During the unprecedented presidential campaign of 2008, in what is now considered the best campaign ever, Barack Obama pledged to create 3.5 million new jobs and cut taxes for 95% of the American population. Lofty goals indeed. Since his brief tenure in office, sobering, even alarming data continue to stream out of government bureaus. To wit: Since December, 2007, 4.4 million American jobs have vanished and unemployment is now at 8.1%, the highest since 1982. GDP fell by 6.2% in the last quarter of 2008 and the Dow Jones has fallen 20% since Inauguration Day in what has become the worst start of a new year in 100 years for world stocks.
On March 6, the S&P 500 closed at 682.50 on 37% less volume than its 2008 peak. Since V shaped market bottoms are characterized by a selling climax, the implication is that the stock market route has not run its course.
This Bear Market is immune to good news. TARP, a $787 billion stimulus package, billions for AIG, billions for Citigroup. A cumulative $9.7 trillion has been pledged by the U.S. to combat the financial crisis, yet financial vital signs remain in critical condition. The Libor-OIS spread,the premium banks charge each other for short-term loans, rose just above 1 percentage point two weeks ago for the first time since Jan. 9. Contracts traded in the forwards market indicate the gauge, which measures banks reluctance to lend, will remain higher for the rest of the year than before Sept. 15, when the bankruptcy of Lehman Brothers froze credit markets. "Libor-OIS remains a barometer of fears of bank insolvency," former Federal Reserve Chairman Alan Greenspan said in an interview. "That fear has been substantially reduced since mid-October, but the decline has stalled well short of any semblance of normal markets." The Fed's quarterly Senior Loan Officer survey released Feb. 2 found that more than 65 percent of banks restricted lending the previous three months even as they received about $200 billion of taxpayer funds from the US government. Interestingly, Maestro Greenspan was absent at Davos last month. I wonder why. In attendance was New York University Professor and prophet of doom Nouriel Roubini, who says U.S. financial losses may reach $3.6 trillion, suggesting the banking system is "effectively insolvent."
The shameless and grossly overpaid corporate chieftains who created this mess are now holding a gun to lawmakers' heads to force government bailouts or else. Last week before Congress, in a rare divergence from his monotone temperament, Fed Chairman Ben Bernanke expressed "anger" that AIG, which effectively exploited its AAA rating to game the system and behave like a hedge fund by selling credit default swaps (insurance) on mortgage-backed securities composed of subprime debt, had to be bailed out by the taxpayer lest the entire world financial system go into cardiac arrest. American International Group appealed for its fourth U.S. rescue by telling regulators the company's collapse could cripple money-market funds, force European banks to raise capital, cause competing life insurers to fail and wipe out the taxpayers' stake in the firm. AIG needed immediate help from the Federal Reserve and Treasury to prevent a "catastrophic" collapse that would be worse for markets than the demise last year of Lehman Brothers, according to a 21-page draft AIG presentation dated Feb. 26, labeled as "strictly confidential" and circulated among federal and state regulators. "What happens to AIG has the potential to trigger a cascading set of further failures which cannot be stopped except by extraordinary means," said the presentation by New York-based AIG. "Insurance is the oxygen of the free enterprise system. Without the promise of protection against life's adversities, the fundamentals of capitalism are undermined." It worked. Regulators revised AIG's bailout last week to ease loan terms and extend $30 billion in fresh capital after the firm posted a $61.7 billion fourth-quarter loss, the worst in all of corporate history. Total US government aid for AIG now stands at US $160 billion. As Lenin put it, "give the capitalists enough rope, and they will hang themselves." What Lenin didn't count on was a benevolent super-state standing by to throw a lifeline once greed had bankrupted the financial system.
Where Will the Money Come From If All the Banks Are Insolvent?
Secretary of State Hillary Clinton thinks the answer is China. China should continue buying U.S. Treasury bonds to help finance Obama's stimulus plan, saying "we are truly going to rise or fall together...our economies are so intertwined. It would not be in China's interest" if the U.S. were unable to finance deficit spending to stimulate its stalled economy. Are you sure, Madame Secretary? Timothy Geithner bashes China as a currency manipulator, the US condemns China over Tibet and maintains a nuclear Navy around Taiwan. Who expects China not to exploit bipolar US policy? At the end of the day, he who pays the piper calls the tune and the US is in hock to China. The only way out is to incur more debt, default on the debt, devalue the dollar or think outside the box. Here is one of my ideas:
What if I told you there is a way to reduce federal and state government spending, increase tax revenue, stabilize friendly foreign governments, fight terrorism and reduce the crime rate, all in one fell swoop? What if I also told you that market forces can be exploited to help achieve these goals without empowering the surveillance society and the national security apparatus, and without confiscation of wealth through taxation and inflation?
Reader, I want you to ponder a few numbers. Enormous anxiety has pushed the price of gold to all time highs in all currencies over the last several months. Its averaging about US$ 950/ounce now, even as the USD has strengthened considerably during the current worldwide stock market panic. Platinum hovers around US $1,000 and silver is at US $13 and change. These precious metals with critical industrial uses are scarce on Earth and very expensive to extract from the ground. They can not be manufactured.
Agricultural commodities are in a different league. Coffee, sugar, tobacco and cotton spring forth from the soil; they are the fruit of sunshine, rain and man's toil. Coffee is sold by the ton; its worth 7 cents an ounce. Cotton is sold by the pound and fetches US$ 2.60/ounce. Corn is US$ 3.66/bushel and a bushel weighs 70 pounds. It makes sense that soft commodities are less valuable than metals, they are much easier to produce. But there's another agricultural "commodity" that we left out. About 1% of the US population consumes it regularly and they comprise about 33% of the world market. The crop is worth hundreds of billions of dollars annually, but since it is unregulated, uninspected, untaxed and duty free, exact figures are hard to come by. Similar in molecular structure to sugar, the plant was used by Aymara shamen decked out in gold finery as they sought to be transformed into avian beings. The alkaloid gave them hallucinations and paradoxically, clarity of thought. Today the plant is grown on primitive plots, chewed and made into tea by the Ameriginal peoples of the Andes and they use it to increase stamina, resist cold, altitude and hunger. Peruvian and Colombian entrepreneurs now market products made from this salutary plant, to great success. What is it? Its coca and it is the active ingredient in cocaine.
Surprised? A box of coca tea is more expensive than Liptons but not outrageously so. Prices are comparable to herbal and green teas at gourmet stores. By comparison, uncut cocaine is worth about US$ 3,000 an ounce, three times its weight in gold! Marijuana, literally a weed, is worth US$100/ounce, seven times its weight in silver. Why is this so? Can coca and marijuana really have intrinsic value in excess of gold and silver? Is their cost of production high? Are they essential to industry or society? I doubt it. They are about as
essential as alcohol and tobacco are, equally or less as addictive, but far less destructive if anti drunk-driving and anti smoking groups' statistics are to be believed. The only answer is that "The War on Drugs," a term coined by president Nixon in 1972, is responsible for the amazing prices...and profits...of cocaine and marijuana. There is just no way that poor Juan Valdez can compete.
But 175 years ago the British Empire and its sidekick the USA had a very different view and fought a very different kind of drug war. At that time, Laissez-Faire reigned supreme. Nothing could stand in the way of colonial expansion through conquest and trade, even trade in drugs. For ages, precious silks, spices and teas had travelled the long Silk Road from China to Europe. But by the 18th century, merchant ships could access China directly and realize superior efficiency and profits. But there were two problems. Due to the Qing Dynasty trade restrictions, whereby international trade was only allowed to take place in Canton (Guangzhou) conducted by imperially sanctioned monopolies, it became uneconomical to trade in low-value manufactured consumer products that the average Chinese could buy from the British like the Indians did. The other problem was that the British Pound (like all currencies) was on the gold standard. Britain had to purchase silver from continental Europe to trade with China, which was a costly process at a time before demonetization of silver by Germany in the 1870s. In casting about for other possible commodities to reverse the flow of specie to China, the British discovered opium. Opium as a medicinal ingredient was documented in texts as early as the Ming dynasty but its recreational use was limited and there were laws in place against its abuse. It was with the mass quantities introduced by the British, that the drug became prevalent in China. British importation of opium in large amounts began in 1781 and between 1821 and 1837 exports increased fivefold. The drug was produced in the traditionally cotton growing regions of India (under British government monopoly (Bengal) and in the Princely states (Malwa) and was sold on the condition that it be shipped by British traders to China. 150 years before the partition of India into India and Pakistan and 200 years before the Taliban would fund their operations through poppy cultivation in neighboring Afghanistan, the British East India Company waxed fat off the narcotics trade.
Alarmed at these developments, the Qing Dynasty government outlawed all trade in opium in 1836, but Anglo, American and Chinese merchants ignored the law and the Chinese government was too weak to enforce it. Finally, war erupted between England and China to settle the issue once and for all. Queen Victoria's navy and army decimated Chinese forces and the 1842 Treaty Of Nanking actually obligated China to compensate England US$6 million for the opium it had confiscated and destroyed. Great fortunes followed the Treaty and in 1865 the Hong Kong Shanghai Bank was founded. We know it today as HSBC.
Like the War on Terrorism, the War on Drugs is more of a catch-all conglomeration of shifting domestic and foreign policy priorities in the service of state power than an articulate and defined objective to achieve a specific, measurable goal by a certain date. These policy
directives operate under a hazy notion of defending the public safety and invariably expand government bureaucracy, budgets and power to serve the broad, rolling agenda of the national security state. These "wars" have no ending and wear down those who wage them. Today's self-defeating drug wars, along with the War on Terrorism, underpin the surveillance society, the erosion of personal and financial privacy and the presumption of innocence.
Unlike its achievements, the drug war's costs are easy to calculate. While the $70 billion US cocaine market remains stable, more Americans are incarcerated than ever before, most of them for drug crimes. Federal and state governments have spent hundreds of billions of dollars to arrest, convict and incarcerate millions of Americans for very long periods of time. Many of them will lose the most productive years of their lives and become essentially unemployable after their release, reducing GDP, income tax receipts and America's competitiveness. Many convicts are held in for-profit facilities constructed in rural communities far from major cities. Inmates are ineligible to vote. Nevertheless, they increase the population count of the communities where they are detained. Federal and state government spending priorities are set according to population head counts, which include inmates even though they are ineligible to vote. The net result is a budget skewed towards the communities where inmates are held rather than the communities where they come from, exacerbating underfunding of social programs where they are usually needed the most. In addition, many states permanently revoke convicted felons' right to vote even after they have served their time. Since most inmates are men of color, the net result is reminiscent of Jim Crow. John V. Santore wrote an excellent piece in the Huffington Post last month on this topic. I recommend it for all those who remain unconvinced.