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Muscle Bound, Broke, And Spoiling For A Fight

SRA Commentary, Week of March 3

Muscle bound, broke, and spoiling for a fight

Sanders Research Associates
March 3, 2002
By Chris Sanders

"He gave people hope that unemployment could be cured without concentration camps"

- Lord Robert Skidelsky on Keynes in PBS Interview, Commanding Heights, 18 July 2000

"The new tyranny, like other recent ones, depends, to a large degree, on a systematic abuse of language"

- John Berger, from introduction to Between the Eyes: Essays on Photography and Politics, by David Levi Strauss to be published in April 2003 by Aperture, quoted in Harpers Magazine, March 2003, p.16.


Mobilising savings for war…

Perhaps the greatest shock associated with the release of America’s trade statistics for December is that they failed to shock. This is really something when you consider that the monthly deficit of $44.2 billion in December represents an annual rate of more than 5% of GDP.

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On reflection, the markets’ apparent insouciance may not be so carefree and casual. After falling over the course of the last year more than eighteen points against the euro, the dollar has managed to only rally a couple of points from its lows. Oil as of this writing is poised to break $40 a barrel. The Bank of Japan has revealed a colossal “covert” dollar support operation in January. (Why the markets should think this operation as covert is beyond us. The BOJ has accumulated more than $400 billion in the last seven years and has not always announced its purchases in advance.)

The European bourses are in apparent free fall, cheaper in fundamental terms than they have been in more than twenty years; and getting cheaper still as they plumb new lows. The head of President Bush’s Council of Economic Advisers, Glenn Hubbard resigned. Following the resignations of White House economics adviser Lindsey and Treasury Secretary O’Neill in December, there could scarcely be a more eloquent indictment of the administration’s economic management.

With all this going on, the firmness of global bond markets only makes sense if you think that the New World Order is going to be setting interest rates in order to mobilise capital for global war.


…in three easy steps

This is a less radical idea than one might at first think. We have, for instance, frequently commented over the last six years that Japan’s monetary posture is evocative of its wartime mobilisation of savings during World War Two. The mobilisation of capital for war proceeds along logical and simple lines. The first step is to concentrate monetary authority by monopolising the creation of currency and credit.

The institutional structure to do this already exists in the form of national central banking and the web of bilateral relationships that exist between the central banks. Likewise, the international framework for moving savings across national boundaries exists in the web of institutional and international treaty obligations that have evolved since World War Two: The IMF, the World Trade Organisation, the World Bank and more recently the Bank for International Settlements.

The second step is to set short interest rates very low both to reduce the cost of government borrowing and in order to achieve a significant gap between short and long term interest rates. The steep yield curve makes it profitable for the commercial banks in the system to buy longer-term government bonds and to finance them in the repo market and opens a direct pipeline via the banking system from savers to government. Now the central bank, in this instance the Federal Reserve, is by statute immune from the discipline of the market place by virtue of the fact that its equity is not openly traded.

This means that it is effectively free of solvency concerns and is free therefore to buy government debt in any quantity necessary to ensure that long and short rates remain in profitable alignment for the commercial banks that are the pipeline for savings. It finances its purchases of bonds with money that it creates.

In the American way of doing this, currency created by the central bank is required by statute to be “secured” with government bonds. This is just a perverse use of language. Far from being “secured” cash is being used to monetise government borrowing. In the contemporary political context, the proceeds of this operation are being used to finance war.

The third and last step is to impose capital controls to prevent savings from flowing out in search of higher returns, increased protection against inflation, or both. For the United States, the dollar’s monopoly position as world reserve and transactions currency unit is tantamount to capital controls. In a closed currency system, there are no alternatives.


Bush: “Use focus groups? Moi?”

In curious juxtaposition to his country’s collapsing international trade position, President Bush in the same week wrote off the millions of antiwar protesters who turned into the streets of the world’s major cities on Saturday the 15th. Averring that he would not be swayed by popular opinion, the president likened the idea of bending to popular will to “government by focus group.” Karl Rove must have wondered what on earth he was talking about.

Last week’s Economist gallantly came to his rescue with an issue devoted to “Why war would be justified” In the course of arguing that Saddam Hussein is, well, basically a bad guy, the Economist compared the protests of the 15th to those of the Vietnam era.

It concluded that today’s protesters were unlike those who protested against the Vietnam War because those who marched against American involvement in Vietnam admired Ho Chi Minh, and today’s protesters would all like to see Saddam Hussein removed. Making this argument, the Economist appropriated for the war party’s cause the very demonstrations against the war.

Clearly, Bill Emmott and the rest of his “cadres of the New World Order” on the editorial staff in London chose to miss the organising slogan of the 1.25 million plus marchers in that city on the 15th: “Not in our name.” Or perhaps they were just making an attempt at humour.


Where have all the ingots gone?

Against the backdrop of looming war, you could be forgiven if you missed the news that little Portugal has either sold or lent at least 70% of its gold reserve. Ancient allies of England, perhaps the Portuguese felt that it was only cricket to lose money too. Begun in the wake of the Ashanti insolvency, Britain’s own gold sales finished a year ago, marking the end of a twenty-year bear market and considerably impoverishing the Exchequer.

They are not the only central banks to cough up national treasure for the cause of the New World Order. The Philippines, Kuwait and in all likelihood quite a few others have done likewise. Note carefully though: Russia and China have been accumulating gold.

We have not focused much on the gold market lately, apart from marking the end of the bear market. However, it is noteworthy that the manipulation of gold by the industrial world’s central banks exposed by our hero Reginald Howe of , the Gold Antitrust Action Committee and the Free Market Gold and Money Report, has finally made mainstream respectability with a feature article in Insight Magazine by investigative reporter Kelly O’Meara.

The investment management industry has by and large still not bought the gold story. O’Meara’s view is that when they do, it is panic stations. She is probably right.


Gold is still money, even if you don’t have any

The reason is basically simple. The United States has no more redrafted the laws of economics than its space program has redrafted the laws of gravity. Gold is money, whatever the poorer Bank of England would like to say about it.

Everyone knows what it is worth though the same cannot be said for the dollar today or for that matter the other fiat currencies either. The Achilles heel of the modern currency markets is their tautological and self-referential character.

They are not based on open and transparent standards, but on the opposite foundations of secrecy. Even the terminology used by the monetary authorities has acquired sinister overtones. Gold held in American official vaults no longer identified according to use and ownership, but is simply called “Deep Storage.”

The central banks mouth slogans about free markets as the American Treasury secretary Snow and his Japanese counterpart Shiokawa did at the recent G7 meeting, but the reality is “covert” intervention to set prices. That is tantamount to them saying that “the dollar is worth 120 yen because we say it is, and we say it is because that’s where we price it.”

Before the Age of Discovery, gold and silver flowed east. In the post-industrial service economy at the end of history, they flow east again.

For the historically minded, it is noteworthy that specie is flowing from West to East just as it did in ancient times and in the Middle Ages before the industrial revolution. Before the industrial revolution, the west traded silver and gold for oriental commodities. With the industrial revolution, things changed. European manufactures changed the face of world trade, with not a little help from the technologically superior weaponry that came with industrialisation. This is what enabled the fantastic accumulation of wealth that formed the basis for modern western society. Today the West, or more specifically America, is trading its treasure for manufactures from the East. Industry without arms is an invitation to looting. Arms without industry is just a precursor to barbarism. No empire has lasted long without both. And it is easy to see in today’s situation the logic of war.


War trumps peace

Those who believe in the natural evolution of economic nature from industrialisation to a “post industrial” service economy are just describing the development of an idle rentier economy living off the work of others.

Since others with any means will not indefinitely acquiesce to such an arrangement, force is necessary to make sure that they do. The economics of the means of coercion, that is to say modern industrial warfare, are such that the expense of modern weaponry has made the unit cost of arming the state too high to afford. It isn’t just simple greed that drives arms exports, as so many on the left seem to think, but the need to achieve longer production runs in order to reduce the unit costs of armaments production to a more affordable level.


The Logic of War


The United States has chosen, for better or far more likely for worse, to subordinate the civilian economy to its military sector. It is often argued that the spin-offs from military research, development and production are a net benefit to the civilian economy, but this is as transparently false in America as it was in the Soviet Union. It is a sad commentary on politics that hardly ten years after the collapse of the Soviet Union the supposed victor, America, has a prison population that rivals Stalin’s.

Just as ironically, American strategic thinkers have based their long-term objectives on technological (read computer and information technology) superiority. Yet the fact is that much if not most of that supply chain is outside the United States in Asia. In fact, it is within a few square miles of Taiwan, and in easy missile range of the mainland or North Korea. The logic of globalisation thus means that America’s military frontier is not the West Coast of the United States but the east coast of Asia and the central Asian borders of the world’s excess oil reserves of the Persian Gulf.

When one considers the current Middle East crisis against this backdrop, the divisions on the UN Security Council are much easier to understand. It is also clear that the potential for escalation is very great. It is difficult to imagine the American government deciding to back down, for the simple reason that its long-term choices in that eventuality are the most difficult to take, depending as they do on a fundamental change in priorities. Far better, you can hear the Neo-cons whisper (or more in character, shout) to strike now and get control of the oil before Europe consolidates, before Russia recovers, and before China and Taiwan reunite.

Thinking about all this it is tempting to remember Lenin’s comment to the effect that given enough rope, the capitalists would hang themselves. For my part, I wonder why our leaders have lost the hope that Keynes sparked in the 30s, and have opted instead for the concentration camps.


© Sanders Research Associates 2003

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