, Berlin, and the Berlin Wall, became a symbolic backdrop for Presidents Kennedy and Reagan, who both gave historic speeches in front of the Wall – to rapturous applause by West Berlin’s citizens.  Both President’s speeches extolled the virtues of freedom and democracy against the evils of communism and the tyranny of the totalitarian state.  The Wall’s construction began in 1961 by the East German regime to keep East German citizens from fleeing to the West, and came down shortly after President Reagan left office with communism’s demise.  As mentioned, the two Germanys, East and West, were formally reunited on November 9^th, 1990.  Ms. Funder's book takes us on a nightmarish journey into the Orwellian police state of East Germany.

Among the key characteristics of the East German state, outlined in Stasiland, were the following:

1.   The state had, and would exert, hegemonic control over nearly every aspect of an East German citizen’s life, from the cradle to the grave:  religious, educational, sports, political, and career, etc.  This power was exerted arbitrarily and capriciously.

2.   If a GDR citizen attempted to escape over the Wall, the escapee could be shot and killed, or if they survived and caught, many were often sent to prison.

3.   If an East German citizen associated with the wrong element, say a foreigner from the West, said citizen could be placed under surveillance and blacklisted, so that educational and career opportunities dried up and vanished.

4.   Citizens were often coerced by the state into informing upon family members, fellow employees, or fellow church congregants.  Stasi officials would often laugh at the number of protestors at a rally, knowing full well that the number informants at the rally actually swelled protestor numbers.

5.   Many of the GDR’s informants weren’t paid or even given special privileges.  East Germans often informed upon one another for purposes of payback, retribution, and for a sense of power.

6.   While many of the East Germans interviewed noted the insidious nature of mass surveillance, they also noted the tremendous sense of inequality, once capitalism and democracy triumphed over communism and totalitarian rule.   Both systems present their own problems, some former GDR citizens commented.

7.   Without due process, an East German could be held in detention and tortured, indefinitely, and worse, murdered. The Stasi, or East German security and surveillance force, held absolute control over the GDR’s civilian population, and was also charged with foreign espionage and covert operations (basically, the equivalent to MI5 and MI6, or the CIA and FBI, rolled into one).

8.   If someone is investigated by the Stasi, the individual is automatically assumed to be an enemy of the state.

9.   Dossiers on many GDR citizens were maintained by the Stasi, and many of these files were burned or shredded shortly before the Wall came down.  Hundreds of thousands of files have been reassembled, and the German public can view their own files.

10. Many of the Stasi men, when the Wall fell, found work in the West in insurance, marketing, and real estate; and the Stasi generally suffered lower rates of unemployment than their fellow GDR citizens, post-reunification.  The rank and file Stasi, largely, were not prosecuted.  Russian leader Putin spent some time in East Germany, during his KGB career, and witnessed the GDR’s collapse.

11.                 If one wanted to get ahead in the GDR, you were expected to be a party member.  Lip service was paid to democracy, and alternative political parties were established in name only, but there was only one East German ruling party.

12.                 The state often used blackmail and extortion to encourage citizens to inform; and family members and children would be used as leverage and pawns by the state to coerce citizens into informing upon others.

13.                 The East German state controlled broadcasting, and the news, except that which was beamed in from the West.

14.                 At the end of the day, the motivation of the Stasi, first and foremost, was to protect the state and the state’s elite, and GDR citizens were essentially slaves to the state.  Therefore, it could be said, the Stasi often considered its citizens to be active, or prospective, enemies of the state.

 

Reading deeper into Stasiland, what one increasingly becomes aware of is how many parallels there are between the policies and government operations of Western democracies today, and the policies of hegemonic control exercised in the former Soviet Union, the Eastern Bloc countries, and in particular the GDR.  To be sure, the U.S. is not a totalitarian regime, and Americans still enjoy a great many freedoms; but these freedoms – particularly privacy – and the expectation of some economic security (aka The American Dream) are rapidly eroding.  Indeed, some of the U.S. military and intelligence institutions presently in place, as well as, some of our policies on mass incarceration and internet surveillance, would suggest that America is on a slippery slope, if not toppling into becoming an authoritarian regime.  Factor in the very real possibility that the U.S. arguable operates, to some degree, a command economy (written about earlier this year), and how SCOTUS – through campaign finance law – allows an elite ruling cadre (aka the oligarchy) unmitigated access and control over the Congress and yes, even POTUS, and one might conclude that some of the parallels between the U.S. and GDR are frightening and cause for serious concern.

Consider the following:

1.   The U.S. has a ruling elite that holds a disproportionate amount of wealth, which has been well documented by the fourth estate.  The Wall Street banks, alone, hold assets worth approximately 65% of GDP.  While wages remain stagnant in the U.S., approximately 95% of all new income earned has gone to the 1%. 

2.   Thanks to SCOTUS, the Citizens United ruling, and current campaign finance laws - to say that our State and Federal officeholders are owned is no exaggeration.  In short, the plutocracy owns the state, and many elected officeholders owe their positions in the government to their patrons, the ownership class.  It is the rare politician who can, and does, finance their own campaign.

3.   The plutocracy not only owns federal and state government, but thanks to privatization, it operates and fills as much as 70% of the positions and staff within the U.S. surveillance or intelligence services.  No wonder the GOP is never quite successful in rolling back Big Brother….. I mean Big Government.  The reason: Corporate America is Big Government; and Corporate America owns the GOP.

4.   Thanks to Snowden’s revelations, and before him author James Bamford’s books and research on the NSA, we all know that the United States and her citizens are under mass surveillance, often with the full knowledge and cooperation of some of America’s largest internet, tech, and telecommunications providers. 

5.   This panopticon of surveillance is multi-layered with multiple points of egress, has the support of a secret U.S. court and both political parties, and enjoys several ambiguous laws and court rulings that further its interests and ability to spy.  This surveillance is pervasive and due to electronic records, and the internet, has the capability to hack every aspect of a U.S. citizen’s life: tax records; travel locations – time and place - thanks to GPS; checking account and credit card transactions; on line medical records; and you’re internet profile and communications.  In essence, the Stasi’s dream and a civil libertarian’s nightmare.

6.   As with the GDR, the primary motivation of the NSA, and the various intelligence and defense services, is to protect the state, and in the U.S. this would obviously include the elite, who own and operate same.  And like the citizens of the GDR, arguably, U.S. citizens are interchangeable cogs in the machine.  Moreover, in the U.S., civil rights, especially the right to privacy, are under assault and steady erosion.  There are some jurist on the far right, who have argued that the Constitution affords no right to privacy, whatsoever.  Know this too, the surveillance state's lust for power is insatiable.

7.   Before tackling the economic and political similarities, it’s important to talk about the DOD, which – like the intelligence services - has a near pathological history of lying to the country about U.S. motives and reasons for war.  The DOD, or MIC (yes, the institution Republican President Eisenhower warned us against), has become a profit center for at least seven of the ten largest government contractors.  Which means there’s a perverse incentive for putting the lives of the men and women who serve on the line and going to war: It’s called the profit motive. 

8.   To keep up public support for the war machine and the private contractors who own and operate the DOD, the corporate run news media, arguably, runs fear campaigns to keep the American public on edge and in support of a never ending war effort.  Going back to Shakespeare’s play Henry IV, foreign entanglements have been a means to distract the public from domestic and economic problems, and some wonder why the U.S. has been at war in the Middle East, continuously, for over a decade with no end in sight.

9.   Arguably, the elite are not only waging political warfare against U.S. citizens, but economic warfare as well.   We can see this in secretive free trade agreements, where free speech and the right to be heard in a court of law are under assault.

10.                 The elite, just like a totalitarian regime, fear democracy and they fear the vagaries of courts and due process even more.  That’s why, through free trade agreements, they have set up extra-judicial bodies (ISDS) that allow them to sue foreign governments, who threaten through regulation monopolistic profits. In essence, the plutocracy has established its own commercial courts and tribunals, under various free trade agreements and pending free trade proposals (TPP and TTIP), which are a direct threat to the rights of man and popular sovereignty.

11.                 Thanks to free trade agreements (aka corporate trade agreements), which have become little more than corporate welfare codified, globalization has strangled what little economic security ordinary Americans may have possessed.  U.S. citizens - with little or no education - find themselves competing with the sweat shops of S.E. Asia, whose workers are often paid as little as 60 cents an hour.  Thanks to globalization and corporate trade agreements (e.g. TPP and TTIP), it is an employer’s market for labor, and wages have stagnated and wealth inequality has escalated to form a Neo-gilded Age.  Throw in regressive tax policies, advocated and enacted by the minions of the plutocracy, plus monopolistic taxation upon the citizenry, and the U.S. middle class and the poor are under economic and political siege, as never before by the ruling plutocracy.  Feel the crushing weight of a totalitarian state, yet?

12.                 While America may not lack for a vast cornucopia of inexpensive products – dumped upon our fair shores by multinationals exploiting third-world and child labor – the U.S. does suffer from a lack of jobs, opportunity, and wage stagnation.  This is yet another means of economic and political oppression carried out by the plutocracy against the American public.

13.                 Another means to exert economic control over U.S. citizens, and an alternative means to control the number of jobs and wages, is via business combination.  The U.S. has seen a record number of mergers and acquisition (M&A) in 2015 (thank you very much Federal Reserve), and M&A fuels monopolies and cartels.  Monopolies and cartels are known for issuing pinks slips to control costs and pay down debt often utilized for financial engineering.  The resulting cartel or monopoly can easily set the prevailing wage rates for that particular industry’s labor pool.  This maybe done through collusion, direct or indirect (e.g. looking at a competitors job posting site and the wages established for a certain class or type of employee); or in the case of a monopoly, the business utilizes monopsony powers to set wages.  It’s just another means of economic control, not unlike what one might see in a totalitarian state. And just like a totalitarian state, the ordinary employee has limited negotiating power, and particularly if one’s labor skills revolve around a monopoly controlled industry, a skilled employee may find themselves with little wage and benefit negotiating power.

14.                 As within the former Communist Bloc, the U.S. means of production for a market – ownership and control - are often organized under a single ruling body.  In the GDR, this would have been the elite cadres that run the state; and in American, it’s the plutocratic elite, who also own and operate the state.  In both scenarios, Crony Capitalism and Communism, the means of production is often formed around a cartel or monopoly.  As this blog has stated many times, monopoly is little more than socialism by private proxy, with all the incumbent inefficiencies of scale that we have come to expect and have witnessed.

15.                 While the U.S. government does not own the press, the plutocracy does; and the plutocracy’s message is heard loud and clear on a daily basis.  Factor in dumbed down content, the consolidation of news outlets, and the gradual elimination of the long form of journalism, and this spells trouble for U.S. democracy and an educated electorate.

16.                 The U.S. prison system is yet another means of control, both economic and political.  And while the U.S. prison system is no Soviet Gulag, the U.S. does suffer the highest incarceration rates in the world, all too often for victimless crimes such as drug possession.  And what is the outcome?  A class of citizens – prisoners - who are disenfranchised, and often are a means of slave labor, during and post incarceration.  Try getting job with a felony record, particularly in a sub-par economy, and we’d all come to quickly understand how the prison, and parolee, population is a pool of slave labor.  Minorities suffer disproportionately from present laws, and enforcement of those laws, and these laws are executed in an arbitrary and capricious manner.  Do my readers believe for an instant, all of this is by coincidence?  Blacks and other minorities tend to vote for politicians that are antithetical to the interests of the Billionaire class.

17.                 Toss in a black site or a covert incarceration site in Chicago, and what do we have?

18.                 Witness too, the militarization of our state and local police force, basically establishing local armies in our communities across the nation, with fire power grossly disproportionate to any threat, real or imagined.  And speaking of threats, while the hallmark of a totalitarian regime is to play up the external threat, we’ve seen that the U.S. too, likes to play up the external threat, but that the real threat – the threat to public safety - is from within.  As documented by The Guardian there have been over a 1,000 mass shootings within our borders, since the Sandy Hook Elementary massacre.  But apparently, the fact that the U.S. spends more money on defense, surveillance, intelligence, and the police state, than the G-20 combined, buys the average U.S. citizen little or no relief from the prospect of being gunned down in our own communities by our fellow Americans. 

19.                 In fact, black citizens and minorities are more likely to be the victims of police violence, than white citizens.  The number of police killings this year now exceeds 900.  The number of jihadi attacks on U.S. soil this year?  Zero.

20.                 The surveillance state isn’t limited to the U.S. government, however.  There’s a very good chance that your employer is swapping information with the government.  As recently as 2013, Bloomberg reported that thousands of U.S. companies were swapping intelligence with the surveillance state.  Now, when one is working, we expect to be monitored, as we are being paid for our time; but when we are off the clock, what business is it of anybody, our employer or our government, how we choose to lead our lives?  That’s where the right to privacy comes in.  If a citizen has done something wrong than the police, or prosecuting attorney, should be forced to obtain a warrant, and judging by the history of our courts, warrants are easy enough to come by.

21.                 Children being used as pawns in the GDR, well they are used as pawns in – unconstitutional - family law courts all across America; only the extortion is often paid to U.S. family court judges, crony lawyers, and members of the family law industrial complex, such as psychologist and therapist.

22.                 A key characteristic of a surveillance state is the secrecy it hides behind, where nothing is transparent and everything is “classified.”  As was the case in the GDR, once the mask falls, the totalitarian state cannot stand public scrutiny.  It may take years, or even decades, but the totalitarian state ultimately collapses under the weight of its own lies.  China should take note.

I could go on and on…. With parallels between the GDR’s police state/totalitarian regime and our own U.S. government and economy.  Please note too, these examples aren’t the ravings of a paranoid mind, but rather, I’m merely quoting our own mainstream news media.  Please, do yourself and your children a favor, and read some of the articles highlighted in blue, above.

It’s a lot to digest.  The examples above on a one-off basis, admittedly, aren't overly concerning (particularly when we – as loyal U.S. citizens – like to give our government, our elected officials, and the ownership class the benefit of the doubt).  Many of us are very proud of our country, especially what the U.S. has the potential to evolve into.  However, when the aforementioned facts are viewed holistically, in sum, the American public should really question where our government, economy, and the mass surveillance state is headed. 

A couple of final thoughts.

A friend of mine recently attended an internet security conference.  As relayed to me, the conference was highly informative; but what was most interesting was that during the entire seminar not once was end-to-end encryption mentioned.  Nor did anyone at the conference mention end-to-end encryption as a means to protect privacy and hold criminal enterprise and foreign governments at bay.   In the ultimate Catch-22, not one speaker mentioned how the surveillance state (NSA, CIA, FBI, Et Al.) had insisted that U.S. hardware, software, and internet providers build backdoors into their products, and how these backdoors were a threat to corporate, government and the public’s privacy and internet security.  You see, thanks to these backdoors and the lack of encryption, we need the security state to protect us from the security state.

But if nothing in this piece concerns you… Look how close we are to becoming a police state?  All the tools of repression are in place:  a massive surveillance state; a monolithic DOD and a heavily armed police force; a watered down press and a public that receives 90% of its news from five corporations; secret courts and a government that is opaque; wars without end; intimidation of whistle blowers; the megalomanical greed of the plutocracy; and a public that is willing to let fear drive them to sacrifice their freedoms for specious claims of greater personal safety.   And last but not least, a government owned and operated by a plutocracy, neatly privatized and legitimized for their personal gain.  Unfortunately, the government itself, and the tools of repression, have become profit centers unto themselves.  All it would take for the plutocracy to clamp down, and destroy our freedoms is an actual act of terrorism or a false flag event.  Burdened by the fear of a catastrophic event, many Americans would welcome such oppression with open arms, based upon false safety guarantees.  In fact clamor for it.  And within seconds, because all the tools of repression are already in place, the U.S. becomes a totalitarian state.

Don’t blink or you’ll miss it.

President Kennedy, months before his assassination, said before the Berlin Wall: 

Freedom has many difficulties and democracy is not perfect, but we have never had to put a wall up to keep our people in, to prevent them from leaving us. I want to say, on behalf of my countrymen, who live many miles away on the other side of the Atlantic, who are far distant from you, that they take the greatest pride that they have been able to share with you, even from a distance, the story of the last eighteen years. I know of no town, no city, that has been besieged for eighteen years that still lives with the vitality and the force and the hope and the determination of the city of West Berlin.

Today, there are many walls, many Berlin Walls if you will, dividing American society, placed there by the plutocracy and the ruling elite.   We have walls in our justice system, within our government, and barriers and death strips in our economy…. These walls divide the ruling elite from the 99%, in a corrupt and repugnant two-tiered system. 

And these walls kill, and are a direct threat to our democracy and freedom.

Copyright JM Hamilton Publishing 2015

Strange Bedfellows

Strange Bedfellows

“The pen is mightier than the sword.”

    - Edward Bulwer-Lytton

"I believe that banking institutions are more dangerous to our liberties than standing armies."
    -  Thomas Jefferson

By J.M. Hamilton  10-3-15

There’s nothing boring about the Fed and Janet &Co.  Between the charts, graphs, moving economic targets, and promises to – maybe someday – wind down of the Fed’s extraordinary efforts, as a result of the 2008 Wall Street crisis…. lies a highly volatile stock market and American politics.  It seems that every time the Fed Chair speaks, or proceeding her speech, the market either experiences a taper tantrum, or spikes up in delight, post-speech, that the banker gravy train (i.e. free money at near zero percent interest) will continue.  Any talk of taking away the punch bowl and the market turns surly, and the VIX soars.  Apparently, Wall Street, bankers, and shadow banking like their money free and easy, not that this translates into easier lending terms, write downs, or debt restructuring for the 99%.  Nice.  (Ms. Yellen’s latest speech appears to be the exception to the rule, when the stock market continued its recent descent, unabated, from Denali like valuations.)

Politicians too, particularly the party in power, like a stock market with an upward trajectory, keeps the big name donors and the plutocracy happy; and if the economy is less than stellar, and unemployment is high, an ascending stock market is a pleasant distraction.  But nearly a decade into the Fed’s easy money policies, a rather nasty habit is developing, not unlike an addiction.  Interest rates have been down for so long, nobody truly knows what the ramifications will be when the Fed starts raising interest rates again.   

One thing we do know: there will be consequences, both intended and unintended.  However, we can glean some information from history and by observing the factions for and against a rate hike.

All of which brings us to the premise of today’s piece:  Politics, economics, and finance make for strange bedfellows.  We don’t see it too often in American politics, and perhaps less in economics and finance, but every now and then, when the moon is full and the stars are aligned, two diametrically opposed camps come together.  Political camps that generally loathe each other – economic schools of thought that generally agree to disagree – on occasion are united by a similar theme.  We can see this now, particularly in politics, with the wave of outsider populist rising in the 2016 POTUS campaign polls.  Messrs. Sanders and Trump immediately come to mind.  A couple of iconoclasts have tapped into a nerve, often written about on this web site, a populist revolt against the crony economy, and an establishment that has neglected the country and the American people.

Political alignment is unusual, but rarer still, how often does one see Keynesians/liberals, or salt water economist, aligned with the Wall Street banker crowd, in support of the continuation of the Fed’s easy money policies?  And yet, that’s exactly what we have today…. Liberals and more than a few bankers and corporate executives, aligned and praying that the Fed keeps the pedal to the metal just a little while longer (Their Augustian prayer: Please Lord make me chaste, but several decades from now, and preferably when I'm dead).  As alluded to above, we can learn a great deal from the arguments/motives put forth by both camps as to the pending fallout, and also get some sense of the tremendous pressure that the Federal Reserve is under.

Let’s start with the Liberals, whose arguments some of us are generally sympathetic too.  Here goes:

·      The poor and the middle class, what remains of it, will bear the brunt of a rate hike.

·      State and Federal government borrowing costs will rise, as will the debt service load, which mean less revenue to be redistributed to those in need and still struggling, in a sub-par economy.

·      The majority of mortgages are, to this very day, adjustable, so a rate hike means higher monthly mortgage payments; add in adjustable subprime automobile notes (currently in vogue), and the lower middle class stands to be hit by rising interest rates, particularly folks who are still upside down on their mortgages.

·      Higher monthly interest payments for mortgages, car loans, and student loans, means less discretionary income and less aggregate demand, which may create headwinds for the economy.  In short, more money going to those – least in need – bankers, shadow banking, and private equity firms (Many of these financial entities, hedge funds and private equity, have waded into the housing market, post crisis, and bought up much of the distressed property at fire side sales prices, courtesy of GSEs, and turned said properties into rental units – so expect rents to climb too).

·      The U.S. economy is not fully healed, and with slowdowns in China and in emerging markets, now is not the time to raise rates.  This point touches upon an argument currently making the rounds, that the world economy is now so interconnected that the Federal Reserve is, and should be, the world’s central bank (here, look to the IMF’s counsel to the Fed and repeated warnings).

·      Let’s face it, egos and politics play a role in all this too.  If the Fed does hike rates, and there is a subsequent economic down turn, members of the Fed will be blamed as will Fed policy; and such a down turn, could possibly cost the Democratic Party, particularly one Bernie Sanders, a trip to the White House.  Alas, for liberals, there will never be a convenient time to raise interest rates.

These are all legitimate arguments and rational concerns.

And now, the Wall Street, and corporate suite, arguments for the continuation of the Fed’s easy money policies.  Some of these are arguments you aren’t likely to hear every day in the financial press or main stream news media, but then, one does not read JMH to hear mainstream arguments.  So here goes:

·      Our economy is debt fueled, and the less expensive the debt, the lower the cost of doing business for banks and corporations.

·      Private Equity, Wall Street, shadow banking, and M&A are fueled by inexpensive debt…. Raise interests rates, and profit margins for all debt fueled business takes a hit, particularly for those businesses already carrying a significant amount of debt (observe: businesses that are highly leveraged are particularly prone to rate hikes).

·      During these uncertain times, and with employment and the consumer not fully recovered, translating into lower top line growth than what we would expect at this stage in the recovery, many corporations have turned to financial engineering to raise stock valuations.  A great deal of this financial engineering (i.e. stock buyback, M&A, corporate restructuring – layoffs, and regulatory, labor, and tax arbitrage) and globalization was, and is, financed by the Fed’s easy money policies.

·      When the Fed raises interest rates, the dollar will rise versus foreign currencies, which means foreign multinational earnings – reported back in dollars – will slump and take a hit.

·      If and when the Fed raises interest rates, capital flows will stream to the U.S., and already cratering emerging markets, and BRICS, will struggle that much harder, particularly to pay back loans denominated in U.S. dollars.

·      Globally, nearly all central banks are engaged in the currency devaluation game.  Therefore, America/The Fed must play the same game, so that the U.S. can continue to remain export competitive.

Ironic isn’t it?  Two worlds, one liberal – striving to look out for the poor, and another - monopolist and pro-Street - solely interested in profit taking, making the same case, albeit by differing logic and circuitous argumentation (that the Fed – nearly a decade into this fiasco - should not prematurely hike interest rates).  Again, all legitimate arguments and rational concerns, given the grave problems this nation faces.  And just to be clear, there are many liberals and banker/raider/corporate types, who do not agree with the Fed’s dovish policies.

So what are the counterarguments?  And why are some of the aforementioned arguments problematic?

·      Probably the greatest fable told about the ’08 financial crisis was that the Fed’s extraordinary efforts would be a temporary measure to address the withdrawal of liquidity from markets, and to allow time for both the consumer and the government to pay down their debt.

·      Now, seven to eight years later (and with the Fed expanding its own balance sheet by 4 to 5 trillion dollars), public and private sector debt, combined, has risen in China, across the E.U., Japan, and in America – to unsustainable sums, well past the 200% threshold.  And collectively, globally, central banks are still doing back flips, in an attempt to keep their respective economies and stock markets afloat.

·      In essence, Fed policy, long known to be a tool of the plutocracy and the financial elite, was used to paper over a financial crisis, and bailout the plutocracy and Wall Street on the backs of the poor and the middle class, who were faced with austerity.  In essence, Messrs. Bernanke, Geithner, Paulson, and Mme. Yellen kept the pitch forks at bay, and in the process created trillions of taxpayer backed liabilities out of thin air.

·      The bailout was highly successful for less than one percent of the population, and everyone else was left to fend for themselves (when similar actions are taken w/ tax policy, it’s called “trickle down").  The rich grew wealthier, as the Fed pumped up asset prices (particularly the stock market), and Wall Street banks grew more concentrated and today, control assets worth at least 65% of national GDP.  Moreover, the financial weapons of mass destruction that left a smoldering Hiroshima in the global economy, derivatives and swaps, have continued to expand exponentially offshore, in Merry ol’ London (700 trillion in notional value and counting).  And the U.S. taxpayer is still on the hook.

·      One of the greatest crimes perpetrated by Federal Reserve policies is that none of the lessons from the crisis were learned, so quick was the Fed to rush in, and provide a smoke screen.  In short the very structural problems the nation faced in 2008 have only exacerbated over the following years:  the crony economy; a morally bankrupt political system that is for sale to the highest bidder; monopolies and cartels in nearly every sector of the economy, preying upon the public; wars w/out end financed by the Fed & a credit card empire – funded by you guessed it, the Fed; and a political party – dominated by billionaires -  that still believes in fairy tales, like laissez faire and trickle down economics, and "free trade."  And we wonder why U.S. economic mobility is in decline, and wage and wealth inequality are on the rise.

·      Indeed, a crisis is a terrible thing to waste, because – thanks to the Fed - rather than address the structural issues that ordinary American’s face daily, eight years later the same problems exist, only worse: the poor have become poorer; the middle class - that made this country great – is beset on all sides by the malefactors of privilege & wealth; and the uber wealthy – in a perpetual game of chance called Wall Street speculation – continue to grossly mismanage the country.  Why start up a new business and create jobs, when the Robber Barons are allowed, by our government, to run money printing and job killing monopolies and cartels?

·      As if the printing up of trillions of dollars in debt to bailout the elite wasn’t enough, the Federal Reserve also shafted the middle and upper middle class by artificially suppressing interest rates, in one of the greatest transfers of wealth, and crime sprees, known.  In short, the Robber Barons of Wall Street, Banks, Hedge Funds, and Private Equity, all received free money via Fed suppressed interest rates, a secondary bailout that exists to this very day.  Conversely, the Fed took away legitimate interest income from: savers, retirees, the elderly, people who do not want to gamble in a corrupt and manipulated stock market, and pension funds and 401Ks.  This interest income was effectively transferred to the aforementioned usual suspects.  Which brings up a legitimate question: At the end of the day, has the Federal Reserve any conscience or sense of decency?  Thanks to the Fed’s revolving door and the riches Wall Street has to offer, apparently not. 

·      As for the diminishment in government services, as a result of a prospective Fed rate hike, well that would actually force the Congress of the United States to govern and be held accountable.  The Fed has enabled the world’s greatest deliberative body, so that it can campaign 24/7, instead of making very hard choices.  How much longer will a Republican Party last, which is already staring into the precipice, when it starts cutting social services – like social security and Medicare, so that the nation can continue to finance foreign wars, its empire, the private contractors at the MIC/surveillance state, and tax cuts for the wealthy?  Thanks to the Fed, the GOP doesn’t have to make those choices; thanks to the Fed, a dying political party rages on.  Ironically, the biggest welfare states are Red states.

·      Moreover, how much longer can the Fed, or global central banks, continue to finance, by printing money, a national debt that has spun out of control and is essentially a Ponzi scheme?  Write downs and haircuts are in order for irresponsible lenders, and have been for a long time…. As they say on the farm, "It’s nut cutting time."  And woe be unto the bond/debt holders.

·      As for the corporations and financial engineering, their focus – thanks to Fed largess – has been myopic.   Short term fixes like stock buybacks and M&A - financed by debt - rarely if ever address real macro and micro problems, like inadequate wages – resulting in low aggregate demand, raging income and wealthy inequality, upgrades in consumer service/CAPEX, a dearth of R&D spending, and the lack of top line growth.  These are all heady issues that will require thinking, and government intervention into the market place: like mandating the payment of a living wage; caps on profit taking, like a windfall profits tax; regulations to save capitalism from predatory monopolies and cartels; the breakup of said monopolies and cartels; and the establishment of global labor, regulatory, and tax equilibrium (so as to eliminate arbitrage and nation states being played off of one another in a race to the bottom).

·      My guess is once the Fed raises interest rates, if ever, global central banks will be forced to do the same, in varying degrees, to eliminate capital flows out of their respective countries, which should help to restore some semblance of equilibrium in exports and imports.

The bottom line, the U.S. central bank has a lot to answer for (unlike every other Federal branch of government, there are no checks and balances), and it too, needs to be reformed.  As with any political institution, without oversight and control, it becomes corrupt.  The Fed, perhaps, is the most powerful branch of government in these United States, and few Americans understand it, and it is not subject to the democratic process.   And the fat cats on Wall Street, and in multinational suites, like it that way. 

Most economist – especially Keynes – recognize that monetary policy is a very crude substitute for well-managed fiscal policies’ ability to address economic crisis, and smooth out the bumps in the road created by capitalism. 

As such, the greatest failing of the Fed over the last eight years was not the effort expended, but that its efforts were directed towards bailing out perpetrators of the crisis, at the expense of everyone else.  In order for an activist monetary policy to truly be effective, it should be directed at the 99%/the demand side of the curve.  The Fed could have done this by embracing the unorthodox:  quantitative easing focused upon financing consumer debt write downs, residential debt/mortgage restructuring (especially since most mortgages are held by government/taxpayer owned enterprises), and desperately needed financing for infrastructure improvements.  In this manner, all would have benefited from the Fed’s extraordinary measures, as opposed to an elite few.

P.S. 

J.M.H. has warned about a potential bond/debt bubble created by the Fed and global central banks, where yields – for a tsunami of debt - inadequately reflect the risk involved, and fail to accurately account for the underlying risk/reward.  By raising interest rates gradually, the Fed may be able to take some of the pressure off this bubble, or it may find itself wading into another illiquid market and providing yet another massive bailout. 

Whatever the Fed does with interest rates, in terms of debt bubble creation and the inevitable collapse, it may be too late.  As such, the Fed may decide “damn the torpedoes – full steam ahead” is the best policy, leaving desperately needed political reform, and economic restructuring unaddressed and for another crisis.  After all, under current campaign finance law, a crisis may lead the Congress to reform, but only the plutocracy can make the Congress enact reform.

Finally, once again, we saw this week that it wasn’t ninja jihadis Americans have to fear, but yet another Caucasian mental defective with a damaged Y chromosome.  Let us pray that the next narcissist/nihilist with a pathological sense of entitlement - to mete out death to the general public - takes his own life before he can harm others.  It’s a shame these losers aren’t educated, or stable, enough to realize that the pen is mightier than the sword; and that everyone remembers Christ, Gandhi, and MLK, but nobody remembers the malcontents who killed them. 

(Correction:  CNN reports the assailant was of mixed race, with a Caucasian father, and a Republican.)

Copyright JM Hamilton Publishing 2015

ESTABLISHMENT

ESTABLISHMENT

I never will, by any word or act, bow to the shrine of intolerance or admit a right of inquiry into the religious opinions of others.  – Thomas Jefferson

By J.M. Hamilton (Originally published 6-14-12)

A conservative at the NY Times, Mr. David Brooks, was complaining about the lack of respect accorded by the general population to the “establishment” this week, and I couldn’t help but find myself amused and relieved.  For here Mr. Brooks offered up a political counterpoint to an editorial written by Mr. Luigi Zingales (of Chicago School of Economics fame).  Both editorials, make perfect bookends to this week’s JMH editorial.  Mr. Brooks laments the lack of good “followers” in America today; and Mr. Zingales – a bit of a conservative in his own right, and certainly a libertarian with strong capitalist credentials, fears the corruption of the political and business establishment culminating, or metastasizing, into crony capitalism.  Mr. Zingales holds up Italy’s corrupted economy and government by way of comparison, and the path he asserts the U.S. is headed down, if we are not careful.

JMH, of course, has argued for some time that we are already there.  Witness the idolatry and blind deference U.S. Senate members accorded Mr. Dimon this week.

Now none of this is to say Mr. Brooks is not a great guy and a worthy polemicist… Shucks, about six years ago and for nearly all of my adult life – starting at the age of two- I would have agreed with nearly everything Mr. Brooks put down on paper.

But something happened in 2007 and 2008 that called into question my entire belief system, and apparently the belief systems of many U.S. Citizens (99%), or what Mr. Brook’s refers to as “followers,” who are having a exceptionally hard time buying what the “establishment” is now laying down as gospel.

What could have awoken the masses from their apathy and slumber, and motivated the “followers” to turn against their master, the establishment?   Was it, as Mr. Brooks asserts, that our own personal “vanity” has made Tea Partiers and disenfranchised libertarians and liberals jaded, or was it something else that turned us off on the ruling economic and political elite?

Was it the fact that for the last thirty years the establishment underwrote the greatest Keynesian raid heretofore known to man, whereby the one percent/establishment crushed democracy and redistributed wealth and expropriated political powers for themselves?

Perhaps it’s the intergenerational wealth larceny that has become today’s FED policy, again all in the interest of keeping the rescued Cartel/establishment afloat, at the expense of savers and retirees.

Or maybe it was the toxic assets that have been transferred from the Cartel’s/establishment’s balance sheet and onto the public sectors balance sheets at list price, only to be sold back, selectively, to the Cartel and shadow banking at a discount.

Was it the fact that the political establishment just could never say “no” to big business or the Chamber of Commerce, and allowed them under the rubric of free trade and capitalism to transfer jobs, tax base, and the U.S. manufacturing economy offshore?

Was it the fact that the establishment showed us the true meaning of socialism with endless bank bailouts – running into the tens of trillions- while hypocritically attempting to light a match to the social contract, and seeking significant reductions/privatization in Medicare, Medicaid, and social spending?

Was it the insider trading cases and the manifestation of a two-tiered stock market: one for the insiders/establishment, and the other for the followers.

Perhaps it’s the two tiered justice system: where white collar criminals/the establishment are rarely if ever convicted, and then there’s the justice system for the rest of us — the “followers” facing the criminal justice industrial complex and corporations profiting from the incarceration of individuals for victimless crimes (so that the U S has the highest incarceration rate among western democracies).  If we are to believe the numbers, the U.S. incarceration rate, per Wikipedia, is 39% higher than Russia’s and several hundred percent higher than China’s….. What’s wrong with this picture?

Or perhaps it’s our beloved supreme court, which like our Republican led congress, suffers from very low follower opinion polls; and why should followers be upset when this very same court tells us that corporations/establishment are people too, who may and will collectively purchase our government under a Citizens United decision.

Perhaps it’s the abuse the establishment has heaped upon our fighting men and women with endless wars, so that the U.S. soldier suicide rate now exceeds are monthly casualty rate.  But heh, those soldiers/followers volunteered for it, so that makes it all okay.

Just maybe as Mr. Zingales notes, from the freshwater school of economics no less, that the U.S. establishment has abandoned meritocracy, industriousness, and capitalism…. for cronyism, speculation/private equity schemes, and monopoly.

Maybe its the real unemployment and underemployment rate in this country, and for much of Europe, is in the high teens— or in some instances in the neighborhood of twenty percent or more; as noted in the Times this week many U.S. citizens have watched their net worth crumble to 1990 levels in the span of four years.

Thank you, Establishment!

Mr. Brooks went on to note: “To have good leaders you have to have good followers— able to recognize just authority, admire it, be grateful for it and emulate it.”

To which JMH responds, which part would you like us to emulate Mr. Brooks?

Democracy is a wonderful thing. It makes people feel empowered, no matter how distorted the representative reality from the ideal.  Take that away, or the ability to protest, or form new political parties, or rebel against the established order of things…. And we find ourselves living in another elitist dictatorship, or government by the establishment.  The very things are founding fathers fought against.

Americans of all stripes understand human failings in the economic and political establishment; what the followers cannot understand is blatant political corruption, economic theft leading to lost decades and lives, and the death of opportunity – strangled by the corporatist and monopolist.  Hence, the rise in America and Europe of extremist political parties, like Occupiers, the Tea Party, and in Europe — Socialist, Anarchist and Communist.

When the establishment abandons the 99%/followers, the followers look for solutions outside mainstream political parties.

P.S.

To his credit, Mr. Brooks wrote admiringly of Mr. Jefferson, whom he referred to – longingly – as a “graceful aristocratic democrat.”

Remarkably, Mr. Jefferson wrote the defining document of the American Revolution and provided the ultimate act of rebellion against the established British aristocracy, with the Declaration of Independence.  One wonders what our third U.S. president would have had to say about what the Wall Street Cartel/establishment has done with his Agrarian Dream, or additional thoughts Mr. Jefferson may have had on the establishment of his day?

We need not wonder, here are a few quotes from Mr. Jefferson on the establishment of his day:

“All tyranny needs to gain a foothold is for people to remain silent.”

“In every country and every age, the priest has been hostile to Liberty.”

“Experience demands that man is the only animal which devours his own kind, for I can apply no milder term to the general prey of the rich upon the poor.”

His thoughts on globalism?  “Merchants have no country.  The mere spot that they stand on does not constitute so strong an attachment as that from which they draw their gains.”

“The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants.”

“Experience hath shewn, that even under the best forms of government those entrusted with power have, in time, and by slow operations, perverted into tyranny.”

“Friendship is but another name for an alliance with the follies and misfortunes of others.  Our own share of miseries is sufficient:  why enter then as volunteers into those of another.”

“I hope we shall crush in its birth the aristocracy of our monied corporations which dare already to challenge our government to a trial of strength, and bid defiance to the laws of this country.”

“I believe banking institutions are more dangerous than standing armies.”

“A Bill of Rights is what the people are entitled to against any government, and what no just government should refuse, or rest in inference.”

Given our nation’s current predicament, I wonder if Mr. Jefferson would have been in favor of an economic bill of rights?

Copyright JM Hamilton Publishing 2015

Power to the Market!

Power to the Market!

“Because the free market system is so weak politically, the forms of capitalism that are experienced in many countries are very far from the ideal.  They are corrupted (diluted) versions, in which powerful interests prevent competition from playing its natural, healthy role….”
     Luigi Zingales – The University of Chicago Booth School of Business

“For Smith, the market moves toward monopoly; it is the job of the philosopher to define, and of the sovereign state to restore, free play.”
              Adam Gopnik – Market Man, The New Yorker

By J.M. Hamilton  (Originally published 8-11-12)

The Moral imperative of capitalism is its incredible ability, when fully functioning, to create goods and services on a spectacular scale.  And service a large number of people, the market, with quality goods and services.  Its ability to foster ancillary jobs and innovation are well known phenomenon.

It is the competitive feature of capitalism, and the government - when fully functioning - in its supportive role, that protects the market (the people) from the merchant's/proprietor's worst impulses, which are greed, the quest for unlimited market share and profits, and the elimination of competition.

The bastard child of competition and of capitalism, indeed what Mr. Adam Smith warned us against, is crony capitalism.  As crony capitalism is produced, fostered and sanctioned by the state, it is perhaps the most debilitating economic feature of our time that we have the means to control: crony capitalism ultimately leads to monopoly and an unprecedented concentration of wealth and power. Possibly more insidious than communism itself because it wraps itself in the cloak of free enterprise, crony capitalism is the "anti-capitalism," and as such, it leaves a debilitating stain upon the most productive economic system known to man.

More frightening still, because of the link between crony capitalism (monopoly) and true capitalism (competition on the supply side of the curve), capitalism is under attack like never before, so that record numbers of people are turning to the state for assistance.

Monopoly begets monopoly:  At a micro level, monopoly in one market, say big oil, inevitably leads to monopoly in other markets, say cellular service, as one market provider attempts to duplicate the profit taking success of another market governed by a monopoly or cartel; separately, because at any given time discretionary income for a nation is fixed, if a monopolistic supplier preys upon a market with inelastic demand, say energy or big oil, this results in diminished demand for other goods and services, as capped discretionary income is eroded by monopolistic profits/taxation.  This in turn leads suppliers of other competitive markets to seek out combination, as a means to shore up reduced earnings, sales and income.

Politicians under the dogma of laissez faire capitalism have allowed combination ad nauseum to the detriment of the worker, corporate top line growth, tax revenue, and most importantly the market.  Why? Simply put because monopolistic profits, lead to monopoly sized campaign contributions, and intellectual and political hegemony over the body politic.  Bottom line, monopolistic profits are the mother’s milk of American politics, like a fist inside a velvet glove or muppet.  Some of the largest GOP and DNC campaign contributors come from markets dominated by cartels, oligopoly, or monopoly.

Government, fiscal and monetary policy, can provide a short term fix to problems created by crony capitalism and monopoly; but they are not a long term substitute for structural reform (i.e. the breakup of these organizations)

Of course monopolistic profits and predatory pricing ultimately are anti-market, crush the welfare of the people, savage competitive markets and top line growth, and lead to the collapse of markets.  Witness the record profits made by big oil leading up to the 2007-2008 economic collapse.  Witness the individual investor flight out of the stock market, due to the flash crash, rigged stock markets, problematic IPOs, program trading, insider trading, and opaque markets, like dark pools.

"Anti-Capitalism" causes instability across the globe, observe the Egyptian military's vast control over broad swaths of the Egyptian economy, ditto Iran's Revolutionary Guard and its extensive ownership and control over that economy.  Ultimately, if enough markets are dominated by cartels and monopolies, the cabal at the top can collude to chart a nation's political future, and manipulate a macro economy via capital strike and finance.

By breaking up the concentration of wealth, power, and some of these monolithic institutions, we actually create more opportunity and a larger number of jobs, not just among the rank and file but also among management and the executive class.  Specifically in regards Wall Street banks - stock valuations demand it, the dearth of the return on equity demands it, and the market demands the break up of these banking institutions.

Diseconomies of scale, failed management, and egregious risk management insist upon it.

(Don't get me wrong, I am not writing against the scale and size of business, as long as big business operates, side by side, with competitors, and government provides effective "rules of the road" or regulation to protect said market and consumers from predatory behavior.)

As often as not, the excuse for these catastrophic combinations, provided by management, is that it is "in the interest of the stockholder;" however, when the break up value of these monstrosities is greater than the stock valuation by a wide margin-- seemingly and conveniently, the interests of management always trumps stockholder value.  Observe Wall Street’s reaction to Mr. Sandy Weill's embrace of the proposed return of Glass Steagall.

Just as politicians created the monopolies and cartels- it can aid the market (i.e. the American people) and the economy by breaking up these statist monstrosities, which often can only exists by state backstop and support.

Possible solutions to our economic crisis are simple:  support the interests of the market, or the demand side of the curve, and economic recovery will follow.  Here are a few simple thoughts and ideas:

1) Leverage the great American market!  Insist that if business sells in America - they produce the goods and services sold in this country with American labor.  If a business doesn’t hire American, that’s fine but than access to the American market would be cut off.  Since this rule would apply across the board to all domestic and foreign companies selling in the US, no one could complain that they were unfairly treated or at a competitive disadvantage.

2) Close all tax loopholes and dodges, which would allow for a lower corporate tax rate--- since it would be a requirement that US labor be utilized for goods and services sold in the US, there would be no opportunity for tax and labor arbitrage for domestically produced goods and services.  If larger business begins paying taxes at a lower effective tax rate (in lieu of paying little or no taxes at all), the consumer could theoretically, enjoy a lower tax rate since they are no longer subsidizing businesses that have the skills and the means to engage in tax avoidance.  This too would help stimulate the economy by increasing consumer/market discretionary income (i.e. aggregate demand).

Eliminate the American tax for goods and services sold overseas by American companies, as long as they employ Americans for goods and services sold in the U.S., with one exception.  Some percentage of the cost of the US military industrial complex (MIC) should be carried by all foreign governments and multinationals based upon their respective contribution to global GDP and global international sales, respectively.  The US military protects and provides stability for global markets, and the beneficiaries of that protection should pay their fair share.  If this in turn relieves additional tax burden on the American consumer/market, it means more income and opportunity flowing into our economy, and less consumer/market money flowing into the MIC, via the government.

That's another half trillion dollars, or more, the US taxpayer (domestic businesses and individuals) would no longer be burdened with - that could flow directly into our economy, or be allocated to deficit reduction.

3.) Cap the election season, so that politicians may only run for office the three months proceeding the election, in lieu of the two year - continuous period presently allotted; and cap the amount of campaign contributions taken in per politician, so as to end the financial/contribution arms race that is core to the modern day election cycle.  By capping both the duration of the election cycle and campaign contributions, we put a huge dent in the power of cartels and monopolies to control political candidates.  In this manner elections become about ideas, and not who has the biggest wad of cash. 

4) Break up cartels and monopolies.

Power to the market! 

Copyright JM Hamilton Publishing 2015