Sowing the Seeds of War

The United States is now in the midst of three wars… or maybe they’re all just smaller parts of what is to become one big war. In any case, we have reason to be very concerned about where our leadership is taking us.

Does my memory fail me or didn’t Obama say he was going to get us out of Afghanistan and Iraq? I mean, wasn’t that the campaign promise? We were going to close Guantanimo and bring the troops home.  Well, now he’s got more troops in the Middle East than Bush had. We are starting to look at who’s going to run for office in the next presidential race and we’re farther away from seeing that promise fulfilled than we were when Obama took office. So why is that? I think the answer is economic. It is about the oil in the Middle East and military Keynesianism.

Well, everyone has probably figured out by now we are really in the Middle East cause they’re sitting on some of the hugest oil reserves in the world, right? With the industrial expansion of the globe and peak oil supply in question we are looking at a precious resource indeed. It’s a global race to the finish and he who owns the oil wins (presumably, at least while the oil lasts). We are struggling to remain the world’s economic leader here in the US. The battle is a ruthless one. Reformed alcoholic and ex-President, George W. Bush, perhaps said it best when he proclaimed the country “addicted to oil.” The US is certainly exhibiting many of the typical behaviors associated with addiction, including denial and telling lies, lies, lies.

A friend of mine in Alcoholics Anonymous once told me the way you can tell an addict is lying is that he’s opening his mouth to talk. So it stands to reason that we are being fed all sorts of untruths by our oil addicted leadership about spreading democracy and our humanitarian motivation for sending aid to struggling rebels, etc- and we, in our own oil dependent lives, eagerly latch onto those lies and repeat them to everyone around us without question. The truth is we are primarily interested in getting control of that Middle Eastern oil, and preserving our own wealth and power. (By the way, did you even realize one of the factions of the rebel troops we are supporting in Libya is Al Queda? Yeah, those guys need a little defending… and maybe some better weapons, too.)

So the seeds of war are spread farther and wider. Now we’re in Libya. Why ever would we want to involve ourselves in more war? “It’s the economy, stupid!,” as ex-President Bill Clinton used to say. For one thing, war is a great way to distract people from any concerns they might have about a failing economy and how poorly the recovery effort is going. For another, it is the best we can do to stay productive these days, or at least to maintain the illusion of being productive. The fact is, we have a terrible unemployment problem and essentially no manufacturing base left in the country. We need war. It comes down to military Keynesianism.

Military Keynesianism can generally be described as a government economic policy where a large amount of spending is devoted to the military in an effort to increase economic growth. The arms industry provides a potentially endless source of cash flow in that it is capable of both generating market demand and fulfilling that demand all at once. At home in the US, there is always a need for security. We must maintain effective defenses against attack. Combined with this is a built in obsolescence in weapons technology. We know historically that he who wields the most advanced weapon wins, so there is always a demand to keep military technology moving forward. Outside the country there is demand from the rest of the world for ever more powerful weaponry as well, and as a leader in the field of development the US is all too happy to supply the market. Selling weapons is a very lucrative export market.

In the latest issue of Philosophy Now, author Mike Fuller examines the views of the great linguist and modern scholar Noam Chomsky regarding military Keynesianism and how it relates to today’s global economy. Chomsky’s view is that in the post Cold War environment, where the world is dominated by one superpower- the US- there is no security threat that would necessitate the massive spending on defense and arms we currently engage in. He sees the domestic and global demand for arms as something we are in large part creating, using fear to keep the system productive. Furthermore, he maintains the government’s rhetoric about the need for upgrading security in a dangerous world is a fiction, at the heart of which lies military Keynesianism, powerful lobbying by unions and private industry, and the promise of “jobs for the boys.”

In his 1997 book Powers and Prospects Chomsky illustrates, “The US share in arms sales to Third World countries has reached almost three-quarters. We must therefore provide them with even more advanced weaponry, so that we can tremble in proper fear. The sale of F-16 aircraft with taxpayer-subsidized loans allows the Air Force to pay Lockheed to upgrade the aircraft and to develop the F-22 to counter the threat they pose.”

Fuller goes on to say, “Even if it is conceded that Chomsky is too cavalier in dismissing the real security and strategic worries in today’s world, and that superpowers do not maintain their status by resting on their laurels, I think it has to be admitted that the security worries are being inflated as an ideological cover for other agendas, such as ‘subsidizing the rich,’ responding to pressure groups, aiding export markets, stimulating the economy and generating civilian spin-offs in research and development.”

It is unlikely a government in the position to do so would not consider tapping the potential for economic stimulus the war machine offers to provide. With the prospect of “civilian spin-offs” in the mix, such as the development of the internet for example, it might even be considered bad business not to take advantage of the fruits of military investment.  On the other hand, there is public sentiment to take into account. Weapons kill people. People suffer and die in war. War is a force of destruction, and the public grows weary of it in time. This offers a sort of built-in counter pressure to any tendency for unfettered growth in the military-industrial complex. In a recent article in The Nation, journalist Robert Dreyfus argues that despite the military’s ongoing push for widening expenditures, the Pentagon may soon be facing sizable cuts to its budget.

In the article, military spending analyst Gordon Adams refers to the powerful nexus that includes the Pentagon, military contractors and lobbyists, and military backing from Congressional armed services committees as the “Iron Triangle.”

“If you leave it to the Iron Triangle, it won’t come down,” Adams asserts about the prospect of a shrinking military budget. “But it will come down, and what will drive it are the outside variables, which create a tidal wave that hits defense spending.”

The article continues, “What’s creating that wave… are two intersecting currents. A politics of debt and deficit reduction has taken hold in Washington, tied to an economic crisis that has convinced many that the United States can no longer afford an oversized Pentagon. And for the public, the decade-long trauma of 9/11, which fueled the ‘war on terror,’ has finally begun to ease. War-weary Americans have turned decisively against the conflicts in Afghanistan and Iraq, and, according to polls, voters support cuts in military spending. All that creates space on Capitol Hill to take on the Iron Triangle.”

While this is a welcome possibility, I imagine the forces fueling the engine of military Keynesianism will not be quelled easily. We may well see a renewed effort from the powers that be to instill new fear in the American public so as to keep the work of the military-industrial complex efficiently humming along and the Iron Triangle in power. Historically we can see that when all else fails economically, they take us to war. This is really how we finally got out of the Great Depression, ramping up to near full employment during World War II after a decade of floundering attempts at stimulating employment. All it would take to put the fear of 9/11 back into the hearts of the public is another well publicized terrorist attack, and with our involvement in the Middle East progressing as it is we are stoking the coals for just that sort of thing to happen.  With a little of the right sort of propaganda thrown onto the ol’ boob tube between reruns of Jersey Shore, Americans could soon find themselves nervously calling for tightened security and more defense spending. In our consumer culture public sentiment is fairly easy to manipulate through media spin alone.

The public may be growing weary of the ‘war on terror,’ but the government is not letting up on the gas just yet. A couple of weeks ago I received a newsletter from the American Civil Liberties Union warning of a new development in the expansion of government war authority. The new National Defense Authorization Act was up for a deciding vote in the House of Representatives, with a new provision for war against terrorism hidden deep inside it. Since that time the act was passed and is now in effect. Essentially it recognizes terrorists and those affiliated with them officially as enemies that may be targeted by the military in warfare, and it allows the president total independent authority to wage war against such enemies anywhere in the world, without end and without congressional authorization. This includes the authority to wage war within the boundaries of the US itself. The ACLU is concerned with the implications.

“The House just passed the National Defense Authorization Act (NDAA),” the ACLU’s blog report states, “including a provision to authorize worldwide war, which has no expiration date and will allow this president — and any future president — to go to war anywhere in the world, at any time, without further congressional authorization. The new authorization wouldn’t even require the president to show any threat to the national security of the United States. The American military could become the world’s cop, and could be sent into harm’s way almost anywhere and everywhere around the globe.”

The stage has been set for further expansion of military power. A good advertising campaign could align public sentiment without much trouble. We really need that oil. We are already involved in three wars in the Middle East. We are economically depressed. This is not a good combination. I am afraid the seeds are being sown for a much larger battle than we have yet seen.

“In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist. We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together.”

- Dwight D. Eisenhower

Philosophy Now
Chomsky on Global Myths and Realities
Mike Fuller
May/June 2011
http://www.philosophynow.org

ACLU Blog of Rights
House Passes Authority for Worldwide War
Sam Milgrom
May 26, 2011
http://www.aclu.org

World Watch
Al Qaeda may already be among Libya’s rebels
Joshua Norman
March 30, 2011
http://www.cbsnews.com

The Nation
Taking Aim at the Pentagon Budget
Robert Dreyfus
March 23, 2011
http://www.thenation.com

Huffpost World
Anti-American Extremists Among Libyan Rebels U.S. Has Vowed To Protect
David Woo
March 19, 2011
http://www.huffingtonpost.com

Rap Battle: Keynes vs Hayek

John Maynard Keynes with the government crew
Hayek represents from the Austrian School
In a battle of principles now here engage
As tongues tie and fists fly in animal rage

The hook’s jumpin’ off but the beat ain’t so fat
The rhyming is hard though delivery’s whack
Nevertheless, I’ll throw a “thumbs up”
For a couple of players who questioned wha’sup…

And a look back at round one –

Note that any advertising junking up the screen can be clicked off, and subtitles can be dragged off so you can actually watch the video.

Econ Stories TV
Fight of the Century
John Papola and Russ Roberts
April 28, 2011
http://econstories.tv

Econ Stories TV
Fear the Boom and Bust
John Papola and Russ Roberts
June 22, 2010
http://econstories.tv

Sliding Into A Double Dip

Newly released statistics last week from Standard & Poor’s Case-Shiller index show continued decline in national home prices, prompting the media to question once again if the housing market is headed into a double dip. Though we can validly view any downward trend as a dip, Standard & Poor’s would define a double dip in housing values as prices falling to previous lows hit during the recession. The newest report from the 20-city index shows current lows are a mere 1.1% above the previous bottom of April 2009.

“The double-dip should happen by June,” Patrick Newport, U.S. economist with IHS Global Insight, wrote in a note Tuesday. “Going forward, weak demand, foreclosures and a glut of homes for sale should translate into at least another 5% drop in the Case-Shiller composite indices.”

Five percent seems like a very conservative estimate. Historically, economic bubbles overshoot on the downside. While much of the media has been debating whether or not a double dip will manifest despite continued declines in prices, sales numbers and building starts since the end of the tax credits last summer, The Paper Boat has been calling for a resumed decline in home prices since the market first began showing signs of recovery. In our view, the downward trajectory of the housing market was deterred only temporarily by expensive unsustainable government intervention and it has always been just a matter of time until housing continues along its merry way to finding a true bottom. In fact, we imagine we will see prices fall to pre-bubble levels before the market begins to appreciate again in any sort of sustainable way.

The Case-Shiller housing index is widely viewed as the most reliable graph of housing price trends, but keep in mind its data is derived from a limited number of larger cities that don’t reflect the devastation of value occurring in outlying areas. Here in southern California, as in much of the country, the hardest hit real estate values are located outside of major cities in outer ring suburban areas like Riverside and Lancaster. In this respect the Case-Shiller index may fall short in its ability to capture the severity of the market’s decline.

It is also important to remember the Case-Shiller index is a lagging indicator. The newest data reflects market trends only through January. If we look at an alternative data source, like Clear Capital’s Home Data Index, we can get a sense of where trend lines have headed all the way through mid-March. Their latest report shows prices have continued to decline over the past two months, showing a quarter-over-quarter national price change of -1.6 percent in February and -1.4 percent in March. It is interesting to note that Clear Capital’s research shows prices are uneven nationwide, with declines in the West dramatically steeper than in the rest of the nation. This has a dampening effect on the overall national price trend. Eight of the fifteen worst fairing markets are located in the western region of the US.

“As prices continue to slide, new record price lows for the West are only 0.7 percent away and could be realized as early as next month. This is notable, since two years have passed since the prior record price lows were seen in early 2009. While local variations persist, this leaves some recently vested investors in the West with little potential gain while broadly amplifying the risk of losses,” the new report from Clear Capital notes.

Watching from the ground in Los Angeles, I would correct that to say “guaranteeing losses” for newly vested investors.  In terms of foreclosures alone we are seeing pending defaults outnumber houses for sale many times over. Most sales transactions are transpiring entirely in cash, which indicates investors are a driving force in moving inventory. I keep wondering who these investors are. They don’t seem very experienced or aware of even the most basic economic principles. The evidence is overwhelming that this is a terrible time to invest in property, yet they are jumping into the market as though we’re seeing deep discounts. On the West Coast the bubble mentality persists that housing will soon be shooting back up in value to the highs we saw six years ago. Meanwhile, many mid to high end areas have yet to see the real damage of the downturn.

A major concern regarding a double dip in the housing market is that it will trigger a double dip in the larger national economy. Yale professor Robert Shiller, co-founder of the Case-Shiller index, warned months ago he sees a looming risk of this happening. Now former Secretary of Labor under Clinton, Robert Reich of UC Berkeley, is echoing those concerns. He makes the point that the economy is reliant upon consumer spending, and that losses in housing value put a damper on people’s willingness to spend.

“Housing is dropping because of the ever-larger number of homes people have walked away from because they can’t pay their mortgages. But because homes are the biggest asset most Americans own, as home prices drop most Americans feel even poorer,” Reich explains.

“Why aren’t Americans being told the truth about the economy?,” he asks. “We’re heading in the direction of a double dip — but you’d never know it if you listened to the upbeat messages coming out of Wall Street and Washington.”

Reich surmises the answer is political. Democrats and the White House want to maintain the illusion that the economy is on an upswing and the recovery is going strong. Republicans, on the other hand, are focused on deficit cuts and are afraid if the alarm is sounded people may want the government to do more rather than less. In any case, it is probably not the best time to buy property, so don’t believe the hype. With the prospect of a double dip in the economy ahead you’d be better off stashing that money under the mattress.

Huffington Post
The Economic Truth That Nobody Will Admit: We’re Heading Back Toward a Double-Dip
Robert Reich
March 31, 2011
http://www.huffingtonpost.com

Los Angeles Times
Home Prices Nearing New Lows
Alejandro Lazo
March 30, 2011
http://www.latimes.com

Standard & Poor’s
Home Prices Off to a Dismal Start in 2011
March 29, 2011
http://www.standardandpoors.com

Clear Capital Market Report
U.S. Home Prices Continue Slight Decline as West Region Drags Nation Down
March 10, 2011
http://www.clearcapital.com

Dr. Housing Bubble
Santa Monica Real Estate Enters Correction Mode
January 26, 2011
http://www.doctorhousingbubble.com

Dateline Report on China’s Ghost Cities

In a moment of uncanny timing yesterday, I ran across a link to a fabulous Dateline episode on the topic of China’s ghost cities in a new post by Mike Shedlock at Mish’s Global Economic Trend Analysis.  Having just written on the subject here at The Paper Boat, I thought I’d follow up.

The New South China Mall, which opened in 2005, stands empty with 99 per cent of its shops having remained unleased and attractions including an indoor and outdoor roller coaster standing idle.

The Dateline piece, by video reporter Adrian Brown, explains how China’s ghost cities are the result of a government effort to keep China’s Gross Domestic Product booming.  China’s economy has been on fire for several years, with last year’s GDP growing near ten percent to make it the second largest economy in the world after that of the US.  Chinese leaders have no intention of letting the country’s new economic power status falter.  Because of this, there is tremendous pressure to keep the GDP growing, and the simplest way to do that is for the government to keep spending.  This keeps people working and goods moving.  So the Chinese government continues to funnel massive amounts of cash into infrastructure projects by building massive shopping malls, residential real estate, whole new cities and roads to connect it all together.

One of the most striking aspects of the documentary is the contrast it reveals between the fantasy lifestyles advertised in connection with the new homes of the ghost cities and the reality of how average working people live in China.  The majority of the country is still very poor, and despite the illusion of prosperity the government construction provides China is still a developing nation with few resources relative to the size of its population.  The average annual wage in the country is $6,000, yet a typical housing unit in the new cities runs $70,000 to $300,000 and up.  Only wealthy investors can afford to buy the units, which they have… and everyone waits for a “someday” when people will actually move into them.  So the years are passing.  The ghost cities remain empty as the populace grows more agitated and the empty buildings begin to show signs of neglect.

China is sitting on the largest property bubble in the world right now.  It will not end happily.  Many will be left financially devastated.  In other words, it looks as though the world’s second largest economy is pumped up on hot air.  It’s interesting to see how a communist country like China is vulnerable to the same forces of human nature that our own capitalist nation is.  In the US we have Wall Street using the housing bubble to rip off the public for unfathomable personal gain, and in China the government is gaming its own system to achieve world power.  The problem is, this all wreaks havoc on the people.  And then again, these sorts of power plays eventually result in what might be likened to shooting oneself in the foot, or biting the hand that feeds.  Just ask Marie Antoinette.  The relentless exploitation of the masses leaves one very lonely at the top of the pyramid, and if revolution doesn’t put an end to the devastation there will eventually be simply nothing left to take.  China will pay the price for its decadence one way or another.  It certainly seems the country is not the global power it strives to be seen as, in any case.

As Mike Shedlock comments,  “All this talk about how undervalued the Yuan is, how China will rule the world, and why the Yuan will be the next global reserve currency is pure silliness.

China’s growth is nothing more than a credit bubble on steroids. Cities are vacant, yet China keeps building, and building and building.

The true state of affairs is China’s banks are insolvent.  China is building units for which there is little demand and few can afford.  China will have to print money to pay for all of this malinvestment.  The idea the Yuan is undervalued fails to take into consideration any of this.”

Mish’s Global Economic Trend Analysis
World’s Biggest Property Bubble
Mike Shedlock
March 23, 2011
http://globaleconomicanalysis.blogspot.com/2011/03/worlds-biggest-property-bubble-chinas.html

Dateline SBS
China’s Ghost Cities
Adrian Brown
March 20, 2011
http://www.sbs.com.au/dateline/story/about/id/601007/n/China-s-Ghost-Cities

Asia News Network
China’s GDP Surged 10.3% in 2010
Li Woke, China Daily
January 21, 2011
http://www.asianewsnet.net/home/news.php?id=16909